UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 20-F

 

(Mark One)

¨          REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

OR

 

x          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

 

OR

 

¨          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

o          SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Commission file number: 001-10306

 

THE ROYAL BANK OF SCOTLAND GROUP plc

 

(Exact name of Registrant as specified in its charter)

 

United Kingdom

 

(Jurisdiction of incorporation)

 

RBS Gogarburn, PO Box 1000, Edinburgh EH12 1HQ, United Kingdom

 

(Address of principal executive offices)

 

Jan Cargill, Chief Governance Officer and Board Counsel, Tel: +44 (0) 131 626 3860, Fax: +44 (0) 131 626 3081

 

PO Box 1000, Gogarburn, Edinburgh EH12 1HQ

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol (s)		Name of each exchange on which registered
American Depositary Shares, each representing 2 ordinary shares, nominal value £1 per share		RBS		New York Stock Exchange
Ordinary shares, nominal value £1 per share				New York Stock Exchange*
American Depositary Shares Series U each representing one Non-Cumulative Dollar Preference Share, Series U		RBS		New York Stock Exchange
Dollar Perpetual Regulatory Tier 1 Securities		RBSP1		New York Stock Exchange
5.625% Senior Notes due 2020		RBS20A		New York Stock Exchange
6.125% Senior Notes due 2021		RBS21		New York Stock Exchange
6.125% Subordinated Tier 2 Notes due 2022		RBS22		New York Stock Exchange
6.000% Subordinated Tier 2 Notes due 2023		RBS23A		New York Stock Exchange
6.100% Subordinated Tier 2 Notes due 2023		RBS23		New York Stock Exchange
5.125% Subordinated Tier 2 Notes due 2024		RBS24		New York Stock Exchange
Fixed-to-fixed Reset Rate Subordinated Tier 2 Notes due 2029		RBS29A		New York Stock Exchange
3.875% Senior Notes due 2023		RBS23B		New York Stock Exchange
3.498% Fixed Rate / Floating Rate Senior Notes due 2023		RBS23D		New York Stock Exchange
4.519% Fixed Rate / Floating Rate Senior Notes due 2024		RBS23A		New York Stock Exchange
4.269% Fixed Rate / Floating Rate Senior Notes due 2025		RBS25		New York Stock Exchange
4.892% Fixed Rate / Floating Rate Senior Notes due 2029		RBS29		New York Stock Exchange
5.076% Fixed Rate / Floating Rate Senior Notes due 2030		RBS30		New York Stock Exchange
4.445% Fixed Rate / Floating Rate Senior Notes due 2030		RBS30A		New York Stock Exchange
Senior Floating Rate Notes due 2023		RBS23C		New York Stock Exchange
Senior Floating Rate Notes due 2024		RBS24B		New York Stock Exchange

 

 

---

*                 Not for trading, but only in connection with the registration of American Depositary Shares representing such ordinary shares pursuant to the requirements of the Securities and Exchange Commission.

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

Perpetual Subordinated Contingent Convertible Additional Tier 1 Capital Notes callable 2020   Irish Stock Exchange

Perpetual Subordinated Contingent Convertible Additional Tier 1 Capital Notes callable 2021   Irish Stock Exchange

Perpetual Subordinated Contingent Convertible Additional Tier 1 Capital Notes callable 2025   Irish Stock Exchange

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2019, the close of the period covered by the annual report:

 

(Title of each class)		(Number of outstanding shares)
Ordinary shares of £1 each 11% cumulative preference shares 5½% cumulative preference shares Non-cumulative dollar preference shares, Series U		12,093,909,192 500,000 400,000 10,130

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

x  Yes      o  No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

o  Yes      x  No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

x  Yes      o  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

x  Yes      o  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new ore revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. o

 

† The term “new or revised financial accounting standard” refers to any update issues by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

o  U.S. GAAP

 

x  International Financial Reporting Standards as issued by the International Accounting Standards Board

 

o  Other

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

o  Item 17       o  Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

o  Yes      x  No

 

 

SEC Form 20-F cross reference guide

 

Item		Item Caption		Pages
PART I
1		Identity of Directors, Senior Management and Advisers		Not applicable
2		Offer Statistics and Expected Timetable		Not applicable
3		Key Information Selected financial data Capitalisation and indebtedness Reasons for the offer and use of proceeds Risk factors		52-57, 198-203, 272-284 Not applicable Not applicable 43-45, 286-300
4		Information on the Company History and development of the Company Business overview Organisational structure Property, plant and equipment		5-9, 13, 50, 110, 204-205, 212-215, 241, 250, 311-312, 318-320 1-46, 54, 110-112, 117-130, 272, 301-302 22, 50-51, 129, Exhibit 8.1 8,11, 16, 18, 38-42, 205, 246-248
4a		Unresolved Staff Comments		Not applicable
5		Operating and Financial Review and Prospects Operating results Liquidity and capital resources Research and development, patents, licences etc Trend information Off-balance sheet arrangements Tabular disclosure of contractual obligations		1-42, 50-63, 176-191 4-9,11-12, 15-18, 22-28, 32, 176-180, 210-220, 257 13, 52-53, 122-133, 177, 198-203,224-227, 237-240, 242-243 Not applicable 1-45, 50-51 126, 134, 144, 251-257 130-133, 246,251
6		Directors, Senior Management and Employees Directors and senior management Compensation Board practices Employees Share ownership		46, 64-65, 111 81-107, 216-220, 258 46, 64-80, 110-112 33-37, 47, 201-202 92-104, 204, 210-212
7		Major Shareholders and Related Party Transactions Major shareholders Related party transactions Interests of experts and counsel		111, 301, 303-304 258-259 Not applicable
8		Financial Information Consolidated statements and other financial information Significant changes		50-63, 198-203 2, 259
9		The Offer and Listing Offer and listing details Plan of distribution Markets Selling shareholders Dilution Expenses of the issue		111, 244-245, 307 Not applicable 108-109, 307 Not applicable Not applicable Not applicable
10		Additional information Share capital Memorandum and articles of association Material contracts Exchange controls Taxation Dividends and paying agents Statement of experts Documents on display Subsidiary information		Not applicable 311-318 303-304 310 309-310 Not applicable Not applicable 318 Not applicable
11		Quantitative and Qualitative Disclosure about Market Risk		120, 125, 129, 134-175, 176-186, 224-238, 272-283
12		Description of Securities other than Equity Securities		285

 

 

SEC Form 20-F cross reference guide continued

 

Item		Item Caption		Pages
PART II
13		Defaults, Dividend Arrearages and Delinquencies		Not applicable
14		Material Modifications to the Rights of Security Holders and Use of Proceeds		Not applicable
15		Controls and Procedures		43-46, 72-78, 108-109, 193-197, Exhibits 12.1 and 12.2
16		[Reserved]
16a		Audit Committee financial expert		72
16b		Code of ethics		6-9, 11, 29-36, 114, 301
16c		Principal Accountant Fees and services		74, 220
16d		Exemptions from the Listing Standards		Not applicable
16e		Purchases of Equity Securities by the Issuer and Affiliated Purchasers		Not applicable
16f		Change in Registrant’s Certifying Accountant		Not applicable
16g		Corporate Governance		46, 64-69, 110-113
16h		Mine Safety Disclosure		Not applicable
PART III
17		Financial Statements		Not applicable
18		Financial Statements		193-266
19		Exhibits		321-322

 

 

 

Forward looking statements

 

 

 

Cautionary statement regarding forward-looking statements

Certain sections in this document contain ‘forward-looking statements’ as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words ‘expect’, ‘estimate’, ‘project’, ‘anticipate’, ‘commit’, ‘believe’, ‘should’, ‘intend’, ‘plan’, ‘could’, ‘probability’, ‘risk’, ‘Value-at-Risk (VaR)’, ‘target’, ‘goal’, ‘objective’, ‘may’, ‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and similar expressions or variations on these expressions.

 

In particular, this document includes forward-looking statements relating, but not limited to: future profitability and performance, including financial performance targets such as return on tangible equity; cost savings and targets; implementation of the RBS Group’s strategy; litigation and government and regulatory investigations, including the timing and financial and other impacts thereof; the implementation of the Alternative Remedies Package; the continuation of the RBS Group’s balance sheet reduction programme, including the reduction of risk-weighted assets (RWAs) and the timing thereof; capital and strategic plans and targets; capital, liquidity and leverage ratios and requirements, including CET1 Ratio, RWA equivalents (RWAe), Pillar 2 and other regulatory buffer requirements, minimum requirement for own funds and eligible liabilities, and other funding plans; funding and credit risk profile; capitalisation; portfolios; net interest margin; customer loan and income growth; the level and extent of future impairments and write-downs, including with respect to goodwill; restructuring and remediation costs and charges; the RBS Group’s exposure to political risk, economic risk, climate change risk, operational risk, conduct risk, cyber and IT risk and credit rating risk and to various types of market risks, including interest rate risk, foreign exchange rate risk and commodity and equity price risk; customer experience including our Net Promotor Score (NPS); employee engagement and gender balance in leadership positions.

 

Limitations inherent to forward-looking statements

These statements are based on current plans, estimates, targets and projections, and are subject to significant inherent risks, uncertainties and other factors, both external and relating to the RBS Group’s strategy or operations, which may result in the RBS Group being unable to achieve the current targets, predictions, expectations and other anticipated outcomes expressed or implied by such forward-looking statements. In addition, certain of these disclosures are dependent on choices relying on key model characteristics and assumptions and are subject to various limitations, including assumptions and estimates made by management. By their nature, certain of these disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated. Accordingly, undue reliance should not be placed on these statements. Forward-looking statements speak only as of the date we make them and we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the RBS Group’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

 

Important factors that could affect the actual outcome of the forward looking statements

We caution you that a large number of important factors could adversely affect our results or our ability to implement our strategy, cause us to fail to meet our targets, predictions, expectations and other anticipated outcomes or affect the accuracy of forward-looking statements we describe in this document, including in the risk factors and other uncertainties set out in the RBS Group’s 2019 Annual Report on Form 20-F and other risk factors and uncertainties discussed in this document. These include the significant risks for the RBS Group presented by: strategic risk (including in respect of: the implementation and execution of the RBS Group’s Purpose-led Strategy, including as it relates to the re-alignment of the NWM franchise and the RBS Group’s climate ambition and the risk that the RBS Group may not achieve its targets); operational and IT resilience risk (including in respect of: the RBS Group being subject to cyberattacks; operational risks inherent in the RBS Group’s business; exposure to third party risks including as a result of outsourcing and its use of new technologies and innovation, as well as related regulatory and market changes; the RBS Group’s operations being highly dependent on its IT systems; the RBS Group relying on attracting, retaining and developing senior management and skilled personnel and maintaining good employee relations; the RBS Group’s risk management framework; and reputational risk), economic and political risk (including in respect of: prevailing uncertainty regarding the terms of the UK’s withdrawal from the European Union; increased political and economic risks and uncertainty in the UK and global markets; climate change and the transition to a low carbon economy; HM Treasury’s ownership of RBSG plc and the possibility that it may exert a significant degree of influence over the RBS Group; changes in interest rates and changes in foreign currency exchange rates), financial resilience risk (including in respect of: the RBS Group’s ability to meet targets and make discretionary capital distributions; the highly competitive markets in which the RBS Group operates; deterioration in borrower and counterparty credit quality; the ability of the RBS Group to meet prudential regulatory requirements for capital and MREL, or to manage its capital effectively; the ability of the RBS Group to access adequate sources of liquidity and funding; changes in the credit ratings of RBSG plc, any of its subsidiaries or any of its respective debt securities; the RBS Group’s ability to meet requirements of regulatory stress tests; possible losses or the requirement to maintain higher levels of capital as a result of limitations or failure of various models; sensitivity of the RBS Group’s financial statements to underlying accounting policies, judgments, assumptions and estimates; changes in applicable accounting policies; the value or effectiveness of any credit protection purchased by the RBS Group; the level and extent of future impairments and write-downs, including with respect to goodwill; and the application of UK statutory stabilisation or resolution powers) and legal, regulatory and conduct risk (including in respect of: the RBS Group’s businesses being subject to substantial regulation and oversight; the RBS Group complying with regulatory requirements; legal, regulatory and governmental actions and investigations (including the final number of PPI claim and their amounts); the replacement of LIBOR, EURIBOR and other IBOR rates to alternative risk free rates; heightened regulatory and governmental scrutiny (including by competition authorities); implementation of the Alternative Remedies Package and the costs related thereto; and changes in tax legislation).

 

The forward-looking statements contained in this document speak only as at the date hereof, and the RBS Group does not assume or undertake any obligation or responsibility to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

The information, statements and opinions contained in this document do not constitute a public offer under any applicable legislation or an offer to sell or solicit of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments.

 

1

 

Presentation of information

 

 

 

In this document, ‘RBSG plc’ refers to The Royal Bank of Scotland Group plc, and ‘RBS’ or ‘RBS Group’ refers to RBSG plc and its subsidiaries.

 

Any information contained on any websites linked or report references in this report is for information only and shall not be deemed to be incorporated by reference in this report.

 

The company publishes its financial statements in pounds sterling (‘£’ or ‘sterling’). The abbreviations ‘£m’ and ‘£bn’ represent millions and thousands of millions of pounds sterling, respectively, and references to ‘pence’ represent pence in the United Kingdom (‘UK’). Reference to ‘dollars’ or ‘$’ are to United States of America (‘US’) dollars. The abbreviations ‘$m’ and ‘$bn’ represent millions and thousands of millions of dollars, respectively, and references to ‘cents’ represent cents in the US. The abbreviation ‘€’ represents the ‘euro’, and the abbreviations ‘€m’ and ‘€bn’ represent millions and thousands of millions of euros, respectively.

 

RBS filed a Form 6-K on 30 April 2019 to restate or represent certain disclosures in RBS Group’s Annual Report on Form 20-F for the year ended 31 December 2018, filed on 28 February 2019, in connection with the re-segmentation completed in Q1 2019 and effective from 1 January 2019 and changes in reporting standard IAS12 ‘Income taxes’ effective from 1 January 2019.

 

Any information contained on websites linked or reports referenced in this Annual Report on Form 20-F is for information only and will not be deemed to be incorporated by reference herein.

