We have audited the financial statements of National Westminster Bank Plc ("the Bank") and its subsidiaries (together "the Group") for the year ended 31 December 2007 which comprise the accounting policies, the balance sheets as at 31 December 2007 and 2006, the consolidated income statement, the cash flow statements, the statements of recognised income and expense for each of the three years in the period ended 31 December 2007 and the related Notes 1 to 42. These financial statements have been prepared under the accounting policies set out therein.2009
Respective responsibilities of directors and auditors
The directors' responsibilities for preparing the annual report, and the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union are set out in the statement of directors' responsibilities.
Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements have been properly prepared in accordance with the Companies Act 1985 and as regards the Group's consolidated financial statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion, the information given in the directors' report is consistent with the financial statements.
In addition we report to you if, in our opinion, the Bank has not kept proper accounting records, we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors' remuneration and other transactions is not disclosed.
We read the other information contained in the Annual Report and Accounts 2007 as described in the contents section and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information outside the Annual Report and Accounts 2007.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board and with the standards of the Public Company Accounting Oversight Board (United States). An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements and of whether the accounting policies are appropriate to the circumstances of the Bank and the Group, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the financial statements.
The Group is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control over financial reporting. Accordingly, we express no such opinion.
UK Opinion
In our opinion:
• | the Group financial statements give a true and fair view, in accordance with IFRS as adopted by the European Union, of the state of the Group's affairs as at 31 December 2007 and of its profit and cash flows for the year then ended; | | | | |
• | the Bank financial statements give a true and fair view, in accordance with IFRS as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of affairs of the Bank as at 31 December 2007; |
| | | | | 2009 | | | 2008 | | | 2007 | | | | Note | | | £m | | | | | | | | Interest receivable | | | | | | 6,451 | | | | 12,373 | | | | 12,178 | | Interest payable | | | | | | (3,254 | ) | | | (6,976 | ) | | | (7,087 | ) | Net interest income | | | 1 | | | | 3,197 | | | | 5,397 | | | | 5,091 | | Fees and commissions receivable | | | | | | | 4,079 | | | | 4,367 | | | | 4,226 | | Fees and commissions payable | | | | | | | (1,241 | ) | | | (1,178 | ) | | | (1,036 | ) | Income/(loss) from trading activities | | | | | | | 1,454 | | | | (963 | ) | | | (360 | ) | Gain on redemption of own debt | | | | | | | 381 | | | | — | | | | — | | Other operating income | | | | | | | 1,404 | | | | 81 | | | | 433 | | Non-interest income | | | 2 | | | | 6,077 | | | | 2,307 | | | | 3,263 | | Total income | | | | | | | 9,274 | | | | 7,704 | | | | 8,354 | | Staff costs – excluding curtailment gains | | | | | | | (1,749 | ) | | | (1,402 | ) | | | (1,567 | ) | – pension schemes curtailment gains | | | | | | | 544 | | | | — | | | | — | | Premises and equipment | | | | | | | (407 | ) | | | (331 | ) | | | (267 | ) | Other administrative expenses | | | | | | | (2,147 | ) | | | (2,516 | ) | | | (2,322 | ) | Depreciation and amortisation | | | | | | | (247 | ) | | | (237 | ) | | | (264 | ) | Write-down of goodwill and other intangible assets | | | | | | | — | | | | (716 | ) | | | — | | Operating expenses | | | 3 | | | | (4,006 | ) | | | (5,202 | ) | | | (4,420 | ) | Profit before impairment losses | | | | | | | 5,268 | | | | 2,502 | | | | 3,934 | | Impairment losses | | | 11 | | | | (4,139 | ) | | | (1,362 | ) | | | (849 | ) | Operating profit before tax | | | | | | | 1,129 | | | | 1,140 | | | | 3,085 | | Tax credit/(charge) | | | 6 | | | | 5 | | | | (599 | ) | | | (768 | ) | Profit for the year | | | | | | | 1,134 | | | | 541 | | | | 2,317 | | | | Profit attributable to: | | | | | | | | | | | | | | | | | Minority interests | | | 23 | | | | — | | | | 93 | | | | 89 | | Ordinary shareholders | | | | | | | 1,134 | | | | 448 | | | | 2,228 | | �� | | | | | | | 1,134 | | | | 541 | | | | 2,317 | |
• | the financial statements have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation; and
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The accompanying notes on pages 96 to 152, the accounting policies on pages 87 to 95 and the audited sections of the ‘Financial review: Risk, capital and liquidity management’ on pages 37 to 60 form an integral part of these financial statements. • | the information given in the directors' report is consistent with the financial statements. |
Separate opinion in relation to IFRS
As explained in the accounting policies, the Group, in addition to complying with its legal obligation to comply with IFRS as adopted by the European Union, has also complied with IFRS as issued by the International Accounting Standards Board (IASB).
In our opinion the financial statements give a true and fair view, in accordance with IFRS, of the state of the Group's affairs as at 31 December 2007 and of its profit and cash flows for the year then ended.
US opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2007 and 2006 and the results of its operations and its cash flows for each of the three years in the period ended 31 December 2007, in accordance with IFRS as adopted for use in the European Union and IFRS as issued by the IASB.
Deloitte & Touche LLP
Chartered Accountants and Registered Auditors
Edinburgh, United Kingdom
28 March 2008
Consolidated income statementfor the year ended 31 December 2007
| | | | | | | | | | | 2005 | | | | | | 2007 | | | 2006 | | | Discontinued* | | | Continuing | | | | Note | | | | £m | | | | £m | | | | £m | | | | £m | | Interest receivable | | | | | | 12,178 | | | | 9,825 | | | | 203 | | | | 8,289 | | Interest payable | | | | | | (7,087 | ) | | | (5,376 | ) | | | 9 | | | | (4,040 | ) | Net interest income | | | | | | 5,091 | | | | 4,449 | | | | 212 | | | | 4,249 | | Fees and commissions receivable | | | | | | 4,226 | | | | 3,928 | | | | 43 | | | | 3,663 | | Fees and commissions payable | | | | | | (1,036 | ) | | | (960 | ) | | | (34 | ) | | | (926 | ) | (Loss)/income from trading activities | | | 1 | | | | (360 | ) | | | 1,458 | | | | – | | | | 808 | | Other operating income | | | | | | | 433 | | | | 451 | | | | – | | | | 635 | | Non-interest income | | | | | | | 3,263 | | | | 4,877 | | | | 9 | | | | 4,180 | | Total income | | | | | | | 8,354 | | | | 9,326 | | | | 221 | | | | 8,429 | | Staff costs | | | | | | | 1,567 | | | | 1,754 | | | | – | | | | 1,477 | | Premises and equipment | | | | | | | 267 | | | | 266 | | | | – | | | | 114 | | Other administrative expenses | | | | | | | 2,322 | | | | 2,741 | | | | 70 | | | | 2,440 | | Depreciation and amortisation | | | | | | | 264 | | | | 257 | | | | – | | | | 382 | | Operating expenses | | | 2 | | | | 4,420 | | | | 5,018 | | | | 70 | | | | 4,413 | | Profit before impairment losses | | | | | | | 3,934 | | | | 4,308 | | | | 151 | | | | 4,016 | | Impairment losses | | | 11 | | | | 849 | | | | 852 | | | | 4 | | | | 752 | | Operating profit before tax | | | | | | | 3,085 | | | | 3,456 | | | | 147 | | | | 3,264 | | Tax | | | 5 | | | | 768 | | | | 831 | | | | 44 | | | | 904 | | Operating profit after tax | | | | | | | 2,317 | | | | 2,625 | | | | 103 | | | | 2,360 | | Discontinued operations | | | | | | | – | | | | – | | | | | | | | 103 | | Profit for the year | | | | | | | 2,317 | | | | 2,625 | | | | | | | | 2,463 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit attributable to: | | | | | | | | | | | | | | | | | | | | | Minority interests | | | | | | | 89 | | | | 39 | | | | | | | | 17 | | Ordinary shareholders | | | | | | | 2,228 | | | | 2,586 | | | | | | | | 2,446 | | | | | | | | | 2,317 | | | | 2,625 | | | | | | | | 2,463 | |
| * | the Group transferred its home mortgage finance business, National Westminster Home Loans Limited, to The Royal Bank of Scotland plc on 31 December 2005 at neither a profit nor a loss. |
Balance sheets at 31 December 2007
| | | | | Group | | Bank | | | | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | | | Note | | | | £m | | | | £m | | | | £m | | | | £m | | Assets | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | | | | 1,363 | | | | 1,525 | | | | 1,006 | | | | 876 | | Treasury and other eligible bills subject to repurchase agreements | | | 27 | | | | 1,974 | | | | 225 | | | | – | | | | – | | Other treasury and other eligible bills | | | | | | | 47 | | | | 50 | | | | – | | | | – | | Treasury and other eligible bills | | | 9 | | | | 2,021 | | | | 275 | | | | – | | | | – | | Loans and advances to banks | | | 9 | | | | 71,449 | | | | 61,563 | | | | 27,296 | | | | 25,006 | | Loans and advances to customers | | | 9 | | | | 188,976 | | | | 182,411 | | | | 115,632 | | | | 109,496 | | Debt securities subject to repurchase agreements | | | 27 | | | | 31,970 | | | | 29,346 | | | | – | | | | – | | Other debt securities | | | | | | | 3,946 | | | | 2,922 | | | | 31 | | | | 42 | | Debt securities | | | 13 | | | | 35,916 | | | | 32,268 | | | | 31 | | | | 42 | | Equity shares | | | 14 | | | | 1,110 | | | | 1,158 | | | | 18 | | | | 50 | | Investments in Group undertakings | | | 15 | | | | – | | | | – | | | | 6,052 | | | | 6,758 | | Settlement balances | | | | | | | 2,700 | | | | 3,574 | | | | – | | | | – | | Derivatives | | | 12 | | | | 3,575 | | | | 2,746 | | | | 1,588 | | | | 1,400 | | Intangible assets | | | 16 | | | | 1,244 | | | | 1,209 | | | | 375 | | | | 359 | | Property, plant and equipment | | | 17 | | | | 1,514 | | | | 1,719 | | | | 908 | | | | 1,009 | | Prepayments, accrued income and other assets | | | 18 | | | | 2,414 | | | | 2,213 | | | | 879 | | | | 705 | | Total assets | | | | | | | 312,282 | | | | 290,661 | | | | 153,785 | | | | 145,701 | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | 9 | | | | 44,861 | | | | 46,258 | | | | 6,324 | | | | 6,438 | | Customer accounts | | | 9 | | | | 205,519 | | | | 181,219 | | | | 132,248 | | | | 125,095 | | Debt securities in issue | | | 9 | | | | 20,923 | | | | 14,335 | | | | 9 | | | | 29 | | Settlement balances and short positions | | | 19 | | | | 14,955 | | | | 24,274 | | | | – | | | | – | | Derivatives | | | 12 | | | | 3,251 | | | | 2,343 | | | | 1,352 | | | | 1,145 | | Accruals, deferred income and other liabilities | | | 20 | | | | 3,417 | | | | 4,108 | | | | 1,091 | | | | 1,231 | | Retirement benefit liabilities | | | 3 | | | | 1,322 | | | | 1,298 | | | | 1,124 | | | | 1,110 | | Subordinated liabilities | | | 22 | | | | 5,932 | | | | 5,641 | | | | 4,244 | | | | 4,583 | | Total liabilities | | | | | | | 300,180 | | | | 279,476 | | | | 146,392 | | | | 139,631 | | | | | | | | | | | | | | | | | | | | | | | Equity | | | | | | | | | | | | | | | | | | | | | Minority interests | | | 23 | | | | 1,314 | | | | 1,012 | | | | – | | | | – | | Shareholders' equity | | | | | | | | | | | | | | | | | | | | | Called up share capital | | | 24 | | | | 1,678 | | | | 1,678 | | | | 1,678 | | | | 1,678 | | Reserves | | | 25 | | | | 9,110 | | | | 8,495 | | | | 5,715 | | | | 4,392 | | Total equity | | | | | | | 12,102 | | | | 11,185 | | | | 7,393 | | | | 6,070 | | | | | | | | | | | | | | | | | | | | | | | Total liabilities and equity | | | | | | | 312,282 | | | | 290,661 | | | | 153,785 | | | | 145,701 | |
The accounts were approved by the Board of directors on 28 March 2008 and signed on its behalf by:
Sir Tom McKillop
Chairman
| Sir Fred Goodwin
Group Chief Executive
| Guy Whittaker
Group Finance Director
|
Financial statements
| | Statements of recognised income and expensefor the year ended 31 December 20072009
| | | | |
| | 2009 | | | 2008 | | | 2007 | | | | £m | | | £m | | | £m | | Profit for the year | | | 1,134 | | | | 541 | | | | 2,317 | | | | Other comprehensive income: | | | | | | | | | | | | | Available-for-sale financial assets | | | 43 | | | | (51 | ) | | | 2 | | Cash flow hedges | | | (42 | ) | | | (36 | ) | | | (20 | ) | Currency translation | | | (795 | ) | | | 1,978 | | | | 247 | | Other comprehensive (loss)/income before tax | | | (794 | ) | | | 1,891 | | | | 229 | | Tax | | | (2 | ) | | | 20 | | | | 7 | | Other comprehensive (loss)/income after tax | | | (796 | ) | | | 1,911 | | | | 236 | | Total comprehensive income for the year | | | 338 | | | | 2,452 | | | | 2,553 | | | | | | Total comprehensive income recognised in the statement of changes in equity is attributable as follows: | | | | Minority interests | | | (41 | ) | | | 105 | | | | 88 | | Ordinary shareholders | | | 379 | | | | 2,347 | | | | 2,465 | | | | | 338 | | | | 2,452 | | | | 2,553 | |
The accompanying notes on pages 96 to 152, the accounting policies on pages 87 to 95 and the audited sections of the ‘Financial review: Risk, capital and liquidity management’ on pages 37 to 60 form an integral part of these financial statements.
| | Group | | Bank | | | 2007 | | | 2006 | | | 2005 | | | 2007 | | | 2006 | | | 2005 | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Available-for-sale investments | | | | | | | | | | | | | | | | | | | | | | | | | Net valuation gains taken direct to equity | | | 87 | | | | 81 | | | | 38 | | | | 40 | | | | 44 | | | | 33 | | Net profit taken to income on sales | | | (85 | ) | | | (55 | ) | | | (324 | ) | | | (72 | ) | | | – | | | | (320 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flow hedges | | | | | | | | | | | | | | | | | | | | | | | | | Net (losses)/gains taken direct to equity | | | – | | | | (2 | ) | | | – | | | | (9 | ) | | | 13 | | | | (39 | ) | Net gains taken to earnings | | | (20 | ) | | | (39 | ) | | | (28 | ) | | | (13 | ) | | | (28 | ) | | | (13 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Exchange differences on translation of foreign operations | | | 247 | | | | (491 | ) | | | 180 | | | | 2 | | | | 6 | | | | (5 | ) | Income/(expense) before tax on items recognised direct in equity | | | 229 | | | | (506 | ) | | | (134 | ) | | | (52 | ) | | | 35 | | | | (344 | ) | Tax on items recognised direct in equity | | | 7 | | | | (43 | ) | | | 106 | | | | 15 | | | | (50 | ) | | | 110 | | Net income/(expense) recognised direct in equity | | | 236 | | | | (549 | ) | | | (28 | ) | | | (37 | ) | | | (15 | ) | | | (234 | ) | Profit for the year | | | 2,317 | | | | 2,625 | | | | 2,463 | | | | 3,210 | | | | 1,688 | | | | 1,774 | | Total recognised income and expense for the year | | | 2,553 | | | | 2,076 | | | | 2,435 | | | | 3,173 | | | | 1,673 | | | | 1,540 | | | | | | | | | | | | | | | | | | | | | | | | | | | Attributable to: | | | | | | | | | | | | | | | | | | | | | | | | | Equity shareholders | | | 2,465 | | | | 2,045 | | | | 2,420 | | | | 3,173 | | | | 1,673 | | | | 1,540 | | Minority interests | | | 88 | | | | 31 | | | | 15 | | | | – | | | | – | | | | – | | | | | 2,553 | | | | 2,076 | | | | 2,435 | | | | 3,173 | | | | 1,673 | | | | 1,540 | |
| | | | | Group | | | | | | Bank | | | | | | | | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | | Note | | | £m | | | £m | | | | | | | | Assets | | | | | | | | | | | | | | | | Cash and balances at central banks | | | 10 | | | | 1,805 | | | | 1,285 | | | | 906 | | | | 838 | | Loans and advances to banks | | | 10 | | | | 133,230 | | | | 66,234 | | | | 81,432 | | | | 23,146 | | Loans and advances to customers | | | 10 | | | | 164,403 | | | | 198,267 | | | | 88,556 | | | | 124,693 | | Debt securities subject to repurchase agreements | | | 26 | | | | 30,602 | | | | 33,817 | | | | — | | | | — | | Other debt securities | | | | | | | 4,187 | | | | 2,176 | | | | 2,163 | | | | 41 | | Debt securities | | | 13 | | | | 34,789 | | | | 35,993 | | | | 2,163 | | | | 41 | | Equity shares | | | 14 | | | | 966 | | | | 1,129 | | | | 13 | | | | 6 | | Investments in Group undertakings | | | 15 | | | | — | | | | — | | | | 6,783 | | | | 7,339 | | Settlement balances | | | | | | | 4,573 | | | | 4,117 | | | | — | | | | — | | Derivatives | | | 12 | | | | 4,470 | | | | 8,895 | | | | 2,900 | | | | 4,897 | | Intangible assets | | | 16 | | | | 748 | | | | 815 | | | | 380 | | | | 401 | | Property, plant and equipment | | | 17 | | | | 3,300 | | | | 1,970 | | | | 837 | | | | 883 | | Deferred taxation | | | 21 | | | | 568 | | | | 496 | | | | — | | | | 400 | | Prepayments, accrued income and other assets | | | 18 | | | | 1,876 | | | | 2,018 | | | | 1,004 | | | | 674 | | Total assets | | | | | | | 350,728 | | | | 321,219 | | | | 184,974 | | | | 163,318 | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | 10 | | | | 61,433 | | | | 53,633 | | | | 21,909 | | | | 8,536 | | Customer accounts | | | 10 | | | | 227,463 | | | | 200,384 | | | | 143,025 | | | | 130,695 | | Debt securities in issue | | | 10 | | | | 11,470 | | | | 17,212 | | | | — | | | | 15 | | Settlement balances and short positions | | | 19 | | | | 16,944 | | | | 13,091 | | | | — | | | | — | | Derivatives | | | 12 | | | | 4,314 | | | | 8,066 | | | | 2,506 | | | | 6,243 | | Accruals, deferred income and other liabilities | | | 20 | | | | 3,827 | | | | 4,032 | | | | 910 | | | | 1,407 | | Retirement benefit liabilities | | | 4 | | | | 512 | | | | 1,198 | | | | 472 | | | | 982 | | Deferred taxation | | | 21 | | | | 285 | | | | 46 | | | | 217 | | | | — | | Subordinated liabilities | | | 22 | | | | 8,999 | | | | 10,099 | | | | 7,105 | | �� | | 7,860 | | Total liabilities | | | | | | | 335,247 | | | | 307,761 | | | | 176,144 | | | | 155,738 | | | | Minority interests | | | 23 | | | | 1,282 | | | | 1,323 | | | | — | | | | — | | Equity owners | | | 24 | | | | 14,199 | | | | 12,135 | | | | 8,830 | | | | 7,580 | | Total equity | | | | | | | 15,481 | | | | 13,458 | | | | 8,830 | | | | 7,580 | | | | Total liabilities and equity | | | | | | | 350,728 | | | | 321,219 | | | | 184,974 | | | | 163,318 | |
The accompanying notes on pages 96 to 152, the accounting policies on pages 87 to 95 and the audited sections of the ‘Financial review: Risk, capital and liquidity management’ on pages 37 to 60 form an integral part of these financial statements. The accounts were approved by the Board of directors on 31 March 2010 and signed on its behalf by: Philip Hampton | Stephen Hester | Bruce Van Saun | Chairman | Group Chief Executive | Group Finance Director | | National Westminster Bank Plc | | | Registration No. 929027 | | |
| | | | | | Cash flow statementsfor the year ended 31 December 20072009
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| | | | | Group | | Bank | | | | | | 2007 | | | 2006 | | | 2005 | | | 2007 | | | 2006 | | | 2005 | | | | Note | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Operating activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit before tax | | | | | | 3,085 | | | | 3,456 | | | | 3,411 | | | | 3,729 | | | | 1,963 | | | | 2,315 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjustments for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation and amortisation | | | | | | 264 | | | | 257 | | | | 382 | | | | 177 | | | | 202 | | | | 326 | | Interest on subordinated liabilities | | | | | | 271 | | | | 310 | | | | 304 | | | | 239 | | | | 271 | | | | 283 | | Charge for defined benefit pension schemes | | | | | | 132 | | | | 229 | | | | 149 | | | | 83 | | | | 168 | | | | 97 | | Cash contribution to defined benefit pension schemes | | | | (117 | ) | | | (135 | ) | | | (1,007 | ) | | | (69 | ) | | | (70 | ) | | | (976 | ) | Elimination of foreign exchange differences | | | | | | (464 | ) | | | 1,503 | | | | (2,178 | ) | | | 5 | | | | 143 | | | | 189 | | Other non-cash items | | | | | | (75 | ) | | | (289 | ) | | | (1,007 | ) | | | (380 | ) | | | 28 | | | | (1,070 | ) | Net cash inflow from trading activities | | | | | | 3,096 | | | | 5,331 | | | | 54 | | | | 3,784 | | | | 2,705 | | | | 1,164 | | Changes in operating assets and liabilities | | | | | | 15,004 | | | | 2,706 | | | | 24,173 | | | | 3,999 | | | | 1,559 | | | | 6,010 | | Net cash flows from operating activities before tax | | | | 18,100 | | | | 8,037 | | | | 24,227 | | | | 7,783 | | | | 4,264 | | | | 7,174 | | Income taxes paid | | | | | | (592 | ) | | | (1,157 | ) | | | (1,170 | ) | | | (104 | ) | | | (588 | ) | | | (662 | ) | Net cash flows from operating activities | | | 32 | | | | 17,508 | | | | 6,880 | | | | 23,057 | | | | 7,679 | | | | 3,676 | | | | 6,512 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Investing activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sale and maturity of securities | | | | | | | 560 | | | | 1,489 | | | | 1,600 | | | | 19 | | | | 85 | | | | 951 | | Purchase of securities | | | | | | | (2,215 | ) | | | (874 | ) | | | (1,322 | ) | | | (82 | ) | | | (60 | ) | | | (80 | ) | Sale of property, plant and equipment | | | | | | | 678 | | | | 268 | | | | 333 | | | | 326 | | | | 265 | | | | 302 | | Purchase of property, plant and equipment | | | | | | | (328 | ) | | | (382 | ) | | | (281 | ) | | | (135 | ) | | | (85 | ) | | | (119 | ) | Net investment in business interests and intangible assets | | | 33 | | | | (159 | ) | | | (92 | ) | | | (168 | ) | | | 403 | | | | (524 | ) | | | (167 | ) | Net cash flows from investing activities | | | | | | | (1,464 | ) | | | 409 | | | | 162 | | | | 531 | | | | (319 | ) | | | 887 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financing activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issue of subordinated liabilities | | | | | | | 634 | | | | 91 | | | | 291 | | | | – | | | | – | | | | – | | Proceeds of minority interests issued | | | | | | | 288 | | | | 271 | | | | 463 | | | | – | | | | – | | | | – | | Redemption of minority interests | | | | | | | (2 | ) | | | – | | | | (121 | ) | | | – | | | | – | | | | – | | Capital contribution | | | | | | | – | | | | 188 | | | | – | | | | – | | | | 188 | | | | – | | Repayment of subordinated liabilities | | | | | | | (403 | ) | | | (719 | ) | | | (210 | ) | | | (381 | ) | | | (590 | ) | | | (210 | ) | Dividends paid | | | | | | | (1,922 | ) | | | (1,534 | ) | | | (365 | ) | | | (1,850 | ) | | | (1,500 | ) | | | (350 | ) | Interest on subordinated liabilities | | | | | | | (274 | ) | | | (313 | ) | | | (319 | ) | | | (244 | ) | | | (276 | ) | | | (297 | ) | Net cash flows from financing activities | | | | | | | (1,679 | ) | | | (2,016 | ) | | | (261 | ) | | | (2,475 | ) | | | (2,178 | ) | | | (857 | ) | Effects of exchange rate changes on cash and cash equivalents | | | | 364 | | | | (2,237 | ) | | | 2,621 | | | | 74 | | | | (240 | ) | | | 135 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net increase in cash and cash equivalents | | | | | | | 14,729 | | | | 3,036 | | | | 25,579 | | | | 5,809 | | | | 939 | | | | 6,677 | | Cash and cash equivalents 1 January | | | | | | | 51,460 | | | | 48,424 | | | | 22,845 | | | | 19,527 | | | | 18,588 | | | | 11,911 | | Cash and cash equivalents 31 December | | | | | | | 66,189 | | | | 51,460 | | | | 48,424 | | | | 25,336 | | | | 19,527 | | | | 18,588 | |
| | | | | Group | | | | | | | | | Bank | | | | | | | 2009 | | | 2008 | | | 2007 | | | 2009 | | | 2008 | | | 2007 | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Called-up share capital | | | | | | | | | | | | | | | | | | | At 1 January and 31 December | | | 1,678 | | | | 1,678 | | | | 1,678 | | | | 1,678 | | | | 1,678 | | | | 1,678 | | | | Share premium account | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January | | | 1,291 | | | | 1,291 | | | | 1,291 | | | | 1,291 | | | | 1,291 | | | | 1,291 | | Ordinary shares issued during the year | | | 935 | | | | — | | | | — | | | | 935 | | | | — | | | | — | | At 31 December | | | 2,226 | | | | 1,291 | | | | 1,291 | | | | 2,226 | | | | 1,291 | | | | 1,291 | | | | Available-for-sale reserve | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January | | | (18 | ) | | | 23 | | | | 18 | | | | — | | | | 9 | | | | 31 | | Unrealised gains/(losses) in the year | | | 78 | | | | (54 | ) | | | 87 | | | | 7 | | | | (13 | ) | | | 40 | | Realised (gains)/losses in the year | | | (35 | ) | | | 3 | | | | (85 | ) | | | — | | | | — | | | | (72 | ) | Taxation | | | (9 | ) | | | 10 | | | | 3 | | | | (2 | ) | | | 4 | | | | 10 | | At 31 December | | | 16 | | | | (18 | ) | | | 23 | | | | 5 | | | | — | | | | 9 | | | | Cash flow hedging reserve | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January | | | 30 | | | | 56 | | | | 72 | | | | (119 | ) | | | 25 | | | | 42 | | Amount recognised in equity during the year | | | (5 | ) | | | — | | | | — | | | | 96 | | | | (158 | ) | | | (9 | ) | Amount transferred from equity to earnings in the year | | | (37 | ) | | | (36 | ) | | | (20 | ) | | | 61 | | | | (29 | ) | | | (13 | ) | Taxation | | | 7 | | | | 10 | | | | 4 | | | | (45 | ) | | | 43 | | | | 5 | | At 31 December | | | (5 | ) | | | 30 | | | | 56 | | | | (7 | ) | | | (119 | ) | | | 25 | | | | Foreign exchange reserve | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January | | | 1,900 | | | | (66 | ) | | | (314 | ) | | | (44 | ) | | | 3 | | | | 1 | | Retranslation of net assets | | | (805 | ) | | | 1,966 | | | | 248 | | | | 32 | | | | (47 | ) | | | 2 | | Foreign currency gains on hedges of net assets | | | 51 | | | | — | | | | — | | | | — | | | | — | | | | — | | At 31 December | | | 1,146 | | | | 1,900 | | | | (66 | ) | | | (12 | ) | | | (44 | ) | | | 3 | | | | Other reserves | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January | | | 614 | | | | 614 | | | | 486 | | | | 614 | | | | 614 | | | | 486 | | Redemption of preference shares classified as debt | | | — | | | | — | | | | 128 | | | | — | | | | — | | | | 128 | | At 31 December | | | 614 | | | | 614 | | | | 614 | | | | 614 | | | | 614 | | | | 614 | | | | Retained earnings | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January | | | 6,640 | | | | 7,192 | | | | 6,942 | | | | 4,160 | | | | 3,773 | | | | 2,541 | | Profit attributable to ordinary shareholders | | | 1,134 | | | | 448 | | | | 2,228 | | | | (584 | ) | | | 1,387 | | | | 3,210 | | Ordinary dividends paid | | | — | | | | (1,000 | ) | | | (1,850 | ) | | | — | | | | (1,000 | ) | | | (1,850 | ) | Redemption of preference shares classified as debt | | | — | | | | — | | | | (128 | ) | | | — | | | | — | | | | (128 | ) | Capital contribution | | | 750 | | | | — | | | | — | | | | 750 | | | | — | | | | — | | At 31 December | | | 8,524 | | | | 6,640 | | | | 7,192 | | | | 4,326 | | | | 4,160 | | | | 3,773 | | | | Shareholders’ equity at 31 December | | | 14,199 | | | | 12,135 | | | | 10,788 | | | | 8,830 | | | | 7,580 | | | | 7,393 | | | | Minority interests | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January | | | 1,323 | | | | 1,314 | | | | 1,012 | | | | — | | | | — | | | | — | | Currency translation adjustments and other movements | | | (41 | ) | | | 12 | | | | (1 | ) | | | — | | | | — | | | | — | | Profit attributable to minority interests | | | — | | | | 93 | | | | 89 | | | | — | | | | — | | | | — | | Dividends paid | | | — | | | | (94 | ) | | | (72 | ) | | | — | | | | — | | | | — | | Equity raised | | | — | | | | 70 | | | | 288 | | | | — | | | | — | | | | — | | Equity withdrawn and disposals | | | — | | | | (72 | ) | | | (2 | ) | | | — | | | | — | | | | — | | At 31 December | | | 1,282 | | | | 1,323 | | | | 1,314 | | | | — | | | | — | | | | — | | | | Total equity at 31 December | | | 15,481 | | | | 13,458 | | | | 12,102 | | | | 8,830 | | | | 7,580 | | | | 7,393 | | | | Total comprehensive income recognised in the statement of changes in equity is attributable as follows: | | | | | | | | | | | | | | | | | | | | | | | | | Minority interests | | | (41 | ) | | | 105 | | | | 88 | | | | — | | | | — | | | | — | | Ordinary shareholders | | | 379 | | | | 2,347 | | | | 2,465 | | | | (435 | ) | | | 1,187 | | | | 3,173 | | | | | 338 | | | | 2,452 | | | | 2,553 | | | | (435 | ) | | | 1,187 | | | | 3,173 | |
The accompanying notes on pages 96 to 152, the accounting policies on pages 87 to 95 and the audited sections of the ‘Financial review: Risk, capital and liquidity management’ on pages 37 to 60 form an integral part of these financial statements.
| | | | | | | | Accounting policiesfor the year ended 31 December 2009
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| | | | | | | | Group | | | | | | | | | Bank | | | | | | | | | | 2009 | | | 2008 | | | 2007 | | | 2009 | | | 2008 | | | 2007 | | | | Note | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Operating activities | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) before tax | | | | | | 1,129 | | | | 1,140 | | | | 3,085 | | | | (692 | ) | | | 1,866 | | | | 3,729 | | | | Adjustments for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation and amortisation | | | | | | 247 | | | | 237 | | | | 264 | | | | 156 | | | | 145 | | | | 177 | | Write-down of goodwill and other intangible assets | | | | | | — | | | | 716 | | | | — | | | | — | | | | 45 | | | | — | | Write-down of investment in subsidiaries | | | | | | — | | | | — | | | | — | | | | 2,281 | | | | — | | | | — | | Interest on subordinated liabilities | | | | | | 454 | | | | 509 | | | | 271 | | | | 414 | | | | 432 | | | | 239 | | Charge for defined benefit pension schemes | | | | | | 54 | | | | 2 | | | | 132 | | | | (29 | ) | | | (65 | ) | | | 83 | | Pension scheme curtailment gains | | | | | | (544 | ) | | | — | | | | — | | | | (358 | ) | | | — | | | | — | | Cash contribution to defined benefit pension schemes | | | | | | (213 | ) | | | (154 | ) | | | (117 | ) | | | (124 | ) | | | (78 | ) | | | (69 | ) | Gain on redemption of own debt | | | | | | (381 | ) | | | — | | | | — | | | | (381 | ) | | | — | | | | — | | Elimination of foreign exchange differences | | | | | | 2,063 | | | | (5,850 | ) | | | (464 | ) | | | 421 | | | | (1,002 | ) | | | 5 | | Other non-cash items | | | | | | 3,272 | | | | 717 | | | | (75 | ) | | | 1,449 | | | | 68 | | | | (380 | ) | Net cash inflow/(outflow) from trading activities | | | | | | 6,081 | | | | (2,683 | ) | | | 3,096 | | | | 3,137 | | | | 1,411 | | | | 3,784 | | Changes in operating assets and liabilities | | | | | | 58,112 | | | | (22,841 | ) | | | 15,004 | | | | 46,091 | | | | (7,163 | ) | | | 3,999 | | Net cash flows from operating activities before tax | | | | | | 64,193 | | | | (25,524 | ) | | | 18,100 | | | | 49,228 | | | | (5,752 | ) | | | 7,783 | | Income taxes paid | | | | | | (1,092 | ) | | | (331 | ) | | | (592 | ) | | | (554 | ) | | | (290 | ) | | | (104 | ) | Net cash flows from operating activities | | | 29 | | | | 63,101 | | | | (25,855 | ) | | | 17,508 | | | | 48,674 | | | | (6,042 | ) | | | 7,679 | | | | Investing activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sale and maturity of securities | | | | | | | 2,253 | | | | 1,304 | | | | 560 | | | | 36 | | | | 71 | | | | 19 | | Purchase of securities | | | | | | | (2,319 | ) | | | (710 | ) | | | (2,215 | ) | | | (2,158 | ) | | | (69 | ) | | | (82 | ) | Sale of property, plant and equipment | | | | | | | 36 | | | | 85 | | | | 678 | | | | 12 | | | | 6 | | | | 326 | | Purchase of property, plant and equipment | | | | | | | (1,484 | ) | | | (512 | ) | | | (328 | ) | | | (11 | ) | | | (84 | ) | | | (135 | ) | Net investment in business interests and intangible assets | | | 30 | | | | (31 | ) | | | 23 | | | | (159 | ) | | | (1,924 | ) | | | (1,000 | ) | | | 403 | | Net cash flows from investing activities | | | | | | | (1,545 | ) | | | 190 | | | | (1,464 | ) | | | (4,045 | ) | | | (1,076 | ) | | | 531 | | | | Financing activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issue of ordinary shares | | | | | | | 935 | | | | — | | | | — | | | | 935 | | | | — | | | | — | | Issue of subordinated liabilities | | | | | | | 1,000 | | | | 2,749 | | | | 634 | | | | 1,000 | | | | 2,700 | | | | — | | Proceeds of minority interests issued | | | | | | | — | | | | 70 | | | | 288 | | | | — | | | | — | | | | — | | Capital contribution | | | | | | | 750 | | | | — | | | | — | | | | 750 | | | | — | | | | — | | Repayment of subordinated liabilities | | | | | | | (1,250 | ) | | | — | | | | (403 | ) | | | (1,052 | ) | | | — | | | | (381 | ) | Redemption of minority interests | | | | | | | — | | | | (72 | ) | | | (2 | ) | | | — | | | | — | | | | — | | Dividends paid | | | | | | | — | | | | (1,094 | ) | | | (1,922 | ) | | | — | | | | (1,000 | ) | | | (1,850 | ) | Interest on subordinated liabilities | | | | | | | (536 | ) | | | (440 | ) | | | (274 | ) | | | (495 | ) | | | (365 | ) | | | (244 | ) | Net cash flows from financing activities | | | | | | | 899 | | | | 1,213 | | | | (1,679 | ) | | | 1,138 | | | | 1,335 | | | | (2,475 | ) | Effects of exchange rate changes on cash and cash equivalents | | | | | | | (3,010 | ) | | | 8,338 | | | | 364 | | | | (500 | ) | | | 1,381 | | | | 74 | | | | Net increase/(decrease) in cash and cash equivalents | | | | | | | 59,445 | | | | (16,114 | ) | | | 14,729 | | | | 45,267 | | | | (4,402 | ) | | | 5,809 | | Cash and cash equivalents at 1 January | | | | | | | 50,075 | | | | 66,189 | | | | 51,460 | | | | 20,934 | | | | 25,336 | | | | 19,527 | | Cash and cash equivalents at 31 December | | | 33 | | | | 109,520 | | | | 50,075 | | | | 66,189 | | | | 66,201 | | | | 20,934 | | | | 25,336 | |
The accompanying notes on pages 96 to 152, the accounting policies on pages 87 to 95 and the audited sections of the ‘Financial review: Risk, capital and liquidity management’ on pages 37 to 60 form an integral part of these financial statements. 1. Presentation of accounts
The accounts are prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board ("IASB"), and interpretations issued by the International Financial Reporting Interpretations Committee of the IASB (together "IFRS") as adopted by the European Union ("EU"). The EU has not adopted the complete text of IAS 39 'Financial Instruments Recognition and Measurement'; it has relaxed some of the standard's hedging requirements. The Group has not taken advantage of this relaxation and has adopted IAS 39 as issued by the IASB. The date of transition to IFRS for the Group and the Bank and the date of their opening IFRS balance sheets was 1 January 2004.
The Group has adopted IFRS 7 'Financial Instruments: Disclosures' for the accounting period beginning 1 January 2007. This has had no effect on the results, cash flows or financial position of the Group or the Bank. However, there are changes to the notes on the accounts and comparative information is presented accordingly.
The Bank is incorporated in the UK and registered in England. The accounts are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, held-for-trading financial assets and financial liabilities, financial assets and financial liabilities that are designated as at fair value through profit or loss, available-for-sale financial assets and investment property. Recognised financial assets and financial liabilities in fair value hedges are adjusted for changes in fair value in respect of the risk that is hedged.
The Bank accounts are presented in accordance with the Companies Act 1985.
2. Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Bank and entities (including certain special purpose entities) that continue to be controlled by the Group (its subsidiaries). Control exists where the Group has the power to govern the financial and operating policies of the entity; generally conferred by holding a majority of voting rights. On acquisition of a subsidiary, its identifiable assets, liabilities and contingent liabilities are included in the consolidated accounts at their fair value. Any excess of the cost (the fair value of assets given, liabilities incurred or assumed and equity instruments issued by the Group plus any directly attributable costs) of an acquisition over the fair value of the net assets acquired is recognised as goodwill. The interest of minority shareholders is stated at their share of the fair value of the subsidiary's net assets.
The results of subsidiaries acquired are included in the consolidated income statement from the date control passes to the Group. The results of subsidiaries are included up until the Group ceases to control them through sale or significant change in circumstances.
All intra-group balances, transactions, income and expenses are eliminated on consolidation. The consolidated accounts are prepared using uniform accounting policies.
3. Revenue recognition
Interest income on financial assets that are classified as loans and receivables, available-for-sale or held-to-maturity and interest expense on financial liabilities other than those at fair value through profit or loss are determined using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or financial liability (or group of financial assets or liabilities) and of allocating the interest income or interest expense over the expected life of the asset or liability. The effective interest rate is the rate that exactly discounts estimated future cash flows to the instrument's initial carrying amount. Calculation of the effective interest rate takes into account fees payable or receivable, that are an integral part of the instrument's yield, premiums or discounts on acquisition or issue, early redemption fees and transaction costs. All contractual terms of a financial instrument are considered when estimating future cash flows.
Financial assets and financial liabilities held-for-trading or designated as at fair value through profit or loss are recorded at fair value. Changes in fair value are recognised in profit or loss together with dividends and interest receivable and payable.
Commitment and utilisation fees are determined as a percentage of the outstanding facility. If it is unlikely that a specific lending arrangement will be entered into, such fees are taken to profit or loss over the life of the facility otherwise they are deferred and included in the effective interest rate on the advance.
Fees in respect of services are recognised as the right to consideration accrues through the provision of the service to the customer. The arrangements are generally contractual and the cost of providing the service is incurred as the service is rendered. The price is usually fixed and always determinable. The application of this policy to significant fee types is outlined below.
Payment services: Accounting policiesthis comprises income received for payment services including cheques cashed, direct debits, Clearing House Automated Payments (the UK electronic settlement system) and BACS payments (the automated clearing house that processes direct debits and direct credits). These are generally charged on a per transaction basis. The income is earned when the payment or transaction occurs. Charges for payment services are usually debited to the customer's |
1. Presentation of accounts The accounts are prepared on a going concern basis and in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) and interpretations issued by the International Financial Reporting Interpretations Committee of the IASB as adopted by the European Union (EU) (together IFRS). The EU has not adopted the complete text of IAS 39 ‘Financial Instruments: Recognition and Measurement’; it has relaxed some of the Standard’s hedging requirements. The Group has not taken advantage of this relaxation and has adopted IAS 39 as issued by the IASB: the Group’s financial statements are prepared in accordance with IFRS as issued by the IASB. IAS 1 (Revised 2007) ‘Presentation of Financial Statements’ has introduced a number of changes in the format and content of the Group’s financial statements including a statement of changes in equity (showing the components of changes in equity for the period) as a primary financial statement and a statement of comprehensive income immediately following the income statement. The Group has adopted ‘Improving Disclosures about Financial Instruments (Amendments to IFRS 7 Financial Instruments: Disclosures)’. These amendments expand the disclosures required about fair value measurement and liquidity risk. As described in Note 34, the NatWest Group has made changes to the operating segments. The changes do not affect the NatWest Group’s results. Comparative data for the operating segments have been restated accordingly. IAS 1 ‘Presentation of Financial Statements’ requires the presentation of a balance sheet as at the beginning of the earliest period when a company applies an accounting policy retrospectively. For the NatWest Group, this balance sheet would be as at 31 December 2007. However, the retrospective accounting for the changes made to the operating segments had no impact on the balance sheet as at 31 December 2007, and therefore that third balance sheet has not been represented in these Consolidated Financial Statements. The Bank is incorporated in the UK and registered in England. The accounts are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, held-for-trading financial assets and financial liabilities, financial assets and financial liabilities that are designated as at fair value through profit or loss, available-for-sale financial assets and investment property. Recognised financial assets and financial liabilities in fair value hedges are adjusted for changes in fair value in respect of the risk that is hedged. The Bank accounts are presented in accordance with the Companies Act 2006. 2. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Bank and entities (including certain special purpose entities) that are controlled by the Group. Control exists where the Group has the power to govern the financial and operating policies of the entity; generally conferred by holding a majority of voting rights. On acquisition of a subsidiary, its identifiable assets, liabilities and contingent liabilities are included in the consolidated accounts at their fair value. Any excess of the cost (the fair value of assets given, liabilities incurred or assumed and equity instruments issued by the Group plus any directly attributable costs) of an acquisition over the fair value of the net assets acquired is recognised as goodwill. The interest of minority shareholders is stated at their share of the fair value of the subsidiary’s net assets. The results of subsidiaries acquired are included in the consolidated income statement from the date control passes until the Group ceases to control them through a sale or significant change in circumstances. All intra-group balances, transactions, income and expenses are eliminated on consolidation. The consolidated accounts are prepared using uniform accounting policies. 3. Revenue recognition Interest income on financial assets that are classified as loans and receivables, available-for-sale or held-to-maturity and interest expense on financial liabilities other than those at fair value through profit or loss are determined using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or financial liability (or group of financial assets or liabilities) and of allocating the interest income or interest expense over the expected life of the asset or liability. The effective interest rate is the rate that exactly discounts estimated future cash flows to the instrument’s initial carrying amount. Calculation of the effective interest rate takes into account fees payable or receivable, that are an integral part of the instrument’s yield, premiums or discounts on acquisition or issue, early redemption fees and transaction costs. All contractual terms of a financial instrument are considered when estimating future cash flows. Financial assets and financial liabilities held-for-trading or designated as at fair value through profit or loss are recorded at fair value. Changes in fair value are recognised in profit or loss together with dividends and interest receivable and payable. Commitment and utilisation fees are determined as a percentage of the outstanding facility. If it is unlikely that a specific lending arrangement will be entered into, such fees are taken to profit or loss over the life of the facility otherwise they are deferred and included in the effective interest rate on the advance. Fees in respect of services are recognised as the right to consideration accrues through the provision of the service to the customer. The arrangements are generally contractual and the cost of providing the service is incurred as the service is rendered. The price is usually fixed and always determinable. The application of this policy to significant fee types is outlined below. Payment services: this comprises income received for payment services including cheques cashed, direct debits, Clearing House Automated Payments (the UK electronic settlement system) and BACS payments (the automated clearing house that processes direct debits and direct credits). These are generally charged on a per transaction basis. The income is earned when the payment or transaction occurs. Charges for payment services are usually debited to the customer’s account monthly or quarterly in arrears. Accruals are raised for services provided but not charged at period end. Accounting policies continued Card related services: fees from credit card business include: Card related services: fees from credit card business include:●
| Commission received from retailers for processing credit and debit card transactions: income is accrued to the income statement as the service is performed.performed; | | | ● | Interchange received: as issuer, the Group receives a fee (interchange) each time a cardholder purchases goods and services. The Group also receives interchange fees from other card issuers for providing cash advances through its branch and Automated Teller Machine networks. These fees are accrued once the transaction has taken place.
| | | | An annual fee payable by a credit card holder is deferred and taken to profit or loss over the period of the service i.e. 12 months. Insurance brokerage: this is made up of fees and commissions received from the agency sale of insurance. Commission on the sale of an insurance contract is earned at the inception of the policy as the insurance has been arranged and placed. However, provision is made where commission is refundable in the event of policy cancellation in line with estimated cancellations.
Investment management fees: fees charged for managing investments are recognised as revenue as the services are provided. Incremental costs that are directly attributable to securing an investment management contract are deferred and charged as expense as the related revenue is recognised.
4. Pensions and other post-retirement benefits
The Group provides post-retirement benefits in the form of pensions and healthcare plans to eligible employees.
For defined benefit schemes, scheme liabilities are measured on an actuarial basis using the projected unit credit method and discounted at a rate that reflects the current rate of return on a high quality corporate bond of equivalent term and currency to the scheme liabilities. Scheme assets are measured at their fair value. Cumulative actuarial gains or losses that exceed 10 per cent of the greater of the assets or the obligations of the scheme are amortised to the income statement over the expected average remaining lives of participating employees. Past service costs are recognised immediately to the extent that benefits have vested; otherwise they are amortised over the period until the benefits become vested.
Any surplus or deficit of scheme assets over liabilities adjusted for unrecognised actuarial gains and losses and past service costs is recognised in the balance sheet as an asset (surplus) or liability (deficit).
Contributions to defined contribution pension schemes are recognised in the income statement when payable.
5. Intangible assets and goodwill
Intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to profit or loss over the assets'
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Insurance brokerage: this is made up of fees and commissions received from the agency sale of insurance. Commission on the sale of an insurance contract is earned at the inception of the policy, as the insurance has been arranged and placed. However, provision is made where commission is refundable in the event of policy cancellation in line with estimated cancellations. Investment management fees: fees charged for managing investments are recognised as revenue as the services are provided. Incremental costs that are directly attributable to securing an investment management contract are deferred and charged as expense as the related revenue is recognised. 4. Pensions and other post-retirement benefits The Group provides post-retirement benefits in the form of pensions and healthcare plans to eligible employees. For defined benefit schemes, scheme liabilities are measured on an actuarial basis using the projected unit credit method and discounted at a rate that reflects the current rate of return on a high quality corporate bond of equivalent term and currency to the scheme liabilities. Scheme assets are measured at their fair value. Cumulative actuarial gains or losses that exceed 10 per cent of the greater of the assets or the obligations of the scheme are amortised to the income statement over the expected average remaining lives of participating employees. Past service costs are recognised immediately to the extent that benefits have vested; otherwise they are amortised over the period until the benefits become vested. Any surplus or deficit of scheme assets over liabilities adjusted for unrecognised actuarial gains and losses and past service costs is recognised in the balance sheet as an asset (surplus) or liability (deficit). Contributions to defined contribution pension schemes are recognised in the income statement when payable. 5. Intangible assets and goodwill Intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to profit or loss over the assets’ estimated economic lives using methods that best reflect the pattern of economic benefits and is included in depreciation and amortisation. The estimated useful economic lives are as follows: Core deposit intangibles | 6 to 10 years | Other acquired intangibles | 5 to 10 years | Computer software | 3 to 5 years |
Expenditure on internally generated goodwill and brands is written-off as incurred. Direct costs relating to the development of internal-use computer software are capitalised once technical feasibility and economic viability have been established. These costs include payroll, the costs of materials and services, and directly attributable overheads. Capitalisation of costs ceases when the software is capable of operating as intended. During and after development, accumulated costs are reviewed for impairment against the projected benefits that the software is expected to generate. Costs incurred prior to the establishment of technical feasibility and economic viability are expensed as incurred as are all training costs and general overheads. The costs of licences to use computer software that are expected to generate economic benefits beyond one year are also capitalised. Acquired goodwill, being the excess of the cost of an acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary, associate or joint venture acquired, is initially recognised at cost and subsequently at cost less any accumulated impairment losses. Goodwill arising on the acquisition of subsidiaries and joint ventures is included in the balance sheet category ‘Intangible assets’ and that on associates within their carrying amounts. The gain or loss on the disposal of a subsidiary, associate or joint venture includes the carrying value of any related goodwill. 6. Property, plant and equipment Items of property, plant and equipment (except investment property –see accounting policy 8) are stated at cost less accumulated depreciation and impairment losses. Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for separately. Depreciation is charged to profit or loss on a straight-line basis so as to write-off the depreciable amount of property, plant and equipment (including assets owned and let on operating leases) over their estimated useful lives. The depreciable amount is the cost of an asset less its residual value. Land is not depreciated. Estimated useful lives are as follows: Freehold and long leasehold buildings | 50 years | Short leaseholds | unexpired period of the lease | Property adaptation costs | 10 to 15 years | Computer equipment | up to 5 years | Other equipment | 4 to 15 years |
Financial statements 7. Impairment of intangible assets and property, plant and equipment At each reporting date, the Group assesses whether there is any indication that its intangible assets, or property, plant and equipment are impaired. If any such indication exists, the Group estimates the recoverable amount of the asset and the impairment loss if any. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. If an asset does not generate cash flows that are independent from those of other assets or groups of assets, recoverable amount is determined for the cash-generating unit to which the asset belongs. The recoverable amount of an asset is the higher of its fair value less cost to sell and its value in use. Value in use is the present value of future cash flows from the asset or cash-generating unit discounted at a rate that reflects market interest rates adjusted for risks specific to the asset or cash-generating unit that have not been reflected in the estimation of future cash flows. If the recoverable amount of an intangible or tangible asset is less than its carrying value, an impairment loss is recognised immediately in profit or loss and the carrying value of the asset reduced by the amount of the loss. A reversal of an impairment loss on intangible assets (excluding goodwill) or property, plant and equipment is recognised as it arises provided the increased carrying value does not exceed that which it would have been had no impairment loss been recognised. Impairment losses on goodwill are not reversed. 8. Investment property Investment property comprises freehold and leasehold properties that are held to earn rentals or for capital appreciation or both. It is not depreciated but is stated at fair value based on valuations by independent registered valuers. Fair value is based on current prices for similar properties in the same location and condition. Any gain or loss arising from a change in fair value is recognised in profit or loss. Rental income from investment property is recognised on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income. 9. Foreign currencies The Group’s consolidated financial statements are presented in sterling which is the functional currency of the Bank. Transactions in foreign currencies are translated into sterling at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the rates of exchange ruling at the balance sheet date. Foreign exchange differences arising on translation are reported in income from trading activities except for differences arising on cash flow hedges and hedges of net investments in foreign operations. Non-monetary items denominated in foreign currencies that are stated at fair value are translated into sterling at foreign exchange rates ruling at the dates the values were determined. Translation differences arising on non-monetary items measured at fair value are recognised in profit or loss except for differences arising on available-for-sale non-monetary financial assets, for example, equity shares which are included in the available-for-sale reserve in equity unless the asset is the hedged item in a fair value hedge. The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into sterling at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated into sterling at average exchange rates unless these do not approximate to the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on the translation of a foreign operation are recognised directly in equity and included in profit or loss on its disposal. 10. Leases Contracts to lease assets are classified as finance leases if they transfer substantially all the risks and rewards of ownership of the asset to the customer. Other contracts to lease assets are classified as operating leases. Finance lease receivables are stated in the balance sheet at the amount of the net investment in the lease being the minimum lease payments and any unguaranteed residual value discounted at the interest rate implicit in the lease. Finance lease income is allocated to accounting periods so as to give a constant periodic rate of return before tax on the net investment. Unguaranteed residual values are subject to regular review to identify potential impairment. If there has been a reduction in the estimated unguaranteed residual value, the income allocation is revised and any reduction in respect of amounts accrued is recognised immediately. Rental income from operating leases is credited to the income statement on a receivable basis over the term of the lease. Operating lease assets are included within Property, plant and equipment and depreciated over their useful lives (see accounting policy 6). 11. Provisions The Group recognises a provision for a present obligation resulting from a past event when it is more likely than not that it will be required to transfer economic benefits to settle the obligation and the amount of the obligation can be estimated reliably. Provision is made for restructuring costs, including the costs of redundancy, when the Group has a constructive obligation to restructure. An obligation exists when the Group has a detailed formal plan for the restructuring and has raised a valid expectation in those affected by starting to implement the plan or announcing its main features. If the Group has a contract that is onerous, it recognises the present obligation under the contract as a provision. An onerous contract is one where the unavoidable costs of meeting the obligations under it exceed the expected economic benefits. When the Group vacates a leasehold property, a provision is recognised for the costs under the lease less any expected economic benefits (such as rental income). Contingent liabilities are possible obligations arising from past events whose existence will be confirmed only by uncertain future events or present obligations arising from past events that are not recognised because either an outflow of economic benefits is not probable or the amount of the obligation cannot be reliably measured. Contingent liabilities are not recognised but information about them is disclosed unless the possibility of any outflow of economic benefits in settlement is remote. Accounting policies continued 12. Taxation Provision is made for taxation at current enacted rates on taxable profits, arising in income or in equity, taking into account relief for overseas taxation where appropriate. Deferred taxation is accounted for in full for all temporary differences between the carrying amount of an asset or liability for accounting purposes and its carrying amount for tax purposes, except in relation to overseas earnings where remittance is controlled by the Group, and goodwill. Deferred tax assets are only recognised to the extent that it is probable that they will be recovered. 13. Financial assets On initial recognition, financial assets are classified into held-to-maturity investments; available-for-sale financial assets; held-for-trading; designated as at fair value through profit or loss; or loans and receivables. Held-to-maturity investments – a financial asset may be classified as a held-to-maturity investment only if it has fixed or determinable payments, a fixed maturity and the Group has the positive intention and ability to hold to maturity. Held-to-maturity investments are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at amortised cost using the effective interest method (see accounting policy 3) less any impairment losses. Held-for-trading – a financial asset is classified as held-for-trading if it is acquired principally for sale in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative (not in a qualifying hedge relationship). Held-for-trading financial assets are recognised at fair value with transaction costs being recognised in profit or loss. Subsequently they are measured at fair value. Gains and losses on held-for-trading financial assets are recognised in profit or loss as they arise. Designated as at fair value through profit or loss – financial assets may be designated as at fair value through profit or loss only if such designation (a) eliminates or significantly reduces a measurement or recognition inconsistency; or (b) applies to a group of financial assets, financial liabilities or both, that the Group manages and evaluates on a fair value basis; or (c) relates to an instrument that contains an embedded derivative which is not evidently closely related to the host contract. Financial assets that the Group designates on initial recognition as being at fair value through profit or loss are recognised at fair value, with transaction costs being recognised in profit or loss, and are subsequently measured at fair value. Gains and losses on financial assets that are designated as at fair value through profit or loss are recognised in profit or loss as they arise. The Group has designated financial assets as at fair value through profit or loss principally where the assets are economically hedged by derivatives and fair value designation eliminates the measurement inconsistency that would arise if the assets were carried at amortised cost or classified as available-for-sale. Loans and receivables – non-derivative financial assets with fixed or determinable repayments that are not quoted in an active market are classified as loans and receivables, except those that are classified as available-for-sale or as held-for-trading, or designated as at fair value through profit or loss. Loans and receivables are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at amortised cost using the effective interest method (see accounting policy 3) less any impairment losses. Available-for-sale – financial assets that are not classified as held-to-maturity; held-for-trading; designated as at fair value through profit or loss; or loans and receivables, are classified as available-for-sale. Financial assets can be designated as available-for-sale on initial recognition. Available-for-sale financial assets are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at fair value. Unquoted equity investments whose fair value cannot be measured reliably are carried at cost and classified as available-for-sale financial assets. Impairment losses and exchange differences resulting from retranslating the amortised cost of foreign currency monetary available-for-sale financial assets are recognised in profit or loss together with interest calculated using the effective interest method (see accounting policy 3). Other changes in the fair value of available-for-sale financial assets are reported in a separate component of shareholders’ equity until disposal, when the cumulative gain or loss is recognised in profit or loss. Reclassifications – held-for-trading and available-for-sale financial assets that meet the definition of loans and receivables (non-derivative financial assets with fixed or determinable payments that are not quoted in an active market) may be reclassified to loans and receivables if the Group has the intention and ability to hold the financial asset for the foreseeable future or until maturity. The Group typically regards the foreseeable future as twelve months from the date of reclassification. Additionally, held-for-trading financial assets that do not meet the definition of loans and receivables may, in rare circumstances, be transferred to available-for-sale financial assets or to held-to-maturity investments. Reclassifications are made at fair value. This fair value becomes the asset’s new cost or amortised cost as appropriate. Gains and losses recognised up to the date of reclassification are not reversed. Regular way purchases of financial assets classified as loans and receivables are recognised on settlement date; issues of equity or financial liabilities measured at amortised cost are recognised on settlement date; all other regular way transactions in financial instruments are recognised on trade date. Fair value for a net open position in a financial asset that is quoted in an active market is the current bid price times the number of units of the instrument held. Fair values for financial assets not quoted in an active market are determined using appropriate valuation techniques including discounting future cash flows, option pricing models and other methods that are consistent with accepted economic methodologies for pricing financial assets. Financial statements
14. Impairment of financial assets The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or group of financial assets classified as held-to-maturity, available-for-sale or loans and receivables is impaired. A financial asset or portfolio of financial assets is impaired and an impairment loss incurred if there is objective evidence that an event or events since initial recognition of the asset have adversely affected the amount or timing of future cash flows from the asset. Financial assets carried at amortised cost – if there is objective evidence that an impairment loss on a financial asset or group of financial assets classified as loans and receivables or as held-to-maturity investments has been incurred, the Group measures the amount of the loss as the difference between the carrying amount of the asset or group of assets and the present value of estimated future cash flows from the asset or group of assets discounted at the effective interest rate of the instrument at initial recognition. Impairment losses are assessed individually for financial assets that are individually significant and individually or collectively for assets that are not individually significant. In making collective assessment of impairment, financial assets are grouped into portfolios on the basis of similar risk characteristics. Future cash flows from these portfolios are estimated on the basis of the contractual cash flows and historical loss experience for assets with similar credit risk characteristics. Historical loss experience is adjusted, on the basis of observable data, to reflect current conditions not affecting the period of historical experience. Impairment losses are recognised in profit or loss and the carrying amount of the financial asset or group of financial assets reduced by establishing an allowance for impairment losses. If, in a subsequent period, the amount of the impairment loss reduces and the reduction can be ascribed to an event after the impairment was recognised, the previously recognised loss is reversed by adjusting the allowance. Once an impairment loss has been recognised on a financial asset or group of financial assets, interest income is recognised on the carrying amount using the rate of interest at which estimated future cash flows were discounted in measuring impairment. Impaired loans and receivables are written off, i.e. the impairment provision is applied in writing down the loan's carrying value partially or in full, when the Group concludes that there is no longer any realistic prospect of recovery of part or all of the loan. For portfolios that are collectively assessed for impairment, the timing of write off principally reflects historic recovery experience for each portfolio. For loans that are individually assessed for impairment, the timing of write off is determined on a case-by-case basis. Such loans are reviewed regularly and write offs will be prompted by bankruptcy, insolvency, restructuring and similar events. Amounts recovered after a loan has been written off are credited to the loan impairment charge for the period in which they are received. Financial assets carried at fair value – when a decline in the fair value of a financial asset classified as available-for-sale has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss is removed from equity and recognised in profit or loss. The loss is measured as the difference between the amortised cost of the financial asset and its current fair value. Impairment losses on available-for-sale equity instruments are not reversed through profit or loss, but those on available-for-sale debt instruments are reversed, if there is an increase in fair value that is objectively related to a subsequent event. 15. Financial liabilities On initial recognition financial liabilities are classified into held-for-trading; designated as at fair value through profit or loss; or amortised cost. Held for trading – a financial liability is classified as held-for-trading if it is incurred principally for repurchase in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative (not in a qualifying hedge relationship). Held-for-trading financial liabilities are recognised at fair value with transaction costs being recognised in profit or loss. Subsequently they are measured at fair value. Gains and losses are recognised in profit or loss as they arise. Designated as at fair value through profit or loss – financial liabilities may be designated as at fair value through profit or loss only if such designation (a) eliminates or significantly reduces a measurement or recognition inconsistency; or (b) applies to a group of financial assets, financial liabilities or both that the Group manages and evaluates on a fair value basis; or (c) relates to an instrument that contains an embedded derivative which is not evidently closely related to the host contract. Financial liabilities that the Group designates on initial recognition as being at fair value through profit or loss are recognised at fair value, with transaction costs being recognised in profit or loss, and are subsequently measured at fair value. Gains and losses on financial liabilities that are designated as at fair value through profit or loss are recognised in profit or loss as they arise. The principal categories of financial liabilities designated as at fair value through profit or loss are structured liabilities issued by the Group: designation significantly reduces the measurement inconsistency between these liabilities and the related derivatives carried at fair value. Amortised cost – all other financial liabilities are measured at amortised cost using the effective interest method (see accounting policy 3). Fair value for a net open position in a financial liability that is quoted in an active market is the current offer price times the number of units of the instrument held or issued. Fair values for financial liabilities not quoted in an active market are determined using appropriate valuation techniques including discounting future cash flows, option pricing models and other methods that are consistent with accepted economic methodologies for pricing financial liabilities. 16. Financial guarantee contracts Under a financial guarantee contract, the Group, in return for a fee, undertakes to meet a customer’s obligations under the terms of a debt instrument if the customer fails to do so. A financial guarantee is recognised as a liability; initially at fair value and, if not designated as at fair value through profit or loss, subsequently at the higher of its initial value less cumulative amortisation and any provision under the contract measured in accordance with accounting policy 11 Provisions. Amortisation is calculated so as to recognise fees receivable in profit or loss over the period of the guarantee. Accounting policies continued 17. Loan commitments Provision is made for loan commitments, other than those classified as held-for-trading, if it is probable that the facility will be drawn and the resulting loan will be recognised at a value less than the cash advanced. Syndicated loan commitments in excess of the level of lending under the commitment approved for retention by the Group are classified as held-for-trading and measured at fair value. 18. Derecognition A financial asset is derecognised when it has been transferred and the transfer qualifies for derecognition. A transfer requires that the Group either: (a) transfers the contractual rights to receive the asset’s cash flows; or (b) retains the right to the asset’s cash flows but assumes a contractual obligation to pay those cash flows to a third party. After a transfer, the Group assesses the extent to which it has retained the risks and rewards of ownership of the transferred asset. If substantially all the risks and rewards have been retained, the asset remains on the balance sheet. If substantially all the risks and rewards have been transferred, the asset is derecognised. If substantially all the risks and rewards have been neither retained nor transferred, the Group assesses whether or not it has retained control of the asset. If it has not retained control, the asset is derecognised. Where the Group has retained control of the asset, it continues to recognise the asset to the extent of its continuing involvement. A financial liability is removed from the balance sheet when the obligation is discharged, or cancelled, or expires. On the redemption or settlement of debt securities (including subordinated liabilities) issued by the Group, the Group derecognises the debt instrument and records a gain or loss being the difference between the debt’s carrying amount and the cost of redemption or settlement. The same treatment applies where the debt is exchanged for a new debt issue that has terms substantially different from those of the existing debt. The assessment of whether the terms of the new debt instrument are substantially different takes into account qualitative and quantitative characteristics including a comparison of the discounted present value of the cash flows under the new terms with the discounted present value of the remaining cash flows of the original debt issue. 19. Sale and repurchase transactions Securities subject to a sale and repurchase agreement under which substantially all the risks and rewards of ownership are retained by the Group continue to be shown on the balance sheet and the sale proceeds recorded as a financial liability. Securities acquired in a reverse sale and repurchase transaction under which the Group is not exposed to substantially all the risks and rewards of ownership are not recognised on the balance sheet and the consideration paid is recorded as a financial asset. Securities borrowing and lending transactions are usually secured by cash or securities advanced by the borrower. Borrowed securities are not recognised on the balance sheet or lent securities derecognised. Cash collateral received or given is treated as a loan or deposit; collateral in the form of securities is not recognised. However, where securities borrowed are transferred to third parties, a liability for the obligation to return the securities to the stock lending counterparty is recorded. 20. Netting Financial assets and financial liabilities are offset and the net amount presented in the balance sheet when, and only when, the Group currently has a legally enforceable right to set off the recognised amounts; and it intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. The Group is party to a number of arrangements, including master netting agreements, that give it the right to offset financial assets and financial liabilities but where it does not intend to settle the amounts net or simultaneously and therefore the assets and liabilities concerned are presented gross. 21. Capital instruments The Group classifies a financial instrument that it issues as a financial asset, financial liability or an equity instrument in accordance with the substance of the contractual arrangement. An instrument is classified as a liability if it is a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or financial liabilities on potentially unfavourable terms. An instrument is classified as equity if it evidences a residual interest in the assets of the Group after the deduction of liabilities. The components of a compound financial instrument issued by the Group are classified and accounted for separately as financial assets, financial liabilities or equity as appropriate. 22. Derivatives and hedging Derivative financial instruments are initially recognised, and subsequently measured, at fair value. Derivative fair values are determined from quoted prices in active markets where available. Where there is no active market for an instrument, fair value is derived from prices for the derivative’s components using appropriate pricing or valuation models. A derivative embedded in a contract is accounted for as a stand-alone derivative if its economic characteristics are not closely related to the economic characteristics of the host contract; unless the entire contract is measured at fair value with changes in fair value recognised in profit or loss. Gains and losses arising from changes in the fair value of a derivative are recognised as they arise in profit or loss unless the derivative is the hedging instrument in a qualifying hedge. The Group enters into three types of hedge relationship: hedges of changes in the fair value of a recognised asset or liability or firm commitment (fair value hedges); hedges of the variability in cash flows from a recognised asset or liability or a highly probable forecast transaction (cash flow hedges); and hedges of the net investment in a foreign operation. Hedge relationships are formally documented at inception. The documentation identifies the hedged item and the hedging instrument and details the risk that is being hedged and the way in which effectiveness will be assessed at inception and during the period of the hedge. If the hedge is not highly effective in offsetting changes in fair values or cash flows attributable to the hedged risk, consistent with the documented risk management strategy, hedge accounting is discontinued. Fair value hedge – in a fair value hedge, the gain or loss on the hedging instrument is recognised in profit or loss. The gain or loss on the hedged item attributable to the hedged risk is recognised in profit or loss and adjusts the carrying amount of the hedged item. Hedge accounting is discontinued if the hedge no longer meets the criteria for hedge accounting; or if the hedging instrument expires or is sold, terminated or exercised; or if hedge designation is revoked. If the hedged item is one for which the effective interest rate method is used, any cumulative adjustment is amortised to profit or loss over the life of the hedged item using a recalculated effective interest rate. Cash flow hedge – in a cash flow hedge, the effective portion of the gain or loss on the hedging instrument is recognised directly in equity and the ineffective portion in profit or loss. When the forecast transaction results in the recognition of a financial asset or financial liability, the cumulative gain or loss is reclassified from equity in the same periods in which the asset or liability affects profit or loss. Otherwise the cumulative gain or loss is removed from equity and recognised in profit or loss at the same time as the hedged transaction. Hedge accounting is discontinued if the hedge no longer meets the criteria for hedge accounting; if the hedging instrument expires or is sold, terminated or exercised; if the forecast transaction is no longer expected to occur; or if hedge designation is revoked. On the discontinuance of hedge accounting (except where a forecast transaction is no longer expected to occur), the cumulative unrealised gain or loss in equity is recognised in profit or loss when the hedged cash flow occurs or, if the forecast transaction results in the recognition of a financial asset or financial liability, in the same periods during which the asset or liability affects profit or loss. Where a forecast transaction is no longer expected to occur, the cumulative unrealised gain or loss in equity is recognised in profit or loss immediately. Hedge of net investment in a foreign operation – in the hedge of a net investment in a foreign operation, the portion of foreign exchange differences arising on the hedging instrument determined to be an effective hedge is recognised directly in equity. Any ineffective portion is recognised in profit or loss. Non-derivative financial liabilities as well as derivatives may be the hedging instrument in a net investment hedge. 23. Cash and cash equivalents Cash and cash equivalents comprises cash and demand deposits with banks together with short-term highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of change in value. 24. Shares in Group entities The Bank’s investments in its subsidiaries are stated at cost less any impairment. Critical accounting policies and key sources of estimation uncertainty The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. UK company law and IFRS require the directors, in preparing the Group’s financial statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent. In the absence of an applicable standard or interpretation, IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’, requires management to develop and apply an accounting policy that results in relevant and reliable information in the light of the requirements and guidance in IFRS dealing with similar and related issues and the IASB’s Framework for the Preparation and Presentation of Financial Statements. The judgements and assumptions involved in the Group’s accounting policies that are considered by the Board to be the most important to the portrayal of its financial condition are discussed below. The use of estimates, assumptions or models that differ from those adopted by the Group would affect its reported results. Loan impairment provisions The Group’s loan impairment provisions are established to recognise incurred impairment losses in its portfolio of loans classified as loans and receivables and carried at amortised cost. A loan is impaired when there is objective evidence that events since the loan was granted have affected expected cash flows from the loan. The impairment loss is the difference between the carrying value of the loan and the present value of estimated future cash flows at the loan’s original effective interest rate. At 31 December 2009, gross loans and advances to customers totalled £170,068 million (2008 – £201,191 million) and customer loan impairment provisions amounted to £5,665 million (2008 – £2,924 million). There are two components to the Group’s loan impairment provisions: individual and collective. Individual component – all impaired loans that exceed specific thresholds are individually assessed for impairment. Individually assessed loans principally comprise the Group’s portfolio of commercial loans to medium and large businesses. Impairment losses are recognised as the difference between the carrying value of the loan and the discounted value of management’s best estimate of future cash repayments and proceeds from any security held. These estimates take into account the customer’s debt capacity and financial flexibility; the level and quality of its earnings; the amount and sources of cash flows; the industry in which the counterparty operates; and the realisable value of any security held. Estimating the quantum and timing of future recoveries involves significant judgement. The size of receipts will depend on the future performance of the borrower and the value of security, both of which will be affected by future economic conditions; additionally, collateral may not be readily marketable. The actual amount of future cash flows and the date they are received may differ from these estimates and consequently actual losses incurred may differ from those recognised in these financial statements. Collective component – this is made up of two elements: loan impairment provisions for impaired loans that are below individual assessment thresholds (collectively assessed provisions) and for loan losses that have been incurred but have not been separately identified at the balance sheet date (latent loss provisions). Collectively assessed provisions are established on a portfolio basis using a present value methodology taking into account the level of arrears, security, past loss experience, credit scores and defaults based on portfolio trends. The most significant factors in establishing these provisions are the expected loss rates and the related average life. These portfolios include credit card receivables and other personal advances including mortgages. The future credit quality of these portfolios is subject to uncertainties that could cause actual credit losses to differ materially from reported loan impairment provisions. These uncertainties include the economic environment, notably interest rates and their effect on customer spending, the unemployment level, payment behaviour and bankruptcy trends. Latent loss provisions are held against estimated Accounting policies continued impairment losses in the performing portfolio that have yet to be identified as at the balance sheet date. To assess the latent loss within its portfolios, the Group has developed methodologies to estimate the time that an asset can remain impaired within a performing portfolio before it is identified and reported as such. Pensions The Group operates a number of defined benefit pension schemes as described in Note 4 on the accounts. The assets of the schemes are measured at their fair value at the balance sheet date. Scheme liabilities are measured using the projected unit method, which takes account of projected earnings increases, using actuarial assumptions that give the best estimate of the future cash flows that will arise under the scheme liabilities. These cash flows are discounted at the interest rate applicable to high-quality corporate bonds of the same currency and term as the liabilities. Any surplus or deficit in excess of 10% of the greater of scheme assets and scheme liabilities is recognised in the balance sheet as an asset (surplus) or liability (deficit). In determining the value of scheme liabilities, assumptions are made as to price inflation, dividend growth, pension increases, earnings growth and employees. There is a range of assumptions that could be adopted in valuing the schemes’ liabilities. Different assumptions could significantly alter the amount of the surplus or deficit recognised in the balance sheet and the pension cost charged to the income statement. The assumptions adopted for the Group’s pension schemes are set out in Note 4 on the accounts together with the sensitivity of reported amounts to changes in those assumptions. A pension asset of £10 million and a liability of £512 million were recognised in the balance sheet at 31 December 2009 (2008: asset – nil, liability – £1,198 million). Fair value – financial instruments Financial instruments classified as held-for-trading or designated as at fair value through profit or loss and financial assets classified as available-for-sale are recognised in the financial statements at fair value. All derivatives are measured at fair value. Gains or losses arising from changes in the fair value of financial instruments classified as held-for-trading or designated as at fair value through profit or loss are included in the income statement. Unrealised gains and losses on available-for-sale financial assets are recognised directly in equity unless an impairment loss is recognised. Financial instruments measured at fair value include: Loans and advances (held-for-trading and designated as at fair value through profit or loss) – principally comprise reverse repurchase agreements (reverse repos) and cash collateral. Debt securities (held-for-trading, designated as at fair value through profit or loss and available-for-sale) – debt securities include those issued by governments, municipal bodies, mortgage agencies and financial institutions as well as corporate bonds, debentures and residual interests in securitisations. Equity securities (held-for-trading, designated as at fair value through profit or loss and available-for-sale) – comprise equity shares of companies or corporations both listed and unlisted. Deposits by banks and customer accounts (held-for-trading and designated as at fair value through profit or loss) – deposits measured at fair value principally include repurchase agreements (repos). Debt securities in issue (held-for-trading and designated as at fair value through profit or loss) – measured at fair value and principally comprise medium term notes. Short positions (held-for-trading) – arise in dealing and market making activities where debt securities and equity shares are sold which the Group does not currently possess. Derivatives – these include swaps (currency swaps, interest rate swaps, credit default swaps, total return swaps and equity and equity index swaps), forward foreign exchange contracts, forward rate agreements, futures (currency, interest rate and equity) and options (exchange-traded options on currencies, interest rates and equities and equity indices and OTC currency and equity options, interest rate caps and floors and swaptions). Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Fair values are determined from quoted prices in active markets for identical financial assets or financial liabilities where these are available. Fair value for a net open position in a financial asset or financial liability in an active market is the current bid or offer price times the number of units of the instrument held. Where a trading portfolio contains both financial assets and financial liabilities which are derivatives of the same underlying instrument, fair value is determined by valuing the gross long and short positions at current mid market prices, with an adjustment at portfolio level to the net open long or short position to amend the valuation to bid or offer as appropriate. Where the market for a financial instrument is not active, fair value is established using a valuation technique. These valuation techniques involve a degree of estimation, the extent of which depends on the instrument’s complexity and the availability of market-based data. More details about the Group’s valuation methodologies and the sensitivity to reasonably possible alternative assumptions of the fair value of financial instruments valued using techniques where at least one significant input is unobservable are given in Note 10 on pages 103 to 114. Deferred tax The Group makes provision for deferred tax on short-term and other temporary differences where tax recognition occurs at a different time from accounting recognition. Deferred tax assets of £568 million were recognised as at 31 December 2009 (2008 – £496 million). The Group has recognised deferred tax assets in respect of losses, principally in the UK, and short-term timing differences. Deferred tax assets are recognised in respect of unused tax losses to the extent that it is probable that there will be future taxable profits against which the losses can be utilised. Business projections prepared for impairment reviews (see Note 16) indicate that sufficient future taxable income will be available against which to offset these recognised deferred tax assets within eight years. The number of years into the future for which forecast profits should be considered when assessing the recoverability of a deferred tax asset is a matter of judgment. A period of eight years is underpinned by the Group’s business projections, its history of profitable operation and the continuing strength of its core business franchises. The Group’s cumulative losses are principally attributable to the recent unparalleled market conditions. Deferred tax assets of £26 million (2008 – £17 million) have not been recognised in respect of tax losses carried forward in jurisdictions where doubt exists over the availability of future taxable profits. International Financial Reporting Standards The International Accounting Standards Board (IASB) published a revised IFRS 3 ‘Business Combinations’ and related revisions to IAS 27 ‘Consolidated and Separate Financial Statements’ following the completion in January 2008 of its project on the acquisition and disposal of subsidiaries. The standards improve convergence with US GAAP and provide new guidance on accounting for changes in interests in subsidiaries. The cost of an acquisition will comprise only consideration paid to vendors for equity; other costs will be expensed immediately. Groups will only account for goodwill on acquisition of a subsidiary; subsequent changes in interest will be recognised in equity and only on a loss of control will there be a profit or loss on disposal to be recognised in income. The changes are effective for accounting periods beginning on or after 1 July 2009 but both standards may be adopted together for accounting periods beginning on or after 1 July 2007. These changes will affect the Group’s accounting for future acquisitions and disposals of subsidiaries. The IASB issued amendments to a number of standards in April 2009 as part of its annual improvements project. The amendments are effective for annual periods beginning on or after 1 July 2009 and are not expected to have a material effect on the Group or the Bank. The IASB issued an amendment, ‘Group Cash-settled Share-based Payment Transactions‘, to IFRS 2 ‘Share-based Payment’ in June 2009 that will change the accounting for share awards by permitting accounting for equity settlement only by entities that either grant awards over their own equity or have no obligation to settle a share-based payment transaction. The amendment is effective for annual periods beginning on or after 1 January 2010 and is not expected to have a material effect on the Group or the Bank. The IASB published an amendment ‘Classification of Rights Issues’ to IAS 32 ‘Financial Instruments: Presentation’ and consequential revisions to other standards in October 2009 to improve the accounting for issues of equity for consideration fixed other than in the reporting entity’s functional currency. The amendment is effective for annual periods beginning on or after 1 February 2010 but it may be adopted earlier. It is not expected to have a material affect on the Group or the Bank. The IASB reissued IAS 24, ‘Related Party Disclosures’, in November 2009 clarifying the existing standard and to provide certain exemptions for entities under government control. The revised standard is effective for annual periods beginning on or after 1 January 2011. The IASB issued IFRS 9 ‘Financial Instruments’ in November 2009 simplifying the classification and measurement requirements in IAS 39 ‘Financial Instruments: Recognition and Measurement’ in respect of financial assets. The standard reduces the measurement categories for financial assets to two: fair value and amortised cost. A financial asset is classified on the basis of the entity’s business model for managing the financial asset and the contractual cash flow characteristics of the financial asset. Only assets with contractual terms that give rise to cash flows on specified dates that are solely payments of principal and interest on the principal amount outstanding and which are held within a business model whose objective is to hold assets in order to collect contractual cash flows are classified as amortised cost. All other financial assets are measured at fair value. Changes in the value of financial assets measured at fair value are generally taken to profit or loss. The standard is effective for annual periods beginning on or after 1 January 2013; early application is permitted. This standard makes major changes to the framework for the classification and measurement of financial assets and will have a significant effect on the Group’s financial statements. The Group is assessing this impact which is likely to depend on the outcome of the other phases of IASB’s IAS 39 replacement project. The International Financial Reporting Interpretations Committee (IFRIC) issued interpretation IFRIC 17 ‘Distributions of Non-Cash Assets to Owners’ and the IASB made consequential amendments to IFRS 5 ‘Non-Current Assets Held for Sale and Discontinued Operations’ in December 2008. The interpretation requires distributions to be presented at fair value with any surplus or deficit recognised in income. The amendment to IFRS 5 extends the definition of disposal groups and discontinued operations to disposals by way of distribution. The interpretation is effective for annual periods beginning on or after 1 July 2009, to be adopted at the same time as IFRS 3 ‘Business Combinations’ (revised 2008), and is not expected to have a material effect on the Bank. The IFRIC issued interpretation IFRIC 18 ‘Transfers of Assets from Customers’ in January 2009. The interpretation addresses the accounting by suppliers for assets received from customers, requiring such assets to be measured at fair value. The interpretation is effective for assets from customers received on or after 1 July 2009 and is not expected to have a material effect on the Group or the Bank. The IFRIC issued interpretation IFRIC 19 ‘Extinguishing Financial Liabilities with Equity Instruments’ in December 2009. The interpretation clarifies that the profit or loss on extinguishing liabilities by issuing equity instruments should be measured by reference to fair value, preferably of the equity instruments. The interpretation, effective for the Group for annual periods beginning on or after 1 January 2011, is not expected to have a material effect on the Group or the Bank. | | | | | Group | | | | | | | 2009 | | | 2008 | | | 2007 | | | | £m | | | | | | | | Loans and advances to customers | | | 4,985 | | | | 10,063 | | | | 9,422 | | Loans and advances to banks | | | 1,367 | | | | 2,125 | | | | 2,586 | | Debt securities | | | 99 | | | | 185 | | | | 170 | | Interest receivable | | | 6,451 | | | | 12,373 | | | | 12,178 | | | | Customer accounts: demand deposits | | | 318 | | | | 1,413 | | | | 1,993 | | Customer accounts: savings deposits | | | 761 | | | | 1,389 | | | | 1,218 | | Customer accounts: other time deposits | | | 603 | | | | 2,032 | | | | 1,929 | | Deposits by banks | | | 837 | | | | 820 | | | | 1,045 | | Debt securities in issue | | | 285 | | | | 862 | | | | 683 | | Subordinated liabilities | | | 454 | | | | 509 | | | | 271 | | Internal funding of trading business | | | (4 | ) | | | (49 | ) | | | (52 | ) | Interest payable | | | 3,254 | | | | 6,976 | | | | 7,087 | | | | Net interest income | | | 3,197 | | | | 5,397 | | | | 5,091 | | | | | | | | | | | | | | | | | 2 Non-interest income | | | | | | | | | | | | | | | | | | | Group | | | | | | | | 2009 | | | 2008 | | | 2007 | | | | | £m | | | | £m | | | | £m | | Fees and commissions receivable | | | 4,079 | | | | 4,367 | | | | 4,226 | | | | Fees and commissions payable | | | (1,241 | ) | | | (1,178 | ) | | | (1,036 | ) | | | Income/(loss) from trading activities (1) | | | | | | | | | | | | | Foreign exchange | | | 179 | | | | (384 | ) | | | 134 | | Interest rate | | | 886 | | | | (558 | ) | | | 310 | | Credit | | | (609 | ) | | | (18 | ) | | | (843 | ) | Equities and commodities | | | 998 | | | | (3 | ) | | | 39 | | | | | 1,454 | | | | (963 | ) | | | (360 | ) | | | Gain on redemption of own debt (2) | | | 381 | | | | — | | | | — | | | | Other operating income | | | | | | | | | | | | | Operating lease and other rental income | | | 61 | | | | 61 | | | | 55 | | Changes in the fair value of securities and other financial assets and liabilities | | | 44 | | | | 65 | | | | 74 | | Changes in the fair value of investment properties | | | 107 | | | | 2 | | | | — | | Profit on sale of available-for-sale financial assets | | | 60 | | | | 17 | | | | 117 | | Profit on sale of property, plant and equipment | | | 4 | | | | 7 | | | | 189 | | Profit/(loss) on sale of subsidiaries and associates | | | 384 | | | | (31 | ) | | | — | | Dividend income | | | 592 | | | | 5 | | | | 14 | | Share of profits less losses of associates | | | (27 | ) | | | (23 | ) | | | (5 | ) | Other income (3) | | | 179 | | | | (22 | ) | | | (11 | ) | | | | 1,404 | | | | 81 | | | | 433 | |
Notes:(1) | The analysis of trading income is based on how the business is organised and the underlying risks managed. Trading income comprises gains and losses on financial instruments held for trading, realised and unrealised, interest income and dividends and the related funding costs. | | The types of instruments include: | | – Foreign exchange: spot foreign exchange contracts, currency swaps and options, emerging markets and related hedges and funding. | | – Interest rate: interest rate swaps, forward foreign exchange contracts, forward rate agreements, interest rate options, interest rate futures and related hedges and funding. | | – Credit: asset-backed securities, corporate bonds, credit derivatives and related hedges and funding. | | – Equities and commodities: equities, commodities, equity derivatives, commodity contracts and related hedges and funding. | (2) | In April 2009, the Group concluded a series of exchange offers and tender offers with the holders of a number of Tier 1 and Upper Tier 2 securities. The exchanges involving instruments classified liabilities all met the criteria in IFRS for treatment as the extinguishment of the original liability and the recognition of a new financial liability. Gains on these exchanges, and on the redemption of classified as liabilities for cash, totalling £381 million were credited to income. | (3) | Other income includes contributions attributable to the Group from activities other than banking. |
| | | | | Group | | | | | | | 2009 | | | 2008 | | | 2007 | | | | £m | | | £m | | | £m | | Wages, salaries and other staff costs | | | 1,590 | | | | 1,296 | | | | 1,339 | | Social security costs | | | 90 | | | | 86 | | | | 82 | | Pension costs | | | | | | | | | | | | | – defined benefit schemes (see Note 4) | | | 54 | | | | 2 | | | | 132 | | – curtailment gains (see Note 4) | | | (544 | ) | | | — | | | | — | | – defined contribution schemes | | | 15 | | | | 18 | | | | 14 | | Staff costs | | | 1,205 | | | | 1,402 | | | | 1,567 | | | | Premises and equipment | | | 407 | | | | 331 | | | | 267 | | Other administrative expenses | | | 2,147 | | | | 2,516 | | | | 2,322 | | | | Property, plant and equipment (see Note 17) | | | 144 | | | | 131 | | | | 109 | | Intangible assets (see Note 16) | | | 103 | | | | 106 | | | | 155 | | Depreciation and amortisation | | | 247 | | | | 237 | | | | 264 | | | | Write-down of goodwill and other intangible assets | | | — | | | | 716 | | | | — | | | | | 4,006 | | | | 5,202 | | | | 4,420 | |
Integration costs included in operating expenses comprise expenditure incurred in respect of cost reduction and revenue enhancement programmes connected with acquisitions made by the Group. | | | | | Group | | | | | | | 2009 | | | 2008 | | | 2007 | | | | £m | | | £m | | | £m | | Staff costs | | | 3 | | | | 4 | | | | 7 | | Premises and equipment | | | (6 | ) | | | — | | | | 4 | | Other administrative expenses | | | 12 | | | | 14 | | | | 1 | | Depreciation and amortisation | | | 7 | | | | 20 | | | | 31 | | | | | 16 | | | | 38 | | | | 43 | | | | | |
Restructuring costs included in operating expenses comprise: | | | | | | | | | | | | | | | | | 2009 | | | 2008 | | | 2007 | | | | | £m | | | | £m | | | | £m | | Staff costs | | | 96 | | | | 4 | | | | — | | Premises and equipment | | | 34 | | | | — | | | | — | | Other administrative expenses | | | 4 | | | | — | | | | — | | | | | 134 | | | | 4 | | | | — | |
Notes on the accounts continued |
3. Operating expenses continued The average number of persons employed, rounded to the nearest hundred, in the Group during the year, excluding temporary staff, was 29,700 (2008 – 32,600; 2007 – 31,200). The number of persons employed by the Group at 31 December, excluding temporary staff, was as follows: | Core deposit intangibles | | | | | Group | | | | | | | 2009 | | | 2008 | | | 2007 | | UK Retail | | | 15,700 | | | | 16,600 | | | | 15,900 | | UK Corporate | | | 300 | | | | 3,200 | | | | 3,000 | | Wealth | | | 3,400 | | | | 3,800 | | | | 3,600 | | Global Banking & Markets | | | 2,000 | | | | 1,200 | | | | 1,200 | | Ulster Bank | | | 4,600 | | | | 5,600 | | | | 6,100 | | Core | | | 26,000 | | | | 30,400 | | | | 29,800 | | Non-Core | | | 100 | | | | 300 | | | | 400 | | Business Services | | | 1,300 | | | | 1,400 | | | | 1,300 | | Total | | | 27,400 | | | | 32,100 | | | | 31,500 | | | | UK | | | 20,500 | | | | 25,100 | | | | 23,900 | | USA | | | 1,900 | | | | 1,300 | | | | 1,300 | | Europe | | | 4,500 | | | | 5,100 | | | | 5,800 | | Rest of the World | | | 500 | | | | 600 | | | | 500 | | Total | | | 27,400 | | | | 32,100 | | | | 31,500 | |
4 Pension costs The Group sponsors a number of pension schemes in the UK and overseas, predominantly defined benefit schemes, whose assets are independent of the Group’s finances. The Group’s defined benefit schemes generally provide a pension of one-sixtieth of final pensionable salary for each year of service prior to retirement up to a maximum of 40 years. Employees do not make contributions for basic pensions but may make voluntary contributions to secure additional benefits on a money-purchase basis. Since October 2006 The Royal Bank of Scotland Group Pension Fund (‘Main scheme’) has been closed to new entrants. The Group also provides post-retirement benefits other than pensions, principally through subscriptions to private healthcare schemes in the UK and the US and unfunded post-retirement benefit plans. Provision for the costs of these benefits is charged to the income statement over the average remaining future service lives of eligible employees. The amounts are not material. The corridor method of accounting permits the Bank to defer recognition of actuarial gains and losses that are within 10% of the larger of the fair value of plan assets and present value of defined benefit obligations of the schemes, on an individual scheme basis, at the reporting date. Any excess variations are amortised prospectively over the average remaining service lives of current members of the schemes. Other acquired intangiblesInterim valuations of the Group’s schemes under IAS 19 ‘Employee Benefits’ were prepared to 31 December with the support of independentactuaries, using the following assumptions: | | | | | Group | | | | | | | | | Bank | | | | | Principal actuarial assumptions at 31 December (weighted average) | | 2009 | | | 2008 | | | 2007 | | | 2009 | | | 2008 | | | 2007 | | Discount rate | | | 5.9 | % | | | 6.4 | % | | | 6.0 | % | | | 5.9 | % | | | 6.5 | % | | | 6.0 | % | Expected return on plan assets | | | 6.2 | % | | | 7.0 | % | | | 6.9 | % | | | 6.2 | % | | | 7.1 | % | | | 6.9 | % | Rate of increase in salaries | | | 1.8 | % | | | 3.8 | % | | | 4.4 | % | | | 1.8 | % | | | 4.0 | % | | | 4.5 | % | Rate of increase in pensions in payment | | | 3.4 | % | | | 2.6 | % | | | 3.2 | % | | | 3.5 | % | | | 2.7 | % | | | 3.2 | % | Inflation assumption | | | 3.4 | % | | | 2.6 | % | | | 3.2 | % | | | 3.5 | % | | | 2.7 | % | | | 3.2 | % | | | | | | | | | | | Group | | | | | | | | | | | Bank | | | | | | Major classes of plan assets as a percentage of total plan assets | | 2009 | | | 2008 | | | 2007 | | | 2009 | | | 2008 | | | 2007 | | Equity interests | | | 47.1 | % | | | 58.0 | % | | | 61.1 | % | | | 47.6 | % | | | 59.4 | % | | | 61.0 | % | Index-linked bonds | | | 22.7 | % | | | 17.4 | % | | | 17.5 | % | | | 23.7 | % | | | 18.0 | % | | | 18.2 | % | Government fixed interest bonds | | | 0.1 | % | | | 2.0 | % | | | 1.7 | % | | | — | | | | 1.2 | % | | | 1.2 | % | Corporate and other bonds | | | 20.2 | % | | | 18.1 | % | | | 14.9 | % | | | 19.7 | % | | | 18.5 | % | | | 15.1 | % | Property | | | 3.5 | % | | | 4.2 | % | | | 4.1 | % | | | 3.5 | % | | | 3.7 | % | | | 3.8 | % | Cash and other assets | | | 6.4 | % | | | 0.3 | % | | | 0.7 | % | | | 5.5 | % | | | (0.8 | %) | | | 0.7 | % |
Ordinary shares of the ultimate holding company with a fair value of £4 million (2008 – £15 million; 2007 – £65 million) are held by the Group’s pension schemes together with holdings of other financial instruments issued by the Group with a value of £192 million (2008 – £421 million; 2007 – £606 million). The expected return on plan assets at 31 December is based upon the weighted average of the following assumed returns on the major classes of plan assets: | | | | | Group | | | | | | | | | Bank | | | | | | | 2009 | | | 2008 | | | 2007 | | | 2009 | | | 2008 | | | 2007 | | Equities | | | 7.9 | % | | | 8.4 | % | | | 8.1 | % | | | 7.9 | % | | | 8.4 | % | | | 8.1 | % | Index-linked bonds | | | 4.5 | % | | | 3.9 | % | | | 4.5 | % | | | 4.5 | % | | | 3.9 | % | | | 4.5 | % | Government fixed interest bonds | | | 4.3 | % | | | 4.3 | % | | | 4.5 | % | | | — | | | | 3.9 | % | | | 4.5 | % | Corporate and other bonds | | | 5.8 | % | | | 6.1 | % | | | 5.5 | % | | | 5.9 | % | | | 6.1 | % | | | 5.5 | % | Property | | | 6.2 | % | | | 6.0 | % | | | 6.3 | % | | | 6.2 | % | | | 6.1 | % | | | 6.3 | % | Cash and other assets | | | 1.3 | % | | | 3.4 | % | | | 4.6 | % | | | 0.5 | % | | | 2.5 | % | | | 4.6 | % | | | | | | | Post-retirement mortality assumptions (Main scheme) | | | | | | | 2009 | | | 2008 | | | 2007 | | Longevity at age 60 for current pensioners (years): | | | | | | | | | | | | | | | | | | | | | | | | | Males | | | | | | | | | | | | | | | 27.1 | | | | 26.1 | | | | 26.0 | | Females | | | | | | | | | | | | | | | 29.5 | | | | 26.9 | | | | 26.8 | | | | Longevity at age 60 for future pensioners (years): | | | | | | | | | | | | | | | | | | | | | | | | | Males | | | | | | | | | | | | | | | 29.2 | | | | 28.1 | | | | 28.1 | | Females | | | | | | | | | | | | | | | 30.8 | | | | 28.2 | | | | 28.2 | |
The allowance for post-retirement mortality has been updated following an analysis of recent experience of pensioners in the main scheme. Computer software
| 6 to 10 years
5 to 10 years
3 to 5Notes on the accounts continued |
4 Pension costs continued | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | | | | | Bank | | | | | | | | | | Present | | | | | | | | | Present | | | | | | | | | | value of | | | Net | | | | | | value of | | | Net | | | | Fair value | | | defined | | | pension | | | Fair value | | | defined | | | pension | | | | of plan | | | benefit | | | deficit/ | | | of plan | | | benefit | | | deficit/ | | | | assets | | | obligations | | | (surplus) | | | assets | | | obligations | | | (surplus) | | Changes in value of net pension deficit/(surplus) | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | At 1 January 2008 | | | 19,513 | | | | 19,213 | | | | (300 | ) | | | 18,575 | | | | 18,100 | | | | (475 | ) | Currency translation and other adjustments | | | 389 | | | | 450 | | | | 61 | | | | — | | | | — | | | | — | | Income statement: | | | | | | | | | | | | | | | | | | | | | | | | | Expected return | | | 1,338 | | | | | | | | (1,338 | ) | | | 1,271 | | | | | | | | (1,271 | ) | Interest cost | | | | | | | 1,145 | | | | 1,145 | | | | | | | | 1,080 | | | | 1,080 | | Current service cost | | | | | | | 491 | | | | 491 | | | | | | | | 437 | | | | 437 | | Less: direct contributions from other scheme members | | | | | | | (319 | ) | | | (319 | ) | | | | | | | (332 | ) | | | (332 | ) | Past service cost | | | | | | | 23 | | | | 23 | | | | | | | | 21 | | | | 21 | | | | | 1,338 | | | | 1,340 | | | | 2 | | | | 1,271 | | | | 1,206 | | | | (65 | ) | Actuarial gains and losses | | | (5,089 | ) | | | (3,527 | ) | | | 1,562 | | | | (4,784 | ) | | | (3,390 | ) | | | 1,394 | | Disposal of subsidiaries | | | — | | | | (3 | ) | | | (3 | ) | | | — | | | | — | | | | — | | Contributions by employer | | | 154 | | | | — | | | | (154 | ) | | | 78 | | | | — | | | | (78 | ) | Contributions by other scheme members | | | 306 | | | | 306 | | | | — | | | | 319 | | | | 319 | | | | — | | Contributions by plan participants | | | 5 | | | | 5 | | | | — | | | | — | | | | — | | | | — | | Benefits paid | | | (660 | ) | | | (660 | ) | | | — | | | | (631 | ) | | | (631 | ) | | | — | | Expenses included in service cost | | | (24 | ) | | | (24 | ) | | | — | | | | (24 | ) | | | (24 | ) | | | — | | At 31 December 2008 | | | 15,932 | | | | 17,100 | | | | 1,168 | | | | 14,804 | | | | 15,580 | | | | 776 | | | | | | Unrecognised actuarial gains | | | | | | | | | | | 30 | | | | | | | | | | | | 206 | | Retirement benefit liabilities at 31 December 2008 | | | | | | | | | | | 1,198 | | | | | | | | | | | | 982 | | | | Unfunded schemes liabilities included in post-retirement benefit liabilities | | | | | | | | | | | 29 | | | | | | | | | | | | 14 | | | | | | | | | | | | Group | | | | | | | | | | | Bank | | | | | | | | | | | | Present | | | | | | | | | | | Present | | | | | | | | | | | | value of | | | Net | | | | | | | value of | | | Net | | | | Fair value | | | defined | | | pension | | | Fair value | | | defined | | | pension | | | | of plan | | | benefit | | | deficit/ | | | of plan | | | benefit | | | deficit/ | | | | assets | | | obligations | | | (surplus) | | | assets | | | obligations | | | (surplus) | | Changes in value of net pension deficit/(surplus) | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | At 1 January 2009 | | | 15,932 | | | | 17,100 | | | | 1,168 | | | | 14,804 | | | | 15,580 | | | | 776 | | Currency translation and other adjustments | | | (52 | ) | | | (76 | ) | | | (24 | ) | | | — | | | | 1 | | | | 1 | | Income statement: | | | | | | | | | | | | | | | | | | | | | | | | | Expected return | | | 1,094 | | | | | | | | (1,094 | ) | | | 1,029 | | | | | | | | (1,029 | ) | Interest cost | | | | | | | 1,073 | | | | 1,073 | | | | | | | | 1,000 | | | | 1,000 | | Current service cost | | | | | | | 355 | | | | 355 | | | | | | | | 300 | | | | 300 | | Less: direct contributions from other scheme members | | | | | | | (302 | ) | | | (302 | ) | | | | | | | (315 | ) | | | (315 | ) | Past service cost | | | | | | | 22 | | | | 22 | | | | | | | | 15 | | | | 15 | | Gains on curtailment | | | | | | | (544 | ) | | | (544 | ) | | | | | | | (358 | ) | | | (358 | ) | | | | 1,094 | | | | 604 | | | | (490 | ) | | | 1,029 | | | | 642 | | | | (387 | ) | | | Actuarial gains and losses | | | 1,076 | | | | 4,659 | | | | 3,583 | | | | 993 | | | | 4,475 | | | | 3,482 | | Transfer from fellow subsidiary | | | — | | | | 17 | | | | 17 | | | | — | | | | — | | | | — | | Contributions by employer | | | 213 | | | | — | | | | (213 | ) | | | 124 | | | | — | | | | (124 | ) | Contributions by other scheme members | | | 405 | | | | 405 | | | | — | | | | 414 | | | | 414 | | | | — | | Contributions by plan participants | | | 7 | | | | 7 | | | | — | | | | 1 | | | | 1 | | | | — | | Benefits paid | | | (802 | ) | | | (802 | ) | | | — | | | | (742 | ) | | | (742 | ) | | | — | | Expenses included in service cost | | | (20 | ) | | | (20 | ) | | | — | | | | (20 | ) | | | (20 | ) | | | — | | At 31 December 2009 | | | 17,853 | | | | 21,894 | | | | 4,041 | | | | 16,603 | | | | 20,351 | | | | 3,748 | | | | | | Unrecognised actuarial gains | | | | | | | | | | | (3,539 | ) | | | | | | | | | | | (3,276 | ) | Retirement benefit liabilities at 31 December 2009 | | | | | | | | | | | 502 | | | | | | | | | | | | 472 | | | | Unfunded schemes liabilities included in post-retirement benefit liabilities | | | | | | | | | | | 49 | | | | | | | | | | | | 14 | |
Notes on the accounts
| | Group | | | Bank | | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | Net pension deficit comprises: | | £m | | | £m | | | | | | £m | | Net assets of schemes in surplus | | | | | | | | | | | | | (included in Prepayments, accrued income and other assets, Note 18) | | | (10 | ) | | | — | | | | — | | | | — | | Net liabilities of schemes in deficit | | | 512 | | | | 1,198 | | | | 472 | | | | 982 | | | | | 502 | | | | 1,198 | | | | 472 | | | | 982 | |
Curtailment gains of £544 million for the Group (£358 million for the Bank) have been recognised in 2009 arising from changes to pension benefits in the Main scheme and certain other subsidiaries schemes due to the capping of future salary increases that will count for pension purposes to the lower of 2% or the rate of inflation in any year. The Group expects to contribute £470 million (Bank – £414 million) to its defined benefit pension schemes in 2010. The most recent funding valuation of the main UK scheme, as at 31 March 2007, showed a surplus of assets over liabilities of £0.7 billion. The next valuation is due as at 31 March 2010 and the Group expects this valuation to show that liabilities exceed the value of the assets. Following this valuation, the Group and scheme Trustees will agree the level of contributions to be paid to the scheme. This could result in the amount ofcontributions payable in 2010 and subsequent years being materially different from the current rates based on the previous valuation. | | | | | | | | Group | | | | | | | | | | | | | | | Bank | | | | | | | | | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | | History of defined benefit schemes | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | | | | £m | | | £m | | Fair value of plan assets | | | 17,853 | | | | 15,932 | | | | 19,513 | | | | 18,213 | | | | 16,697 | | | | 16,603 | | | | 14,804 | | | | 18,575 | | | | 17,374 | | | | 15,914 | | Present value of defined benefit obligations | | | 21,894 | | | | 17,100 | | | | 19,213 | | | | 20,006 | | | | 20,174 | | | | 20,351 | | | | 15,580 | | | | 18,100 | | | | 18,986 | | | | 19,105 | | Net (deficit)/surplus | | | (4,041 | ) | | | (1,168 | ) | | | 300 | | | | (1,793 | ) | | | (3,477 | ) | | | (3,748 | ) | | | (776 | ) | | | 475 | | | | (1,612 | ) | | | (3,191 | ) | | | Experience gains/(losses) on plan liabilities | | | 165 | | | | (73 | ) | | | (209 | ) | | | (7 | ) | | | (55 | ) | | | 135 | | | | (55 | ) | | | (256 | ) | | | (4 | ) | | | (41 | ) | Experience gains/(losses) on plan assets | | | 1,076 | | | | (5,089 | ) | | | 150 | | | | 570 | | | | 1,639 | | | | 993 | | | | (4,784 | ) | | | 163 | | | | 552 | | | | 1,556 | | Actual return on pension schemes assets | | | 2,170 | | | | (3,751 | ) | | | 1,392 | | | | 1,593 | | | | 2,611 | | | | 2,022 | | | | (3,513 | ) | | | 1,345 | | | | 1,574 | | | | 2,486 | | Actual return on pension schemes assets – % | | | 13.7 | % | | | (19.1 | )% | | | 7.7 | % | | | 9.6 | % | | | 18.4 | % | | | 13.8 | % | | | (19.0 | )% | | | 7.8 | % | | | 9.9 | % | | | 18.4 | % |
The table below sets out the sensitivities of the pension cost for the year and the present value of defined benefit obligations at the balance sheet dates to a change in the principal actuarial assumptions: | | Group | | | Bank | | | | | | | Increase/(decrease) | | | | | | | | | Increase/(decrease) | | | | | | | in pension | | | in obligation | | | in pension | | | in obligation | | | | cost for the year | | | at 31 December | | | cost for the year | | | at 31 December | | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | 0.25% increase in the discount rate | | | (27 | ) | | | (42 | ) | | | (854 | ) | | | (754 | ) | | | (21 | ) | | | (37 | ) | | | (790 | ) | | | (696 | ) | 0.25% increase in inflation | | | 58 | | | | 85 | | | | 722 | | | | 686 | | | | 49 | | | | 77 | | | | 654 | | | | 624 | | 0.25% additional rate of increase in pensions in payment | | | 39 | | | | 45 | | | | 483 | | | | 417 | | | | 33 | | | | 41 | | | | 442 | | | | 383 | | 0.25% additional rate of increase in deferred pensions | | | 17 | | | | 8 | | | | 221 | | | | 98 | | | | 16 | | | | 8 | | | | 214 | | | | 94 | | 0.25% additional rate of increase in salaries | | | 11 | | | | 32 | | | | 85 | | | | 190 | | | | 8 | | | | 28 | | | | 66 | | | | 168 | | Longevity increase of 1 year | | | 34 | | | | 34 | | | | 453 | | | | 335 | | | | 29 | | | | 31 | | | | 416 | | | | 302 | |
Notes on the accounts continued Amounts paid to the auditors for statutory audit and other services were as follows: | | Group | | | | 2009 | | | 2008 | | | | £m | | | £m | | Audit Services | | | | | | | | | — Statutory Audit | | | 2.6 | | | | | | — audit related regulatory reporting | | | 0.2 | | | | | | | | | 2.8 | | | | | | Tax Fees | | | 0.1 | | | | | | All other services | | | 0.1 | | | | 0.3 | | Total | | | 3.0 | | | | 3.3 | |
6 Tax | | | | | | | | | | | | Group | | | | 2009 | | | 2008 | | | 2007 | | | | £m | | | £m | | | £m | | Current taxation: | | | | | | | | | | (Credit)/charge for the year | | | (147 | ) | | | 677 | | | | 989 | | Over provision in respect of prior periods | | | (29 | ) | | | (164 | ) | | | (71 | ) | Relief for overseas taxation | | | — | | | | — | | | | (76 | ) | | | | (176 | ) | | | 513 | | | | 842 | | Deferred taxation: | | | | | | | | | | | | | Charge/(credit) for the year | | | 253 | | | | (4 | ) | | | (60 | ) | (Over)/under provision in respect of prior periods | | | (82 | ) | | | 90 | | | | (14 | ) | Tax (credit)/charge for the year | | | (5 | ) | | | 599 | | | | 768 | |
The actual tax (credit)/charge differs from the expected tax charge computed by applying the standard rate of UK corporation tax of 28% (2008 –28.5%; 2007 – 30%) as follows: | | 2009 | | | 2008 | | | 2007 | | | | £m | | | £m | | | £m | | Expected tax charge | | | 316 | | | | 325 | | | | 926 | | Non-deductible goodwill impairment | | | — | | | | 165 | | | | — | | Other non-deductible items | | | 70 | | | | 78 | | | | 52 | | Non-taxable items: | | | | | | | | | | | | | – gain on redemption of own debt | | | (107 | ) | | | — | | | | — | | – other | | | (203 | ) | | | (32 | ) | | | (178 | ) | Taxable foreign exchange movements | | | (101 | ) | | | 149 | | | | (3 | ) | Group relief at non-standard rates | | | (140 | ) | | | (16 | ) | | | 94 | | Foreign profits taxed at other rates | | | 266 | | | | (1 | ) | | | (57 | ) | (Increase)/decrease in deferred tax asset following change in the rate of UK corporation tax | | | — | | | | (2 | ) | | | 18 | | Unutilised losses brought forward and carried forward | | | 5 | | | | 7 | | | | 1 | | Adjustments in respect of prior periods | | | (111 | ) | | | (74 | ) | | | (85 | ) | Actual tax (credit)/charge for the year | | | (5 | ) | | | 599 | | | | 768 | | | | | | 7 Dividends to preference shareholders | | | | | | | | | | | | | | | | | | | Group | | | | | | | | 2009 | | | 2008 | | | 2007 | | | | | £m | | | | £m | | | | £m | | 9% non-cumulative sterling preference shares, Series A | | | 13 | | | | 13 | | | | 13 | | Non-cumulative dollar preference shares, Series C | | | 15 | | | | 12 | | | | 12 | | | | | 28 | | | | 25 | | | | 25 | | | | Note: | | | | | | | | | | | | | (1) In accordance with IAS 32, the Group’s preference shares are included in subordinated liabilities and the related finance cost in interest payable. |
Notes on the accounts
| | Group | | | | 2009 | | | 2008 | | | 2007 | | | | £m | | | £m | | | £m | | Ordinary dividends paid to the parent company | | | — | | | | 1,000 | | | | 1,850 | |
9 (Loss)/profit dealt with in the accounts of the Bank As permitted by section 408(3) of the Companies Act 2006, no income statement or statement of comprehensive income for the Bank has been presented as a primary financial statement. Of the profit attributable to ordinary shareholders, a loss of £584 million (2008 – £1,387 million profit; 2007 – £3,210 million profit) has been dealt with in the accounts of the Bank. 10 Financial instruments Classification The following tables analyse the Group’s financial assets and financial liabilities in accordance with the categories of financial instruments in IAS 39. Assets and liabilities outside the scope of IAS 39 are shown separately as non financial assets/liabilities. | | Group | | | | | | | Designated | | | | | | | | | Other | | | | | | | | | | | | | | | | as at fair | | | | | | | | | financial | | | | | | Non | | | | | | | | | | value | | | | | | | | | instruments | | | | | | financial | | | | | | | | | | through | | | Available- | | | Loans and | | | (amortised | | | Finance | | | assets/ | | | | | | | trading | | | profit or loss | | | for-sale | | | receivables | | | cost) | | | leases | | | liabilities | | | Total | | 2009 | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | — | | | | — | | | | — | | | | 1,805 | | | | | | | | | | | | | 1,805 | | Loans and advances to banks (1) | | | 19,772 | | | | 1,042 | | | | — | | | | 112,416 | | | | | | | | | | | | | 133,230 | | Loans and advances to customers (2) | | | 5,196 | | | | — | | | | — | | | | 158,944 | | | | | | | 263 | | | | | | | 164,403 | | Debt securities (3) | | | 30,530 | | | | 13 | | | | 2,087 | | | | 2,159 | | | | | | | | | | | | | | 34,789 | | Equity shares | | | 5 | | | | 25 | | | | 936 | | | | — | | | | | | | | | | | | | | 966 | | Settlement balances | | | — | | | | — | | | | — | | | | 4,573 | | | | | | | | | | | | | | 4,573 | | Derivatives | | | 4,470 | | | | — | | | | — | | | | — | | | | | | | | | | | | | | 4,470 | | Intangible assets | | | | | | | | | | | | | | | | | | | | | | | | | | 748 | | | | 748 | | Property, plant and equipment | | | | | | | | | | | | | | | | | | | | | | | | | | 3,300 | | | | 3,300 | | Deferred taxation | | | | | | | | | | | | | | | | | | | | | | | | | | 568 | | | | 568 | | Prepayments, accrued income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and other assets | | | — | | | | — | | | | — | | | | 33 | | | | | | | | | | | 1,843 | | | | 1,876 | | | | | 59,973 | | | | 1,080 | | | | 3,023 | | | | 279,930 | | | | | | | 263 | | | | 6,459 | | | | 350,728 | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks (4) | | | 17,757 | | | | — | | | | | | | | | | | | 43,676 | | | | | | | | | | | | 61,433 | | Customer accounts (5, 6) | | | 16,891 | | | | 2,435 | | | | | | | | | | | | 208,137 | | | | | | | | | | | | 227,463 | | Debt securities in issue (7) | | | — | | | | — | | | | | | | | | | | | 11,470 | | | | | | | | | | | | 11,470 | | Settlement balances and short positions | | | 13,917 | | | | — | | | | | | | | | | | | 3,027 | | | | | | | | | | | | 16,944 | | Derivatives | | | 4,314 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | 4,314 | | Accruals, deferred income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and other liabilities | | | — | | | | — | | | | | | | | | | | | 717 | | | | 5 | | | | 3,105 | | | | 3,827 | | Retirement benefit liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | 512 | | | | 512 | | Deferred taxation | | | | | | | | | | | | | | | | | | | | | | | | | | | 285 | | | | 285 | | Subordinated liabilities (8) | | | 1,142 | | | | — | | | | | | | | | | | | 7,857 | | | | | | | | — | | | | 8,999 | | | | | 54,021 | | | | 2,435 | | | | | | | | | | | | 274,884 | | | | 5 | | | | 3,902 | | | | 335,247 | | | | Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 15,481 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 350,728 | | For notes relating to this table refer to page 104 | | | | | | | | | | | | | | | | | | | | | | |
Notes on the accounts continued | | | | | | | | | 10 Financial instruments continued | | | | | | | |
| | Group | | | | | | | Designated | | | | | | | | | Other | | | | | | | | | | | | | | | | as at fair | | | | | | | | | financial | | | | | | Non | | | | | | | | | | value | | | | | | | | | instruments | | | | | | financial | | | | | | | | | | through | | | Available- | | | Loans and | | | (amortised | | | Finance | | | assets/ | | | | | | | trading | | | profit or loss | | | for-sale | | | receivables | | | cost) | | | leases | | | liabilities | | | Total | | 2008 | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | — | | | | — | | | | — | | | | 1,285 | | | | | | | | | | | | | 1,285 | | Loans and advances to banks (1) | | | 11,432 | | | | 302 | | | | — | | | | 54,500 | | | | | | | | | | | | | 66,234 | | Loans and advances to customers (2) | | | 2,883 | | | | — | | | | — | | | | 195,080 | | | | | | | 304 | | | | | | | 198,267 | | Debt securities (3) | | | 32,357 | | | | 21 | | | | 3,615 | | | | — | | | | | | | | | | | | | | 35,993 | | Equity shares | | | 109 | | | | 22 | | | | 998 | | | | — | | | | | | | | | | | | | | 1,129 | | Settlement balances | | | — | | | | — | | | | — | | | | 4,117 | | | | | | | | | | | | | | 4,117 | | Derivatives | | | 8,895 | | | | — | | | | — | | | | — | | | | | | | | | | | | | | 8,895 | | Intangible assets | | | | | | | | | | | �� | | | | | | | | | | | | | | | 815 | | | | 815 | | Property, plant and equipment | | | | | | | | | | | | | | | | | | | | | | | | | | 1,970 | | | | 1,970 | | Deferred taxation | | | | | | | | | | | | | | | | | | | | | | | | | | 496 | | | | 496 | | Prepayments, accrued income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and other assets | | | — | | | | — | | | | — | | | | 32 | | | | | | | — | | | | 1,986 | | | | 2,018 | | | | | 55,676 | | | | 345 | | | | 4,613 | | | | 255,014 | | | | | | | 304 | | | | 5,267 | | | | 321,219 | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks (4) | | | 22,610 | | | | — | | | | | | | | | | | | 31,023 | | | | | | | | | | | | 53,633 | | Customer accounts (5, 6) | | | 20,561 | | | | 2,291 | | | | | | | | | | | | 177,532 | | | | | | | | | | | | 200,384 | | Debt securities in issue (7) | | | 75 | | | | — | | | | | | | | | | | | 17,137 | | | | | | | | | | | | 17,212 | | Settlement balances and short positions | | | 11,241 | | | | — | | | | | | | | | | | | 1,850 | | | | | | | | | | | | 13,091 | | Derivatives | | | 8,066 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | 8,066 | | Accruals, deferred income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and other liabilities | | | — | | | | — | | | | | | | | | | | | 532 | | | | 5 | | | | 3,495 | | | | 4,032 | | Retirement benefit liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,198 | | | | 1,198 | | Deferred taxation | | | | | | | | | | | | | | | | | | | | | | | | | | | 46 | | | | 46 | | Subordinated liabilities (8) | | | 1,224 | | | | — | | | | | | | | | | | | 8,875 | | | | | | | | | | | | 10,099 | | | | | 63,777 | | | | 2,291 | | | | — | | | | — | | | | 236,949 | | | | 5 | | | | 4,739 | | | | 307,761 | | | | Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 13,458 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 321,219 | |
Expenditure on internally generated goodwill and brands is written-off as incurred. Direct costs relating to the development(1) | Includes reverse repurchase agreements of internal-use computer software are capitalised once technical feasibility and economic viability have been established. These costs include payroll, the costs of materials and services, and directly attributable overhead. Capitalisation of costs ceases when the software is capable of operating as intended. During and after development, accumulated costs are reviewed for impairment against the projected benefits that the software is expected to generate. Costs incurred prior to the establishment of technical feasibility and economic viability are expensed as incurred as are all training costs and general overhead. The costs of licences to use computer software that are expected to generate economic benefits beyond one year are also capitalised.Acquired goodwill being the excess of the cost of an acquisition over the Group's interest£7,287 million (2008 – £3,882 million), items in the net fair valuecourse of the identifiable assets, liabilitiescollection from other banks of £2,118 million (2008 – £2,107 million), amounts due from holding company of £116,616 million (2008 – £53,781 million) and contingent liabilitiesamounts due from fellow subsidiaries of the subsidiary, associate or joint venture acquired is initially recognised at cost£1,243 million (2008 – £404 million).
| | Includes reverse repurchase agreements of £9,916 million (2008 – £5,202 million) and subsequently at cost less any accumulated impairment losses. Goodwill arising on the acquisitionamounts due from fellow subsidiaries of subsidiaries£14,295 million (2008 – £40,970 million). | | Includes treasury bills and joint ventures is includedsimilar securities of £1,015 million (2008 – £382 million) and other eligible bills of £253 million (2008 – £54 million). | | Includes repurchase agreements of £10,591 million (2008 – £12,027 million), items in the balance sheet caption 'Intangible assets'course of transmission to other banks of £649 million (2008 – £545 million), amounts due to holding company of £36,162 million (2008 – £34,401 million) and that on associates within their carrying amounts. The gain or loss on the disposalamounts due to fellow subsidiaries of a subsidiary, associate or joint venture includes the carrying value£8,858 million (2008 – £881 million). | | Includes repurchase agreements of any related goodwill.On implementation£36,922 million (2008 – £23,985 million) and amounts due to fellow subsidiaries of IFRS, the Group did not restate business combinations that occurred before 1 January 2004. Under previous GAAP, goodwill arising on acquisitions was capitalised and amortised over its estimated useful economic life. £9,539 million (2008 – £6,741 million).
| | The carrying amount of goodwill in the Group's opening IFRS balance sheet (1 January 2004) was £273 million, its carrying value under previous GAAP.6. Property, plant and equipment
Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses. Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for separately. Property that is being constructed or developed for future use as investment property is classified as property, plant and equipment and stated at cost until construction or development is complete, at which time it is reclassified as investment property.
Depreciation is charged to profit or loss on a straight-line basis so as to write-off the depreciable amount of property, plant and equipment (including assets owned and let on operating leases (except investment property – see accounting policy 19 below)) over their estimated useful lives. The depreciable amount is the cost of an asset less its residual value. Land is not depreciated. Estimated useful lives are as follows:
| Freehold and long leasehold buildings
Short leaseholds
Property adaptation costs
Computer equipment
Other equipment
| 50 years
unexpired period of the lease
10 to 15 years
up to 5 years
4 to 15 years
|
Under previous GAAP, the Group's freehold and long leasehold property occupied for its own use was recorded at valuation on the basis of existing use value. The Group elected to use this valuation as at 31 December 2003 (£1,334 million) as deemed cost for its opening IFRS balance sheet (1 January 2004).
Accounting policies continued
7. Impairment of intangible assets and property, plant and equipment
At each reporting date, the Group assesses whether there is any indication that its intangible assets, or property, plant and equipment are impaired. If any such indication exists, the Group estimates the recoverable amount of the asset and the impairment loss if any. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. If an asset does not generate cash flows that are independent from those of other assets or groups of assets, recoverable amount is determined for the cash-generating unit to which the asset belongs. The recoverable amount of an asset is the higher of its fair value less cost to sell and its value in use. Value in use is the present value of future cash flows from the asset or cash-generating unit discounted at a rate that reflects market interest rates adjusted for risks specific to the asset or cash generating unit that have not been reflected in the estimation of future cash flows. If the recoverable amount of an intangible or tangible asset is less than its carrying value, an impairment loss is recognised immediately in profit or loss and the carrying value of the asset reduced by the amount of the loss. A reversal of an impairment loss on intangible assets (excluding goodwill) or property, plant and equipment is recognised as it arises provided the increased carrying value does not exceed that which it would have been had no impairment loss been recognised. Impairment losses on goodwill are not reversed.
8. Foreign currencies
The Group’s consolidated financial statements are presented in sterling which is the functional currency of the Bank.
Transactions in foreign currencies are translated into sterling at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the rates of exchange ruling at the balance sheet date. Foreign exchange differences arising on translation are reported in income from trading activities except for differences arising on cash flow hedges and hedges of net investments in foreign operations. Non-monetary items denominated in foreign currencies that are stated at fair value are translated into sterling at foreign exchange rates ruling at the dates the values were determined. Translation differences arising on non-monetary items measured at fair value are recognised in profit or loss except for differences arising on available-for-sale non-monetary financial assets, for example equity shares, which are included in the available-for-sale reserve in equity unless the asset is the hedged item in a fair value hedge.
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into sterling at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated into sterling at average exchange rates unless these do not approximate to the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on the translation of a foreign operation are recognised directly in equity and included in profit or loss on its disposal.
9. Leases
Contracts to lease assets are classified as finance leases if they transfer substantially all the risks and rewards of ownership of the asset to the customer. Other contracts to lease assets are classified as operating leases.
Finance lease receivables are stated in the balance sheet at the amount of the net investment in the lease being the minimum lease payments and any unguaranteed residual value discounted at the interest rate implicit in the lease. Finance lease income is allocated to accounting periods so as to give a constant periodic rate of return before tax on the net investment. Unguaranteed residual values are subject to regular review to identify potential impairment. If there has been a reduction in the estimated unguaranteed residual value, the income allocation is revised and any reduction in respect of amounts accrued is recognised immediately.
Rental income from operating leases is credited to the income statement on a receivable basis over the term of the lease. Operating lease assets are included within Property, plant and equipment and depreciated over their useful lives (see accounting policy 6 above).
10. Taxation
Provision is made for taxation at current enacted rates on taxable profits, arising in income or in equity, taking into account relief for overseas taxation where appropriate. Deferred taxation is accounted for in full for all temporary differences between the carrying amount of an asset or liability for accounting purposes and its carrying amount for tax purposes, except in relation to overseas earnings where remittance is controlled by the Group, and goodwill.
Deferred tax assets are only recognised to the extent that it is probable that they will be recovered.
11. Financial assets
On initial recognition financial assets are classified into held-to-maturity investments; available-for-sale financial assets; held-for-trading; designated as at fair value through profit or loss; or loans and receivables.
Held-to-maturity investments – a financial asset may be classified as a held-to-maturity investment only if it has fixed or determinable payments, a fixed maturity and the Group has the positive intention and ability to hold to maturity. Held-to-maturity investments are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at amortised cost using the effective interest method (see accounting policy 3 above) less any impairment losses.
Held-for-trading – a financial asset is classified as held-for-trading if it is acquired principally for the purpose of selling in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative (not in a qualifying hedge relationship). Held-for-trading financial assets are recognised at fair value with transaction costs being recognised in profit or loss. Subsequently they are measured at fair value. Gains and losses on held-for-trading financial assets are recognised in profit or loss as they arise.
Designated as at fair value through profit or loss – financial assets may be designated as at fair value through profit or loss only if such designation (a) eliminates or significantly reduces a measurement or recognition inconsistency; or (b) applies to a group of financial assets, financial liabilities or both that the Group manages and evaluates on a fair value basis; or (c) relates to an instrument that contains an embedded derivative which is not evidently closely related to the host contract.
Financial assets that the Group designates on initial recognition as being at fair value through profit or loss are recognised at fair value, with transaction costs being recognised in profit or loss and are subsequently measured at fair value. Gains and losses on financial assets that are designated as at fair value through profit or loss are recognised in profit or loss as they arise.
The Group has designated financial assets as at fair value through profit or loss principally where the assets are economically hedged by derivatives and fair value designation eliminates the measurement inconsistency that would arise if the assets were carried at amortised cost or classified as available-for-sale.
Loans and receivables – non-derivative financial assets with fixed or determinable repayments that are not quoted in an active market are classified as loans and receivables except those that are classified as available-for-sale or as held-for-trading, or designated as at fair value through profit or loss. Loans and receivables are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at amortised cost using the effective interest method (see accounting policy 3 above) less any impairment losses.
Available-for-sale – financial assets that are not classified as held-to-maturity; held-for-trading; designated as at fair value through profit or loss; or loans and receivables are classified as available-for-sale. Financial assets can be designated as available-for-sale on initial recognition. Available-for-sale financial assets are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at fair value. Unquoted equity investments whose fair value cannot be measured reliably are carried at cost and classified as available-for-sale financial assets. Impairment losses and exchange differences resulting from retranslating the amortised cost of currency monetary available-for-sale financial assets are recognised in profit or loss together with interest calculated using the effective interest method (see accounting policy 3 above). Other changes in the fair value of available-for-sale financial assets are reported in a separate component of shareholders’ equity until disposal, when the cumulative gain or loss is recognised in profit or loss.
Regular way purchases of financial assets classified as loans and receivables are recognised on settlement date; all other regular way purchases are recognised on trade date.
Fair value for a net open position in a financial asset that is quoted in an active market is the current bid price times the number of units of the instrument held. Fair values for financial assets not quoted in an active market are determined using appropriate valuation techniques including discounting future cash flows, option pricing models and other methods that are consistent with accepted economic methodologies for pricing financial assets.
12. Impairment of financial assets
The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or group of financial assets classified as held-to-maturity, available-for-sale or loans and receivables is impaired. A financial asset or portfolio of financial assets is impaired and an impairment loss incurred if there is objective evidence that an event or events since initial recognition of the asset have adversely affected the amount or timing of future cash flows from the asset.
Financial assets carried at amortised cost – if there is objective evidence that an impairment loss on a financial asset or group of financial assets classified as loans and receivables or as held-to-maturity investments has been incurred, the Group measures the amount of the loss as the difference between the carrying amount of the asset or group of assets and the present value of estimated future cash flows from the asset or group of assets discounted at the effective interest rate of the instrument at initial recognition.
Impairment losses are assessed individually for financial assets that are individually significant and individually or collectively for assets that are not individually significant. In making collective assessment of impairment, financial assets are grouped into portfolios on the basis of similar risk characteristics. Future cash flows from these portfolios are estimated on the basis of the contractual cash flows and historical loss experience for assets with similar credit risk characteristics. Historical loss experience is adjusted, on the basis of current observable data, to reflect the effects of current conditions not affecting the period of historical experience.
Impairment losses are recognised in profit or loss and the carrying amount of the financial asset or group of financial assets reduced by establishing an allowance for impairment losses. If in a subsequent period the amount of the impairment loss reduces and the reduction can be ascribed to an event after the impairment was recognised, the previously recognised loss is reversed by adjusting the allowance. Once an impairment loss has been recognised on a financial asset or group of financial assets, interest income is recognised on the carrying amount using the rate of interest at which estimated future cash flows were discounted in measuring impairment.
Financial assets carried at fair value – when a decline in the fair value of a financial asset classified as available-for-sale has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss is removed from equity and recognised in profit or loss. The loss is measured as the difference between the amortised cost of the financial asset and its current fair value. Impairment losses on available-for-sale equity instruments are not reversed through profit or loss, but those on available-for-sale debt instruments are reversed, if there is an increase in fair value that is objectively related to a subsequent event.
Accounting policies continued
13. Financial liabilities
A financial liability is classified as held-for-trading if it is incurred principally for the purpose of selling in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative (not in a qualifying hedge relationship). Held-for-trading financial liabilities are recognised at fair value with transaction costs being recognised in profit or loss. Subsequently they are measured at fair value. Gains and losses are recognised in profit or loss as they arise.
Financial liabilities that the Group designates on initial recognition as being at fair value through profit or loss are recognised at fair value, with transaction costs being recognised in profit or loss, and are subsequently measured at fair value. Gains and losses on financial liabilities that are designated as at fair value through profit or loss are recognised in profit or loss as they arise.
Financial liabilities may be designated as at fair value through profit or loss only if such designation (a) eliminates or significantly reduces a measurement or recognition inconsistency; or (b) applies to a group of financial assets, financial liabilities or both that the Group manages and evaluates on a fair value basis; or (c) relates to an instrument that contains an embedded derivative which is not evidently closely related to the host contract.
The principal category of financial liabilitiescustomer accounts designated as at fair value through profit or loss is structured liabilities issued by£17 million greater (2008 – £81 million lower) than the Group: designation significantly reduces the measurement inconsistency between these liabilities and the related derivatives carried at fair value.
All other financial liabilities are measured at amortised cost using the effective interest method (see accounting policy 3 above).
Fair value for a net open position in a financial liability that is quoted in an active market is the current offer price times the number of units of the instrument held or issued. Fair values for financial liabilities not quoted in an active market are determined using appropriate valuation techniques including discounting future cash flows, option pricing models and other methods that are consistent with accepted economic methodologies for pricing financial liabilities.
14. Derecognition
A financial asset is derecognised when it has been transferred and the transfer qualifies for derecognition. A transfer requires that the Group either: (a) transfers the contractual rights to receive the asset’s cash flows; or (b) retains the right to the asset’s cash flows but assumes a contractual obligation to pay those cash flows to a third party. After a transfer, the Group assesses the extent to which it has retained the risks and rewards of ownership of the transferred asset. If substantially all the risks and rewardsprincipal amount. No amounts have been retained, the asset remains on the balance sheet. If substantially all the risks and rewards have been transferred, the asset is derecognised. If substantially all the risks and rewards have been neither retained nor transferred, the Group assesses whether or not it has retained control of the asset. If it has not retained control, the asset is derecognised. Where the Group has retained control of the asset, it continues to recognise the asset to the extent of its continuing involvement.
A financial liability is removed from the balance sheet when the obligation is discharged, or cancelled, or expires.
15. Sale and repurchase transactions
Securities subject to a sale and repurchase agreement under which substantially all the risks and rewards of ownership are retained by the Group continue to be shown on the balance sheet and the sale proceeds recorded as a deposit. Securities acquired in a reverse sale and repurchase transaction under which the Group is not exposed to substantially all the risks and rewards of ownership are not recognised on the balance sheet and the consideration is recorded in Loans and advances to banks or Loans and advances to customers as appropriate.
Securities borrowing and lending transactions are usually secured by cash or securities advanced by the borrower. Borrowed securities are not recognised on the balance sheet or lent securities derecognised. Cash collateral received or given is treated as a loan or deposit; collateral in the form of securities is not recognised. However, where securities borrowed are transferred to third parties, a liability for the obligation to return the securities to the stock lending counterparty is recorded.
16. Netting
Financial assets and financial liabilities are offset and the net amount presented in the balance sheet when, and only when, the Group currently has a legally enforceable right to set off the recognised amounts; and it intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. The Group is party to a number of arrangements, including master netting agreements, that give it the right to offset financial assets and financial liabilities but where it does not intend to settle the amounts net or simultaneously and therefore the assets and liabilities concerned are presented gross.
17. Capital instruments
The Group classifies a financial instrument that it issues as a financial asset, financial liability or an equity instrument in accordance with the substance of the contractual arrangement. An instrument is classified as a liability if it is a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or financial liabilities on potentially unfavourable terms. An instrument is classified as equity if it evidences a residual interest in the assets of the Group after the deduction of liabilities. The components of a compound financial instrument issued by the Group are classified and accounted for separately as financial assets, financial liabilities or equity as appropriate.
18. Derivatives and hedging
Derivative financial instruments are recognised initially, and subsequently measured, at fair value. Derivative fair values are determined from quoted prices in active markets where available. Where there is no active market for an instrument, fair value is derived from prices for the derivative’s components using appropriate pricing or valuation models.
A derivative embedded in a contract is accounted for as a stand-alone derivative if its economic characteristics are not closely related to the economic characteristics of the host contract; unless the entire contract is carried at fair value through profit or loss.
Gains and losses arising from changes in the fair value of a derivative are recognised as they arise in profit or loss unless the derivative is the hedging instrument in a qualifying hedge. There are three types of hedge relationship: hedges of changes in the fair value of a recognised asset or liability or firm commitment (fair value hedges); hedges of the variability in cash flows from a recognised asset or liability or a forecast transaction (cash flow hedges); and hedges of the net investment in a foreign operation.
Hedge relationships are formally documented at inception. The documentation includes identification of the hedged item and the hedging instrument, details the risk that is being hedged and the way in which effectiveness will be assessed at inception and during the period of the hedge. If the hedge is not highly effective in offsetting changes in fair values or cash flows attributable to the hedged risk, consistent with the documented risk management strategy, hedge accounting is discontinued.
Fair value hedge – in a fair value hedge, the gain or loss on the hedging instrument is recognised in profit or loss. The gain or loss on the hedged item attributable to the hedged risk is recognised in profit or loss and adjusts the carrying amount of the hedged item. Hedge accounting is discontinued if the hedge no longer meets the criteria for hedge accounting or if the hedging instrument expires or is sold, terminated or exercised or if hedge designation is revoked. If the hedged item is one for which the effective interest rate method is used, any cumulative adjustment is amortised to profit or loss over the life of the hedged item using a recalculated effective interest rate.
Cash flow hedge – where a derivative financial instrument is designated as a hedge of the variabilitychanges in cash flows of a recognised asset or liability or a highly probable forecast transaction, the effective portion of the gain or loss on the hedging instrument is recognised directly in equity. The ineffective portion is recognised in profit or loss. When the forecast transaction results in the recognition of a financial asset or financial liability, the cumulative gain or loss is reclassified from equity in the same periods in which the asset or liability affects profit or loss. Otherwise the cumulative gain or loss is removed from equity and recognised in profit or loss at the same timecredit risk associated with these liabilities as the hedged transaction. Hedge accounting is discontinued ifchanges are immaterial measured as the hedge no longer meets the criteria for hedge accounting; if the hedging instrument expires or is sold, terminated or exercised; if the forecast transaction is no longer expected to occur; or if hedge designation is revoked. On the discontinuance of hedge accounting (except where a forecast transaction is no longer expected to occur), the cumulative unrealised gain or loss recognised in equity is recognised in profit or loss when the hedged cash flow occurs or, if the forecast transaction results in the recognition of a financial asset or financial liability, in the same periods during which the asset or liability affects profit or loss. Where a forecast transaction is no longer expected to occur, the cumulative unrealised gain or loss is recognised in profit or loss immediately.
Hedge of net investment in a foreign operation – in the hedge of a net investment in a foreign operation, the portion of foreign exchange differences arising on the hedging instrument determined to be an effective hedge is recognised directly in equity. Any ineffective portion is recognised in profit or loss. Non-derivative financial liabilities as well as derivatives may be the hedging instrument in a net investment hedge.
19. Investment property
Investment property comprises freehold and leasehold properties that are held to earn rentals or for capital appreciation or both. It is not depreciated but is stated at fair value based on valuations by independent registered valuers. Fair value is based on current prices for similar properties in the same location and condition. Any gain or loss arising from a change in fair value is recognisedfrom movements in profit or loss. Rental income from investment property is recognised on a straight-line basis over the period in the credit risk premium payable.
| | Comprises bonds and medium term notes of the lease. Lease incentives granted are recognised as an integral part£8,839 million (2008 – £11,574 million) and certificates of the total rental income.20. Cashdeposit and cash equivalentsother commercial paper of £2,631 million (2008 – £5,638 million).
| (8) Cash and cash equivalents comprises cash and demand deposits with banks together with short-term highly liquid investments that are readily convertible
| Includes amounts due to known amountsholding company of cash and subject to insignificant risk of change in value.£5,148 million (2008 – £4,293 million). | (9) 21. Shares in Group entities
The Bank’s investments in its subsidiaries are stated at cost less any impairment.
Critical accounting policies and key sources of accounting judgements
The reported results of
| During 2008 the Group are sensitive toreclassified financial assets from the accounting policies, assumptions and estimates that underlieheld-for-trading category into the preparation of its financial statements. UK company law and IFRS require the directors, in preparing the Group's financial statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent. In the absence of an applicable standard or interpretation, IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’, requires management to develop and apply an accounting policy that results in relevant and reliable information in the light of the requirements and guidance in IFRS dealing with similar and related issues and the IASB’s Framework for the Preparation and Presentation of Financial Statements. The judgements and assumptions involved in the Group’s accounting policies that are considered by the Board to be the most important to the portrayal of its financial condition are discussed below. The use of estimates, assumptions or models that differ from those adopted by the Group would affect its reported results.Loan impairment provisions
The Group’s loan impairment provisions are established to recognise incurred impairment losses in its portfolio of loans classified as loans and receivables and carried at amortised cost. A loan is impaired when there is objective evidence that
58category (see page 107).
|
Notes on the accounts
The following tables analyse the Bank’s financial assets and financial liabilities in accordance with the categories of financial instruments in IAS 39. Assets and liabilities outside the scope of IAS 39 are shown separately as non financial assets/liabilities. | | | | | | | | | | | Bank | | | | | | | | | | | | | | | | Designated | | | | | | | | | Other | | | | | | | | | | | | | as at fair | | | | | | | | | financial | | | Non | | | | | | | | | | value | | | | | | | | | instruments | | | financial | | | | | | | | | | through | | | Available- | | | Loans and | | | (amortised | | | assets/ | | | | | | | trading | | | profit or loss | | | for-sale | | | receivables | | | cost) | | | liabilities | | | Total | | 2009 | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Assets | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | — | | | | — | | | | — | | | | 906 | | | | | | | | | | 906 | | Loans and advances to banks (1) | | | 130 | | | | 940 | | | | — | | | | 80,362 | | | | | | | | | | 81,432 | | Loans and advances to customers (2) | | | 216 | | | | — | | | | — | | | | 88,340 | | | | | | | | | | 88,556 | | Debt securities | | | — | | | | — | | | | 5 | | | | 2,158 | | | | | | | | | | 2,163 | | Equity shares | | | — | | | | — | | | | 13 | | | | — | | | | | | | | | | 13 | | Investment in Group undertakings | | | | | | | | | | | | | | | | | | | | | | 6,783 | | | | 6,783 | | Derivatives | | | 2,900 | | | | — | | | | — | | | | — | | | | | | | | | | | 2,900 | | Intangible assets | | | | | | | | | | | | | | | | | | | | | | 380 | | | | 380 | | Property, plant and equipment | | | | | | | | | | | | | | | | | | | | | | 837 | | | | 837 | | Prepayments, accrued income | | | | | | | | | | | | | | | | | | | | | | | | | | | | and other assets | | | — | | | | — | | | | — | | | | — | | | | | | | 1,004 | | | | 1,004 | | | | | 3,246 | | | | 940 | | | | 18 | | | | 171,766 | | | | | | | 9,004 | | | | 184,974 | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks (3) | | | 70 | | | | — | | | | | | | | | | | | 21,839 | | | | | | | | 21,909 | | Customer accounts (4, 5) | | | 1,176 | | | | 947 | | | | | | | | | | | | 140,902 | | | | | | | | 143,025 | | Derivatives | | | 2,506 | | | | — | | | | | | | | | | | | | | | | | | | | 2,506 | | Accruals, deferred income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and other liabilities | | | — | | | | — | | | | | | | | | | | | | | | | 910 | | | | 910 | | Retirement benefit liabilities | | | | | | | | | | | | | | | | | | | | | | | 472 | | | | 472 | | Deferred taxation | | | | | | | | | | | | | | | | | | | | | | | 217 | | | | 217 | | Subordinated liabilities | | | — | | | | — | | | | | | | | | | | | 7,105 | | | | | | | | 7,105 | | | | | 3,752 | | | | 947 | | | | | | | | | | | | 169,846 | | | | 1,599 | | | | 176,144 | | | | Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | 8,830 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 184,974 | | For notes relating to this table refer to page 106 | | | | | | | | | | | | | | | | | | | | | | |
Accounting policiesNotes on the accounts continued
|
10 Financial instruments continued | | Bank | | | | | | | Designated | | | | | | | | | | | | Other | | | | | | | | | | | | | as at fair | | | | | | | | | | | | financial | | | Non | | | | | | | | | | value | | | | | | | | | | | | instruments | | | financial | | | | | | | | | | through | | | Hedging | | | Available- | | | Loans and | | | (amortised | | | assets/ | | | | | | | trading | | | profit or loss | | | derivatives | | | for-sale | | | receivables | | | cost) | | | liabilities | | | Total | | 2008 | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | — | | | | — | | | | | | | — | | | | 838 | | | | | | | | | | 838 | | Loans and advances to banks (1) | | | 111 | | | | 302 | | | | | | | — | | | | 22,733 | | | | | | | | | | 23,146 | | Loans and advances to customers (2) | | | 302 | | | | — | | | | | | | — | | | | 124,391 | | | | | | | | | | 124,693 | | Debt securities | | | — | | | | — | | | | | | | 41 | | | | — | | | | | | | | | | 41 | | Equity shares | | | — | | | | — | | | | | | | 6 | | | | — | | | | | | | | | | 6 | | Investment in Group undertakings | | | — | | | | — | | | | | | | — | | | | — | | | | | | | 7,339 | | | | 7,339 | | Derivatives | | | 4,897 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | 4,897 | | Intangible assets | | | | | | | | | | | | | | | | | | | | | | | | | | 401 | | | | 401 | | Property, plant and equipment | | | | | | | | | | | | | | | | | | | | | | | | | | 883 | | | | 883 | | Deferred taxation | | | | | | | | | | | | | | | | | | | | | | | | | | 400 | | | | 400 | | Prepayments, accrued income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and other assets | | | — | | | | — | | | | | | | | — | | | | — | | | | | | | 674 | | | | 674 | | | | | 5,310 | | | | 302 | | | | — | | | | 47 | | | | 147,962 | | | | | | | 9,697 | | | | 163,318 | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks (3) | | | 311 | | | | — | | | | | | | | | | | | | | | | 8,225 | | | | | | | | 8,536 | | Customer accounts (4, 5) | | | 500 | | | | 302 | | | | | | | | | | | | | | | | 129,893 | | | | | | | | 130,695 | | Debt securities in issue (6) | | | — | | | | — | | | | | | | | | | | | | | | | 15 | | | | | | | | 15 | | Derivatives | | | 5,325 | | | | — | | | | 918 | | | | | | | | | | | | | | | | | | | | 6,243 | | Accruals, deferred income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and other liabilities | | | — | | | | — | | | | | | | | | | | | | | | | — | | | | 1,407 | | | | 1,407 | | Retirement benefit liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | 982 | | | | 982 | | Subordinated liabilities (7) | | | — | | | | — | | | | | | | | | | | | | | | | 7,860 | | | | | | | | 7,860 | | | | | 6,136 | | | | 302 | | | | 918 | | | | — | | | | — | | | | 145,993 | | | | 2,389 | | | | 155,738 | | | | Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 7,580 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 163,318 | |
events since(1) | Includes items in the loan was granted have affected expected cash flowscourse of collection from the loan. The impairment loss is the difference between the carrying valueother banks of the loan and the present value£1,881 million (2008 – £2,022 million), amounts due from holding company of estimated future cash flows at the loan's original effective interest rate.