 

Non-IFRS financial information

As described in the accounting policies on pages 204 to 208, RBS prepares its financial statements in accordance with IFRS as issued by the IASB which constitutes a body of generally accepted accounting principles (GAAP). This document contains a number of adjusted or alternative performance measures, also known as non-GAAP or non-IFRS performance measures. These measures are adjusted for certain items which management believe are not representative of the underlying performance of the business and which distort period-on-period comparison. These non-IFRS measures are not measures within the scope of IFRS and are not a substitute for IFRS measures. These measures include:

 

Measure	Basis of preparation	Additional analysis or reconciliation
RBS return on tangible equity	Profit for the period attributable to ordinary shareholders divided by average tangible equity. Average tangible equity is total equity less intangible assets and other owners’ equity.	Table I on page 268
RBS return on tangible equity excluding FX recycling gain	Profit for the period attributable to ordinary shareholders, adjusted for FX recycling gain, for the period divided by average tangible equity. Average tangible equity is total equity less intangible assets and other owners’ equity.	Table I on page 268
Segmental return on equity	Segmental operating profit adjusted for tax and for preference share dividends divided by average notional equity, allocated at an operating segment specific rate, of the period average segmental risk-weighted assets incorporating the effect of capital deductions (RWAes).	Table I on page 268
Operating expenses analysis – management view	The management analysis of strategic disposals in other income and operating expenses shows strategic costs and litigation and conduct costs in separate lines. These amounts are included in staff, premises and equipment and other administrative expenses in the statutory analysis.	Table II on page 269
Cost:income ratio	Total operating expenses less operating lease depreciation divided by total income less operating lease depreciation.	Table III on page 269
Commentary – adjusted periodically for specific items	RBS and segmental business performance commentary have been adjusted for the impact of specific items such as the Alawwal bank merger, FX recycling gains, push payments fraud costs, strategic, litigation and conduct costs (detailed on pages 55 to 56).	Notable items - page 55 Notable items within expenses - pages 56
Bank net interest margin (NIM)	Net interest income of the banking business less the NatWest Markets (NWM) element as a percentage of interest-earning assets of the banking business less the NWM element.	Table IV on page 270

 

Performance metrics not defined under IFRS(1)

 

Measure	Basis of preparation	Additional analysis or reconciliation
Loan:deposit ratio	Net customer loans held at amortised cost divided by total customer deposits.	Table V on page 270
Tangible net asset value (TNAV)	Tangible equity divided by the number of ordinary shares in issue. Tangible equity is ordinary shareholders’ interest less intangible assets.	Page 57.
NIM	Net interest income of the banking business as a percentage of interest-earning assets of the banking business.	Pages 58 to 62.
Funded assets	Total assets less derivatives.	Pages 59 and 63.
ECL loss rate	The annualised loan impairment charge divided by gross customer loans.	Pages 56.

 

Note:

(1)     Metric based on GAAP measures, included as not defined under IFRS and reported for compliance with ESMA adjusted performance measure rules.

 

In Q1 2019,  RBS introduced a new adjusted performance metric, Bank NIM, which is calculated as RBS net interest income and interest-earning assets less NWM net interest income and interest-earning assets. Bank NIM is believed by management to more accurately reflect the performance of the business as net interest income is not considered a main income stream for the NWM segment.

 

2

 

 

	Strategic report
	2019 highlights and our future strategy
	Performance against our 2019 targets	4
	Chairman’s statement	5
	Group Chief Executive’s statement	7
	Our Purpose-led strategy	11
	Outlook	13
	2019 Performance at a glance	15
	How we do business
	Our operating environment	17
	How we create value	19
	Our businesses & performance	22
	Building a more sustainable bank
	Our Values	29
	Stakeholder engagement	30
	Our Customers	31
	Our Colleagues	33
	Climate-related financial disclosures	38
	Risk Management
	Risk overview	43
	Top and Emerging Risks	45
	Governance and compliance
	Governance at a glance	46
	Board engagement with stakeholders	47
	Business Review	50
	The financial performance of our business and our operating segments.
	Governance	64
	A detailed review of our corporate governance and remuneration, including the Report of the directors and annual report on remuneration.
	Capital and risk management	114
	Disclosures on our capital, liquidity and funding position and a detailed overview of the management of key risks relating to our business operations.
	Financial Statements	192
	Our audited financial statements and related notes, including our report of independent registered public accounting firm.
	Risk Factors	286
	A description of certain risk factors that could adversely affect our future results, financial condition and prospects and cause them to be materially different.

 

We are a financial services company, providing a wide range of products and services to personal, commercial, large corporate and institutional customers.

 

Approval of Strategic Report

 

The Strategic Report for the year ended 31 December 2019 set out on pages 3 to 49 was approved by the Board of directors on 13 February 2020.

 

By order of the Board
Company Secretary       Jan Cargill
	13 February 2020
Chairman	Howard Davies
Executive directors       Alison Rose-Slade
	Katie Murray
Non-executive directors	Frank Dangeard	Baroness Noakes
	Alison Davis	Mike Rogers
	Patrick Flynn	Mark Seligman
	Morten Friis	Lena Wilson
	Robert Gillespie

 

Approach to non-financial performance reporting

 

We note the requirements under the provisions of the Companies Act 2006, relating to the preparation of the Strategic Report which have been amended by the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016, which implements EU Directive 2014/95/EU (on non-financial and diversity information). As a result of these changes, we have integrated non-financial information across the Strategic Report, thereby promoting cohesive reporting of non-financial matters. These include specific sections on where readers can read more on our business model and policies (How we do Business; Building a more sustainable bank), due diligence and outcome of such policies (Governance and compliance), principal risk and mitigatory actions (Risk Management), and performance measures (2019 highlights and our future strategy). We have also begun reporting in accordance with guidance from the International Integrated Reporting Council and the recommendations of the Taskforce on Climate-related Finance Disclosures (TCFD) (Climate-related financial disclosures).

 

Further information on environmental, social, employee and human rights matters, together with detailed information on our sustainability performance can be found on our Sustainable Banking web pages on rbs.com

 

Assurance

 

The scope of work performed by the RBS Group’s independent auditor as part of their review of other information included in the 2019 Annual Report on Form 20-F is described in the report of independent registered public accounting firm to the members of The Royal Bank of Scotland Group plc on pages 193 to 197.

 

In addition, The Royal Bank of Scotland Group plc appointed Ernst & Young LLP to provide limited independent assurance over selected sustainability content marked with (*) within the Strategic Report, as at and for the year ended 31 December 2019.

 

The assurance engagement was planned and performed in accordance with the International Standard for Assurance Engagements (ISAE) 3000 Revised, Assurance Engagements Other Than Audits or Reviews of Historical Financial Information. An opinion was issued and is available on rbs.com. This opinion includes details of the scope, respective responsibilities, work performed, limitations and conclusion.

 

3

 

2019 highlights and our future strategy

 

 

4

 

2019 highlights and our future strategy

 

 

 

 

Howard Davies

Chairman

 

 

2019 was another year of positive progress for the Bank, set against ongoing political and economic uncertainty.

 

Dear shareholders,

2019 was another year of progress for the Bank, set against ongoing political and economic uncertainty. Further cost reduction, increased lending to our personal and business customers and more dividends for our shareholders are all good outcomes. I am also very pleased that we appointed Alison Rose as Group CEO. Alison brings a wealth of experience from many different roles in the Group and the Board and I look forward to continuing to work with her as we strive to improve the Bank for our customers.

 

On behalf of the Board, I would like to thank Ross McEwan for his immense commitment to RBS throughout his tenure here. The Bank has undergone a substantial transformation, and his leadership was fundamental. I am confident that the work he did during his time here has set us up well for the future.

 

Renaming the RBS Group

Today, we have announced that we plan to rename our parent company. The Royal Bank of Scotland Group plc is intended to be renamed NatWest Group plc later this year. As we evolve our strategic plan, the Board has decided that it is the right time to align the parent name with the brand under which the great majority of our business is delivered. Customers will see no change to products or services as a result of this change and will continue to be served through the brands they recognise today, including the Royal Bank of Scotland. Similarly, our employees will also see no change to the way they work and we will not be moving people out of Scotland as a result of this change.

 

Economic outlook and 2019 financial performance

Uncertainty continues to dominate the political and economic environment. We await further details of the future terms of trade between the EU and UK and what they mean for both the Bank and its customers. The UK economy slowed in 2019 with GDP growth of 1.2% in the year. That was accompanied by lower business investment and slowing house price growth. More encouragingly, unemployment is low and impairments remain very low.

 

The low interest rate environment continues to challenge income growth for UK and European banks. Despite that pressure, the Bank delivered a solid performance, generating a pre-tax operating profit of £4.2 billion and an attributable profit of £3.1 billion or £1.6 billion excluding the FX recycling gain following the merger of Alawwal Bank with Saudi British Bank (SABB). Our stake in Alawwal Bank was a position we have been working to unwind for a number of years as we have refocused on the UK & Republic of Ireland. Another

 

5

 

2019 highlights and our future strategy

 

significant item was an additional charge of £900 million relating to PPI, as, along with other banks, we experienced a significantly higher number of claims than expected as we approached the FCA’s 29 August 2019 deadline.

 

The Bank reduced its operating costs while maintaining a sound control environment. In 2019, operating expenses reduced by £320 million (2018 - £756 million). Costs, excluding strategic, litigation and conduct costs, reduced by £310 million, taking the cumulative cost reduction to £4.5 billion since 2014. The Bank’s balance sheet remains strong, and we obtained a clear pass in the Bank of England stress test in December 2019. Our Common Equity Tier 1 ratio – the key measure of financial strength – is the highest of the major UK banks.

 

Shareholder returns

We are pleased to announce that, subject to shareholder approval at the Annual General Meeting, we will pay a final ordinary dividend of 3 pence per share and a special dividend of 5 pence per share. This year, our total ordinary dividend of 5 pence per share is excluding the post-tax FX recycling gains of £1.6 billion, given this is purely an accounting adjustment. If approved, this will mean that we have returned £4.2 billion in capital to shareholders since we resumed dividend payments in 2018, of which £2.6 billion has gone to the UK taxpayer.

 

Looking ahead, we expect to maintain ordinary dividends of around 40% of attributable profit and retain approval from shareholders to buy back shares - equivalent to 4.99% of the RBS Group’s issued share capital - from HM Treasury. Any buyback of these shares will be at the discretion of HM Treasury, but the Board believes that participating in government share sales in the future is an excellent mechanism to return excess capital to shareholders in an efficient way.

 

Becoming more diverse and inclusive

Our renewed sense of purpose is reflected in continued efforts to become more diverse and inclusive. We are making progress towards our goal of having at least 30% senior women in our top three leadership layers in each of our businesses by 2020 and to be fully gender balanced across the Bank by 2030.

 

Since the introduction of our targets, we have seen an increase in the proportion of women in senior roles. Currently the top three leadership levels in 10 of our 12 business areas have more than 30% women. On aggregate across the entire Bank, that translates to women filling 35% of roles in the top three leadership levels – a 6% increase since targets were introduced.

 

In our top 4,000 leadership positions, female representation has improved, with 44% women in those roles. That is a 12% increase over the same timeframe. So we are making progress but must continue with momentum to meet our ambition of having a fully gender balanced workforce at all levels of the organisation by 2030.

 

We also continue to focus on building an ethnically diverse organisation. Our plan involves positive action and includes reciprocal mentoring, targeted development workshops and leadership programmes and ensuring we have a Black, Asian and Minority Ethnic (BAME) focus on recruitment, talent identification and promotion. We introduced formal UK targets at the start of 2018 to improve the representation of BAME/non-white colleagues in our top four leadership layers to at least 14% by 2025. At the end of 2019 we had 9% BAME/non-white colleagues in those layers and employed 15% BAME/non-white staff across the UK.

 

Listening to and engaging with stakeholders

During 2019, we conducted regular engagement with a broad range of stakeholders, ensuring their views informed our discussion and thinking. Engagement included visits and the ‘Meet the Board’ event with colleagues. Our Colleague Advisory Panel (CAP) met twice in 2019, providing a valuable mechanism for colleagues to gain a greater understanding of the Board’s role and provide feedback to directors. Two-way communication is crucial for both colleagues and Board members and embodies the open and inclusive culture of the Bank. Furthermore, we hold regular retail shareholder events, where shareholders can ask questions to a panel of executives and Non-Executive Directors and learn more about the business, our progress to date and our plans for the future. We held two such events during 2019, one of which was our first virtual shareholder evening.

 

Board changes

In addition to the change of Group CEO, Brendan Nelson stepped down as a non-executive director on 25 April 2019. Patrick Flynn succeeded Brendan as Chairman of the Group Audit Committee. Aileen Taylor left the role of Chief Governance & Regulatory Officer and Board Counsel, and Company Secretary on 5 August 2019 following 19 years with RBS. Jan Cargill, previously Deputy Secretary and Director, Corporate Governance, has very successfully stepped up to the role of Chief Governance Officer and Company Secretary. I would like, once again, to thank Brendan and Aileen for their contributions to the Bank over many years.

 

Conclusion

Today marks an exciting and important moment for the Bank, our customers and our shareholders, as we look forward and set out how our strategy will evolve over the coming years. By building on solid foundations, putting a focus on Purpose at the centre of our decision making and refreshing our approach to deliver a better service for customers, we will create a more sustainable Bank, and in turn more sustainable returns, for you, our shareholders.

 

 

 

 

 

 

We are pleased to announce that, subject to shareholder approval at the Annual General Meeting, we will pay a final ordinary dividend of 3 pence per share and a special dividend of 5 pence per share.

 

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Alison Rose

Group Chief Executive

 

 

We champion potential, helping people, families and businesses tothrive.

 

Dear shareholders,

It is a privilege to be writing to you as CEO of the company that I joined as a graduate more than 25 years ago. I am truly excited by the opportunity to lead the Bank as we set out a new commitment to become a Purpose-led organisation, which will champion the potential of people, families and businesses across the communities we serve.

 

A period of unprecedented disruption

We, like our customers, are living in a period of unprecedented disruption – whether it is the struggle to get on the housing ladder or starting a business, the rapid growth of disruptive technology, an ageing population, the emergence of the gig economy or the existential impact of climate change. The way people live is changing, and their expectations of companies are changing too. I firmly believe in response, we have to adopt a new approach that moves away from a view that is defined by products and transactions, and uses the strength of the relationships we have with all of our stakeholders as the real test of our progress.

 

This disruption is happening against the backdrop of a highly uncertain economic environment. UK economic growth remains subdued, compared to its historic trend, and interest rates are likely to be lower for longer. This has an impact on our ability to generate net interest income. Business confidence continues to be affected by the UK’s departure from the EU as our customers await certainty over the future terms of trade. Consumer confidence on the other hand continues to be supported by a relatively strong UK employment market and we are seeing good volumes in our mortgage business as a result. We still see opportunities to grow in our key target markets despite some of these challenging trends.

 

Purpose-led organisation – Building more sustainable returns

Today marks a new era, as we provide an update to our plans and a new Purpose for the Bank that will help us become a more sustainable business, delivering better outcomes for our customers and our shareholders.

 

We are privileged to play a central role in the UK economy. That brings with it, a deep responsibility to the communities we serve and to wider society. That is why we have a refreshed Purpose:

 

We champion potential, helping people, families and businesses to thrive.

 

We won’t get everything right every time, but this simple expression will be the standard to which we will hold ourselves.

 

Sustainable returns, however, can only come from a sustainable business model and building a Purpose-led bank must underpin the services we provide.

 

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It also means we must play our role in tackling the issues which hold people, families and businesses back.

 

The Board and management team have worked together to define an approach to becoming a Purpose-led organisation based on balancing the interests of all our stakeholders. As part of this, we have worked with the not-for-profit organisation a Blueprint for Better Business.

 

We have informed our approach using their framework that identifies the need to be: Honest and Fair with Customers and Suppliers; A Good Citizen; A Guardian for Future Generations; and A Responsible and Responsive Employer as key drivers to becoming a more sustainable business. In addition, we have analysed what is driving the changes in our own customer behaviours and the subsequent trends borne from their experiences. This forms the building blocks for the plans we are setting out today.