At 31 December 2007, gross loans and advances to customers totalled £191,314£78,203 million (2006(2008 – £184,470£18,707 million), amounts due from fellow subsidiaries of £9 million (2008 – £534 million) and customer loan impairment provisions amountedamounts due from subsidiaries of £57 million (2008 – £333 million).
| | Includes amounts due from fellow subsidiaries of £12,995 million (2008 – £40,920 million) and amounts due from subsidiaries of £1,715 million (2008 – £4,142 million). | | Includes items in the course of transmission to £2,338other banks of £467 million (2006(2008 – £2,059£532 million).There are two components, amounts due to the Group’s loan impairment provisions: individualholding company of £16,572 million (2008 – £1,259 million), amounts due to fellow subsidiaries of £9 million (2008 – £4,316 million) and collective.
Individual component amounts due to subsidiaries of £2,365 million (2008 – all impaired loans that exceed specific thresholds are individually assessed for impairment. Individually assessed loans principally comprise the Group's portfolio£295 million).
| | Includes amounts due to fellow subsidiaries of commercial loans£9,185 million (2008 – £6,293 million) and amounts due to medium and large businesses. Impairment losses are recognised as the difference between thesubsidiaries of £2,152 million (2008 – £3,558 million). | | The carrying value of the loan and the discounted value of management’s best estimate of future cash repayments and proceeds from any security held. These estimates take into account the customer’s debt capacity and financial flexibility; the level and quality of its earnings; the amount and sources of cash flows; the industry in which the counterparty operates; and the realisable value of any security held. Estimating the quantum and timing of future recoveries involves significant judgement. The size of receipts will depend on the future performance of the borrower and the value of security, both of which will be affected by future economic conditions; additionally, collateral may not be readily marketable. The actual amount of future cash flows and the date they are received may differ from these estimates and consequently actual losses incurred may differ from those recognised in these financial statements.Collective component – this is made up of two elements: loan impairment provisions for impaired loans that are below individual assessment thresholds (collective impaired loan provisions) and for loan losses that have been incurred but have not been separately identified at the balance sheet date (latent loss provisions). These are established on a portfolio basis using a present value methodology taking into account the level of arrears, security, past loss experience, credit scores and defaults based on portfolio trends. The most significant factors in establishing these provisions are the expected loss rates and the related average life. These portfolios include credit card receivables and other personal advances including mortgages. The future credit quality of these portfolios is subject to uncertainties that could cause actual credit losses to differ materially from reported loan impairment provisions. These uncertainties include the economic environment, notably interest rates and their effect on customer spending, the unemployment level, payment behaviour and bankruptcy trends.
Pensions
The Group operates a number of defined benefit pension schemes as described in Note 3 on the accounts. The assets of the schemes are measured at their fair value at the balance sheet date. Scheme liabilities are measured using the projected unit method, which takes account of projected earnings increases, using actuarial assumptions that give the best estimate of the future cash flows that will arise under the scheme liabilities. These cash flows are discounted at the interest rate applicable to high-quality corporate bonds of the same currency and term as the liabilities. Any surplus or deficit in excess of 10% of the greater of scheme assets and scheme liabilities is recognised in the balance sheet as an asset (surplus) or liability (deficit). In determining the value of scheme liabilities, assumptions are made as to price inflation, dividend growth, pension increases, earnings growth and employees. There is a range of assumptions that could be adopted in valuing the schemes’ liabilities. Different assumptions could significantly alter the amount of the deficit recognised in the balance sheet and the pension cost charged to the income statement. The assumptions adopted for the Group’s pension schemes are set out in Note 3 on the accounts. The pension deficit recognised in the balance sheet at 31 December 2007 was £1,322 million (2006 – £1,298 million).
Fair value – financial instruments
Financial instruments classified as held-for-trading oraccounts designated as at fair value through profit or loss and financial assets classified as available-for-sale areis £26 million greater (2008 – £8 million lower) than the principal amount. No amounts have been recognised in the financial statements at fair value. All derivatives are measured at fair value. Gains or losses arising from changes in the fair value of financial instruments classified as held-for-trading or designated as at fair value through profit or loss for changes in credit risk associated with these liabilities as the changes are includedimmaterial measured as the change in fair value from movement in the income statement. Unrealised gainsperiod in the credit risk premium payable.
| | Comprises bonds and losses on available-for-salemedium term notes of £15 million. | | Includes amounts due to the holding company of £3,710 million (2007 – £2,751 million). | | During 2008 the Bank reclassified financial assets are recognised directly in equity unless an impairment loss is recognised.
Financial instruments measured at fair value include:
Loans and advances (held-for-trading and designated as at fair value though profit or loss) – principally comprise reverse repurchase agreements (reverse repos) and US commercial mortgage loans. In repurchase agreements one party agrees to sell securities to another and simultaneously agrees to repurchase the securities at a future date for a specified price. The repurchase price is fixed at the outset, usually being the original sale price plus an amount representing interest for the period from the sale toheld-for-trading category into the repurchase.
Treasuryloans and other eligible bills and debt securities (held-for-trading and available-for-sale) – treasury bills are UK and foreign government treasury bills and other bank bills eligible for refinancing with central banks. Debt securities include those issued by governments, municipal bodies, mortgage agencies and financial institutions as well as corporate bonds, debentures and residual interests in securitisations.
Equity securities (held-for-trading, designated as at fair value though profit or loss and available-for-sale) comprise equity shares of companies or corporations both listed and unlisted.
Deposits by banks and customer accounts (held-for-trading and designated as at fair value though profit or loss) – deposits measured at fair value principally comprise repurchase agreements (repos) discussed above.
Short positions (held-for-trading) arise in dealing and market making activities where Treasury and other eligible bills, debt securities and equity shares are sold which the Group does not currently possess.
Derivatives – these include swaps, forwards, futures and options. They may be traded on an organised exchange (exchange-traded) or over-the-counter (OTC)receivables category (see page 107). Holders of exchange traded derivatives are generally required to provide margin daily in the form of cash or other collateral.
Swaps include currency swaps, interest rate swaps, credit default swaps, total return swaps and equity and equity index swaps. A swap is an agreement to exchange cash flows in the future in accordance with a pre-arranged formula. In currency swap transactions, interest payment obligations are exchanged on assets and liabilities denominated in different currencies; the exchange of principal may be notional or actual. Interest rate swap contracts generally involve exchange of fixed and floating interest payment obligations without the exchange of the underlying principal amounts.
Forwards include forward foreign exchange contracts and forward rate agreements. A forward contract is a contract to buy (or sell) a specified amount of a physical or financial commodity, at an agreed price, on an agreed future date. Forward foreign exchange contracts are contracts for the delayed delivery of currency on a specified future date. Forward rate agreements are contracts under which two counterparties agree on the interest to be paid on a notional deposit of a specified term starting on a specific future date; there is no exchange of principal.
Futures are exchange-traded forward contracts to buy (or sell) standardised amounts of underlying physical or financial commodities. The Group buys and sells currency, interest rate and equity futures. Options include exchange-traded options on currencies, interest rates and equities and equity indices and OTC currency and equity options, interest rate caps and floors and swaptions. They are contracts that give the holder the right but not the obligation to buy (or sell) a specified amount of the underlying physical or financial commodity at an agreed price on an agreed date or over an agreed period.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Fair values are determined from quoted prices in active markets for identical financial assets or financial liabilities where these are available. Fair value for a net open position in a financial asset or financial liability in an active market is the current bid or offer price times the number of units of the instrument held. Where a trading portfolio contains both financial assets and financial liabilities which are derivatives of the same underlying instrument, fair value determined by valuing the gross long and short positions at current mid market prices, with an adjustment at portfolio level to the net open long or short position to amend the valuation to bid or offer as appropriate. Where the market for a financial instrument is not active, fair value is established using a valuation technique. These valuation techniques involve a degree of estimation, the extent of which depends on the instrument’s complexity and the availability of market-based data.
Accounting policies continued
The table below analyses the Group’s financial instruments carried at fair value as at 31 December 2007 by valuation method.
| | | | | | | | Valuation | | | | | | | | | | | | | techniques | | | | | | | | | | Valuation | | | incorporating | | | | | | | | | | techniques | | | information | | | | | | | Quoted prices | | | based on | | | other than | | | | | | | in active | | | observable | | | observable | | | | | | | markets(1) | | | market data(2) | | | market data(3) | | | Total | | Financial instruments measured at fair value | | £bn | | | £bn | | | £bn | | | £bn | | Assets | | | | | | | | | | | | | Fair value through profit or loss | | | | | | | | | | | | | Loans and advances to banks | | | — | | | | 18.1 | | | | — | | | | 18.1 | | Loans and advances to customers | | | — | | | | 12.7 | | | | 2.2 | | | | 14.9 | | Treasury and other eligible bills and debt securities | | | 12.4 | | | | 21.6 | | | | 0.1 | | | | 34.1 | | Equity shares | | | — | | | | — | | | | 0.2 | | | | 0.2 | | Derivatives | | | 0.1 | | | | 3.5 | | | | — | | | | 3.6 | | Available for sale | | | | | | | | | | | | | | | | | Treasury and other eligible bills and debt securities | | | 2.3 | | | | 1.5 | | | | — | | | | 3.8 | | Equity shares | | | 0.1 | | | | — | | | | 0.9 | | | | 1.0 | | | | | 14.9 | | | | 57.4 | | | | 3.4 | | | | 75.7 | | Liabilities | | | | | | | | | | | | | | | | | Deposits | | | — | | | | 34.2 | | | | — | | | | 34.2 | | Short positions | | | 11.7 | | | | 0.7 | | | | — | | | | 12.4 | | Derivatives | | | 0.3 | | | | 3.0 | | | | — | | | | 3.3 | | | | | 12.0 | | | | 37.9 | | | | — | | | | 49.9 | |
Note:
(1) | Financial assets and financial liabilities which are valued using unadjusted quoted prices in active markets for identical assets or liabilities. This category includes listed equity shares, exchange-traded derivatives, UK, US and certain other government securities, and US agency securities in active markets. |
(2) | Financial assets and financial liabilities valued using techniques based on observable market data. Instruments in this category have been valued using: | | Group | | | | 2009 | | | 2008 | | | 2007 | | Amounts included in the consolidated income statement | | £m | | | £m | | | £m | | | | Gains on financial assets/liabilities designated as at fair value through profit or loss | | | 45 | | | | 2 | | | | 19 | |
Notes on the accounts
Reclassification of financial instruments The Group reclassified financial assets from the held-for-trading (HFT)category into the loans and receivables (LAR) category (as permitted byparagraph 50D of IAS 39 as amended). The table below shows the carrying value, fair value and effect on profitor loss of reclassification undertaken by the Group in 2008. | | Group | | | | 31 December 2009 | | | After reclassification | | | Amount | | | Increase in | | | | | | | | | | | | | | | | that would | | | profit or loss | | | | Carrying | | | Fair | | | | | | Impairment | | | have been | | | as a result of | | | | value | | | value | | | Income | | | losses | | | recognised | | | reclassification | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | �� | £m | | Reclassified from HFT to LAR: | | | | | | | | | | | | | | | | | | | | | | | | | Loans | | | | | | | | | | | | | | | | | | | | | | | | | Corporate and other loans | | | 379 | | | | 222 | | | | 18 | | | | 20 | | | | (88 | ) | | | 86 | |
The following table is for reclassifications made in 2008. The balancesheet values of these assets, the effect of the reclassification on theincome statement for the period from the date of reclassification to 31December 2008 and the gains and losses relating to these assetsrecorded in the income statement for the years ended 31 December2008, 2007 and 2006 were as follows: | | Group | | | | | | | | | | | | | | 2008 | | 2007 | | 2006 | | | | 2008 – on reclassification | | 31 December 2008 | | | | After reclassification | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Increase | | Gains/(losses) | | | | | | | | | | | | | | Gains/(losses) | | | | | | | | | | in profit | | recognised in | | | | | | | | | | | | | | up to the | | | | | | | | Amount | | or loss | | the income | | | | | | Effective | | Expected | | | | | | date of | | | | | | | | that would | | a result of | | statement | | | | Carrying | | interest | | cash | | Carrying | | Fair | | reclassi- | | | | | Impairment | | | have been | | reclassi- | | in prior | | | | value | | rate | | flows | | value | | value | | fication | | | Income | | losses | | | recognised | | fication | | periods | | | | | £m | | % | | | £m | | | £m | | | £m | | | £m | | | | £m | | | £m | | | | £m | | £m | | | £m | | £m | | Reclassified from HFT to LAR: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Corporate and other loans | | | 425 | | 5.39 | | | 951 | | | 466 | | | 395 | | | (25 | ) | | | 11 | | | — | | | | (60 | ) | 71 | | | — | | — | |
The table below shows the carrying value and fair value of reclassification undertaken by the Bank in 2008. | | Bank | | | | 31 December 2009 | | | | | | | | | Reclassified from HFT to LAR: Loans Corporate and other loans | | | 203 | | | | 45 | |
The following table is for reclassifications in 2008. | | Bank | | | | 2008 – on reclassification | | | 31 December 2008 | | | | | | Effective | | Expected | | | | | | | | | | Carrying | | interest | | cash | | | Carrying | | | Fair | | | | value | | rate | | flows | | | value | | | value | | | | | £m | | % | | | £m | | | | £m | | | | £m | | Reclassified from HFT to LAR: | | | | | | | | | | | | | | | | | | Loans | | | | | | | | | | | | | | | | | | Corporate and other loans | | | 260 | | 3.09 | | | 328 | | | | 264 | | | | 193 | |
(1) | 2008 tables have been restated for the Group and Bank. |
| (a) | quoted prices for similar assets or liabilities, or identical assets or liabilities in markets which are considered to be less than active; or |
| (b) | valuation techniques where all the inputs that have a significant effect on the valuation are directly or indirectly based on observable market data. |
107
| Financial assets and financial liabilities in this category include repos, reverse repos, structured loans and deposits, corporate and municipal debt securities, the majority of the Group’s OTC derivatives and certain instruments listed in (1) above where markets are to be active. | Notes on the accounts continued (3) | Valuation techniques incorporating information other than observable market data are used for instruments where at least one input (which could have a significant effect on the instrument’s valuation) cannot be based on observable market data. Where inputs can be observed from market data without undue cost and effort, the observed input is used, if not, the input is estimated. Financial assets in this category include certain US commercial mortgage loans, unlisted equity shares and less liquid debt securities. |
10 Financial instruments continued Valuation of financial instruments carried at fair value Control environment The RBS Group’s control environment for the determination of the fair value of financial instruments includes formalised protocols for the review and validation of fair values independent from the businesses entering into the transactions. There are specific controls to ensure consistent pricing policies and procedures, incorporating disciplined price verification. The Group ensures that appropriate attention is given to bespoke transactions, structured products, illiquid products and other instruments which are difficult to price. A key element of the control environment is the independent price verification (‘IPV’) process. Valuations are first performed by the business which entered into the transaction. Such valuations may be directly from available prices, or may be derived using a model and variable model inputs. These valuations are reviewed, and if necessary amended, by a team, independent of those trading the financial instruments, in the light of available pricing evidence. IPV is performed at a frequency to match the availability of independent data. For liquid instruments IPV is performed daily. The minimum frequency of review in the RBS Group is monthly for exposures in the regulatory trading book, and six monthly for exposures in the regulatory banking. The IPV control includes formalised reporting and escalation of any valuation differences in breach of established thresholds. The Global Pricing Unit determines IPV policy, monitors adherence to that policy, and performs additional independent reviews on highly subjective valuation issues for GBM and Non-Core. Certain assets in the non-core business are comparably more difficult and subjective to value. The valuations of these portfolios are subject to a further level of review through an additional Non-Core valuation committee comprising senior representatives of the trading function, risk management and the Global Pricing Unit which meets regularly and are responsible for monitoring, assessing and enhancing the adequacy of the valuation techniques being adopted for these instruments. Valuation models are subject to a review process which requires different levels of model documentation, testing and review, depending on the complexity of the model and the size of the Group’s exposure. A key element of the control environment over model use in the RBS Group is a modelled product review committee, made up of valuations experts from several functions within the RBS Group. This committee sets the policy for model documentation, testing and review, and prioritises models with significant exposure for review by the RBS Group’s Quantitative Research Centre. Potential valuation uncertainty is a key input in determining model review priorities at these meetings. The Quantitative Research Centre, which is independent of the trading businesses, assesses the appropriateness of the application of the model to the product, the mathematical robustness of the model, and (where appropriate), considers alternative modelling approaches. GBM’s senior management valuations control committee meets formally monthly to discuss independent pricing, reserving and valuation issues relating to both GBM and Non-Core exposures. All material methodology changes require review and ratification by this committee. The committee includes valuation specialists representing several independent review functions including Market Risk, the quantitative research centre and finance. The Group Executive Valuation Committee discusses the issues escalated by the modelled product review committee, GBM senior management valuations committee and other relevant issues. The committee covers key material and subjective valuation issues within the trading business. The committee will provide ratification to the appropriateness of areas with very high residual valuation uncertainty. Committee membership includes the Group Finance Director, the Group Chief Accountant, Head of Group Market Risk, GBM CFO and Non-Core CFO, and representation from front office trading and Finance. Valuation techniques The RBS Group uses a number of methodologies to determine the fair values of financial instruments for which observable prices in active markets for identical instruments are not available. These techniques include: relative value methodologies based on observable prices for similar instruments; present value approaches where future cash flows from the asset or liability are estimated and then discounted using a risk-adjusted interest rate; option pricing models (such as Black-Scholes or binomial option pricing models) and simulation models such as Monte-Carlo. The principal inputs to these valuation techniques are listed below. Values between and beyond available data points are obtained by interpolation and extrapolation. When utilising valuation techniques, the fair value can be significantly affected by the choice of valuation model and by underlying assumptions concerning factors such as the amounts and timing of cash flows, discount rates and credit risk. The Group uses a number of methodologies to determine the fair value of financial instruments for which observable prices in active markets for identical instruments are not available. These techniques include: relative value methodologies based on observable prices for similar instruments; present value approaches where future cash flows from the asset or liability are estimated and then discounted using a risk-adjusted interest rate; and Black-Scholes, Monte-Carlo and binomial option pricing models. The principal inputs to these valuation techniques are listed below. Values between and beyond available data points are obtained by interpolation and extrapolation.
• | Bond prices – quoted prices are generally available for government bonds, certain corporate securities and some mortgage-related products. |
| | ● • | Credit spreads – where available, these are derived from prices of credit default swaps | Credit spreads – where available, these are derived from prices of CDS or other credit based instruments, such as debt securities. For others, credit spreads are obtained from pricing services. |
| | ● • | Interest rates – these are principally benchmark interest rates such as the London Inter-Bank Offered Rate (LIBOR) and quoted interest rates in the swap, bond and futures markets. |
| | ● • | Foreign currency exchange rates – there are observable markets both for spot and forward contracts and forward and in futures in the world’s major currencies. |
| | ● • | Equity and equity index prices – quoted prices are generally readily available for equity shares listed on the world’s major stock exchanges and for major indices on such shares. |
| | ● • | Commodity prices – many commodities are actively traded in spot and forward contracts and futures on exchanges in London, New York and other commercial centres. | | | ● | Price volatilities and correlations – volatility is a measure of the tendency of a price to change with time. Correlation measures the degree to which two or more prices or other variables are observed to move together. If they move in the same direction there is positive correlation; if they move in opposite directions there is negative correlation. Volatility is a key input in valuing options and the valuation of certain products such as derivatives with more than one underlying variable that are correlation-dependent. Volatility and correlation values are obtained from broker quotations, pricing services or derived from option prices. |
• | Price volatilities and correlations – volatility is a measure of the tendency of a price to change with time. Correlation measures the degree to which two or more prices or other variables are observed to move together. If they move in the same direction there is positive correlation; if they move in opposite directions there is negative correlation. Volatility is a key input in valuing options and the value of certain products such as derivatives with more than one underlying is correlation-dependent. Volatility and correlation values are obtained from broker quotations, pricing services or derived from option prices.
|
• | Prepayment rates – the fair value of a financial instrument that can be prepaid by the issuer or borrower differs from that of an instrument that cannot be prepaid. In valuing prepayable instruments that are not quoted in active markets the Group incorporatesNotes on the accounts
● | Prepayment rates – the fair value of a financial instrument that can be prepaid by the issuer or borrower differs from that of an instrument that cannot be prepaid. In valuing prepayable instruments that are not quoted in active markets, the Group considers the value of the prepayment option. | | | ● | Counterparty credit spreads – adjustments are made to market prices (or parameters) when the creditworthiness of the counterparty differs from that of the assumed counterparty in the market price (or parameters). | | | ● | Recovery rates/loss given default – these are used as an input to valuation models and reserves for ABS and other credit products as an indicator of severity of losses on default. Recovery rates are primarily sourced from market data providers or inferred from observable credit spreads. |
• | Counterparty credit spreads – adjustment is made to market prices (or parameters) when the creditworthiness of the counterparty differs from that of the assumed counterparty in the market price or parameter; for example many OTC derivative price quotations are for transactions with a counterparty with an ‘AA’ credit rating.In order to determine a reliable fair value, where appropriate, management applies valuation adjustments to the pricing information gathered from the above sources. These adjustments reflect the Group’s assessment of factors that market participants would consider in setting a price, to the extent that these factors are not reflected in that pricing information. Furthermore, on an ongoing basis, the Group assesses the appropriateness of any model used. To the extent that the price provided by internal models does not represent the fair value of the instrument, for instance in highly stressed market conditions, the Group makes adjustments to the model valuation to calibrate to other available pricing sources. Where unobservable inputs are used, the Group may determine a range of possible valuations derived from differing stress scenarios to determine the sensitivity associated with the valuation. When establishing the fair value of a financial instrument using a valuation technique, the Group considers certain adjustments to the modelled price which market participants would make when pricing that instrument. Such adjustments include the credit quality of the counterparty and adjustments to compensate for any known model limitations.The table below shows the financial instruments carried at fair value by valuation method for the Group. | | 2009 | | | 2008 | | | | Level 1(1) | | | Level 2 (2) | | | Level 3 (3) | | | Total | | | Level 1(1) | | | Level 2 (2) | | | Level 3(3) | | | Total | | | | £bn | | | £bn | | | £bn | | | £bn | | | £bn | | | £bn | | | £bn | | | | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | Fair value through profit or loss: | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to banks | | | — | | | | 20.8 | | | | — | | | | 20.8 | | | | — | | | | 11.7 | | | | — | | | | 11.7 | | Loans and advances to customers | | | — | | | | 5.0 | | | | 0.2 | | | | 5.2 | | | | — | | | | 2.5 | | | | 0.4 | | | | 2.9 | | Debt securities | | | 12.4 | | | | 18.1 | | | | — | | | | 30.5 | | | | 8.2 | | | | 23.7 | | | | 0.5 | | | | 32.4 | | Equity shares | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.1 | | | | 0.1 | | Derivatives | | | 0.5 | | | | 3.5 | | | | 0.5 | | | | 4.5 | | | | 0.1 | | | | 7.7 | | | | 1.1 | | | | 8.9 | | | | | 12.9 | | | | 47.4 | | | | 0.7 | | | | 61.0 | | | | 8.3 | | | | 45.6 | | | | 2.1 | | | | 56.0 | | Available-for-sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Debt securities | | | 1.6 | | | | 0.5 | | | | — | | | | 2.1 | | | | 2.5 | | | | 1.1 | | | | — | | | | 3.6 | | Equity shares (5) | | | — | | | | — | | | | 0.9 | | | | 0.9 | | | | — | | | | — | | | | 1.0 | | | | 1.0 | | | | | 1.6 | | | | 0.5 | | | | 0.9 | | | | 3.0 | | | | 2.5 | | | | 1.1 | | | | 1.0 | | | | 4.6 | | | | | | | 14.5 | | | | 47.9 | | | | 1.6 | | | | 64.0 | | | | 10.8 | | | | 46.7 | | | | 3.1 | | | | 60.6 | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value through profit or loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks and customers | | | 0.4 | | | | 36.7 | | | | — | | | | 37.1 | | | | — | | | | 45.5 | | | | — | | | | 45.5 | | Debt securities in issue | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.1 | | | | — | | | | 0.1 | | Short positions | | | 10.8 | | | | 3.1 | | | | — | | | | 13.9 | | | | 9.9 | | | | 1.3 | | | | — | | | | 11.2 | | Derivatives | | | 0.6 | | | | 3.7 | | | | — | | | | 4.3 | | | | 0.3 | | | | 7.7 | | | | 0.1 | | | | 8.1 | | Other financial liabilities (4) | | | — | | | | 1.1 | | | | — | | | | 1.1 | | | | — | | | | 1.1 | | | | 0.1 | | | | 1.2 | | | | | 11.8 | | | | 44.6 | | | | — | | | | 56.4 | | | | 10.2 | | | | 55.7 | | | | 0.2 | | | | 66.1 | |
The Group refines(1) | Level 1: valued using unadjusted quoted prices in active markets, examples include G10 government securities, listed equity shares, certain exchange-traded derivatives and modifies its valuation techniques as marketscertain US agency securities. | (2) | Level 2: includes most government agency securities, investment-grade corporate bonds, certain mortgage products, certain bank and bridge loans, repos and reverse repos, less liquid listed equities, state and municipal obligations, most physical commodities and certain money market securities and loan commitments and most OTC derivatives. | (3) | Level 3: includes cash instruments which trade infrequently, certain commercial mortgage loans, unlisted equity shares, certain residual interests in securitisations, other mortgage-based products develop and the pricing for individual products become more transparent.Whilst the Group believes its valuation techniques are appropriate and consistent with other market participants, the use of different methodologies or assumptions could result in different estimates of fair value at the balance sheet date. Portfolios whose fair values are based on valuation techniques incorporating information other than observable market data and related sensitivity analysis at 31 December 2007 are discussed below.
Commercial mortgages – senior and mezzanine commercial mortgages of £2.2 billion in the Group’s US subsidiary are loans secured on commercial land and buildings that were originated or acquired by the Group for securitisation. Senior commercial mortgages carry a variable interest rate and mezzanine or more junior commercial mortgages may carry a fixed or variable interest rate. Factors affecting the value of these loans may include, but are not limited to, loan type, underlying property type and geographic location, loan interest rate, loan to value ratios, debt service coverage ratios, prepayment rates, cumulative loan loss information, yields, investor demand, market volatility since the last securitisation, and credit enhancement.
Where observable market prices for a particular loan are not available, the fair value will typically be determined with reference to observable market transactions in other loans or credit related products includingless liquid debt securities, and OTC derivatives where valuation depends upon unobservable inputs such as certain credit and exotic derivatives. Assumptions are made aboutNo gain or loss is recognised on the relationship between the loan and the available benchmarkinitial recognition of a financial instrument valued using a technique incorporating significant unobservable data. Using reasonably possible alternative assumptions for credit spreads (taking into account all other applicable factors) would reduce the fair value by up to £52 million or increase the fair value by up to £49 million.
| (4) | Comprise subordinated liabilities. | (5) | 2008 has been revised. |
Notes on the accounts continued 10 Financial instruments continued For each of the portfolio categories shown in the above table, set out below is a description of the types of products that comprise the portfolio and the valuation techniques that are applied in determining fair value, including a description of valuation techniques used for levels 2 and 3 and inputs to those models and techniques. Where reasonably possible alternative assumptions of unobservable inputs used in models would change the fair value of the portfolio significantly, the alternative inputs are indicated. Where there have been significant changes to valuation techniques during the year a discussion of the reasons for this are also included. Loans and advances to customers Loans in level 3 primarily comprise commercial mortgages. Commercial mortgages These senior and mezzanine commercial mortgages are loans secured on commercial land and buildings that were originated or acquired by the Group for securitisation. Senior commercial mortgages carry a variable interest rate and mezzanine or more junior commercial mortgages may carry a fixed or variable interest rate. Factors affecting the value of these loans may include, but are not limited to, loan type, underlying property type and geographic location, loan interest rate, loan to value ratios, debt service coverage ratios, prepayment rates, cumulative loan loss information, yields, investor demand, market volatility since the last securitisation, and credit enhancement. Where observable market prices for a particular loan are not available, the fair value will typically be determined with reference to observable market transactions in other loans or credit related products including debt securities and credit derivatives. Assumptions are made about the relationship between the loan and the available benchmark data. Using reasonably possible alternate assumptions for credit spread would reduce the fair value of £0.2 billion (2008 – £0.4 billion) by up to £10 million (2008 – £10 million) or increase by up to £20 million (2008 – £10 million). Commercial mortgage backed securities CMBS is valued using an industry standard model and the inputs, where possible, are corroborated using observable market data. Equity shares Level 3 equity shares principally comprise investments of £0.8 billion in fellow subsidiaries. Derivatives Derivatives are priced using quoted prices for the same or similar instruments where these are available. However, the majority of derivatives are valued using pricing models. Inputs for these models are usually observed directly in the market, or derived from observed prices. However, it is not always possible to observe or corroborate all model inputs. Unobservable inputs used are based on estimates taking into account a range of available information including historic analysis, historic traded levels, market practice, comparison to other relevant benchmark observable data and consensus pricing data. Interest rate derivatives Interest rate options provide a payout (or series of payouts) linked to the performance of one or more underlying, including interest rates and foreign exchange rates. Exotic options do not trade in active markets except in a small number of cases. Consequently, the Group uses models to determine fair value using valuation techniques typical for the industry. These techniques can be divided, firstly, into modelling approaches and, secondly, into methods of assessing appropriate levels for model inputs. The Group uses a variety of proprietary models for valuing exotic trades. Exotic valuation inputs include correlation between interest rates and foreign exchange rates. Correlations for more liquid rate pairs are valued using independently sourced consensus pricing levels. Where a consensus pricing benchmark is unavailable, these instruments are categorised as level 3. Using reasonably possible alternative assumptions the fair value of £0.5 billion (2008 – £1.1 billion) would be reduced by up to £50 million (2008 £80 million) or increased by up to £30 million (2008 – £80 million). Level 3 portfolio movement table | | | | | Gains or | | | | | | | | | | | | | | | | | | Gains or | | | | | | | (losses) | | | | | | | | | | | | | | | | | | (losses) | | | | | | | recognised | | | | | | | | | | | | | | | | | | relating to | | | | At | | | in the income | | | Transfers | | | | | | | | | | | | At 31 | | | instruments | | | | 1 January | | | statement or | | | in/(out) of | | | Purchases | | | Sales and | | | Foreign | | | December | | | held at | | | | 2009 | | | | | | Level 3 | | | and issues | | | settlements | | | exchange | | | 2009 | | | year end | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | FVTPL: (2) | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances | | | 376 | | | | (73 | ) | | | (68 | ) | | | 19 | | | | (40 | ) | | | (32 | ) | | | 182 | | | | 7 | | Debt securities | | | 464 | | | | (19 | ) | | | (133 | ) | | | 104 | | | | (345 | ) | | | (33 | ) | | | 38 | | | | (58 | ) | Equity shares | | | 137 | | | | (18 | ) | | | — | | | | 2 | | | | (112 | ) | | | (6 | ) | | | 3 | | | | (14 | ) | Derivatives | | | 1,099 | | | | 6 | | | | (28 | ) | | | — | | | | (575 | ) | | | — | | | | 502 | | | | (2 | ) | FVTPL assets | | | 2,076 | | | | (104 | ) | | | (229 | ) | | | 125 | | | | (1,072 | ) | | | (71 | ) | | | 725 | | | | (67 | ) | AFS: (3) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Debt securities | | | 28 | | | | — | | | | — | | | | 3 | | | | (20 | ) | | | — | | | | 11 | | | | — | | Equity shares | | | 970 | | | | (32 | ) | | | (2 | ) | | | 31 | | | | (23 | ) | | | (32 | ) | | | 912 | | | | (9 | ) | AFS assets | | | 998 | | | | (32 | ) | | | (2 | ) | | | 34 | | | | (43 | ) | | | (32 | ) | | | 923 | | | | (9 | ) | Total assets | | | 3,074 | | | | (136 | ) | | | (231 | ) | | | 159 | | | | (1,115 | ) | | | (103 | ) | | | 1,648 | | | | (76 | ) | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivatives | | | 74 | | | | 21 | | | | 1 | | | | — | | | | (70 | ) | | | (2 | ) | | | 24 | | | | 12 | | Other financial liabilities | | | 89 | | | | — | | | | (89 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | Total liabilities | | | 163 | | | | 21 | | | | (88 | ) | | | — | | | | (70 | ) | | | (2 | ) | | | 24 | | | | 12 | |
Accounting policies continued
Equity shares – includes £0.6 billion relating to investments held by the Bank in fellow subsidiaries.Other portfolios – other than the instruments discussed above, there are other financial instruments which are held, by the Group’s subsidiaries, at fair value determined from data which are not market observable, or incorporating a material adjustments to market observed data. Using reasonably possible alternative assumptions would reduce the fair value by up to £5 million or increase the fair value by up to £5 million.
Accounting developments
International Financial Reporting Standards
The International Financial Reporting Interpretations Committee (‘IFRIC’) issued interpretation IFRIC 11 ‘Group and Treasury Share Transactions’ in November 2006. Entities which buy their own shares, or whose shareholders buy shares in the reporting entity, in order to provide incentives to employees shall account for those incentives on an equity-settled basis. This principle applies also to the accounting by subsidiaries. The interpretation is effective for annual accounting periods beginning on or after 1 March 2007 and is not expected to have a material effect on the Group or the Bank.
The IFRIC issued interpretation IFRIC 12 ‘Service Concession Arrangements’ in November 2006. Entities providing infrastructure and services to governments under concession arrangements shall account for each component of the arrangement separately. Infrastructure provided under these arrangements may be recognised as either a financial asset or an intangible asset. The interpretation is effective for accounting periods beginning on or after 1 January 2008 and is not expected to have a material effect on the Group or the Bank.
The IASB issued IFRS 8 ‘Operating Segments’ in November 2006. This will replace IAS 14 ‘Segment Reporting’ for accounting periods beginning on or after 1 January 2009. IFRS 8 requires entities to report segment information as reported to management and reconcile it to the financial statements and is not expected to have a material effect on the Group or the Bank.
The IASB issued a revised IAS 23 ‘Borrowing Costs’ in March 2007. Entities are required to capitalise borrowing costs attributable to the development or construction of intangible assets or property plant or equipment. The standard is effective for accounting periods beginning on or after 1 January 2009 and is not expected to have a material effect on the Group or the Bank.
The IFRIC issued interpretation IFRIC 13 ‘Customer Loyalty Programmes’ in June 2007. Entities that provide customers with benefits ancillary to a sale of goods or services should apportion the sales proceeds to those benefits on the basis of relative fair values. The interpretation is effective for accounting periods beginning on or after 1 July 2008 and is not expected to have a material effect on the Group or the Bank.
The IFRIC issued interpretation IFRIC 14 ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’ in July 2007. The net pension asset that may be recognised by a sponsoring entity is limited to the amount to which it has an unconditional right of refund or can be recovered through the settlement of plan liabilities. Entities legally bound to minimum funding requirements should not overlook those obligations when recognising the net asset or liability for an employee benefit scheme. The interpretation is effective for accounting periods beginning on or after 1 January 2008 and is not expected to have a material effect on the Group or the Bank.
The IASB issued a revised IAS 1 ‘Presentation of Financial Statements’ in September 2007 effective for accounting periods beginning on or after 1 January 2009. The amendments to the presentation requirements for financial statements are not expected to have a material effect on the Group or the Bank.
The IASB published a revised IFRS 3 ‘Business Combinations’ and related revisions to IAS 27 ‘Consolidated and Separate Financial Statements’ following the completion in January 2008 of its project on the acquisition and disposal of subsidiaries. The standards improve convergence with US GAAP and provide new guidance on accounting for changes in interests in subsidiaries. The cost of an acquisition will comprise only consideration paid to vendors for equity; other costs will be expensed immediately. Groups will only account for goodwill on acquisition of a subsidiary; subsequent changes in interest will be recognised in equity and only on a loss of control will there be a profit or loss on disposal to be recognised in income. The changes are effective for accounting periods beginning on or after 1 July 2009 but both standards may be adopted together for accounting periods beginning on or after 1 July 2007. These changes will affect the Group's accounting for future acquisitions and disposals of subsidiaries.
The IASB published revisions to IAS 32 ‘Financial Instruments: Presentation’ and consequential revisions to other standards in February 2008 to improve the accounting for and disclosure of puttable financial instruments. The revisions are effective for accounting periods beginning on or after 1 January 2009 but together they may be adopted earlier. They are not expected to have a material affect on the Group or the Bank.
Notes on the accounts
1 Income from trading activities | | Group | | | | 2007 | | | 2006 | | | 2005 | | | | | £m | | | | £m | | | | £m | | Foreign exchange (1) | | | 134 | | | | 595 | | | | (33 | ) | Interest rates (2) | | | 310 | | | | 352 | | | | 367 | | Credit (3) | | | (843 | ) | | | 589 | | | | 562 | | Equities and commodities (4) | | | 39 | | | | (78 | ) | | | (88 | ) | | | | (360 | ) | | | 1,458 | | | | 808 | |
The analysis of trading income is based on how the business is organised and the underlying risks managed.
Notes:Trading income comprises gains and losses on financial instruments held for trading, both realised and unrealised, interest income and dividends and the related funding costs. The types of instruments include:
| (1) | Foreign exchange: spot foreign exchange contracts, currency swaps and options, emerging markets and related hedges and funding. |
| (2) | Interest rates: interest rate swaps, forward foreign exchange contracts, forward rate agreements, interest rate options, interest rate futures and related hedges and funding. |
| (3) | Credit: asset-backed securities, corporate bonds, credit derivatives and related hedges and funding. |
| (4) | Equities and commodities: equity derivatives, commodity contracts and related hedges and funding. |
2 Operating expenses | | Group | | | | 2007 | | | 2006 | | | 2005 | | | | | £m | | | | £m | | | | £m | | Wages, salaries and other staff costs | | | 1,339 | | | | 1,438 | | | | 1,246 | | Social security costs | | | 82 | | | | 78 | | | | 70 | | Pension costs (see Note 3) | | | | | | | | | | | | | – defined benefit schemes | | | 132 | | | | 229 | | | | 149 | | – defined contribution schemes | | | 14 | | | | 9 | | | | 12 | | Staff costs | | | 1,567 | | | | 1,754 | | | | 1,477 | | Premises and equipment | | | 267 | | | | 266 | | | | 114 | | Other administrative expenses | | | 2,322 | | | | 2,741 | | | | 2,510 | | Property, plant and equipment (see Note 17) | | | 109 | | | | 98 | | | | 105 | | Intangible assets (see Note 16) | | | 155 | | | | 159 | | | | 277 | | Depreciation and amortisation | | | 264 | | | | 257 | | | | 382 | | | | | 4,420 | | | | 5,018 | | | | 4,483 | |
Integration costs included(1) | Net losses recognised in operating expenses comprise expenditure incurred in respect of cost reduction and revenue enhancement targets set in connection with the various acquisitions made by the Group: | | Group | | | | 2007 | | | 2006 | | | 2005 | | | | | £m | | | | £m | | | | £m | | Staff costs | | | 7 | | | | 48 | | | | 17 | | Premises and equipment | | | 4 | | | | 3 | | | | 1 | | Other administrative expenses | | | 1 | | | | 11 | | | | 14 | | Depreciation and amortisation | | | 31 | | | | 5 | | | | 131 | | | | | 43 | | | | 67 | | | | 163 | |
Notes on the accounts continued
The average number of persons employed by the Group during the year, excluding temporary staff, was 31,200 (2006 – 31,000; 2005 –30,000). The number of persons employed by the Group at 31 December, excluding temporary staff, was as follows:
| | Group | | | | 2007 | | | 2006 | | | 2005 | | Global Banking & Markets | | | 1,300 | | | | 1,300 | | | | 1,100 | | Retail | | | 19,200 | | | | 19,700 | | | | 20,300 | | Wealth Management | | | 3,400 | | | | 3,100 | | | | 2,800 | | Ulster Bank | | | 6,400 | | | | 5,600 | | | | 5,200 | | Manufacturing | | | 1,200 | | | | 1,300 | | | | 1,200 | | Total | | | 31,500 | | | | 31,000 | | | | 30,600 | | | | | | | | | | | | | | | UK | | | 23,900 | | | | 24,100 | | | | 24,300 | | USA | | | 1,300 | | | | 1,300 | | | | 1,100 | | Europe | | | 5,800 | | | | 5,200 | | | | 4,900 | | Rest of the World | | | 500 | | | | 400 | | | | 300 | | Total | | | 31,500 | | | | 31,000 | | | | 30,600 | |
| | Bank | | | | 2007 | | | 2006 | | | 2005 | | | | | £m | | | | £m | | | | £m | | Wages, salaries and other staff costs | | | 474 | | | | 429 | | | | 380 | | Social security costs | | | 30 | | | | 29 | | | | 27 | | Pension costs (see Note 3) | | | | | | | | | | | | | – defined benefit schemes | | | 83 | | | | 168 | | | | 97 | | – defined contribution schemes | | | 1 | | | | — | | | | 4 | | Staff costs | | | 588 | | | | 626 | | | | 508 | |
The average number of persons employed by the Bank during the year, excluding temporary staff, was 20,000 (2006 – 20,700; 2005 – 20,600). The number of persons employed by the Bank at 31 December, excluding temporary staff, was as follows:
| | Bank | | | | 2007 | | | 2006 | | | 2005 | | Retail | | | 19,100 | | | | 19,700 | | | | 20,200 | | Wealth Management | | | 600 | | | | 600 | | | | 600 | | Total | | | 19,700 | | | | 20,300 | | | | 20,800 | |
All of the above are employed in the UK.
3 Pension costs
Members of the Group sponsor a number of pension schemes in the UK and overseas, predominantly of the defined benefit type, whose assets are independent of the Group’s finances. Defined benefit pensions generally provide a pension of one-sixtieth of final pensionable salary for each year of service prior to retirement up to a maximum of 40 years. Employees do not make contributions for basic pensions but may make voluntary contributions to secure additional benefits on a money-purchase basis. Since October 2006 the defined benefit section of The Royal Bank of Scotland Group Pension Fund (‘Main scheme’), has been closed to new entrants.
The Group also provides post-retirement benefits other than pensions, principally through subscriptions to private healthcare schemes in the UK and the US and unfunded post-retirement benefit plans. Provision for the costs of these benefits is charged to the income statement over the average remaining future service livesand statement of the eligible employees. The amounts are not material.comprehensive income were £107 million and £8 million respectively. Net losses on FVTPL assets and liabilities of £83 million were included in income from trading activities. £24 million net losses relating to AFS assets were recorded within interest income, dividend income and impairment losses as appropriate.
| (2) | FVTPL: Fair value through profit and loss. | (3) | AFS: Available-for-sale. |
Assets reduced in the year due to disposals and reclassifications. The decrease in debt securities of £484 million is due to transfers to level 2 to increase observability, write downs and sales. Derivative assets include illiquid rate derivatives. Notes on the accounts continued 10 Financial instruments continued Fair value of financial instruments not carried at fair value The following table shows the carrying values and the fair values of financial instruments carried on the balance sheet at amortised cost. | | Group | | | Bank | | | | 2009 | | | 2009 | | | 2008 | | | 2008 | | | 2009 | | | 2009 | | | 2008 | | | 2008 | | | | Carrying | | | Fair | | | Carrying | | | Fair | | | Carrying | | | Fair | | | Carrying | | | Fair | | | | value | | | value | | | value | | | value | | | value | | | value | | | value | | | value | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Financial assets | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | 1,805 | | | | 1,805 | | | | 1,285 | | | | 1,285 | | | | 906 | | | | 906 | | | | 838 | | | | 838 | | Loans and advances to banks | | | 112,416 | | | | 112,418 | | | | 54,500 | | | | 54,475 | | | | 80,362 | | | | 80,357 | | | | 22,733 | | | | 22,708 | | Loans and advances to customers | | | 159,207 | | | | 152,758 | | | | 195,384 | | | | 188,404 | | | | 88,340 | | | | 84,419 | | | | 124,391 | | | | 120,165 | | Debt securities | | | 2,159 | | | | 2,098 | | | | — | | | | — | | | | 2,158 | | | | 2,097 | | | | — | | | | — | | Settlement balances | | | 4,573 | | | | 4,573 | | | | 4,117 | | | | 4,117 | | | | — | | | | — | | | | — | | | | — | | | | Financial liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | 43,676 | | | | 43,665 | | | | 31,023 | | | | 31,022 | | | | 21,839 | | | | 21,830 | | | | 8,225 | | | | 8,224 | | Customer accounts | | | 208,137 | | | | 207,440 | | | | 177,532 | | | | 177,532 | | | | 140,902 | | | | 140,169 | | | | 129,893 | | | | 129,884 | | Debt securities in issue | | | 11,470 | | | | 9,362 | | | | 17,137 | | | | 16,087 | | | | — | | | | — | | | | 15 | | | | 15 | | Subordinated liabilities | | | 7,857 | | | | 7,535 | | | | 8,875 | | | | 8,178 | | | | 7,105 | | | | 6,784 | | | | 7,860 | | | | 7,163 | | Settlement balances and short positions | | | 3,027 | | | | 3,027 | | | | 1,850 | | | | 1,850 | | | | — | | | | — | | | | — | | | | — | |
The fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Quoted market values are used where available; otherwise, fair values have been estimated based on discounted expected future cash flows and other valuation techniques. These techniques involve uncertainties and require assumptions and judgments covering prepayments, credit risk and discount rates. Changes in these assumptions would significantly affect estimated fair values. The fair values reported would not necessarily be realised in an immediate sale or settlement. As a wide range of valuation techniques is available, it may be inappropriate to compare the Group’s fair value information to independent markets or other financial institutions’ fair values. The fair values of intangible assets, such as core deposits, credit card and other customer relationships are not included in the calculation of these fair values since these are not financial instruments. The assumptions and methodologies underlying the calculation of fair values of financial instruments at the balance sheet date are set out below: The fair value of financial instruments which are of short maturity (3 months or less) approximates their carrying value. This applies mainly to cash and balances at central banks, items in the course of collection from other banks, settlement balances, items in the course of transmission to other banks and demand deposits. Loans and advances to banks and customers Fair value is estimated by grouping loans into homogeneous portfolios and applying a discount rate to the cash flows. The discount rate is based on the market rate applicable at the balance sheet date for a similar portfolio with similar maturity and credit risk characteristics. Debt securities Fair values are determined using quoted prices where available or by reference to quoted prices of similar instruments. Deposits by banks and customer accounts The fair values of deposits are estimated using discounted cash flow valuation techniques. Debt securities in issue and subordinated liabilities Fair values are determined using quoted prices where available or by reference to valuation techniques and adjusting for own credit spreads where appropriate. Notes on the accounts
The following tables show the residual maturity of financial instruments, based on contractual date of maturity. | | | | | | | | Group | | | | | | | | | | | | | 2009 | | | | | | | | | 2008 | | | | | | | Less than | | | More than | | | | | | Less than | | | More than | | | | | | | 12 months | | | 12 months | | | Total | | | 12 months | | | 12 months | | | Total | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Assets | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | 1,804 | | | | 1 | | | | 1,805 | | | | 1,283 | | | | 2 | | | | 1,285 | | Loans and advances to banks | | | 120,391 | | | | 12,839 | | | | 133,230 | | | | 62,423 | | | | 3,811 | | | | 66,234 | | Loans and advances to customers | | | 78,298 | | | | 86,105 | | | | 164,403 | | | | 110,546 | | | | 87,721 | | | | 198,267 | | Debt securities | | | 2,504 | | | | 32,285 | | | | 34,789 | | | | 5,797 | | | | 30,196 | | | | 35,993 | | Equity shares | | | — | | | | 966 | | | | 966 | | | | — | | | | 1,129 | | | | 1,129 | | Settlement balances | | | 4,573 | | | | — | | | | 4,573 | | | | 4,117 | | | | — | | | | 4,117 | | Derivatives | | | 1,007 | | | | 3,463 | | | | 4,470 | | | | 2,719 | | | | 6,176 | | | | 8,895 | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | 50,435 | | | | 10,998 | | | | 61,433 | | | | 50,793 | | | | 2,840 | | | | 53,633 | | Customer accounts | | | 219,559 | | | | 7,904 | | | | 227,463 | | | | 195,111 | | | | 5,273 | | | | 200,384 | | Debt securities in issue | | | 3,978 | | | | 7,492 | | | | 11,470 | | | | 8,364 | | | | 8,848 | | | | 17,212 | | Settlement balances and short positions | | | 3,441 | | | | 13,503 | | | | 16,944 | | | | 2,691 | | | | 10,400 | | | | 13,091 | | Derivatives | | | 736 | | | | 3,578 | | | | 4,314 | | | | 2,308 | | | | 5,758 | | | | 8,066 | | Subordinated liabilities | | | 937 | | | | 8,062 | | | | 8,999 | | | | 1,050 | | | | 9,049 | | | | 10,099 | | | | | | | | | | | | | | Bank | | | | | | | | | | | | | | | | 2009 | | | | | | | | | | | 2008 | | | | | | | | Less than | | | More than | | | | | | | Less than | | | More than | | | | | | | | 12 months | | | 12 months | | | Total | | | 12 months | | | 12 months | | | Total | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | 906 | | | | — | | | | 906 | | | | 838 | | | | — | | | | 838 | | Loans and advances to banks | | | 73,633 | | | | 7,799 | | | | 81,432 | | | | 23,033 | | | | 113 | | | | 23,146 | | Loans and advances to customers | | | 42,532 | | | | 46,024 | | | | 88,556 | | | | 81,196 | | | | 43,497 | | | | 124,693 | | Debt securities | | | 5 | | | | 2,158 | | | | 2,163 | | | | 41 | | | | — | | | | 41 | | Equity shares | | | — | | | | 13 | | | | 13 | | | | — | | | | 6 | | | | 6 | | Derivatives | | | 461 | | | | 2,439 | | | | 2,900 | | | | 1,216 | | | | 3,681 | | | | 4,897 | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | 12,594 | | | | 9,315 | | | | 21,909 | | | | 7,462 | | | | 1,074 | | | | 8,536 | | Customer accounts | | | 139,768 | | | | 3,257 | | | | 143,025 | | | | 128,599 | | | | 2,096 | | | | 130,695 | | Debt securities in issue | | | — | | | | — | | | | — | | | | 15 | | | | — | | | | 15 | | Derivatives | | | 412 | | | | 2,094 | | | | 2,506 | | | | 1,081 | | | | 5,162 | | | | 6,243 | | Subordinated liabilities | | | 625 | | | | 6,480 | | | | 7,105 | | | | 856 | | | | 7,004 | | | | 7,860 | |
On balance sheet liabilities The following tables show, by contractual maturity, the undiscounted cash flows payable up to a period of 20 years from the balance sheet date, including future payments of interest. | | | | | | | | Group | | | | | | | | | | 0-3 months | | | 3-12 months | | | 1-3 years | | | 3-5 years | | | 5-10 years | | | 10-20 years | | 2009 | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Deposits by banks | | | 39,886 | | | | 2,031 | | | | 1,103 | | | | 499 | | | | 224 | | | | 5 | | Customers accounts | | | 203,751 | | | | 3,094 | | | | 2,465 | | | | 1,836 | | | | 108 | | | | 20 | | Debt securities in issue | | | 3,605 | | | | 1,354 | | | | 444 | | | | 408 | | | | — | | | | — | | Subordinated liabilities | | | 1,946 | | | | 588 | | | | 1,160 | | | | 1,393 | | | | 4,621 | | | | 732 | | Settlement balances and other liabilities | | | 3,744 | | | | — | | | | — | | | | — | | | | 1 | | | | 4 | | | | | 252,932 | | | | 7,067 | | | | 5,172 | | | | 4,136 | | | | 4,954 | | | | 761 | | | | Guarantees and commitments - notional amount | | | | | | | | | | | | | | | | | | | | | | | | | Guarantees (1) | | | 2,450 | | | | — | | | | — | | | | — | | | | — | | | | — | | Commitments (2) | | | 57,199 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | 59,649 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Notes on the accounts continued 10 Financial instruments continued | | | | | | | | Group | | | | | | | | | | | | | 0-3 months | | | 3-12 months | | | 1-3 years | | | 3-5 years | | | 5-10 years | | | 10-20 years | | 2008 | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Deposits by banks | | | 25,194 | | | | 3,198 | | | | 2,046 | | | | 509 | | | | 319 | | | | 4 | | Customers accounts | | | 171,888 | | | | 4,319 | | | | 2,498 | | | | 1,540 | | | | 153 | | | | 24 | | Debt Securities in Issue | | | 8,482 | | | | 3,131 | | | | 1,185 | | | | 1,105 | | | | 445 | | | | 742 | | Subordinated liabilities | | | 227 | | | | 1,536 | | | | 2,257 | | | | 824 | | | | 3,869 | | | | 2,468 | | Settlement balances and other liabilities | | | 2,382 | | | | — | | | | — | | | | — | | | | 4 | | | | — | | | | | 208,173 | | | | 12,184 | | | | 7,986 | | | | 3,978 | | | | 4,790 | | | | 3,238 | |
(1) | The corridor method of accounting permitsGroup is only called upon to satisfy a guarantee when the Bankguaranteed party fails to defer recognition of actuarial gains and losses that are within 10% of the larger of the fair value of plan assets and present value of defined benefit obligations of the schemes, on an individual scheme basis, at the reporting date. Any excess variations are amortised prospectively over the average remaining service lives of current members of the schemes.Interim valuations of the Group’s schemes were prepared to 31 December by independent actuaries, using the following assumptions:
| | Group | | | Bank | | Principal actuarial assumptions at 31 December (weighted average) | | 2007 | | | 2006 | | | 2005 | | | 2007 | | | 2006 | | | 2005 | | Discount rate | | | 6.0 | % | | | 5.3 | % | | | 4.8 | % | | | 6.0 | % | | | 5.3 | % | | | 4.8 | % | Expected return on plan assets | | | 6.9 | % | | | 6.9 | % | | | 6.5 | % | | | 6.9 | % | | | 6.9 | % | | | 6.5 | % | Rate of increase in salaries | | | 4.4 | % | | | 4.1 | % | | | 3.9 | % | | | 4.5 | % | | | 4.2 | % | | | 3.9 | % | Rate of increase in pensions in payment | | | 3.2 | % | | | 2.9 | % | | | 2.7 | % | | | 3.2 | % | | | 2.9 | % | | | 2.7 | % | Inflation assumption | | | 3.2 | % | | | 2.9 | % | | | 2.7 | % | | | 3.2 | % | | | 2.9 | % | | | 2.7 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | Bank | | Major classes of plan assets as a percentage of total plan assets | | 2007 | | | 2006 | | | 2005 | | | 2007 | | | 2006 | | | 2005 | | Equities | | | 61.1 | % | | | 60.5 | % | | | 61.4 | % | | | 61.0 | % | | | 60.5 | % | | | 61.3 | % | Index-linked bonds | | | 17.5 | % | | | 16.7 | % | | | 17.5 | % | | | 18.2 | % | | | 17.3 | % | | | 18.1 | % | Government fixed interest bonds | | | 1.7 | % | | | 3.0 | % | | | 2.3 | % | | | 1.2 | % | | | 2.5 | % | | | 1.8 | % | Corporate and other bonds | | | 14.9 | % | | | 13.8 | % | | | 14.4 | % | | | 15.1 | % | | | 14.0 | % | | | 14.6 | % | Property | | | 4.1 | % | | | 4.6 | % | | | 3.8 | % | | | 3.8 | % | | | 4.3 | % | | | 3.6 | % | Cash and other assets | | | 0.7 | % | | | 1.4 | % | | | 0.6 | % | | | 0.7 | % | | | 1.4 | % | | | 0.6 | % |
Ordinary shares of the holding company with a fair value of £65 million (2006 – £87 million; 2005 – £76 million) are held by the Group’s pension schemes together with holdings of other financial instruments issued by the Group with a value of £606 million (2006 – £258 million; 2005 – £299 million).
The expected return on plan assets at 31 December 2007 is based upon the weighted average of the following assumed returns on the major classes of plan assets:
| | Group | | | Bank | | | | 2007 | | | 2006 | | | 2005 | | | 2007 | | | 2006 | | | 2005 | | Equities | | | 8.1 | % | | | 8.1 | % | | | 7.7 | % | | | 8.1 | % | | | 8.1 | % | | | 7.7 | % | Index-linked bonds | | | 4.5 | % | | | 4.5 | % | | | 4.1 | % | | | 4.5 | % | | | 4.5 | % | | | 4.1 | % | Government fixed interest bonds | | | 4.5 | % | | | 4.5 | % | | | 4.0 | % | | | 4.5 | % | | | 4.5 | % | | | 4.1 | % | Corporate and other bonds | | | 5.5 | % | | | 5.3 | % | | | 4.8 | % | | | 5.5 | % | | | 5.3 | % | | | 4.8 | % | Property | | | 6.3 | % | | | 6.3 | % | | | 5.9 | % | | | 6.3 | % | | | 6.3 | % | | | 5.9 | % | Cash and other assets | | | 4.6 | % | | | 4.6 | % | | | 4.1 | % | | | 4.6 | % | | | 4.6 | % | | | 4.2 | % | | | | | | | | | | | | | | | | | | | | | | | Post-retirement mortality assumptions (Main scheme) | | | | | | | | | | | | | | 2007 | | | 2006 | | | 2005 | | Longevity at age 60 for current pensioners (years) | | | | | | | | | | | | | | | | | | | | | | | | | Males | | | | | | | | | | | | | | | 26.0 | | | | 26.0 | | | | 25.4 | | Females | | | | | | | | | | | | | | | 26.8 | | | | 28.9 | | | | 28.2 | | | | | | | | | | | | | | | | | | | | | | | | | | | Longevity at age 60 for future pensioners (years) | | | | | | | | | | | | | | | | | | | | | | | | | Males | | | | | | | | | | | | | | | 28.1 | | | | 26.8 | | | | 26.2 | | Females | | | | | | | | | | | | | | | 28.2 | | | | 29.7 | | | | 29.0 | |
These post-retirement mortality assumptions are derived from standard mortality tables used by the scheme actuary to value the liabilities for the main scheme. Following a comprehensive review of the mortality experience of the main scheme over the last three years by the scheme actuary, different standard mortality tables (adjusted as appropriate) have been used in valuing the scheme liabilities as at 31 December 2007.