 

It is essential that our Purpose underpins our strategy and the decisions we make on the future direction of the business. At a practical level, we have been reviewing how to embed Purpose within Board forums and processes to ensure it is a central part of how we work. We are very clear that our Purpose must apply across the whole organisation and to everything we do. We are also clear that getting this right will take time.

 

Three initial areas of focus where we can make a substantial impact

We have identified three areas of focus where we can make a substantial impact in addressing challenges that threaten to hold people, families and businesses back:

 

·             Enterprise, and the barriers that too many face to starting a business;

·             Learning, and what we can do to improve financial capability and confidence for our customers, as well as establishing a dynamic learning culture for our employees; and

·             Climate, and the role we can play in accelerating the transition to a low carbon economy.

 

We have set out some significant ambitions across these three areas that will deliver important benefits for our customers and the wider economy.

 

An ambition to take the lead in combating the causes of climate change

Today, we are setting a bold new ambition – to be a leading bank in the UK & Republic of Ireland helping to address the climate challenge; by making our own operations net carbon zero in 2020 and climate positive by 2025, and by driving material reductions in the climate impact of our financing activity. We are setting ourselves the challenge to at least halve the climate impact of our financing activity by 2030, and intend to do what is necessary to achieve alignment with the 2015 Paris Agreement.

 

This will be a significant challenge as we, like others, do not yet fully understand what this will require and how it will be achieved, not least as there is currently no standard industry methodology or approach. Solving this will require UK and international industry, regulators and experts to come together and find solutions. We are determined to not just play our part, but to lead on the collaboration and co-operation that is so critical to influencing the transition to a low carbon economy.

 

As a systemic UK bank, we must play an active role and these market leading ambitions underline our position. This is not only the right thing to do, it will give us the opportunity to do more business with our customers, as they transition to a low carbon economy.

 

We are already taking positive steps in the right direction. This year we became one of the Founding Signatories of the United Nations Environment Programme Finance Initiative (UNEP FI) Principles for Responsible Banking, committing to begin strategically aligning our business with the UN Sustainable Development Goals (SDGs) and the 2015 Paris Agreement. We have been reviewing specific SDGs with relevance to our Purpose focus areas of Climate Change, Enterprise and Learning.

 

The Bank continues to support the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) - a voluntary set of guidelines encouraging consistent climate-related disclosures in annual reporting. In 2019, we were one of the first companies worldwide to commit to all the Climate Group initiatives on electric vehicles (EV100), energy productivity (EP100), and renewable power (RE100).

 

In November 2019 we issued the first exclusively social bond under ICMA’s Social Bond Principles in the UK by any financial institution. The impact of the lending funded by this bond will be reported 12 months after issuance, measuring the number of jobs created and retained in some of the UK’s most deprived areas.

 

This is good progress, but we can, and will, do more.

 

Improving financial confidence and becoming a learning organisation

We also know that we have a responsibility to help our customers improve their financial confidence. Our UK-wide financial education programme, MoneySense has now been running for 25 years. We can help children in schools and at home understand the value and importance of finance from an early age. We will target reaching 2.5 million people through financial capability interactions each year. The more confidence our customers have, the more opportunity we will have to provide services to them.

 

I also want to build the confidence and capability of our employees. We already have one of the most qualified workforces in the UK. Today I am setting a target to have all front-line staff professionally accredited within the first twelve months of being in role.

 

Removing barriers to enterprise

As the largest supporter of UK business, we already offer a wide range of support to those who want to start a new business. But we also know that for many, it remains harder than it should be. We are committed to helping create an additional 50,000 new businesses across the UK by 2023, through inspiring and supporting over 500,000 people to consider enterprise as a career option.

 

Our focus will be on under-represented populations, with women making up at least 60% of those we support and more than 20% being Black, Asian, Minority Ethnic-led businesses. We will also make sure that at least 75% of the people we support are in regions outside of London

 

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and the South East. By helping to tackle the barriers to starting a business, there will be more opportunities to help companies grow.

 

Starting with strong foundations, but with much more to do

We have built strong foundations, but our performance doesn’t yet match its full potential and we need to support our customers better at the key moments in their lives. This means running a bank that is safe, simple and smart – supporting our customers with what they need and also making some tough choices in order to deliver for shareholders and colleagues.

 

Safe

Safety and soundness must underpin everything we do. Intelligent risk-taking is why banks exist - to find valuable and sustainable uses for the resources in the economy, and to help customers achieve their ambitions. We have strong capital and liquidity positions and are well placed to help our customers succeed. In today’s digital world, our operational resilience and keeping our customers’ data safe are top priorities. We can never lose sight of this, even as we look to grow. We have announced today that we will reduce our Common Equity Tier 1 ratio (CET 1) over the medium to long-term to around 13-14%. This will ensure that the Bank remains safe, and also allow room for further capital distributions.

 

Simple

We are still too complicated for our customers. Much of the potential value in this Bank is locked in business lines and business models that are too complex and generating too little return. This complexity also creates ‘bad costs’ – costs that provide no benefit to customers.

 

This applies to parts of our NatWest Markets business, where we have shrunk over time but we could do more to increase its focus on our corporate and institutional customers and their needs.

 

Today we are announcing that we will reduce the size of this business by around half, as measured by Risk Weighted Assets, managing down and optimising low-returning capital and inefficient activities. We will build a much smaller and simpler part of the business which will bring customers closer to the services they need, reduce costs and release capital for shareholders.

 

This action will refocus our NatWest Markets products and services on our corporate and institutional customers. We estimate that for 2019, our corporate and institutional customers represented around £75 billion of Risk Weighted Asset equivalents but only generated returns of around 2% on an underlying basis and excluding strategic costs and litigation and conduct costs. We believe that as we refocus NatWest Markets, corporate and institutional customers in the medium to long term will represent around £60 billion of Risk Weighted Asset equivalents and returns will improve to around 8%.

 

Driving out bad costs also means simplifying our core customer journeys, like our account opening and lending application processes. Aligning and accelerating the transformation of these with more automation and less manual processing will save money, deliver better controls and improve service.

 

We are targeting an overall cost reduction this year of £250 million.

 

Smart

Taking a disciplined approach to cost means we can make smart investment choices, investing to improve our services across our retail and commercial customer bases. We will continue to explore the potential for partnerships across industries, and within banking, that can help us innovate faster and ensure our investment is wisely spent.

 

We already have strong relationships with millions of customers in this country, but we can deepen them even further by building propositions that provide support throughout their financial lives. This may mean looking to increase our presence in certain areas including through partnerships, where relevant, to ensure we are helping our customers meet their needs and ambitions.

 

In recent years we have dramatically increased the focus on innovation across the Bank. This has positioned us well with partners, opened up new income lines and helped improve our time-to-market in a number of critical areas. There is an amazing opportunity for NatWest to use its brand and market presence to connect new technology solutions with the problems that hold back potential in the personal, professional and business lives of our customers.

 

This must, however, also be matched by the financial discipline to call time on ventures that don’t deliver and that can’t deliver a big enough impact for our customers and investors.

 

By simplifying our innovation focus, and being disciplined on the internal allocation of capital, we will strengthen the core of the Bank. By making smarter investments in services for our customers we will deepen our leading positions in personal, business, commercial and corporate banking.

 

Delivering sustainable returns

Championing the potential of people, families and businesses is not an add-on to our strategy, it is our strategy. I firmly believe this new Purpose-led approach is what will deliver reliable returns for our shareholders, year in, year out.

 

We will target a return on tangible equity of 9%-11% from a CET 1 ratio of 13%-14% in the medium to long-term. Subject to shareholder approval of our 2019 final and special dividends, we will have returned £4.2 billion to shareholders, with £2.6 billion returned to UK taxpayers since 2018. We have a clear plan to continue to return capital to our shareholders over time.

 

I know from experience, that we only succeed when our customers and wider communities succeed. I am confident that the strategy I have outlined will deliver sustainable long-term shareholder returns and will also build a Bank that the UK and Republic of Ireland can be proud of. We will create lasting value when we champion the potential of those we serve. That is our Purpose and our Strategy.

 

 

We are privileged to play a central role in the UK economy. That brings with it a deep responsibility to the communities we serve and to wider society.

 

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Our Purpose-led strategy

 

A purpose-led bank responding to the changing needs of all stakeholders.

 

Being purposeful is about recognising our business is made up of a network of relationships with multiple stakeholders with different interests. To be purpose-led and create long term sustainable value we need to balance appropriately the interests of all stakeholders and move from being transactional to relationship focused.

 

Purpose will sit at the core of all our decision making, and we will aspire to live by it every day. Delivering on our Purpose will create longer-term, deeper relationships with our customers helping them to thrive throughout their lives. When our customers succeed, our communities succeed, our economy thrives and we too succeed.

 

Our Purpose

 

We champion potential, helping people, families and businesses to thrive

 

As part of our shift to being purpose-led there are currently three key areas where we believe our business and role in society means we can make a meaningful contribution.

 

Our areas of focus     Our Ambition             Our targets1                                               Our initial areas of focus contribute to UN Sustainable Development Goals

 

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Our purpose-led approach is supported by our Strategic Priorities, taken together with our Bank-wide Financial Targets1, these set out how we will create value and deliver sustainable financial returns for the benefit of all our stakeholders.

 

 

 

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Outlook(1)

 

 

 

RBS, like all companies, continues to deal with a range of significant risks and uncertainties in the external economic, political and regulatory environment. Our central economic forecast, which supports our corporate plan, is in line with consensus as at the end of December 2019 and shows average UK GDP growth of around 1.6% from 2019 to 2023 and continued low interest rates; we expect a base rate cut in the short term and then flat thereafter. Given the current uncertainties we will continue to actively monitor and react to market conditions.

 

2020 Outlook

In the current environment, and recognising ongoing market uncertainty, we continue to expect challenges on income. In addition, we anticipate that regulatory changes will adversely impact income in our personal business by around £200 million.

 

We plan ongoing operating cost take-out by reducing operating expenses excluding strategic costs, litigation and conduct costs and operating lease depreciation costs by £250 million in 2020 compared with 2019. We expect to incur £0.8-1.0 billion of strategic costs during 2020 resulting from a refocusing of NatWest Markets and the continued resizing of the Group’s cost base. We anticipate that NatWest Markets exit, restructuring and disposal costs will be around £0.6 billion in 2020, with around £0.4 billion as disposal losses through income and £0.2 billion through strategic costs.

 

We expect to remain below our through-the-cycle impairment loss rate assumption of 30-40 basis points, although the potential impact on the real economy of ongoing political uncertainties and geopolitical tensions could affect our credit loss outcome. The threat from single name and sector driven events remains.

 

We are targeting lending growth of greater than 3% across our retail and commercial franchises.

 

We expect to end 2020 with risk weighted assets (RWAs) of around £185-190 billion including an estimated £10.5 billion increase associated with the implementation of Bank of England mortgage floors, with NatWest Markets RWAs reducing by around £6-8 billion in the year.

 

RBS Group (RBSG) capital and funding plans focus on issuing £2-4 billion of MREL-compliant instruments, of which we would expect around £1 billion to be issued under our Green, Social and Sustainable Bond Framework, up to £1.5 billion of AT1 and up to £2.5 billion of Tier 2 instruments. As in prior years, we will continue to target other funding sources to diversify our funding structure, including senior secured from NatWest Bank subject to funding and liquidity considerations.

 

Medium term outlook

We expect to achieve a return on tangible equity of 9-11% in the medium to long term. In addition, we expect ongoing operating cost take-out.

 

Within NatWest Markets franchise, we anticipate that RWAs will reduce to around £20 billion in the medium term, which, after accounting for strategic costs and disposal losses, is expected to be capital ratio accretive in year one and over the course of the transition plan period.

 

We anticipate that the overall RWA impact of Basel 3 amendments to be around 5-10% and phased across 2021 to 2023, with the details still subject to regulatory uncertainty on both quantum and timing.

 

RBS Group capital distributions

We expect to maintain ordinary dividends of around 40% of attributable profit. We retain our guidance of CET1 ratio to be approximately 14% at the end of 2021, and we will target a reduction to 13-14% in the medium to long term. We have shareholder and regulatory approval to carry out directed buybacks of the UK government stake in RBS but recognise that any exercise of this authority would be dependent upon HMT’s intentions and is limited to 4.99% of issued share capital in any 12 month period. As a reminder, we have also committed to make further pre-tax contributions to the pension scheme of up to £1.5 billion in aggregate from 1 January 2020 linked to future distributions to RBS shareholders.

 

NatWest Markets Plc

Whilst we have announced a refocusing of the business, NatWest Markets Plc remains a regulated entity and is targeting to maintain a CET1 ratio above 15%, MREL ratio of at least 30%, leverage ratio of at least 4%, and to reduce RWAs by around £14-18 billion in the medium term.

 

NatWest Markets Plc, as a standalone bank, plans to issue £3-5 billion of term senior unsecured instruments in 2020.

 

 

 

Note:

 

(1)    The targets, expectations and trends discussed in this section represent RBS Group’s and NatWest Markets Plc’s management current expectations and are subject to change, including as a result of the factors described in the “Risk Factors” section on pages 286 to 300 and on pages 143 to 156 of NatWest Markets Plc’s 2019 Annual Report and Accounts. These statements constitute forward-looking statements; refer to Forward-looking statements on page 1.

 

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2019 Performance at a glance

 

Strength and sustainability

 

Total income increased by £851 million, or 6.3%. Excluding notable items, income decreased by £813 million, or 6.3%.		Return on tangible equity of 9.4% for 2019 and 4.7% excluding FX recycling gains.
Maintained a CET1 ratio of 16.2% after accruing £2.7 billion of distributions to shareholders and a £0.4 billion post tax charge in respect of foreseeable pension contributions.		Ordinary dividend of 5 pence per share calculated from earnings, excluding FX recycling gains, of 13 pence per share.

 

Customer experience

 

 

 

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2019 highlights and our future strategy

 

Simplifying the bank

 

 

 

In 2019, operating expenses reduced by £320 million (2018 - £756 million). Costs, excluding strategic, litigation and conduct costs, reduced by £310 million, ahead of target, despite incurring an additional £38 million of authorised push payment fraud costs in line with new industry practice.

 

 

Employee engagement

 

 

Our most recent colleague opinion survey showed further improvement in our key measure of engagement, we are above the global financial services norm in all comparable survey categories.		Colleague sentiment on inclusion is at an all time high at 91 points (10 points above the global financial services norm).

 

Supporting sustainable growth

 

 

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Our operating environment

 

 

 

Where to find outmore

 

 

Our operating environment continues to evolve at pace across economic, social, environmental, political, regulatory and technological boundaries. We consider external societal megatrends and the UN Sustainable Development Goals to inform our thinking and approach.