Notes on the accounts continued
3 Pension costs (continued) | | Group | | Bank | | | | | | Present | | | | | | | | | Present | | | | | | | | | | value of | | | Net | | | | | | value of | | | Net | | | | Fair value | | | defined | | | pension | | | Fair value | | | defined | | | pension | | | | of plan | | | benefit | | | deficit/ | | | of plan | | | benefit | | | deficit/ | | | | assets | | | obligations | | | (surplus) | | | assets | | | obligations | | | (surplus) | | Changes in value of net pension liability | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | At 1 January 2006 | | | 16,697 | | | | 20,174 | | | | 3,477 | | | | 15,914 | | | | 19,105 | | | | 3,191 | | Currency translation and other adjustments | | | (10 | ) | | | (40 | ) | | | (30 | ) | | | — | | | | (28 | ) | | | (28 | ) | Income statement: | | | | | | | | | | | | | | | | | | | | | | | | | Expected return | | | 1,023 | | | | | | | | (1,023 | ) | | | 1,022 | | | | | | | | (1,022 | ) | Interest cost | | | | | | | 938 | | | | 938 | | | | | | | | 919 | | | | 919 | | Current service cost | | | | | | | 597 | | | | 597 | | | | | | | | 571 | | | | 571 | | Less: direct contributions from other scheme members | | | | | | | (328 | ) | | | (328 | ) | | | | | | | (340 | ) | | | (340 | ) | Past service cost | | | | | | | 24 | | | | 24 | | | | | | | | 20 | | | | 20 | | Amortisation of net unrecognised actuarial losses | | | | | | | 21 | | | | 21 | | | | | | | | 20 | | | | 20 | | | | | 1,023 | | | | 1,252 | | | | 229 | | | | 1,022 | | | | 1,190 | | | | 168 | | Actuarial gains and losses | | | 570 | | | | (1,156 | ) | | | (1,726 | ) | | | 552 | | | | (1,077 | ) | | | (1,629 | ) | Disposal of subsidiaries | | | — | | | | (1 | ) | | | (1 | ) | | | — | | | | — | | | | — | | Contributions by employer | | | 135 | | | | — | | | | (135 | ) | | | 70 | | | | — | | | | (70 | ) | Contributions by other scheme members | | | 342 | | | | 342 | | | | — | | | | 359 | | | | 359 | | | | — | | Benefits paid | | | (517 | ) | | | (517 | ) | | | — | | | | (517 | ) | | | (517 | ) | | | — | | Expenses included in service cost | | | (27 | ) | | | (27 | ) | | | — | | | | (26 | ) | | | (26 | ) | | | — | | Amortisation of net unrecognised actuarial losses | | | | | | | (21 | ) | | | (21 | ) | | | | | | | (20 | ) | | | (20 | ) | At 31 December 2006 | | | 18,213 | | | | 20,006 | | | | 1,793 | | | | 17,374 | | | | 18,986 | | | | 1,612 | | Unrecognised actuarial losses | | | | | | | | | | | 495 | | | | | | | | | | | | 502 | | Retirement benefit liabilities at 31 December 2006 | | | | | | | | | | | 1,298 | | | | | | | | | | | | 1,110 | | Unfunded schemes liabilities included in post-retirement benefit liabilities | | | | | | | | 26 | | | | | | | | | | | | 15 | |
At 1 January 2007 | | | 18,213 | | | | 20,006 | | | | 1,793 | | | | 17,374 | | | | 18,986 | | | | 1,612 | | Currency translation and other adjustments | | | 40 | | | | 49 | | | | 9 | | | | — | | | | — | | | | — | | Income statement: | | | | | | | | | | | | | | | | | | | | | | | | | Expected return | | | 1,242 | | | | | | | | (1,242 | ) | | | 1,182 | | | | | | | | (1,182 | ) | Interest cost | | | | | | | 1,060 | | | | 1,060 | | | | | | | | 1,008 | | | | 1,008 | | Current service cost | | | | | | | 610 | | | | 610 | | | | | | | | 566 | | | | 566 | | Less: direct contributions from other scheme members | | | | | | | (316 | ) | | | (316 | ) | | | | | | | (328 | ) | | | (328 | ) | Past service cost | | | | | | | 20 | | | | 20 | | | | | | | | 19 | | | | 19 | | | | | 1,242 | | | | 1,374 | | | | 132 | | | | 1,182 | | | | 1,265 | | | | 83 | | Actuarial gains and losses | | | 150 | | | | (1,967 | ) | | | (2,117 | ) | | | 163 | | | | (1,938 | ) | | | (2,101 | ) | Transfer from fellow subsidiary | | | 30 | | | | 30 | | | | — | | | | 30 | | | | 30 | | | | — | | Contributions by employer | | | 117 | | | | — | | | | (117 | ) | | | 69 | | | | — | | | | (69 | ) | Contributions by other scheme members | | | 335 | | | | 335 | | | | — | | | | 348 | | | | 348 | | | | — | | Contributions by plan participants | | | 4 | | | | 4 | | | | — | | | | — | | | | — | | | | — | | Benefits paid | | | (579 | ) | | | (579 | ) | | | — | | | | (552 | ) | | | (552 | ) | | | — | | Expenses included in service cost | | | (39 | ) | | | (39 | ) | | | — | | | | (39 | ) | | | (39 | ) | | | — | | At 31 December 2007 | | | 19,513 | | | | 19,213 | | | | (300 | ) | | | 18,575 | | | | 18,100 | | | | (475 | ) | Unrecognised actuarial gains | | | | | | | | | | | (1,622 | ) | | | | | | | | | | | (1,599 | ) | Retirement benefit liabilities at 31 December 2007 | | | | | | | | | | | 1,322 | | | | | | | | | | | | 1,124 | | Unfunded schemes liabilities included in post-retirement benefit liabilities | | | | | | | | 28 | | | | | | | | | | | | 15 | |
meet its obligations. The Group expects most guarantees it provides to contribute £456 million (Bank – £414 million)expire unused. | (2) | The Group has given commitments to its defined benefit pension schemes in 2008.provide funds to customers under undrawn formal facilities, credit lines and other commitments to lend subject to certain conditions being met by the counterparty. The Group does not expect all facilities to be drawn, and some may lapse before drawdown. |
| | | | | | | | Bank | | | | | | | | | | | | | 0-3 months | | | 3-12 months | | | 1-3 years | | | 3-5 years | | | 5-10 years | | | 10-20 years | | 2009 | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Deposits by banks | | | 20,432 | | | | 1,230 | | | | 4 | | | | 4 | | | | 183 | | | | — | | Customers accounts | | | 141,596 | | | | 253 | | | | 7 | | | | — | | | | 3 | | | | — | | Subordinated liabilities | | | 1,653 | | | | 272 | | | | 1,146 | | | | 1,322 | | | | 4,564 | | | | 681 | | | | | 163,681 | | | | 1,755 | | | | 1,157 | | | | 1,326 | | | | 4,750 | | | | 681 | | | | Guarantees and commitments - notional amount | | | | | | | | | | | | | | | | | | | | | | | | | Guarantees | | | 1,369 | | | | — | | | | — | | | | — | | | | — | | | | — | | Commitments | | | 46,930 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | 48,299 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2008 | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | 6,332 | | | | 798 | | | | 948 | | | | 11 | | | | 157 | | | | — | | Customer accounts | | | 128,925 | | | | 593 | | | | 741 | | | | 7 | | | | — | | | | — | | Debt securities in issue | | | — | | | | 15 | | | | — | | | | — | | | | — | | | | — | | Derivatives held for hedging | | | 10 | | | | 57 | | | | 125 | | | | 95 | | | | 203 | | | | 366 | | Subordinated liabilities | | | 178 | | | | 1,055 | | | | 1,892 | | | | 752 | | | | 3,816 | | | | 2,432 | | | | | 135,445 | | | | 2,518 | | | | 3,706 | | | | 865 | | | | 4,176 | | | | 2,798 | |
The tables above show the timing of cash outflows to settle financial liabilities. They have been prepared on the following basis: Financial liabilities are included at the earliest date on which the counterparty can require repayment regardless of whether or not such early repayment results in a penalty. If repayment is triggered by, or is subject to, specific criteria such as market price hurdles being reached, the liability is included at the earliest possible date that the conditions could be fulfilled without considering the probability of the conditions being met. For example, if a structured note is automatically prepaid when an equity index exceeds a certain level, the cash outflow will be included in the less than three months period whatever the level of the index at the year end. The settlement date of debt securities in issue issued by certain securitisation vehicles consolidated by the Group depends on when cash flows are received from the securitised assets. Where these assets are prepayable, the timing of the cash outflow relating to securities assumes that each asset will be prepaid at the earliest possible date. Liabilities with a contractual maturity of greater than 20 years – the principal amounts of financial liabilities that are repayable after 20 years or where the counterparty has no right to repayment of the principal are excluded from the table as are interest payments after 20 years. Held-for-trading liabilities – held-for-trading liabilities amounting to £54.0 billion (2008 – £63.8 billion) for the Group and £3.8 billion (2008 – £6.1 billion) for the Bank have been excluded from the table in view of their short term nature. Notes on the accounts
11 Financial assets – impairments The following tables show the movement in the provision for impairment losses for loans and advances. | | | | | | | | Group | | | | | | | | | | Individually | | | Collectively | | | | | | Total | | | | | | | | | | assessed | | | assessed | | | Latent | | | 2009 | | | 2008 | | | 2007 | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | At 1 January | | | 637 | | | | 2,009 | | | | 280 | | | | 2,926 | | | | 2,340 | | | | 2,061 | | Currency translation and other adjustments | | | 25 | | | | (15 | ) | | | (8 | ) | | | 2 | | | | 65 | | | | 41 | | Amounts written-off | | | (237 | ) | | | (934 | ) | | | — | | | | (1,171 | ) | | | (792 | ) | | | (617 | ) | Recoveries of amounts previously written-off | | | 3 | | | | 45 | | | | — | | | | 48 | | | | 62 | | | | 94 | | Charged to the income statement | | | 1,922 | | | | 1,605 | | | | 588 | | | | 4,115 | | | | 1,351 | | | | 848 | | Unwind of discount | | | (152 | ) | | | (94 | ) | | | — | | | | (246 | ) | | | (100 | ) | | | (87 | ) | At 31 December (1) | | | 2,198 | | | | 2,616 | | | | 860 | | | | 5,674 | | | | 2,926 | | | | 2,340 | | | | Note: | | | | | | | | | | | | | | | | | | | | | | | | | (1) The provision for impairment losses at 31 December 2009 includes £9 million relating to loans and advances to banks (2008 – £2 million; 2007 – £2 million). | | | | | | | | | | | | | | Bank | | | | | | | | | | | | Individually | | | Collectively | | | | | | | Total | | | | | | | | | | | | assessed | | | assessed | | | Latent | | | 2009 | | | 2008 | | | 2007 | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | At 1 January | | | 201 | | | | 1,748 | | | | 154 | | | | 2,103 | | | | 1,921 | | | | 1,707 | | Currency translation and other adjustments | | | (2 | ) | | | (1 | ) | | | — | | | | (3 | ) | | | 6 | | | | 13 | | Amounts written-off | | | (226 | ) | | | (898 | ) | | | — | | | | (1,124 | ) | | | (739 | ) | | | (541 | ) | Recoveries of amounts previously written-off | | | 2 | | | | 45 | | | | — | | | | 47 | | | | 55 | | | | 71 | | Charged to the income statement | | | 414 | | | | 1,335 | | | | 417 | | | | 2,166 | | | | 929 | | | | 742 | | Unwind of discount | | | (12 | ) | | | (65 | ) | | | — | | | | (77 | ) | | | (69 | ) | | | (71 | ) | At 31 December (1) | | | 377 | | | | 2,164 | | | | 571 | | | | 3,112 | | | | 2,103 | | | | 1,921 | | | | Note: | | | | | | | | | | | | | | | | | | | | | | | | | (1) The provision for impairment losses at 31 December 2009 includes £8 million relating to loans and advances to banks (2008 and 2007 – nil). | | | | | | | | | | | | | | | | | | | | | | Group | | | | | | | | | | | | | | | | | | | | 2009 | | | 2008 | | | 2007 | | Impairment losses charged to the income statement | | | | | | | | | | | | | | | £m | | | | £m | | | | £m | | Loans and advances to customers | | | | | | | | | | | | | | | 4,108 | | | | 1,351 | | | | 848 | | Loans and advances to banks | | | | | | | | | | | | | | | 7 | | | | — | | | | — | | | | | | | | | | | | | | | | | 4,115 | | | | 1,351 | | | | 848 | | Equity shares | | | | | | | | | | | | | | | 24 | | | | 11 | | | | 1 | | | | | | | | | | | | | | | | | 4,139 | | | | 1,362 | | | | 849 | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | | | | | | | | | | | | | | | | 2009 | | | 2008 | | | 2007 | | | | | | | | | | | | | | | | | £m | | | | £m | | | | £m | | Gross income not recognised but which would have been recognised under the original terms of non-accrual and restructured loans | | | | | | | | | | | | | | | | | | | | | | | | | Domestic | | | | | | | | | | | | | | | 310 | | | | 243 | | | | 200 | | Foreign | | | | | | | | | | | | | | | 153 | | | | 108 | | | | 10 | | | | | | | | | | | | | | | | | 463 | | | | 351 | | | | 210 | | | | | | Interest on non-accrual and restructured loans included in net interest income | | | | | | | | | | | | | | | | | | | | | | Domestic | | | | | | | | | | | | | | | 124 | | | | 78 | | | | 75 | | Foreign | | | | | | | | | | | | | | | 122 | | | | 22 | | | | 12 | | | | | | | | | | | | | | | | | 246 | | | | 100 | | | | 87 | |
Notes on the accounts continued 11 Financial assets – impairmentscontinued The following tables show an analysis of impaired financial assets. | | | | | 2009 | | | | | | | | | 2008 | | | | | | | | | | | | | Carrying | | | | | | | | | Carrying | | | | Cost | | | Provision | | | value | | | Cost | | | Provision | | | value | | Group | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Loans and receivables | | | | | | | | | | | | | | | | | | | Loans and advances to banks (1) | | | 9 | | | | 9 | | | | — | | | | 2 | | | | 2 | | | | — | | Loans and advances to customers (2) | | | 12,906 | | | | 4,805 | | | | 8,101 | | | | 6,070 | | | | 2,644 | | | | 3,426 | | | | | 12,915 | | | | 4,814 | | | | 8,101 | | | | 6,072 | | | | 2,646 | | | | 3,426 | | | | | | | | | | | | | | | | | | | | | | Group | | | | | | | | | | | | | | | | | | | | Carrying | | | Carrying | | | | | | | | | | | | | | | | | | | | Value | | | Value | | | | | | | | | | | | | | | | | | | | 2009 | | | 2008 | | | | | | | | | | | | | | | | | | | | | £m | | | | £m | | Available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | | Equity shares | | | | | | | | | | | | | | | | | | | 15 | | | | 7 | | | | | | | | | | | | 2009 | | | | | | | | | | | 2008 | | | | | | | | | | | | | | | | Carrying | | | | | | | | | | | Carrying | | | | Cost | | | Provision | | | value | | | Cost | | | Provision | | | value | | Bank | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Loans and receivables | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to banks (1) | | | 8 | | | | 8 | | | | — | | | | — | | | | — | | | | — | | Loans and advances to customers (3) | | | 4,362 | | | | 2,533 | | | | 1,829 | | | | 3,135 | | | | 1,949 | | | | 1,186 | | | | | 4,370 | | | | 2,541 | | | | 1,829 | | | | 3,135 | | | | 1,949 | | | | 1,186 | |
| | Group | | | Bank | | | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | | History of defined benefits schemes | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Fair value of plan assets | | | 19,513 | | | | 18,213 | | | | 16,697 | | | | 14,236 | | | | 18,574 | | | | 17,374 | | | | 15,914 | | | | 13,569 | | Present value of defined benefit obligations | | | 19,213 | | | | 20,006 | | | | 20,174 | | | | 17,894 | | | | 18,099 | | | | 18,986 | | | | 19,105 | | | | 16,922 | | Net surplus/(deficit) | | | 300 | | | | (1,793 | ) | | | (3,477 | ) | | | (3,658 | ) | | | 475 | | | | (1,612 | ) | | | (3,191 | ) | | | (3,353 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Experience losses on plan liabilities | | | (209 | ) | | | (7 | ) | | | (55 | ) | | | (611 | ) | | | (256 | ) | | | (4 | ) | | | (41 | ) | | | (624 | ) | Experience gains on plan assets | | | 150 | | | | 570 | | | | 1,639 | | | | 403 | | | | 163 | | | | 552 | | | | 1,556 | | | | 392 | | Actual return on pension schemes assets | | | 1,392 | | | | 1,593 | | | | 2,611 | | | | 1,283 | | | | 1,345 | | | | 1,574 | | | | 2,486 | | | | 1,230 | |
4 Auditors' remuneration | | | | | | | | Amounts paid to the auditors for statutory audit and other services were as follows: | | | | | | Group | | | | 2007 | | | 2006 | | | 2005 | | | | | £m | | | | £m | | | | £m | | Audit services | | | | | | | | | | | | | -Statutory audit | | | 2.2 | | | | 2.2 | | | | 2.0 | | -Audit related regulatory reporting | | | 0.1 | | | | 0.1 | | | | 1.2 | | | | | 2.3 | | | | 2.3 | | | | 3.2 | | All other services | | | 1.0 | | | | 0.1 | | | | 1.5 | | Total | | | 3.3 | | | | 2.4 | | | | 4.7 | |
5 Tax | | Group | | | | 2007 | | | 2006 | | | 2005 | | | | | £m | | | | £m | | | | £m | | Current taxation: | | | | | | | | | | | | | Charge for the year | | | 989 | | | | 1,095 | | | | 1,142 | | Over provision in respect of prior periods | | | (71 | ) | | | (251 | ) | | | (68 | ) | Relief for overseas taxation | | | (76 | ) | | | — | | | | (24 | ) | | | | 842 | | | | 844 | | | | 1,050 | | Deferred taxation: | | | | | | | | | | | | | Credit for the year | | | (60 | ) | | | (42 | ) | | | (81 | ) | (Over)/under provision in respect of prior periods | | | (14 | ) | | | 29 | | | | (21 | ) | Tax charge for the year | | | 768 | | | | 831 | | | | 948 | |
The actual tax charge differs from the expected tax charge computed by applying the standard rate of UK Corporation Tax of 30% as follows:
| | 2007 | | | 2006 | | | 2005 | | | | | £m | | | | £m | | | | £m | | Expected tax charge | | | 926 | | | | 1,037 | | | | 1,023 | | Non-deductible items | | | 52 | | | | 157 | | | | 70 | | Non-taxable items | | | (178 | ) | | | (35 | ) | | | (71 | ) | Taxable foreign exchange movements | | | (3 | ) | | | (106 | ) | | | 35 | | Group relief at non-standard rates | | | 94 | | | | 13 | | | | — | | Foreign profits taxed at other rates | | | (57 | ) | | | (23 | ) | | | (21 | ) | Increase in deferred tax asset following change in the rate of UK Corporation Tax | | | 18 | | | | — | | | | — | | Unutilised losses brought forward and carried forward | | | 1 | | | | 10 | | | | 1 | | Adjustments in respect of prior periods | | | (85 | ) | | | (222 | ) | | | (89 | ) | Actual tax charge for the year | | | 768 | | | | 831 | | | | 948 | |
The effective tax rate for the year was 24.9% (2006 – 24.0%; 2005 – 27.8%) .. The tax rate was affected by an increase of £18 million in the deferred tax asset following the change in the rate of UK Corporation Tax from 30% to 28% from 1 April 2008.
Notes on the accounts continued
6 Dividends to preference shareholders | | Group | | | | 2007 | | | 2006 | | | 2005 | | | | | £m | | | | £m | | | | £m | | 9% non-cumulative sterling preference shares, Series A | | | 13 | | | | 13 | | | | 13 | | Non-cumulative dollar preference shares, Series B (2) | | | — | | | | 11 | | | | 11 | | Non-cumulative dollar preference shares, Series C | | | 12 | | | | 12 | | | | 12 | | Total | | | 25 | | | | 36 | | | | 36 | |
Notes: | | | | | (1) In accordance with IAS 32, the Group’s preference shares are included in subordinated liabilities and the related finance cost in interest payable.(2) Redeemed in January 2007.
7 Ordinary dividends | | Group | | | | 2007 | | | 2006 | | | 2005 | | | | | £m | | | | £m | | | | £m | | Ordinary dividend paid to the parent company | | | 1,850 | | | | 1,500 | | | | 350 | |
8 Profit dealt with in the accounts of the Bank
As permitted by section 230(3) of the Companies Act 1985, no income statement for the Bank has been presented as a primary financial statement. Of the profit attributable to ordinary shareholders, £3,210 million (2006 – £1,688 million; 2005 – £1,774 million) has been dealt with in the accounts of the Bank.
9 Financial instruments
The following tables analyse the financial assets and financial liabilities in accordance with the categories of financial instruments in IAS 39. Assets and liabilities outside the scope of IAS 39 are shown separately.
| | Group | | | | | | Designated | | | | | | | | | | | | | | | | | | | | | | | | | as at fair | | | | | | | | | | | | | | | Non | | | | | | | | | | value | | | | | | | | | Other | | | | | | financial | | | | | | | Held-for- | | | through | | | Available- | | | Loans and | | | (amortised | | | Finance | | | assets/ | | | | | | | trading | | | profit or loss | | | for-sale | | | receivable | | | cost | ) | | leases | | | liabilities | | | Total | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | — | | | | — | | | | — | | | | 1,363 | | | | | | | | — | | | | | | | | 1,363 | | Treasury and other eligible bills (1) | | | 1,975 | | | | — | | | | 46 | | | | — | | | | | | | | — | | | | | | | | 2,021 | | Loans and advances to banks (2) | | | 17,912 | | | | 237 | | | | — | | | | 53,300 | | | | | | | | — | | | | | | | | 71,449 | | Loans and advances to customers (3) | | | 13,642 | | | | 1,280 | | | | — | | | | 173,603 | | | | | | | | 451 | | | | | | | | 188,976 | | Debt securities | | | 31,980 | | | | 154 | | | | 3,782 | | | | — | | | | | | | | — | | | | | | | | 35,916 | | Equity shares | | | 152 | | | | 32 | | | | 926 | | | | — | | | | | | | | — | | | | | | | | 1,110 | | Settlement balances | | | — | | | | — | | | | — | | | | 2,700 | | | | | | | | — | | | | | | | | 2,700 | | Derivatives | | | 3,575 | | | | — | | | | — | | | | — | | | | | | | | — | | | | | | | | 3,575 | | Intangible assets | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,244 | | | | 1,244 | | Property, plant and equipment | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,514 | | | | 1,514 | | Prepayments, accrued income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and other assets | | | — | | | | — | | | | — | | | | 19 | | | | | | | | — | | | | 2,395 | | | | 2,414 | | | | | 69,236 | | | | 1,703 | | | | 4,754 | | | | 230,985 | | | | | | | | 451 | | | | 5,153 | | | | 312,282 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks (4) | | | 17,255 | | | | — | | | | | | | | | | | | 27,606 | | | | — | | | | — | | | | 44,861 | | Customer accounts (5, 6) | | | 15,341 | | | | 1,661 | | | | | | | | | | | | 188,517 | | | | — | | | | — | | | | 205,519 | | Debt securities in issue (7) | | | — | | | | — | | | | | | | | | | | | 20,923 | | | | — | | | | — | | | | 20,923 | | Settlement balances | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and short positions | | | 12,437 | | | | — | | | | | | | | | | | | 2,518 | | | | — | | | | — | | | | 14,955 | | Derivatives | | | 3,251 | | | | — | | | | | | | | | | | | — | | | | — | | | | — | | | | 3,251 | | Accruals, deferred income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and other liabilities | | | — | | | | — | | | | | | | | | | | | 465 | | | | 4 | | | | 2,948 | | | | 3,417 | | Retirement benefit liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,322 | | | | 1,322 | | Subordinated liabilities (8) | | | — | | | | — | | | | | | | | | | | | 5,932 | | | | — | | | | — | | | | 5,932 | | | | | 48,284 | | | | 1,661 | | | | | | | | | | | | 245,961 | | | | 4 | | | | 4,270 | | | | 300,180 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12,102 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 312,282 | |
| | Group | | | | | | Designated | | | | | | | | | | | | | | | | | | | | | | | | | as at fair | | | | | | | | | | | | | | | | | | | | | | | | | value | | | | | | | | | | | | | | | Non | | | | | | | | | | through | | | | | | | | | Other | | | | | | financial | | | | | | | Held-for- | | | profit or | | | Available- | | | Loans and | | | (amortised | | | Finance | | | assets/ | | | | | | | trading | | | loss | | | for-sale | | | receivables | | | cost | ) | | leases | | | liabilities | | | Total | | 2006 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | — | | | | — | | | | — | | | | 1,525 | | | | | | | | — | | | | | | | | 1,525 | | Treasury and other eligible bills (1) | | | 225 | | | | — | | | | 50 | | | | — | | | | | | | | — | | | | | | | | 275 | | Loans and advances to banks (2) | | | 11,884 | | | | 654 | | | | — | | | | 49,025 | | | | | | | | — | | | | | | | | 61,563 | | Loans and advances to customers (3) | | | 21,935 | | | | 516 | | | | — | | | | 159,516 | | | | | | | | 444 | | | | | | | | 182,411 | | Debt securities | | | 28,531 | | | | 1,649 | | | | 2,088 | | | | — | | | | | | | | — | | | | | | | | 32,268 | | Equity shares | | | 42 | | | | 36 | | | | 1,080 | | | | — | | | | | | | | — | | | | | | | | 1,158 | | Settlement balances | | | — | | | | — | | | | — | | | | 3,574 | | | | | | | | — | | | | | | | | 3,574 | | Derivatives | | | 2,746 | | | | — | | | | — | | | | — | | | | | | | | — | | | | | | | | 2,746 | | Intangible assets | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,209 | | | | 1,209 | | Property, plant and equipment | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,719 | | | | 1,719 | | Prepayments, accrued income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and other assets | | | — | | | | — | | | | — | | | | 18 | | | | | | | | — | | | | 2,195 | | | | 2,213 | | | | | 65,363 | | | | 2,855 | | | | 3,218 | | | | 213,658 | | | | | | | | 444 | | | | 5,123 | | | | 290,661 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks (4) | | | 6,770 | | | | — | | | | | | | | | | | | 39,488 | | | | — | | | | — | | | | 46,258 | | Customer accounts (5, 6) | | | 8,665 | | | | 1,448 | | | | | | | | | | | | 171,106 | | | | — | | | | — | | | | 181,219 | | Debt securities in issue (6) | | | — | | | | — | | | | | | | | | | | | 14,335 | | | | — | | | | — | | | | 14,335 | | Settlement balances | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and short positions | | | 21,296 | | | | — | | | | | | | | | | | | 2,978 | | | | — | | | | — | | | | 24,274 | | Derivatives | | | 2,343 | | | | — | | | | | | | | | | | | — | | | | — | | | | — | | | | 2,343 | | Accruals, deferred income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and other liabilities | | | — | | | | — | | | | | | | | | | | | 405 | | | | 4 | | | | 3,699 | | | | 4,108 | | Retirement benefit liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,298 | | | | 1,298 | | Subordinated liabilities (8) | | | — | | | | — | | | | | | | | | | | | 5,641 | | | | — | | | | — | | | | 5,641 | | | | | 39,074 | | | | 1,448 | | | | | | | | | | | | 233,953 | | | | 4 | | | | 4,997 | | | | 279,476 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11,185 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 290,661 | |
(1) | Comprises treasury bills and similar securities of £134 million (2006 – £185 million) and other eligible bills of £1,887 million (2006 – £90 million). |
(2) | Includes reverse repurchase agreements of £8,487 million (2006 – £10,793 million), items in the course of collection from other banks of £2,296 million (2006 – £2,306 million), amounts due from holding company of £54,006 million (2006 – £44,834 million) and amounts due from fellow subsidiaries of £1,175 million (2006 – £24 million). |
(3) | Includes reverse repurchase agreements of £15,557 million (2006 – £19,459 million), amounts due from ultimate holding company of nil (2006 – £737 million), amounts due from fellow subsidiaries of £35,880 million (2006 – £35,358 million) and amounts due from holding company of £912 million (2006 – nil). |
(4) | Includes repurchase agreements of £13,139 million (2006 – £20,386 million), items in the course of transmission to other banks of £714 million (2006 – £742 million), amounts due to holding company of £27,884 million (2006 – £20,871 million) and amounts due to fellow subsidiaries of £58 million (2006 – £33 million). |
(5) | Includes repurchase agreements of £30,239 million (2006 – £25,806 million), amounts due to fellow subsidiaries of £7,583 million (2006 – £7,380 million) and amounts due to holding company of £181 million (2006 – nil). |
(6) | The carrying amount of other customer accounts designated as at fair value through profit and loss is £69 million (2006 – £80 million) greater than the principal amount. No amounts have been recognised in profit or loss for changes in credit risk associated with these liabilities as the changes are immaterial measured as the change in fair value from movements in the period in the credit risk premium payable. The amount includes investment contracts with a carrying value of nil (2006 – nil). |
(7) | Comprises bonds and medium term notes of £6,101 million (2006 – £4,656 million) and certificates of deposit and other commercial paper of £14,822 million (2006 – £9,679 million). |
(8) | Includes amounts due to holding company of £1,173 million (2006 – £267 million). |
| | Group | | | | 2007 | | | 2006 | | | 2005 | | Amounts included in the income statement | | | £m | | | | £m | | | | £m | | Gains on financial assets/liabilities designated as at fair value through profit or loss | | | 19 | | | | 116 | | | | 26 | | Gains on disposal or settlement of loans and receivables | | | — | | | | 1 | | | | — | |
Notes on the accounts continued
9 Financial instruments (continued) | | | | | | | | | | | Bank | | | | | | | | | | | | | | | | Designated | | | | | | | | | | | | | | | | | | | | | | | | | as at fair | | | | | | | | | | | | | | | | | | | | | | | | | value | | | | | | | | | | | | | | | Non | | | | | | | | | | through | | | | | | | | | | | | Other | | | financial | | | | | | | Held-for- trading | | | profit or loss | | | | | | | | | | | | | ) | | | | | Total | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | — | | | | — | | | | | | | | — | | | | 1,006 | | | | | | | | — | | | | 1,006 | | Loans and advances to banks (1) | | | 116 | | | | 17 | | | | | | | | — | | | | 27,163 | | | | | | | | — | | | | 27,296 | | Loans and advances to customers (2) | | | 355 | | | | — | | | | | | | | — | | | | 115,277 | | | | | | | | — | | | | 115,632 | | Debt securities | | | — | | | | — | | | | | | | | 31 | | | | — | | | | | | | | — | | | | 31 | | Equity shares | | | — | | | | — | | | | | | | | 18 | | | | — | | | | | | | | — | | | | 18 | | Investment in Group undertakings | | | — | | | | — | | | | | | | | — | | | | — | | | | | | | | 6,052 | | | | 6,052 | | Derivatives | | | 1,523 | | | | — | | | | 65 | | | | — | | | | — | | | | | | | | — | | | | 1,588 | | Intangible assets | | | | | | | | | | | | | | | | | | | | | | | | | | | 375 | | | | 375 | | Property, plant and equipment | | | | | | | | | | | | | | | | | | | | | | | | | | | 908 | | | | 908 | | Prepayments, accrued income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and other assets | | | — | | | | — | | | | | | | | — | | | | — | | | | | | | | 879 | | | | 879 | | | | | 1,994 | | | | 17 | | | | 65 | | | | 49 | | | | 143,446 | | | | | | | | 8,214 | | | | 153,785 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks (3) | | | 735 | | | | — | | | | | | | | | | | | | | | | 5,589 | | | | — | | | | 6,324 | | Customer accounts (4, 5) | | | 107 | | | | 170 | | | | | | | | | | | | | | | | 131,971 | | | | — | | | | 132,248 | | Debt securities in issue (6) | | | — | | | | — | | | | | | | | | | | | | | | | 9 | | | | — | | | | 9 | | Derivatives | | | 1,318 | | | | — | | | | 34 | | | | | | | | | | | | — | | | | — | | | | 1,352 | | Accruals, deferred income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and other liabilities | | | — | | | | — | | | | | | | | | | | | | | | | — | | | | 1,091 | | | | 1,091 | | Retirement benefit liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,124 | | | | 1,124 | | Subordinated liabilities | | | — | | | | — | | | | | | | | | | | | | | | | 4,244 | | | | — | | | | 4,244 | | | | | 2,160 | | | | 170 | | | | 34 | | | | | | | | | | | | 141,813 | | | | 2,215 | | | | 146,392 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 7,393 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 153,785 | |
| | | | | | | | | | | Bank | | | | | | | | | | | | | | | | Designated | | | | | | | | | | | | | | | | | | | | | | | | | as at fair | | | | | | | | | | | | | | | | | | | | | | | | | value | | | | | | | | | | | | | | | Non | | | | | | | | | | through | | | | | | | | | | | | Other | | | financial | | | | | | | Held-for- trading | | | profit or loss | | | | | | | | | | | | | ) | | | | | Total | | 2006 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | — | | | | — | | | | | | | | — | | | | 876 | | | | | | | | — | | | | 876 | | Loans and advances to banks (1) | | | 147 | | | | — | | | | | | | | — | | | | 24,859 | | | | | | | | — | | | | 25,006 | | Loans and advances to customers (2) | | | 1,056 | | | | — | | | | | | | | — | | | | 108,440 | | | | | | | | — | | | | 109,496 | | Debt securities | | | 1 | | | | — | | | | | | | | 41 | | | | — | | | | | | | | — | | | | 42 | | Equity shares | | | — | | | | — | | | | | | | | 50 | | | | — | | | | | | | | — | | | | 50 | | Investment in Group undertakings | | | — | | | | — | | | | | | | | — | | | | — | | | | | | | | 6,758 | | | | 6,758 | | Derivatives | | | 1,339 | | | | — | | | | 61 | | | | — | | | | — | | | | | | | | — | | | | 1,400 | | Intangible assets | | | | | | | | | | | | | | | | | | | | | | | | | | | 359 | | | | 359 | | Property, plant and equipment | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,009 | | | | 1,009 | | Prepayments, accrued income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and other assets | | | — | | | | — | | | | | | | | — | | | | — | | | | | | | | 705 | | | | 705 | | | | | 2,543 | | | | — | | | | 61 | | | | 91 | | | | 134,175 | | | | | | | | 8,831 | | | | 145,701 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks (3) | | | 328 | | | | — | | | | | | | | | | | | | | | | 6,110 | | | | — | | | | 6,438 | | Customer accounts (4, 5) | | | 196 | | | | 116 | | | | | | | | | | | | | | | | 124,783 | | | | — | | | | 125,095 | | Debt securities in issue (6) | | | — | | | | — | | | | | | | | | | | | | | | | 29 | | | | — | | | | 29 | | Derivatives | | | 1,082 | | | | — | | | | 63 | | | | | | | | | | | | — | | | | — | | | | 1,145 | | Accruals, deferred income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and other liabilities | | | — | | | | — | | | | | | | | | | | | | | | | — | | | | 1,231 | | | | 1,231 | | Retirement benefit liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,110 | | | | 1,110 | | Subordinated liabilities | | | — | | | | — | | | | | | | | | | | | | | | | 4,583 | | | | — | | | | 4,583 | | | | | 1,606 | | | | 116 | | | | 63 | | | | | | | | | | | | 135,505 | | | | 2,341 | | | | 139,631 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,070 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 145,701 | |
(1)
| Comprises items in the course of collection from other banks of £2,206 million (2006 – £2,108 million), amounts due from holding company of £22,749 million (2006 – £21,684 million), amounts due from fellow subsidiaries of £383 million (2006 – £24 million) and amounts due from subsidiaries of £553 million (2006 – £641 million).
|
(2)
| Includes amounts due from ultimate holding company of nil (2006 – £737 million), amounts due from fellow subsidiaries of £35,500 million (2006 – £34,119 million), amounts due from subsidiaries of £3,095 million (2006 – £4,143 million) and amounts due from holding company of £335 million (2006 – nil).
|
(3)
| Includes items in the course of transmission to other banks of £764 million (2006 – £777 million), amounts due to holding company of £1,908 million (2006 – £4,242 million), amounts due to fellow subsidiaries of £1,721 million (2006 – £8 million) and amounts due to subsidiaries of £636 million (2006 – £366 million).
|
(4)
| Includes amounts due to fellow subsidiaries of £7,360 million (2006 – £6,901 million), amounts due to subsidiaries of £1,461 million (2006 – £6,576 million) and amounts due to holding company of £181 million (2006 – nil).
|
(5)
| The carrying amount of other customer accounts designated as at fair value through profit and loss is £17 million (2006 – £4 million) greater than the principal amount. No amounts have been recognised in profit or loss for changes in credit risk associated with these liabilities as the changes are immaterial measured as the change in fair value from movement in the period in the credit risk premium payable. The amount includes investment contracts with a carrying value of nil (2006 – nil).
|
(6)
| Comprises bonds and medium term notes of £9 million (2006 – £29 million).
|
Notes on the accounts continued
9 Financial instruments (continued)
The following table shows the carrying values and the fair values of financial instruments on the balance sheets at amortised cost.
| | | | | Group | | | | | | | | | Bank | | | | | | 2007 | | | 2007 | | | 2006 | | | 2006 | | | 2007 | | | 2007 | | | 2006 | | | 2006 | | | | Carrying | | | Fair | | | Carrying | | | Fair | | | Carrying | | | Fair | | | Carrying | | | Fair | | | | value | | | value | | | value | | | value | | | value | | | value | | | value | | | value | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Financial assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | 1,363 | | | | 1,363 | | | | 1,525 | | | | 1,525 | | | | 1,006 | | | | 1,006 | | | | 876 | | | | 876 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to banks | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and receivables | | | 53,300 | | | | 53,293 | | | | 49,025 | | | | 49,022 | | | | 27,163 | | | | 27,164 | | | | 24,859 | | | | 24,859 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to customers | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and receivables | | | 173,603 | | | | 173,554 | | | | 159,516 | | | | 159,447 | | | | 115,277 | | | | 115,250 | | | | 108,440 | | | | 108,321 | | Finance leases | | | 451 | | | | 458 | | | | 444 | | | | 477 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Settlement balances | | | 2,700 | | | | 2,700 | | | | 3,574 | | | | 3,574 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortised cost | | | 27,606 | | | | 27,606 | | | | 39,488 | | | | 39,487 | | | | 5,589 | | | | 5,590 | | | | 6,110 | | | | 6,110 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Customer accounts | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortised cost | | | 188,517 | | | | 188,502 | | | | 171,106 | | | | 171,099 | | | | 131,971 | | | | 131,967 | | | | 124,783 | | | | 124,781 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Debt securities in issue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortised cost | | | 20,923 | | | | 20,943 | | | | 14,335 | | | | 14,390 | | | | 9 | | | | 9 | | | | 29 | | | | 29 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Subordinated liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortised cost | | | 5,932 | | | | 5,842 | | | | 5,641 | | | | 6,061 | | | | 4,244 | | | | 4,214 | | | | 4,583 | | | | 4,940 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Settlement balances and short positions | | | 2,518 | | | | 2,518 | | | | 2,978 | | | | 2,978 | | | | — | | | | — | | | | — | | | | — | |
Remaining maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | | | | | | 2007 | | 2006 | | | Less than | | | More than | | | | | | Less than | | | More than | | | | | | | 12 months | | | 12 months | | | Total | | | 12 months | | | 12 months | | | Total | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | 1,363 | | | | — | | | | 1,363 | | | | 1,525 | | | | — | | | | 1,525 | | Treasury and other eligible bills | | | 2,021 | | | | — | | | | 2,021 | | | | 275 | | | | — | | | | 275 | | Loans and advances to banks | | | 69,783 | | | | 1,666 | | | | 71,449 | | | | 60,280 | | | | 1,283 | | | | 61,563 | | Loans and advances to customers | | | 117,090 | | | | 71,886 | | | | 188,976 | | | | 113,393 | | | | 69,018 | | | | 182,411 | | Debt securities | | | 3,442 | | | | 32,474 | | | | 35,916 | | | | 1,838 | | | | 30,430 | | | | 32,268 | | Equity shares | | | — | | | | 1,110 | | | | 1,110 | | | | — | | | | 1,158 | | | | 1,158 | | Settlement balances | | | 2,700 | | | | — | | | | 2,700 | | | | 3,574 | | | | — | | | | 3,574 | | Derivatives | | | 1,230 | | | | 2,345 | | | | 3,575 | | | | 1,111 | | | | 1,635 | | | | 2,746 | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | 42,978 | | | | 1,883 | | | | 44,861 | | | | 44,308 | | | | 1,950 | | | | 46,258 | | Customer accounts | | | 201,014 | | | | 4,505 | | | | 205,519 | | | | 177,858 | | | | 3,361 | | | | 181,219 | | Debt securities in issue | | | 10,429 | | | | 10,494 | | | | 20,923 | | | | 8,250 | | | | 6,085 | | | | 14,335 | | Settlement balances and short positions | | | 3,444 | | | | 11,511 | | | | 14,955 | | | | 3,978 | | | | 20,296 | | | | 24,274 | | Derivatives | | | 1,315 | | | | 1,936 | | | | 3,251 | | | | 1,169 | | | | 1,174 | | | | 2,343 | | Subordinated liabilities | | | 195 | | | | 5,737 | | | | 5,932 | | | | 113 | | | | 5,528 | | | | 5,641 | |
| | | | | | | | Bank | | | | | | | | | | | | | 2007 | | | | | | | | | 2006 | | | | | | | Less than | | | More than | | | | | | Less than | | | More than | | | | | | | 12 months | | | 12 months | | | Total | | | 12 months | | | 12 months | | | Total | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | 1,006 | | | | — | | | | 1,006 | | | | 876 | | | | — | | | | 876 | | Loans and advances to banks | | | 27,058 | | | | 238 | | | | 27,296 | | | | 24,442 | | | | 564 | | | | 25,006 | | Loans and advances to customers | | | 78,387 | | | | 37,245 | | | | 115,632 | | | | 76,651 | | | | 32,845 | | | | 109,496 | | Debt securities | | | 30 | | | | 1 | | | | 31 | | | | 42 | | | | — | | | | 42 | | Equity shares | | | — | | | | 18 | | | | 18 | | | | — | | | | 50 | | | | 50 | | Derivatives | | | 319 | | | | 1,269 | | | | 1,588 | | | | 442 | | | | 958 | | | | 1,400 | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | 5,733 | | | | 591 | | | | 6,324 | | | | 5,696 | | | | 742 | | | | 6,438 | | Customer accounts | | | 129,787 | | | | 2,461 | | | | 132,248 | | | | 122,191 | | | | 2,904 | | | | 125,095 | | Debt securities in issue | | | — | | | | 9 | | | | 9 | | | | 20 | | | | 9 | | | | 29 | | Derivatives | | | 302 | | | | 1,050 | | | | 1,352 | | | | 422 | | | | 723 | | | | 1,145 | | Subordinated liabilities | | | 106 | | | | 4,138 | | | | 4,244 | | | | 111 | | | | 4,472 | | | | 4,583 | |
Notes on the accounts continued
10 Asset quality
Asset grades
Internal reporting and oversight of risk assets is principally differentiated by credit ratings. Internal ratings are used to assess the credit quality of borrowers. Customers are assigned credit ratings based on various credit grading models that reflect the probability of default. All credit ratings across the Group map to a RBS Group level asset quality scale.
Expressed as an annual probability of default, the upper and lower boundaries and the midpoint for each of these RBS Group level asset quality grades are as follows:
| Annual probability of default | | Minimum | Midpoint | Maximum | Asset quality grade | % | % | % | AQ1 | 0.00 | 0.10 | 0.20 | AQ2 | 0.21 | 0.40 | 0.60 | AQ3 | 0.61 | 1.05 | 1.50 | AQ4 | 1.51 | 3.25 | 5.00 | AQ5 | 5.01 | 52.50 | 100.00 |
The following table provides an analysis of the credit quality of financial assets by the RBS Group’s internal credit ratings.
| | | | | | | | | | | | | | | | | | | Group | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balances with Group | | | | Accruing | | | | Non- | | | | Impairment | | | | | | | | | AQ1 | | | | AQ2 | | | | AQ3 | | | | AQ4 | | | | AQ5 | | | | companies | | | | past due | | | | accrual | | | | provision | | | | Total | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Cash and balances at central banks | | | 1,363 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,363 | | Treasury and other eligible bills | | | 2,021 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,021 | | Loans and advances to banks* | | | 13,308 | | | | 492 | | | | 146 | | | | 23 | | | | 2 | | | | 55,181 | | | | — | | | | 2 | | | | (2 | ) | | | 69,152 | | Loans and advances to customers | | | 31,716 | | | | 21,636 | | | | 61,593 | | | | 22,471 | | | | 10,485 | | | | 36,792 | | | | 3,324 | | | | 3,297 | | | | (2,338 | ) | | | 188,976 | | Debt securities | | | 34,877 | | | | 765 | | | | 133 | | | | 31 | | | | 110 | | | | — | | | | — | | | | — | | | | — | | | | 35,916 | | Settlement balances | | | 1,376 | | | | 9 | | | | 202 | | | | 32 | | | | 29 | | | | — | | | | 1,052 | | | | — | | | | — | | | | 2,700 | | Derivatives | | | 1,443 | | | | 198 | | | | 162 | | | | 41 | | | | 16 | | | | 1,715 | | | | — | | | | — | | | | — | | | | 3,575 | | Other financial instruments | | | 19 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 19 | | | | | 86,123 | | | | 23,100 | | | | 62,236 | | | | 22,598 | | | | 10,642 | | | | 93,688 | | | | 4,376 | | | | 3,299 | | | | (2,340 | ) | | | 303,722 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commitments | | | 16,363 | | | | 22,106 | | | | 21,931 | | | | 10,321 | | | | 5,615 | | | | — | | | | — | | | | — | | | | — | | | | 76,336 | | Contingent liabilities | | | 1,708 | | | | 1,357 | | | | 1,680 | | | | 383 | | | | 217 | | | | — | | | | — | | | | — | | | | — | | | | 5,345 | | Total off-balance sheet | | | 18,071 | | | | 23,463 | | | | 23,611 | | | | 10,704 | | | | 5,832 | | | | — | | | | — | | | | — | | | | — | | | | 81,681 | |
| | | | | | | | | | | | | | | | | | | | | | | Balances with Group | | | | Accruing | | | | Non- | | | | | Impairment provisions individually assessed. | | | | | | | | AQ1 | | | | AQ2 | | | | AQ3 | | | | AQ4 | | | | AQ5 | | | | companies | | | | past due | | | | accrual | | | | provision | | | | Total | | 2006 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | |
Cash and balances at central banks | | | 1,525 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,525 | | Treasury and other eligible bills | | | 275 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 275 | | Loans and advances to banks* | | | 13,994 | | | | 119 | | | | — | | | | 278 | | | | 8 | | | | 44,858 | | | | — | | | | 2 | | | | (2 | ) | | | 59,257 | | Loans and advances to customers | | | 37,412 | | | | 15,228 | | | | 49,314 | | | | 32,203 | | | | 8,166 | | | | 36,095 | | | | 3,070 | | | | 2,982 | | | | (2,059 | ) | | | 182,411 | | Debt securities | | | 29,804 | | | | 1,191 | | | | 795 | | | | 78 | | | | 400 | | | | — | | | | — | | | | — | | | | — | | | | 32,268 | | Settlement balances | | | 1,904 | | | | 127 | | | | 251 | | | | 97 | | | | — | | | | — | | | | 1,195 | | | | — | | | | — | | | | 3,574 | | Derivatives | | | 1,198 | | | | 193 | | | | 172 | | | | 14 | | | | 6 | | | | 1,163 | | | | — | | | | — | | | | — | | | | 2,746 | | Other financial instruments | | | 18 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 18 | | | | | 86,130 | | | | 16,858 | | | | 50,532 | | | | 32,670 | | | | 8,580 | | | | 82,116 | | | | 4,265 | | | | 2,984 | | | | (2,061 | ) | | | 282,074 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commitments | | | 24,411 | | | | 15,531 | | | | 19,845 | | | | 8,653 | | | | 6,659 | | | | — | | | | — | | | | — | | | | — | | | | 75,099 | | Contingent liabilities | | | 2,465 | | | | 1,534 | | | | 833 | | | | 250 | | | | 79 | | | | — | | | | — | | | | — | | | | — | | | | 5,161 | | Total off-balance sheet | | | 26,876 | | | | 17,065 | | | | 20,678 | | | | 8,903 | | | | 6,738 | | | | — | | | | — | | | | — | | | | — | | | | 80,260 | |
* Excluding items in the course of collection of £2,297 million (2006 – £2,306 million).
| | | |
The following table provides an analysis of the credit quality of financial assets by the RBS Group’s internal credit ratings.
| | | | | | | | | | | | | | Bank | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balances with Group | | | Accruing | | | Non | | | Impairment | | | | | | | AQ1 | | | AQ2 | | | AQ3 | | | AQ4 | | | AQ5 | | | companies | | | past due | | | accrual | | | provision | | | Total | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Cash and balances at central banks | | | 1,006 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,006 | | Loans and advances to banks* | | | 968 | | | | 268 | | | | 146 | | | | 23 | | | | — | | | | 23,685 | | | | — | | | | — | | | | — | | | | 25,090 | | Loans and advances to customers | | | 11,165 | | | | 16,147 | | | | 26,468 | | | | 12,000 | | | | 8,423 | | | | 38,930 | | | | 1,786 | | | | 2,634 | | | | (1,921 | ) | | | 115,632 | | Debt securities | | | 31 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 31 | | Derivatives | | | 321 | | | | 171 | | | | 144 | | | | 31 | | | | 16 | | | | 905 | | | | — | | | | — | | | | — | | | | 1,588 | | | | | 13,491 | | | | 16,586 | | | | 26,758 | | | | 12,054 | | | | 8,439 | | | | 63,520 | | | | 1,786 | | | | 2,634 | | | | (1,921 | ) | | | 143,347 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commitments | | | 11,769 | | | | 19,930 | | | | 13,477 | | | | 6,471 | | | | 3,682 | | | | 193 | | | | — | | | | — | | | | — | | | | 55,522 | | Contingent liabilities | | | 1,181 | | | | 1,282 | | | | 1,035 | | | | 262 | | | | 192 | | | | — | | | | — | | | | — | | | | — | | | | 3,952 | | Total off-balance sheet | | | 12,950 | | | | 21,212 | | | | 14,512 | | | | 6,733 | | | | 3,874 | | | | 193 | | | | — | | | | — | | | | — | | | | 59,474 | |
| | | | | | | | | | | | | | | | | Balances with Group | | | Accruing | | | Non | | | Impairment | | | | | | | AQ1 | | | AQ2 | | | AQ3 | | | AQ4 | | | AQ5 | | | companies | | | past due | | | accrual | | | provision | | | Total | | 2006 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | |
Cash and balances at central banks | | | 876 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 876 | | Loans and advances to banks* | | | 244 | | | | 19 | | | | — | | | | 278 | | | | 8 | | | | 22,349 | | | | — | | | | — | | | | — | | | | 22,898 | | Loans and advances to customers | | | 7,084 | | | | 10,338 | | | | 19,123 | | | | 24,207 | | | | 7,118 | | | | 38,999 | | | | 1,872 | | | | 2,462 | | | | (1,707 | ) | | | 109,496 | | Debt securities | | | — | | | | — | | | | — | | | | 42 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 42 | | Derivatives | | | 214 | | | | 184 | | | | 152 | | | | 14 | | | | 6 | | | | 830 | | | | — | | | | — | | | | — | | | | 1,400 | | | | | 8,418 | | | | 10,541 | | | | 19,275 | | | | 24,541 | | | | 7,132 | | | | 62,178 | | | | 1,872 | | | | 2,462 | | | | (1,707 | ) | | | 134,712 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commitments | | | 21,462 | | | | 14,960 | | | | 8,138 | | | | 6,650 | | | | 5,857 | | | | 273 | | | | — | | | | — | | | | — | | | | 57,340 | | Contingent liabilities | | | 2,058 | | | | 1,481 | | | | 304 | | | | 170 | | | | 55 | | | | — | | | | — | | | | — | | | | — | | | | 4,068 | | Total off-balance sheet | | | 23,520 | | | | 16,441 | | | | 8,442 | | | | 6,820 | | | | 5,912 | | | | 273 | | | | — | | | | — | | | | — | | | | 61,408 | |
* Excluding items in the course of collection of £2,206 million (2006 – £2,108 million).
Notes on the accounts continued
10 Asset quality (continued)
Industry risk – geographical analysis
The following table analyses financial assets by location of office and industry type.
| | | | | | | | Group | | | | | | | | | | Loans and advances to banks and customers | | | Treasury bills, debt securities and equity shares | | | Derivatives | | | | | | Total | | | Netting offset(2) | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | UK | | | | | | | | | | | | | | | | | | | | | | | | | Central and local government | | | 2,067 | | | | 1,341 | | | | — | | | | — | | | | 3,408 | | | | 1,144 | | Manufacturing | | | 6,737 | | | | 2 | | | | 101 | | | | — | | | | 6,840 | | | | 2,256 | | Construction | | | 6,147 | | | | — | | | | 25 | | | | — | | | | 6,172 | | | | 917 | | Finance | | | 73,279 | | | | 1,571 | | | | 1,216 | | | | — | | | | 76,066 | | | | 368 | | Service industry and business activities | | | 27,051 | | | | 2 | | | | 184 | | | | — | | | | 27,237 | | | | 4,546 | | Agriculture, forestry and fishing | | | 1,733 | | | | 1 | | | | 2 | | | | — | | | | 1,736 | | | | 18 | | Property | | | 24,211 | | | | 26 | | | | 103 | | | | — | | | | 24,340 | | | | 1,445 | | Individuals | | | | | | | | | | | | | | | | | | | | | | | | | Home mortgages | | | 3,565 | | | | — | | | | 2 | | | | — | | | | 3,567 | | | | — | | Other | | | 16,486 | | | | — | | | | — | | | | — | | | | 16,486 | | | | 2 | | Finance leases and instalment credit | | | 310 | | | | — | | | | — | | | | — | | | | 310 | | | | — | | Interest accruals | | | 470 | | | | — | | | | — | | | | — | | | | 470 | | | | — | | Total UK | | | 162,056 | | | | 2,943 | | | | 1,633 | | | | — | | | | 166,632 | | | | 10,696 | | | | | | | | | | | | | | | | | | | | | | | | | | | US | | | | | | | | | | | | | | | | | | | | | | | | | Central and local government | | | — | | | | 7,050 | | | | — | | | | 212 | | | | 7,262 | | | | — | | Manufacturing | | | — | | | | 112 | | | | — | | | | — | | | | 112 | | | | — | | Construction | | | — | | | | 48 | | | | — | | | | — | | | | 48 | | | | — | | Finance | | | 41,858 | | | | 26,046 | | | | 577 | | | | 2,478 | | | | 70,959 | | | | 2,485 | | Service industry and business activities | | | 16 | | | | 823 | | | | 1 | | | | 1 | | | | 841 | | | | 1 | | Property | | | 1,975 | | | | — | | | | — | | | | — | | | | 1,975 | | | | — | | Individuals | | | | | | | | | | | | | | | | | | | | | | | | | Home mortgages | | | 967 | | | | — | | | | — | | | | — | | | | 967 | | | | — | | Other | | | 9 | | | | — | | | | — | | | | — | | | | 9 | | | | — | | Interest accruals | | | 224 | | | | 241 | | | | — | | | | — | | | | 465 | | | | 2 | | Total US | | | 45,049 | | | | 34,320 | | | | 578 | | | | 2,691 | | | | 82,638 | | | | 2,488 | | | | | | | | | | | | | | | | | | | | | | | | | | | Europe | | | | | | | | | | | | | | | | | | | | | | | | | Central and local government | | | 104 | | | | 959 | | | | — | | | | — | | | | 1,063 | | | | — | | Manufacturing | | | 1,803 | | | | — | | | | — | | | | — | | | | 1,803 | | | | — | | Construction | | | 2,860 | | | | — | | | | — | | | | — | | | | 2,860 | | | | — | | Finance | | | 11,381 | | | | 780 | | | | 1,336 | | | | 28 | | | | 13,525 | | | | — | | Service industry and business activities | | | 6,123 | | | | — | | | | 8 | | | | — | | | | 6,131 | | | | 16 | | Agriculture, forestry and fishing | | | 587 | | | | — | | | | — | | | | — | | | | 587 | | | | — | | Property | | | 8,028 | | | | 15 | | | | — | | | | — | | | | 8,043 | | | | — | | Individuals | | | | | | | | | | | | | | | | | | | | | | | | | Home mortgages | | | 16,201 | | | | 18 | | | | — | | | | — | | | | 16,219 | | | | — | | Other | | | 4,892 | | | | — | | | | — | | | | — | | | | 4,892 | | | | — | | Finance leases and instalment credit | | | 43 | | | | — | | | | — | | | | — | | | | 43 | | | | — | | Interest accruals | | | 177 | | | | — | | | | — | | | | — | | | | 177 | | | | — | | Total Europe | | | 52,199 | | | | 1,772 | | | | 1,344 | | | | 28 | | | | 55,343 | | | | 16 | | | | | | | | | | | | | | | | | | | | | | | | | | | Rest of the World | | | | | | | | | | | | | | | | | | | | | | | | | Central and local government | | | — | | | | 1 | | | | — | | | | — | | | | 1 | | | | — | | Finance | | | 2,114 | | | | 12 | | | | 20 | | | | — | | | | 2,146 | | | | — | | Service industry and business activities | | | — | | | | 1 | | | | — | | | | — | | | | 1 | | | | — | | Individuals | | | | | | | | | | | | | | | | | | | | | | | | | Home mortgages | | | 197 | | | | — | | | | — | | | | — | | | | 197 | | | | — | | Other | | | 1,147 | | | | — | | | | — | | | | — | | | | 1,147 | | | | — | | Interest accruals | | | 3 | | | | — | | | | — | | | | — | | | | 3 | | | | — | | Total Rest of the World | | | 3,461 | | | | 14 | | | | 20 | | | | — | | | | 3,495 | | | | — | |
Industry risk – geographical analysis
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Group | | | | | | | | | | Loans and advances to banks and customers | | | Treasury bills, debt securities and equity shares | | | Derivatives | | | Other(1) | | | Total | | | Netting offset(2) | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Total | | | | | | | | | | | | | | | | | | | | | | | | | Central and local government | | | 2,171 | | | | 9,351 | | | | — | | | | 212 | | | | 11,734 | | | | 1,144 | | Manufacturing | | | 8,540 | | | | 114 | | | | 101 | | | | — | | | | 8,755 | | | | 2,256 | | Construction | | | 9,007 | | | | 48 | | | | 25 | | | | — | | | | 9,080 | | | | 917 | | Finance | | | 128,632 | | | | 28,409 | | | | 3,149 | | | | 2,506 | | | | 162,696 | | | | 2,853 | | Service industry and business activities | | | 33,190 | | | | 826 | | | | 193 | | | | 1 | | | | 34,210 | | | | 4,563 | | Agriculture, forestry and fishing | | | 2,320 | | | | 1 | | | | 2 | | | | — | | | | 2,323 | | | | 18 | | Property | | | 34,214 | | | | 41 | | | | 103 | | | | — | | | | 34,358 | | | | 1,445 | | Individuals | | | | | | | | | | | | | | | | | | | | | | | | | Home mortgages | | | 20,930 | | | | 18 | | | | 2 | | | | — | | | | 20,950 | | | | — | | Other | | | 22,534 | | | | — | | | | — | | | | — | | | | 22,534 | | | | 2 | | Finance leases and instalment credit | | | 353 | | | | — | | | | — | | | | — | | | | 353 | | | | — | | Interest accruals | | | 874 | | | | 241 | | | | — | | | | — | | | | 1,115 | | | | 2 | | | | | 262,765 | | | | 39,049 | | | | 3,575 | | | | 2,719 | | | | 308,108 | | | | 13,200 | |
(1)
| Includes settlement balances of £2,700 million.
|
(2)
| This column shows the amount by which the Group’s credit risk exposure is reduced through arrangements, such as master netting agreements, which give the Group a legal right to set-off the financial asset against a financial liability due to the same counterparty. In addition, the Group holds collateral in respect of individual loans and advances to banks and to customers. This collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant, inventories and trade debtors; and guarantees of lending from parties other than the borrower. The Group obtains collateral in the form of securities in reverse repurchase agreements. Cash and securities are received as collateral in respect of derivative transactions.
|
Notes on the accounts continued
10 Asset quality (continued)
Industry risk – geographical analysis
| | | | | | | | Group | | | | | | | | | | Loans and advances to banks and customers | | | Treasury bills, debt securities and equity shares | | | Derivatives | | | | | | Total | | | Netting offset(2) | | 2006 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | UK | | | | | | | | | | | | | | | | | | | | | | | | | Central and local government | | | 2,130 | | | | 1,428 | | | | 4 | | | | — | | | | 3,562 | | | | 1,050 | | Manufacturing | | | 6,635 | | | | 1 | | | | 74 | | | | — | | | | 6,710 | | | | 3,174 | | Construction | | | 5,083 | | | | 1 | | | | 34 | | | | — | | | | 5,118 | | | | 766 | | Finance | | | 84,028 | | | | 1,748 | | | | 979 | | | | — | | | | 86,755 | | | | 421 | | Service industry and business activities | | | 24,150 | | | | 22 | | | | 241 | | | | — | | | | 24,413 | | | | 3,707 | | Agriculture, forestry and fishing | | | 2,004 | | | | 1 | | | | 1 | | | | — | | | | 2,006 | | | | 34 | | Property | | | 19,966 | | | | 18 | | | | 64 | | | | — | | | | 20,048 | | | | 744 | | Individuals | | | | | | | | | | | | | | | | | | | | | | | | | Home mortgages | | | 3,449 | | | | — | | | | — | | | | — | | | | 3,449 | | | | — | | Other | | | 16,172 | | | | — | | | | — | | | | — | | | | 16,172 | | | | 6 | | Finance leases and instalment credit | | | 308 | | | | — | | | | — | | | | — | | | | 308 | | | | — | | Interest accruals | | | 402 | | | | — | | | | — | | | | — | | | | 402 | | | | — | | Total UK | | | 164,327 | | | | 3,219 | | | | 1,397 | | | | — | | | | 168,943 | | | | 9,902 | | | | | | | | | | | | | | | | | | | | | | | | | | | US | | | | | | | | | | | | | | | | | | | | | | | | | Central and local government | | | — | | | | 8,641 | | | | — | | | | 102 | | | | 8,743 | | | | — | | Manufacturing | | | — | | | | 248 | | | | — | | | | — | | | | 248 | | | | — | | Construction | | | — | | | | 48 | | | | — | | | | — | | | | 48 | | | | — | | Finance | | | 32,237 | | | | 19,158 | | | | 468 | | | | 3,462 | | | | 55,325 | | | | 1,265 | | Service industry and business activities | | | 21 | | | | 643 | | | | 1 | | | | — | | | | 665 | | | | — | | Property | | | 2,647 | | | | — | | | | — | | | | — | | | | 2,647 | | | | — | | Individuals | | | | | | | | | | | | | | | | | | | | | | | | | Home mortgages | | | 6,708 | | | | — | | | | — | | | | — | | | | 6,708 | | | | — | | Other | | | 3 | | | | — | | | | — | | | | — | | | | 3 | | | | — | | Interest accruals | | | 128 | | | | 230 | | | | — | | | | — | | | | 358 | | | | 2 | | Total US | | | 41,744 | | | | 28,968 | | | | 469 | | | | 3,564 | | | | 74,745 | | | | 1,267 | | | | | | | | | | | | | | | | | | | | | | | | | | | Europe | | | | | | | | | | | | | | | | | | | | | | | | | Central and local government | | | 263 | | | | 310 | | | | — | | | | — | | | | 573 | | | | — | | Manufacturing | | | 1,005 | | | | — | | | | — | | | | — | | | | 1,005 | | | | — | | Construction | | | 2,291 | | | | — | | | | — | | | | — | | | | 2,291 | | | | — | | Finance | | | 5,045 | | | | 1,202 | | | | 865 | | | | 17 | | | | 7,129 | | | | 4 | | Service industry and business activities | | | 4,795 | | | | 1 | | | | 10 | | | | 8 | | | | 4,814 | | | | — | | Agriculture, forestry and fishing | | | 469 | | | | 2 | | | | — | | | | — | | | | 471 | | | | — | | Property | | | 6,053 | | | | — | | | | — | | | | — | | | | 6,053 | | | | — | | Individuals | | | | | | | | | | | | | | | | | | | | | | | | | Home mortgages | | | 13,597 | | | | — | | | | — | | | | — | | | | 13,597 | | | | — | | Other | | | 3,567 | | | | — | | | | — | | | | — | | | | 3,567 | | | | — | | Finance leases and instalment credit | | | 38 | | | | — | | | | — | | | | — | | | | 38 | | | | — | | Interest accruals | | | 144 | | | | — | | | | — | | | | — | | | | 144 | | | | — | | Total Europe | | | 37,267 | | | | 1,515 | | | | 875 | | | | 25 | | | | 39,682 | | | | 4 | | | | | | | | | | | | | | | | | | | | | | | | | | | Rest of the World | | | | | | | | | | | | | | | | | | | | | | | | | Central and local government | | | — | | | | 1 | | | | — | | | | — | | | | 1 | | | | — | | Finance | | | 1,823 | | | | — | | | | — | | | | — | | | | 1,823 | | | | — | | Service industry and business activities | | | — | | | | — | | | | 5 | | | | 3 | | | | 8 | | | | — | | Individuals | | | | | | | | | | | | | | | | | | | | | | | | | Home mortgages | | | 90 | | | | — | | | | — | | | | — | | | | 90 | | | | — | | Other | | | 781 | | | | — | | | | — | | | | — | | | | 781 | | | | — | | Interest accruals | | | 3 | | | | — | | | | — | | | | — | | | | 3 | | | | — | | Total Rest of the World | | | 2,697 | | | | 1 | | | | 5 | | | | 3 | | | | 2,706 | | | | — | |
Industry risk – geographical analysis
| | | | | | | | Group | | | | | | | | | | Loans and advances to banks and customers | | | Treasury bills, debt securities and equity shares | | | Derivatives | | | | | | Total | | | Netting
offset(2)
| | 2006 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | |
Total | | | | | | | | | | | | | | | | | | | Central and local government | | | 2,393 | | | | 10,380 | | | | 4 | | | | 102 | | | | 12,879 | | | | 1,050 | | Manufacturing | | | 7,640 | | | | 249 | | | | 74 | | | | — | | | | 7,963 | | | | 3,174 | | Construction | | | 7,374 | | | | 49 | | | | 34 | | | | — | | | | 7,457 | | | | 766 | | Finance | | | 123,133 | | | | 22,108 | | | | 2,312 | | | | 3,479 | | | | 151,032 | | | | 1,690 | | Service industry and business activities | | | 28,966 | | | | 666 | | | | 257 | | | | 11 | | | | 29,900 | | | | 3,707 | | Agriculture, forestry and fishing | | | 2,473 | | | | 3 | | | | 1 | | | | — | | | | 2,477 | | | | 34 | | Property | | | 28,666 | | | | 18 | | | | 64 | | | | — | | | | 28,748 | | | | 744 | | Individuals | | | | | | | | | | | | | | | | | | | | | | | | | Home mortgages | | | 23,844 | | | | — | | | | — | | | | — | | | | 23,844 | | | | — | | Other | | | 20,523 | | | | — | | | | — | | | | — | | | | 20,523 | | | | 6 | | Finance leases and instalment credit | | | 346 | | | | — | | | | — | | | | — | | | | 346 | | | | — | | Interest accruals | | | 677 | | | | 230 | | | | — | | | | — | | | | 907 | | | | 2 | | | | | 246,035 | | | | 33,703 | | | | 2,746 | | | | 3,592 | | | | 286,076 | | | | 11,173 | |
(1)
| Includes settlement balances of £3,574 million.
|
(2)
| This column shows the amount by which the Group’s credit risk exposure is reduced through arrangements, such as master netting agreements, which give the Group a legal right to set-off the financial asset against a financial liability due to the same counterparty. In addition, the Group holds collateral in respect of individual loans and advances to banks and to customers. This collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant, inventories and trade debtors; and guarantees of lending from parties other than the borrower. The Group obtains collateral in the form of securities in reverse repurchase agreements. Cash and securities are received as collateral in respect of derivative transactions.
|
Notes on the accounts continued
10 Asset quality (continued)
Industry risk – geographical analysis
| | | | | | | | Bank | | | | | | | | | | Loans and advances to banks and customers | | | Treasury bills, debt securities and equity shares | | | Derivatives | | | Total | | | Netting offset (1) | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | UK | | | | | | | | | | | | | | | | | | | | | Central and local government | | | 2,066 | | | | — | | | | — | | | | 2,066 | | | | 1,144 | | Manufacturing | | | 6,472 | | | | — | | | | 101 | | | | 6,573 | | | | 2,256 | | Construction | | | 4,720 | | | | — | | | | 25 | | | | 4,745 | | | | 917 | | Finance | | | 59,312 | | | | 48 | | | | 1,174 | | | | 60,534 | | | | 368 | | Service industry and business activities | | | 25,948 | | | | 1 | | | | 181 | | | | 26,130 | | | | 4,546 | | Agriculture, forestry and fishing | | | 1,445 | | | | — | | | | 2 | | | | 1,447 | | | | 18 | | Property | | | 20,568 | | | | — | | | | 103 | | | | 20,671 | | | | 1,445 | | Individuals | | | | | | | | | | | | | | | | | | | | | Home mortgages | | | 26 | | | | — | | | | 2 | | | | 28 | | | | — | | Other | | | 14,527 | | | | — | | | | — | | | | 14,527 | | | | 2 | | Finance lease and instalment credit | | | 13 | | | | — | | | | — | | | | 13 | | | | — | | Interest accruals | | | 402 | | | | — | | | | — | | | | 402 | | | | — | | Total UK | | | 135,499 | | | | 49 | | | | 1,588 | | | | 137,136 | | | | 10,696 | | | | | | | | | | | | | | | | | | | | | | | US | | | | | | | | | | | | | | | | | | | | | Finance | | | 5,867 | | | | — | | | | — | | | | 5,867 | | | | — | | Total US | | | 5,867 | | | | — | | | | — | | | | 5,867 | | | | — | | | | | | | | | | | | | | | | | | | | | | | Europe | | | | | | | | | | | | | | | | | | | | | Finance | | | 3,035 | | | | — | | | | — | | | | 3,035 | | | | — | | Total Europe | | | 3,035 | | | | — | | | | — | | | | 3,035 | | | | — | | | | | | | | | | | | | | | | | | | | | | | Rest of the World | | | | | | | | | | | | | | | | | | | | | Finance | | | 448 | | | | — | | | | — | | | | 448 | | | | — | | Total Rest of the World | | | 448 | | | | — | | | | — | | | | 448 | | | | — | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | | | | | | | | | | | | | | | Central and local government | | | 2,066 | | | | — | | | | — | | | | 2,066 | | | | 1,144 | | Manufacturing | | | 6,472 | | | | — | | | | 101 | | | | 6,573 | | | | 2,256 | | Construction | | | 4,720 | | | | — | | | | 25 | | | | 4,745 | | | | 917 | | Finance | | | 68,662 | | | | 48 | | | | 1,174 | | | | 69,884 | | | | 368 | | Service industry and business activities | | | 25,948 | | | | 1 | | | | 181 | | | | 26,130 | | | | 4,546 | | Agriculture, forestry and fishing | | | 1,445 | | | | — | | | | 2 | | | | 1,447 | | | | 18 | | Property | | | 20,568 | | | | — | | | | 103 | | | | 20,671 | | | | 1,445 | | Individuals | | | | | | | | | | | | | | | | | | | | | Home mortgages | | | 26 | | | | — | | | | 2 | | | | 28 | | | | — | | Other | | | 14,527 | | | | — | | | | — | | | | 14,527 | | | | 2 | | Finance lease and instalment credit | | | 13 | | | | — | | | | — | | | | 13 | | | | — | | Interest accruals | | | 402 | | | | — | | | | — | | | | 402 | | | | — | | | | | 144,849 | | | | 49 | | | | 1,588 | | | | 146,486 | | | | 10,696 | |
(1)
| This column shows the amount by which the Bank’s credit risk exposure is reduced through arrangements, such as master netting agreements, which give the Bank a legal right to set-off the financial asset against a financial liability due to the same counterparty. In addition, the Bank holds collateral in respect of individual loans and advances to banks and to customers. This collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant, inventories and trade debtors; and guarantees of lending from parties other than the borrower. The Bank obtains collateral in the form of securities in reverse repurchase agreements. Cash and securities are received as collateral in respect of derivative transactions.
|
Industry risk – geographical analysis
| | | | | | | | Bank | | | | | | | | | | Loans and advances to banks and customers | | | Treasury bills, debt securities and equity shares | | | Derivatives | | | Total | | | Netting
offset (1)
| | 2006 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | |
UK | | | | | | | | | | | | | | | | Central and local government | | | 2,126 | | | | — | | | | 4 | | | | 2,130 | | | | 1,050 | | Manufacturing | | | 6,391 | | | | — | | | | 74 | | | | 6,465 | | | | 3,174 | | Construction | | | 4,225 | | | | — | | | | 34 | | | | 4,259 | | | | 766 | | Finance | | | 66,045 | | | | 91 | | | | 981 | | | | 67,117 | | | | 399 | | Service industry and business activities | | | 23,080 | | | | — | | | | 242 | | | | 23,322 | | | | 3,707 | | Agriculture, forestry and fishing | | | 1,736 | | | | — | | | | 1 | | | | 1,737 | | | | 34 | | Property | | | 17,329 | | | | — | | | | 64 | | | | 17,393 | | | | 744 | | Individuals | | | | | | | | | | | | | | | | | | | | | Home mortgages | | | 35 | | | | — | | | | — | | | | 35 | | | | — | | Other | | | 14,000 | | | | — | | | | — | | | | 14,000 | | | | 6 | | Interest accruals | | | 334 | | | | — | | | | — | | | | 334 | | | | — | | Total UK | | | 135,301 | | | | 91 | | | | 1,400 | | | | 136,792 | | | | 9,880 | | | | | | | | | | | | | | | | | | | | | | | US | | | | | | | | | | | | | | | | | | | | | Finance | | | 2 | | | | — | | | | — | | | | 2 | | | | — | | Service industry and business activities | | | — | | | | 1 | | | | — | | | | 1 | | | | — | | Total US | | | 2 | | | | 1 | | | | — | | | | 3 | | | | — | | | | | | | | | | | | | | | | | | | | | | | Europe | | | | | | | | | | | | | | | | | | | | | Finance | | | 906 | | | | — | | | | — | | | | 906 | | | | — | | Total Europe | | | 906 | | | | — | | | | — | | | | 906 | | | | — | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | | | | | | | | | | | | | | | Central and local government | | | 2,126 | | | | — | | | | 4 | | | | 2,130 | | | | 1,050 | | Manufacturing | | | 6,391 | | | | — | | | | 74 | | | | 6,465 | | | | 3,174 | | Construction | | | 4,225 | | | | — | | | | 34 | | | | 4,259 | | | | 766 | | Finance | | | 66,953 | | | | 91 | | | | 981 | | | | 68,025 | | | | 399 | | Service industry and business activities | | | 23,080 | | | | 1 | | | | 242 | | | | 23,323 | | | | 3,707 | | Agriculture, forestry and fishing | | | 1,736 | | | | — | | | | 1 | | | | 1,737 | | | | 34 | | Property | | | 17,329 | | | | — | | | | 64 | | | | 17,393 | | | | 744 | | Individuals | | | | | | | | | | | | | | | | | | | | | Home mortgages | | | 35 | | | | — | | | | — | | | | 35 | | | | — | | Other | | | 14,000 | | | | — | | | | — | | | | 14,000 | | | | 6 | | Interest accruals | | | 334 | | | | — | | | | — | | | | 334 | | | | — | | | | | 136,209 | | | | 92 | | | | 1,400 | | | | 137,701 | | | | 9,880 | |
(1)
| This column shows the amount by which the Bank’s credit risk exposure is reduced through arrangements, such as master netting agreements, which give the Bank a legal right to set-off the financial asset against a financial liability due to the same counterparty. In addition, the Bank holds collateral in respect of individual loans and advances to banks and to customers. This collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant, inventories and trade debtors; and guarantees of lending from parties other than the borrower. The Bank obtains collateral in the form of securities in reverse repurchase agreements. Cash and securities are received as collateral in respect of derivative transactions.
|
Notes on the accounts continued
11 Past due and impaired financial assets
The following table shows the movement in the provision for impairment losses for loans and advances.
| | | | | | | | Group | | | | | | | | | | Individually | | | Collectively | | | | | | Total | | | | | | | | | | assessed | | | assessed | | | Latent | | | 2007 | | | 2006 | | | 2005 | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | At 1 January | | | 269 | | | | 1,596 | | | | 196 | | | | 2,061 | | | | 2,031 | | | | 1,940 | | Implementation of IAS 39 on 1 January 2005 | | | — | | | | — | | | | — | | | | — | | | | — | | | | 185 | | Currency translation and other adjustments | | | 8 | | | | (8 | ) | | | 41 | | | | 41 | | | | (25 | ) | | | (2 | ) | Disposals of subsidiaries | | | — | | | | — | | | | — | | | | — | | | | — | | | | (7 | ) | Amounts written-off (1) | | | (58 | ) | | | (559 | ) | | | — | | | | (617 | ) | | | (801 | ) | | | (818 | ) | Recoveries of amounts previously written-off | | | 11 | | | | 83 | | | | — | | | | 94 | | | | 71 | | | | 56 | | Charged to the income statement | | | 79 | | | | 749 | | | | 20 | | | | 848 | | | | 852 | | | | 753 | | Unwind of discount | | | (13 | ) | | | (74 | ) | | | — | | | | (87 | ) | | | (67 | ) | | | (76 | ) | At 31 December (2) | | | 296 | | | | 1,787 | | | | 257 | | | | 2,340 | | | | 2,061 | | | | 2,031 | |
(1)
| Amounts written-off include £3 million in 2005 relating to loans and advances to banks.
|
(2)
| Impairment losses at 31 December 2007 include £2 million relating to loans and advances to banks (2006 – £2 million; 2005 – £3 million).
|
| | | | | | | | Bank | | | | | | | | | | Individually | | | Collectively | | | | | | Total | | | | | | | | | | assessed | | | assessed | | | Latent | | | 2007 | | | 2006 | | | 2005 | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | |
At 1 January | | | 178 | | | | 1,421 | | | | 108 | | | | 1,707 | | | | 1,673 | | | | 1,633 | | Implementation of IAS 39 on 1 January 2005 | | | — | | | | — | | | | — | | | | — | | | | — | | | | 177 | | Currency translation and other adjustments | | | — | | | | (21 | ) | | | 34 | | | | 13 | | | | (21 | ) | | | 5 | | Disposals of subsidiaries | | | — | | | | — | | | | — | | | | — | | | | — | | | | (17 | ) | Amounts written-off | | | (53 | ) | | | (488 | ) | | | — | | | | (541 | ) | | | (702 | ) | | | (758 | ) | Recoveries of amounts previously written-off | | | 9 | | | | 62 | | | | — | | | | 71 | | | | 58 | | | | 43 | | Charged to the income statement | | | 56 | | | | 685 | | | | 1 | | | | 742 | | | | 754 | | | | 651 | | Unwind of discount | | | (8 | ) | | | (63 | ) | | | — | | | | (71 | ) | | | (55 | ) | | | (61 | ) | At 31 December | | | 182 | | | | 1,596 | | | | 143 | | | | 1,921 | | | | 1,707 | | | | 1,673 | |
| | | | | Group | | | | | | | 2007 | | | 2006 | | | 2005 | | Impairment losses charged to the income statement | | | £m | | | | £m | | | | £m | | Loans and advances to customers | | | 848 | | | | 852 | | | | 753 | | Equity shares | | | 1 | | | | — | | | | 3 | | | | | 849 | | | | 852 | | | | 756 | | | | | | | | | | | | | | | | | | | | | | | | 2007 | | | 2006 | | | 2005 | | Group | | | £m | | | | £m | | | | £m | | Gross income not recognised but which would have been | | | | | | | | | | | | | recognised under the original terms of non-accrual and restructured loans | | | | | | | | | | | | | Domestic | | | 200 | | | | 225 | | | | 99 | | Foreign | | | 10 | | | | 24 | | | | 21 | | | | | 210 | | | | 249 | | | | 120 | | | | | | | | | | | | | | | Group | | | | | | | | | | | | | Interest on non-accrual and restructured loans included in net interest income | | | | | | | | | | | | | Domestic | | | 75 | | | | 68 | | | | 67 | | Foreign | | | 12 | | | | 9 | | | | 9 | | | | | 87 | | | | 77 | | | | 76 | |
The following tables show analyses of impaired financial assets.
| | | | | 2007 | | | | | | | | | 2006 | | | | | | | | | | | | | Net book | | | | | | | | | Net book | | | | Cost | | | Provision | | | value | | | Cost | | | Provision | | | value | | Group | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Impaired financial assets | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to banks (1) | | | 2 | | | | 2 | | | | — | | | | 2 | | | | 2 | | | | — | | Loans and advances to customers (2) | | | 3,297 | | | | 2,081 | | | | 1,216 | | | | 2,982 | | | | 1,863 | | | | 1,119 | | Equity shares (1) | | | 10 | | | | 2 | | | | 8 | | | | 11 | | | | 2 | | | | 9 | | | | | 3,309 | | | | 2,085 | | | | 1,224 | | | | 2,995 | | | | 1,867 | | | | 1,128 | |
| | | | | 2007 | | | | | | | | | 2006 | | | | | | | | | | | | | Net book | | | | | | | | | Net book | | | | Cost | | | Provision | | | value | | | Cost | | | Provision | | | value | | Bank | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | |
Impaired financial assets | | �� | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to customers (3) | | | 2,634 | | | | 1,778 | | | | 856 | | | | 2,462 | | | | 1,599 | | | | 863 | |
Notes:
(1) Impairment provisions individually assessed.