 

Economic and political landscape

 

 

The UK economy continued to slow in 2019 as uncertainty in relation to the UK’s exit from the EU weighed on activity. Interest rate and foreign exchange markets were also volatile in response to the changing political landscape. The uncertainty weighed on business investment and contributed to slowing house price growth. House prices fell modestly in London and the South East, but transaction levels remained relatively resilient. Low interest rates, very low unemployment and improving wage growth supported demand for mortgage lending. Consumer credit growth continued to gradually cool, influenced by regulatory interventions. Despite economic headwinds, impairments remained at very low levels across all portfolios. A slowing global economy and heightened geopolitical risks, particularly in regard to trade tensions, further complicated the outlook. Despite an uncertain economic outlook, RBS remained focused on meeting the diverse needs of customers locally, across the UK regions and internationally.

 

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How we do business

 

Changing Customer Behaviour

 

 

Customers’ needs and behaviours are changing as a result of new technologies, demographic shifts and changing labour patterns. Key trends include the gig-economy which is resulting in changing working patterns and increasing use of new technologies resulting in faster and tailored customer service. RBS understands the importance of supporting customers’ needs and focusing on customer life journeys to tailor services and products that meet their evolving needs and expectations.

 

Climate Change

 

 

RBS recognises climate change as a top risk and strategic priority. Ensuring banks manage the financial risks associated with climate change has also risen up the regulatory agenda. Throughout 2019 work continued to integrate climate-related financial risks into the risk framework and to proactively support our customers transition to a low carbon economy.

 

Competition

 

 

The level of competition in the UK banking market remained intense in 2019 driven by a combination of technology, lower barriers to entry and regulation including Open Banking. The competitive landscape is evolving as fintech and large technology companies contribute to greater choice for how banking needs are met. RBS remained focused on innovation to evolve our business model and deliver first-class, compelling propositions to our customers. The launch of RBS’s new digital retail and business banks, Bó and Mettle, was a significant milestone in the evolution of our competitive offering.

 

Culture and Colleagues

 

 

The Bank’s long-term success depends on building and nurturing a healthy culture where colleagues are engaged, and where our working environment is underpinned by robust risk behaviours.

 

We are proud to be building an inclusive bank which is a great place for all colleagues to work. Culturally, becoming a learning organisation is a strategic priority. We need to prepare colleagues for the future and we continue to focus broader development on the Bank’s Critical People Capabilities.

 

Cyber Security

 

 

Disruptive cyber-attacks and fraud remained a growing threat to the industry in 2019. Significant investment continues to prevent, monitor and detect cyber-attacks and fraud. This includes participation in industry-wide initiatives to monitor and anticipate developments aimed at protecting our customers data and assets.

 

Demographics

 

 

Demographic shifts mean that the needs and behaviours of our customers are changing, amplified by rapid technological change. Key trends impacting our customers include retiring later and working longer, buying a house later in life and often with the support of family members and more focus on financial planning for retirement. RBS is committed to supporting the evolving needs of our customers ranging from helping first time buyers to supporting customers in vulnerable situations.

 

Financial Capability, Exclusion and Social Inequality

 

 

For RBS, supporting financial capability goes beyond delivering fair products and great service. It also means helping our customers, wider society and future generations to develop good money management skills so they are empowered to make better financial decisions. Against a backdrop of weaker economic growth and social inequality there is an increased focus on customers in vulnerable situations and/or precarious financial situations, supporting our diverse range of customers to access suitable banking services and products.

 

Operational Resilience

 

 

2019 has seen continued regulatory focus and media coverage on the operational competency of UK banks, including data breaches and technology failures. Ensuring operational resilience remained a commercial imperative for RBS. To provide continuity of service for customers with minimal disruption, RBS must continue to monitor and assess a diverse and evolving array of threats, both external and internal, as well as developing, strengthening or adapting existing control capability to be able to absorb and adapt to such disruptions.

 

Regulation

 

 

RBS operates in a highly regulated market which continues to evolve in scope to include competition, financial risks from climate change, customer vulnerability, operational resilience and cyber-attack. The Bank seeks to comply with all regulation and welcomes the positive impact on customers and other stakeholders.

 

Reputation and Trust

 

 

Restoring trust and safeguarding reputation remains a key priority for most banks. RBS continues to strive to build a reputation for serving our customers well, and in a safe and secure manner, in addition to generating value for our shareholders and broader society, through the products, services and facilities we provide.

 

Technology and Innovation

 

 

The pace of technological change continues to accelerate, influencing the behaviours of our customers and redefining traditional business models. Technologies such as cloud computing and machine learning offer huge opportunities, but also create new risks that must be closely managed. Through 2019, RBS has invested £755 million on technology, helping to deliver innovative solutions for our customers whilst simplifying processes, reducing cost and improving our resilience and stability. For example, facial recognition technology has allowed account opening in under 10 minutes for NatWest Bank personal customers.

 

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How we do business

 

 

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How we do business

 

 

 

UK Personal Banking is committed to making banking effortless every day and brilliant when it matters. Customers want to manage their money conveniently and safely and our digital channels make it easier to bank on the go.

 

 

With security front of mind, we are continually working to fight fraud, identify suspicious transactions and safeguard payments. We are the first UK bank to pilot biometric cards, and the only UK bank to let customers lock their cards via our mobile banking app, yet still get cash from an ATM.

 

When customers want personal support, branch colleagues are there to help, or our community and video bankers can take banking to them. Investment in the latest contact centre technology is also providing a more personal experience over the phone.

 

Using our market leading app, customers can set up a savings goal, download statements, choose how to repay large credit card purchases and view details of their credit cards, current accounts and savings with other banks. 7 million customers use our app across personal and business banking and almost three quarters of active current account customers use online or mobile banking. Reflecting the change in customer behaviour, we also launched our digital only offering, Bò, in the Apple App and Google Play stores.

 

At the end of 2019, more than two thirds of frontline colleagues held Professional Banker qualifications and we also helped one million customers improve their finances with a free financial health check. In 2019 we also began piloting pop-up learning sessions to help customers develop good financial habits.

 

We continued to drive a reduction in unnecessary paper, improving our digital application journeys, launching the UK’s first paperless mortgage and increasing usage of digital statements and correspondence. We have also reduced energy consumption in our branches by 22% in 2019 and all of the electricity we purchased was from renewable sources.

 

Our commitment to customers has resulted in improved UK Personal Banking NPS scores. NatWest moved up three places in the CMA Service Quality Survey rankings for ‘overall service’ in 2019, Customer Trust in RBS is improving. NatWest were also named best online current account provider, best online student account provider and best direct current account provider at the Your Money Awards.

 

Despite challenging operating conditions, UK Personal Banking delivered an operating profit of £855 million. Operating expenses of £3,618 million were £751 million, or 26.2%, higher than 2018. Operating expenses of £2,403 million, excluding strategic, litigation and conduct costs, were 1.0% lower than in 2018 despite incurring an additional £29 million for push payment fraud costs. Gross new mortgage lending was £33.3 billion in 2019, giving a new business market share of approximately 12.5% supporting balance growth of 6.7%, more than double the market, and a stock share of around 10.2%, whilst maintaining a prudent approach to risk and pricing in a very competitive market.

 

 

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Ulster Bank RoI continues to build a more sustainable bank that supports the communities we operate in, helping more customers than ever to buy a home or build their businesses in 2019.

 

	2019	2018
Income (m)	£567 €647	£610 €689
Expenses (m)	(£552) (€630)	(£583) (€657)
Operating profit (m)	£49 €55	£12 €15
Net loans to customers (bn)	£18.2 €21.4	£18.8 €21.0
Risk-weighted assets (bn)	£13.0 €15.3	£14.7 €16.4
Return on equity (%)	2.3	0.5

 

Ulster Bank RoI made significant improvements to the home buying and ownership journey in 2019, launching a new Home Buying Platform that enables customers to obtain an agreement in principle offer and track the progress of their mortgage application online. We also upgraded our branch network to better serve customers and improve efficiency, testing new design concepts and technology such as Qudini; a branch concierge tool to help customers speak to the right person quicker.

 

As part of our digital first strategy, we continue to invest in our online and mobile banking channels, releasing new mobile app features to help customers create savings goals, lock and unlock their debit card and take control of their spending, including being able to block transactions linked to gambling on their credit card. Ulster Bank RoI also launched ClearSpend, an expenses management app that gives business customers control of their commercial card spending in real-time, along with our new Rate Manager platform, which delivers a simplified and faster fixed rate borrowing option for our SME and Corporate customers.

 

Ulster Bank RoI sponsored over 200 professional qualifications in 2019, upskilling colleagues through programmes such as the Personal Banker qualification for branch staff. We also partnered with Code Institute, Europe’s only credit rated coding bootcamp, giving over 100 colleagues the opportunity to participate in a five day coding challenge.

 

Ulster Bank RoI continues to support renewable energy projects in Ireland and is always looking for ways to reduce its own environmental footprint, becoming the first bank in Ireland to be accredited with the Carbon Trust Standard for zero waste to landfill.

 

Startup, Ulster Bank RoI’s intrapreneurship programme, won the Learning award at the Deloitte Financial Services Innovation Awards in 2019. We also received the IBEC KeepWell Mark accreditation, an award for companies that make their employees’ wellbeing a priority for their business, and were reaccredited with the BITC (Business in the Community), Business Working Responsibly Mark; the only independently audited standard for CSR and Sustainability in Ireland.

 

Operating profit of £49 million (€55 million), increased by £37 million (€40 million) compared to 2018 primarily as a result of higher impairment releases and lower conduct charges as remediation projects near completion. Net loans to customers decreased by £0.6 billion due to a weakening of the euro but increased by €0.4 billion in euro terms reflecting strong personal and commercial lending, offset by the continued run down of the tracker mortgage book.

 

 

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How we do business

 

 

Commercial Banking

 

Commercial Banking has professional relationship management at its core and a strong regional network, providing deep sector and business insight to help UK businesses and the UK economy succeed.

 

 

NatWest maintained its #1 NPS position for Commercial customers (1), delivered the first SONIA loan ahead of the industry-wide transition away from LIBOR, and continued to support customers impacted by Brexit both through the dedicated Growth Fund, and as a founding signatory of the UK Government’s SME Finance Charter.

 

We remain at the leading edge of digital developments. Our new merchant acquiring solution, Tyl, was launched to our SME customers, Esme loans, our alternative finance provider, continues to grow, and our next generation digital bank, Mettle, was released on Apple App and Google Play stores. NatWest was the first major UK commercial bank with an API clearing offering for Faster Payments, and the first UK bank to release a secure biometric authentication service for payment approvals in Bankline Mobile, making it easier for our customers to approve payments on the go.

 

In March 2019, we launched ‘Back Her Business’, a female-only crowdfunding programme, which alongside the Rose Review forms part of the Bank’s wider ambition to reduce the entrepreneurial gender gap. Our UK-wide network of Entrepreneur Accelerator hubs continues to evolve, providing support to c.13,000 entrepreneurs in 2019.

 

In November 2019, we issued our inaugural social bond, the first of its kind by a UK Financial Institution, under ICMA’s Social Bond Principles. Our social bond is linked to existing SME lending in areas with the highest levels of unemployment and lowest job creation. We also launched a Digital and Innovation Apprenticeship programme to support individuals from under-represented backgrounds and help the Bank build a diverse workforce.

 

Commercial Banking secured a range of awards in 2019: Lombard was named Best Business Motor Finance Provider at the Business MoneyFacts awards; ClearSpend won Best Initiative in Mobile Payments at the Card & Payments Awards; FreeAgent collected three awards including the best SME accounting software of the year; NatWest was named Best Trade Finance Bank in the UK by Global Finance; and Commercial Banking’s social responsibility has been recognised via awards for Social & Community Finance at the Alternative Investment Awards.

 

Operating profit of £1,327 million was 32.6% lower than 2018 primarily due to £169 million asset disposal and fair value gains in 2018 combined with lower deposit and non interest income, higher impairments and higher strategic costs. Lending across Business Banking, SME & Mid-Corporates and Specialised business was £1.1 billion, or 2.1%, higher than 2018.

 

 

Note:

(1)  MarketVue Business Banking Survey from Savanta, Q4 2019 data (excl. DK). Comparison made among brands with base > 50 in the England & Wales, turning over more than £2 million. Data weighted by region and turnover to be representative of businesses in England & Wales.

 

 

 

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How we do business

 

Private Banking

 

Private Banking incorporates the Coutts and Adam & Co. brands to provide a relationship led, digitally enabled, client engagement model. We have been investing in the business, focusing on efficiencies and improving client satisfaction by seeking to meet more of our clients’ needs across the full suite of banking, lending and wealth management products.

 

 

Note:

(1)  Private Banking manages assets under management portfolios on behalf of UK PB and RBSI. Private Banking receives a management fee from UK PB and clients of RBSI in respect of providing this service.

 

 

Understanding our clients and building lasting connections remains at the heart of our business model. New clients to Private Banking increased to 2,400 in 2019, supported by a 36% increase in referrals from the wider RBS Group. The Coutts Client Council allows us to hear directly from clients, from shaping the proposition to how we build lasting relationships with them, contributing towards the highest client satisfaction score since records began in H2 2017.

 

Private Banking continues to deliver against our digital strategy with more functionality to enable clients to access their complete financial world. Coutts24 and Adam24 call centres augment the digital capabilities and Coutts Connect, a social platform for clients to network, has attracted over 1,700 registrations since inception in 2018.

 

We also value what our employees say about us; the People Council is the voice of our colleagues and acts as custodians of our culture plan. We achieved our highest ever engagement score of +87, four ahead of the Global Financial Services norm.

 

As a Responsible Investor, Coutts integrates ESG factors in investment decision-making processes and ownership practices. Coutts is a signatory of the Principles for Responsible Investing and has Tier 1 ranking from the Financial Reporting Council for its Statement of Compliance with the UK Stewardship Code. In 2019, Coutts became a signatory to the Climate Action 100+, a consortium of asset managers who have come together to change corporate behaviours in some of the largest corporate greenhouse gas emitters globally. Private Banking recognises the importance of our environmental footprint and client engagement on this topic, hosting a high profile client event in 2019 focused on the climate crisis for over 300 attendees, including Sir David Attenborough and Mark Carney.

 

Our award-winning Coutts Institute helps clients make a difference to the causes and communities that they care about and the Coutts Foundation is an internal body which focuses on tackling poverty. Our efforts in philanthropy continued to be externally recognised, with Coutts awarded Best Private Bank for Philanthropic Services by Global Finance at the World’s Best Private Bank Awards 2019 and the Portfolio Asset Manager award for Innovation in 2019.

 

Return on equity of 15.4% was in line with 2018. Operating profit of £297 million was 2.0% lower than in 2018 primarily due to lower deposit income and higher strategic costs partially offset by volume growth and lower back office operations costs. Net loans to customers increased by £1.2 billion, or 8.4%. Assets under management and administration increased by £4.0 billion, or 15.2%, reflecting positive investment performance of £3.2 billion and net new business of £0.8 billion.

 

 

 

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How we do business

 

 

RBS International

 

RBSI has established itself as a specialist provider in Funds banking onshore and offshore. It also provides retail and commercial banking services in the Channel Islands, Gibraltar and the Isle of Man, drawing on NatWest Holdings customer propositions. It is a systemic bank in these locations and has focused on becoming number one for customer service, trust and advocacy.