(2) Impairment provisions individually assessed on balances of £539£8,340 million (2006(2008 – £453£2,654 million). | | (3) Impairment provisions individually assessed on balances of £270£1,122 million (2006(2008 – £265£404 million). | |
The Group and Bank hold collateral in respect of certain loans and advances to banks and to customers that are past due or impaired. Such collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant, inventories and trade debtors; and guarantees of lending from parties other than the borrower. The following table shows financial and non-financial assets, recognised on the Group's and Bank’s balance sheets, obtained during the year by taking possession of collateral or calling on other credit enhancements. | | Group | | | Bank | | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | | £m | | | £m | | | £m | | | £m | | Other property | | | 104 | | | | — | | | | — | | | | — | | Cash | | | 41 | | | | 28 | | | | 41 | | | | 28 | | | | | 145 | | | | 28 | | | | 41 | | | | 28 | |
In general, the Group seeks to dispose of property and other assets not readily convertible into cash obtained by taking possession of collateral as rapidly as the market for the individual asset permits. Notes on the accounts
11 Financial assets – impairments continued The following loans and advances to customers were past due at the balance sheet date but not considered impaired: | | | | | | Group | | | | | | | | | | | | Bank | | | | | | | | | | | | | | | | Past due | | | | | | | | | | | | | Past due | | | | | | | Past due | | Past due | | Past due | | 90 days | | | | | | Past due | | Past due | | Past due | | | 90 days | | | | | | | 1-29 days | | 30-59 days | | 60-89 days | | or more | | | Total | | | 1-29 days | | 30-59 days | | 60-89 days | | | or more | | | Total | | | | £m | | £m | | £m | | £m | | | £m | | | £m | | £m | | £m | | | £m | | | £m | | | | 2009 | | | 2,465 | | | 1,010 | | | 1,387 | | | 1,670 | | | 6,532 | | | | 1,075 | | | 600 | | | 1,084 | | | | 1,016 | | | 3,775 | | 2008 | | | 2,909 | | | 743 | | | 500 | | | 1,000 | | | 5,152 | | | | 1,151 | | | 302 | | | 207 | | | | 556 | | | 2,216 | |
These balances include loans and advances to customers that are past due through administrative and other delays in recording payments or in finalising documentation and other events unrelated to credit quality. Loans that have been renegotiated in the past 12 months that would otherwise have been past due or impaired amounted to £514 million (Bank – £173 million) as at 31 December 2009 (2008: Group – £127 million; Bank – £127 million). 12 Derivatives Companies in the Group transact derivatives as principal either as a trading activity or to manage balance sheet foreign exchange, interest rate and credit risk. The following table shows the notional amounts and fair values of the Group’s derivatives. | | | | | | | | Group | | | | | | | | | | | | | 2009 | | | | | | | | | 2008 | | | | | | | Notional | | | | | | | | | Notional | | | | | | | | | | amounts | | | Assets | | | Liabilities | | | amounts | | | Assets | | | Liabilities | | | | £bn | | | | | | £m | | | £bn | | | £m | | | £m | | Exchange rate contracts | | | | | | | | | | | | | | | | | | | Spot, forwards and futures | | | 22 | | | | 366 | | | | 335 | | | | 41 | | | | 1,916 | | | | 1,424 | | Currency swaps | | | 5 | | | | 265 | | | | 478 | | | | 7 | | | | 404 | | | | 824 | | Options purchased | | | 3 | | | | 90 | | | | — | | | | 5 | | | | 267 | | | | — | | Options written | | | 2 | | | | — | | | | 90 | | | | 4 | | | | — | | | | 266 | | | | Interest rate contracts | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swaps | | | 410 | | | | 3,197 | | | | 3,146 | | | | 264 | | | | 4,490 | | | | 4,927 | | Options purchased | | | 60 | | | | 391 | | | | — | | | | 34 | | | | 407 | | | | — | | Options written | | | 63 | | | | — | | | | 196 | | | | 28 | | | | — | | | | 162 | | Futures and forwards | | | 40 | | | | 4 | | | | 4 | | | | 63 | | | | — | | | | 6 | | | | Credit derivatives | | | 5 | | | | 86 | | | | 54 | | | | 242 | | | | 1,376 | | | | 447 | | | | Equity and commodity contracts | | | 2 | | | | 71 | | | | 11 | | | | 1 | | | | 35 | | | | 10 | | | | | | | | | 4,470 | | | | 4,314 | | | | | | | | 8,895 | | | | 8,066 | | Amounts above include: | | | | | | | | | | | | | | | | | | | | | | | | | Due from/to holding company | | | | | | | 2,422 | | | | 3,940 | | | | | | | | 5,647 | | | | 6,132 | | Due from/to fellow subsidiaries | | | | | | | 7 | | | | 1 | | | | | | | | 8 | | | | 1 | |
Notes on the accounts continued The following table shows the nominal amounts and fair values of the Bank’s derivatives. | | | | | | | | Bank | | | | | | | | | | | | | 2009 | | | | | | | | | 2008 | | | | | | | Notional | | | | | | | | | Notional | | | | | | | | | | amounts | | | Assets | | | Liabilities | | | amounts | | | Assets | | | Liabilities | | | | £bn | | | £m | | | £m | | | £bn | | | £m | | | £m | | Exchange rate contracts | | | | | | | | | | | | | | | | | | | Spot, forwards and futures | | | 11 | | | | 197 | | | | 199 | | | | 16 | | | | 954 | | | | 883 | | Currency swaps | | | 3 | | | | 154 | | | | 184 | | | | 3 | | | | 206 | | | | 282 | | Options purchased | | | 2 | | | | 88 | | | | — | | | | 4 | | | | 259 | | | | — | | Options written | | | 2 | | | | — | | | | 87 | | | | 3 | | | | — | | | | 259 | | | | Interest rate contracts | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swaps | | | 260 | | | | 2,095 | | | | 1,863 | | | | 82 | | | | 3,136 | | | | 4,753 | | Options purchased | | | 9 | | | | 332 | | | | — | | | | 6 | | | | 304 | | | | — | | Options written | | | 12 | | | | — | | | | 162 | | | | 2 | | | | — | | | | 40 | | Futures and forwards | | | 4 | | | | 4 | | | | 4 | | | | — | | | | — | | | | — | | | | Credit derivatives | | | 1 | | | | 30 | | | | 7 | | | | 2 | | | | 38 | | | | 26 | | | | | | | | | 2,900 | | | | 2,506 | | | | | | | | 4,897 | | | | 6,243 | | Amounts above include: | | | | | | | | | | | | | | | | | | | | | | | | | Due from/to holding company | | | | | | | 1,559 | | | | 2,343 | | | | | | | | 2,617 | | | | 3,621 | | Due from/to fellow subsidiaries | | | | | | | — | | | | — | | | | | | | | — | | | | — | | Due from/to subsidiaries | | | | | | | — | | | | — | | | | | | | | 54 | | | | 1,517 | | | | Certain derivative asset and liability balances with the London Clearing House, which meet the offset criteria in IAS 32 ‘Financial Instruments: | | Presentation’, are shown net. | | | | | | | | | | | | | | | | | | | | | | | | | | | Included above are derivatives held for hedging purposes as follows: | | | | | | | | | | | | | | | | | | | | 2009 | | | 2008 | | | | | | | | | | | | Assets | | | Liabilities | | | Assets | | | Liabilities | | | | | | | | | | | | | £m | | | | £m | | | | £m | | | | £m | | Fair value hedging: | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate contracts | | | | | | | | | | | — | | | | — | | | | — | | | | 720 | | | | Cash flow hedging: | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate contracts | | | | | | | | | | | — | | | | — | | | | — | | | | 198 | |
The following tables show, for the Bank, when the hedged cash flows are expected to occur and when they will affect income for designated cash flow hedges. | | | | | | | | | | | 2008 | | | | | | | | | | | | | | 0-1 | | | | 1-2 | | | | 2-3 | | | | 3-4 | | | | 4-5 | | | | 5-10 | | | | 10-20 | | | Over 20 | | | | | | | years | | | years | | | years | | | years | | | years | | | years | | | years | | | years | | | Total | | Hedged forecast cash flows expected to occur | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | £m | | | £m | | Forecast payable cash flows | | | (5 | ) | | | (5 | ) | | | (5 | ) | | | (5 | ) | | | (5 | ) | | | (25 | ) | | | (51 | ) | | | (15 | ) | | | (116 | ) | | | | | Hedged forecast cash flows affect profit or loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Forecast payable cash flows | | | (5 | ) | | | (5 | ) | | | (5 | ) | | | (5 | ) | | | (5 | ) | | | (25 | ) | | | (51 | ) | | | (15 | ) | | | (116 | ) |
Notes on the accounts
| | | | | | | | Group | | | | | | | | | | | | | | Other | | | | Mortgage- | | | | | | | | | | UK central | | US central | | central | | Bank and | | and other | | | | | | | | | | and local | | and local | | and local | | building | | asset backed | | | | | | | | | | government | | government | | government | | society | | securities (1, 2) | | Corporate | | Other | | Total | | 2009 | | £m | | £m | | £m | | £m | | £m | | £m | | £m | | £m | | Held-for-trading | | | — | | | 12,189 | | | 301 | | | 487 | | | 15,416 | | | 2,137 | | | — | | | 30,530 | | Designated as at fair value through profit or loss | | | 1 | | | — | | | — | | | 3 | | | 1 | | | 8 | | | — | | | 13 | | Available-for-sale | | | — | | | — | | | 1,559 | | | 375 | | | 128 | | | 25 | | | — | | | 2,087 | | Loans and receivables | | | — | | | — | | | — | | | — | | | 2,159 | | | — | | | — | | | 2,159 | | | | | 1 | | | 12,189 | | | 1,860 | | | 865 | | | 17,704 | | | 2,170 | | | — | | | 34,789 | | | | Available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | | | Gross unrealised gains | | | — | | | — | | | 16 | | | 3 | | | 2 | | | 1 | | | — | | | 22 | | Gross unrealised losses | | | — | | | — | | | — | | | (7 | ) | | — | | | — | | | — | | | (7 | ) | | | 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | Held-for-trading | | | — | | | 8,157 | | | 63 | | | 62 | | | 20,338 | | | 3,737 | | | — | | | 32,357 | | Designated as at fair value through profit or loss | | | 1 | | | — | | | — | | | — | | | 1 | | | 17 | | | 2 | | | 21 | | Available-for-sale | | | 1,372 | | | — | | | 1,343 | | | 713 | | | 168 | | | 19 | | | — | | | 3,615 | | | | | 1,373 | | | 8,157 | | | 1,406 | | | 775 | | | 20,507 | | | 3,773 | | | 2 | | | 35,993 | | | | Available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | | | Gross unrealised gains | | | — | | | — | | | 24 | | | — | | | 1 | | | — | | | — | | | 25 | | Gross unrealised losses | | | (25 | ) | | — | | | — | | | (24 | ) | | (14 | ) | | — | | | — | | | (63 | ) |
The Group and Bank hold collateral in respect of certain loans and advances to banks and to customers that are past due or impaired. Such collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant, inventories and trade debtors; and guarantees of lending from parties other than the borrower.
The following loans and advances to customers were past due at the balance sheet date but not considered impaired:
| | | | | | | | Group | | | | | | | | | | | | | | | Bank | | | | | | | | | | Past due 1-29 days | | | Past due 30-59 days | | | Past due 60-89 days | | | Past due 90 days or more | | | Total | | | Past due 1-29 days | | | Past due 30-59 days | | | Past due 60-89 days | | | Past due 90 days or more | | | Total | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | 2007 | | | 2,285 | | | | 569 | | | | 381 | | | | 89 | | | | 3,324 | | | | 1,213 | | | | 357 | | | | 176 | | | | 40 | | | | 1,786 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2006 | | | 2,276 | | | | 428 | | | | 271 | | | | 95 | | | | 3,070 | | | | 1,379 | | | | 275 | | | | 148 | | | | 70 | | | | 1,872 | |
These balances include loans and advances to customers that are past due through administrative and other delays in recording payments or in finalising documentation and other events unrelated to credit quality.
Loans that have been renegotiated in the past 12 months that would otherwise have been past due or impaired amounted to £169 million (Bank – £167 million) as at 31 December 2007 (2006: Group – £135 million; Bank – £133 million).
Notes on the accounts continued
12 Derivatives
Companies in the Group transact derivatives as principal either as a trading activity or to manage balance sheet foreign exchange, interest rate and credit risk.
| | Group | | | | | | | 2007 | | | | | | | | | 2006 | | | | | | | Notional | | | | | | | | | Notional | | | | | | | | | | amounts | | | Assets | | | Liabilities | | | amounts | | | Assets | | | Liabilities | | | | £bn | | | | £m | | | | £m | | | £bn | | | | £m | | | | £m | | Exchange rate contracts | | | | | | | | | | | | | | | | | | | | | | | Spot, forwards and futures | | | 36 | | | | 378 | | | | 478 | | | | 33 | | | | 202 | | | | 311 | | Currency swaps | | | 30 | | | | 513 | | | | 504 | | | | 22 | | | | 326 | | | | 230 | | Options purchased | | | 4 | | | | 122 | | | | — | | | | 6 | | | | 275 | | | | — | | Options written | | | 3 | | | | — | | | | 122 | | | | 6 | | | | — | | | | 302 | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate contracts | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swaps | | | 204 | | | | 1,852 | | | | 1,854 | | | | 408 | | | | 1,721 | | | | 1,428 | | Options purchased | | | 79 | | | | 89 | | | | — | | | | 174 | | | | 44 | | | | — | | Options written | | | 68 | | | | — | | | | 37 | | | | 116 | | | | — | | | | 43 | | Futures and forwards | | | 24 | | | | — | | | | — | | | | 196 | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit derivatives | | | 9 | | | | 464 | | | | 256 | | | | 12 | | | | 15 | | | | 28 | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity and commodity contracts | | | 1 | | | | 157 | | | | — | | | | 1 | | | | 163 | | | | 1 | | | | | | | | | 3,575 | | | | 3,251 | | | | | | | | 2,746 | | | | 2,343 | | Amounts above include: | | | | | | | | | | | | | | | | | | | | | | | | | Due from/to holding company | | | | | | | 1,711 | | | | 2,000 | | | | | | | | 1,163 | | | | 974 | | Due from/to fellow subsidiaries | | | | | | | 4 | | | | — | | | | | | | | — | | | | — | |
| | Bank | | | | | | | 2007 | | | | | | | | | 2006 | | | | | | | Notional | | | | | | | | | Notional | | | | | | | | | | amounts | | | Assets | | | Liabilities | | | amounts | | | Assets | | | Liabilities | | | | £bn | | | | £m | | | | £m | | | £bn | | | | £m | | | | £m | | Exchange rate contracts | | | | | | | | | | | | | | | | | | | | | | | Spot, forwards and futures | | | 13 | | | | 226 | | | | 164 | | | | 11 | | | | 164 | | | | 165 | | Currency swaps | | | 3 | | | | 207 | | | | 100 | | | | 1 | | | | 116 | | | | 3 | | Options purchased | | | 4 | | | | 119 | | | | — | | | | 6 | | | | 272 | | | | — | | Options written | | | 3 | | | | — | | | | 119 | | | | 6 | | | | — | | | | 272 | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate contracts | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swaps | | | 78 | | | | 969 | | | | 954 | | | | 82 | | | | 832 | | | | 687 | | Options purchased | | | 6 | | | | 58 | | | | — | | | | 3 | | | | 15 | | | | — | | Options written | | | 3 | | | | — | | | | 7 | | | | 2 | | | | — | | | | 13 | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit derivatives | | | 1 | | | | 9 | | | | 8 | | | | 4 | | | | — | | | | 4 | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity and commodity contracts | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | 1 | | | | | | | | | 1,588 | | | | 1,352 | | | | | | | | 1,400 | | | | 1,145 | | | | | | | | | | | | | | | | | | | | | | | | | | | Included in the above are derivatives held for hedging as follows | | | | | | | | | | | | | | | | | | | | | | | | | Fair value hedging: | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swaps | | | | | | | 65 | | | | — | | | | | | | | 61 | | | | 36 | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flow hedging: | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swaps | | | | | | | — | | | | 34 | | | | | | | | — | | | | 27 | | | | | | | | | | | | | | | | | | | | | | | | | | | Amounts above include: | | | | | | | | | | | | | | | | | | | | | | | | | Due from/to holding company | | | | | | | 850 | | | | 786 | | | | | | | | 763 | | | | 540 | | Due from/to fellow subsidiaries | | | | | | | 3 | | | | — | | | | | | | | — | | | | — | | Due from/to subsidiaries | | | | | | | 52 | | | | 201 | | | | | | | | 67 | | | | 146 | |
13 Debt securities
| | Group | | | | UK government | | | US government state and federal agency | | | Other government | | | US government sponsored entity | | | Bank and building society | | | Mortgage-backed securities(1) | | | Corporate | | | Other | | | Total | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Held-for-trading | | | — | | | | 8,334 | | | | 9 | | | | 18,193 | | | | — | | | | 4,220 | | | | 1,224 | | | | — | | | | 31,980 | | Designated as at fair value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | through profit or loss | | | 5 | | | | — | | | | 6 | | | | — | | | | 123 | | | | — | | | | 11 | | | | 9 | | | | 154 | | Available-for-sale | | | 1,320 | | | | — | | | | 940 | | | | — | | | | 831 | | | | 124 | | | | 14 | | | | 553 | | | | 3,782 | | At 31 December 2007 | | | 1,325 | | | | 8,334 | | | | 955 | | | | 18,193 | | | | 954 | | | | 4,344 | | | | 1,249 | | | | 562 | | | | 35,916 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross unrealised gains | | | 25 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 25 | | Gross unrealised losses | | | — | | | | — | | | | (2 | ) | | | — | | | | (26 | ) | | | — | | | | — | | | | — | | | | (28 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2006 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Held-for-trading | | | — | | | | 10,240 | | | | 87 | | | | 10,064 | | | | — | | | | 6,521 | | | | 1,618 | | | | 1 | | | | 28,531 | | Designated as at fair value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | through profit or loss | | | 1,285 | | | | — | | | | 85 | | | | — | | | | 26 | | | | — | | | | 248 | | | | 5 | | | | 1,649 | | Available-for-sale | | | — | | | | — | | | | 925 | | | | — | | | | 692 | | | | 104 | | | | 101 | | | | 266 | | | | 2,088 | | At 31 December 2006 | | | 1,285 | | | | 10,240 | | | | 1,097 | | | | 10,064 | | | | 718 | | | | 6,625 | | | | 1,967 | | | | 272 | | | | 32,268 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross unrealised gains | | | — | | | | — | | | | 4 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4 | | Gross unrealised losses | | | — | | | | — | | | | (20 | ) | | | — | | | | (6 | ) | | | — | | | | (1 | ) | | | — | | | | (27 | ) |
Note:
(1) Excludes | Includes AAA rated securities issued by US federal agencies of £2,646 million (2008 – £1,222 million) and government sponsored entities.entities of £11,250 million (2008 – £17,847 million) of current year vintage. | (2) | Includes sub-prime RMBS of £451 million (2008 – £396 million) and Alt-A RMBS of £335 million (2008 – £229 million). |
Gross gains of £60 million (2008 – £14 million; 2007 – £1 million) and gross losses of £2 million (2008 – nil; 2007 – £1 million) were realised on the sale of available-for-sale securities. | | | | | | | | Bank | | | | | | | | | | | | | 2009 | | | | | | | | | 2008 | | | | | | | Mortgage | | | | | | | | | Bank and | | | | | | | �� | | | backed | | | | | | | | | building | | | | | | | | | | securities | | | Corporate | | | Total | | | society | | | Corporate | | | Total | | | | £m | | | £m | | | £m | | | | | | £m | | | £m | | Available-for-sale | | | — | | | | 5 | | | | 5 | | | | 34 | | | | 7 | | | | 41 | | Loans and receivables | | | 2,158 | | | | — | | | | 2,158 | | | | — | | | | — | | | | — | | | | | 2,158 | | | | 5 | | | | 2,163 | | | | 34 | | | | 7 | | | | 41 | |
Notes on the accounts continued 14 Equity shares | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | | | | | | | | | | | | 2009 | | | | | | | | | 2008 | | | | | | | Listed | | | Unlisted | | | Total | | | Listed | | | Unlisted | | | Total | | | | £m | | | £m | | | £m | | | £m | | | £m | | | | | Held-for-trading | | | 4 | | | | 1 | | | | 5 | | | | 7 | | | | 102 | | | | 109 | | Designated as at fair value through profit or loss | | | 25 | | | | — | | | | 25 | | | | 22 | | | | — | | | | 22 | | Available-for-sale | | | 13 | | | | 923 | | | | 936 | | | | 4 | | | | 994 | | | | 998 | | | | | 42 | | | | 924 | | | | 966 | | | | 33 | | | | 1,096 | | | | 1,129 | | | | Available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | | Gross unrealised gains | | | 8 | | | | 35 | | | | 43 | | | | — | | | | 42 | | | | 42 | | Gross unrealised losses | | | — | | | | (30 | ) | | | (30 | ) | | | (4 | ) | | | (12 | ) | | | (16 | ) |
Gross gains of £3 million (2008 – £4 million; 2007 – £117 million) and gross losses of £1 million (2008 – £1 million; 2007 – nil) were realised by the Group on the sale of available-for-sale equity shares. Dividend income from available-for-sale equity shares was £592 million (2008 – £5 million; 2007 – £14 million). Unquoted equity investments whose fair value cannot be reliablymeasured are carried at cost and classified as available-for-salefinancial assets. They include investments in fellow subsidiaries of £766 million (2008 – £634 million; 2007 – £634 million). Disposals in the year generated losses of £0.6 million (2008 – nil; 2007 – £0.6 million). | | | | | | | | Bank | | | | | | | | | | | | | 2009 | | | | | | | | | 2008 | | | | | | | Listed | | | Unlisted | | | Total | | | Listed | | | Unlisted | | | Total | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Available-for-sale | | | 9 | | | | 4 | | | | 13 | | | | 2 | | | | 4 | | | | 6 | | | Available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | | Gross unrealised gains | | | 7 | | | | — | | | | 7 | | | | — | | | | — | | | | — | |
Disposals in the year of unquoted equity investments classified as available-for-sale financial assets generated no gains or losses in 2009, 2008 or 2007. Notes on the accounts
15 Investments in Group undertakings Investments in Group undertakings are carried at cost less impairment. Movements during the year were as follows: | | Bank | | | | 2009 | | | 2008 | | | | £m | | | £m | | At 1 January | | | 7,339 | | | | 6,052 | | Currency translation and other adjustments | | | (130 | ) | | | 441 | | Additional investments in Group undertakings | | | 3,005 | | | | — | | Additions | | | — | | | | 846 | | Redemption of investments in Group undertakings | | | (1,150 | ) | | | — | | Impairments | | | (2,281 | ) | | | — | | At 31 December | | | 6,783 | | | | 7,339 | |
The principal subsidiary undertakings of the Bank are shown below. Their capital consists of ordinary and preference shares, which are unlisted. All of the subsidiary undertakings are owned directly or indirectly through intermediate holding companies and are all wholly-owned. All of these subsidiary undertakings are included in the Group’s consolidated financial statements and have an accounting reference date of 31 December. | | Country of incorporation | | Nature of | and principal area | | business | of operations | Gross gains of £1 million (2006 – £2 million) and gross losses of £1 million (2006 – nil) were realised on the sale of available-for-sale securities.Coutts & Company (1)
| | Bank | | | | 2007 | | 2006 | | | Bank and | | | | | | | | | | | | | | | | building | | | | | | | | | | | | | | | | society | | | Corporate | | | Total | | | Other | | | Total | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Held-for-trading | | | — | | | | — | | | | — | | | | 1 | | | | 1 | | Available-for-sale | | | 24 | | | | 7 | | | | 31 | | | | 41 | | | | 41 | | At 31 December | | | 24 | | | | 7 | | | | 31 | | | | 42 | | | | 42 | |
| Notes on the accounts continuedPrivate banking
| | Group | | | | | 2007 | | | | | | | | | 2006 | | | | | | | Listed | | | Unlisted | | | Total | | | Listed | | | Unlisted | | | Total | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Held-for-trading | | | 12 | | | | 140 | | | | 152 | | | | 42 | | | | — | | | | 42 | | Designated as at fair value through profit or loss | | | 32 | | | | — | | | | 32 | | | | 36 | | | | — | | | | 36 | | Available-for-sale | | | 34 | | | | 892 | | | | 926 | | | | 22 | | | | 1,058 | | | | 1,080 | | | | | 78 | | | | 1,032 | | | | 1,110 | | | | 100 | | | | 1,058 | | | | 1,158 | | | | | | | | | | | | | | | | | | | | | | | | | | | Available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | | Gross unrealised gains | | | 13 | | | | 31 | | | | 44 | | | | 15 | | | | 44 | | | | 59 | | Gross unrealised losses | | | (3 | ) | | | (6 | ) | | | (9 | ) | | | — | | | | (5 | ) | | | (5 | ) | | | | 10 | | | | 25 | | | | 35 | | | | 15 | | | | 39 | | | | 54 | |
| Gross gains of £86 million (2006 – £84 million) and gross losses of nil (2006 – nil) were realised by the Group on the sale of available-for-sale equity shares.Great Britain
| Dividend income from available-for-sale equity shares was £14 million (2006 – £36 million; 2005 – £48 million).RBS Securities Inc. (2)
| Unquoted equity investments whose fair value cannot be reliably measured are carried at cost and classified as available-for-sale financial assets. They include investments in fellow subsidiaries of £634 million (2006 – £910 million; 2005 – £634 million). Disposals in the year generated gains of £0.6 million (2006 – £31 million; 2005 – £4 million) based on cost of sales of £4 million (2006 – £14 million; 2005 – £3 million).Broker dealer
| | Bank | | | | | 2007 | | | | | | | | | 2006 | | | | | | | Listed | | | Unlisted | | | Total | | | Listed | | | Unlisted | | | Total | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | |
Available-for-sale | | | 15 | | | | 3 | | | | 18 | | | | 10 | | | | 40 | | | | 50 | | | | | | | | | | | | | | | | | | | | | | | | | | | Available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | | Gross unrealised gains | | | 13 | | | | — | | | | 13 | | | | 8 | | | | 36 | | | | 44 | |
| There were no disposals in the year of unquoted equity investments classified as available-for-sale financial assets (2006 – £24 million gain; 2005 – nil).US
15 Investments in Group undertakings
Investments in Group undertakings are carried at cost less impairment. Movements during the year were as follows:
| | Bank | | | 2007 | | | 2006 | | | | | £m | | | | £m | | At 1 January | | | 6,758 | | | | 6,633 | | Currency translation and other adjustments | | | (25 | ) | | | (177 | ) | Additions | | | 965 | | | | 622 | | Additional investments in Group undertakings | | | 251 | | | | 719 | | Repayment of investments | | | (1,823 | ) | | | (1,022 | ) | Increase in provisions | | | (74 | ) | | | (17 | ) | At 31 December | | | 6,052 | | | | 6,758 | |
| The principal subsidiary undertakings of theUlster Bank are shown below. Their capital consists of ordinary and preference shares, which are unlisted. All of the subsidiary undertakings are owned directly or indirectly through intermediate holding companies and are all wholly-owned. All of these subsidiary undertakings are included in the Group’s consolidated financial statements and have an accounting reference date of 31 December.Limited (3)
| | Country of incorporation | | Nature of | and principal area | | business | of operations | Coutts & Co (1) | Private banking | Great Britain | Greenwich Capital Markets, Inc. (2) | Broker dealer | US | Ulster Bank Limited (3) | Banking | Banking | Northern Ireland |
(1) | Coutts & CoCompany is incorporated with unlimited liability. Its registered office is 440 Strand, London WC2R 0QS. | (2) | Shares are not directly held by the Bank. | (3) | Ulster Bank Limited and its subsidiary undertakings also operate in the Republic of Ireland. The above information is provided in relation to the principal related undertakings as permitted by section 231(5) of the Companies Act 1985.
|
The above information is provided in relation to the principal related undertakings as permitted by section 410(2) of the Companies Act 2006. Full information on all related undertakings will be included in the Annual Return filed with the UK Companies House. Notes on the accounts continued | | | | | | | | Group | | | | | | | | | | | | | Core | | | Other | | | Internally | | | | | | | | | | deposit | | | purchased | | | generated | | | | | | | Goodwill | | | intangibles | | | intangibles | | | software | | | Total | | 2009 | | £m | | | £m | | | £m | | | £m | | | £m | | Cost: | | | | | | | | | | | | | | | | At 1 January 2009 | | | 973 | | | | 35 | | | | 49 | | | | 2,195 | | | | 3,252 | | Currency translation and other adjustments | | | (72 | ) | | | (2 | ) | | | (3 | ) | | | (6 | ) | | | (83 | ) | Additions | | | — | | | | — | | | | — | | | | 70 | | | | 70 | | Disposals and write-off of fully amortised assets | | | — | | | | (2 | ) | | | — | | | | — | | | | (2 | ) | At 31 December 2009 | | | 901 | | | | 31 | | | | 46 | | | | 2,259 | | | | 3,237 | | | | Accumulated amortisation and impairment: | | | | | | | | | | | | | | | | | | | | | At 1 January 2009 | | | 579 | | | | 24 | | | | 41 | | | | 1,793 | | | | 2,437 | | Currency translation and other adjustments | | | (41 | ) | | | (2 | ) | | | (2 | ) | | | (5 | ) | | | (50 | ) | Disposals and write-off of fully amortised assets | | | — | | | | (1 | ) | | | — | | | | — | | | | (1 | ) | Charge for the year | | | — | | | | 10 | | | | 2 | | | | 91 | | | | 103 | | At 31 December 2009 | | | 538 | | | | 31 | | | | 41 | | | | 1,879 | | | | 2,489 | | | | Net book value at 31 December 2009 | | | 363 | | | | — | | | | 5 | | | | 380 | | | | 748 | | | | 2008 | | | | | | | | | | | | | | | | | | | | | Cost: | | | | | | | | | | | | | | | | | | | | | At 1 January 2008 | | | 773 | | | | 27 | | | | 32 | | | | 2,028 | | | | 2,860 | | Currency translation and other adjustments | | | 247 | | | | 8 | | | | 10 | | | | 8 | | | | 273 | | Additions | | | — | | | | — | | | | 8 | | | | 159 | | | | 167 | | Disposals of subsidiaries | | | (47 | ) | | | — | | | | — | | | | — | | | | (47 | ) | Disposals and write-off of fully amortised assets | | | — | | | | — | | | | (1 | ) | | | — | | | | (1 | ) | At 31 December 2008 | | | 973 | | | | 35 | | | | 49 | | | | 2,195 | | | | 3,252 | | | | Accumulated amortisation and impairment: | | | | | | | | | | | | | | | | | | | | | At 1 January 2008 | | | — | | | | 14 | | | | 13 | | | | 1,589 | | | | 1,616 | | Currency translation and other adjustments | | | — | | | | 7 | | | | 4 | | | | 1 | | | | 12 | | Disposals and write-off of fully amortised assets | | | — | | | | — | | | | (1 | ) | | | — | | | | (1 | ) | Charge for the year | | | — | | | | 3 | | | | 4 | | | | 99 | | | | 106 | | Write down of goodwill and other intangible assets | | | 579 | | | | — | | | | 21 | | | | 104 | | | | 704 | | At 31 December 2008 | | | 579 | | | | 24 | | | | 41 | | | | 1,793 | | | | 2,437 | | | | Net book value at 31 December 2008 | | | 394 | | | | 11 | | | | 8 | | | | 402 | | | | 815 | |
Notes on the accounts
16 Intangible assets continued | | Bank | | Internally generated software | | | £m | | Cost: | | | | | At 1 January 2009 | | | 2,064 | | Additions | | | 69 | | At 31 December 2009 | | | 2,133 | | | | Accumulated amortisation: | | | | | At 1 January 2009 | | | 1,663 | | 88Charge for the year
| | | 90 | | At 31 December 2009 | | | 1,753 | | | | Net book value at 31 December 2009 | | | 380 | | | | | | Cost: | | | | | At 1 January 2008 | | | 1,912 | | Additions | | | 152 | | At 31 December 2008 | | | 2,064 | | | | Accumulated amortisation: | | | | | At 1 January 2008 | | | 1,537 | | Charge for the year | | | 81 | | Write down | | | 45 | | At 31 December 2008 | | | 1,663 | | | | Net book value at 31 December 2008 | | | 401 | |
Notes on the accounts continued 16 Intangible assets continued Impairment reviewThe Group’s goodwill acquired in business combinations is reviewed annually at 30 September for impairment by comparing the recoverable amount of each cash generating unit (CGU) to which goodwill has been allocated with its carrying value. Changes were made to the Group’s reporting structure in the first half of 2009, which is detailed on page 144. Following the reorganisation of the Group, goodwill was reallocated to the appropriate CGUs. The CGUs where the goodwill is significant are as follows: | | | | | | | | | | | | | | | | | | | | | Goodwill at | | | Significant | Recoverable amount | | | | | | | | 30 September | | 2009 | acquisition | based on | | | | | | | | £m | | Global Banking & Markets | Greenwich | Fair value less cost to sell | | | | | | | | | 117 | | Wealth | Bank Von Ernst | Value in use | | | | | | | | | 170 | | | | | | | | | | | | | | | | | | | | Goodwill prior to | | | | | | Goodwill at | | | Significant | Recoverable amount | | write down | | | Write down | | | 31 December | | 2008 | acquisition | based on | | £m | | | £m | | | | £m | | Global Banking & Markets | Greenwich | Fair value less cost to sell | | | 128 | | | | — | | | | 128 | | Europe & Middle East Retail & Commercial Banking | First Active | Value in use | | | 576 | | | | (576 | ) | | | — | | Asia Retail & Commercial Banking | Bank Von Ernst | Value in use | | | 182 | | | | — | | | | 182 | |
The analysis of goodwill by operating segment is shown in Note 34. The Group has adopted value in use test for Wealth based upon management’s latest five year forecasts. For the value in use test, the long-term growth rates have been based on respective country GDP rates adjusted for inflation. The risk discount rates are based on observable market long-term government bond yields and average industry betas adjusted for an appropriate risk premium based on independent analysis. Fair value less costs to sell test has been adopted for Global Banking & Markets. The goodwill in Global Banking & Markets arose from the Group’s interest in Greenwich Capital. The recoverable amount exceeds the carrying value by more than 100% (2008 – £0.7 billion). The earnings multiples, validated against independent analyst information, or the earnings would have to reduce by a quarter of those used to cause the value in use to equal its carrying value. In Wealth there was no impairment recognised in respect of the goodwill arising on the acquisition of Bank von Ernst. The recoverable amount was based on a 5% (2008 – 5%) terminal growth rate and 11% (2008 – 11%) pre tax risk discount rate. A 1% change in the discount rate or similar change in the terminal growth rate would change the recoverable amount by approximately £250 million (2008 – £150 million) and £200 million (2008 – £100 million) respectively. In addition a 5% change in forecast pre tax earnings would change the recoverable amount by £100 million (2008 – £50 million). In 2008, a goodwill write down was recorded in Europe & Middle East Retail & Commercial Banking. Notes on the accounts
17 Property, plant and equipment | | | | | | | | Group | | | | | | | | | | | | | | | | Long | | | Short | | | Computers | | | | | | | Investment | | | Freehold | | | leasehold | | | leasehold | | | and other | | | | | | | properties | | | premises | | | premises | | | premises | | | equipment | | | Total | | 2009 | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Cost or valuation: | | | | | | | | | | | | | | | | | | | At 1 January 2009 | | | 212 | | | | 1,299 | | | | 142 | | | | 717 | | | | 484 | | | | 2,854 | | Currency translation and other adjustments | | | (52 | ) | | | (47 | ) | | | — | | | | (30 | ) | | | (27 | ) | | | (156 | ) | Reclassifications | | | 1 | | | | 18 | | | | 1 | | | | (23 | ) | | | 3 | | | | — | | Additions | | | 1,336 | | | | 126 | | | | 7 | | | | 31 | | | | 45 | | | | 1,545 | | Change in fair value of investment properties | | | 107 | | | | — | | | | — | | | | — | | | | — | | | | 107 | | Disposals and write-off of fully depreciated assets | | | — | | | | (19 | ) | | | (14 | ) | | | (43 | ) | | | (62 | ) | | | (138 | ) | At 31 December 2009 | | | 1,604 | | | | 1,377 | | | | 136 | | | | 652 | | | | 443 | | | | 4,212 | | | | Accumulated impairment, depreciation and amortisation: | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2009 | | | — | | | | 291 | | | | 52 | | | | 267 | | | | 274 | | | | 884 | | Currency translation and other adjustments | | | — | | | | (2 | ) | | | 1 | | | | (4 | ) | | | (14 | ) | | | (19 | ) | Write down of property, plant and equipment | | | — | | | | 5 | | | | — | | | | 4 | | | | — | | | | 9 | | Disposals and write-off of fully depreciated assets | | | — | | | | (8 | ) | | | — | | | | (41 | ) | | | (57 | ) | | | (106 | ) | Charge for the year | | | — | | | | 34 | | | | 4 | | | | 51 | | | | 55 | | | | 144 | | At 31 December 2009 | | | — | | | | 320 | | | | 57 | | | | 277 | | | | 258 | | | | 912 | | | | Net book value at 31 December 2009 | | | 1,604 | | | | 1,057 | | | | 79 | | | | 375 | | | | 185 | | | | 3,300 | | | | | | | | 2008 | | | | | | | | | | | | | | | | | | | | | | | | | Cost or valuation: | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2008 | | | 110 | | | | 980 | | | | 133 | | | | 635 | | | | 359 | | | | 2,217 | | Currency translation and other adjustments | | | 45 | | | | 110 | | | | 5 | | | | 42 | | | | 88 | | | | 290 | | Additions | | | 125 | | | | 215 | | | | 5 | | | | 52 | | | | 75 | | | | 472 | | Change in fair value of investment properties | | | 2 | | | | — | | | | — | | | | — | | | | — | | | | 2 | | Transfer to fellow subsidiary | | | — | | | | — | | | | — | | | | (8 | ) | | | (6 | ) | | | (14 | ) | Disposal of subsidiaries | | | — | | | | — | | | | — | | | | (2 | ) | | | (21 | ) | | | (23 | ) | Disposals and write-off of fully depreciated assets | | | (70 | ) | | | (6 | ) | | | (1 | ) | | | (2 | ) | | | (11 | ) | | | (90 | ) | At 31 December 2008 | | | 212 | | | | 1,299 | | | | 142 | | | | 717 | | | | 484 | | | | 2,854 | | | | Accumulated impairment, depreciation and amortisation: | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2008 | | | — | | | | 247 | | | | 48 | | | | 204 | | | | 204 | | | | 703 | | Currency translation and other adjustments | | | — | | | | 4 | | | | 1 | | | | 15 | | | | 49 | | | | 69 | | Transfer to fellow subsidiary | | | — | | | | — | | | | — | | | | (1 | ) | | | (2 | ) | | | (3 | ) | Disposal of subsidiaries | | | — | | | | — | | | | — | | | | (1 | ) | | | (15 | ) | | | (16 | ) | Write down of property, plant and equipment | | | — | | | | 12 | | | | — | | | | — | | | | — | | | | 12 | | Disposals and write-off of fully depreciated assets | | | — | | | | (1 | ) | | | — | | | | (1 | ) | | | (10 | ) | | | (12 | ) | Charge for the year | | | — | | | | 29 | | | | 3 | | | | 51 | | | | 48 | | | | 131 | | At 31 December 2008 | | | — | | | | 291 | | | | 52 | | | | 267 | | | | 274 | | | | 884 | | | | Net book value at 31 December 2008 | | | 212 | | | | 1,008 | | | | 90 | | | | 450 | | | | 210 | | | | 1,970 | |
Notes on the accounts continued
16 Intangible assets
| | | | | | | | Group | | | | | | | | | | | | | Core | | | Other | | | Internally | | | | | | | | | | deposit | | | purchased | | | generated | | | | | | | Goodwill | | | intangibles | | | intangibles | | | software | | | Total | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Cost: | | | | | | | | | | | | | | | | | | | | | At 1 January 2007 | | | 719 | | | | 25 | | | | 30 | | | | 1,893 | | | | 2,667 | | Currency translation and other adjustments | | | 54 | | | | 2 | | | | 2 | | | | 3 | | | | 61 | | Additions | | | — | | | | — | | | | — | | | | 132 | | | | 132 | | At 31 December 2007 | | | 773 | | | | 27 | | | | 32 | | | | 2,028 | | | | 2,860 | | | | | | | | | | | | | | | | | | | | | | | Accumulated amortisation: | | | | | | | | | | | | | | | | | | | | | At 1 January 2007 | | | — | | | | 10 | | | | 9 | | | | 1,439 | | | | 1,458 | | Currency translation and other adjustments | | | — | | | | 1 | | | | 1 | | | | 1 | | | | 3 | | Charge for the year | | | — | | | | 3 | | | | 3 | | | | 149 | | | | 155 | | At 31 December 2007 | | | — | | | | 14 | | | | 13 | | | | 1,589 | | | | 1,616 | | | | | | | | | | | | | | | | | | | | | | | Net book value at 31 December 2007 | | | 773 | | | | 13 | | | | 19 | | | | 439 | | | | 1,244 | | | | | | | | | | | | | | | | | | | | | | | 2006 | | | | | | | | | | | | | | | | | | | | | Cost: | | | | | | | | | | | | | | | | | | | | | At 1 January 2006 | | | 760 | | | | 25 | | | | 29 | | | | 1,682 | | | | 2,496 | | Currency translation and other adjustments | | | (38 | ) | | | — | | | | — | | | | (1 | ) | | | (39 | ) | Additions | | | — | | | | — | | | | 1 | | | | 229 | | | | 230 | | Disposal of subsidiaries | | | (3 | ) | | | — | | | | — | | | | — | | | | (3 | ) | Disposals and write-off of fully amortised assets | | | — | | | | — | | | | — | | | | (17 | ) | | | (17 | ) | At 31 December 2006 | | | 719 | | | | 25 | | | | 30 | | | | 1,893 | | | | 2,667 | | | | | | | | | | | | | | | | | | | | | | | Accumulated amortisation: | | | | | | | | | | | | | | | | | | | | | At 1 January 2006 | | | — | | | | 7 | | | | 5 | | | | 1,286 | | | | 1,298 | | Currency translation and other adjustments | | | — | | | | — | | | | 1 | | | | — | | | | 1 | | Charge for the year | | | — | | | | 3 | | | | 3 | | | | 153 | | | | 159 | | At 31 December 2006 | | | — | | | | 10 | | | | 9 | | | | 1,439 | | | | 1,458 | | | | | | | | | | | | | | | | | | | | | | | Net book value at 31 December 2006 | | | 719 | | | | 15 | | | | 21 | | | | 454 | | | | 1,209 | |
| | Bank | | | | 2007 | | Internally generated software | | | £m | | Cost: | | | | | At 1 January 2007 | | | 1,781 | | Additions | | | 131 | | At 31 December 2007 | | | 1,912 | | | | | | | Accumulated amortisation: | | | | | At 1 January 2007 | | | 1,422 | | Charge for the year | | | 115 | | At 31 December 2007 | | | 1,537 | | | | | | | Net book value at 31 December 2007 | | | 375 | |
| | Bank | | | | 2006 | | Internally generated software | | | £m | | Cost: | | | | | At 1 January 2006 | | | 1,622 | | Additions | | | 159 | | At 31 December 2006 | | | 1,781 | | | | | | | Accumulated amortisation: | | | | | At 1 January 2006 | | | 1,275 | | Charge for the year | | | 147 | | At 31 December 2006 | | | 1,422 | | | | | | | Net book value at 31 December 2006 | | | 359 | |
Impairment review
The Group’s goodwill acquired in business combinations is reviewed annually at 30 September for impairment by comparing the recoverable amount of each cash generating unit (CGU) to which goodwill has been allocated with its carrying value. There was no impairment recognised in 2007 or 2006.
CGUs where goodwill is significant were as follows:
| | | | Goodwill at 30 September | | | Significant | | | 2007 | | | 2006 | | Division | acquisition | Basis | | | £m | | | | £m | | Global Banking & Markets | Greenwich | Fair value less costs to sell | | | 92 | | | | 100 | | Wealth Management | Bank Von Ernst | Fair value less costs to sell | | | 121 | | | | 124 | | Ulster Bank | First Active | Fair value less costs to sell | | | 421 | | | | 409 | |
The recoverable amounts for all CGUs were based on fair value less costs to sell. Fair value was based upon a price-earnings methodology using current earnings for each unit. Approximate price earnings multiples, validated against independent analyst information were applied to each CGU. The multiples used for both 2007 and 2006 were in the range 9.5 – 13.0 times earnings after charging manufacturing costs. The multiples or earnings would have to be less than one fifth of those used to cause the value in use of the units to equal their carrying value.
Notes on the accounts continued
17 Property, plant and equipment continued | | Group | | | | | | | | | Long | | | Short | | | Computers | | | | | | | Investment | | | Freehold | | | leasehold | | | leasehold | | | and other | | | | | | | properties | | | premises | | | premises | | | premises | | | equipment | | | Total | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Cost or valuation: | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2007 | | | 202 | | | | 1,089 | | | | 200 | | | | 590 | | | | 306 | | | | 2,387 | | Currency translation and other adjustments | | | 8 | | | | 9 | | | | 1 | | | | 6 | | | | 15 | | | | 39 | | Additions | | | 75 | | | | 113 | | | | 10 | | | | 58 | | | | 41 | | | | 297 | | Disposals and write-off of fully depreciated assets | | | (175 | ) | | | (231 | ) | | | (78 | ) | | | (19 | ) | | | (3 | ) | | | (506 | ) | At 31 December 2007 | | | 110 | | | | 980 | | | | 133 | | | | 635 | | | | 359 | | | | 2,217 | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated depreciation and amortisation: | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2007 | | | — | | | | 259 | | | | 71 | | | | 173 | | | | 165 | | | | 668 | | Currency translation and other adjustments | | | — | | | | 1 | | | | — | | | | 2 | | | | 9 | | | | 12 | | Disposals and write-off of fully depreciated assets | | | — | | | | (44 | ) | | | (28 | ) | | | (11 | ) | | | (3 | ) | | | (86 | ) | Charge for the year | | | — | | | | 31 | | | | 5 | | | | 40 | | | | 33 | | | | 109 | | At 31 December 2007 | | | — | | | | 247 | | | | 48 | | | | 204 | | | | 204 | | | | 703 | | | | | | | | | | | | | | | | | | | | | | | | | | | Net book value at 31 December 2007 | | | 110 | | | | 733 | | | | 85 | | | | 431 | | | | 155 | | | | 1,514 | |
| | Group | | | | | | | | | Long | | | Short | | | Computers | | | Operating | | | | | | | Investment | | | Freehold | | | leasehold | | | leasehold | | | and other | | | lease | | | | | | | properties | | | premises | | | premises | | | premises | | | equipment | | | assets | | | Total | | 2006 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Cost or valuation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2006 | | | 69 | | | | 1,108 | | | | 269 | | | | 448 | | | | 280 | | | | 11 | | | | 2,185 | | Currency translation and other adjustments | | | (1 | ) | | | (5 | ) | | | (1 | ) | | | (4 | ) | | | (11 | ) | | | (1 | ) | | | (23 | ) | Reclassifications | | | — | | | | 25 | | | | (41 | ) | | | 17 | | | | (1 | ) | | | — | | | | — | | Additions | | | 135 | | | | 76 | | | | 9 | | | | 139 | | | | 81 | | | | — | | | | 440 | | Change in fair value of investment properties | | | (1 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1 | ) | Disposals and write-off of fully depreciated assets | | | — | | | | (115 | ) | | | (36 | ) | | | (4 | ) | | | (41 | ) | | | — | | | | (196 | ) | Disposals of subsidiaries | | | — | | | | — | | | | — | | | | (1 | ) | | | (1 | ) | | | — | | | | (2 | ) | Transfer to fellow subsidiary | | | — | | | | — | | | | — | | | | (5 | ) | | | (1 | ) | | | (10 | ) | | | (16 | ) | At 31 December 2006 | | | 202 | | | | 1,089 | | | | 200 | | | | 590 | | | | 306 | | | | — | | | | 2,387 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated depreciation and amortisation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2006 | | | — | | | | 232 | | | | 98 | | | | 142 | | | | 181 | | | | 1 | | | | 654 | | Currency translation and other adjustments | | | — | | | | — | | | | — | | | | (2 | ) | | | (6 | ) | | | — | | | | (8 | ) | Reclassifications | | | — | | | | 3 | | | | (7 | ) | | | 4 | | | | — | | | | — | | | | — | | Disposals and write-off of fully depreciated assets | | | — | | | | (6 | ) | | | (25 | ) | | | (3 | ) | | | (38 | ) | | | — | | | | (72 | ) | Transfer to fellow subsidiary | | | — | | | | — | | | | — | | | | (2 | ) | | | (1 | ) | | | (1 | ) | | | (4 | ) | Charge for the year | | | — | | | | 30 | | | | 5 | | | | 34 | | | | 29 | | | | — | | | | 98 | | At 31 December 2006 | | | — | | | | 259 | | | | 71 | | | | 173 | | | | 165 | | | | — | | | | 668 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net book value at 31 December 2006 | | | 202 | | | | 830 | | | | 129 | | | | 417 | | | | 141 | | | | — | | | | 1,719 | |
|
Investment properties are valued to reflect fair value, that is, the market value of the Group’s interest at the reporting date excluding any special terms or circumstances relating to the use or financing of the property and transaction costs that would be incurred in making a sale. Observed market data such as rental yield, replacement cost and useful life, reflect relatively few transactions involving property that, necessarily, is not identical to property owned by the Group. Valuations are carried out by qualified surveyors who are members of the Royal Institution of Chartered Surveyors, or an equivalent overseas body. The valuation as at 31 December 2007 valuation2009 for a significant majority of the Group’s investment properties was undertaken by with the support of external valuers. |
Investment property acquired during 2009 includes £1,336 million arising on assumption by the Group of control of the properties for which it provided finance to a customer. The fair value of investment properties does not include anyincludes £105 million (2008 – £5 million loss) of appreciation since purchase. Rental income from investment properties was nil (2008 – £10 million (2006 – £5 million). Property, plant and equipment, excluding investment properties, include £91 million (2006nil (2008 – £43£339 million) assets in the course of construction. Freehold and long leasehold properties with a net book value of £202 £3 million (2006(2008 – £62 million; 2005 – £44 million)nil) were sold subject to operating leases. |
| | | | | | | | Bank | | | | | | | | | | | | | Long | | | Short | | | Computers | | | | | | | Freehold | | | leasehold | | | leasehold | | | and other | | | | | | | premises | | | premises | | | premises | | | equipment | | | Total | | 2009 | | £m | | | £m | | | £m | | | £m | | | £m | | Cost or valuation: | | | | | | | | | | | | | | | | At 1 January 2009 | | | 762 | | | | 90 | | | | 523 | | | | 7 | | | | 1,382 | | Currency translation and other adjustments | | | — | | | | — | | | | (18 | ) | | | — | | | | (18 | ) | Reclassifications | | | 22 | | | | 1 | | | | (23 | ) | | | — | | | | — | | Additions | | | 30 | | | | 7 | | | | 12 | | | | — | | | | 49 | | Disposals and write-off of fully depreciated assets | | | (15 | ) | | | (10 | ) | | | (3 | ) | | | — | | | | (28 | ) | At 31 December 2009 | | | 799 | | | | 88 | | | | 491 | | | | 7 | | | | 1,385 | | | | Accumulated depreciation and amortisation: | | | | | | | | | | | | | | | | | | | | | At 1 January 2009 | | | 254 | | | | 45 | | | | 194 | | | | 6 | | | | 499 | | Disposals and write-off of fully depreciated assets | | | (7 | ) | | | (1 | ) | | | (9 | ) | | | — | | | | (17 | ) | Charge for the year | | | 27 | | | | 2 | | | | 37 | | | | — | | | | 66 | | At 31 December 2009 | | | 274 | | | | 46 | | | | 222 | | | | 6 | | | | 548 | | | | Net book value at 31 December 2009 | | | 525 | | | | 42 | | | | 269 | | | | 1 | | | | 837 | | | | 2008 | | | | | | | | | | | | | | | | | | | | | Cost or valuation: | | | | | | | | | | | | | | | | | | | | | At 1 January 2008 | | | 729 | | | | 90 | | | | 518 | | | | 7 | | | | 1,344 | | Additions | | | 36 | | | | 1 | | | | 7 | | | | — | | | | 44 | | Disposals and write-off of fully depreciated assets | | | (3 | ) | | | (1 | ) | | | (2 | ) | | | — | | | | (6 | ) | At 31 December 2008 | | | 762 | | | | 90 | | | | 523 | | | | 7 | | | | 1,382 | | | | Accumulated depreciation and amortisation: | | | | | | | | | | | | | | | | | | | | | At 1 January 2008 | | | 229 | | | | 42 | | | | 160 | | | | 5 | | | | 436 | | Disposals and write-off of fully depreciated assets | | | — | | | | — | | | | (1 | ) | | | — | | | | (1 | ) | Charge for the year | | | 25 | | | | 3 | | | | 35 | | | | 1 | | | | 64 | | At 31 December 2008 | | | 254 | | | | 45 | | | | 194 | | | | 6 | | | | 499 | | | | Net book value at 31 December 2008 | | | 508 | | | | 45 | | | | 329 | | | | 1 | | | | 883 | |
Notes on the accounts
18 Prepayments, accrued income and other assets | | Group | | Bank | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | | £m | | | £m | | | £m | | | £m | | Prepayments | | | 41 | | | | 42 | | | | 12 | | | | 4 | | Accrued income | | | 261 | | | | 294 | | | | 190 | | | | 212 | | Deferred expenses | | | 93 | | | | 18 | | | | — | | | | — | | Pension schemes in net surplus | | | 10 | | | | — | | | | — | | | | — | | Other assets | | | 1,471 | | | | 1,664 | | | | 802 | | | | 458 | | | | | 1,876 | | | | 2,018 | | | | 1,004 | | | | 674 | | | | | | 19 Settlement balances and short positions | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | | | | | | | | 2009 | | | 2008 | | | | | | | | | | | | | £m | | | | £m | | Settlement balances (amortised cost) | | | | | | | | | | | 3,027 | | | | 1,850 | | Short positions (held-for-trading): | | | | | | | | | | | | | | | | | Debt securities – Government | | | | | | | | | | | 10,141 | | | | 9,869 | | – Other issuers | | | | | | | | | | | 3,776 | | | | 1,372 | | | | | | | | | | | | | 16,944 | | | | 13,091 | | | | | | | | | | | | | | | | | | | | | 20 Accruals, deferred income and other liabilities | | | | | | | | | | | | | | | | | | | Group | | | Bank | | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | | | £m | | | | £m | | | | £m | | | | £m | | Notes in circulation | | | 717 | | | | 532 | | | | — | | | | — | | Current taxation | | | 82 | | | | 647 | | | | 45 | | | | 633 | | Accruals | | | 1,463 | | | | 943 | | | | 402 | | | | 177 | | Deferred income | | | 290 | | | | 188 | | | | 209 | | | | 118 | | Other liabilities | | | 1,275 | | | | 1,722 | | | | 254 | | | | 479 | | | | | 3,827 | | | | 4,032 | | | | 910 | | | | 1,407 | | | | | | Included in other liabilities are provisions for liabilities and charges as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | Bank | | | | | | | | | | | | | £m | | | | £m | | At 1 January 2009 | | | | | | | | | | | 99 | | | | 94 | | Currency translation and other movements | | | | | | | | | | | (19 | ) | | | (21 | ) | Charge to income statement | | | | | | | | | | | 90 | | | | 20 | | Releases to income statement | | | | | | | | | | | (15 | ) | | | (13 | ) | Provisions utilised | | | | | | | | | | | (29 | ) | | | (15 | ) | At 31 December 2009 | | | | | | | | | | | 126 | | | | 65 | |
| | Bank | | | | | | Long | | | Short | | | Computers | | | | | | | Freehold | | | leasehold | | | leasehold | | | and other | | | | | | | premises | | | premises | | | premises | | | equipment | | | Total | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Cost or valuation: | | | | | | | | | | | | | | | | | | | | | At 1 January 2007 | | | 835 | | | | 98 | | | | 498 | | | | 7 | | | | 1,438 | | Additions | | | 59 | | | | 6 | | | | 39 | | | | — | | | | 104 | | Disposals and write-off of fully depreciated assets | | | (165 | ) | | | (14 | ) | | | (19 | ) | | | — | | | | (198 | ) | At 31 December 2007 | | | 729 | | | | 90 | | | | 518 | | | | 7 | | | | 1,344 | | | | | | | | | | | | | | | | | | | | | | | Accumulated depreciation and amortisation: | | | | | | | | | | | | | | | | | | | | | At 1 January 2007 | | | 239 | | | | 47 | | | | 140 | | | | 3 | | | | 429 | | Disposals and write-off of fully depreciated assets | | | (37 | ) | | | (8 | ) | | | (10 | ) | | | — | | | | (55 | ) | Charge for year | | | 27 | | | | 3 | | | | 30 | | | | 2 | | | | 62 | | At 31 December 2007 | | | 229 | | | | 42 | | | | 160 | | | | 5 | | | | 436 | | | | | | | | | | | | | | | | | | | | | | | Net book value at 31 December 2007 | | | 500 | | | | 48 | | | | 358 | | | | 2 | | | | 908 | | | | | | | | | | | | | | | | | | | | | | | 2006 | | | | | | | | | | | | | | | | | | | | | Cost or valuation: | | | | | | | | | | | | | | | | | | | | | At 1 January 2006 | | | 930 | | | | 105 | | | | 383 | | | | 7 | | | | 1,425 | | Additions | | | 19 | | | | 3 | | | | 121 | | | | — | | | | 143 | | Disposals and write-off of fully depreciated assets | | | (114 | ) | | | (10 | ) | | | (2 | ) | | | — | | | | (126 | ) | Transfer to fellow subsidiary | | | — | | | | — | | | | (4 | ) | | | — | | | | (4 | ) | At 31 December 2006 | | | 835 | | | | 98 | | | | 498 | | | | 7 | | | | 1,438 | | | | | | | | | | | | | | | | | | | | | | | Accumulated depreciation and amortisation: | | | | | | | | | | | | | | | | | | | | | At 1 January 2006 | | | 217 | | | | 45 | | | | 116 | | | | 3 | | | | 381 | | Disposals and write-off of fully depreciated assets | | | (4 | ) | | | — | | | | (1 | ) | | | — | | | | (5 | ) | Transfer to fellow subsidiary | | | — | | | | — | | | | (2 | ) | | | — | | | | (2 | ) | Charge for year | | | 26 | | | | 2 | | | | 27 | | | | — | | | | 55 | | At 31 December 2006 | | | 239 | | | | 47 | | | | 140 | | | | 3 | | | | 429 | | | | | | | | | | | | | | | | | | | | | | | Net book value at 31 December 2006 | | | 596 | | | | 51 | | | | 358 | | | | 4 | | | | 1,009 | |
Notes on the accounts continued
18 Prepayments, accrued income and other assets
| | Group | | Bank | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | | | | £m | | | | £m | | | | £m | | | | £m | | Prepayments | | | 39 | | | | 147 | | | | 1 | | | | 52 | | Accrued income | | | 247 | | | | 192 | | | | 154 | | | | 124 | | Deferred tax asset (see Note 21) | | | 521 | | | | 418 | | | | 321 | | | | 311 | | Other assets | | | 1,607 | | | | 1,456 | | | | 403 | | | | 218 | | | | | 2,414 | | | | 2,213 | | | | 879 | | | | 705 | | Amounts above include: | | | | | | | | | | | | | | | | | Due from holding company | | | — | | | | — | | | | — | | | | 11 | | Due from fellow subsidiaries | | | — | | | | 75 | | | | — | | | | — | | Due from subsidiaries | | | — | | | | — | | | | — | | | | 6 | |
19 Settlement balances and short positions | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | | | | | | | | 2007 | | | 2006 | | | | | | | | | | | | | £m | | | | £m | | Settlement balances (amortised cost) | | | | | | | | | | | 2,518 | | | | 2,978 | | Short positions (held-for-trading): | | | | | | | | | | | | | | | | | Debt securities – Government | | | | | | | | | | | 10,046 | | | | 18,981 | | – Other issuers | | | | | | | | | | | 2,120 | | | | 2,022 | | Treasury and other eligible bills | | | | | | | | | | | 271 | | | | 239 | | Equity shares | | | | | | | | | | | — | | | | 54 | | | | | | | | | | | | | 14,955 | | | | 24,274 | |
20 Accruals, deferred income and other liabilities | | Group | | | Bank | | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | | | | £m | | | | £m | | | | £m | | | | £m | |
Notes in circulation | | | 465 | | | | 405 | | | | — | | | | — | | Current taxation | | | 534 | | | | 136 | | | | 419 | | | | 10 | | Accruals | | | 824 | | | | 943 | | | | 126 | | | | 286 | | Deferred income | | | 174 | | | | 145 | | | | 99 | | | | 108 | | Deferred tax liability (see Note 21) | | | 36 | | | | 11 | | | | — | | | | — | | Other liabilities | | | 1,384 | | | | 2,468 | | | | 447 | | | | 827 | | | | | 3,417 | | | | 4,108 | | | | 1,091 | | | | 1,231 | | Amounts above include: | | | | | | | | | | | | | | | | | Due to holding company | | | — | | | | 27 | | | | — | | | | 10 | | Due to fellow subsidiaries | | | — | | | | — | | | | — | | | | 17 | |
Included in other liabilities are provisions for liabilities and charges as follows: | | | | | | |
At 1 January 2007 | | | | | | | | | | | 135 | | | | 119 | | Currency translation and other movements | | | | | | | | | | | (1 | ) | | | — | | Charge to income statement | | | | | | | | | | | 96 | | | | 94 | | Releases to income statement | | | | | | | | | | | (29 | ) | | | (29 | ) | Provisions utilised | | | | | | | | | | | (135 | ) | | | (123 | ) | At 31 December 2007 | | | | | | | | | | | 66 | | | | 61 | |
Note:
(1) Comprises property provisions and other provisions arising in the normal course of business.
21 Deferred taxation
Provision for deferred taxation has been made as follows:
| | Group | | | Bank | | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | | | | £m | | | | £m | | | | £m | | | | £m | | Deferred tax liability (included in Accruals, deferred income and other liabilities, Note 20) | | | 36 | | | | 11 | | | | — | | | | — | | Deferred tax asset (included in Prepayments, accrued income and other assets, Note 18) | | | (521 | ) | | | (418 | ) | | | (321 | ) | | | (311 | ) | Net deferred tax | | | (485 | ) | | | (407 | ) | | | (321 | ) | | | (311 | ) |
| | Group | | | | | | | | | | | | | | | | | | | Fair | | | | | | | | | | | | | | | | | | | Accelerated | | | | | | | | | | | | value of | | | | | | | | | | | | | | | | | | | capital | | | | | | Deferred | | | IAS | | | financial | | | | | | | | | | | | | | | | Pension | | | allowances | | | Provisions | | | gains | | | transition | | | instruments | | | Intangibles | | | Hedging | | | Other | | | Total | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | At 1 January 2006 | | | (340 | ) | | | 202 | | | | (220 | ) | | | 92 | | | | (134 | ) | | | 7 | | | | 31 | | | | 30 | | | | (28 | ) | | | (360 | ) | Charge to income statement | | | (25 | ) | | | 32 | | | | 65 | | | | 6 | | | | (96 | ) | | | (4 | ) | | | (3 | ) | | | 16 | | | | (7 | ) | | | (16 | ) | Charge to equity directly | | | — | | | | — | | | | — | | | | — | | | | (2 | ) | | | (1 | ) | | | — | | | | (7 | ) | | | — | | | | (10 | ) | Acquisitions/(disposals) of subsidiaries | | | — | | | | (19 | ) | | | — | | | | — | | | | (2 | ) | | | — | | | | — | | | | — | | | | — | | | | (21 | ) | Other | | | (18 | ) | | | (11 | ) | | | 12 | | | | — | | | | (4 | ) | | | (1 | ) | | | — | | | | — | | | | 22 | | | | — | | At 1 January 2007 | | | (383 | ) | | | 204 | | | | (143 | ) | | | 98 | | | | (238 | ) | | | 1 | | | | 28 | | | | 39 | | | | (13 | ) | | | (407 | ) | Charge to income statement | | | 13 | | | | (42 | ) | | | (73 | ) | | | (34 | ) | | | 58 | | | | 2 | | | | (8 | ) | | | (7 | ) | | | 17 | | | | (74 | ) | Charge to equity directly | | | 17 | | | | — | | | | — | | | | (10 | ) | | | — | | | | 9 | | | | — | | | | (3 | ) | | | — | | | | 13 | | Other | | | (1 | ) | | | — | | | | 5 | | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | (22 | ) | | | (17 | ) | At 31 December 2007 | | | (354 | ) | | | 162 | | | | (211 | ) | | | 54 | | | | (179 | ) | | | 12 | | | | 20 | | | | 29 | | | | (18 | ) | | | (485 | ) |
| | Bank | | | | Pension | | | Accelerated capital allowances | | | Provisions | | | Deferred gains | | | IAS transition | | | Intangibles | | | Hedging | | | Total | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | At 1 January 2006 | | | (302 | ) | | | 120 | | | | (119 | ) | | | 76 | | | | (134 | ) | | | 31 | | | | 10 | | | | (318 | ) | Charge to income statement | | | (28 | ) | | | 39 | | | | 95 | | | | 6 | | | | (99 | ) | | | (23 | ) | | | 17 | | | | 7 | | Charge to equity directly | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (3 | ) | | | (3 | ) | Other | | | 1 | | | | 2 | | | | — | | | | — | | | | (1 | ) | | | — | | | | 1 | | | | 3 | | At 1 January 2007 | | | (329 | ) | | | 161 | | | | (24 | ) | | | 82 | | | | (234 | ) | | | 8 | | | | 25 | | | | (311 | ) | Charge to income statement | | | 14 | | | | (28 | ) | | | 17 | | | | (34 | ) | | | 48 | | | | (8 | ) | | | (4 | ) | | | 5 | | Charge to equity directly | | | — | | | | — | | | | — | | | | (10 | ) | | | — | | | | — | | | | (5 | ) | | | (15 | ) | At 31 December 2007 | | | (315 | ) | | | 133 | | | | (7 | ) | | | 38 | | | | (186 | ) | | | — | | | | 16 | | | | (321 | ) |
(1)
| Deferred tax assets of £22 million (2006 – £31 million) have not been recognised in respect of tax losses carried forward of £65 million (2006 – £88 million) as it is not considered probable that taxable profits will arise against which they could be utilised. Of these losses, £45 million will expire within one year. The balance of tax losses carried forward has no time limit.
|
Notes on the accounts continued | Deferred tax liabilities of £594 million (2006 – £484 million) have not been recognised in respect of retained earnings of overseas subsidiaries and held-over gains on the incorporation of overseas branches. Retained earnings of overseas subsidiaries are expected to be reinvested indefinitely or remitted to the UK free from further taxation.
Provision for deferred taxation has been made as follows: | | Group | | | Bank | | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | | £m | | | £m | | | £m | | | £m | | Deferred tax liability | | | 285 | | | | 46 | | | | 217 | | | | — | | Deferred tax asset | | | (568 | ) | | | (496 | ) | | | — | | | | (400 | ) | Net deferred tax | | | (283 | ) | | | (450 | ) | | | 217 | | | | (400 | ) |
| | | | | | | | | | | | | | | | | Group | | | | | | | | | | | | | | | | | | | Pension | | | | | | Provisions | | | | | | IAS transition | | | | | | assets | | | Intangibles | | | Cash flow hedging | | | | | | Other | | | Total | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | At 1 January 2008 | | | (354 | ) | | | 162 | | | | (211 | ) | | | 54 | | | | (179 | ) | | | 12 | | | | — | | | | 20 | | | | 29 | | | | — | | | | (18 | ) | | | (485 | ) | Charge/(credit) to income statement | | | 45 | | | | (137 | ) | | | 14 | | | | 13 | | | | 10 | | | | (5 | ) | | | 1 | | | | (8 | ) | | | 110 | | | | — | | | | 43 | | | | 86 | | Charge/(credit) to equity directly | | | 4 | | | | — | | | | — | | | | (3 | ) | | | — | | | | 3 | | | | — | | | | — | | | | (10 | ) | | | — | | | | — | | | | (6 | ) | Disposals of subsidiaries | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6 | ) | | | (6 | ) | Other | | | (6 | ) | | | (1 | ) | | | (71 | ) | | | 2 | | | | 3 | | | | — | | | | 3 | | | | (1 | ) | | | 30 | | | | — | | | | 2 | | | | (39 | ) | At 1 January 2009 | | | (311 | ) | | | 24 | | | | (268 | ) | | | 66 | | | | (166 | ) | | | 10 | | | | 4 | | | | 11 | | | | 159 | | | | — | | | | 21 | | | | (450 | ) | Charge/(credit) to income statement | | | 654 | | | | (16 | ) | | | (159 | ) | | | 5 | | | | (2 | ) | | | (154 | ) | | | 27 | | | | (8 | ) | | | 5 | | | | (175 | ) | | | (6 | ) | | | 171 | | (Credit)/charge to equity directly | | | — | | | | — | | | | — | | | | (33 | ) | | | — | | | | — | | | | (194 | ) | | | — | | | | 181 | | | | — | | | | — | | | | (46 | ) | Other | | | 2 | | | | — | | | | 33 | | | | — | | | | 1 | | | | 5 | | | | 5 | | | | 1 | | | | (20 | ) | | | — | | | | 15 | | | | 42 | | At 31 December 2009 | | | 345 | | | | 8 | | | | (394 | ) | | �� | 38 | | | | (167 | ) | | | (139 | ) | | | (158 | ) | | | 4 | | | | 325 | | | | (175 | ) | | | 30 | | | | (283 | ) |
| | | | | | | | Bank | | | | | | | | | | Pension | | | | | | | | | | | | | | | | | | Total | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | At 1 January 2008 | | | (315 | ) | | | 133 | | | | (7 | ) | | | 38 | | | | (186 | ) | | | 16 | | | | (321 | ) | Charge/(credit) to income statement | | | 40 | | | | (108 | ) | | | 2 | | | | 14 | | | | 30 | | | | 3 | | | | (19 | ) | Credit to equity directly | | | — | | | | — | | | | — | | | | (4 | ) | | | — | | | | (43 | ) | | | (47 | ) | Other | | | — | | | | — | | | | — | | | | — | | | | — | | | | (13 | ) | | | (13 | ) | At 1 January 2009 | | | (275 | ) | | | 25 | | | | (5 | ) | | | 48 | | | | (156 | ) | | | (37 | ) | | | (400 | ) | Charge/(credit) to income statement | | | 619 | | | | (16 | ) | | | (11 | ) | | | (34 | ) | | | 4 | | | | 4 | | | | 566 | | Charge to equity directly | | | — | | | | — | | | | — | | | | 2 | | | | — | | | | 44 | | | | 46 | | Other | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5 | | | | 5 | | At 31 December 2009 | | | 344 | | | | 9 | | | | (16 | ) | | | 16 | | | | (152 | ) | | | 16 | | | | 217 | |
(1) | Deferred tax assets of £26 million (2008 – £17 million) have not been recognised in respect of tax losses carried forward of £100 million (2008 – £67 million) as it is not considered probable that taxable profits will arise against which they could be utilised. Of these losses, £24 million will expire after five years. The balance of tax losses carried forward has no time limit. | (2) | Deferred tax liabilities of £262 million (2008 – £621 million) have not been recognised in respect of retained earnings of overseas subsidiaries and held-over gains on the incorporation of overseas branches. Retained earnings of overseas subsidiaries are expected to be reinvested indefinitely or remitted to the UK free from further taxation. No taxation is expected to arise in the foreseeable future in respect of held-over gains. The temporary differences at the balance sheet date are significantly reduced from the previous year as a result of a change to UK tax legislation which largely exempts from UK tax, overseas dividends received on or after 1 July 2009. |
| No taxation is expected to arise in the foreseeable future in respect of held-over gains.Notes on the accounts
22 Subordinated liabilities | | Group | | | Bank | | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | | £m | | | £m | | | £m | | | | | Dated loan capital | | | 6,403 | | | | 6,560 | | | | 4,695 | | | | 4,518 | | Undated loan capital | | | 2,271 | | | | 3,194 | | | | 2,085 | | | | 2,997 | | Preference shares | | | 325 | | | | 345 | | | | 325 | | | | 345 | | | | | 8,999 | | | | 10,099 | | | | 7,105 | | | | 7,860 | |
In April 2009, the Group concluded a series of exchange offers and tenderoffers with the holders of a number of Upper Tier 2 securities. Theexchanges involving instruments classified as liabilities all met the criteriain IFRS for treatment as the extinguishment of the original liability and therecognition of a new financial liability. Gains on these exchanges, and onthe redemption of securities classified as liabilities for cash, totalling £381million were credited to income. The RBS Group has undertaken that, unless otherwise agreed with theEuropean Commission, neither the ultimate holding company nor any of itsdirect or indirect subsidiaries (excluding companies in the ABN AMROGroup) will pay external investors any dividends or coupons on existinghybrid capital instruments (including preference shares, B shares andupper and lower tier 2 instruments) from a date starting not later than 30April 2010 and for a period of two years thereafter (“the deferral period”),or exercise any call rights in relation to these capital instruments between24 November 2009 and the end of the deferral period, unless there is alegal obligation to do so. Hybrid capital instruments issued after 24November 2009 will generally not be subject to the restriction on dividendor coupon payments or call options. The Group’s preference shares are classified as liabilities; these securitiesremain subject to the capital maintenance rules of the Companies Act2006. The following tables analyse the remaining maturity of subordinatedliabilities by (1) the final redemption date; and (2) the next call date. | | | | | | | | | | | | | | Group | | | | | | | | | | | | | | | | 2010 | | | 2011 | | | | 2012-2014 | | | | 2015-2019 | | | Thereafter | | | Perpetual | | | Total | | 2009 – final redemption | | | | | | | | £m | | | | £m | | | | £m | | | £m | | | £m | | | £m | | Sterling | | | | | | 40 | | | | — | | | | — | | | | 3,497 | | | | 353 | | | | 1,211 | | | | 5,101 | | US Dollars | | | | | | 316 | | | | — | | | | — | | | | 247 | | | | — | | | | 756 | | | | 1,319 | | Euro | | | | | | 581 | | | | 443 | | | | — | | | | 437 | | | | 516 | | | | 602 | | | | 2,579 | | | | | | | | 937 | | | | 443 | | | | — | | | | 4,181 | | | | 869 | | | | 2,569 | | | | 8,999 | | | | | | | | | | | | | | | | | Group | | | | | | | | | | | | | | | | Currently | | | 2010 | | | 2011 | | | | 2012–2014 | | | | 2015–2019 | | | Thereafter | | | Perpetual | | | Total | | 2009 – call date | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Sterling | | | 174 | | | | 128 | | | | — | | | | 766 | | | | 3,331 | | | | 534 | | | | 168 | | | | 5,101 | | US Dollars | | | 1,008 | | | | 311 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,319 | | Euro | | | 649 | | | | 458 | | | | 443 | | | | — | | | | 355 | | | | 516 | | | | 158 | | | | 2,579 | | | | | 1,831 | | | | 897 | | | | 443 | | | | 766 | | | | 3,686 | | | | 1,050 | | | | 326 | | | | 8,999 | | | | | | | | | | | | | | | | | | | | | | Group | | | | | | | | | | | | | | | | | | | | 2009 | | | 2010 | | | | 2011-2013 | | | | 2014-2018 | | | Thereafter | | | Perpetual | | | Total | | 2008 – final redemption | | | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Sterling | | | | | | | 94 | | | | — | | | | — | | | | 2,403 | | | | 456 | | | | 1,597 | | | | 4,550 | | US Dollars | | | | | | | 896 | | | | 342 | | | | — | | | | — | | | | 274 | | | | 1,225 | | | | 2,737 | | Euro | | | | | | | 60 | | | | 586 | | | | 476 | | | | 382 | | | | 643 | | | | 651 | | | | 2,798 | | Other | | | | | | | — | | | | — | | | | — | | | | — | | | | 14 | | | | — | | | | 14 | | | | | | | | | 1,050 | | | | 928 | | | | 476 | | | | 2,785 | | | | 1,387 | | | | 3,473 | | | | 10,099 | | | | | | | | | | | | | | | | | | Group | | | | | | | | | | | | | | | | Currently | | | 2009 | | | 2010 | | | | 2011–2013 | | | | 2014–2018 | | | Thereafter | | | Perpetual | | | Total | | 2008 – call date | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Sterling | | | — | | | | 94 | | | | 430 | | | | 766 | | | | 2,337 | | | | 755 | | | | 168 | | | | 4,550 | | US Dollars | | | 1,513 | | | | 882 | | | | 342 | | | | — | | | | — | | | | — | | | | — | | | | 2,737 | | Euro | | | — | | | | 633 | | | | 586 | | | | 476 | | | | 382 | | | | 555 | | | | 166 | | | | 2,798 | | Other | | | — | | | | — | | | | — | | | | — | | | | — | | | | 14 | | | | — | | | | 14 | | | | | 1,513 | | | | 1,609 | | | | 1,358 | | | | 1,242 | | | | 2,719 | | | | 1,324 | | | | 334 | | | | 10,099 | |
Notes on the accounts continued 22 Subordinated liabilities continued | | | | | | | | | | | | | | Bank | | | | | | | | | | | | | | | | 2010 | | | 2011 | | | | 2012-2014 | | | | 2015-2019 | | | Thereafter | | | Perpetual | | | Total | | 2009 – final redemption | | | | | £m | | | £m | | | | £m | | | | £m | | | £m | | | £m | | | £m | | Sterling | | | | | | 40 | | | | — | | | | — | | | | 3,331 | | | | 323 | | | | 1,183 | | | | 4,877 | | US Dollars | | | | | | 5 | | | | — | | | | — | | | | — | | | | — | | | | 756 | | | | 761 | | Euro | | | | | | 580 | | | | 443 | | | | — | | | | — | | | | — | | | | 444 | | | | 1,467 | | | | | | | | 625 | | | | 443 | | | | — | | | | 3,331 | | | | 323 | | | | 2,383 | | | | 7,105 | | | | | | | | | | | | | | | | | | | Bank | | | | | | | | | | | | | | | | Currently | | | 2010 | | | 2011 | | | | 2012–2014 | | | | 2015–2019 | | | Thereafter | | | Perpetual | | | Total | | 2009 – call date | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Sterling | | | 174 | | | | 28 | | | | — | | | | 700 | | | | 3,331 | | | | 504 | | | | 140 | | | | 4,877 | | US Dollars | | | 761 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 761 | | Euro | | | 564 | | | | 460 | | | | 443 | | | | — | | | | — | | | | — | | | | — | | | | 1,467 | | | | | 1,499 | | | | 488 | | | | 443 | | | | 700 | | | | 3,331 | | | | 504 | | | | 140 | | | | 7,105 | | | | | | | | | | | | | | | | | | | | | | | | | | Bank | | | | | | | | | | | | | | | | | | | | 2009 | | | 2010 | | | | 2011-2013 | | | | 2014-2018 | | | Thereafter | | | Perpetual | | | Total | | 2008 – final redemption | | | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Sterling | | | | | | | 94 | | | | — | | | | — | | | | 2,337 | | | | 326 | | | | 1,569 | | | | 4,326 | | US Dollars | | | | | | | 710 | | | | — | | | | — | | | | — | | | | — | | | | 1,225 | | | | 1,935 | | Euro | | | | | | | 52 | | | | 586 | | | | 476 | | | | — | | | | — | | | | 485 | | | | 1,599 | | | | | | | | | 856 | | | | 586 | | | | 476 | | | | 2,337 | | | | 326 | | | | 3,279 | | | | 7,860 | | | | | | | | | | | | | | | | | | | | Bank | | | | | | | | | | | | | | | | Currently | | | 2009 | | | 2010 | | | | 2011–2013 | | | | 2014–2018 | | | Thereafter | | | Perpetual | | | Total | | 2008 – call date | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Sterling | | | — | | | | 94 | | | | 330 | | | | 700 | | | | 2,337 | | | | 725 | | | | 140 | | | | 4,326 | | US Dollars | | | 1,238 | | | | 697 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,935 | | Euro | | | — | | | | 537 | | | | 586 | | | | 476 | | | | — | | | | — | | | | — | | | | 1,599 | | | | | 1,238 | | | | 1,328 | | | | 916 | | | | 1,176 | | | | 2,337 | | | | 725 | | | | 140 | | | | 7,860 | |
Dated loan capital | | | | | | | | The Bank | | | | | | | | US$1,000 million 7.375% subordinated notes 2009 (redeemed October 2009) | | | | — | | | | 697 | | €600 million 6.0% subordinated notes 2010 | | | | 564 | | | | 619 | | €500 million 5.125% subordinated notes 2011 | | | | 455 | | | | 488 | | £300 million 7.875% subordinated notes 2015 | | | | 338 | | | | 344 | | £300 million 6.5% subordinated notes 2021 | | | | 329 | | | | 332 | | £2,000 million subordinated loan capital floating rate notes 2018 (4) | | | | 2,009 | | | | 2,038 | | £1,000 million subordinated loan capital floating rate notes 2019 (issued November 2009) (4) | | | | 1,000 | | | | — | | | | | | 4,695 | | | | 4,518 | | RBS Holdings USA Inc. | | | | | | | | | | US$100 million 5.575% senior subordinated revolving credit 2009 (redeemed October 2009) | | | | — | | | | 69 | | US$170 million subordinated loan capital floating rate notes 2009 (redeemed October 2009) | | | | — | | | | 116 | | US$500 million subordinated loan capital floating rate notes 2010 (callable on any interest payment date) | | | | 311 | | | | 342 | | | | | | | | | | | | First Active plc | | | | | | | | | | £60 million 6.375% subordinated bonds 2018 (callable April 2013) | | | | 66 | | | | 66 | | | | | | | | | | | | Ulster Bank Limited | | | | | | | | | | €120 million floating rate notes 2020 (4) | | | | 107 | | | | 115 | | £100 million floating rate subordinated loan capital 2019 (callable September 2010) (4) | | | | 100 | | | | 100 | | €60 million floating rate notes 2020 (4) | | | | 53 | | | | 57 | | €100 million floating rate notes 2022 (4) | | | | 89 | | | | 97 | | €280 million floating rate notes 2022 (4) | | | | 247 | | | | 271 | | €400 million floating rate notes 2017 (4) | | | | 355 | | | | 382 | | | | | | | | | | | | RBS Coutts Bank Limited | | | | | | | | | | CHF22 million floating rate note 2022 (redeemed February 2009) | | | | — | | | | 14 | | | | | | | | | | | | Coutts & Company | | | | | | | | | | £30 million 7.278% subordinated notes 2023 (4) | | | | 30 | | | | 30 | | €20 million 6.274% subordinated notes 2023 (4) | | | | 18 | | | | 19 | | | | | | | | | | | | RBS Netherlands Holdings B.V. | | | | | | | | | | £92 million floating rate note 2019 (callable April 2010) (4) | | | | 85 | | | | 89 | | | | | | | | | | | | NatWest Group Holdings Corporation | | | | | | | | | | US$400 million floating rate note 2018 (callable on any interest payment date) (4) | | | | 247 | | | | 275 | | | | | | 6,403 | | | | 6,560 | |
Notes:
(1) | In the event of certain changes in the tax laws of the UK, all of the dated loan capital issues are redeemable in whole, but not in part, at the option of the issuer, at the principal amount thereof plus accrued interest, subject to prior approval of the UK Financial Services Authority. |
Table(2) | Except as stated above, claims in respect of ContentsNotes on the accounts continued
22 Subordinated liabilities | | | | Group’s dated loan capital are subordinated to the claims of other creditors. None of the Group’s undated loan capital is secured. |
| | Group | | | Bank | | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | | | | £m | | | | £m | | | | £m | | | | £m | |
Dated loan capital | | | 3,586 | | | | 2,916 | | | | 2,050 | | | | 2,000 | | Undated loan capital | | | 2,056 | | | | 2,303 | | | | 1,904 | | | | 2,161 | | Preference shares | | | 290 | | | | 422 | | | | 290 | | | | 422 | | | | | 5,932 | | | | 5,641 | | �� | | 4,244 | | | | 4,583 | |
The Group’s preference shares are classified as liabilities; these securities remain subject to the capital maintenance rules of the Companies Act 1985.
The following tables analyse the remaining maturity of subordinated liabilities by (1) the final redemption date; and (2) the next callable date.
| | | | | Group | | | | | | | 2008 | | | 2009 | | | | 2010-2012 | | | | 2013-2017 | | | Thereafter | | | Perpetual | | | Total | | 2007 – final redemption | | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Sterling | | | | | | 43 | | | | — | | | | — | | | | 343 | | | | 491 | | | | 985 | | | | 1,862 | | US$ | | | | | | 108 | | | | 548 | | | | 249 | | | | — | | | | 200 | | | | 895 | | | | 2,000 | | Euro | | | | | | 44 | | | | — | | | | 826 | | | | 294 | | | | 480 | | | | 416 | | | | 2,060 | | Other | | | | | | — | | | | — | | | | — | | | | — | | | | 10 | | | | — | | | | 10 | | Total | | | | | | 195 | | | | 548 | | | | 1,075 | | | | 637 | | | | 1,181 | | | | 2,296 | | | | 5,932 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | Currently | | | 2008 | | | 2009 | | | | 2010– 2012 | | | | 2013– 2017 | | | Thereafter | | | Perpetual | | | Total | | 2007 – call date | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Sterling | | | — | | | | 43 | | | | — | | | | 433 | | | | 408 | | | | 725 | | | | 253 | | | | 1,862 | | US$ | | | 1,109 | | | | 94 | | | | 548 | | | | 249 | | | | — | | | | — | | | | — | | | | 2,000 | | Euro | | | — | | | | 44 | | | | 445 | | | | 826 | | | | 294 | | | | 412 | | | | 39 | | | | 2,060 | | Other | | | — | | | | — | | | | — | | | | — | | | | — | | | | 10 | | | | — | | | | 10 | | Total | | | 1,109 | | | | 181 | | | | 993 | | | | 1,508 | | | | 702 | | | | 1,147 | | | | 292 | | | | 5,932 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | | | | 2007 | | | 2008 | | | | 2009-2011 | | | | 2012-2016 | | | Thereafter | | | Perpetual | | | Total | | 2006 – final redemption | | | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Sterling | | | | | | | 43 | | | | — | | | | — | | | | 348 | | | | 493 | | | | 900 | | | | 1,784 | | US$ | | | | | | | 33 | | | | 87 | | | | 761 | | | | 22 | | | | 203 | | | | 1,299 | | | | 2,405 | | Euro | | | | | | | 37 | | | | — | | | | 763 | | | | — | | | | 183 | | | | 469 | | | | 1,452 | | Total | | | | | | | 113 | | | | 87 | | | | 1,524 | | | | 370 | | | | 879 | | | | 2,668 | | | | 5,641 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | Currently | | | 2007 | | | 2008 | | | | 2009– 2011 | | | | 2012– 2016 | | | Thereafter | | | Perpetual | | | Total | | 2006 – call date | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Sterling | | | — | | | | 43 | | | | — | | | | 437 | | | | 413 | | | | 726 | | | | 165 | | | | 1,784 | | US$ | | | 1,260 | | | | 551 | | | | 87 | | | | 507 | | | | — | | | | — | | | | — | | | | 2,405 | | Euro | | | — | | | | 37 | | | | — | | | | 1,177 | | | | — | | | | 121 | | | | 117 | | | | 1,452 | | Total | | | 1,260 | | | | 631 | | | | 87 | | | | 2,121 | | | | 413 | | | | 847 | | | | 282 | | | | 5,641 | |
| | | | | Bank | | | | | | | 2008 | | | 2009 | | | | 2010-2012 | | | | 2013-2017 | | | Thereafter | | | Perpetual | | | Total | | 2007 – final redemption | | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Sterling | | | | | | 43 | | | | — | | | | — | | | | 343 | | | | 326 | | | | 872 | | | | 1,584 | | US$ | | | | | | 23 | | | | 498 | | | | — | | | | — | | | | — | | | | 895 | | | | 1,416 | | Euro | | | | | | 40 | | | | — | | | | 826 | | | | — | | | | — | | | | 378 | | | | 1,244 | | Total | | | | | | 106 | | | | 498 | | | | 826 | | | | 343 | | | | 326 | | | | 2,145 | | | | 4,244 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bank | | | Currently | | | 2008 | | | 2009 | | | | 2010– 2012 | | | | 2013– 2017 | | | Thereafter | | | Perpetual | | | Total | | 2007 – call date | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Sterling | | | — | | | | 43 | | | | — | | | | 333 | | | | 343 | | | | 725 | | | | 140 | | | | 1,584 | | US$ | | | 909 | | | | 9 | | | | 498 | | | | — | | | | — | | | | — | | | | — | | | | 1,416 | | Euro | | | — | | | | 40 | | | | 378 | | | | 826 | | | | — | | | | — | | | | — | | | | 1,244 | | Total | | | 909 | | | | 92 | | | | 876 | | | | 1,159 | | | | 343 | | | | 725 | | | | 140 | | | | 4,244 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bank | | | | | | | 2007 | | | 2008 | | | | 2009-2011 | | | | 2012-2016 | | | Thereafter | | | Perpetual | | | Total | | 2006 – final redemption | | | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Sterling | | | | | | | 43 | | | | — | | | | — | | | | 348 | | | | 328 | | | | 875 | | | | 1,594 | | US$ | | | | | | | 31 | | | | — | | | | 507 | | | | — | | | | — | | | | 1,299 | | | | 1,837 | | Euro | | | | | | | 37 | | | | — | | | | 763 | | | | — | | | | — | | | | 352 | | | | 1,152 | | Total | | | | | | | 111 | | | | — | | | | 1,270 | | | | 348 | | | | 328 | | | | 2,526 | | | | 4,583 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bank | | | Currently | | | 2007 | | | 2008 | | | | 2009– 2011 | | | | 2012– 2016 | | | Thereafter | | | Perpetual | | | Total | | 2006 – call date | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Sterling | | | — | | | | 43 | | | | — | | | | 337 | | | | 348 | | | | 726 | | | | 140 | | | | 1,594 | | US$ | | | 1,057 | | | | 273 | | | | — | | | | 507 | | | | — | | | | — | | | | — | | | | 1,837 | | Euro | | | — | | | | 37 | | | | — | | | | 1,115 | | | | — | | | | — | | | | — | | | | 1,152 | | Total | | | 1,057 | | | | 353 | | | | — | | | | 1,959 | | | | 348 | | | | 726 | | | | 140 | | | | 4,583 | |
Notes on the accounts continued
22 Subordinated liabilities (continued)
| | |
| | 2007 | | | 2006 | | Dated loan capital | | | £m | | | | £m | | The Bank | | | | | | | | | US$1,000 million 7.375% fixed rate subordinated notes 2009 | | | 507 | | | | 516 | | €600 million 6.0% subordinated notes 2010 | | | 485 | | | | 452 | | €500 million 5.125% subordinated notes 2011 | | | 376 | | | | 343 | | £300 million 7.875% subordinated notes 2015 | | | 350 | | | | 355 | | £300 million 6.5% subordinated notes 2021 | | | 332 | | | | 334 | | | | | 2,050 | | | | 2,000 | | Greenwich Capital Holdings, Inc. | | | | | | | | | US$100 million 5.575% senior subordinated revolving credit 2009 (issued June 2007) | | | 50 | | | | — | | US$170 million subordinated loan capital floating rate notes 2008 | | | 85 | | | | 87 | | US$500 million subordinated loan capital floating rate notes 2010 (callable on any interest payment date) | | | 249 | | | | 256 | | | | | | | | | | | First Active plc | | | | | | | | | US$35 million 7.24% subordinated notes 2012 (redeemed December 2007) | | | — | | | | 22 | | £60 million 6.375% subordinated notes 2018 (callable April 2013) | | | 65 | | | | 65 | | | | | | | | | | | Ulster Bank Limited | | | | | | | | | €120 million floating rate notes 2019 | | | 88 | | | | 81 | | £100 million floating rate subordinated loan capital 2020 (callable September 2010) | | | 100 | | | | 100 | | €60 million floating rate notes 2020 | | | 44 | | | | 40 | | €100 million floating rate notes 2019 (issued April 2007) | | | 74 | | | | — | | €280 million floating rate notes 2022 (issued July 2007) | | | 208 | | | | — | | €400 million floating rate notes 2017 (issued December 2007) | | | 295 | | | | — | | | | | | | | | | | Coutts Bank Von Ernst | | | | | | | | | CHF22 million floating rate note 2022 (callable January 2009) | | | 10 | | | | — | | | | | | | | | | | RBS Netherlands Holdings B.V. | | | | | | | | | €22 million floating rate note 2019 (callable January 2009) | | | 68 | | | | 62 | | | | | | | | | | | NatWest Group Holdings Corporation | | | | | | | | | US$400 million floating rate note 2018 (callable on any interest payment date) | | | 200 | | | | 203 | | | | | 3,586 | | | | 2,916 | | Notes: | | | | | | | | |
(1)
| In the event of certain changes in the tax laws of the UK, all of the dated loan capital issues are redeemable in whole, but not in part, at the option of the issuer, at the principal amount thereof plus accrued interest, subject to prior approval of the UK Financial Services Authority.
|
(2)
| Except as stated above, claims in respect of the Group’s dated loan capital are subordinated to the claims of other creditors. None of the Group’s undated loan capital is secured.
|
(3) | Interest on all floating rate subordinated notes is calculated by reference to market rates. |
(4) | On-lent to The Royal Bank of Scotland plc on a subordinated basis. |
| | 2007 | | | 2006 | | Undated loan capital | | | £m | | | | £m | | The Bank | | | | | | | | | US$500 million primary capital floating rate notes, Series A (callable on any interest payment date) | | | 251 | | | | 256 | | US$500 million primary capital floating rate notes, Series B (callable on any interest payment date) | | | 256 | | | | 267 | | US$500 million primary capital floating rate notes, Series C (callable on any interest payment date) | | | 255 | | | | 254 | | US$500 million 7.75% reset subordinated notes (redeemed October 2007) | | | — | | | | 264 | | €400 million 6.625% fixed/floating rate undated subordinated notes (callable October 2009) | | | 309 | | | | 289 | | €100 million floating rate undated subordinated step-up notes (callable October 2009) | | | 74 | | | | 68 | | £325 million 7.625% undated subordinated step-up notes (callable January 2010) | | | 356 | | | | 361 | | £200 million 7.125% undated subordinated step-up notes (callable October 2022) | | | 201 | | | | 201 | | £200 million 11.5% undated subordinated notes (callable December 2022) (1) | | | 202 | | | | 201 | | | | | 1,904 | | | | 2,161 | | First Active plc | | | | | | | | | £20 million 11.75% perpetual tier two capital | | | 23 | | | | 23 | | €30 million 11.375% perpetual tier two capital | | | 39 | | | | 36 | | £1.3 million floating rate perpetual tier two capital | | | 2 | | | | 2 | | | | | | | | | | | Ulster Bank Limited | | | | | | | | | €120 million perpetual floating rate subordinated notes | | | 88 | | | | 81 | | | | | 2,056 | | | | 2,303 | | Notes: | | | | | | | | |
| Exchangeable at the option of the issuer into 200 million 8.392% (gross) non-cumulative preference shares of £1 each of National Westminster Bank Plc at any time.
|
(2)
| Except as stated above, claims in respect of the Group’s undated loan capital are subordinated to the claims of other creditors. None of the Group’s undated loan capital is secured.
|
131 (3)
| In the event of certain changes in the tax laws of the UK, all of the undated loan capital issues are redeemable in whole, but not in part, at the option of the issuer, at the principal amount thereof plus accrued interest, subject to prior approval of the UK Financial Services Authority.
|
(4)
| Interest on all floating rate subordinated notes is calculated by reference to market rates.Notes on the accounts continued
22 Subordinated liabilities continued Undated loan capital | | | | | | | The Bank | | | | | | | US$293 million (2008 – US$500 million) primary capital floating rate notes, Series A (callable on any interest payment date) (1) | | | 205 | | | | 343 | | US$312 million (2008 – US$500 million) primary capital floating rate notes, Series B (callable on any interest payment date) (1) | | | 182 | | | | 347 | | US$332 million (2008 – US$500 million) primary capital floating rate notes, Series C (callable on any interest payment date) (1) | | | 192 | | | | 346 | | €400 million 6.625% fixed/floating rate undated subordinated notes (callable April 2010) | | | 358 | | | | 395 | | €100 million floating rate undated step-up notes (callable April 2010) | | | 90 | | | | 97 | | £162 million (2008 – £325 million) 7.625% undated subordinated step-up notes (callable January 2010) (1) | | | 174 | | | | 353 | | £127 million (2008 – £200 million) 7.125% undated subordinated step-up notes (callable October 2022) (1) | | | 127 | | | | 201 | | £68 million (2008 – £200 million) 11.5% undated subordinated notes (callable December 2022) (1,2) | | | 56 | | | | 202 | | £700 million subordinated loan capital floating rate notes (6) | | | 701 | | | | 713 | | | | | | | | | | | | | | 2,085 | | | | 2,997 | | First Active plc | | | | | | | | | £20 million 11.75% perpetual tier two capital | | | 26 | | | | 26 | | €38 million 11.375% perpetual tier two capital | | | 51 | | | | 52 | | £1.3 million floating rate perpetual tier two capital | | | 2 | | | | 2 | | | | | | | | | | | Ulster Bank Limited | | | | | | | | | €120 million perpetual floating rate subordinated notes (6) | | | 107 | | | | 117 | | | | | | | | | | | | | | 2,271 | | | | 3,194 | |
Notes: (1) | Partially redeemed following the completion of the exchange and tender offers in April 2009. |
| | 2007 | | | 2006 | | Preference shares (1) | | | £m | | | | £m | | Non-cumulative preference shares of £1 | | | | | | | | | Series A £140 million 9% (non-redeemable) | | | 142 | | | | 142 | | | | | | | | | | | Non-cumulative preference shares of US$25 | | | | | | | | | Series B US$250 million 7.8752% (redeemed January 2007) | | | — | | | | 129 | | Series C US$300 million 7.7628% (2) | | | 148 | | | | 151 | | | | | 290 | | | | 422 | | Notes: | | | | | | | | |
(1)
| Further details of the contractual terms of the preference shares is given in Note 24 below. |
(2)
| Series C preference shares carry a gross dividend of 8.625% inclusive of associated tax credit. They are redeemable at the option of the Bank, at US$25 per share. |
| | Group | | | 2007 | | | 2006 | | | | | £m | | | | £m | | At 1 January | | | 1,012 | | | | 744 | | Currency translation adjustments and other movements | | | (1 | ) | | | (8 | ) | Profit attributable to minority interests | | | 89 | | | | 39 | | Dividends paid | | | (72 | ) | | | (34 | ) | Equity raised | | | 288 | | | | 271 | | Equity withdrawn | | | (2 | ) | | | — | | At 31 December | | | 1,314 | | | | 1,012 | |
| | Group and Bank | | | Allotted, called up and fully paid | | | Authorised | | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | | | | £m | | | | £m | | | | m | | | | m | | Ordinary shares of £1 | | | 1,678 | | | | 1,678 | | | | £2,250 | | | | £2,250 | | Non-cumulative preference shares of £1 | | | 140 | | | | 140 | | | | £1,000 | | | | £1,000 | | Non-cumulative preference shares of US$25 | | | 150 | | | | 320 | | | | $2,000 | | | | $2,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allotted, called up and fully paid | | | Authorised | | Number of shares – millions | | 2007 | | | 2006 | | | 2007 | | | 2006 | | Ordinary shares of £1 | | | 1,678 | | | | 1,678 | | | | 2,250 | | | | 2,250 | | Non-cumulative preference shares of £1 | | | 140 | | | | 140 | | | | 1,000 | | | | 1,000 | | Non-cumulative preference shares of US$25 | | | 12 | | | | 22 | | | | 80 | | | | 80 | |
The 9% non-cumulative preference shares, Series A, of £1 each are non-redeemable.
In January 2007, the Bank redeemed all of the non-cumulative preference shares, Series B of US$25 each at US$25 per share.
The non-cumulative preference shares, Series C, of US$25 each carry the right to a gross dividend of 8.625% inclusive of associated tax credit. They are redeemable(2) | Exchangeable at the option of the Bank at US$25 per share.
The holders of sterling and dollarissuer into 8.392% (gross) non-cumulative preference shares are entitled, on the winding-up of the£1 each of National Westminster Bank to priority over the ordinary shareholders as regards payment of capital. Otherwise the holders of preference shares are not entitled to any further participation in the profits or assets of the Bank and accordingly these shares are classified as non-equity shares.
The holders of sterling and dollar preference shares are not entitled to receive notice of, attend, or votePlc at any general meeting unless the business of the meeting includes the consideration of a resolution for the winding-up of the Bank or the sale of the whole of the business of the Bank or any resolution directly affecting any of the special rights or privileges attached to any of the classes of preference shares.time.
|
Under IFRS, the Group’s preference shares are classified(3) | Except as debt and are includedstated above, claims in subordinated liabilities on the balance sheet (see Note 22).Notes on the accounts continued
25 Shareholders’ equity
| | Group | | Bank | | | 2007 | | | 2006 | | | 2005 | | | 2007 | | | 2006 | | | 2005 | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Called-up share capital | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January | | | 1,678 | | | | 1,678 | | | | 2,102 | | | | 1,678 | | | | 1,678 | | | | 2,102 | | Implementation of IAS 32 on 1 January 2005 | | | — | | | | — | | | | (424 | ) | | | — | | | | — | | | | (424 | ) | At 31 December | | | 1,678 | | | | 1,678 | | | | 1,678 | | | | 1,678 | | | | 1,678 | | | | 1,678 | | | | | | | | | | | | | | | | | | | | | | | | | | | Share premium account | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January | | | 1,291 | | | | 1,291 | | | | 1,286 | | | | 1,291 | | | | 1,291 | | | | 1,286 | | Reclassification of preference shares on | | | | | | | | | | | | | | | | | | | | | | | | | implementation of IAS 32 on 1 January 2005 | | | — | | | | — | | | | 5 | | | | — | | | | — | | | | 5 | | At 31 December | | | 1,291 | | | | 1,291 | | | | 1,291 | | | | 1,291 | | | | 1,291 | | | | 1,291 | | | | | | | | | | | | | | | | | | | | | | | | | | | Available-for-sale reserve | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January | | | 18 | | | | — | | | | | | | | 31 | | | | — | | | | | | Implementation of IAS 32 and IAS 39 on 1 January 2005 | | | — | | | | — | | | | 200 | | | | — | | | | — | | | | 201 | | Unrealised gains in the year | | | 87 | | | | 81 | | | | 38 | | | | 40 | | | | 44 | | | | 33 | | Realised gains in the year | | | (85 | ) | | | (55 | ) | | | (324 | ) | | | (72 | ) | | | — | | | | (320 | ) | Taxation | | | 3 | | | | (8 | ) | | | 86 | | | | 10 | | | | (13 | ) | | | 86 | | At 31 December | | | 23 | | | | 18 | | | | — | | | | 9 | | | | 31 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flow hedging reserve | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January | | | 72 | | | | 148 | | | | — | | | | 42 | | | | 94 | | | | — | | Implementation of IAS 32 and IAS 39 on 1 January 2005 | | | — | | | | — | | | | 156 | | | | — | | | | — | | | | 122 | | Amount recognised in equity during the year | | | — | | | | (2 | ) | | | — | | | | (9 | ) | | | 13 | | | | (39 | ) | Amount transferred from equity to earnings in the year (1) | | | (20 | ) | | | (39 | ) | | | (28 | ) | | | (13 | ) | | | (28 | ) | | | (13 | ) | Taxation | | | 4 | | | | (35 | ) | | | 20 | | | | 5 | | | | (37 | ) | | | 24 | | At 31 December | | | 56 | | | | 72 | | | | 148 | | | | 25 | | | | 42 | | | | 94 | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign exchange reserve | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January | | | (314 | ) | | | 169 | | | | (19 | ) | | | 1 | | | | (5 | ) | | | — | | Implementation of IAS 32 and IAS 39 on 1 January 2005 | | | — | | | | — | | | | 6 | | | | — | | | | — | | | | — | | Retranslation of net assets | | | 248 | | | | (483 | ) | | | 182 | | | | 2 | | | | 6 | | | | (5 | ) | At 31 December | | | (66 | ) | | | (314 | ) | | | 169 | | | | 3 | | | | 1 | | | | (5 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Other reserves | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January | | | 486 | | | | 298 | | | | 298 | | | | 486 | | | | 298 | | | | 298 | | Redemption of preference shares classified as debt | | | 128 | | | | — | | | | — | | | | 128 | | | | — | | | | — | | Capital contribution | | | — | | | | 188 | | | | — | | | | — | | | | 188 | | | | — | | At 31 December | | | 614 | | | | 486 | | | | 298 | | | | 614 | | | | 486 | | | | 298 | | | | | | | | | | | | | | | | | | | | | | | | | | | Retained earnings | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January | | | 6,942 | | | | 5,856 | | | | 4,342 | | | | 2,541 | | | | 2,353 | | | | 1,416 | | Implementation of IAS 32 and IAS 39 on 1 January 2005 | | | — | | | | — | | | | (582 | ) | | | — | | | | — | | | | (487 | ) | Profit attributable to ordinary shareholders | | | 2,228 | | | | 2,586 | | | | 2,446 | | | | 3,210 | | | | 1,688 | | | | 1,774 | | Ordinary dividends paid | | | (1,850 | ) | | | (1,500 | ) | | | (350 | ) | | | (1,850 | ) | | | (1,500 | ) | | | (350 | ) | Redemption of preference shares classified as debt | | | (128 | ) | | | — | | | | — | | | | (128 | ) | | | — | | | | — | | At 31 December | | | 7,192 | | | | 6,942 | | | | 5,856 | | | | 3,773 | | | | 2,541 | | | | 2,353 | | | | | | | | | | | | | | | | | | | | | | | | | | | Shareholders’ equity at 31 December | | | 10,788 | | | | 10,173 | | | | 9,440 | | | | 7,393 | | | | 6,070 | | | | 5,709 | |
Note:
(1) The amounts transferred to earnings were included in net interest income.
UK law prescribes that only reserves of the Bank are taken into account for the purpose of making distributions and the permissible applications of the share premium account and capital redemption reserve of £426 million (2006 – £298 million) included within other reserves.
The Group optimises capital efficiency by maintaining reserves in subsidiaries, including regulated entities. Certain preference shares and subordinated debt are also included within regulatory capital. The remittance of reserves to the parent or the redemption of shares or subordinated capital by regulated entities may be subject to maintaining the capital resources required by the relevant regulator.
26 Leases
Minimum amounts receivable and payable under non-cancellable leases.
| | 2007 | | | 2006 | | | | Year in which receipt or payment will occur | | | Year in which receipt or payment will occur | | | | | | | After 1 year | | | | | | | | | | | | After 1 year | | | | | | | | | | Within 1 | | | but within | | | After 5 | | | | | | Within 1 | | | but within | | | After 5 | | | | | | | year | | | 5 years | | | years | | | Total | | | year | | | 5 years | | | years | | | Total | | Group | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Finance lease assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amounts receivable | | | 162 | | | | 231 | | | | 206 | | | | 599 | | | | 157 | | | | 238 | | | | 227 | | | | 622 | | Present value adjustment | | | (22 | ) | | | (60 | ) | | | (66 | ) | | | (148 | ) | | | (23 | ) | | | (75 | ) | | | (80 | ) | | | (178 | ) | Present value amounts receivable | | | 140 | | | | 171 | | | | 140 | | | | 451 | | | | 134 | | | | 163 | | | | 147 | | | | 444 | | Operating lease obligations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Future minimum lease payables: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Premises | | | 105 | | | | 358 | | | | 1,017 | | | | 1,480 | | | | 87 | | | | 293 | | | | 708 | | | | 1,088 | | Equipment | | | 3 | | | | 4 | | | | — | | | | 7 | | | | — | | | | — | | | | — | | | | — | | | | | 108 | | | | 362 | | | | 1,017 | | | | 1,487 | | | | 87 | | | | 293 | | | | 708 | | | | 1,088 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bank | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating lease obligations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Future minimum lease payables: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Premises | | | 79 | | | | 283 | | | | 803 | | | | 1,165 | | | | 69 | | | | 239 | | | | 525 | | | | 833 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | Bank | | | | | | | | | | | | | | | | | | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | Amounts recognised as income and expense | | | | £m | | | | £m | | | | £m | | | | £m | | Operating lease payables – minimum payments | | | | 100 | | | | 106 | | | | 77 | | | | 76 | | | | | | | | | | | | | | | | | | | | Finance lease receivables | | | | | | | | | | | | | | | | | | Unearned finance income | | | | 148 | | | | 178 | | | | — | | | | — | |
The Group provides asset finance to its customers through acting as a lessor. It purchases plant, equipment and intellectual property; renting them to customers under lease arrangements that, depending on their terms, qualify as either operating or finance leases.
Notes on the accounts continued
27 Collateral
Securities repurchase agreements and lending transactions
The Group enters into securities repurchase agreements and securities lending transactions under which it receives or transfers collateral in accordance with normal market practice. Generally, the agreements require additional collateral to be provided if the value of the securities fall below a predetermined level. Under standard terms for repurchase transactions in the UK and US markets, the recipient of collateral has an unrestricted right to sell or repledge it, subject to returning equivalent securities on settlement of the transaction.
The fair value (and carrying value) of securities transferred under repurchase transactions included within securities on the balance sheet were as follows:
| | Group | | | 2007 | | | 2006 | | | | | £m | | | | £m | | Treasury and other eligible bills | | | 1,974 | | | | 225 | | Debt securities | | | 31,970 | | | | 29,346 | | | | | 33,944 | | | | 29,571 | |
All of the above securities could be sold or repledged by the holder. Securities received as collateral under reverse repurchase agreements amounted to £36.7 billion (2006 – £42.1 billion), of which £34.1 billion (2006 – £36.8 billion) has been resold or repledged as collateral for the Group’s own transactions.
Other collateral given | | Group | | Bank | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | Group assets charged as security for liabilities | | | £m | | | | £m | | | | £m | | | | £m | | Loans and advances to customers | | | 9,301 | | | | 7,318 | | | | 1,259 | | | | 1,384 | | | | | | | | | | | | | | | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | Liabilities secured by charges on Group assets | | | £m | | | | £m | | | | £m | | | | £m | | Customer accounts | | | 1,173 | | | | 1,286 | | | | 1,173 | | | | 1,286 | | Debt securities in issue | | | 8,041 | | | | 5,907 | | | | — | | | | — | | | | | 9,214 | | | | 7,193 | | | | 1,173 | | | | 1,286 | |
The balances above relate to securitisations (see note 28).
28 Securitisations and other asset transfers
The Group engages in securitisation transactions and other transfers of its financial assets including commercial and residential mortgage loans, commercial and residential mortgage related securities, US Government agency collateralised mortgage obligations, and other types of financial assets.
In the normal course of business, the Group arranges securitisations to facilitate client transactions and undertakes securitisations to sell financial assets or to fund specific portfolios of assets. The Group also acts as an underwriter and depositor in securitisation transactions involving both client and proprietary transactions. In a securitisation, assets, or interests in a pool of assets, are transferred generally to a special purpose entity (“SPE”) which then issues liabilities to third party investors.
SPEs are vehicles set up for a specific, limited purpose, usually do not carry out a business or trade and typically have no employees. They take a variety of legal forms – trusts, partnerships and companies – and fulfil many different functions. As well as being a key element of securitisations, SPEs are also used in fund management activities to segregate custodial duties from the fund management advice provided by the Group.
Securitisations may, depending on the individual arrangement, result in continued recognition of the securitised assets; continued recognition of the assets to the extentrespect of the Group’s continuing involvement in those assets; or derecognition of the assets and the separate recognition, as assets or liabilities, of any rights and obligations created or retained in the transfer (see Accounting policy on page 57). The Group has securitisations in each of these categories.
Continued recognition
The table below sets out the asset categories together with the carrying amounts of the assets and associated liabilities.
| | Group | | | 2007 | | 2006 | | | Assets | | | Liabilities | | | Assets | | | Liabilities | | Asset type | | | £m | | | | £m | | | | £m | | | | £m | | Residential mortgages | | | 7,693 | | | | 7,692 | | | | 5,550 | | | | 5,547 | | Credit card receivables | | | 1,259 | | | | 1,173 | | | | 1,384 | | | | 1,286 | | Other loans | | | 349 | | | | 349 | | | | 384 | | | | 360 | |
Residential mortgages securitisations – the Group has securitised portfolios of residual mortgages. Mortgages have been transferred to SPEs, held ultimately by charitable trusts, funded principally through the issue of floating rate notes. The Group has entered into arm’s length fixed/floating interest rate swaps and cross-currency swaps with the securitisation SPEs and provides mortgage management and agency servicesundated loan capital are subordinated to the SPEs. On repaymentclaims of the financing, any further amounts generated by the mortgages will be paid to the Group. The SPEs are consolidated and the mortgages remain on the Group’s balance sheet.
Credit card securitisations – credit card receivables in the UK have been securitised. Notes have been issued by an SPE. the note holders have a proportionate interest in a pool of credit card receivables that have been equitably assigned by the Group to a receivables trust. The Group continues to be exposed to the risks and rewards of the transferred receivables through its right to excess spread (after charge-offs). The SPE is consolidated and the credit card receivables remain on the Group’s balance sheet.
Other securitisations – other loans originated by the Group have been transferred to SPEs funded through the issue of notes. Any proceeds from the loans in excess of the amounts required to service and repay the notes are payable to the Group after deduction of expenses. The SPEs are consolidated and the loans remain on the Group’s balance sheet.
Continuing involvement
In certain securitisations of US residential mortgages, substantially all the risks and rewards have been neither transferred nor retained, but the Group has retained control, as defined by IFRS, of the assets and continues to recognise the assets to the extent of its continuing involvement which takes the form of retaining certain subordinated bonds issued by the securitisation vehicles. These bonds have differing rights and, depending on their terms, they may expose the Group to interest rate risk where they carry a fixed coupon or to credit risk depending on the extent of their subordination. Certain bonds entitle the Group to additional interest if the portfolio performs better than expected and others give the Group the right to prepayment penalties received on the securitised mortgages. At 31 December 2007, securitised assets were £17.6 billion (2006 – £37.3 billion); retained interests £888 million (2006 – £930 million); subordination assets £314 million (2006 – £694 million) and related liabilities £314 million (2006 –£694 million).
Derecognition
Other securitisationscreditors. None of the Group’s financial assetsundated loan capital is secured.
|
(4) | In the event of certain changes in the US qualify for derecognition as substantially all the risks and rewardstax laws of the assets have been transferred. The Group continues to recognise any retained interests in the securitisation vehicles.
Notes on the accounts continued
29 Risk management
Risk Management is conducted on an overall basis within the RBS Group. Therefore in the discussion on risk management (pages103 to 109) references to “the Group” or “Group” Board and committees are to the RBS Group.
Governance framework
The Group Board of directors sets the overall risk appetite and philosophy for the Group; the risk and capital framework underpins deliveryUK, all of the Board’s strategy.undated loan capital issues are redeemable in whole, but not in part, at the option of the issuer, at the principal amount thereof plus accrued interest, subject to prior approval of the UK Financial Services Authority.
| (5) | Interest on all floating rate subordinated notes is calculated by reference to market rates. | (6) | On-lent to The Board is supported by three committees:•
| Group Audit Committee (“GAC”) comprising independent non-executive directors focuses on financial reporting and application of accounting policies as part of the internal control and risk assessment framework. GAC monitors the identification, evaluation and management of all significant risks throughout the Group. This work is supported by Group Internal Audit which provides an independent assessment of the design, adequacy and effectiveness of internal controls. Royal Bank of Scotland plc on a subordinated basis. |
•
| Advances Committee (“AC”), reporting to the Board deals with transactions that exceed the Group Credit Committee’s delegated authority.
|
Preference shares (1) | | | | | | | The Bank | | | | | | | Non-cumulative preference shares of £1 | | | | | | | Series A £140 million 9% (non-redeemable) | | 143 | | | | 143 | | | | | | | | | | Non-cumulative preference shares of US$25 | | | | | | | | Series C US$300 million 7.7628% | | 182 | | | | 202 | | | | | | | | | | | | 325 | | | | 345 | |
•
| Group Executive Management Committee (“GEMC”), an executive committee ensures that implementation of strategy and operations are in line with the agreed risk appetite. GEMC is supported by the following:
|
Note: –
| Group Risk Committee (“GRC”) recommends and approves limits, processes and policies that ensure the effective management of all material non-balance sheet risks across the Group.
| (1) Further details of the contractual terms of the preference shares are given in Note 24 on page 133. | Group Credit Committee (“GCC”) approves credit proposals under authority delegated to it by the Board and/or Advances Committee.
|
–
| Group Asset and Liability Management Committee (“GALCO”) is responsible for identifying, managing and controlling the Group balance sheet risks. These risks are managed by setting limits and controls for capital adequacy, funding and liquidity intra-group exposure and non-trading interest rate equity and foreign currency risk.
| Notes on the accounts
Risk and capital
It is the Group’s policy to optimise return to shareholders while maintaining a strong capital base and credit rating to support business growth and meet regulatory capital requirements at all times.
Risk appetite is measured as the maximum level of retained risk the Group will accept to deliver its business objectives. Risk appetite is generally defined through both quantitative and qualitative techniques including stress testing, risk concentration, value-at-risk and risk underwriting criteria, ensuring that appropriate principles, policies and procedures are in place and applied.
The main financial risks facing the Group are as follows:
•
| Credit risk: is the risk arising from the possibility that the Group will incur losses from the failure of customers to meet their obligations.
|
23 Minority interests | | | | | | | | | | | | Group | | | | | | | | | | | At 1 January | | | 1,323 | | | | 1,314 | | Currency translation adjustments and other movements | | | (41 | ) | | | 12 | | Profit attributable to minority interests | | | — | | | | 93 | | Dividends paid | | | — | | | | (94 | ) | Equity raised | | | — | | | | 70 | | Equity withdrawn and disposals | | | — | | | | (72 | ) | At 31 December | | | 1,282 | | | | 1,323 | |
•
| Funding and liquidity risk: is the risk that the Group is unable to meet its obligations as they fall due.
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•
| Market risk: the Group is exposed to market risk because of positions held in its trading portfolios and its non-trading businesses.
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| Equity risk: reflects the variability in the value of equity investments resulting in gains or losses
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Credit risk
Credit risk is managed to achieve sustainable and superior risk-reward performance whilst maintaining exposures within acceptable risk appetite parameters. This is achieved through the combination of governance, policies, systems and controls, underpinned by sound commercial judgement as described below.
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| Policies and risk appetite: policies provide a clear framework for the assessment, approval, monitoring and management of credit risk where risk appetite sets the tolerance of loss. Limits are used to manage concentration risk by single name, sector and country.
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| Decision makers: credit authority is granted to independent persons or committees with the appropriate experience, seniority and commercial judgement. Credit authority is not extended to relationship managers. Specialist internal credit risk departments independently oversee the credit process and make credit decisions or recommendations to the appropriate credit committee.
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| Models: credit models are used to measure and assess risk decisions and to aid on-going monitoring. Measures, such as Probability of Default, Exposure at Default, Loss Given Default (see below) and Expected Loss are calculated using duly authorised models. All credit models are subject to independent review prior to implementation and existing models are reviewed on at least an annual basis.
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| Mitigation techniques to reduce the potential for loss: credit risk may be mitigated by the taking of financial or physical security, the assignment of receivables or the use of credit derivatives, guarantees, risk participations, credit insurance, set off or netting.
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| Risk systems and data quality: systems are well organised to produce timely, accurate and complete inputs for risk reporting and to administer key credit processes.
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| Analysis and reporting: portfolio analysis and reporting are used to ensure the identification of emerging concentration risks and adverse movements in credit risk quality.
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24 Share capital and reserves | | | | | | | | | | | | | | | | | | | | Allotted, called upand fully paid | | | | Authorised | | | | | | | | | | | | | | | | | | | Ordinary shares of £1 | | | 1,678 | | | | 1,678 | | | | £2,250 | | | | £2,250 | | Non-cumulative preference shares of £1 | | | 140 | | | | 140 | | | | £1,000 | | | | £1,000 | | Non-cumulative preference shares of US$25 | | | 150 | | | | 150 | | | | $2,000 | | | | $2,000 | |
• | | | Allotted, called upand fully paid | | | | Authorised | | Number of shares – millions | | | | | | | | | | | | | | | | | Ordinary shares of £1 | | | 1,678 | | | | 1,678 | | | | 2,250 | | | | 2,250 | | Non-cumulative preference shares of £1 | | | 140 | | | | 140 | | | | 1,000 | | | | 1,000 | | Non-cumulative preference shares of US$25 | | | 12 | | | | 12 | | | | 80 | | | | 80 | |
| Stress testing: stress testing forms an integral part of portfolio analysis, providing a measure of potential vulnerability to exceptional but plausible economic and geopolitical events which assists management in the identification of risk not otherwise apparent in more benign circumstances. Stress testing informs risk appetite decisions.
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Ordinary shares and preference shares
During the year the Bank issued 935 new ordinary shares of £1 each to the parent company at £1 million per share.
The 9% non-cumulative preference shares Series A of £1 each are non-redeemable.
The non-cumulative preference shares Series C of US$25 each carry the right to a gross dividend of 8.625% inclusive of associated tax credit. They are redeemable at the option of the Bank at US$25 per share.
The holders of sterling and dollar preference shares are entitled, on the winding-up of the Bank, to priority over the ordinary shareholders as regards payment of capital. Otherwise the holders of preference shares are not entitled to any further participation in the profits or assets of the Bank and accordingly these shares are classified as non-equity shares.
The holders of sterling and dollar preference shares are not entitled to receive notice of, attend, or vote at any general meeting unless the business of the meeting includes the consideration of a resolution for the winding-up of the Bank or the sale of the whole of the business of the Bank or any resolution directly affecting any of the special rights or privileges attached to any of the classes of preference shares.
Under IFRS, the Group’s preference shares are classified as debt and are included in subordinated liabilities on the balance sheet (see Note 22).
Reserves
UK law prescribes that only reserves of the Bank are taken into account for the purpose of making distributions and the permissible applications of the share premium account and capital redemption reserve of £426 million (2008 – £426 million) included within other reserves.
The Group optimises capital efficiency by maintaining reserves in subsidiaries, including regulated entities. Certain preference shares and subordinated debt are also included within regulatory capital. The remittance of reserves to the parent or the redemption of shares or subordinated capital by regulated entities may be subject to maintaining the capital resources required by the relevant regulator. | Portfolio management: active management of portfolio concentrations as measured by risk reporting and stress testing, where credit risk may be mitigated through promoting asset sales, buying credit protection or curtailing risk appetite for new transactions.
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Notes on the accounts continued
| Credit stewardship: customer transaction monitoring and management is a continuous process, ensuring performance is satisfactory and that documentation, security and valuations are complete and up to date.
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| Problem debt identification: policies and systems encourage the early identification of problems and the employment of specialised staff focused on collections and problem debt management.
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25 Leases | | | | | | | | | | | | | | | | | | | | Minimum amounts receivable under non-cancellable leases: | | | | | | | | | | | | Group | | | | Finance lease contracts | | Year in which receipt will occur | | | | | | | | | | 2009 | | | | | | | | | | Receivable: | | | | | | | | | | Within 1 year | | | 167 | | | | (13 | ) | | | 154 | | After 1 year but within 5 years | | | 58 | | | | (16 | ) | | | 42 | | After 5 years | | | 109 | | | | (43 | ) | | | 66 | | Total | | | 334 | | | | (72 | ) | | | 262 | |
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| Provisioning: independent assessment using best practice models for collective and latent loss. Professional evaluation is applied to individual cases, to ensure that such losses are comprehensively identified and adequately provided for.
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2008 | | | | | | | | | | Receivable: | | | | | | | | | | Within 1 year | | | 65 | | | | (19 | ) | | | 46 | | After 1 year but within 5 years | | | 203 | | | | (35 | ) | | | 168 | | After 5 years | | | 152 | | | | (61 | ) | | | 91 | | Total | | | 420 | | | | (115 | ) | | | 305 | |
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| Recovery: maximising the return to the Group through the recovery process.
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| | Group | | | Bank | | | | | | | | | | | | | | | Amounts recognised as income and expenses | | | | | | | | | | | | | Finance leases – contingent rental income | | | (2 | ) | | | (1 | ) | | | (1 | ) | | | (1 | ) | Operating leases – minimum rentals payable | | | 141 | | | | 112 | | | | 88 | | | | 85 | |
The Group provides asset finance to its customers through acting as a lessor. It purchases plant, equipment and intellectual property; renting them to customers under lease arrangements that, depending on their terms, qualify as either operating or finance leases. Notes on the accounts
26 Collateral and securitisations Securities repurchase agreements and lending transactions The Group enters into securities repurchase agreements and securities lending transactions under which it receives or transfers collateral in accordance with normal market practice. Generally, the agreements require additional collateral to be provided if the value of the securities fall below a predetermined level.
Under standard terms for repurchase transactions in the UK and US markets, the recipient of collateral has an unrestricted right to sell or repledge it, subject to returning equivalent securities on settlement of the transaction.
The fair value (and carrying value) of securities transferred under repurchase transactions included within debt securities on the balance sheet were £30.6 billion (2008 – £33.8 billion). All of these securities could be sold or repledged by the holder. Securities received as collateral under reverse repurchase agreements amounted to £17.2 billion (2008 – £9.1 billion), of which £17.2 billion (2008 – £9.1 billion) had been resold or repledged as collateral for the Group’s own transactions. | | | Group | | | | Bank | Group assets pledged against Group liabilities | | | | | | | | | | | | | | | | | Loans and advances to customers | | | 30,052 | | | | 8,668 | | | | 15,201 | | | | 1,465 | |
Liabilities secured by Group assets Deposits by banks | | | 1,749 | | | | — | | | | — | | | | — | | Customer accounts | | | 630 | | | | 990 | | | | 630 | | | | 990 | | Debt securities in issue | | | 3,857 | | | | 7,042 | | | | — | | | | — | | | | | 6,236 | | | | 8,032 | | | | 630 | | | | 990 | |
Note: Credit risk models
Credit risk models are(1) | The table above includes assets used throughout the Group to support the analytical elements of the credit risk management framework, in particular the risk assessment part of the credit approval process, ongoing monitoring as well as portfolio analysis and reporting. Credit risk models used by the Group can be broadly grouped into three categories.collateral for central bank liquidity schemes |
Of the assets above, £16.3 billion (2008 – £15.2 billion) relate to securitisations. Securitisations and other asset transfers Continued recognition The Group arranges securitisations to facilitate client transactions and undertakes securitisations to sell financial assets or to fund specific portfolios of assets. The Group also acts as an underwriter and depositor in securitisation transactions involving both client and proprietary transactions. In a securitisation, assets, or interests in a pool of assets, are transferred generally to a special purpose entity (SPE) which then issues liabilities to third party investors. SPEs are vehicles established for a specific, limited purpose, usually do not carry out a business or trade and typically have no employees. They take a variety of legal forms – trusts, partnerships and companies – and fulfil many different functions. It is primarily the extent of risks and rewards assumed that determines whether these entities are consolidated in the Group’s financial statements. The following section aims to address the significant exposures which arise from the Group’s activities through specific types of SPEs.
The table below sets out the asset categories together with the carrying amounts of the assets and associated liabilities for those securitisations and other asset transfers where substantially all the risks and rewards of the asset have been retained by the Group. | | | 2009 | | | | 2008 | | Asset type | | | | | | | | | | | | | | | | | Residential mortgages | | | 14,540 | | | | 3,507 | | | | 13,384 | * | | | 6,693 | | Credit card receivables | | | 1,449 | | | | 630 | | | | 1,465 | | | | 990 | | Other loans | | | 349 | | | | 349 | | | | 349 | | | | 349 | | | | | 16,338 | | | | 4,486 | | | | 15,198 | | | | 8,032 | |
* revised Continuing involvement At 31 December 2009, securitised assets were £3.1 billion (2008 – £323 million); retained interest £101 million (2008 – £50 million); subordinated assets £91 million (2008 – £9 million); and related liabilities £33 million (2008 – £9 million). Notes on the accounts continued •
| Probability of default (“PD”): the likelihood that a customer will fail to make full and timely repayment of credit obligations over a one year time horizon. Customers are assigned an internal credit grade which corresponds to probability of default. Every customer credit grade across all grading scales in the Group can be mapped to a Group level credit grade (see page 75).
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| Exposure at default (“EAD”):such models estimate the expected level of utilisation of a credit facility at the time of a borrower’s default. The EAD is typically higher than the current utilisation (e.g. in the case where further drawings are made on a revolving credit facility prior to default) but will not typically exceed the total facility limit.
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| Loss given default (“LGD”):models estimate the economic loss that may occur in the event of default, being the debt that cannot be recovered. The Group’s LGD models take into account the type of borrower, facility and any risk mitigation such as security or collateral held.
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Impairment loss provision methodology
Provisions for impairment losses are assessed under three categories as described below:
Individually assessed provisions are the provisions required for individually significant impaired assets which are assessed on a case-by-case basis, taking into account the financial condition of the counterparty and any guarantor. This incorporates an estimate of the discounted value of any recoveries and realisation of security or collateral. The asset continues to be assessed on an individual basis until it is repaid in full, transferred to the performing portfolio or written-off.
Collectively assessed provisions are the provisions on impaired credits below an agreed threshold which are assessed on a portfolio basis, to reflect the homogeneous nature of the assets, such as credit cards or personal loans. The provision is determined from a quantitative review of the relevant portfolio, taking account of the level of arrears, security and average loss experience over the recovery period.
Latent loss provisions are the provisions held against the estimated impairment in the performing portfolio which has yet to be identified as at the balance sheet date. To assess the latent loss within the portfolio, the Group has developed methodologies to estimate the time that an asset can remain impaired within a performing portfolio before it is identified and reported as such.
Provision analysis
The Group’s consumer portfolios, which consist of small value, high volume credits, have highly efficient, largely automated processes for identifying problem credits and very short timescales, typically three months, before resolution or adoption of various recovery methods.
Corporate portfolios consist of higher value, lower volume credits, which tend to be structured to meet individual customer requirements. Provisions are assessed on a case by case basis by experienced specialists, with input from professional valuers and accountants as appropriate. The Group operates a provisions governance framework which sets thresholds whereby suitable oversight and challenge is undertaken. These opinions and levels of provision are overseen by each division’s Provision Committee. Significant cases are presented to, and challenged by, the Group Problem Exposure Review Forum.
Early and active management of problem exposures ensures that credit losses are minimised. Specialised units are used for different customer types to ensure that the appropriate risk mitigation is taken in a timely manner.
Portfolio provisions are reassessed regularly as part of the Group’s ongoing monitoring process.
Notes on the accounts continued
29 Risk management (continued)
Liquidity risk
The Group’s liquidity policy is designed to ensure that it can at all times meet its obligations as they fall due.
Liquidity management within the Group focuses on both overall balance sheet structure and the control, within prudent limits, of risk arising from the mismatch of maturities across the balance sheet and from exposure to undrawn commitments and other contingent obligations. The management of liquidity risk within the Group is undertaken within limits and other policy parameters set by GALCO. Compliance is monitored and coordinated by Group Treasury both in respect of internal policy and the regulatory requirements of the Financial Services Authority. In addition, all subsidiaries and branches outside the UK ensure compliance with any local regulatory liquidity requirements and are subject to Group Treasury oversight.
Diversification of funding sources
The structure of the Group’s balance sheet is managed to maintain substantial diversification, to minimise concentration across its various deposit sources, and to limit the reliance on total short-term wholesale sources of funds (gross and net of repos) within prudent levels.
Management of term structure
The Group evaluates on a regular basis its structural liquidity risk and applies a variety of balance sheet management and term funding strategies to maintain this risk within its normal policy parameters.
The degree of maturity mismatch within the overall long-term structure of the Group’s assets and liabilities is managed within internal policy guidelines, to ensure that term asset commitments may be funded on an economic basis over their life. In managing its overall term structure, the Group analyses and takes into account the effect of retail and corporate customer behaviour on actual asset and liability maturities where they differ materially from the underlying contractual maturities.
Stress testing
The Group performs stress tests to simulate how events may impact the Groups’ funding and liquidity capabilities. Such tests inform the overall balance sheet structure and help define prudent limits for control of the risk arising from the mismatch of maturities across the balance sheet and from undrawn commitments and other contingent obligations. The nature of stress tests is kept under review in line with evolving market conditions.
Daily management
The short-term maturity structure of the Group’s liabilities and assets is managed daily to ensure that all material or potential cash flow obligations arising from undrawn commitments and other contingent obligations, can be met. Potential sources include cash inflows from maturing assets, new borrowing or the sale or repurchase of debt securities held (after allowing for appropriate haircuts).
Short-term liquidity risk is generally managed on a consolidated basis with internal liquidity mismatch limits set for all subsidiaries and non-UK branches which have material local treasury activities, thereby assuring that the daily maintenance of the Group’s overall liquidity risk position is not compromised.
The following tables show cash flows payable on financial liabilities up to a period of 20 years including future payments of interest.
| | NatWest Group | | | 0-3 months | | | 3-12 months | | | 1-3 years | | | 3-5 years | | | 5-10 years | | | 10-20 years | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Deposits by banks | | | 24,056 | | | | 2,489 | | | | 808 | | | | 270 | | | | 138 | | | | 3 | | Customer accounts | | | 184,228 | | | | 2,881 | | | | 2,515 | | | | 893 | | | | 252 | | | | 81 | | Debt securities in issue | | | 9,074 | | | | 2,769 | | | | 4,455 | | | | 4,208 | | | | 1,460 | | | | — | | Subordinated liabilities | | | 102 | | | | 985 | | | | 1,807 | | | | 542 | | | | 2,145 | | | | 1,622 | | Settlement balances and other liabilities | | | 2,983 | | | | — | | | | — | | | | — | | | | 1 | | | | 2 | | | | | 220,443 | | | | 9,124 | | | | 9,585 | | | | 5,913 | | | | 3,996 | | | | 1,708 | | | | | | | | | | | | | | | | | | | | | | | | | | | 2006 | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | 35,648 | | | | 2,450 | | | | 687 | | | | 416 | | | | 465 | | | | — | | Customer accounts | | | 169,142 | | | | 1,579 | | | | 1,711 | | | | 284 | | | | 170 | | | | 8 | | Debt securities in issue | | | 6,366 | | | | 2,127 | | | | 1,929 | | | | 1,823 | | | | 2,748 | | | | 571 | | Subordinated liabilities | | | 145 | | | | 255 | | | | 1,314 | | | | 1,567 | | | | 1,578 | | | | 2,072 | | Settlement balances and other liabilities | | | 3,383 | | | | — | | | | — | | | | 3 | | | | — | | | | — | | | | | 214,684 | | | | 6,411 | | | | 5,641 | | | | 4,093 | | | | 4,961 | | | | 2,651 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bank | | | | 0-3 months | | | 3-12 months | | | 1-3 years | | | 3-5 years | | | 5-10 years | | | 10-20 years | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Deposits by banks | | | 5,123 | | | | 91 | | | | 353 | | | | 7 | | | | 84 | | | | — | | Customer accounts | | | 130,693 | | | | 393 | | | | 1,344 | | | | 111 | | | | — | | | | — | | Debt securities in issue | | | — | | | | 9 | | | | — | | | | — | | | | — | | | | — | | Derivatives held for hedging | | | 1 | | | | 4 | | | | 11 | | | | 6 | | | | 9 | | | | 12 | | Subordinated liabilities | | | 62 | | | | 685 | | | | 1,184 | | | | 340 | | | | 1,074 | | | | 1,622 | | | | | 135,879 | | | | 1,182 | | | | 2,892 | | | | 464 | | | | 1,167 | | | | 1,634 | | 2006 | | Deposits by banks | | | 5,284 | | | | 119 | | | | 286 | | | | 179 | | | | 317 | | | | — | | Customer accounts | | | 123,433 | | | | 291 | | | | 1,334 | | | | — | | | | 19 | | | | — | | Debt securities in issue | | | — | | | | 21 | | | | 9 | | | | — | | | | — | | | | — | | Derivatives held for hedging | | | — | | | | 5 | | | | 21 | | | | 12 | | | | 21 | | | | 24 | | Subordinated liabilities | | | 68 | | | | 200 | | | | 1,061 | | | | 1,197 | | | | 1,233 | | | | 1,869 | | | | | 128,785 | | | | 636 | | | | 2,711 | | | | 1,388 | | | | 1,590 | | | | 1,893 | |
The tables above show the timing of cash outflows to settle financial liabilities. They have been prepared on the following basis:
Prepayable liabilities – where a financial liability can be prepaid by the counterparty, the cash outflow has been included at the earliest date on which the counterparty can require repayment regardless of whether or not such early repayment results in a penalty. If the repayment of a financial liability is triggered by, or is subject to, specific criteria such as market price hurdles being reached, it is included at the earliest possible date that the conditions could be fulfilled without considering the probability of the conditions being met. For example, if a structured note is automatically prepaid when an equity index exceeds a certain level, the cash outflow will be included in the less than three months period whatever the level of the index at the year end. The settlement date of debt securities in issue issued by certain securitisation vehicles consolidated by the Bank depends on when cash flows are received from the securitised assets. Where these assets are prepayable, the timing of the cash outflow relating to securities assumes that each asset will be prepaid at the earliest possible date.