 

 

RBSI has started to work with trusted technology partners to serve customers future needs. To help colleagues respond to rapid change, RBSI has launched a multi-stage training program, covering future work-force capabilities and innovation, which will continue into next year.

 

We have made it quicker to open personal savings accounts and request credit. For sole applicants, automated account opening has enabled the savings account journey for the majority of existing customers to reduce from 14 days to 8 minutes, with over 3,000 new accounts opened this year. There have been 26 updates across RBSI’s Local Banking digital channels; driven by customer feedback, supporting a 17% increase in mobile adoption.

 

Through increased investment in the multi-currency banking platform, eQ, we have improved the digital experience for institutional clients. These include a feedback tool, a live statement view and the ability to re-batch payments. All users have moved to the new version of eQ, making sure everyone has the same great functionality and experience.

 

80% of our colleagues completed the staff opinion survey. Scores improved in all 15 categories and 13 are now above the Global Financial Services norm. Through volunteering and fundraising RBSI raised £61,279 for charity. For the 11th year running, the Bank were proud sponsors of the NatWest International Island Games. The 2019 games, held in Gibraltar, supported 1,700 athletes from 22 participating islands and the Bank’s commitment to sponsor the Games continues in Guernsey 2021.

 

RBSI continues to develop its longer term climate commitments in line with the wider Bank strategic response, supporting renewable energy funds, which invest in a wide array of renewable energy assets including onshore and offshore wind, solar, biomass and other renewable technologies. Additionally, in 2019, RBSI completed its first investor backed leverage facility supporting investment into large scale battery storage projects.

 

Operating profit of £344 million in 2019 was 2.4% higher than 2018 primarily due to increased volumes of customer lending and deposits, driving a £16 million increase in income. Operating expenses of £264 million were £4 million, or 1.5%, higher than 2018. Excluding strategic, litigation and conduct costs, operating expenses were £16 million lower as a £24 million reduction in back office operations costs was partially offset by increased investment spend. Net loans to customers increased £0.8 billion, or 6.0% in 2019, reflecting a Funds sector transfer of £0.5 billion from NatWest Markets and higher volumes in Institutional and Local Banking.

 

 

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How we do business

 

 

NatWest Markets

 

NatWest Markets (1) continued to focus on supporting clients consistently with market leading colour, content and ideas.

 

 

In Q1 2019, NatWest Markets N.V. commenced fully-integrated support for RBS Group’s customers through its Western European branch network, and on 29 November it became a subsidiary of NatWest Markets Plc.

 

In Q2 2019, Standard & Poor’s upgraded NatWest Markets entities long-term issuer credit rating to A-, strengthening our credit story. NatWest Markets continued to play a leading role in market structural reform. We were first-to-market with our Realised Rate calculator and we acted as the sole solicitation agent for the first ever LIBOR to SONIA bond amendment issued in the market.

 

In Q3 2019 a trading support ‘bot’ (Scout) was launched onto the Symphony collaboration platform, giving clients instant responses to requests for the latest bond prices while improving our efficiency.

 

NatWest Markets continued to develop its track record in Environmental Social Governance (ESG), launching its ESG Product Framework, the first of its kind, to provide clients with ESG-linked investments and help develop the sterling green market to meet a growing regulatory focus on responsible investing. It was also part of a group that raised £10 billion funds in line with the UN Sustainable Development Goals and executed over £2 billion worth of Social Housing issuance helping create 40,000 new homes over the next five years to ease the UK social housing shortage.

 

NatWest Markets’ commitment to clients has been recognised by a number of awards and surveys:

 

·       UK Corporate FX Service Quality Leader – 2018 Greenwich Associates FX Study awarded in 2019

 

·       Tied No. 1 for Interest Rate Derivatives Service Quality –Greenwich Associates European Fixed Income Interest Rate Derivatives 2019

 

·       No.1 European Government Bonds by Market Share – Gilts–Greenwich Associates European Fixed Income Rates 2019

 

·       Risk Solutions House of the Year- Risk Awards 2020 awarded in November 2019

 

Global market conditions continued to be dominated by geo-political uncertainty, creating challenging conditions for our clients and us. Total income decreased by £100 million, or 6.9%, to £1,342 million reflecting lower core income and own credit adjustments (OCA), partially offset by increased legacy income following the £444 million gain on the merger of Alawwal bank with SABB. RWAs decreased by £7.0 billion to £37.9 billion driven by the £4.7 billion reduction following the merger of Alawwal bank with SABB and other legacy reductions.

 

 

Note:

(1)   The NatWest Markets operating segment is not the same as the NatWest Markets Plc legal entity or group. For 2019, NatWest Markets Plc entity includes NatWest Markets N.V. from the 29 November 2019 only, whereas the NatWest Markets franchise excludes the Central items & other segment. For periods prior to Q4 2019, NatWest Markets N.V. was also excluded from the NatWest Markets Plc entity.

 

 

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Stakeholder engagement

 

 

Defining our Purpose together

On her first day as Group CEO, Alison Rose set out her vision to become a purpose-led bank. The planning had begun more than a year ago, with colleagues involved every step of the way.

 

“Our colleagues will live and breathe our new Purpose, which is why the conversation had to start with them.”Alison Rose, CEO, RBS

 

Over 200 hours of qualitative interviews, team events, focus groups and intranet surveys, combined to provide a powerful body of colleague views. The Board’s Colleague Advisory Panel, and Sustainable Banking Committee enabled Board level engagement. This dovetailed with input from external stakeholders.

 

“Through the Bank’s engagement with Blueprint, it’s heartening to see RBS set themselves the challenge of becoming a purpose-led company.”

Charles Wookey, CEO,

A Blueprint for Better Business

 

Partnering to support customers

New partnerships were established to help customers in vulnerable situations. SafeLives provided expertise on policies, and training focused on awareness raising and support. A pilot with GamCare began using branch space for private consultations and talking therapies.

 

“Banks play an important role in our life, often for many years and sometimes for a lifetime, and they therefore have a crucial role to play in improving the response to abuse, using the insight and tools they have. We’re delighted to see NatWest’s commitment to addressing financial abuse and look forward to working together.”

Suzanne Jacob, OBE, CEO of SafeLives

 

“To be able to offer our support on the high street in NatWest branches will make our help more available to the people that need it most, reducing traditional barriers to access.”

Anna Hemmings, CEO of GamCare

 

Leading in step with clients

Alongside our client Landsec, the Bank achieved a global first by pledging commitments to all three initiatives of an international non-profit organisation. The Climate Group’s EV100 is focused on electric vehicles, EP100 on energy productivity, and RE100 on renewable electricity.

 

“Managing our own footprint is important in tackling climate change. The Bank’s commitments are to switch 300 vehicles to electric, improve energy productivity by 40% and source 100% renewable electricity by 2025. Fulfilling these relies on close relationships with our suppliers. We’re also committed to supporting customers and colleagues on the transition towards a low carbon economy.”

Laura Barlow, Sponsor of Sustainable Energy Forum, RBS

 

“Congratulations to RBS and Landsec on showing it is already possible for the private sector to go further and faster in driving the clean energy transition.”

Mike Peirce, The Climate Group

 

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Customer Advocacy and Trust Scores

 

 

Personal Banking

 

Source: Ipsos MORI FRS 6 month rolling data. Latest base sizes: 2,829 for NatWest (England & Wales); 451 for Royal Bank of Scotland (Scotland). Based on the question: “How likely is it that you would recommend (brand) to a relative, friend or colleague in the next 12 months for current account banking?” Base: Claimed main banked current account customers.

 

Source: Coyne Research 12 month rolling data. Question: “Please indicate to what extent you would be likely to recommend (brand) to your friends or family using a scale of 0 to 10 where 0 is not at all likely and 10 is extremely likely”. Latest base sizes: 352 Northern Ireland; 1,424 Republic of Ireland.

 

Business Banking

 

 

Source: Savanta MarketVue Business Banking, YE Q4 2019. Based on interviews with businesses with an annual turnover up to £2 million. Latest base sizes: 1104 for NatWest (England & Wales), 416 for Royal Bank of Scotland (Scotland). Question: “How likely would you be to recommend (bank)”. Base: Claimed main bank. Data weighted by region and turnover to be representative of businesses in Great Britain.

 

Commercial Banking

 

 

Source: Savanta MarketVue Business Banking, YE Q4 2019. Based on interviews with businesses with an annual turnover over £2 million. Latest base sizes: 586 for NatWest (England & Wales), 100 for Royal Bank of Scotland (Scotland). Question: “How likely would you be to recommend (bank)”. Base: Claimed main bank. Data weighted by region and turnover to be representative of businesses in Great Britain.

 

Trust

 

We also use independent experts to measure our customers’ trust in the bank. Each quarter we ask customers to what extent they trust or distrust their bank to do the right thing. The score is a net measure of those customers that trust their bank (a lot or somewhat) minus those that distrust their bank (a lot or somewhat).

 

 

Source: Populus. Latest quarter’s data. Measured as a net % of those that trust Royal Bank of Scotland/NatWest to do the right thing, less those that do not. Latest base sizes: 531 for NatWest (England & Wales), 214 for Royal Bank of Scotland (Scotland).

 

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Building a more sustainable bank

 

 

 

Professional standards are important to us and we offer a wide range of learning to support professional development. We work closely with a wide range of professional bodies, government agencies and our peers to maintain and grow professional standards across the industry. We have recently become the first bank to be awarded Corporate Chartered status by the Chartered Banker Institute in recognition of our continuing investment in professional development and our commitment to professional values and advocacy.

 

Sales Excellence is our complete bank-wide sales programme. It teaches the tools and techniques that enable those in sales roles to be the best at ethical, needs-based selling. We were awarded a Princess Royal Training Award for our Sales Excellence programme in 2019.

 

Our female, multicultural and disability development initiatives focus on supporting our colleagues to reach their full potential and manage their careers effectively. These initiatives support our commitment in building a more inclusive bank.

 

We had a second intake on our NextGen talent development programme for high potential colleagues at managerial level, helping them become the future leaders we need. The learning opportunities available through the programme align to the Critical People Capabilities and we received a Princess Royal Training Award in 2019 for our NextGen programme.

 

Investing in Colleagues

We have also transformed our colleagues’ experience by deploying new digital tools. Workday was implemented as a new digital HR platform in November 2019, and includes a mobile app, giving colleagues an experience on par with the digital experience our customers enjoy. We extended ServiceNow to improve how we respond to colleagues queries, and our HR chat bot has expanded helping over 50,000 colleagues to answer their basic queries. These enhancements are enabling us to respond to the evolving world of work and needs of our colleagues.

 

Health and Wellbeing

As a strong component of making RBS a great place to work, wellbeing initiatives have successfully delivered against four pillars; Physical, Mental, Social and Financial Wellbeing. Our internal wellbeing index has increased by a further 2% taking us 3% above other high performing norm companies and 10% above high performing Financial Services companies.

 

We continue to embrace the rapid acceleration of digital wellbeing by offering our colleagues online and on-site wellbeing tools and resources. This year we’ve seen over 27,000 onsite health checks completed across a number of our key hubs and our Workplace Wellbeing Group has grown to c.28,000 members.

 

We continue to support the Time to Change pledge as well as signing up to the Mental Health at Work Commitment, and this year launched our new wellbeing campaign Live Well, Being You. Our month long wellbeing campaign in May 2019 focused on each of our four pillars with a specific focus on Mental Health Awareness Week and we held our third Mental Health Conference with both internal and external delegates.

 

In 2019 we again supported our colleagues through change and have fully utilised the services of our Employee Assistance Programme. In the UK the utilisation of our assistance programme was 16%.

 

 

 

Our approach to Human Rights

 

Modern Slavery Act

We are committed to our responsibilities to respect and uphold human rights across our business and sphere of influence. The Modern Slavery Act 2015 (MSA) forms part of our approach to human rights. Our statement is available on rbs.com alongside our Human Rights Position Statement. Our approach covers our customers, our people and our suppliers.

 

Our Customers

Our relationship with our customers is governed by a wide range of risk considerations, including our Anti-Money Laundering (AML) and Environmental, Social, and Ethical (ESE) risk assessments on current and new customers, to consider whether any of their activities carry human rights infringements.

 

Our People

All of our people are legally recruited subject to local jurisdiction and in the UK must meet 1998 Immigration Act requirements. The Bank also has policies and processes such as ‘Our Code’, the ‘Yes Check’ and ‘Speak Up’ and was an early adopter of the Living Wage to support the Bank’s position on Modern Slavery.

 

Our Suppliers

Our Supplier Code of Conduct (SCoC), available on rbs.com, continues to be a contractual requirement and we expect our suppliers to uphold the same values and commitments we have made on social and environmental impacts.

 

35

 

Building a more sustainable bank   Inclusion   We are proud to be building an inclusive bank which is a great place for all colleagues to work.   Our inclusion guidelines apply to all our colleagues globally to make sure everyone feels included and valued, regardless of their background. As at 31 December 2019 our permanent headcount was 64,397. 50% were male and 50% female. Our Inclusion plans apply globally and are formed around five key priorities:   Gender Balanced:   ·    We continue to work towards our goal of having at least 30% senior women in our top three leadership layers in each of our businesses by 2020 and to be fully gender balanced across the bank by 2030.   ·    As at the 31 December 2019 we have, on aggregate, 35% women in our top three leadership layers, and our pipeline (c.4000 of our most senior roles) has 44% women.   ·    The mean gender pay gap for NatWest Bank Plc is 30.4% (median: 34.1%) and the mean bonus pay gap is 49.9% (median: 53.8%).   ·    Our positive action approach for gender, which is benchmarked externally, is helping to ensure that our people policies and processes are inclusive and accessible – from how we attract and recruit, to how we reward and engage colleagues. We are confident this approach is the right one and through time, it will help us achieve a better balance of diversity throughout the organisation.   Disability Smart:   ·    We have plans in place to deliver against all segments of our bank-wide disability plan. It addresses areas for improvement including branch access, accessible services, improving colleague adjustment processes and inserting accessibility checks into our key processes and practices.   ·    RBS policy is that people with disabilities are given full and fair consideration for employment and subsequent training, career development and promotion based on merit. If colleagues become disabled, it is the policy of RBS, wherever possible, to retain them in their existing jobs or to re-deploy them in suitable alternative duties.   ·    During 2019 we continued to roll out our Disability Career and Personal Development Programme for colleagues with disabilities which supports development and career progression by addressing common barriers colleagues with disabilities can face. We also extended this Programme externally, hosting delegates from outside the bank at our campus in Edinburgh.   Ethnically Diverse:   ·    We continue to focus on building an ethnically diverse RBS. Our plan focuses on positive action and includes reciprocal mentoring, targeted development workshops and leadership programmes and ensuring we have a Black, Asian and Minority Ethnic (BAME) focus on recruitment, talent identification and promotion.   ·    From the start of 2018 we introduced formal UK targets to improve the representation of BAME /non white colleagues in our top four leadership layers to at least 14% (in line with the working age UK BAME population identified by the Office for National Statistics) by 2025.   ·    As at the 31 December 2019 we have on aggregate 9% BAME/non-white colleagues in our top four leadership layers in the UK. We employ 15% BAME/non-white staff across the UK.   ·    Given our focus on becoming more ethnically diverse and desire to be transparent, we use the same methodology as gender pay gap reporting to look at our ethnicity pay gap.   ·    The bank’s mean ethnicity pay gap is 11.8% (median: 15.7%), and the mean bonus pay gap is 24.7% (median: 12.3%), which we disclose at an RBS Group Combined UK and Ireland level.   LGBT+ Innovative:   ·    Our LGBT+ agenda continues to deliver a better experience for our LGBT+ colleagues and customers, reflected within our policies and ways of working, across our locations globally. While reflecting local legislation and jurisdictional requirements, we are clear that LGBT+ colleagues and customers are welcome at RBS and will be supported.   ·    The 2019 Pride season has seen our biggest and boldest attendance ever – supporting and celebrating Pride with customers and colleagues across the UK, Republic of Ireland, Poland and India, showing our support to our LGBT+ colleagues and customers in countries where LGBT+ inclusion is not as progressed as in the UK.   Inclusive Culture:   ·    We continue to support our strong colleague led networks that have c.20,000 members.   ·    We have flexible working practices in place across the organisation and externally we are again a Top Ten Employer for Working Families in 2019.   ·    During 2019 we introduced ‘Good Judgement’ inclusion and diversity learning to create a solid platform for behavioural and cultural change, supplementing existing learning.   ·    For more information on our Inclusion work, including our positive action approaches, refer to rbs.com.
	2019 Gender profile (*)
		#Women	#Men		%Women
	CEO	1	0		100
	CEO – 1	3	13		19
	CEO – 2	41	81		34
	CEO – 3	262	472		36
	CEO – 4	1579	1987		44
	Target population (CEO – 3 and above)	306	566		35
Note: We report to reflect our organisational (CEO) levels. This method more accurately describes our gender balance at leadership/pipeline levels. As well as being more reflective of our organisational structure, this enables comparison to be made externally. This also includes NatWest Holdings CEO-1 level.
		Male		Female
	Executive Employees	75 (78%)		21 (22%)
	Directors of Subsidiaries	207 (78%)		59 (22%)
There were 362 senior managers (in accordance with the definition contained within the relevant Companies Act legislation), which comprises our executive population and individuals who are directors of our subsidiaries.