Notes on the accounts continued
29 Risk management (continued)
Liabilities with a contractual maturity of greater than 20 years –the principal amounts of financial liabilities that are repayable after 20 years or where the counterparty has no right to repayment of the principal are excluded from the table as are interest payments after 20 years.
Held-for-trading liabilities – held-for-trading liabilities amounting to £48.3 billion (2006 – £39.1 billion) (Bank £2.1 billion (2006 –£1.6 billion)) have been excluded from the table in view of their short term nature.
Financial assets held by the NatWest Group to meet these cash outflows include cash, balances at central banks and treasury bills of £3.4 billion (2006 – £1.8 billion), loans to banks and customers of £260.4 billion (2006 – £244.0 billion) including £163.7 billion (2006 – £150.0 billion) repayable within three months. The Natwest Group also held debt securities with a market value of £35.9 billion (2006 – £32.3 billion) of which £32.0 billion (2006 – £29.3 billion) were pledged to secure liabilities. Funds can be raised in the short-term from highly liquid securities held by the NatWest Group by sale or by disposal or by sale and repurchase transactions regardless of their stated maturity.
As explained above the table is prepared on the basis that prepayable liabilities are called at the earliest possible date. In practice, the average maturity of these liabilities significantly exceeds that shown in the table. In addition, although many customer accounts are contractually repayable on demand or at short notice, the short-term deposit base of the Bank and its subsidiaries is stable over the long term as deposit rollovers and new deposits offset cash outflows.
Other contractual cash obligations
Other contractual obligations are summarised by payment date in the tables below.
| | NatWest Group | | | 0-3 months | | | 3-12 months | | | 1-3 years | | | 3-5 years | | | 5-10 years | | | 10-20 years | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Operating leases | | | 27 | | | | 81 | | | | 189 | | | | 173 | | | | 354 | | | | 663 | | Contractual obligations to purchase goods or services | | | 23 | | | | 88 | | | | 3 | | | | — | | | | — | | | | — | | | | | 50 | | | | 169 | | | | 192 | | | | 173 | | | | 354 | | | | 663 | | 2006 | | Operating leases | | | 22 | | | | 65 | | | | 157 | | | | 136 | | | | 260 | | | | 448 | | Contractual obligations to purchase goods or services | | | 4 | | | | 11 | | | | 1 | | | | — | | | | — | | | | — | | | | | 26 | | | | 76 | | | | 158 | | | | 136 | | | | 260 | | | | 448 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bank | | | | 0-3 months | | | 3-12 months | | | 1-3 years | | | 3-5 years | | | 5-10 years | | | 10-20 years | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Operating leases | | | 20 | | | | 59 | | | | 146 | | | | 137 | | | | 278 | | | | 525 | | 2006 | | Operating leases | | | 17 | | | | 52 | | | | 125 | | | | 114 | | | | 209 | | | | 316 | |
Undrawn formal facilities, credit lines and other commitments to lend were £76,116 million (2006 – £74,918 million) for the NatWest Group. Undrawn formal facilities, credit lines and other commitments to lend for the Bank were £55,411 million (2006 – £57,240 million). While commitments have been given to provide these funds, some may be subject to certain conditions being met by the counterparty. Not all facilities are expected to be drawn, and some may lapse before drawdown.
Market risk
Market risk is defined as the risk of loss resulting from adverse changes in risk factors including interest rates, foreign currency and equity prices together with related factors such as market volatilities.
The Group is exposed to market risk because of positions held in its trading portfolios as well as its non-trading business including the Group’s treasury operations.
Value-at-risk (“VaR”)
VaR is a technique that produces estimates of the potential negative change in the market value of a portfolio over a specified time horizon at given confidence levels. For internal risk management purposes, the Group’s VaR assumes a time horizon of one day and a confidence level of 95%. The Group uses historical simulation models in computing VaR. This approach, in common with many other VaR models, assumes that risk factor changes observed in the past are a good estimate of those likely to occur in the future and is, therefore, limited by the relevance of the historical data used. The Group’s method, however, does not make any assumption about the nature or type of underlying loss distribution. The Group typically uses the previous 500 trading days of market data.
The Group’s VaR should be interpreted in light of the limitations of the methodology used. These limitations include: 27 Capital resources The Group’s regulatory capital resources at 31 December in accordance with Financial Services Authority (FSA) definitions were as follows:
• Composition of regulatory capital | | | | | | | Tier 1 | | | | | | | Ordinary shareholders’ equity | | | 14,199 | | | | 12,135 | | Minority interests | | | 1,282 | | | | 1,323 | | Adjustment for: | | | | | | | | | – Goodwill and other intangible assets | | | (748 | ) | | | (815 | ) | – Unrealised losses on available-for-sale debt securities | | | (12 | ) | | | 32 | | – Reserves arising on revaluation of property and unrealised gains on available-for-sale equities | | | (109 | ) | | | (14 | ) | – Reallocation of preference shares and innovative securities | | | (1,207 | ) | | | (1,246 | ) | – Other regulatory adjustments | | | (492 | ) | | | 17 | | Less expected loss over provisions | | | (1,351 | ) | | | (986 | ) | Less securitisation positions | | | (380 | ) | | | (112 | ) | Core Tier 1 capital | | | 11,182 | | | | 10,334 | | | | | | | | | | | Preference shares | | | 1,532 | | | | 1,591 | | Tax on the excess of expected losses over provisions | | | 539 | | | | 393 | | Less deductions from Tier 1 capital | | | (327 | ) | | | (330 | ) | Total Tier 1 capital | | | 12,926 | | | | 11,988 | | | | | | | | | | | Tier 2 | | | | | | | | | Reserves arising on revaluation of property and unrealised gains on available-for-sale equities | | | 109 | | | | 14 | | Collective impairment allowances | | | 3 | | | | 5 | | Perpetual subordinated debt | | | 2,170 | | | | 3,043 | | Term subordinated debt | | | 4,830 | | | | 4,234 | | Less deductions from Tier 2 capital | | | (2,598 | ) | | | (1,821 | ) | Total Tier 2 capital | | | 4,514 | | | | 5,475 | | | | | | | | | | | Supervisory deductions | | | | | | | | | Unconsolidated investments | | | (121 | ) | | | (119 | ) | Other deductions | | | (170 | ) | | | (171 | ) | Deductions from total capital | | | (291 | ) | | | (290 | ) | Total regulatory capital | | | 17,149 | | | | 17,173 | |
In the management of capital resources, the Group is governed by the RBS Group’s policy which is to maintain a strong capital base, to expand it as appropriate and to utilise it efficiently throughout its activities to optimise the return to shareholders while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, the RBS Group has regard to the supervisory requirements of the FSA. The FSA uses Risk Asset Ratio (RAR) as a measure of capital adequacy for UK banks, comparing a bank’s capital resources with its risk-weighted assets (the assets and off-balance sheet exposures are ‘weighted’ to reflect the inherent credit and other risks); by international agreement, the RAR should be not less than 8% with a tier 1 component of not less than 4%. The RBS Group has complied with the FSA’s capital requirements throughout the year. | Historical data may not provide the best estimate of the joint distribution of risk factor changes in the future and may fail to capture the risk of possible extreme adverse market movements which have not occurred in the historical window used in the calculations.
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A number of subsidiaries and sub-groups within the Group, principally banking entities, are subject to various individual regulatory capital requirements in the UK and overseas. | VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day.
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| VaR using a 95% confidence level does not reflect the extent of potential losses beyond that percentile. |
The Group largely computes the VaR of trading portfolios at the close of business and positions may change substantially during the course of the trading day. Further controls are in place to limit the Group’s intra-day exposure; such as the calculation of the VaR for selected portfolios. These limitations and the nature of the VaR measure mean that the Group cannot guarantee that losses will not exceed the VaR amounts indicated.
The Group calculates both general market risk (i.e. the risk due to movement in general benchmark) and idiosyncratic market risk (i.e. the risk due to movements in the value of securities by reference to specific issuers) using its VaR models.
Trading
The primary focus of the Group’s trading activities is client facilitation – providing products to the Group’s client base at competitive prices. The Group also undertakes: market making – quoting firm bid (buy) and offer (sell) prices with the intention of profiting from the spread between the quotes; arbitrage –entering into offsetting positions in different but closely related markets in order to profit from market imperfections; and proprietary activity – taking positions in financial instruments as principal in order to take advantage of anticipated market conditions. The principal risk factors are interest rates, credit spreads, equity prices and foreign exchange. Financial instruments held in the Group’s trading portfolios include, but are not limited to, debt securities, loans, deposits, equity shares, securities sale and repurchase agreements and derivative financial instruments (futures, forwards, swaps and options). For a discussion of the Group’s accounting policies for derivative financial instruments, see Accounting policies.
The VaR for NatWest Group’s trading portfolios segregated by type of market risk exposure, including idiosyncratic risk, is presented in the table below.
| | 2007 | | 2006 | | | Average | | | Period end | | | Maximum | | | Minimum | | | Average | | | Period end | | | Maximum | | | Minimum | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Interest rate | | | 5.9 | | | | 4.8 | | | | 9.6 | | | | 3.1 | | | | 5.1 | | | | 5.7 | | | | 8.3 | | | | 3.5 | | Credit spread | | | 9.9 | | | | 11.6 | | | | 30.4 | | | | 4.6 | | | | 5.6 | | | | 5.9 | | | | 7.1 | | | | 4.1 | | Currency | | | 0.3 | | | | 0.4 | | | | 1.0 | | | | — | | | | 0.5 | | | | 0.3 | | | | 1.6 | | | | — | | Equity and commodity | | | 1.0 | | | | 0.1 | | | | 2.8 | | | | — | | | | 0.6 | | | | 0.8 | | | | 4.2 | | | | — | | Diversification | | | | | | | (3.9 | ) | | | | | | | | | | | | | | | (5.4 | ) | | | | | | | | | Total trading VaR | | | 11.8 | | | | 13.0 | | | | 32.0 | | | | 6.8 | | | | 6.8 | | | | 7.3 | | | | 9.0 | | | | 4.9 | |
Non-trading
The principal market risks arising from the Group’s non-trading activities are interest rate risk, currency risk and equity risk.
Treasury activity and mismatches between the repricing of assets and liabilities in its retail and commercial banking operations account for most of the non-trading interest rate risk. Non-trading currency risk derives from the Group’s investments in overseas subsidiaries, associates and branches. The Group’s portfolios of non-trading financial instruments mainly comprise loans (including finance leases), debt securities, equity shares, deposits, certificates of deposits and other debt securities issued, loan capital and derivatives.
Non-trading interest rate VaR
Non-trading interest rate VaR for NatWest Group’s treasury and retail and commercial banking activities was £27.6 million at 31 December 2007 (2006 – £24.6 million). During the year, the maximum VaR was £27.6 million (2006 – £28.8 million), the minimum £21.6 million (2006 – £24.6 million) and the average £24.5 million (2006 – £27.1 million).
Notes on the accounts continued
29 Risk management (continued)
Interest rate risk
Non-trading interest rate risk arises from the Group’s treasury activities and retail and commercial banking businesses.
Treasury
The Group’s treasury activities include its money market business and the management of internal funds flow within the Group’s businesses. Money market portfolios include cash instruments (principally debt securities, loans and deposits) and related hedging derivatives.
Retail and commercial banking
Non-trading interest rate risk is calculated in each business on the basis of establishing the repricing behaviour of each asset, liability and off-balance sheet product. For many products, the actual interest rate repricing characteristics differ from the contractual repricing. In most cases, the repricing maturity is determined by the market interest rate that most closely fits the historical behaviour of the product interest rate. For non-interest bearing current accounts, the repricing maturity is determined by the stability of the portfolio. The repricing maturities used are approved by Group Treasury and divisional asset and liability committees at least annually. Key conventions are reviewed annually by GALCO.
A static maturity gap report is produced as at the month-end for each division, in each functional currency based on the behaviouralised repricing for each product. It is Group policy to include in the gap report, non-financial assets and liabilities, mainly property, plant and equipment and the Group’s capital and reserves, spread over medium and longer term maturities. This report also includes hedge transactions, principally derivatives.
Any residual non-trading interest rate exposures are controlled by limiting repricing mismatches in the individual business balance sheets. Potential exposures to interest rate movements in the medium to long term are measured and controlled using a version of the same VaR methodology that is used for the Group’s trading portfolios but without discount factors. Net accrual income exposures are measured and controlled in terms of sensitivity over time to movements in interest rates.
Risk is managed within limits approved by GALCO through the execution of cash and derivative instruments. Execution of the hedging is carried out by the relevant division through the Group’s treasury function. The residual risk position is reported to divisional asset and liability committees, GALCO and the Board.
Currency risk
The Group does not maintain material non-trading open currency positions other than the structural foreign currency translation exposures arising from its investments in foreign subsidiaries and associated undertakings and their related currency funding. The Group’s policy in relation to structural positions is to match fund the structural foreign currency exposure arising from net asset value, including goodwill, in foreign subsidiaries, equity accounted investments and branches, except where doing so would materially increase the sensitivity of either the Group’s or the subsidiary’s regulatory capital ratios to currency movements. The policy requires structural foreign exchange positions to be reviewed regularly by GALCO. Foreign exchange differences arising on the translation of foreign operations are recognised directly in equity together with the effective portion of foreign exchange differences arising on hedging instruments.
The table below sets out NatWest Group’s structural foreign currency exposures.
| | 2007 | | | 2006 | | | | Net investments in foreign operations | | | Related currency borrowings | | | Structured foreign currency exposures | | | Net investments in foreign operations | | | Related currency borrowings | | | Structured foreign currency exposures | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | US dollar | | | 2,786 | | | | 2,681 | | | | 105 | | | | 3,022 | | | | 2,936 | | | | 86 | | Euro | | | 3,116 | | | | 894 | | | | 2,222 | | | | 2,622 | | | | 455 | | | | 2,167 | | Swiss franc | | | 563 | | | | — | | | | 563 | | | | 462 | | | | 457 | | | | 5 | | Other non-sterling | | | 7 | | | | 7 | | | | — | | | | 6 | | | | 4 | | | | 2 | | | | | 6,472 | | | | 3,582 | | | | 2,890 | | | | 6,112 | | | | 3,852 | | | | 2,260 | |
The structural foreign currency exposure in euros is principally due to Ulster Bank running an open structural foreign exchange position to minimise the sensitivity of its capital ratios to possible movements in the Euro exchange rate against Sterling.
At 31 December 2007 and 31 December 2006, NatWest Group had no net investment hedge relationships. The table above shows net investments in foreign operations and related currency borrowings. These borrowings do not qualify as hedges and gains or losses on their retranslation are taken to profit or loss: a five percent strengthening of foreign currencies would result in a loss of £179 million (2006 – £193 million) and a five percent weakening of foreign currencies would result in a gain of £171 million (2006 – £183 million). Gains or losses on retranslating net investments in foreign operations are taken to equity: a five percent strengthening of foreign currencies would result in a gain of £324 million (2006 – £306 million) and a five percent weakening of foreign currencies would result in a loss of £308 million (2006 – £291 million).
30 Capital resources
The Group’s regulatory capital resources at 31 December in accordance with Financial Services Authority (“FSA”) definitions were as follows:
| | 2007 | | | 2006 | | Composition of regulatory capital | | | £m | | | | £m | | Tier 1 capital: | | | | | | | | | Shareholders' funds and minority interests | | | 12,083 | | | | 11,147 | | Subordinated liabilities | | | 285 | | | | 288 | | Goodwill capitalised and intangible assets | | | (1,244 | ) | | | (1,209 | ) | Pension deficit and other regulatory adjustments | | | 890 | | | | 1,074 | | Total qualifying tier 1 capital | | | 12,014 | | | | 11,300 | | | | | | | | | | | Tier 2 capital: | | | | | | | | | Unrealised gains on available-for-sale equities | | | 19 | | | | 38 | | Collective impairment allowances, net of taxes | | | 1,430 | | | | 1,254 | | Qualifying subordinated debt | | | 4,044 | | | | 4,043 | | Total qualifying tier 2 capital | | | 5,493 | | | | 5,335 | | | | | | | | | | | Supervisory deductions: | | | | | | | | | Unconsolidated investments | | | 729 | | | | 660 | | Other deductions | | | 625 | | | | 1,272 | | Total supervisory deductions | | | 1,354 | | | | 1,932 | | Total regulatory capital | | | 16,153 | | | | 14,703 | |
In the management of capital resources, the Group is governed by RBS Group’s policy which is to maintain a strong capital base, to expand it as appropriate and to utilise it efficiently throughout its activities to optimise the return to shareholders while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, the Group has regard to the supervisory requirements of the FSA. The FSA uses Risk Asset Ratio (“RAR”) as a measure of capital adequacy in the UK banking sector, comparing a bank’s capital resources with its risk-weighted assets (the assets and off-balance sheet exposures are ‘weighted’ to reflect the inherent credit and other risks); by international agreement, the RAR should be not less than 8% with a tier 1 component of not less than 4%. The Group has complied with the FSA’s capital requirements throughout the year.
A number of subsidiaries and sub-groups within the Group, principally banking entities, are subject to various individual regulatory capital requirements in the UK and overseas.
Notes on the accounts continued
31 Memorandum items
Contingent liabilities and commitments
The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31 December. Although the Group is exposed to credit risk in the event of non-performance of the obligations undertaken by customers, the amounts shown do not, and are not intended to, provide any indication of the Group’s expectation of future losses.
| | Group | | | Bank | | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | | | | £m | | | | £m | | | | £m | | | | £m | | Contingent liabilities: | | | | | | | | | | | | | | | | | Guarantees and assets pledged as collateral security | | | 2,438 | | | | 2,272 | | | | 1,811 | | | | 1,895 | | Other contingent liabilities | | | 2,907 | | | | 2,889 | | | | 2,141 | | | | 2,173 | | | | | 5,345 | | | | 5,161 | | | | 3,952 | | | | 4,068 | | Commitments: | | | | | | | | | | | | | | | | | Undrawn formal standby facilities, credit lines and other commitments to lend | | | | | | | | | | | | | | | | | – less than one year | | | 62,298 | | | | 58,611 | | | | 43,073 | | | | 42,086 | | – one year and over | | | 13,818 | | | | 16,307 | | | | 12,338 | | | | 15,154 | | Other commitments | | | 220 | | | | 181 | | | | 111 | | | | 100 | | | | | 76,336 | | | | 75,099 | | | | 55,522 | | | | 57,340 | |
Note:
Notes on the accounts
28 Memorandum items
Contingent liabilities and commitments
The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31 December. Although the Group is exposed to credit risk in the event of non-performance of the obligations undertaken by customers, the amounts shown do not, and are not intended to, provide any indication of the Group’s expectation of future losses. | | Group | | | Bank | | | | | | | | | | | | | | | | | | | | | Contingent liabilities: | | | | | | | | | | | | | | | | | | | Guarantees and assets pledged as collateral security | | | 2,494 | | | | 2,609 | | | | 2,438 | | | | 1,369 | | | | 1,840 | | | | 1,811 | | Other contingent liabilities | | | 2,241 | | | | 2,654 | | | | 2,907 | | | | 1,814 | | | | 2,032 | | | | 2,141 | | | | | 4,735 | | | | 5,263 | | | | 5,345 | | | | 3,183 | | | | 3,872 | | | | 3,952 | |
Commitments: | | | | | | | | | | | | | | | | | | | Undrawn formal standby facilities, credit lines and other commitments to lend | | | | | | | | | | | | | | | | | | | – less than one year | | | 44,203 | | | | 53,902 | | | | 62,298 | | | | 35,749 | | | | 38,954 | | | | 43,073 | | – one year and over | | | 12,996 | | | | 13,485 | | | | 13,818 | | | | 11,181 | | | | 9,194 | | | | 12,338 | | Other commitments | | | 397 | | | | 709 | | | | 220 | | | | 315 | | | | 627 | | | | 111 | | | | | 57,596 | | | | 68,096 | | | | 76,336 | | | | 47,245 | | | | 48,775 | | | | 55,522 | |
Note: (1) | In the normal course of business, the Bank guarantees specified third party liabilities of certain subsidiaries; it also gives undertakings that individual subsidiaries will fulfil their obligations to third parties under contractual or other arrangements. |
Banking commitments and contingent obligations, which have been entered into on behalf of customers and for which there are corresponding obligations from customers, are not included in assets and liabilities. The Group’s maximum exposure to credit loss, in the event of non-performance by the other party and where all counterclaims, collateral or security proves valueless, is represented by the contractual nominal amount of these instruments included in the table above. These commitments and contingent obligations are subject to the Group’s normal credit approval processes.
Contingent liabilities
Guarantees – the Group gives guarantees on behalf of customers. A financial guarantee represents an irrevocable undertaking that the Group will meet a customer’s obligations to third parties if the customer fails to do so. The maximum amount that the Group could be required to pay under a guarantee is its principal amount as disclosed in the table above. The Group expects most guarantees it provides to expire unused. Other contingent liabilities – these include standby letters of credit, supporting customer debt issues and contingent liabilities relating to customer trading activities such as those arising from performance and customs bonds, warranties, indemnities and acceptances.
Commitments
Commitments to lend – under a loan commitment the Group agrees to make funds available to a customer in the future. Loan commitments, which are usually for a specified term may be unconditionally cancellable or may persist, provided all conditions in the loan facility are satisfied or waived. Commitments to lend include commercial standby facilities and credit lines, liquidity facilities to commercial paper conduits and unutilised overdraft facilities.
Other commitments – these include documentary credits, which are commercial letters of credit providing for payment by the Group to a named beneficiary against presentation of specified documents, forward asset purchases, forward deposits placed and undrawn note issuance and revolving underwriting facilities, and other short-term trade related transactions. Notes on the accounts continued 28 Memorandum items continued Contractual obligations for future expenditure not provided in the accounts The following table shows contractual obligations for future expenditure not provided for in the accounts at the year end. | | Group | | | Bank | | | | | | | | | | | | | | | Operating leases: | | | | | | | | | | | | | Minimum rentals payable under non-cancellable leases (1) | | | | | | | | | | | | | Within 1 year | | | 115 | | | | 114 | | | | 82 | | | | 80 | | After 1 year but within 5 years | | | 393 | | | | 410 | | | | 281 | | | | 286 | | After 5 years | | | 866 | | | | 938 | | | | 632 | | | | 701 | | | | | 1,374 | | | | 1,462 | | | | 995 | | | | 1,067 | | Other capital expenditure | | | 2 | | | | 6 | | | | — | | | | — | | Contracts to purchase goods or services (2) | | | 21 | | | | 41 | | | | — | | | | — | | Total | | | 1,397 | | | | 1,509 | | | | 995 | | | | 1,067 | |
Notes: (1) | Predominantly property leases |
Banking commitments and contingent obligations,(2) | Of which have been entered into on behalf of customers and for which there are corresponding obligations from customers, are not included in assets and liabilities. The Group’s maximum exposure to credit loss, in the event of non-performance by the other party and where all counterclaims, collateral or security proves valueless, is represented by the contractual nominal amount of these instruments included in the table above. These commitments and contingent obligations are subject to the Group’s normal credit approval processes and any potential loss is taken into account in assessing provisions for bad and doubtful debts in accordance with the Group’s provisioning policy.due within 1 year: £17 million (2008 – £34 million). |
Trustee and other fiduciary activities
In its capacity as trustee or other fiduciary role, the Group may hold or place assets on behalf of individuals, trusts, companies, pension schemes and others. The assets and their income are not included in the Group’s financial statements. The Group earned fee income of £320 million (2008 – £385 million; 2007 – £409 million). The Bank earned fee income of £53 million (2008 – £58 million; 2007 – £62 million).
The Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS), the UK's statutory fund of last resort for customers of authorised financial services firms, pays compensation if a firm is unable to meet its obligations. The FSCS funds compensation for customers by raising management expenses levies and compensation levies on the industry. In relation to protected deposits, each deposit-taking institution contributes towards these levies in proportion to their share of total protected deposits on 31 December of the year preceding the scheme year (which runs from 1 April to 31 March), subject to annual maxima set by the Financial Services Authority (FSA). In addition, the FSCS has the power to raise levies (‘exit levies’) on firms who have ceased to participate in the scheme and are in the process of ceasing to be authorised for the amount that the firm would otherwise have been asked to pay during the relevant levy year. The FSCS also has the power to raise exit levies on such firms which look at their potential liability to pay levies in future years.
FSCS has borrowed from HM Treasury to fund the compensation costs associated with Bradford & Bingley, Heritable Bank, Kaupthing Singer & Friedlander, Landsbanki ‘Icesave’ and London Scottish Bank plc. These borrowings are on an interest-only basis until September 2011. The annual limit on the FSCS management expenses levy for the three years from September 2008 in relation to these institutions has been capped at £1 billion per annum. The FSCS will receive funds from asset sales, surplus cash flow, or other recoveries in relation to these institutions which will be used to reduce the principal amount of the FSCS's borrowings. Only after the interest only period, which is expected to end in September 2011, will a schedule for repayment of any remaining principal outstanding (after recoveries) on the borrowings be agreed between the FSCS and HM Treasury. It is expected that, from that point, the FSCS will begin to raise compensation levies (principal repayments). No provision has been made for these levies as the amount is not yet known and is unlikely to be determined before 2011.
Litigation
As a participant in the financial services industry, the Group operates in a legal and regulatory environment that exposes it to potentially significant litigation risks. As a result, the Bank and other members of the RBS Group are involved in various disputes and legal proceedings in the United Kingdom, the United States and other jurisdictions, including litigation. Such cases are subject to many uncertainties, and their outcome is often difficult to predict, particularly in the earlier stages of a case.
Other than as set out in this section, so far as the Group is aware, neither the Bank nor any member of the RBS Group is or has been engaged in or has pending or threatened any governmental, legal or arbitration proceedings which may have or have had in the recent past (covering the 12 months immediately preceding the date of this document) a significant effect on the Group’s financial position or profitability. Notes on the accounts
28 Memorandum items continued Unarranged overdraft charges In common with other banks in the United Kingdom, the Royal Bank and NatWest have received claims and complaints from a large number of customers in the United Kingdom seeking refunds of unarranged overdraft charges (the “Charges”). The vast majority of these claims and complaints have challenged the Charges on the basis that they contravene the Unfair Terms in Consumer Contracts Regulations 1999 (the “Regulations”) or are unenforceable under the common law penalty doctrine (or both).
In July 2007, the Office of Fair Trading (“OFT”) issued proceedings in a test case in the English High Court against the banks which was intended to determine certain issues concerning the legal status and enforceability of contractual terms relating to the Charges. The test case concluded in November 2009 with a judgment of the Supreme Court in favour of the banks. As a result of the court rulings made in the test case, the RBS Group expects substantially all of the customer claims and complaints it has received relating to the Charges to fail. The RBS Group cannot at this stage predict with any certainty the final outcome of all customer claims and complaints. It is unable reliably to estimate any liability that may arise as a result of or in connection with these matters or its effect on the Group’s consolidated net assets, operating results or cash flows in any particular period.
Shareholder litigation
The ultimate holding company and a number of its subsidiaries and certain individual officers and directors have been named as defendants in a class action filed in the United States District Court for the Southern District of New York. The consolidated amended complaint alleges certain false and misleading statements and omissions in public filings and other communications during the period 1 March 2007 to 19 January 2009, and variously asserts claims under Sections 11, 12 and 15 of the Securities Act 1933, Sections 10 and 20 of the Securities Exchange Act 1934 and Rule 10b-5 thereunder.
The putative class is composed of (1) all persons who purchased or otherwise acquired RBS Group securities between 1 March 2007 and 19 January 2009; and/or (2) all persons who purchased or otherwise acquired Series Q, R, S, T and/or U non-cumulative dollar preference shares issued pursuant or traceable to the 8 April 2005 SEC registration statement and were damaged thereby. Plaintiffs seek unquantified damages on behalf of the putative class.
RBS Group has also received notification of similar prospective claims in the United Kingdom and elsewhere but no court proceedings have been commenced in relation to these claims.
RBS Group considers that it has substantial and credible legal and factual defences to these claims and will defend them vigorously. The RBS Group is unable reliably to estimate the liability, if any, that might arise or its effect on the Group’s consolidated net assets, operating results or cash flows in any particular period.
Other securitisation and securities related litigation in the United States
RBS Group companies have been named as defendants in a number of purported class action and other lawsuits in the United States that relate to the securitisation and securities underwriting businesses. In general, the cases involve the issuance of mortgage backed securities, collateralised debt obligations, or public debt or equity where the plaintiffs have brought actions against the issuers and underwriters of such securities (including RBS Group companies) claiming that certain disclosures made in connection with the relevant offerings of such securities were false or misleading with respect to alleged “sub-prime” mortgage exposure. The RBS Group considers that it has substantial and credible legal and factual defences to these claims and will continue to defend them vigorously. The RBS Group cannot at this stage reliably estimate the liability, if any, that may arise as a result of or in connection with the these lawsuits, individually or in the aggregate, or their effect on the Group’s consolidated net assets, operating results or cash flows in any particular period.
Summary of other disputes, legal proceedings and litigation
Members of the RBS Group are engaged in other litigation in the United Kingdom and a number of overseas jurisdictions, including the United States, involving claims by and against them arising in the ordinary course of business. RBS Group has reviewed these other actual, threatened and known potential claims and proceedings and, after consulting with its legal advisers, does not expect that the outcome of these other claims and proceedings will have a material adverse effect on the Group’s financial position or profitability in any particular period.
Investigations
The RBS Group’s businesses and financial condition can be affected by the fiscal or other policies and other actions of various governmental and regulatory authorities in the United Kingdom, the European Union, the United States and elsewhere. The RBS Group has engaged, and will continue to engage, in discussions with relevant regulators, including in the United Kingdom and the United States, on an ongoing and regular basis informing them of operational, systems and control evaluations and issues as deemed appropriate or required, and it is possible that any matters discussed or identified may result in investigatory actions by the regulators, increased costs being incurred by the RBS Group, remediation of systems and controls, public or private censure or fines. Any of these events or circumstances could have a material adverse impact on Group, its business, reputation, results of operations or the price of securities issued by it.
In particular there is continuing political and regulatory scrutiny of the operation of the retail banking and consumer credit industries in the United Kingdom and elsewhere. The nature and impact of future changes in policies and regulatory action are not predictable and are beyond the RBS Group’s control but could have an adverse impact on the Group’s businesses and earnings. Notes on the accounts continued
28 Memorandum items continued
Retail banking
In the European Union, regulatory actions included an inquiry into retail banking initiated on 13 June 2005 in all of the then 25 member states by the European Commission’s Directorate General for Competition. The inquiry examined retail banking in Europe generally. On 31 January 2007, the European Commission announced that barriers to competition in certain areas of retail banking, payment cards and payment systems in the European Union had been identified. The European Commission indicated that it will consider using its powers to address these barriers and will encourage national competition authorities to enforce European and national competition laws where appropriate.
Multilateral interchange fees
In 2007, the European Commission issued a decision that while interchange is not illegal per se, MasterCard’s current multilateral interchange fee (“MIF”) arrangement for cross border payment card transactions with MasterCard and Maestro branded consumer credit and debit cards in the European Union are in breach of competition law. MasterCard was required by the decision to withdraw the relevant cross-border MIFs (i.e. set these fees to zero) by 21 June 2008.
MasterCard appealed against the decision to the European Court of First Instance on 1 March 2008, and the RBS Group has intervened in the appeal proceedings. In addition, in Summer 2008, MasterCard announced various changes to its scheme arrangements. The European Commission was concerned that these changes might be used as a means of circumventing the requirements of the infringement decision. In April 2009 MasterCard agreed an interim settlement on the level of cross-border MIF with the European Commission pending the outcome of the appeal process and, as a result, the European Commission has advised it will no longer investigate the non-compliance issue (although MasterCard is continuing with its appeal).
Visa’s cross-border MIFs were exempted in 2002 by the European Commission for a period of five years up to 31 December 2007 subject to certain conditions. On 26 March 2008, the European Commission opened a formal inquiry into Visa’s current MIF arrangements for cross border payment card transactions with Visa branded debit and consumer credit cards in the European Union and on 6 April 2009 the European Commission announced that it had issued Visa with a formal Statement of Objections. At the same time Visa announced changes to its interchange levels and introduced some changes to enhance transparency. There is no deadline for the closure of the inquiry.
In the UK, the OFT has carried out investigations into Visa and MasterCard domestic credit card interchange rates. The decision by the OFT in the MasterCard interchange case was set aside by the Competition Appeal Tribunal (the “CAT”) in June 2006. The OFT’s investigations in the Visa interchange case and a second MasterCard interchange case are ongoing. On 9 February 2007, the OFT announced that it was expanding its investigation into domestic interchange rates to include debit cards. In January 2010 the OFT advised that it did not anticipate issuing a Statement of Objections prior to the European Court’s judgment, although it has reserved the right to do so if it considers it appropriate.
The outcome of these investigations is not known, but they may have an impact on the consumer credit industry in general and, therefore, on the RBS Group’s business in this sector.
Payment protection insurance
Having conducted a market study relating to Payment Protection Insurance (“PPI”), on 7 February 2007 the OFT referred the PPI market to the Competition Commission (“CC”) for an in-depth inquiry. The CC published its final report on 29 January 2009 and announced its intention to order a range of remedies, including a prohibition on actively selling PPI at point of sale of the credit product (and for 7 days thereafter), a ban on single premium policies and other measures to increase transparency (in order to improve customers’ ability to search and improve price competition). Barclays Bank PLC subsequently appealed certain CC findings to the Competition Appeal Tribunal (“CAT”). On 16 October 2009, the CAT handed down a judgment quashing the ban on selling PPI at the point of sale of credit products and remitted the matter back to the CC for review. The CC’s current Administrative Timetable is to publish a supplementary report by Summer 2010 and give further consideration to its full range of recommended remedies and a draft order to implement them during Autumn 2010.
The FSA has been conducting a broad industry thematic review of PPI sales practices and in September 2008, the FSA announced that it intended to escalate its level of regulatory intervention. Substantial numbers of customer complaints alleging the mis-selling of PPI policies have been made to banks and to the FOS and many of these are being upheld by the FOS against the banks.
In September 2009, the FSA issued a consultation paper on guidance on the fair assessment of PPI mis-selling complaints and, where necessary, the provision of an appropriate level of redress. The consultation also covers proposed rules requiring firms to re-assess (against the new guidance) all PPI mis-selling complaints received and rejected since 14 January 2005. A policy statement containing final guidance and rules is expected in early 2010. Separately, discussions continue between the FSA and the RBS Group in respect of concerns expressed by the FSA over certain categories of historical PPI sales. 28 Memorandum items continued Personal current accounts On 16 July 2008, the OFT published the results of its market study into personal current accounts in the United Kingdom. The OFT found evidence of competition and several positive features in the personal current account market but believes that the market as a whole is not working well for consumers and that the ability of the market to function well has become distorted.
On 7 October 2009, the OFT published a follow-up report summarising the initiatives agreed between the OFT and personal current account providers to address the OFT’s concerns about transparency and switching, following its market study. Personal current account providers will take a number of steps to improve transparency, including providing customers with an annual summary of the cost of their account and making charges prominent on monthly statements. To improve the switching process, a number of steps are being introduced following work with BACS, the payment processor, including measures to reduce the impact on consumers of any problems with transferring direct debits.
On 22 December 2009, the OFT published a further report in which it stated that it continued to have significant concerns about the operation of the personal current account market in the United Kingdom, in particular in relation to unarranged overdrafts, and that it believed that fundamental changes are required for the market to work in the best interests of bank customers. The OFT stated that it would discuss these issues intensively with banks, consumer groups and other organisations, with the aim of reporting on progress by the end of March 2010.
Securitisation and collateralised debt obligation business
The New York State Attorney General has issued subpoenas to a wide array of participants in the securitisation and securities industry, focusing on the information underwriters obtained as part of the due diligence process from the independent due diligence firms. RBS Securities Inc. has produced documents requested by the New York State Attorney General, principally related to loans that were pooled into one securitisation transaction and will continue to cooperate with the investigation. More recently, the Massachusetts Attorney General has issued a subpoena to RBS Securities Inc. seeking information related to residential mortgage lending practices and sales and securitisation of residential mortgage loans. These respective investigations are in the early stages and therefore it is difficult to predict the potential exposure from any such investigation. The ultimate holding company and its subsidiaries are cooperating with these various investigations and requests.
Other investigations In the UK, the OFT has also been investigating the RBS Group for alleged conduct in breach of Article 101 of the Treaty on the Functioning of the European Union and/or the Chapter 1 prohibition of the Competition Act 1998 relating to the provision of loan products to professional services firms. The ultimate holding company and its subsidiaries are co-operating fully with the OFT’s investigation.
In April 2009 the FSA notified the RBS Group that it was commencing a supervisory review of the acquisition of ABN AMRO in 2007 and the 2008 capital raisings and an investigation into conduct, systems and controls within the Global Banking & Markets division of the RBS Group. The ultimate holding company and its subsidiaries are cooperating fully with this review and investigation.
In November 2009, the FSA informed the RBS Group that it was commencing an investigation into certain aspects of the policies of, and training and controls within, certain of the RBS Group’s UK subsidiaries relating to compliance with UK money laundering regulations during the period from December 2007 to December 2008. The ultimate holding company and its subsidiaries are cooperating fully with this investigation.
In January 2010, the FSA informed the RBS Group that it intended to commence an investigation into certain aspects of the handling of customer complaints. The scope of the proposed investigation (including which businesses and subsidiaries are affected) is not yet clear. The ultimate holding company and its subsidiaries intend to co-operate fully with this investigation.
In the United States, the RBS Group and certain subsidiaries have received requests for information from various governmental agencies, self-regulatory organisations, and state governmental agencies including in connection with sub-prime mortgages and securitisations, collateralised debt obligations and synthetic products related to sub-prime mortgages. In particular, during March 2008, the RBS Group was advised by the US Securities and Exchange Commission that it had commenced a non-public, formal investigation relating to the RBS Group’s United States sub-prime securities exposures and United States residential mortgage exposures. The ultimate holding company and its subsidiaries are cooperating with these various requests for information and investigations. Notes on the accounts continued 29 Net cash inflow/(outflow) from operating activities | | | Group | | | | Bank | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) before tax | | | 1,129 | | | | 1,140 | | | | 3,085 | | | | (692 | ) | | | 1,866 | | | | 3,729 | | (Increase)/decrease in prepayments and accrued income | | | (41 | ) | | | (59 | ) | | | (92 | ) | | | 14 | | | | (61 | ) | | | (66 | ) | Interest on subordinated liabilities | | | 454 | | | | 509 | | | | 271 | | | | 414 | | | | 432 | | | | 239 | | Increase/(decrease) in accruals and deferred income | | | 561 | | | | 181 | | | | (431 | ) | | | 278 | | | | 110 | | | | (521 | ) | Provisions for impairment losses | | | 4,139 | | | | 1,362 | | | | 849 | | | | 2,166 | | | | 929 | | | | 742 | | Loans and advances written-off net of recoveries | | | (1,123 | ) | | | (730 | ) | | | (523 | ) | | | (1,077 | ) | | | (684 | ) | | | (470 | ) | Unwind of discount on impairment losses | | | (246 | ) | | | (100 | ) | | | (87 | ) | | | (77 | ) | | | (69 | ) | | | (71 | ) | Profit on sale of property, plant and equipment | | | (4 | ) | | | (7 | ) | | | (189 | ) | | | (1 | ) | | | (1 | ) | | | (114 | ) | (Loss)/profit on sale of subsidiaries and associates | | | (384 | ) | | | 31 | | | | — | | | | (3 | ) | | | 2 | | | | 73 | | Profit on sale of available-for-sale financial assets | | | (60 | ) | | | (17 | ) | | | (117 | ) | | | — | | | | — | | | | (72 | ) | Charge for defined benefit pension schemes | | | 54 | | | | 2 | | | | 132 | | | | (29 | ) | | | (65 | ) | | | 83 | | Pension scheme curtailment gains | | | (544 | ) | | | — | | | | — | | | | (358 | ) | | | — | | | | — | | Cash contribution to defined benefit pension schemes | | | (213 | ) | | | (154 | ) | | | (117 | ) | | | (124 | ) | | | (78 | ) | | | (69 | ) | Other provisions utilised | | | (29 | ) | | | (10 | ) | | | (135 | ) | | | (15 | ) | | | (10 | ) | | | (123 | ) | Depreciation and amortisation | | | 247 | | | | 237 | | | | 264 | | | | 156 | | | | 145 | | | | 177 | | Gain on redemption of own debt | | | (381 | ) | | | — | | | | — | | | | (381 | ) | | | — | | | | — | | Write-down of goodwill and other intangible assets | | | — | | | | 716 | | | | — | | | | — | | | | 45 | | | | — | | Write-down of investment in subsidiaries | | | — | | | | — | | | | — | | | | 2,281 | | | | — | | | | — | | Elimination of foreign exchange differences | | | 2,063 | | | | (5,850 | ) | | | (464 | ) | | | 421 | | | | (1,002 | ) | | | 5 | | Other non-cash items | | | 459 | | | | 66 | | | | 650 | | | | 164 | | | | (148 | ) | | | 242 | | Net cash inflow/(outflow) from trading activities | | | 6,081 | | | | (2,683 | ) | | | 3,096 | | | | 3,137 | | | | 1,411 | | | | 3,784 | | Decrease/(increase) in loans and advances to banks and customers | | | 23,042 | | | | (22,246 | ) | | | (1,856 | ) | | | 22,038 | | | | (9,345 | ) | | | (2,958 | ) | Decrease/(increase) in securities | | | 1,348 | | | | 1,758 | | | | (2,061 | ) | | | — | | | | (1 | ) | | | 1 | | Decrease/(increase) in other assets | | | 820 | | | | (19 | ) | | | (1,772 | ) | | | 300 | | | | (57 | ) | | | (167 | ) | Decrease/(increase) in derivative assets | | | 4,425 | | | | (5,320 | ) | | | (829 | ) | | | 1,997 | | | | (3,309 | ) | | | (188 | ) | Changes in operating assets | | | 29,635 | | | | (25,827 | ) | | | (6,518 | ) | | | 24,335 | | | | (12,712 | ) | | | (3,312 | ) | Increase in deposits by banks and customers | | | 34,879 | | | | 4,878 | | | | 22,903 | | | | 25,703 | | | | 659 | | | | 7,064 | | (Decrease)/increase in debt securities in issue | | | (5,742 | ) | | | (3,711 | ) | | | 6,588 | | | | (15 | ) | | | 6 | | | | (20 | ) | (Decrease)/increase in other liabilities | | | (305 | ) | | | 285 | | | | (432 | ) | | | (195 | ) | | | (7 | ) | | | 60 | | (Decrease)/increase in derivative liabilities | | | (3,752 | ) | | | 4,815 | | | | 908 | | | | (3,737 | ) | | | 4,891 | | | | 207 | | Increase/(decrease) in settlement balances and short positions | | | 3,397 | | | | (3,281 | ) | | | (8,445 | ) | | | — | | | | — | | | | — | | Changes in operating liabilities | | | 28,477 | | | | 2,986 | | | | 21,522 | | | | 21,756 | | | | 5,549 | | | | 7,311 | | Total income taxes paid | | | (1,092 | ) | | | (331 | ) | | | (592 | ) | | | (554 | ) | | | (290 | ) | | | (104 | ) | Net cash inflow/(outflow) from operating activities | | | 63,101 | | | | (25,855 | ) | | | 17,508 | | | | 48,674 | | | | (6,042 | ) | | | 7,679 | |
30 Analysis of the net investment in business interests and intangible assets | | | Group | | | | Bank | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value given for businesses acquired | | | (22 | ) | | | (60 | ) | | | (35 | ) | | | (3 | ) | | | — | | | | — | | Additional investments in Group undertakings | | | — | | | | — | | | | — | | | | (3,005 | ) | | | (846 | ) | | | (1,216 | ) | Net outflow of cash in respect of purchases | | | (22 | ) | | | (60 | ) | | | (35 | ) | | | (3,008 | ) | | | (846 | ) | | | (1,216 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Other assets sold | | | (324 | ) | | | 277 | | | | 3 | | | | 1,150 | | | | — | | | | — | | Repayment of investments | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,823 | | Profit/(loss) on disposal | | | 384 | | | | (31 | ) | | | — | | | | 3 | | | | (2 | ) | | | (73 | ) | Net cash inflow/(outflow) on disposals | | | 60 | | | | 246 | | | | 3 | | | | 1,153 | | | | (2 | ) | | | 1,750 | | | | | | | | | | | | | | | | | | | | | | | | | | | Dividends received from joint ventures | | | — | | | | 4 | | | | 5 | | | | — | | | | — | | | | — | | Net cash expenditure on other intangible assets | | | (69 | ) | | | (167 | ) | | | (132 | ) | | | (69 | ) | | | (152 | ) | | | (131 | ) | Net (outflow)/inflow | | | (31 | ) | | | 23 | | | | (159 | ) | | | (1,924 | ) | | | (1,000 | ) | | | 403 | |
31 Interest received and paid | | | Group | | | | Bank | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest received | | | 6,720 | | | | 12,472 | | | | 12,035 | | | | 4,204 | | | | 7,917 | | | | 7,942 | | Interest paid | | | (4,975 | ) | | | (6,893 | ) | | | (5,752 | ) | | | (2,551 | ) | | | (4,144 | ) | | | (4,325 | ) | | | | 1,745 | | | | 5,579 | | | | 6,283 | | | | 1,653 | | | | 3,773 | | | | 3,617 | |
32 Analysis of changes in financing during the year | | | Group | | | | Bank | | | | | Share capital and share premium | | | | | | | | Share capital and share premium | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January | | | 2,969 | | | | 2,969 | | | | 10,099 | | | | 5,932 | | | | 2,969 | | | | 2,969 | | | | 7,860 | | | | 4,244 | | Issue of ordinary shares | | | 935 | | | | — | | | | | | | | | | | | 935 | | | | — | | | | | | | | | | Net proceeds from issue of subordinated liabilities | | | | | | | | | | | 1,000 | | | | 2,749 | | | | | | | | | | | | 1,000 | | | | 2,700 | | Repayment of subordinated liabilities | | | | | | | | | | | (1,250 | ) | | | — | | | | | | | | | | | | (1,052 | ) | | | — | | Net cash inflow/(outflow) from financing | | | 935 | | | | — | | | | (250 | ) | | | 2,749 | | | | 935 | | | | — | | | | (52 | ) | | | 2,700 | | Currency translation and other adjustments | | | — | | | | — | | | | (850 | ) | | | 1,418 | | | | — | | | | — | | | | (703 | ) | | | 916 | | At 31 December | | | 3,904 | | | | 2,969 | | | | 8,999 | | | | 10,099 | | | | 3,904 | | | | 2,969 | | | | 7,105 | | | | 7,860 | |
33 Analysis of cash and cash equivalents | | Group | | | Bank | | | | | | | | | | | | | | | | | | | | | At 1 January | | | | | | | | | | | | | | | | | | | – cash | | | 31,365 | | | | 37,364 | | | | 38,650 | | | | 12,529 | | | | 18,071 | | | | 16,340 | | – cash equivalents | | | 18,710 | | | | 28,825 | | | | 12,810 | | | | 8,405 | | | | 7,265 | | | | 3,187 | | | | | 50,075 | | | | 66,189 | | | | 51,460 | | | | 20,934 | | | | 25,336 | | | | 19,527 | | Net cash inflow/(outflow) | | | 59,445 | | | | (16,114 | ) | | | 14,729 | | | | 45,267 | | | | (4,402 | ) | | | 5,809 | | At 31 December | | | 109,520 | | | | 50,075 | | | | 66,189 | | | | 66,201 | | | | 20,934 | | | | 25,336 | |
Comprising: | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | 1,726 | | | | 1,203 | | | | 1,258 | | | | 842 | | | | 771 | | | | 921 | | Treasury bills and debt securities | | | — | | | | — | | | | 28 | | | | — | | | | — | | | | — | | Loans and advances to banks | | | 107,794 | | | | 48,872 | | | | 64,903 | | | | 65,359 | | | | 20,163 | | | | 24,415 | | Cash and cash equivalents | | | 109,520 | | | | 50,075 | | | | 66,189 | | | | 66,201 | | | | 20,934 | | | | 25,336 | |
The Bank and certain subsidiary undertakings are required to maintain balances with Central banks which, at 31 December 2009, amounted to £78 million (2008 – £82 million). Notes on the accounts continued Contingent liabilities
Guarantees – the Group gives guarantees on behalf of customers. A financial guarantee represents an irrevocable undertaking that the Group will meet a customer’s obligations to third parties if the customer fails to do so. The maximum amount that the Group could be required to pay under a guarantee is its principal amount as disclosed in the table above. The Group expects most guarantees it provides to expire unused.
Other contingent liabilities – these include standby letters of credit, supporting customer debt issues and contingent liabilities relating to customer trading activities such as those arising from performance and customs bonds, warranties, indemnities and acceptances.
Commitments
Commitments to lend – under a loan commitment the Group agrees to make funds available to a customer in the future. Loan commitments, which are usually for a specified term may be unconditionally cancellable or may persist, provided all conditions in the loan facility are satisfied or waived. Commitments to lend include commercial standby facilities and credit lines, liquidity facilities to commercial paper conduits and unutilised overdraft facilities.
Other commitments – these include forward asset purchases, forward deposits placed and undrawn note issuance and revolving underwriting facilities, documentary credits and other short-term trade related transactions.
Regulatory enquiries and investigations
In the normal course of business the Group and its subsidiaries co-operate with regulatory authorities in various jurisdictions in their enquiries or investigations into alleged or possible breaches of regulations.
Certain of the Group’s subsidiaries have received requests for information from various US governmental agencies and self-regulatory organisations including in connection with sub-prime mortgages and securitisations, collateralised debt obligations and synthetic products related to sub-prime mortgages. The Group and its subsidiaries are cooperating with these various requests for information and investigations.
Trustee and other fiduciary activities
In its capacity as trustee or other fiduciary role, the Group may hold or place assets on behalf of individuals, trusts, companies, pension schemes and others. The assets and their income are not included in the Group’s financial statements. The Group earned fee income of £409 million (2006 – £381 million; 2005 – £278 million). The Bank earned fee income of £62 million (2006 – £64 million; 2005 – £57 million).
Proceedings, including consolidated class actions on behalf of former Enron securities holders, have been brought in the United States against a large number of defendants, including the Group, following the collapse of Enron. The claims against the Group could be significant; the class plaintiff’s position is that each defendant is responsible for an entire aggregate damage amount less settlements – they have not quantified claimed damages against the Group in particular. The Group considers that it has substantial and credible legal and factual defences to these claims and will continue to defend them vigorously. Recent Supreme Court and Fifth Circuit decisions provide further support for the Group’s position. The Group is unable reliably to estimate the liability, if any, that might arise or its effect on the Group’s consolidated net assets, its operating results or cash flows in any particular period.
On 27 July 2007, following discussions between the Office of Fair Trading (‘OFT’), the Financial Ombudsman Service, the Financial Services Authority and all the major UK banks (including the Group) in the first half of 2007, the OFT issued proceedings in a test case against the banks including the Group to determine the legal status and enforceability of certain charges relating to unauthorised overdrafts. The hearing of the test case commenced on 17 January 2008. The Group maintains that its charges are fair and enforceable and is defending its position vigorously. It cannot, however, at this stage predict with any certainty the outcome of the test case and is unable reliably to estimate the liability, if any, that may arise or its effect on the Group’s consolidated net assets, operating results or cash flows in any particular period.
Members of the Group are engaged in other litigation in the United Kingdom and a number of overseas jurisdictions, including the United States, involving claims by and against them arising in the ordinary course of business. The Group has reviewed these other actual, threatened and known potential claims and proceedings and, after consulting with its legal advisers, does not expect that the outcome of these other claims and proceedings will have a material adverse effect on its consolidated net assets, operating results or cash flows in any particular period.
Additional contingent liabilities arise in the normal course of the Group’s business. It is not anticipated that any material loss will arise from these transactions.
32 Net cash flows from operating activities
| | | | | Group | | | | | | | | | Bank | | | | | | | 2007 | | | 2006 | | | 2005 | | | 2007 | | | 2006 | | | 2005 | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Operating profit before tax | | | 3,085 | | | | 3,456 | | | | 3,411 | | | | 3,729 | | | | 1,963 | | | | 2,315 | | (Increase)/decrease in prepayments and accrued income | | | (92 | ) | | | (17 | ) | | | 988 | | | | (66 | ) | | | 30 | | | | 557 | | Interest on subordinated liabilities | | | 271 | | | | 310 | | | | 304 | | | | 239 | | | | 271 | | | | 283 | | (Decrease)/increase in accruals and deferred income | | | (431 | ) | | | 37 | | | | (1,278 | ) | | | (521 | ) | | | (28 | ) | | | (846 | ) | Provisions for impairment losses | | | 849 | | | | 852 | | | | 756 | | | | 742 | | | | 754 | | | | 651 | | Loans and advances written-off net of recoveries | | | (523 | ) | | | (730 | ) | | | (762 | ) | | | (470 | ) | | | (644 | ) | | | (715 | ) | Unwind of discount on impairment losses | | | (87 | ) | | | (67 | ) | | | (76 | ) | | | (71 | ) | | | (55 | ) | | | (61 | ) | Profit on sale of property, plant and equipment | | | (189 | ) | | | (31 | ) | | | (51 | ) | | | (114 | ) | | | (31 | ) | | | (39 | ) | Loss/(profit) on sale of subsidiaries and associates | | | — | | | | (70 | ) | | | (12 | ) | | | 73 | | | | 45 | | | | (221 | ) | Loss/(profit) on sale of investment securities | | | 117 | | | | (86 | ) | | | (327 | ) | | | 72 | | | | (24 | ) | | | (320 | ) | Charge for defined benefit pension schemes | | | 132 | | | | 229 | | | | 149 | | | | 83 | | | | 168 | | | | 97 | | Cash contribution to defined benefit pension schemes | | | (117 | ) | | | (135 | ) | | | (1,007 | ) | | | (69 | ) | | | (70 | ) | | | (976 | ) | Other provisions utilised | | | (135 | ) | | | (30 | ) | | | (18 | ) | | | (123 | ) | | | (20 | ) | | | (16 | ) | Depreciation and amortisation | | | 264 | | | | 257 | | | | 382 | | | | 177 | | | | 202 | | | | 326 | | Elimination of foreign exchange differences | | | (464 | ) | | | 1,503 | | | | (2,178 | ) | | | 5 | | | | 143 | | | | 189 | | Other non-cash items | | | 416 | | | | (147 | ) | | | (227 | ) | | | 98 | | | | 1 | | | | (60 | ) | Net cash inflow from trading activities | | | 3,096 | | | | 5,331 | | | | 54 | | | | 3,784 | | | | 2,705 | | | | 1,164 | | Increase in loans and advances to banks and customers | | | (1,856 | ) | | | (40,552 | ) | | | (24,532 | ) | | | (2,958 | ) | | | (15,215 | ) | | | (4,182 | ) | (Increase)/decrease in securities | | | (2,061 | ) | | | (4,316 | ) | | | (5,565 | ) | | | 1 | | | | 2 | | | | 1 | | (Increase)/decrease in other assets | | | (1,772 | ) | | | 1,303 | | | | (1,469 | ) | | | (167 | ) | | | 707 | | | | (625 | ) | (Increase)/decrease in derivative assets | | | (829 | ) | | | 230 | | | | 797 | | | | (188 | ) | | | (197 | ) | | | 335 | | Changes in operating assets | | | (6,518 | ) | | | (43,335 | ) | | | (30,769 | ) | | | (3,312 | ) | | | (14,703 | ) | | | (4,471 | ) | Increase in deposits by banks and customers | | | 22,903 | | | | 39,118 | �� | | | 49,683 | | | | 7,064 | | | | 16,281 | | | | 9,815 | | Increase/(decrease) in debt securities in issue | | | 6,588 | | | | 3,534 | | | | 5,724 | | | | (20 | ) | | | (9 | ) | | | (1 | ) | (Decrease)/increase in other liabilities | | | (432 | ) | | | 646 | | | | 1,138 | | | | 60 | | | | (26 | ) | | | 953 | | Increase/(decrease) in derivative liabilities | | | 908 | | | | (314 | ) | | | (951 | ) | | | 207 | | | | 16 | | | | (286 | ) | (Decrease)/increase in settlement balances and short positions | | | (8,445 | ) | | | 3,057 | | | | (652 | ) | | | — | | | | — | | | | — | | Changes in operating liabilities | | | 21,522 | | | | 46,041 | | | | 54,942 | | | | 7,311 | | | | 16,262 | | | | 10,481 | | Total income taxes paid | | | (592 | ) | | | (1,157 | ) | | | (1,170 | ) | | | (104 | ) | | | (588 | ) | | | (662 | ) | Net cash inflow from operating activities | | | 17,508 | | | | 6,880 | | | | 23,057 | | | | 7,679 | | | | 3,676 | | | | 6,512 | |
Notes on the accounts continued
33 Analysis of the net investment in business interests and intangible assets
| | | | | Group | | | | | | | | | Bank | | | | | | | 2007 | | | 2006 | | | 2005 | | | 2007 | | | 2006 | | | 2005 | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Fair value given for businesses acquired | | | (35 | ) | | | (20 | ) | | | (238 | ) | | | — | | | | (624 | ) | | | — | | Additional investments in Group undertakings | | | — | | | | — | | | | — | | | | (1,216 | ) | | | (719 | ) | | | (217 | ) | Cash and cash equivalents acquired | | | — | | | | — | | | | 25 | | | | — | | | | — | | | | — | | Non-cash consideration | | | — | | | | — | | | | 3 | | | | — | | | | — | | | | — | | Net outflow of cash in respect of purchases | | | (35 | ) | | | (20 | ) | | | (210 | ) | | | (1,216 | ) | | | (1,343 | ) | | | (217 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents in businesses sold | | | — | | | | — | | | | (2 | ) | | | — | | | | — | | | | — | | Other assets sold | | | 3 | | | | (41 | ) | | | 260 | | | | — | | | | 1 | | | | 7 | | Repayment of investments | | | — | | | | — | | | | — | | | | 1,823 | | | | 1,022 | | | | 2 | | Non-cash consideration | | | — | | | | 112 | | | | (25 | ) | | | — | | | | — | | | | — | | Profit/(loss) on disposal | | | — | | | | 70 | | | | 12 | | | | (73 | ) | | | (45 | ) | | | 221 | | Net cash inflow on disposals | | | 3 | | | | 141 | | | | 245 | | | | 1,750 | | | | 978 | | | | 230 | | | | | | | | | | | | | | | | | | | | | | | | | | | Dividends received from joint ventures | | | 5 | | | | 17 | | | | 7 | | | | — | | | | — | | | | — | | Net cash expenditure on other intangible assets | | | (132 | ) | | | (230 | ) | | | (210 | ) | | | (131 | ) | | | (159 | ) | | | (180 | ) | Net outflow | | | (159 | ) | | | (92 | ) | | | (168 | ) | | | 403 | | | | (524 | ) | | | (167 | ) |
34 Interest received and paid | | | | | | | | | | | | |
| | | | | Group | | | | | | | | | Bank | | | | | | | 2007 | | | 2006 | | | 2005 | | | 2007 | | | 2006 | | | 2005 | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Interest received | | | 12,035 | | | | 9,952 | | | | 8,475 | | | | 7,942 | | | | 6,601 | | | | 5,621 | | Interest paid | | | (5,752 | ) | | | (5,527 | ) | | | (4,164 | ) | | | (4,325 | ) | | | (3,405 | ) | | | (2,683 | ) | | | | 6,283 | | | | 4,425 | | | | 4,311 | | | | 3,617 | | | | 3,196 | | | | 2,938 | |
35 Analysis of changes in financing during the year
| | Group | | | Bank | | | | Share capital | | | Subordinated | | | Share capital | | | Subordinated | | | | and share premium | | | liabilities | | | and share premium | | | liabilities | | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | At 1 January | | | 2,969 | | | | 2,969 | | | | 5,641 | | | | 6,648 | | | | 2,969 | | | | 2,969 | | | | 4,583 | | | | 5,501 | | Net proceeds from issue of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | subordinated liabilities | | | | | | | | | | | 634 | | | | 91 | | | | | | | | | | | | — | | | | — | | Repayment of subordinated liabilities | | | | | | | | | | | (403 | ) | | | (719 | ) | | | | | | | | | | | (381 | ) | | | (590 | ) | Net cash outflow from financing | | | — | | | | — | | | | 231 | | | | (628 | ) | | | — | | | | — | | | | (381 | ) | | | (590 | ) | Currency translation and other adjustments | | | — | | | | — | | | | 60 | | | | (379 | ) | | | — | | | | — | | | | 42 | | | | (328 | ) | At 31 December | | | 2,969 | | | | 2,969 | | | | 5,932 | | | | 5,641 | | | | 2,969 | | | | 2,969 | | | | 4,244 | | | | 4,583 | |
36 Analysis of cash and cash equivalents
| | | | | Group | | | | | | | | | Bank | | | | | | | 2007 | | | 2006 | | | 2005 | | | 2007 | | | 2006 | | | 2005 | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | At 1 January | | | | | | | | | | | | | | | | | | | | | | | | | – cash | | | 38,650 | | | | 33,273 | | | | 14,816 | | | | 16,340 | | | | 13,952 | | | | 9,952 | | – cash equivalents | | | 12,810 | | | | 15,151 | | | | 8,029 | | | | 3,187 | | | | 4,636 | | | | 1,959 | | Net cash inflow | | | 14,729 | | | | 3,036 | | | | 25,579 | | | | 5,809 | | | | 939 | | | | 6,677 | | At 31 December | | | 66,189 | | | | 51,460 | | | | 48,424 | | | | 25,336 | | | | 19,527 | | | | 18,588 | | | | | | | | | | | | | | | | | | | | | | | | | | | Comprising: | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | 1,258 | | | | 1,430 | | | | 1,446 | | | | 921 | | | | 795 | | | | 779 | | Treasury bills and debt securities | | | 28 | | | | 1 | | | | 1 | | | | — | | | | — | | | | — | | Loans and advances to banks | | | 64,903 | | | | 50,029 | | | | 46,977 | | | | 24,415 | | | | 18,732 | | | | 17,809 | | Cash and cash equivalents | | | 66,189 | | | | 51,460 | | | | 48,424 | | | | 25,336 | | | | 19,527 | | | | 18,588 | |
The Bank and certain subsidiary undertakings are required to maintain balances with the Central banks which, at 31 December 2007, amounted to £105 million (2006 – £95 million).
| (a) | Divisions |
Following a comprehensive strategic review, changes have been made to the Group’s operating segments in 2009. A Non-Core division has been created comprising those lines of business, portfolios and individual assets that the Group intends to run off or sell. Furthermore, Business Services (formerly Group Manufacturing) is no longer reported as a separate division and its costs are now allocated to the customer-facing divisions. UK Retail & Commercial Banking has been split into three segments (UK Retail, UK Corporate and Wealth). Ulster Bank has become a specific segment. The remaining elements of Europe & Middle East Retail & Commercial Banking and Asia Retail & Commercial Banking form part of Non-Core. The segment measure is now Operating profit/(loss) before tax which differs from Contribution used previously; it excludes certain infrequent items. Comparative data have been restated accordingly.
The directors manage the Group primarily by class of business and present the segmental analysis on that basis. Segments charge market prices for services rendered to other parts of the Group.
The Group’s activities are organised as follows:
• | UK Retail offers a comprehensive range of banking products and related financial services to the personal market. It serves customers through the NatWest network of branches and ATMs in the United Kingdom, and also through telephone and internet channels.
UK Corporate is a provider of banking, finance, and risk management services to the corporate and SME sector in the United Kingdom. It offers a full range of banking products and related financial services through a nationwide network of relationship managers, and also through telephone and internet channels.
Wealth provides private banking and investment services in the UK through Coutts & Company offshore banking through NatWest Offshore, and international private banking through RBS Coutts. Global Banking & Markets (GBM) is a leading banking partner to major corporations and financial institutions around the world, providing an extensive range of debt and equity financing, risk management and investment services to its customers. The division is currently organised along six principal business lines: money markets; rates flow trading; currencies and commodities; equities; credit markets and portfolio management & origination.
Global Transaction Services offers global payments, cash and liquidity management, and trade finance, United Kingdom and international merchant acquiring and commercial card products and services. It includes the Group’s corporate money transmission activities in the United Kingdom and the United States.
Ulster Bank is the leading retail and commercial bank in Northern Ireland and the third largest banking group on the island of Ireland. It provides a comprehensive range of financial services through both its Retail Markets division which has a network of branches and operates in the personal and bancassurance sectors, and its Corporate Markets division provides services to SME business customers, corporates and institutional markets.
Central Functions comprises group and corporate functions, such as treasury, funding and finance, risk management, legal, communications and human resources. The Centre manages the Group’s capital resources and Group-wide regulatory projects and provides services to the operating divisions.
Non-Core Division manages separately assets that the Group intends to run off or dispose. The division contains a range of businesses and asset portfolios, linked to proprietary trading, higher risk profile asset portfolios including excess risk concentrations, and other illiquid portfolios. It also includes a number of other portfolios and businesses including regional markets businesses that the Group has concluded are no longer strategic. 34 | Segmental analysis continued |
| | | | | Group | | | Total revenue | | Total Income | | | | | | | | | | | | | | | | External | | | Inter segment | | | Total | | | External | | | Inter segment | | | Total | | | Operating expenses | | | Depreciation and amortisation | | | Impairment losses | | | Operating (loss)/profit before tax | | 2009 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | UK Retail | | | 2,396 | | | | 10 | | | | 2,406 | | | | 2,539 | | | | 10 | | | | 2,549 | | | | (1,625 | ) | | | (1 | ) | | | (988 | ) | | | (65 | ) | UK Corporate | | | 1,669 | | | | 2 | | | | 1,671 | | | | 1,854 | | | | (132 | ) | | | 1,722 | | | | (610 | ) | | | — | | | | (485 | ) | | | 627 | | Wealth | | | 1,014 | | | | 63 | | | | 1,077 | | | | 668 | | | | 51 | | | | 719 | | | | (488 | ) | | | (10 | ) | | | (13 | ) | | | 208 | | Global Banking & Markets | | | 1,936 | | | | 292 | | | | 2,228 | | | | 1,080 | | | | (30 | ) | | | 1,050 | | | | (606 | ) | | | (14 | ) | | | (3 | ) | | | 427 | | Global Transaction Services | | | 1,680 | | | | — | | | | 1,680 | | | | 1,041 | | | | (13 | ) | | | 1,028 | | | | (542 | ) | | | — | | | | (5 | ) | | | 481 | | Ulster Bank | | | 1,703 | | | | 5 | | | | 1,708 | | | | 865 | | | | 218 | | | | 1,083 | | | | (709 | ) | | | (5 | ) | | | (649 | ) | | | (280 | ) | Central Items | | | 1,724 | | | | 287 | | | | 2,011 | | | | 20 | | | | 245 | | | | 265 | | | | 538 | | | | (198 | ) | | | — | | | | 605 | | Core | | | 12,122 | | | | 659 | | | | 12,781 | | | | 8,067 | | | | 349 | | | | 8,416 | | | | (4,042 | ) | | | (228 | ) | | | (2,143 | ) | | | 2,003 | | Non-Core | | | 1,266 | | | | 679 | | | | 1,945 | | | | 826 | | | | (349 | ) | | | 477 | | | | (108 | ) | | | — | | | | (1,996 | ) | | | (1,627 | ) | | | | 13,388 | | | | 1,338 | | | | 14,726 | | | | 8,893 | | | | — | | | | 8,893 | | | | (4,150 | ) | | | (228 | ) | | | (4,139 | ) | | | 376 | | Eliminations | | | — | | | | (1,338 | ) | | | (1,338 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | 13,388 | | | | — | | | | 13,388 | | | | 8,893 | | | | — | | | | 8,893 | | | | (4,150 | ) | | | (228 | ) | | | (4,139 | ) | | | 376 | | Reconciling items | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortisation of purchased intangible assets | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (12 | ) | | | — | | | | (12 | ) | Integration and restructuring costs | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (143 | ) | | | (7 | ) | | | — | | | | (150 | ) | Gain on redemption of own debt | | | 381 | | | | — | | | | 381 | | | | 381 | | | | — | | | | 381 | | | | — | | | | — | | | | — | | | | 381 | | Gains on pensions curtailment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 544 | | | | — | | | | — | | | | 544 | | Bonus tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (10 | ) | | | — | | | | — | | | | (10 | ) | | | | 13,769 | | | | — | | | | 13,769 | | | | 9,274 | | | | — | | | | 9,274 | | | | (3,759 | ) | | | (247 | ) | | | (4,139 | ) | | | 1,129 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | UK Retail | | | 4,143 | | | | 7 | | | | 4,150 | | | | 3,260 | | | | 18 | | | | 3,278 | | | | (1,655 | ) | | | (1 | ) | | | (601 | ) | | | 1,021 | | UK Corporate | | | 3,203 | | | | 1 | | | | 3,204 | | | | 2,277 | | | | (472 | ) | | | 1,805 | | | | (589 | ) | | | — | | | | (102 | ) | | | 1,114 | | Wealth | | | 1,691 | | | | 87 | | | | 1,778 | | | | 728 | | | | 70 | | | | 798 | | | | (498 | ) | | | (8 | ) | | | (10 | ) | | | 282 | | Global Banking & Markets | | | 1,375 | | | | 1,029 | | | | 2,404 | | | | 440 | | | | 53 | | | | 493 | | | | (379 | ) | | | (10 | ) | | | — | | | | 104 | | Global Transaction Services | | | 1,660 | | | | — | | | | 1,660 | | | | 1,077 | | | | (27 | ) | | | 1,050 | | | | (488 | ) | | | — | | | | (15 | ) | | | 547 | | Ulster Bank | | | 3,233 | | | | 277 | | | | 3,510 | | | | 1,319 | | | | (204 | ) | | | 1,115 | | | | (678 | ) | | | — | | | | (106 | ) | | | 331 | | Central Items | | | (1,250 | ) | | | 837 | | | | (413 | ) | | | (2,291 | ) | | | 1,195 | | | | (1,096 | ) | | | 188 | | | | (190 | ) | | | — | | | | (1,098 | ) | Core | | | 14,055 | | | | 2,238 | | | | 16,293 | | | | 6,810 | | | | 633 | | | | 7,443 | | | | (4,099 | ) | | | (209 | ) | | | (834 | ) | | | 2,301 | | Non-Core | | | 1,803 | | | | 286 | | | | 2,089 | | | | 894 | | | | (633 | ) | | | 261 | | | | (128 | ) | | | (1 | ) | | | (528 | ) | | | (396 | ) | | | | 15,858 | | | | 2,524 | | | | 18,382 | | | | 7,704 | | | | — | | | | 7,704 | | | | (4,227 | ) | | | (210 | ) | | | (1,362 | ) | | | 1,905 | | Eliminations | | | — | | | | (2,524 | ) | | | (2,524 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | 15,858 | | | | — | | | | 15,858 | | | | 7,704 | | | | — | | | | 7,704 | | | | (4,227 | ) | | | (210 | ) | | | (1,362 | ) | | | 1,905 | | Reconciling items | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortisation of purchased intangible assets | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (7 | ) | | | — | | | | (7 | ) | Integration and restructuring costs | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (22 | ) | | | (20 | ) | | | — | | | | (42 | ) | Goodwill and other asset write-downs | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (716 | ) | | | — | | | | — | | | | (716 | ) | | | | 15,858 | | | | — | | | | 15,858 | | | | 7,704 | | | | — | | | | 7,704 | | | | (4,965 | ) | | | (237 | ) | | | (1,362 | ) | | | 1,140 | |
Notes on the accounts continued 34 Segmental analysis continued | | Group | | | Total revenue | | Total Income | | | | | | | | | | | | | | | External | | | Inter segment | | | Total | | | External | | | Inter segment | | | Total | | | Operating expenses | | | Depreciation and amortisation | | | Impairment losses | | | Operating profit/(loss) before tax | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | UK Retail | | | 5,236 | | | | 2 | | | | 5,238 | | | | 4,118 | | | | 15 | | | | 4,133 | | | | (971 | ) | | | (2 | ) | | | (654 | ) | | | 2,506 | | UK Corporate | | | 2,462 | | | | — | | | | 2,462 | | | | 1,528 | | | | (450 | ) | | | 1,078 | | | | (168 | ) | | | — | | | | (82 | ) | | | 828 | | Wealth | | | 1,586 | | | | 76 | | | | 1,662 | | | | 624 | | | | 73 | | | | 697 | | | | (359 | ) | | | (10 | ) | | | (1 | ) | | | 327 | | Global Banking & Markets | | | 1,463 | | | | 1,168 | | | | 2,631 | | | | 131 | | | | (110 | ) | | | 21 | | | | (394 | ) | | | (5 | ) | | | (2 | ) | | | (380 | ) | Global Transaction Services | | | 1,638 | | | | — | | | | 1,638 | | | | 1,055 | | | | (47 | ) | | | 1,008 | | | | (134 | ) | | | — | | | | (6 | ) | | | 868 | | Ulster Bank | | | 2,637 | | | | — | | | | 2,637 | | | | 1,136 | | | | (117 | ) | | | 1,019 | | | | (582 | ) | | | (5 | ) | | | (39 | ) | | | 393 | | Central Items | | | 360 | | | | 618 | | | | 978 | | | | (411 | ) | | | 656 | | | | 245 | | | | (1,427 | ) | | | (204 | ) | | | — | | | | (1,386 | ) | Core | | | 15,382 | | | | 1,864 | | | | 17,246 | | | | 8,181 | | | | 20 | | | | 8,201 | | | | (4,035 | ) | | | (226 | ) | | | (784 | ) | | | 3,156 | | Non-Core | | | 1,095 | | | | 600 | | | | 1,695 | | | | 173 | | | | (20 | ) | | | 153 | | | | (109 | ) | | | (1 | ) | | | (65 | ) | | | (22 | ) | | | | 16,477 | | | | 2,464 | | | | 18,941 | | | | 8,354 | | | | — | | | | 8,354 | | | | (4,144 | ) | | | (227 | ) | | | (849 | ) | | | 3,134 | | Eliminations | | | — | | | | (2,464 | ) | | | (2,464 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | 16,477 | | | | — | | | | 16,477 | | | | 8,354 | | | | — | | | | 8,354 | | | | (4,144 | ) | | | (227 | ) | | | (849 | ) | | | 3,134 | | Reconciling items | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortisation of purchased intangible assets | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6 | ) | | | — | | | | (6 | ) | Integration costs | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (12 | ) | | | (31 | ) | | | — | | | | (43 | ) | | | | 16,477 | | | | — | | | | 16,477 | | | | 8,354 | | | | — | | | | 8,354 | | | | (4,156 | ) | | | (264 | ) | | | (849 | ) | | | 3,085 | |
Note: (1) | Segmental results for 2008 and 2007 have been restated to reflect transfers of businesses between segments in 2009. |
Notes on the accounts
34 Segmental analysis continued | | Group | | | 2009 | | 2008 | | | Assets | | | Liabilities | | | Cost to acquire fixed assets and intangible assets | | | Assets | | | Liabilities | | | Cost to acquire fixed assets and intangible assets | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | UK Retail | | | 19,932 | | | | 66,632 | | | | — | | | | 51,038 | | | | 59,280 | | | | — | | UK Corporate | | | 45,111 | | | | 42,011 | | | | — | | | | 46,312 | | | | 37,912 | | | | — | | Wealth | | | 31,993 | | | | 30,381 | | | | 5 | | | | 29,834 | | | | 28,273 | | | | 20 | | Global Banking & Markets | | | 143,163 | | | | 79,744 | | | | 126 | | | | 88,882 | | | | 70,585 | | | | 347 | | Global Transaction Services | | | 5,422 | | | | 22,890 | | | | — | | | | 6,653 | | | | 21,661 | | | | — | | Ulster Bank | | | 47,156 | | | | 56,020 | | | | — | | | | 53,056 | | | | 59,856 | | | | 7 | | Central Items | | | 18,471 | | | | 26,645 | | | | 148 | | | | 2,712 | | | | 12,889 | | | | 263 | | Core | | | 311,248 | | | | 324,323 | | | | 279 | | | | 278,487 | | | | 290,456 | | | | 637 | | Non-Core | | | 39,480 | | | | 10,924 | | | | 1,336 | | | | 42,732 | | | | 17,305 | | | | 2 | | Group | | | 350,728 | | | | 335,247 | | | | 1,615 | | | | 321,219 | | | | 307,761 | | | | 639 | |
Note: (1) | Segmental results for 2008 have been restated to reflect transfers of businesses between segments in 2009. |
• | UK Corporate Banking provides banking, finance and risk management services to UK corporate customers. Through its network of relationship managers across the country it distributes the full range of Corporate Markets’ products and services to companies. |
Segmental analysis of goodwill is as follows: • | Retail comprises the NatWest retail brand, and a number of direct providers offering a full range of banking products and related financial services to the personal, premium and small business markets across several distribution channels. |
| | Wealth | | | Global Banking & Markets | | | Global Transaction Services | | | Ulster Bank | | | Non-Core | | | Total | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | At 1 January 2008 | | | 128 | | | | 93 | | | | 64 | | | | 443 | | | | 45 | | | | 773 | | Currency translation and other adjustments | | | 57 | | | | 35 | | | | 20 | | | | 133 | | | | 2 | | | | 247 | | Disposals | | | — | | | | — | | | | — | | | | — | | | | (47 | ) | | | (47 | ) | Write-down of goodwill | | | (3 | ) | | | — | | | | — | | | | (576 | ) | | | — | | | | (579 | ) | At 1 January 2009 | | | 182 | | | | 128 | | | | 84 | | | | — | | | | — | | | | 394 | | Currency translation and other adjustments | | | (12 | ) | | | (13 | ) | | | (6 | ) | | | — | | | | — | | | | (31 | ) | At 31 December 2009 | | | 170 | | | | 115 | | | | 78 | | | | — | | | | — | | | | 363 | |
| Retail also includes the Group’s non-branch based retail business that issues a comprehensive range of credit and charge cards to personal and corporate customers and provides card processing services for retail businesses. |
147
• | Wealth Management provides private banking and investment services to its global clients through Coutts Group and NatWest Offshore. |
• | Ulster Bank Group brings together the Ulster Bank and First Active businesses. Retail Markets serves personal customers through both brands and Corporate Markets caters for the banking needs of business and corporate customers. | Notes on the accounts continued • | Manufacturing supports the customer-facing businesses and provides operational technology, customer support in telephony, account management, lending and money transmission, global purchasing, property and other services. |
Segments charge market prices for services rendered to other parts of the Group with the exception of Manufacturing and central items. The expenditure incurred by Manufacturing relates to costs principally in respect of the Group’s banking operations in the UK and Ireland. These costs reflect activities that are shared between the various customer-facing divisions. These shared costs and related assets and liabilities are not allocated to divisions in the day-to-day management of the businesses but they are allocated to customer-facing divisions for financial reporting purposes on a basis the directors consider to be reasonable. Funding charges between segments are determined by Group Treasury, having regard to commercial demands. The results of each division before amortisation of purchased intangible assets, integration costs and net gain on sale of strategic investments and subsidiaries, and where appropriate, allocation of Manufacturing costs (‘Contribution’) and after allocation of Manufacturing costs (‘Operating profit before tax’) are shown below.
| | | Group | | | | | Revenue | | | | Total income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | External | | | | Inter segment | | | | Total | | | | External | | | | Inter segment | | | | Total | | | | Operating expenses | | | | Depreciation and amortisation | | | | Impairment losses | | | | Contribution | | | | Allocation of Manufac- turing costs | | | | Operating profit before tax | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Global Banking & Markets | | | 2,294 | | | | 1,768 | | | | 4,062 | | | | 134 | | | | (154 | ) | | | (20 | ) | | | (468 | ) | | | (11 | ) | | | (5 | ) | | | (504 | ) | | | (59 | ) | | | (563 | ) | UK Corporate Banking | | | 2,734 | | | | — | | | | 2,734 | | | | 2,027 | | | | (459 | ) | | | 1,568 | | | | (270 | ) | | | — | | | | (82 | ) | | | 1,216 | | | | (226 | ) | | | 990 | | Retail | | | 6,466 | | | | 4 | | | | 6,470 | | | | 4,544 | | | | 17 | | | | 4,561 | | | | (992 | ) | | | (2 | ) | | | (657 | ) | | | 2,910 | | | | (1,128 | ) | | | 1,782 | | Wealth Management | | | 1,581 | | | | 74 | | | | 1,655 | | | | 618 | | | | 71 | | | | 689 | | | | (363 | ) | | | (10 | ) | | | (2 | ) | | | 314 | | | | (33 | ) | | | 281 | | Ulster Bank | | | 3,043 | | | | — | | | | 3,043 | | | | 1,428 | | | | (131 | ) | | | 1,297 | | | | (430 | ) | | | (24 | ) | | | (104 | ) | | | 739 | | | | (219 | ) | | | 520 | | Manufacturing | | | (85 | ) | | | 1 | | | | (84 | ) | | | (144 | ) | | | (1 | ) | | | (145 | ) | | | (1,362 | ) | | | (178 | ) | | | — | | | | (1,685 | ) | | | 1,685 | | | | — | | Central items | | | 444 | | | | 617 | | | | 1,061 | | | | (253 | ) | | | 657 | | | | 404 | | | | (259 | ) | | | (2 | ) | | | 1 | | | | 144 | | | | (20 | ) | | | 124 | | Eliminations | | | — | | | | (2,464 | ) | | | (2,464 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | 16,477 | | | | — | | | | 16,477 | | | | 8,354 | | | | — | | | | 8,354 | | | | (4,144 | ) | | | (227 | ) | | | (849 | ) | | | 3,134 | | | | — | | | | 3,134 | | Amortisation of intangibles | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6 | ) | | | — | | | | (6 | ) | | | — | | | | (6 | ) | Integration costs | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (12 | ) | | | (31 | ) | | | — | | | | (43 | ) | | | — | | | | (43 | ) | | | | 16,477 | | | | — | | | | 16,477 | | | | 8,354 | | | | — | | | | 8,354 | | | | (4,156 | ) | | | (264 | ) | | | (849 | ) | | | 3,085 | | | | — | | | | 3,085 | |
Notes on the accounts continued
37 Segmental analysis (continued)
| | | Group | | | | Revenue | | | Total Income | | | | | | | | | | | | | | | | | | | | | | | | | | | | External | | | | Inter segment | | | | Total | | | | External | | | | Inter segment | | | | Total | | | | Operating expenses | | | | Depreciation and amortisation | | | | Impairment losses | | | | Contribution | | | | Allocation of Manufac- turing costs | | | | Operating profit before tax | | 2006 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Global Banking & Markets | | | 3,180 | | | | 1,334 | | | | 4,514 | | | | 1,769 | | | | (63 | ) | | | 1,706 | | | | (896 | ) | | | (8 | ) | | | 24 | | | | 826 | | | | (96 | ) | | | 730 | | UK Corporate Banking | | | 2,222 | | | | — | | | | 2,222 | | | | 1,805 | | | | (350 | ) | | | 1,455 | | | | (233 | ) | | | — | | | | (72 | ) | | | 1,150 | | | | (228 | ) | | | 922 | | Retail | | | 5,938 | | | | 4 | | | | 5,942 | | | | 4,337 | | | | 9 | | | | 4,346 | | | | (979 | ) | | | (1 | ) | | | (697 | ) | | | 2,669 | | | | (1,130 | ) | | | 1,539 | | Wealth Management | | | 1,260 | | | | 2 | | | | 1,262 | | | | 594 | | | | (6 | ) | | | 588 | | | | (317 | ) | | | (11 | ) | | | (1 | ) | | | 259 | | | | (52 | ) | | | 207 | | Ulster Bank | | | 2,557 | | | | 20 | | | | 2,577 | | | | 1,175 | | | | (33 | ) | | | 1,142 | | | | (364 | ) | | | (28 | ) | | | (104 | ) | | | 646 | | | | (215 | ) | | | 431 | | Manufacturing | | | 26 | | | | 5 | | | | 31 | | | | (60 | ) | | | (21 | ) | | | (81 | ) | | | (1,482 | ) | | | (204 | ) | | | — | | | | (1,767 | ) | | | 1,767 | | | | — | | Central items | | | 479 | | | | 570 | | | | 1,049 | | | | (294 | ) | | | 464 | | | | 170 | | | | (428 | ) | | | 6 | | | | (2 | ) | | | (254 | ) | | | (46 | ) | | | (300 | ) | Eliminations | | | — | | | | (1,935 | ) | | | (1,935 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | 15,662 | | | | — | | | | 15,662 | | | | 9,326 | | | | — | | | | 9,326 | | | | (4,699 | ) | | | (246 | ) | | | (852 | ) | | | 3,529 | | | | — | | | | 3,529 | | Amortisation of intangibles | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6 | ) | | | — | | | | (6 | ) | | | — | | | | (6 | ) | Integration costs | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (62 | ) | | | (5 | ) | | | — | | | | (67 | ) | | | — | | | | (67 | ) | | | | 15,662 | | | | — | | | | 15,662 | | | | 9,326 | | | | — | | | | 9,326 | | | | (4,761 | ) | | | (257 | ) | | | (852 | ) | | | 3,456 | | | | — | | | | 3,456 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Global Banking & Markets | | | 2,212 | | | | 1,002 | | | | 3,214 | | | | 1,507 | | | | 114 | | | | 1,621 | | | | (467 | ) | | | (7 | ) | | | 27 | | | | 1,174 | | | | (93 | ) | | | 1,081 | | UK Corporate Banking | | | 1,923 | | | | 1 | | | | 1,924 | | | | 1,617 | | | | (373 | ) | | | 1,244 | | | | (330 | ) | | | — | | | | (35 | ) | | | 879 | | | | (224 | ) | | | 655 | | Retail | | | 5,772 | | | | 1,301 | | | | 7,073 | | | | 4,109 | | | | (90 | ) | | | 4,019 | | | | (808 | ) | | | (6 | ) | | | (624 | ) | | | 2,581 | | | | (1,136 | ) | | | 1,445 | | Wealth Management | | | 1,102 | | | | 2 | | | | 1,104 | | | | 508 | | | | (1 | ) | | | 507 | | | | (276 | ) | | | (13 | ) | | | (6 | ) | | | 212 | | | | (54 | ) | | | 158 | | Ulster Bank | | | 1,945 | | | | 25 | | | | 1,970 | | | | 976 | | | | 26 | | | | 1,002 | | | | (314 | ) | | | (25 | ) | | | (95 | ) | | | 568 | | | | (207 | ) | | | 361 | | Manufacturing | | | 45 | | | | 6 | | | | 51 | | | | 3 | | | | (30 | ) | | | (27 | ) | | | (1,550 | ) | | | (57 | ) | | | — | | | | (1,634 | ) | | | 1,634 | | | | — | | Central items | | | 64 | | | | 438 | | | | 502 | | | | (623 | ) | | | 354 | | | | (269 | ) | | | (254 | ) | | | (137 | ) | | | (19 | ) | | | (679 | ) | | | 80 | | | | (599 | ) | Eliminations | | | — | | | | (2,775 | ) | | | (2,775 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Continuing operations | | | 13,063 | | | | — | | | | 13,063 | | | | 8,097 | | | | — | | | | 8,097 | | | | (3,999 | ) | | | (245 | ) | | | (752 | ) | | | 3,101 | | | | — | | | | 3,101 | | Discontinued operations | | | 246 | | | | — | | | | 246 | | | | 221 | | | | — | | | | 221 | | | | (70 | ) | | | — | | | | (4 | ) | | | 147 | | | | — | | | | 147 | | Amortisation of intangibles | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6 | ) | | | — | | | | (6 | ) | | | — | | | | (6 | ) | Integration costs | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (32 | ) | | | (131 | ) | | | — | | | | (163 | ) | | | — | | | | (163 | ) | Net gain on sale of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | strategic investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and subsidiaries | | | 332 | | | | — | | | | 332 | | | | 332 | | | | — | | | | 332 | | | | — | | | | — | | | | — | | | | 332 | | | | — | | | | 332 | | | | | 13,641 | | | | — | | | | 13,641 | | | | 8,650 | | | | — | | | | 8,650 | | | | (4,101 | ) | | | (382 | ) | | | (756 | ) | | | 3,411 | | | | — | | | | 3,411 | |
Note:
(1) Revenue represents total income included in the income statement grossed-up for interest payable and commissions payable.
| | | Group | | | | Assets - before allocation of Manufacturing assets | | | | Allocation of Manufacturing assets | | | | Assets | | | | Loabilities - before allocation of Manufacturing liabilities | | | | Alloocation of Manufacturing liabilities | | | | Liabilities | | | | Cost to acquire fixed assets and intangible assets - before allocation of Manufacturing assets | | | | Allocation of Manufacturing assets | | | | Cost to acquire fixed assets and intangible assets | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Global Banking & Markets | | | 121,506 | | | | 115 | | | | 121,621 | | | | 99,891 | | | | — | | | | 99,891 | | | | 138 | | | | 13 | | | | 151 | | UK Corporate Banking | | | 41,555 | | | | 179 | | | | 41,734 | | | | 40,631 | | | | — | | | | 40,631 | | | | — | | | | 33 | | | | 33 | | Retail | | | 59,357 | | | | 857 | | | | 60,214 | | | | 69,546 | | | | — | | | | 69,546 | | | | 1 | | | | 110 | | | | 111 | | Wealth Management | | | 26,688 | | | | 79 | | | | 26,767 | | | | 25,646 | | | | — | | | | 25,646 | | | | 19 | | | | 13 | | | | 32 | | Ulster Bank | | | 59,626 | | | | 103 | | | | 59,729 | | | | 55,678 | | | | — | | | | 55,678 | | | | 35 | | | | 17 | | | | 52 | | Manufacturing | | | 1,691 | | | | (1,691 | ) | | | — | | | | 578 | | | | (578 | ) | | | — | | | | 234 | | | | (234 | ) | | | — | | Central items | | | 1,859 | | | | 358 | | | | 2,217 | | | | 8,210 | | | | 578 | | | | 8,788 | | | | 2 | | | | 48 | | | | 50 | | Group | | | 312,282 | | | | — | | | | 312,282 | | | | 300,180 | | | | — | | | | 300,180 | | | | 429 | | | | — | | | | 429 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2006 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Global Banking & Markets | | | 126,238 | | | | 106 | | | | 126,344 | | | | 107,242 | | | | — | | | | 107,242 | | | | 182 | | | | 14 | | | | 196 | | UK Corporate Banking | | | 36,476 | | | | 179 | | | | 36,655 | | | | 36,921 | | | | — | | | | 36,921 | | | | — | | | | 38 | | | | 38 | | Retail | | | 55,640 | | | | 1,003 | | | | 56,643 | | | | 62,910 | | | | — | | | | 62,910 | | | | 3 | | | | 156 | | | | 159 | | Wealth Management | | | 21,741 | | | | 86 | | | | 21,827 | | | | 20,795 | | | | — | | | | 20,795 | | | | 13 | | | | 17 | | | | 30 | | Ulster Bank | | | 46,507 | | | | 117 | | | | 46,624 | | | | 41,874 | | | | — | | | | 41,874 | | | | 166 | | | | 21 | | | | 187 | | Manufacturing | | | 1,977 | | | | (1,977 | ) | | | — | | | | 329 | | | | (329 | ) | | | — | | | | 302 | | | | (302 | ) | | | — | | Central items | | | 2,082 | | | | 486 | | | | 2,568 | | | | 9,405 | | | | 329 | | | | 9,734 | | | | 4 | | | | 56 | | | | 60 | | Group | | | 290,661 | | | | — | | | | 290,661 | | | | 279,476 | | | | — | | | | 279,476 | | | | 670 | | | | — | | | | 670 | |
34 Segmental analysis continued (b) Geographical segments The geographical analyses in the tables below have been compiled on the basis of location of office where the transactions are recorded. | | Group | | | UK | | | USA | | | Europe | | | Rest of the World | | | Total | | 2009 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Total revenue | | | 9,873 | | | | 1,558 | | | | 2,221 | | | | 117 | | | | 13,769 | | | | | | | | | | | | | | | | | | | | | | | Net interest income | | | 2,317 | | | | (5 | ) | | | 864 | | | | 21 | | | | 3,197 | | Net fees and commissions | | | 2,254 | | | | 340 | | | | 206 | | | | 38 | | | | 2,838 | | Income/(loss) from trading activities | | | 391 | | | | 1,133 | | | | (77 | ) | | | 7 | | | | 1,454 | | Other operating income | | | 1,515 | | | | 5 | | | | 265 | | | | — | | | | 1,785 | | Total income | | | 6,477 | | | | 1,473 | | | | 1,258 | | | | 66 | | | | 9,274 | | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) before tax | | | 1,018 | | | | 1,013 | | | | (899 | ) | | | (3 | ) | | | 1,129 | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | 213,085 | | | | 74,112 | | | | 59,440 | | | | 4,091 | | | | 350,728 | | | | | | | | | | | | | | | | | | | | | | | Total liabilities | | | 208,123 | | | | 70,754 | | | | 52,291 | | | | 4,079 | | | | 335,247 | | | | | | | | | | | | | | | | | | | | | | | Net assets attributable to equity shareholders and minority interests | | | 4,962 | | | | 3,358 | | | | 7,149 | | | | 12 | | | | 15,481 | | | | | | | | | | | | | | | | | | | | | | | Contingent liabilities and commitments | | | 59,892 | | | | 83 | | | | 1,220 | | | | 1,136 | | | | 62,331 | | | | | | | | | | | | | | | | | | | | | | | Cost to acquire property, plant and equipment and intangible assets | | | 124 | | | | 126 | | | | 1,365 | | | | — | | | | 1,615 | | | | | 2008 | | | | | | | | | | | | | | | | | | | | | Total revenue | | | 12,046 | | | | 134 | | | | 3,476 | | | | 202 | | | | 15,858 | | | | | | | | | | | | | | | | | | | | | | | Net interest income | | | 4,577 | | | | 141 | | | | 658 | | | | 21 | | | | 5,397 | | Net fees and commissions | | | 2,518 | | | | 333 | | | | 293 | | | | 45 | | | | 3,189 | | (Loss)/income from trading activities | | | (518 | ) | | | (389 | ) | | | (65 | ) | | | 9 | | | | (963 | ) | Other operating income/(loss) | | | 78 | | | | (20 | ) | | | 22 | | | | 1 | | | | 81 | | Total income | | | 6,655 | | | | 65 | | | | 908 | | | | 76 | | | | 7,704 | | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) before tax | | | 2,097 | | | | (187 | ) | | | (767 | ) | | | (3 | ) | | | 1,140 | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | 186,140 | | | | 63,984 | | | | 66,589 | | | | 4,506 | | | | 321,219 | | | | | | | | | | | | | | | | | | | | | | | Total liabilities | | | 179,488 | | | | 60,728 | | | | 63,050 | | | | 4,495 | | | | 307,761 | | | | | | | | | | | | | | | | | | | | | | | Net assets attributable to equity shareholders and minority interests | | | 6,652 | | | | 3,256 | | | | 3,539 | | | | 11 | | | | 13,458 | | | | | | | | | | | | | | | | | | | | | | | Contingent liabilities and commitments | | | 64,470 | | | | 3,355 | | | | 1,378 | | | | 4,156 | | | | 73,359 | | | | | | | | | | | | | | | | | | | | | | | Cost to acquire property, plant and equipment and intangible assets | | | 218 | | | | 214 | | | | 188 | | | | 19 | | | | 639 | |
Segmental analysis of goodwill is as follows: | | | | | | | | | | | Notes on the accounts
34 Segmental analysis continued | | Group | | | UK | | | USA | | | Europe | | | Rest of the World | | | Total | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Total revenue | | | 13,759 | | | | (250 | ) | | | 2,766 | | | | 202 | | | | 16,477 | | Net interest income | | | 4,379 | | | | (14 | ) | | | 711 | | | | 15 | | | | 5,091 | | Net fees and commissions | | | 2,506 | | | | 341 | | | | 281 | | | | 62 | | | | 3,190 | | Income/(loss) from trading activities | | | 186 | | | | (658 | ) | | | 108 | | | | 4 | | | | (360 | ) | Other operating income | | | 357 | | | | 11 | | | | 64 | | | | 1 | | | | 433 | | Total income | | | 7,428 | | | | (320 | ) | | | 1,164 | | | | 82 | | | | 8,354 | | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) before tax | | | 2,989 | | | | (341 | ) | | | 423 | | | | 14 | | | | 3,085 | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | 181,249 | | | | 74,775 | | | | 52,329 | | | | 3,929 | | | | 312,282 | | | | | | | | | | | | | | | | | | | | | | | Total liabilities | | | 174,797 | | | | 72,521 | | | | 48,950 | | | | 3,912 | | | | 300,180 | | | | | | | | | | | | | | | | | | | | | | | Net assets attributable to equity shareholders and minority interests | | | 6,452 | | | | 2,254 | | | | 3,379 | | | | 17 | | | | 12,102 | | | | | | | | | | | | | | | | | | | | | | | Contingent liabilities and commitments | | | 64,384 | | | | 3,040 | | | | 12,143 | | | | 2,114 | | | | 81,681 | | | | | | | | | | | | | | | | | | | | | | | Cost to acquire property, plant and equipment and intangible assets | | | 239 | | | | 63 | | | | 124 | | | | 3 | | | | 429 | |
35 Directors’ and key management remuneration The directors of the Bank are also directors of the ultimate holding company and are remunerated for their services to the RBS Group as a whole. The remuneration of the directors is disclosed in the Report and Accounts of the RBS Group. Pensions paid to former directors of the Bank and their dependants amounted to £167,000 (2008 – £244,000). | | | | | | | | Group | | | | | | | | | | Global | | | | | | | | | | | | | | | | Banking & | | | | | | Wealth | | | Ulster | | | | | | | Markets | | | Retail | | | Management | | | Bank | | | Total | | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | At 1 January 2006 | | | 108 | | | | 107 | | | | 131 | | | | 414 | | | | 760 | | Currency translation and other adjustments | | | (14 | ) | | | (8 | ) | | | (7 | ) | | | (9 | ) | | | (38 | ) | Disposals | | | — | | | | — | | | | (3 | ) | | | — | | | | (3 | ) | At 1 January 2007 | | | 94 | | | | 99 | | | | 121 | | | | 405 | | | | 719 | | Currency translation and other adjustments | | | (1 | ) | | | 9 | | | | 7 | | | | 39 | | | | 54 | | Transfer between divisions | | | — | | | | (44 | ) | | | — | | | | 44 | | | | — | | At 31 December 2007 | | | 93 | | | | 64 | | | | 128 | | | | 488 | | | | 773 | |
(b) Geographical segments
The geographical analyses in the tables below have been compiled on the basis of location of office where the transactions are recorded.
| | | | | | | | Group | | | | | | | | | | | | | | | | | | | Rest of | | | | | | | UK | | | USA | | | Europe | | | the World | | | Total | | 2007 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Total revenue | | | 13,759 | | | | (250 | ) | | | 2,766 | | | | 202 | | | | 16,477 | | | | | | | | | | | | | | | | | | | | | | | Net interest income | | | 4,379 | | | | (14 | ) | | | 711 | | | | 15 | | | | 5,091 | | Fees and commissions (net) | | | 2,506 | | | | 341 | | | | 281 | | | | 62 | | | | 3,190 | | Income from trading activities | | | 186 | | | | (658 | ) | | | 108 | | | | 4 | | | | (360 | ) | Other operating income | | | 357 | | | | 11 | | | | 64 | | | | 1 | | | | 433 | | Total income | | | 7,428 | | | | (320 | ) | | | 1,164 | | | | 82 | | | | 8,354 | | | | | | | | | | | | | | | | | | | | | | | Operating profit before tax | | | 2,989 | | | | (341 | ) | | | 423 | | | | 14 | | | | 3,085 | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | 181,249 | | | | 74,775 | | | | 52,329 | | | | 3,929 | | | | 312,282 | | | | | | | | | | | | | | | | | | | | | | | Total liabilities | | | 174,797 | | | | 72,521 | | | | 48,950 | | | | 3,912 | | | | 300,180 | | | | | | | | | | | | | | | | | | | | | | | Net assets attributable to equity shareholders and minority interests | | | 6,452 | | | | 2,254 | | | | 3,379 | | | �� | 17 | | | | 12,102 | | | | | | | | | | | | | | | | | | | | | | | Contingent liabilities and commitments | | | 64,384 | | | | 3,040 | | | | 12,143 | | | | 2,114 | | | | 81,681 | | | | | | | | | | | | | | | | | | | | | | | Cost to acquire property, plant and equipment and intangible assets | | | 239 | | | | 63 | | | | 124 | | | | 3 | | | | 429 | | | | | | | | | | | | | | | | | | | | | | | 2006 | | | | | | | | | | | | | | | | | | | | | Total revenue | | | 11,811 | | | | 1,140 | | | | 2,506 | | | | 205 | | | | 15,662 | | | | | | | | | | | | | | | | | | | | | | | Net interest income | | | 3,865 | | | | (11 | ) | | | 581 | | | | 14 | | | | 4,449 | | Fees and commissions (net) | | | 2,327 | | | | 258 | | | | 309 | | | | 74 | | | | 2,968 | | Income from trading activities | | | 547 | | | | 783 | | | | 126 | | | | 2 | | | | 1,458 | | Other operating income | | | 315 | | | | 48 | | | | 88 | | | | — | | | | 451 | | Total income | | | 7,054 | | | | 1,078 | | | | 1,104 | | | | 90 | | | | 9,326 | | | | | | | | | | | | | | | | | | | | | | | Operating profit before tax | | | 2,434 | | | | 623 | | | | 399 | | | | — | | | | 3,456 | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | 168,696 | | | | 76,883 | | | | 42,334 | | | | 2,748 | | | | 290,661 | | | | | | | | | | | | | | | | | | | | | | | Total liabilities | | | 163,083 | | | | 74,723 | | | | 38,938 | | | | 2,732 | | | | 279,476 | | | | | | | | | | | | | | | | | | | | | | | Net assets attributable to equity shareholders and minority interests | | | 5,613 | | | | 2,160 | | | | 3,396 | | | | 16 | | | | 11,185 | | | | | | | | | | | | | | | | | | | | | | | Contingent liabilities and commitments | | | 66,273 | | | | 3,978 | | | | 8,049 | | | | 1,960 | | | | 80,260 | | | | | | | | | | | | | | | | | | | | | | | Cost to acquire property, plant and equipment and intangible assets | | | 490 | | | | 46 | | | | 130 | | | | 4 | | | | 670 | |
Notes on the accounts continued
37 Segmental analysis (continued)
| | | | | | | | Group | | | | | | | | | | | | | | | | | | | Rest of | | | | | | | UK | | | USA | | | Europe | | | the World | | | Total | | 2005 | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Total revenue | | | 10,417 | | | | 1,078 | | | | 1,982 | | | | 164 | | | | 13,641 | | | | | | | | | | | | | | | | | | | | | | | Net interest income | | | 3,858 | | | | 12 | | | | 578 | | | | 13 | | | | 4,461 | | Fees and commissions (net) | | | 2,308 | | | | 157 | | | | 208 | | | | 73 | | | | 2,746 | | Income from trading activities | | | (5 | ) | | | 777 | | | | 33 | | | | 3 | | | | 808 | | Other operating income | | | 493 | | | | 45 | | | | 97 | | | | — | | | | 635 | | Total income | | | 6,654 | | | | 991 | | | | 916 | | | | 89 | | | | 8,650 | | | | | | | | | | | | | | | | | | | | | | | Operating profit before tax | | | 2,522 | | | | 560 | | | | 297 | | | | 32 | | | | 3,411 | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | 138,574 | | | | 74,162 | | | | 44,673 | | | | 3,194 | | | | 260,603 | | | | | | | | | | | | | | | | | | | | | | | Total liabilities | | | 133,341 | | | | 72,218 | | | | 41,787 | | | | 3,073 | | | | 250,419 | | | | | | | | | | | | | | | | | | | | | | | Net assets attributable to equity shareholders and minority interests | | | 5,233 | | | | 1,944 | | | | 2,886 | | | | 121 | | | | 10,184 | | | | | | | | | | | | | | | | | | | | | | | Contingent liabilities and commitments | | | 58,532 | | | | 6,231 | | | | 9,177 | | | | — | | | | 73,940 | | | | | | | | | | | | | | | | | | | | | | | Cost to acquire property, plant and equipment and intangible assets | | | 368 | | | | 29 | | | | 144 | | | | 7 | | | | 548 | |
38 Directors’ and key management remuneration
The current directors of the Bank are also directors of the ultimate holding company and are remunerated for their services to the RBS Group as a whole. The remuneration of the directors is disclosed in the Report and Accounts of the RBS Group. Pensions paid to former directors of the Bank and their dependants amounted to £243,000 (2006 – £307,000).
Compensation of key management The aggregate remuneration of directors and other members of key management during the year, borne by the RBS Group, was as follows: | | 2009 | | | 2008 | | | | | £000 | | | | £000 | | Short-term benefits | | | 29,292 | | | | 16,813 | | Post-employment benefits | | | 9,781 | | | | 13,174 | | Other long-term benefits | | | — | | | | 496 | | Termination benefits | | | — | | | | 345 | | Share-based payments | | | 8,953 | | | | 2,078 | | | | | 48,026 | | | | 32,906 | |
Notes on the accounts continued 36 Transactions with directors and key management
The aggregate remuneration of directors and other members of key management during the year was as follows:
| | RBS Group | | | | 2007 | | | 2006 | | | | | £000 | | | | £000 | | Short-term benefits | | | 37,763 | | | | 41,003 | | Post-employment benefits | | | 10,051 | | | | 11,264 | | Other long-term benefits | | | 708 | | | | 3,309 | | Share-based payments | | | 5,165 | | | | 2,787 | | | | | 53,687 | | | | 58,363 | |
39 Transactions with directors, officers and others
(a) | At 31 December 2007,2009, the amounts outstanding in relation to transactions, arrangements and agreements entered into by authorised institutions in the Group, as defined in UK legislation, were £39,125£53,334 in respect of loans to 10 persons who were directors of the Bank (or persons connected with them) at any time during the financial period and £1,211,846 to 3 people who were officers of the Bank at any time during the financial period. |
(b) | For the purposes of IAS 24 ‘Related Party Disclosures’, key management comprise directors of the Bank and members of the RBS Group’s Group Executive Management Committee. The captions in the primary financial statements include the following amounts attributable, in aggregate, to key management:
| | 2007 | | | 2006 | | | | | £000 | | | | £000 | | Loans and advances to customers | | | 1,479 | | | | 1,884 | | Customer accounts | | | 2,177 | | | | 1,797 | |
|
| | 2009 | | | 2008 | | | | | £000 | | | | £000 | | Loans and advances to customers | | | 3,805 | | | | 2,753 | | Customer accounts | | | 5,129 | | | | 4,508 | |
Key management have banking relationships with Group entities which are entered into in the normal course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with other persons of a similar standing or, where applicable, with other employees. These transactions did not involve more than the normal risk of repayment or present other unfavourable features. Key management had no reportable transactions or balances with the ultimate holding company. Notes on the accounts
37 Related parties UK Government On 1 December 2008, the UK Government through HM Treasury became the ultimate controlling party of The Royal Bank of Scotland Group plc. The UK Government’s shareholding is managed by UK Financial Investments Limited, a company wholly owned by the UK Government. As a result the UK Government and UK Government controlled bodies became related parties of the Group. The Group enters into transactions with many of these bodies on an arm’s length basis. Such transactions include the payment of: taxes including UK corporation tax and value added tax; national insurance contributions; local authority rates; and regulatory fees and levies; together with banking transactions such as loans and deposits undertaken in the normal course of banker-customer relationships. The volume and diversity of these transactions are such that disclosure of their amounts is impractical. As at 31 December 2009 and 2008 balances with the UK Government and UK Government controlled bodies were: | | 2009 | | 2008 | | | Central government (including the Bank of England) | | | Local government | | | Banks, financial corporations and public corporations | | | Total | | | Central government (including the Bank of England) | | | Local government | | | Banks, financial corporations and public corporations | | | Total | | Group | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balances at central banks | | | 79 | | | | — | | | | — | | | | 79 | | | | 82 | | | | — | | | | — | | | | 82 | | Loans and advances to customers | | | 6 | | | | 247 | | | | 32 | | | | 285 | | | | 5 | | | | 146 | | | | 37 | | | | 188 | | Debt securities | | | 1 | | | | — | | | | — | | | | 1 | | | | 1,373 | | | | — | | | | 10 | | | | 1,383 | | Derivatives | | | — | | | | 3 | | | | 1 | | | | 4 | | | | — | | | | 4 | | | | 3 | | | | 7 | | Other | | | — | | | | — | | | | 3 | | | | 3 | | | | — | | | | — | | | | — | | | | — | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Customer accounts | | | 1,262 | | | | 1,832 | | | | 358 | | | | 3,452 | | | | 1,315 | | | | 1,886 | | | | 449 | | | | 3,650 | | Derivatives | | | — | | | | 6 | | | | — | | | | 6 | | | | — | | | | 9 | | | | 7 | | | | 16 | | | | | | Bank | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balances at central banks | | | 65 | | | | — | | | | — | | | | 65 | | | | 67 | | | | — | | | | — | | | | 67 | | Loans and advances to customers | | | 4 | | | | 106 | | | | 28 | | | | 138 | | | | 4 | | | | 146 | | | | 32 | | | | 182 | | Derivatives | | | — | | | | 3 | | | | 1 | | | | 4 | | | | — | | | | 4 | | | | 3 | | | | 7 | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Customer accounts | | | 1,228 | | | | 1,672 | | | | 325 | | | | 3,325 | | | | 1,307 | | | | 1,249 | | | | 444 | | | | 3,000 | | Derivatives | | | — | | | | 6 | | | | — | | | | 6 | | | | — | | | | 9 | | | | 7 | | | | 16 | |
No impairment losses were recognised by the Group in 2009 or 2008 in respect of balances with UK Government and UK Government controlled bodies. Notes: (1) | In addition to the UK Government’s shareholding in the Group, the UK Government and UK Government controlled bodies may hold debt securities, subordinated liabilities and other liabilities or shares issued by the Group in the normal course of their business. It is not practicable to ascertain and disclose these amounts. |
| | (2) | Certain of the liability balances are secured. |
Notes on the accounts continued 37 Related parties continued Other related parties(a) | In their roles as providers of finance, Group companies provide development and other types of capital support to businesses. These investments are made in the normal course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with other persons of a similar standing or, where applicable, with other employees. These transactions did not involve more than the normal risk of repayment or present other unfavourable features.Key management had no reportable transactions or balances with the holding company except for dividends.
(a)
| Group companies provide development and other types of capital support to businesses in their roles as providers of finance. These investments are made in the normal course of business and on arm’s-lengtharm’s length terms. In some instances, the investment may extend to ownership or control over 20% or more of the voting rights of the investee company. However, these investments are not considered to give rise to transactions of a materiality requiring disclosure under IAS 24. |
| | (b) | The Group recharges The Royal Bank of Scotland Group Pension Fund with the cost of administration services incurred by it. The amounts involved are not material to the Group. |
| | (c) | In accordance with IAS 24, transactions or balances between Group entities that have been eliminated on consolidation are not reported. |
| | (d) | The captions in the primary financial statements of the Bank include amounts attributable to subsidiaries. These amounts have been disclosed in aggregate in the relevant notes to the financial statements. The table below discloses items included in income and operating expenses on transactions between the Group and fellow subsidiaries of the RBS Group. |
| | 2007 | | | 2006 | | | | | £m | | | | £m | | Income | | | | | | | | | Interest receivable | | | 4,257 | | | | 3,204 | | Interest payable | | | 1,090 | | | | 744 | | Fees and commissions receivable | | | 235 | | | | 122 | | Fees and commissions payable | | | 81 | | | | 106 | | | | | | | | | | | Expenses | | | | | | | | | Other administrative expenses | | | 1,725 | | | | 1,761 | |
41 Ultimate holding company
The Group’s ultimate holding company and ultimate controlling party is The Royal Bank of Scotland Group plc and its immediate parent company is The Royal Bank of Scotland plc. Both companies are incorporated in Great Britain and registered in Scotland. As at 31 December 2007, The Royal Bank of Scotland Group plc heads the largest group in which the Group is consolidated and The Royal Bank of Scotland plc heads the smallest group in which the Group is consolidated. Copiesfellow subsidiaries of the consolidated accounts of both companies may be obtained from The Secretary, The Royal Bank of Scotland Group plc, Gogarburn, PO Box 1000, Edinburgh EH12 1HQ.
42 Post balance sheet events
There have been no significant events between the year end and the date of approval of these accounts which would require a change to or disclosure in the accounts.
|
| | 2009 | | | 2008 | | | | | £m | | | | £m | | Income | | | | | | | | | Interest receivable | | | 1,299 | | | | 3,857 | | Interest payable | | | 1,119 | | | | 1,147 | | Fees and commissions receivable | | | 221 | | | | 299 | | Fees and commissions payable | | | 74 | | | | 184 | | | | Expenses | | | | | | | | | Other administrative expenses | | | 1,015 | | | | 1,509 | |
38 Ultimate holding company The Group’s ultimate holding company is The Royal Bank of Scotland Group plc and its immediate parent company is The Royal Bank of Scotland plc. Both companies are incorporated in Great Britain and registered in Scotland. As at 31 December 2009, The Royal Bank of Scotland Group plc heads the largest group in which the Group is consolidated and The Royal Bank of Scotland plc heads the smallest group in which the Group is consolidated. Copies of the consolidated accounts of both companies may be obtained from The Secretary, The Royal Bank of Scotland Group plc, Gogarburn, PO Box 1000, Edinburgh EH12 1HQ. Following placing and open offers by The Royal Bank of Scotland Group plc in December 2008 and April 2009, the UK Government, through HM Treasury, currently holds 70.3% of the issued ordinary share capital of the ultimate holding company and is therefore the Group’s ultimate controlling party. 39 Post balance sheet events There have been no significant events between the year end and the date of approval of these accounts which would require a change to or disclosure in the accounts. On 25 March 2010, the RBS Group announced its intention to launch (i) an offer to exchange certain subordinated debt securities issued by Group members for new senior debt and (ii) tender offers in respect of certain preference shares, preferred securities and perpetual securities issued by Group members. The RBS Group expects to announce the offers in early April and will seek shareholder approvals as required in coordination with the annual general meeting of The Royal Bank of Scotland Group plc scheduled to take place on 28 April 2010. On 30 March 2010, the Office of Fair Trading announced that it had arrived at an early resolution agreement with the RBS Group by which the RBS Group will pay a fine of £29 million and admit a breach in competition law relating to the provision of loan products to professional services firms. Additional information
Glossary of terms Adjustable rate mortgage (ARM) – in the US a variable-rate mortgage. ARMs include: hybrid ARMs which typically have a fixed-rate period followed by an adjustable-rate period; interest-only ARMs where interest only is payable for a specified number of years, typically for three to ten years; and payment-option ARMs that allow the borrower to choose periodically between various payment options. Exhibit number | | Description | | | | | | | 1.1 | * | | Memorandum and Articles of Association of National Westminster Bank Plc | | | | | | | 7.1 | | | Explanation of ratio calculations | | | | | | | 8.1 | | | Omitted pursuant to General Instruction I(2)(b) of Form 10-K as applied to reports on Form 20-F | | | | | | | 12.1 | | | CEO certifications required by Rule 13a-14(a) | | | | | | | 12.2 | | | CFO certifications required by Rule 13a-14(a) | | | | | | | 13.1 | | | Certifications required by Rule 13a-14(b) | Alt-A (Alternative A-paper) are mortgage loans with a higher credit quality than sub-prime loans but with features that disqualify the borrower from a traditional prime loan. Alt-A lending characteristics include limited documentation; high loan-to-value ratio; secured on non-owner occupied properties; and debt-to-income ratio above normal limits. Arrears are the aggregate of contractual payments due on a debt that have not been met by the borrower. A loan or other financial asset is said to be ’in arrears’ when payments have not been made. Asset-backed commercial paper (ABCP) – a form of asset-backed security generally issued by a commercial paper conduit. Asset-backed securities (ABS) are securities that represent interests in specific portfolios of assets. They are issued by a special purpose entity following a securitisation. The underlying portfolios commonly comprise residential or commercial mortgages but can include any class of asset that yields predictable cash flows. Payments on the securities depend primarily on the cash flows generated by the assets in the underlying pool and other rights designed to assure timely payment, such as guarantees or other credit enhancements. Collateralised bond obligations, collateralised debt obligations, collateralised loan obligations, commercial mortgage backed securities and residential mortgage backed securities are all types of ABS. Assets under management are assets managed by the Group on behalf of clients. Collateralised bond obligations (CBOs) are asset-backed securities for which the underlying asset portfolios are bonds, some of which may be sub-investment grade. Collateralised debt obligations (CDOs) are asset-backed securities for which the underlying asset portfolios are debt obligations: either bonds (collateralised bond obligations) or loans (collateralised loan obligations) or both. The credit exposure underlying synthetic CDOs derives from credit default swaps. The CDOs issued by an individual vehicle are usually divided in different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated). Losses are borne first by the equity securities, next by the junior securities, and finally by the senior securities; junior tranches offer higher coupons (interest payments) to compensate for their increased risk. Collateralised debt obligation squared (CDO-squared) is a type of collateralised debt obligation where the underlying asset portfolio includes tranches of other CDOs. Collateralised loan obligations (CLOs) are asset-backed securities for which the underlying asset portfolios are loans, often leveraged loans. Collectively assessed loan impairment provisions – impairment loss provisions in respect of impaired loans, such as credit cards or personal loans, that are below individual assessment thresholds. Such provisions are established on a portfolio basis, taking account the level of arrears, security, past loss experience, credit scores and defaults based on portfolio trends. Commercial mortgage backed securities (CMBS) are asset-backed securities for which the underlying asset portfolios are loans secured on commercial real estate. Commercial paper (CP) comprises unsecured obligations issued by a corporate or a bank directly or secured obligations (asset-backed CP), often issued through a commercial paper conduit, to fund working capital. Maturities typically range from two to 270 days. However, the depth and reliability of some CP markets means that issuers can repeatedly roll over CP issuance and effectively achieve longer term funding. Commercial paper is issued in a wide range of denominations and can be either discounted or interest-bearing. Commercial paper conduit is a special purpose entity that issues commercial paper and uses the proceeds to purchase or fund a pool of assets. The commercial paper is secured on the assets and is redeemed either by further commercial paper issuance, repayment of assets or liquidity drawings. Commercial real estate – freehold and leasehold properties used for business activities. Commercial real estate includes office buildings, industrial property, medical centres, hotels, retail stores, shopping centres, agricultural land and buildings, warehouses, garages etc. Contractual maturity is the date in the terms of a financial instrument on which the last payment or receipt under the contract is due for settlement. Core Tier 1 capital – called-up share capital and eligible reserves plus equity non-controlling interests, less intangible assets and other regulatory deductions. Core Tier 1 capital ratio – core Tier 1 capital as a percentage of risk-weighted assets. Cost: income ratio – operating expenses as a percentage of total income. Covered mortgage bonds are debt securities backed by a portfolio of mortgages that is segregated from the issuer’s other assets solely for the benefit of the holders of the covered bonds. Credit default swap (CDS) is a contract where the protection seller receives premium or interest-related payments in return for contracting to make payments to the protection buyer upon a defined credit event in relation to a reference financial asset or portfolio of financial assets. Credit events usually include bankruptcy, payment default and rating downgrades. Additional information continued Glossary of terms continued Credit derivative product company (CDPC) is a special purpose entity that sells credit protection under credit default swaps or certain approved forms of insurance policies. Sometimes they can also buy credit protection. CDPCs are similar to monoline insurers. However, unlike monoline insurers, they are not regulated as insurers. Credit derivatives are contractual agreements that provide protection against a credit event on one or more reference entities or financial assets. The nature of a credit event is established by the protection buyer and protection seller at the inception of a transaction, and such events include bankruptcy, insolvency or failure to meet payment obligations when due. The buyer of the credit derivative pays a periodic fee in return for a payment by the protection seller upon the occurrence, if any, of a credit event. Credit derivatives include credit default swaps, total return swaps and credit swap options. Credit enhancements are techniques that improve the credit standing of financial obligations; generally those issued by an SPE in a securitisation. External credit enhancements include financial guarantees and letters of credit from third-party providers. Internal enhancements include excess spread – the difference between the interest rate received on the underlying portfolio and the coupon on the issued securities; and over-collateralisation – on securitisation, the value of the underlying portfolio is greater than the securities issued. Credit risk assets – loans and advances (including overdraft facilities), instalment credit, finance lease receivables and other traded instruments across all customer types. Credit risk spread is the difference between the coupon on a debt instrument and the benchmark or the risk-free interest rate for the instrument’s maturity structure. It is the premium over the risk-free rate required by the market for the credit quality of an individual debt instrument. Credit valuation adjustments are adjustments to the fair values of derivative assets to reflect the creditworthiness of the counterparty. Currency swap – an arrangement in which two parties exchange specific principal amounts of different currencies at inception and subsequently interest payments on the principal amounts. Often, one party will pay a fixed interest rate, while the other will pay a floating exchange rate (though there are also fixed-fixed and floating-floating arrangements). At the maturity of the swap, the principal amounts are usually re-exchanged. Customer accounts comprise money deposited with the Group by counterparties other than banks and classified as liabilities. They include demand, savings and time deposits; securities sold under repurchase agreements; and other short term deposits. Deposits received from banks are classified as deposits by banks. Debt restructuring – see renegotiated loans. Debt securities are transferable instruments creating or acknowledging indebtedness. They include debentures, bonds, certificates of deposit, notes and commercial paper. The holder of a debt security is typically entitled to the payment of principal and interest, together with other contractual rights under the terms of the issue, such as the right to receive certain information. Debt securities are generally issued for a fixed term and redeemable by the issuer at the end of that term. Debt securities can be secured or unsecured. Debt securities in issue comprise unsubordinated debt securities issued by the Group. They include commercial paper, certificates of deposit, bonds and medium-term notes. Deferred tax asset – income taxes recoverable in future periods as a result of deductible temporary differences – temporary differences between the accounting and tax base of an asset or liability that will result in tax deductible amounts in future periods – and the carry-forward of tax losses and unused tax credits. Deferred tax liability – income taxes payable in future periods as a result of taxable temporary differences (temporary differences between the accounting and tax base of an asset or liability that will result in taxable amounts in future periods). Defined benefit obligation – the present value of expected future payments required to settle the obligations of a defined benefit plan resulting from employee service. Defined benefit plan – pension or other post-retirement benefit plan other than a defined contribution plan. Defined contribution plan – pension or other post-retirement benefit plan where the employer’s obligation is limited to its contributions to the fund. Delinquency - a debt or other financial obligation is considered delinquent when one or more contractual payments are overdue. Delinquency is usually defined in terms of days past due. Delinquent and in arrears are synonymous. Deposits by banks comprise money deposited with the Group by banks and recorded as liabilities. They include money-market deposits, securities sold under repurchase agreements, federal funds purchased and other short term deposits. Deposits received from customers are recorded as customer accounts. Derivative – a contract or agreement whose value changes with changes in an underlying index such as interest rates, foreign exchange rates, share prices or indices and which requires no initial investment or an initial investment that is smaller than would be required for other types of contracts with a similar response to market factors. The principal types of derivatives are: swaps, forwards, futures and options. Exposure at default (EAD) – an estimate of the expected level of utilisation of a credit facility at the time of a borrower’s default. The EAD may be higher than the current utilisation (e.g. in the case where further drawings may be made under a revolving credit facility prior to default) but will not typically exceed the total facility limit. Fannie Mae (Federal National Mortgage Association) is a US Government Sponsored Enterprise. It buys mortgages, principally issued by banks, on the secondary market, pools them, and sells them as residential mortgage-backed securities to investors on the open market. Its obligations are not explicitly guaranteed by the full faith and credit of the US Government. Additional information
Federal Home Loan Mortgage Corporation see Freddie Mac. Federal National Mortgage Association see Fannie Mae. First/second lien – a lien is a charge such as a mortgage held by one party, over property owned by a second party, as security for payment of some debt, obligation, or duty owed by that second party. The holder of a first lien takes precedence over all other encumbrances on that property i.e. second and subsequent liens. Forward contract – a contract to buy (or sell) a specified amount of a physical or financial commodity, at an agreed price, at an agreed future date. Freddie Mac (Federal Home Loan Mortgage Corporation) is a US Government Sponsored Enterprise. It buys mortgages, principally issued by thrifts, on the secondary market, pools them, and sells them as residential mortgage-backed securities to investors on the open market. Its obligations are not explicitly guaranteed by the full faith and credit of the US Government. Futures contract is a contract which provides for the future delivery (or acceptance of delivery) of some type of financial instrument or commodity under terms established at the outset. Futures differ from forward contracts in that they are traded on recognised exchanges and rarely result in actual delivery; most contracts are closed out prior to maturity by acquisition of an offsetting position. G10 - the Group of Ten comprises the eleven industrial countries (Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States) that have agreed to participate in the IMF’s General Arrangements to Borrow. Ginnie Mae (Government National Mortgage Association) is a US Government Agency that guarantees investors the timely payment of principal and interest on mortgage-backed securities for which the underlying asset portfolios comprise federally insured or guaranteed loans – mainly loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. Ginnie Mae obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the US Government. Government Sponsored Enterprises (GSEs) are a group of financial services corporations created by the US Congress. Their function is to improve the efficiency of capital markets and to overcome statutory and other market imperfections which otherwise prevent funds from moving easily from suppliers of funds to areas of high loan demand. They include Fannie Mae and Freddie Mac. Gross yield is the interest rate earned on average interest-earning assets, i.e. interest income divided by average interest-earning assets. Guaranteed mortgages are mortgages that are guaranteed by a government or government agency. In the US, government loan guarantee programmes are offered by the Federal Housing Administration, the Department of Veterans Affairs, and the Department of Agriculture’s Rural Housing Service. In the Netherlands, the Gemeentegarantie programme is run partly by the central government and partly by the municipalities. Home equity loan is a type of loan in which the borrower uses the equity in their home as collateral. A home equity loan creates a charge against the borrower’s house. Impaired loans – a loan or other financial asset or portfolio of financial assets classified as held-to-maturity, available-for-sale or loans and receivables is impaired if there is objective evidence that an event or events since initial recognition of the asset have adversely affected the amount or timing of future cash flows from the asset. Impairment allowance – see loan impairment provisions. Impairment losses – for impaired financial assets measured at amortised cost, impairment losses – the difference between carrying value and the present value of estimated future cash flows discounted at the asset’s original effective interest rate – are recognised in profit or loss and the carrying amount of the financial asset reduced by establishing a provision (allowance). For impaired available-for-sale financial assets, the cumulative loss that had been recognised directly in equity is removed from equity and recognised in profit or loss as an impairment loss. Individually assessed loan impairment provisions – impairment loss provisions for individually significant impaired loans assessed on a case-by-case basis, taking into account the financial condition of the counterparty and any guarantor and the realisable value of any collateral held. International Accounting Standards Board (IASB) is the independent standard-setting body of the IASC Foundation. Its members are responsible for the development and publication of International Financial Reporting Standards (IFRS) and for approving Interpretations of IFRS as developed by the International Financial Reporting Interpretations Committee (IFRIC). Interest rate swap – a contract under which two counterparties agree to exchange periodic interest payments on a predetermined monetary principal, the notional amount. Interest spread is the difference between the gross yield and the interest rate paid on average interest-bearing liabilities. Investment grade generally represents a risk profile similar to a rating of a “BBB-”/”Baa3” or better, as defined by independent rating agencies. Latent loss provisions – loan impairment provisions held against impairments in the performing loan portfolio that have been incurred as a result of events occurring before the balance sheet date but which have not been identified as impaired at the balance sheet. The Group has developed methodologies to estimate latent loss provisions that reflect historical loss experience (adjusted for current economic and credit conditions) and the period between an impairment occurring and a loan being identified and reported as impaired. Loan impairment provisions – are established to recognise incurred impairment losses on a portfolio of loans classified as loans and receivables and carried at amortised cost. It has three components: individually assessed loan impairment provisions, collectively assessed loan impairment provisions and latent loss provisions.
Additional information continued Glossary of terms continued Loan-to-value ratio – the amount of a secured loan as a percentage of the appraised value of the security, e.g. the outstanding amount of a mortgage loan as a percentage of the property’s value. Loss given default (LGD) – the economic loss that may occur in the event of default i.e. the actual loss – that part of the exposure that is not expected to be recovered – plus any costs of recovery. Master netting agreement is an agreement between two counterparties that have multiple derivative contracts with each other that provides for the net settlement of all contracts through a single payment, in a single currency, in the event of default on, or termination of, any one contract. Medium term notes (MTNs) are debt securities usually with a maturity of five to ten years, but the term may be less than one year or as long as 50 years. They can be issued on a fixed or floating coupon basis or with an exotic coupon; with a fixed maturity date (non-callable) or with embedded call or put options or early repayment triggers. MTNs are most generally issued as senior, unsecured debt. Monoline insurers are entities that specialise in providing credit protection against the notional and interest cash flows due to the holders of debt instruments in the event of default. This protection is typically in the form of derivatives such as credit default swaps. Mortgage-backed securities – are asset-backed securities for which the underlying asset portfolios are loans secured on property. See residential mortgage backed securities and commercial mortgage backed securities. Mortgage servicing rights are the rights of a mortgage servicer to collect mortgage payments and forward them, after deducting a fee, to the mortgage lender. Mortgage vintage – the year in which a mortgage loan was made to the customer. Negative equity mortgages – mortgages where the value of the property mortgaged is less than the outstanding balance on the loan. Net interest income is the difference between interest receivable on financial assets classified as loans and receivables or available-for-sale and interest payable on financial liabilities carried at amortised cost. Net interest margin is net interest income as a percentage of average interest-earning assets. Net principal exposure is the carrying value of a financial asset after taking account of credit protection purchased but excluding the effect of any counterparty credit valuation adjustment to that protection. Non-accrual loans comprise all loans for which an impairment provision has been established; for collectively assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in non-accrual loans. Option - an option is a contract that gives the holder the right but not the obligation to buy (or sell) a specified amount of the underlying physical or financial commodity, at a specific price, at an agreed date or over an agreed period. Options can be exchange-traded or traded over-the-counter. Past due – a financial asset such as a loan is past due when the counterparty has failed to make a payment when contractually due. Potential problem loans – are loans other than non-accrual loans, accruing loans which are contractually overdue 90 days or more as to principal or interest and troubled debt restructurings where known information about possible credit problems of the borrower causes management to have serious doubts about the borrower’s ability to meet the loan’s repayment terms. Prime - prime mortgage loans generally have low default risk and are made to borrowers with good credit records and a monthly income that is at least three to four times greater than their monthly housing expense (mortgage payments plus taxes and other debt payments). These borrowers provide full documentation and generally have reliable payment histories. Private equity investments are equity investments in operating companies not quoted on a public exchange. Capital for private equity investment is raised from retail or institutional investors and used to fund investment strategies such as leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital. Probability of default (PD) – the likelihood that a customer will fail to make full and timely repayment of credit obligations over a one year time horizon. Regular way purchase or sale is a purchase or sale of a financial asset under a contract whose terms require delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned. Renegotiated loans – loans are generally renegotiated (‘restructured’) either as part of the ongoing banking relationship with a creditworthy customer or in response to a borrower’s financial difficulties. In the latter case renegotiation may result in an extension of the due date of payment, a concessionary rate of interest or other changes in the terms of the loan; the loan continues to be overdue and will be individually impaired if the renegotiated payments of interest and principal are insufficient to recover the loan’s original carrying amount. Repurchase agreement (Repo) see Sale and repurchase agreements. Residential mortgage backed securities (RMBS) are asset-backed securities for which the underlying asset portfolios are residential mortgages. Retail loans are loans made to individuals rather than institutions. The loans may be for car purchases, home purchases, medical care, home repair, holidays and other consumer uses. Additional information
Reverse repurchase agreement (Reverse repo) – see Sale and repurchase agreements. Risk asset ratio (RAR) – total regulatory capital as a percentage of risk-weighted assets. Risk elements in lending (REIL) comprise non-accrual loans, accruing loans which are contractually overdue 90 days or more as to principal or interest and troubled debt restructurings. Risk-weighted assets – assets adjusted for their associated risks using weightings established in accordance with the Basel Capital Accord as implemented by the FSA. Certain assets are not weighted but deducted from capital. Sale and repurchase agreements – in a sale and repurchase agreement one party, the seller, sells a financial asset to another party, the buyer, at the same time the seller agrees to reacquire, and the buyer to resell, the asset at a later date. From the seller’s perspective such agreements are repurchase agreements (repos) and from the buyer’s reverse repurchase agreements (reverse repos). Securitisation is a process by which assets or cash flows are transformed into transferable securities. The underlying assets or cash flows are transferred by the originator or an intermediary, typically an investment bank, to a special purpose entity which issues securities to investors. Asset securitisations involve issuing debt securities (asset-backed securities) that are backed by the cash flows of income-generating assets (ranging from credit card receivables to residential mortgage loans). Liability securitisations typically involve issuing bonds that assume the risk of a potential insurance liability (ranging from a catastrophic natural event to an unexpected claims level on a certain product type). Special purpose entity (SPE) is an entity created by a sponsor, typically a major bank, finance company, investment bank or insurance company. An SPE can take the form of a corporation, trust, partnership, corporation or a limited liability company. Its operations are typically limited for example in a securitisation to the acquisition and financing of specific assets or liabilities. Structured notes are securities that pay a return linked to the value or level of a specified asset or index. Structured notes can be linked to equities, interest rates, funds, commodities and foreign currency. Student loan related assets are assets that are referenced to underlying student loans. Subordinated liabilities are liabilities which, in the event of insolvency or liquidation of the issuer, are subordinated to the claims of depositors and other creditors of the issuer. Sub-prime – sub-prime mortgage loans are designed for customers with one or more high risk characteristics, such as: unreliable or poor payment histories; loan-to-value ratio of greater than 80%; high debt-to-income ratio; the loan is not secured on the borrower’s primary residence; or a history of delinquencies or late payments on the loan. Super senior CDO is the most senior class of instrument issued by a CDO vehicle. They benefit from the subordination of all other instruments, including AAA-rated securities, issued by the CDO vehicle. Tier 1 capital – core Tier 1 capital plus other Tier 1 securities in issue, less material holdings in financial companies. Tier 1 capital ratio – Tier 1 capital as a percentage of risk-weighted assets. Tier 2 capital – qualifying subordinated debt and other Tier 2 securities in issue, eligible collective impairment allowances, unrealised available for sale equity gains and revaluation reserves less certain regulatory deductions. Troubled debt restructurings – comprise those loans that are troubled debt restructurings but that are not included in either non-accrual loans or in accruing loans which are contractually overdue 90 days or more as to principal or interest. A restructuring of a loan is a troubled debt restructuring if the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. US Government National Mortgage Association see Ginnie Mae. Unaudited – unaudited financial information is information that has not been subjected to the audit procedures undertaken by the Group’s auditors to enable them to express an opinion on the Group’s financial statements. VaR is a technique that produces estimates of the potential change in the market value of a portfolio over a specified time horizon at given confidence levels. Wrapped security – a wrapped security is a debt security where the holder benefits from credit protection provided by a third party, typically a financial guarantor or monoline insurer. Write down – a reduction in the carrying value of an asset to record a decline in its fair value or value in use.
Additional information continued Five year summary | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | | Summary consolidated income statement | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Net interest income | | | 3,197 | | | | 5,397 | | | | 5,091 | | | | 4,449 | | | | 4,461 | | Non-interest income (1) | | | 6,077 | | | | 2,307 | | | | 3,263 | | | | 4,877 | | | | 4,189 | | Total income | | | 9,274 | | | | 7,704 | | | | 8,354 | | | | 9,326 | | | | 8,650 | | Operating expenses (2, 3, 4) | | | (4,006 | ) | | | (5,202 | ) | | | (4,420 | ) | | | (5,018 | ) | | | (4,483 | ) | Profit before impairment losses | | | 5,268 | | | | 2,502 | | | | 3,934 | | | | 4,308 | | | | 4,167 | | Impairment losses | | | (4,139 | ) | | | (1,362 | ) | | | (849 | ) | | | (852 | ) | | | (756 | ) | Operating profit before tax | | | 1,129 | | | | 1,140 | | | | 3,085 | | | | 3,456 | | | | 3,411 | | Tax credit/(charge) | | | 5 | | | | (599 | ) | | | (768 | ) | | | (831 | ) | | | (948 | ) | Profit after tax | | | 1,134 | | | | 541 | | | | 2,317 | | | | 2,625 | | | | 2,463 | | Minority interests | | | — | | | | (93 | ) | | | (89 | ) | | | (39 | ) | | | (17 | ) | Profit attributable to ordinary shareholders | | | 1,134 | | | | 448 | | | | 2,228 | | | | 2,586 | | | | 2,446 | |
Notes: (1) | Includes gain on redemption of own debt of £381 million in 2009. |
* Incorporated by reference to (2) | Includes integration and restructuring costs of £150 million (2008 – £42 million, 2007 – £43 million, 2006 – £67 million, 2005 – £163 million). |
(3) | Includes write-down of goodwill and other intangible assets of £716 million in 2008. |
(4) | Includes gain on pensions curtailment of £544 million in 2009. |
| | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | | Summary consolidated balance sheet | | | £m | | | | £m | | | | £m | | | | £m | | | | £m | | Loans and advances | | | 297,633 | | | | 264,501 | | | | 260,425 | | | | 243,974 | | | | 215,938 | | Debt securities and equity shares | | | 35,755 | | | | 37,122 | | | | 39,047 | | | | 33,701 | | | | 30,338 | | Derivatives and settlement balances | | | 9,043 | | | | 13,012 | | | | 6,275 | | | | 6,320 | | | | 6,907 | | Other assets | | | 8,297 | | | | 6,584 | | | | 6,535 | | | | 6,666 | | | | 7,420 | | Total assets | | | 350,728 | | | | 321,219 | | | | 312,282 | | | | 290,661 | | | | 260,603 | | | | Shareholders’ equity | | | 14,199 | | | | 12,135 | | | | 10,788 | | | | 10,173 | | | | 9,440 | | Minority interests | | | 1,282 | | | | 1,323 | | | | 1,314 | | | | 1,012 | | | | 744 | | Subordinated liabilities | | | 8,999 | | | | 10,099 | | | | 5,932 | | | | 5,641 | | | | 6,648 | | Deposits | | | 288,896 | | | | 254,017 | | | | 250,380 | | | | 227,477 | | | | 203,925 | | Derivatives, settlement balances and short positions | | | 21,258 | | | | 21,157 | | | | 18,206 | | | | 26,617 | | | | 24,231 | | Other liabilities | | | 16,094 | | | | 22,488 | | | | 25,662 | | | | 19,741 | | | | 15,615 | | Total liabilities and equity | | | 350,728 | | | | 321,219 | | | | 312,282 | | | | 290,661 | | | | 260,603 | |
ITEM 19. EXHIBIT INDEX Exhibit number | | Description | | | | | | | 1.1 to the | * | | Memorandum and Articles of Association of National Westminster Bank Plc Annual Report | | | | | | | 7.1 | | | Explanation of ratio calculations | | | | | | | 8.1 | | | Omitted pursuant to General Instruction I(2)(b) of Form 10-K as applied to reports on Form 20-F for the fiscal year ended 31 December 2002 (File No. 1-9266). | | | | | | | 12.1 | | | CEO certifications required by Rule 13a-14(a) | | | | | | | 12.2 | | | CFO certifications required by Rule 13a-14(a) | | | | | | | 13.1 | | | Certifications required by Rule 13a-14(b) | |
* Previously filed and incorporated by reference to Exhibit 1.1 to the company’s Annual Report on Form 20-F for the fiscal year ended 31 December 2009 (File No. 1-09266) SIGNATUREThe registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report to be signed on its behalf. SignaturesPursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorised.
National Westminster Bank Plc Registrant /s/ Guy Robert WhittakerBruce Van Saun Guy Robert WhittakerBruce Van Saun
Group Finance Director 25 June27 April 20082010
Exhibit number | | Description | | | | | | | 1.1 | * | | Memorandum and Articles of Association of National Westminster Bank Plc | | | | | | | 7.1 | | | Explanation of ratio calculations | | | | | | | 8.1 | | | Omitted pursuant to General Instruction I(2)(b) of Form 10-K as applied to reports on Form 20-F | | | | | | | 12.1 | | | CEO certifications required by Rule 13a-14(a) | | | | | | | 12.2 | | | CFO certifications required by Rule 13a-14(a) | | | | | | | 13.1 | | | Certifications required by Rule 13a-14(b) | |
* IncorporatedPreviously filed and incorporated by reference to Exhibit 1.1 to the National Westminster Bank Plccompany’s Annual Report on Form 20-F for the fiscal year ended 31 December 20022009 (File No. 1-9266).1-09266) 121161
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