 

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Building a more sustainable bank

 

Climate-related financial disclosures

 

 

We recognise that climate change is a critical global issue which has significant implications for our customers, employees, suppliers, partners and ourselves. RBS Group has many years’ experience in supporting our customers’ transition to a low carbon economy but the scale and pace of activity required is now rapidly accelerating. Our ambition is to be a leading bank in the UK & RoI helping to address the climate challenge; by making our own operations net carbon zero in 2020 and climate positive by 2025, and by driving material reductions in the climate impact of our financing activity. We are setting ourselves the challenge to at least halve the climate impact of our financing activity by 2030, and intend to do what is necessary to achieve alignment with the 2015 Paris Agreement1.

 

During 2019, we committed to and joined a number of major initiatives to support this, including:

 

·    Becoming a founding signatory of the UN Environment Programme Finance Initiative’s (UNEP FI) Principles for Responsible Banking which commits us to work towards aligning our strategy with the overall objectives of the 2015 Paris Agreement.

 

·    Jointly the first company globally to commit to all three of the Climate Group’s initiatives on electric vehicles EV100, renewable energy RE100 and energy productivity EP100.

 

·    Participating in the UNEP FI scenario analysis pilot .

 

·    Joining the Climate Financial Risk Forum, established by the FCA and the PRA to develop practical tools to address climate-related financial risks.

 

Climate risk was classified as a top risk in 2019 and we are working to integrate climate related financial risks into our core risk framework. RBS Group has also continued to engage with investors, NGOs and other key stakeholders on the actions we are taking to play our part in addressing this important issue.

 

We remain committed to developing our disclosures in line with the Task Force on Climate related Financial Disclosures (TCFD) recommendations. The table below summarises the work done in 2019 and future planned activity related to each of the TCFD themes:

 

Theme	On-going Progress in 2019	Focus areas for 2020-2021
Governance	Focus on further increasing internal climate related knowledge, skills and abilities at senior levels.   Climate change governance roles and responsibilities refreshed, including Senior Managers Regime (SMR) responsibility.	Further establish climate change reporting and monitoring rhythm at Board and Executive level across the RBS Group structure.   Continue to enhance Board-level and executive knowledge and visibility of climate change related issues ahead of broader strategic and risk appetite integration discussions.
Strategy	Internal review of climate related risks and opportunities. Continued engagement with external partners to inform development of climate change strategy.	Further develop and implement Group strategy to address climate change that is wholly aligned to RBS Group’s overall vision, purpose, strategy and plan.
Scenario analysis	Detailed review of methodology and best practice as it emerges in the market, including participating in the UNEP FI TCFD scenario analysis pilot.	Develop our climate risk scenario modelling and stress testing capabilities. Carry out climate scenario and stress testing analysis, in particular as part of the 2021 climate risk Biennial Exploratory Scenario (BES) exercise (starting H2 2020). This will develop understanding of how climate risk interacts with key exposures.
Risk Management	Targeted analysis for climate change/physical risk impact on UK residential mortgage portfolio using a range of climate change scenarios.   Commenced updating of RBS Group’s Enterprise Risk Management Framework to include climate change in the risk toolkit.   Continued review of the Environmental, Social, Ethical (ESE) Risk Management sector policy positions.	Risk identification and measurement, risk management, risk monitoring, and risk reporting to be performed in line with principles set out in the Enterprise Wide Framework.   Embed climate change consideration in the Bank’s risk appetite framework in a qualitative manner until climate risk indicators allow incorporation on a quantitative basis. In particular, perform targeted sector and product reviews to improve measurement and assessment of climate related risk factors to inform future management actions.
Metrics and Targets	Sustainable energy funding and financing target of £10 billion for 2018-2020 substantially met in 2019 (£9.9 billion in 2018 and 2019).   Jointly the first company globally to commit to RE100, EV100 & EP100.	Additional £20 billion funding and financing for climate and sustainable finance between 2020 and 2022. Refer to the strategy section for further targets set as part of our ambition to be a leading bank in the UK and RoI helping to address the climate challenge.1

 

Note:

(1)   The targets, expectations and trends discussed in this section represent RBS Group’s and NatWest Markets Plc’s management current expectations and are subject to change, including as a result of the factors described in the “Risk Factors” section on pages 286 to 300 and on pages 143 to 156 of NatWest Markets Plc’s 2019 Annual Report and Accounts. These statements constitute forward-looking statements; refer to Forward-looking statements on page 1.

 

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Governance

It is recognised that climate change, including the associated financial risks, must have greater prominence at both senior management and Board level across RBS Group. Further details on RBS Group’s Corporate Governance structure is included on page 46.

 

Board and Executive-level activity in 2019 focused on increasing the knowledge and understanding of the financial risks associated with climate change and strategic opportunities. Areas of future development include risk appetite integration, strategic delivery and embedding the agreed climate risk operating model to support Board-level reporting, including Top Risk Reporting as well as quarterly reporting to the Executive Risk Committee and Board Risk Committee.

 

A climate governance map detailing the relevant roles and responsibilities of RBSG plc Board, board committees, management committees and individuals, as well as operational working groups tasked with managing the Bank’s transition, has been prepared to support internal mobilisation and planning. While the Sustainable Banking Committee’s role in overseeing climate related opportunities will continue going forward, the Board and other board committees will also play a prominent role in overseeing the interaction between climate change, strategy and risk appetite.

 

The RBSG plc Board approved the allocation of the responsibility for identifying and managing financial risks from climate change to the Group Chief Risk Officer (CRO) who has been tasked with ensuring that the financial risks from climate change are adequately reflected in risk management frameworks, and that the Bank can identify, measure, monitor, manage, and report on its exposure to these risks.

 

In the second half of 2019, the existing Climate Change Working Group (CCWG) was formalised into an RBS Group wide Climate Change Programme (GCCP). Now co-chaired by the Group CRO and Head of Large Corporates and Institutions, the GCCP Executive Steering Group (ESG) is responsible for coordinating the RBS Group response across climate related regulations, risks and opportunities.

 

The ESG includes cross-franchise and functional representatives from across NatWest Holdings Limited, NatWest Markets Plc and RBS International; and ensures alignment of underlying franchise initiatives and working groups. This includes the efforts of the existing Sustainable Energy Forum (an internal forum with a focus on helping our customers transition towards a low carbon economy) and existing or proposed working groups at franchise and functional level. It also oversees activities around communication and education as RBS Group builds further awareness of Climate Change considerations in support of our ambitions.

 

In October, following approval through the GCCP ESG and the Board, RBS Group provided a response to PRA Supervisory Statement 3/19 ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’ (SS 3/19). SS 3/19 required RBS Group to provide an RBSG plc Board approved plan outlining how the financial risks of Climate Change will be managed. Our response outlined a multi-phase, multi-year plan to build out capabilities across governance, scenario analysis and stress testing, risk management and disclosures (including TCFD). It recognises that the GCCP plan will be subject to continual monitoring and refinement to ensure it remains responsive to both internal and external stimuli, including market expectations, UK Government policy and other regulatory or international drivers.

 

To inform the continued development of our plan, RBS Group continues to enhance its participation in several climate related initiatives, including the UNEP FI Responsible Banking Principles, UNEP FI TCFD scenario analysis pilot and other TCFD working groups and the PRA and FCA’s Climate Financial Risk Forum.

 

Strategy1

Our Group CEO Alison Rose announced on her first day that she intends to run the Bank with the understanding that if our customers do well, if our economy does well and if our communities do well, then we all succeed together. She was clear that shared success also means playing our part to help tackle the problems that can hold the country back, including the threat from climate change. Addressing this challenge forms a key part of our future strategy.

 

Our ambition to be a leading bank in the UK and RoI helping to address the climate challenge is supported by the following key areas of activity:

 

a.         Helping to end the most harmful activity: We plan to stop lending and underwriting to companies with more than 15% of activities related to thermal and lignite coal; unless they have a credible transition plan in line with the 2015 Paris Agreement in place by end of 2021. We plan a full phase-out from coal by 2030. Also, to stop lending and underwriting to major oil & gas producers unless they have a credible transition plan aligned with the 2015 Paris Agreement in place by the end of 2021.

 

b.         Accelerating the speed of transition:

 

(i)             support our UK & RoI mortgage customers to increase their residential energy efficiency and incentivise purchasing of the most energy efficient homes, with an ambition that 50% of our mortgage book has an EPC or equivalent rating of C or above by 2030.

 

(ii)          we plan to collaborate cross-industry, and create products and services to enable customers to track their carbon impact.

 

(iii)       Coutts Asset Management has set a target to reduce the level of carbon intensity for the equity component of their portfolios by 25% by end of 2021.

 

(iv)       support the drive to decarbonise UK transport through our Mobility Opportunity Group. This is a multi-disciplined centre of excellence working across the Bank and the emerging mobility eco-system to enable us to invest in the development of our product and service offering, in addition to enhancing our market and risk insight to maximise the support for the decarbonisation of UK surface transport.

 

c.   Championing climate solutions: we will provide additional £20 billion funding and financing for Climate and Sustainable finance between 2020-2022. Additionally, we will aim to reserve at least 25% of the spaces

 

Note:

(1)   The targets, expectations and trends discussed in this section represent RBS Group’s and NatWest Markets Plc’s management current expectations and are subject to change, including as a result of the factors described in the “Risk Factors” section on pages 286 to 300 and on pages 143 to 156 of NatWest Markets Plc’s 2019 Annual Report and Accounts. These statements constitute forward-looking statements; refer to Forward-looking statements on page 1.

 

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Building a more sustainable bank

 

in our Entrepreneur accelerator hubs for businesses where their core offering supports sustainable environmental activities (including climate solutions).

 

d.   Embedding climate into our culture and decision making: We are revising executive remuneration to reflect achievement of climate targets. We are also setting ourselves the challenge to at least halve the climate impact of our financing activity by 2030, and intend to do what is necessary to achieve alignment with the 2015 Paris Agreement. To do this, we plan to quantify our climate impact and set sector-specific targets by 2022. Further to this, we will integrate the financial and non-financial risks arising from climate change into our EWRMF.

 

We are already working to support our customers’ ambitions to mitigate their emissions, save energy and reduce costs. We have many years’ experience in supporting our customers in the sustainable energy sector – providing bespoke solutions to mitigate their emissions, funding their renewable energy generation, and financing innovative projects to spread new and more efficient energy technologies.

 

Refer to the Our purpose-led strategy on pages 11 and 12 for further details. In 2019, we have continued to help our customers, both small and large, transition towards a low carbon economy by providing funding and financing to the sustainable energy sector. This includes funding for various low carbon generation and energy efficiency technologies, low carbon vehicles and increasingly helping clients raise funds through green bonds, green loans and green private placements.

 

Scenario analysis

In 2019 we included a qualitative assessment of climate risk as one of the contributing factors in our annual ICAAP scenario. To the extent possible, we aim to use the insight from both the UNEP FI TCFD scenario analysis pilot and the BES to make a more quantitative statement about climate risk in the next ICAAP.

 

RBS Group is currently undertaking climate scenario analysis on agriculture and real estate sectors as part of the UNEP FI TCFD scenario analysis pilot. Findings from this analysis will be published in 2020. We are using climate scenarios aligned with the Network for Greening the Financial System (NGFS) recommended framework and developed using Integrated Assessment Models (IAM) by Potsdam Institute for Climate Impact Research (PIK) and the International Institute for Applied Systems Analysis (IIASA). Both physical and transitional risks are being incorporated.

 

We are also developing our own internal climate scenario analysis and stress testing capability. The aim of this work is twofold:

 

· prepare for the BES starting in the second half of 2020, which will explore three climate scenarios over a 30-year horizon to test the financial system’s resilience to physical and transition climate-related risks

 

· develop the necessary methodology and processes to be able to run climate risk scenario analysis for risk management and strategic decision making purposes.

 

We recognise this is a fast evolving space and we will be continually reviewing and updating our approach, scenarios and assumptions as best practice emerges.

 

We are reviewing external modelling specialists and will partner with one, if appropriate, to supplement our in-house analytics. We recognise the unique nature of this risk and the need for us to build our in house expertise.

 

The main outcomes of the various scenario analysis projects we are conducting at the moment are:

 

· identify at the overall portfolio level, the climate related risks and opportunities;

 

· inform our strategic response to the climate challenge;

 

· embed climate within our wider risk framework, including risk management policies and risk appetite.

 

The below table summarises the range of finance solutions and energy intelligence we provide to customers to accelerate the transition to a low carbon economy.

 

Sustainable energy funding and financing:

 

Provide lending and wider financing to customers of all sizes for their sustainable energy projects encompassing various low carbon generation and energy efficiency technologies, low carbon vehicles and helping clients raise funds through green bonds, green loans and green private placements.

 

Products offered:

 

· Asset finance (provided by Lombard, one of our brands)   · Structured asset finance   · Project finance   · Support for infrastructure and renewable energy funds	· Green and sustainable bonds   · Green and sustainable private placements   · Sustainability linked loans
Note:   (1) includes financing of solar, onshore wind, offshore wind, hydro, biomass, anaerobic digestion, LED lighting, energy from waste, smart metering, offshore transmission operators (OFTOs), interconnectors, heat pumps, air and ground source heat pumps, Gas to Grid Plants, Combined Heat & Power (CHP) and alternative fuelled/low-carbon vehicles including hybrid buses.

 

In addition to the above, we can support customers through:
· RBS Social & Community Capital - our independent charity that runs a fund to help social enterprises who have been declined a loan from a mainstream bank. The project should be financially sustainable and deliver social impact to the local and wider community.	· Energy audits – a service to help customers understand how they could reduce their energy costs or generate their own renewable energy. This service is available to all customers with an energy spend over £10,000 a year or with more complex energy requirements. There is a cost associated with this service.

 

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Risk management

Within RBS Group, climate risk management builds upon the established Environmental, Social, Ethical (ESE) Risk Management sector policies. Credit approvals consider market and economic factors that are relevant to our customers, which include issues relevant to customers’ exposure to climate risks. All credit approvals are subject to these ESE policies which restrict exposures to high carbon emitting subsectors including mining and energy for example. Specifically, flooding and risks associated with building energy efficiency are already considered as part of our residential mortgage lending process (energy efficiency in buy to let mortgages) and transaction acceptance standards in commercial real estate.

 

We are performing an assessment of the potential financial impact of climate change on the UK mortgage portfolio, with a focus on flood risk from a physical risk perspective and energy efficiency (EPC) from a transitional risk perspective. We are using established methodologies and data from third party providers to establish flood risk at a property level for the UK mortgage portfolio. Factors considered include surface flooding, river, ground water and coastal flooding on a range of scenarios.

 

RBS Group will be working to embed consideration of climate change risks into its wholesale sector framework, which forms the basis for the Bank’s risk appetite to sectors on a qualitative basis initially. Quantitative analysis of flood and EPC related risk in the Commercial Real Estate portfolio will be developed using applicable methodologies from the assessment of our Retail mortgage portfolio.

 

Work to further embed climate change risk considerations within risk frameworks will be underpinned by RBS Group-wide training and education programmes for staff.

 

Flood risk assessment tool

We are currently piloting innovative climate risk tools to assess the physical risk to our retail and commercial portfolios.

 

We have worked with a consortium of partners led by D-Risk Group Ltd and Airbus Defence and Space supported by CLS Data. We have piloted Airbus’ Geospatial Financial Hub (GFH). The GFH maps flood risk against residential properties in the UK using JBA Risk Management Flood Map and Climate Change Flood Risk Indicator. The pilot calculated the physical risks to properties now and as global temperatures change in the future using climate data from the UK Climate Change Risk Assessment 2017 and UK Climate Projections 2009.

 

Images included provide examples of the data available for flood risk assessment for properties in an area. We have linked this information to our portfolio to assess our exposure to these physical risks and determine how we integrate this and other climate considerations into our lending and risk frameworks. This will also drive the complete data requirements for physical risk analysis and will enable the selection of a vendor solution for a strategic data partnership. We are committed to the on-going use of the best performing and most reliable data and innovative climate risk tools as skills and knowledge in the climate space evolve.

 

 

Flood Risk

 

This image shows the varying degrees of river water flood risk with the darker blue colours showing greater depth of flooding for an event with a 1.3% annual probability of occurring ( 1 in 75 years ) . The combined flood risk is scored from 0 to 53 (where 53 is the highest risk possible).

 

© Ordnance Survey & © JBA Risk Management Limited 2020

 

 

2040 postcode flood risk indicator

 

This image shows the 2040 climate change flood risk indicator which indicates for each postcode area whether the flood risk is likely to improve (shown in green) or worsen (shown in orange) or see no change (no colour).

 

 

© Ordnance Survey & © JBA Risk Management Limited 2020

 

 

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Metrics and targets

Sector exposures

We are working to reduce our lending to carbon intensive parts of the global economy. Noted below are exposures for certain sectors that could be considered relevant for climate risk purposes. Exposure represents gross lending and the related off balance sheet exposures in the banking book. The amounts include all lending to customers including sustainable lending, as well as to environmentally responsible customers.

 

Sector	Exposure percentage(*) (1)
Personal mortgages	40.3%
Automotive	2.2%
Power utilities	2.0%
Agriculture	1.3%
Oil and gas	1.0%
Water	0.8%
Chemicals	0.3%
Mining and metals	0.3%

 

(1)     Exposure percentage represents the gross lending and related off balance sheet exposure to a sector as a percentage of total gross lending and the related off balance sheet exposures.

 

 

We have reported on all emission sources required under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013. Our reporting year runs from October 2018 to September 2019. The emissions reporting boundary is defined as all entities and facilities either owned or under our operational control. *Scope 1 Emissions from fluorinated gas losses and fuel combustion in RBS Group premises/ vehicles, **Scope 2 Emissions from electricity, district heating and cooling used in RBS Group premises, ***Market-based Scope 2 Emissions and ****Scope 3 Emissions associated with business travel by RBS Group employees have been calculated using the Greenhouse Gas Protocol Corporate Standard, (2015), Scope 2 guidance, (2015) and Scope 3 calculation guidance, (2013). To our knowledge there are no material omissions. Independent limited assurance of total reported emissions in tonnes of CO2e, (Scope 1, 2 and 3 location-based emissions) has been provided by Ernst & Young LLP. Emissions factors used are from UK Government Emissions Conversion Factors for Greenhouse Gas Company Reporting (Department for Business, Energy & Industrial Strategy, 2019), CO2 Emissions from Fuel Combustion (International Energy Agency, 2018) or from relevant local authorities as required. For more information please see our website (https://www.rbs.com/rbs/sustainability/responsible-business.html).

 

Sustainable energy funding and financing: Noted below is the funding provided to customers during 2018 and 2019 to fulfil our three year commitment to provide £10 billion of funding and financing to the sustainable energy sector by 2020.
	Number of deals	£ billion (*)
Sustainable energy lending: Loans towards low carbon and environmental assets as well as companies and funds that operate in this sector.	269	3.4
Green and sustainable bond and private placements: Debt capital market issuance for sustainable energy projects and clients that operate in this sector	27	3.7
Green and sustainable market funding: Other market funding facilities to support customers’ transition to the low carbon economy including Sustainability Linked Loans which enables borrowers to incorporate sustainability objectives and targets into the banking facilities.	35	2.8
The above includes continued financing of low carbon generation and energy efficiency projects, as well as an increased focus on energy efficiency in real estate and alternative fueled vehicles.	331	9.9

 

Operational footprint

Between 2014 and 2019 we reduced our operational greenhouse gas emissions (Scopes 1, 2 and 3 – Business Travel) by 61%, exceeding our Science Based Target of 45% by 2020. This has been achieved by a 39% reduction in energy consumption in our buildings and a reduction of 60% in staff business travel.

 

During 2019, our UK and Ireland operations achieved Zero Waste to Landfill accreditation from the Carbon Trust.

 

Jointly the first company globally to commit to all three of the Climate Group’s initiatives on electric vehicles EV100, renewable energy RE100 and energy productivity EP100, pledging to:

 

·    Use only renewable electricity in our direct global operations by 2025 (RE100)

 

·    Install electric vehicle charging infrastructure in more than 600 spaces across our UK&I portfolio by 2030 (EV100)

 

·    Upgrade our job need cars of around 300 vehicles to electric models by 2025(EV100)

 

·    Reduce our energy consumption 40% by 2025 against its 2015 baseline (EP100).

 

As part of our RE100 commitment, RBS Group purchases 100% of its UK and Irish energy from renewable energy sources. Globally, in 2019 RBS Group purchased 79% of its energy from renewable sources.

 

Greenhouse Gas (GHG)	2014	2018	2019 (*)
Emissions	(Baseline)
Location-based CO2e emissions (Scope 1, 2 & business travel) (tonnes) (*)	496,249	252,340	191,103
Scope 1* CO2e emissions (tonnes)	30,695	29,959	20,672
Scope 2** Market-based*** CO2e emissions (tonnes)	377,337	57,735	45,913
Scope 2 Location-based CO2e emissions (tonnes)	360,201	166,179	127,730
Scope 3**** CO2e emissions from business travel (tonnes)	105,352	56,203	42,701
Location-based CO2e emissions per FTE(Scope 1, 2 & business travel) (tonnes)	5.07	3.56	2.87
Total energy use (GWh)	862	619	524

 

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Risk Management

 

Risk overview

 

Prudent risk management is central to the successful delivery of the RBS strategy

 

Risk is an inherent part of business activity and can arise as a result of the wider economic environment, market evolution, competitor activity, regulatory policy or process error. RBS operates an integrated risk management framework centred around the embedding of a strong risk culture. It ensures tools are in place to identify and manage both internal and external threats.

 

The framework allows RBS to:

·   Understand the risk environment and its drivers.

·   Identify risks and assess potential exposure.

·   Monitor and manage risks appropriately.

·   Provide effective risk reporting to the Board.

 

All RBS colleagues share ownership of risk management. RBS uses the three lines of defence model to define responsibilities and accountabilities, ensuring that risks are properly identified, measured, monitored, controlled and reported. Risk management is integrated into day-to-day business activities and key processes, including strategic planning.

 

Risk appetite, which defines the level and types of risk RBS is willing to accept, is set in line with overall strategy and approved by the RBSG plc Board.

 

Areas of focus in 2019

Against a backdrop of slowing global growth, evolving customer behaviour and the uncertain political environment in RBS’s core market, there was a significant focus on key financial risks. Risk management activities throughout 2019 were carried out with a strong awareness of the potential impacts of events in the wider environment for both RBS and its customers. Despite economic headwinds, the credit risk profile was broadly stable. A rise in impairments reflected the transition from relatively favourable conditions to a more normal external credit environment. Despite periods of market volatility resulting from geopolitical developments, traded VaR remained well within appetite.

 

The completion of the merger of Alawwal bank and Saudi British Bank in June 2019 led to a reduction in risk-weighted assets (RWAs) of £4.7 billion and further improvement in RBS’s CET1 position.

 

However, the impact of the UK’s withdrawal from the European Union has been difficult to predict. To minimise the risk of service disruption to customers, NatWest Markets Plc set up its Frankfurt branch and a number of client migrations to NatWest Markets N.V. were concluded. Oversight of planning for regulatory and legislative impacts – as well as economic impacts – remained a critical part of forward-looking risk management throughout 2019. This included stress testing and scenario modelling as well as capital planning. While the longer-term effects on the operating environment remain unpredictable, the potential second and third order effects on RBS and its customers continue to be an area of focus. This includes planning for the results of periodic financial volatility and slower economic growth.

 

The continued low interest rate environment presents an industry-wide challenge. Coupled with a softening economic outlook, sustained net interest margin compression increases risk to the achievement of financial and strategic objectives. While some rebalancing of business activity can mitigate short-term impacts, the effect of prolonged low interest rates over the medium term intensifies threats to the business model. Though RBS’s strong capital position is helpful here, dynamic risk management, including consideration of funding structure and off-balance sheet activities, has a key role in ensuring such threats do not disrupt the achievement of business objectives.

 

Further progress was made on the journey towards RBS’s target of embedding a generative risk culture across all three lines of defence. The aim, to make risk part of the way colleagues work and think, supports intelligent risk-taking, better customer outcomes, stronger and more sustainable business, and an improved cost base. The multi-year programme to enhance risk management capability at every level of the organisation continues with an emphasis on training, empowerment and proactivity.

 

Along with oversight of work to further implement GDPR, there was significant focus on data management in the context of RBS’s digitisation strategy. This was supported by a continuing emphasis on robust data standards designed to safeguard customer information.

 

Operational resilience – especially in terms of the continuity of key services – was a particular focus.

 

There was also a strong focus on oversight of work to further embed compliance with ring-fencing and operational continuity in resolution (OCiR) rules.

 

RBS continues to closely monitor the evolving regulatory environment. There is an ongoing focus on investment in systems and capability to ensure that RBS is well positioned to address new regulation and potential new themes.

 

Cyber security

Increasing digitisation to ensure families and businesses can access banking support wherever and whenever they need to – along with the increasing emphasis on digital services globally – requires intense vigilance relating to cyber security. RBS has a multi-layered approach to its defences. While the threat landscape continued to evolve in 2019, further investment in control enhancements was made. This included new anti-malware controls and improved security testing tooling to quickly detect and remediate potential vulnerabilities.

 

Financial crime

RBS has continued to enhance the policies, processes and systems used to combat financial crime, in line with the evolving threat. As changes in technology, the economy and wider society take place, risks relating to money-laundering, terrorist financing,

 

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Risk Management

 

tax evasion, bribery and corruption and financial sanctions develop. Understanding and responding to them appropriately remains a key area of focus. There was further emphasis during 2019 on ensuring proportionate, risk-focused customer due diligence standards are in place and significant investment was made in enhancing those controls. Improvements to the financial crime control environment also remained a key focus.

 

Business model disruption

The threat of disruption to RBS’s business model has intensified due to a combination of new technologies, changing customer behaviour and the evolving regulatory landscape. During 2019 there was a significant focus on anticipating developments and ensuring these were addressed by appropriate management activities. A number of technology-based innovations – such as the Esme end-to-end digital lending platform for business customers and the new Bó banking app for personal banking customers – were introduced to provide cutting-edge solutions. Effective risk management was a vital element of the development process and continues to be at the heart of RBS’s technology strategy.

 

Climate-related financial risk

Climate-related financial risk is classified as a top risk and is being integrated into core risk management. For more details, refer to pages 38 to 42.

 

LIBOR transition

RBS is continuing its preparations for the full transition from LIBOR to other interest-rate benchmarks by the end of 2021. This is a major undertaking since a significant number of transactions across the industry reference LIBOR. RBS continues to work closely with regulators and industry bodies to manage the impact. Oversight of the RBS-wide programme to prepare for the transition has been a major focus along with activities across all three lines of defence to minimise risk and disruption to customers (including the launch of a tool to allow customers using SONIA to calculate compounded rates in all major tenors). Activity to assess the conduct risk implications for RBS and its customers has also been a key focus.

 

Anti-bribery and corruption (ABC)

RBS is committed to ensuring it acts responsibly and ethically, both when pursuing its own business opportunities and when awarding business. Consequently, it has embedded appropriate policies, mandatory procedures and controls to ensure its employees, and any other parties it does business with, understand these obligations and abide by them whenever they act for RBS. ABC training is mandatory for all staff on an annual basis, with targeted training appropriate for certain roles. RBS considers ABC risk in its business processes including, but not limited to, corporate donations, charitable sponsorships, political activities and commercial sponsorships. Where appropriate, there is a requirement for ABC contract clauses in written agreements.

 

Model risk

Given the increasing importance and complexity of predictive analytics, during 2019 significant management time was devoted to model risk. This included improvements to the internal model control environment and the introduction of a model risk uncertainty framework for stress testing to enhance the accuracy of projections under stress. The focus on model usage and model risk across RBS continues to increase, both in relation to regulatory focus and as artificial intelligence applications become more integral to decision-making across the industry.

 

Risk-weighted assets (RWAs)

RWAs were down £9.5 billion at 31 December 2019, ending the year at £179.2 billion (from £188.7 billion in 2018). This reduction was driven by the completion of the merger of Alawwal bank and Saudi British Bank as well as revisions to LGD models in the personal and small business asset finance portfolio as well as reductions in market risk capital requirements.

 

Common Equity Tier 1 ratio

RBS maintained a strong CET1 ratio of 16.2%. This reflected the solid capital position given distributions to shareholders totalling £2.7 billion and a £0.4 billion charge for pension contributions. Excluding the impact of the Alawwal bank merger and PPI, RBS generated approximately 110 basis points of capital from attributable profits and approximately 60 basis points from a reduction in RWAs and other capital movements.

 

Leverage ratios

The CRR leverage ratio decreased to 5.1% (2018 – 5.4%). The UK leverage ratio decreased to 5.8% (2018 – 6.2%) due to lower Tier 1 capital.

 

Stress testing

Under the 2019 Bank of England hypothetical stress test, on an IFRS 9 transitional basis RBS’s low point CET1 ratio was 9.9%. This was significantly above the hurdle rate of 7.2%. After the impact of strategic management actions, RBS’s low point CET 1 ratio improved to 10.3%. The transitional Tier 1 leverage ratio low point was projected to be 4.7% under stress, which was above the leverage ratio hurdle rate of 3.56%. The Bank of England did not require RBS to submit a revised capital plan.

 

Liquidity and funding

The liquidity portfolio increased by £1 billion to £199 billion, with primary liquidity reducing by £3 billion to £125 billion. The reduction in primary liquidity was driven by reduced customer surplus in NatWest Holdings Group, dividend payments and Term Funding Scheme (TFS) repayment, offset by increased net term issuance. The increase in secondary liquidity was driven primarily by TFS repayment, resulting in the return of previously encumbered assets.

 

Litigation and conduct

Litigation and conduct costs of £895 million included an additional provision of £900 million in relation to PPI. This reflected greater than expected complaints volumes in advance of the 29 August 2019 deadline for new PPI complaints as well as a £169 million reimbursement under indemnification agreements relating to residential mortgage-backed securities.

 

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Risk Management

 

Top and Emerging Risks(1)

 

 

RBS employs a continuous process for identifying and managing its top and emerging risks. Top and emerging risks are those that could have a significant negative impact on its ability to operate or meet its strategic objectives.

 

External
Economic & Political Risks	As a UK-focused bank, RBS is exposed to the economic and political risks facing the UK including risks from a sustained period of low economic growth and low interest rates. A range of complementary approaches is used to inform strategic planning and risk mitigation. This includes active management of portfolios and adjustment of risk appetite, scenario planning and stress testing. In addition, RBS has implemented plans to prepare for the loss of access to the European Single Market and continues to monitor domestic political risk including developments in relation to a second Scottish independence referendum, as well as geopolitical risks. In the longer term, demographic change, high levels of debt and financial inequality in the UK could all have financial impacts and, as a result, are closely monitored with strategic plans adapted as appropriate.
Climate Related Risks	Accelerating climate change may lead to heightened financial risks and faster-than-anticipated impacts on RBS and the wider economy. These include financial loss as a result of deterioration in credit quality, market risk exposure and operational risk. The operation and business strategy continues to be adapted to mitigate the direct and indirect physical risks of climate change and the transition to a low carbon economy. In addition, climate-related financial risk is being integrated into the risk management framework.
Cyber Threats	Cyber-attacks continue to increase in frequency, sophistication and severity. There is a risk that a catastrophic cyber-attack damages the ability to do business and/or compromises data security. RBS operates a multi-layered approach to its defences and continues to invest in a multi-year programme to build resilience and cybersecurity capabilities. Cyber-attacks may also threaten the supply chain, reinforcing the importance of due diligence and close working with the third parties on which RBS relies.
Competitive Environment	Target markets are highly competitive, with changes in technology, regulation, customer behaviour and business models continuing to accelerate competitive pressure. RBS monitors the competitive environment and adapts strategy as appropriate, remaining focused on innovating to evolve the business model to deliver compelling propositions for customers. This includes the launch of new digital retail and business offerings, Bo´ and Mettle.
Regulatory, Legal & Conduct Risk	RBS continues to face stringent regulatory and supervisory requirements, particularly regarding conduct, financial crime, the use of models, and capital and liquidity management. A strong and comprehensive risk and compliance culture continues to be embedded. RBS engages with regulators to implement new regulatory requirements and incorporates the implications of proposed or potential regulatory activities in its strategic and financial plans.
LIBOR transition	UK and international regulators are driving a transition from the use of interbank offer rates (IBORs), including LIBOR, to alternative risk-free rates. Uncertainties around the transition represent a number of risks including elevated legal and conduct risks. While a programme to manage the transition is underway, there is a risk that this may not be done effectively.
Internal
Third Party Suppliers	Inadequate control over selection, governance and oversight of third-party suppliers could affect operational resilience. RBS is diligent in its screening of suppliers with strict contractual obligations governing supplier relationships and activity.
IT System Resilience	RBS continues to invest in IT infrastructure to prevent customer service disruption, which could result in reputational and regulatory damage. To mitigate these risks, a major investment programme has significantly improved the resilience of the systems and further progress is expected.
Culture & People Risk	There is a risk that RBS lacks sufficient capability or capacity at a senior level to deliver, or adapt to, change. People risk is monitored closely and plans are in place to support retention of key roles, with wider programmes supporting engagement and training for all employees. Ensuring a healthy culture remains a core priority and a multi-year programme focused on enhancing culture, including risk culture, is ongoing.
Data Management	Ineffective management of data, including a breach in data privacy, could have material negative impacts. RBS operates a control and policy framework governing data usage and continues to evolve a long-term data strategy.
Change Risk	Losses may arise from a failure to successfully execute major changes to the business model. RBS continues to implement change in line with its strategic plans while assessing the implementation risks and taking appropriate mitigating action as required. In addition, RBS continues to strengthen its control environment.

 

Note:

(1) The factors discussed in this section and elsewhere in the document should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties facing RBS. Please refer to “Risk Factors” on pages 286 to 300 for further details.

 

45

 

Governance and compliance

 

Governance at a glance

 

The Board has twelve directors comprising the Chairman, two executive directors and nine independent non-executive directors, one of whom is the Senior Independent Director. Biographies of the directors can be found on pages 64 and 65.

 

The Board is collectively responsible for promoting the long-term success of RBSG plc, driving both shareholder value and contribution to wider society. Its role is to provide leadership of RBSG plc within a framework of prudent and effective controls which enables risk to be assessed and managed.

 

In 2019, the Board and committee evaluation process was conducted by the Company Secretary.

 

Our Board committees

In order to provide effective oversight and leadership, the Board has established a number of Board committees with particular responsibilities. The work of the Board committees is discussed in their individual reports. The terms of reference for each of these committees is available on rbs.com.

 

The full Governance report is on pages 64 to 112 of the 2019 Annual Report on Form 20-F.

 

Group Audit Committee

Assists the Board in discharging its responsibilities for monitoring the quality of the financial statements of RBSG plc. It reviews the accounting policies, financial reporting and regulatory compliance practices of RBS and RBS’s systems and standards of internal controls, and monitors the work of internal audit and the external auditor.

 

Group Board Risk Committee

Provides oversight and advice to the Board on current and potential future risk exposures of RBS and future risk profile. It reviews RBS’s compliance with approved risk appetite and oversees a number of submissions to regulators.

 

Group Sustainable Banking Committee

Provides support to the Board in overseeing actions being taken by management to run a sustainable long term business, with specific focus on customers and brands; people and culture; the competitive environment; and society and environment.

 

Group Performance and Remuneration Committee

Responsible for approving remuneration policy and reviewing the effectiveness of its implementation. It also considers senior executive remuneration and makes recommendations to the Board on the remuneration of executive directors.

 

Group Nominations and Governance Committee

Assists the Board in the selection and appointment of directors. It reviews the structure, size and composition of the Board, and the membership and chairmanship of Board committees. It considers succession planning taking into account the skills and expertise which will be needed on the Board in the future. Its remit also includes oversight of RBS Group’s governance arrangements.

 

Technology and Innovation Committee

Assists the Board in overseeing and monitoring the execution of RBS’s strategic direction in relation to technology and innovation.

 

Group Executive Committee

The Group Executive Committee supports the Group Chief Executive Officer (CEO) in managing RBS’s businesses. It considers strategic, financial, capital, risk and operational issues affecting RBS. It reviews and debates relevant items before consideration by the Board.

 

UK Corporate Governance Code

Throughout the year ended 31 December 2019, RBSG plc has complied with all of the provisions of the UK Corporate Governance Code issued by the Financial Reporting Council dated July 2018 except in relation to provision 17 that the Group Nominations and Governance Committee should ensure plans are in place for orderly succession to both the Board and senior management and oversee the development of a diverse pipeline for succession, and provision 33 that the Group Performance and Remuneration Committee should have delegated responsibility for setting remuneration for the Chairman and executive directors. The Board considers that these are matters which should rightly be reserved for the Board.

 

 

Our Board

 

 

 

 

Board of directors

 

Chairman

 

Howard Davies

 

Executive directors

 

Alison Rose

 

Katie Murray

 

 

Non-executive directors

 

Frank Dangeard

 

Alison Davis

 

Patrick Flynn

 

Morten Friis

 

Robert Gillespie

 

Baroness Noakes

 

Mike Rogers

 

Mark Seligman

 

(Senior Independent Director)

 

Lena Wilson

 

Company Secretary

 

Jan Cargill

 

46

 

Governance and compliance

 

 

Board engagement with stakeholders

 

 

This section of the Strategic Report describes how the directors have had regard to the matters set out in section 172(1) (a) to (f), and forms the directors’ statement required under section 414CZA, of The Companies Act 2006.

 

 

Refer to page 30 for further details on our stakeholder engagement activities.

 

 

 

Refer to pages 33 to 36 for further details on RBS’s approach to colleague engagement.

 

Section 172(1) statement

The Board objectives, approved in February 2019, identified the Board’s key stakeholders (as set out in this statement). During 2019, the Board undertook a variety of activities to engage with stakeholders and bring their voice into the boardroom.

 

Customers

Customers are at the heart of everything we do. During the year the Board received updates on key customer issues through customer service performance updates and regular business reviews. There was also a dedicated Board session on the Retail Banking environment. Our directors met a range of business and personal customers during a programme of visits in September 2019, which provided an opportunity to gain insights into customer issues and challenges.

 

The Chairman and CEO have regular meetings with customers to enhance relationships and understand their views.

 

In addition, the Group Sustainable Banking Committee held two dedicated sessions on customer service performance and customers in vulnerable situations, inviting the SafeLives charity to join for the latter session to gain a better understanding of how the Bank can support those suffering financial abuse.

 

Colleagues

The Board promotes colleague voice in the boardroom through a variety of channels.

 

During 2019, the Board engaged with colleagues during a number of Board and committee visits to businesses and functions, and we also held our annual Meet the Board event.

 

Our Colleague Advisory Panel (CAP), established in 2018, met twice during 2019, providing a valuable mechanism for directors to engage directly with colleagues on topics of strategic interest affecting RBS and the workforce; and offering our colleagues a greater understanding of the Board’s role. A number of directors attended CAP meetings during the year and discussion topics included Purpose, future strategy, executive pay, inclusion and sustainability. Outputs were reported to the Board and have influenced the Board’s consideration of these topics.

 

In February 2019, the Banking Standards Board presented a summary of their 2018 culture assessment report on RBS, and in October 2019, the Board considered another set of encouraging results from the annual colleague opinion and 2019 Banking Standards Board surveys.

 

The colleague opinion survey results were one culture oversight tool available to the Board. The survey results confirmed to the Board that 2019 targets had been achieved

 

 

47

 

Governance and compliance

 

 

across key measurements, trends and benchmarks in relation to leadership, engagement and culture.

 

Through the Group Sustainable Banking Committee, the Board received a culture measurement report which supported the Board in assessing progress in building a healthy culture across the Bank and alignment of values and culture.

 

The Board also listened to colleague views during the process of establishing the Bank’s Purpose, as set out more fully on page 49.

 

Shareholders

All shareholders have the opportunity to ask questions at our Annual General Meeting (AGM) and any other General Meetings which may be held. We also hold regular retail shareholder events, where shareholders can ask questions of a panel of executives and non-executive directors and learn more about the business, our progress to date and our plans for the future. We held two such events during 2019. The first took place in London on 10 September 2019 and on 25 November 2019 we held our first virtual shareholder event. We plan to hold further similar events in 2020.

 

Communication with RBSG plc’s largest institutional shareholders is undertaken as part of the Investor Relations programme. The Chairman, CEO and Group Chief Financial Officer (CFO) undertook an extensive programme of meetings with our largest institutional shareholders, including UK Government Investments (UKGI). The Chairman’s regular engagement with major shareholders allows him to understand their views on governance and performance against strategy. The Chairman of the Group Performance and Remuneration Committee met with institutional shareholders to discuss remuneration matters, including the executive directors’ remuneration policy and updated the Board on those discussions. The Board met a number of investors during September 2019 to understand investor sentiment across a range of issues.

 

In October 2019, the Chairman and Senior Independent Director hosted a corporate governance roundtable event attended by a number of institutional shareholders. Issues covered included Purpose, Board diversity, climate change risk and colleague voice. Throughout the year, the Chairman provided regular updates to the Board on shareholder engagement, in order to ensure the Board as a whole has a clear understanding of the views of shareholders. The Board also received regular updates on investor feedback from the CFO.

 

Regulators

The Board recognises the importance of open and continuous dialogue with our regulators. Representatives from the Financial Conduct Authority (FCA) attended the February 2019 Board meeting to present and discuss their annual Firm Evaluation letter. The Prudential Regulation Authority (PRA) conducted a Board effectiveness review in 2019, which included attendance at the October 2019 Board meeting and meetings with directors. The Chairman and executive directors have regular meetings with both the FCA and PRA. In addition, individual directors engage regularly with our regulators through Continuous Assessment and Proactive Engagement meetings.

 

Suppliers

The Board recognises the key role our suppliers play in ensuring we deliver a reliable service to our customers. In October 2019 the Board held a suppliers’ spotlight session, which included an overview of RBS’s suppliers and provided insights on the Bank’s approach towards managing key supplier relationships, including payment practices. The directors noted that the Bank had performed well against key performance indicators in relation to payment periods. They also discussed the future approach to suppliers and the changing regulatory landscape in relation to outsourcing. Meetings with key suppliers in September 2019 provided a first hand opportunity for directors to hear directly from strategic partners and to discuss current challenges.

 

Community and Environment

The role of the Bank in supporting the communities in which we operate has been an important topic of discussion during 2019 as the Board, together with management, explored the Bank’s broader purpose in society and the UK economy. It is recognised by the Board that climate change must have greater prominence at both senior management and board levels across RBS Group. This year the Board took steps towards building greater knowledge and understanding of climate-related risks through a dedicated teach-in session. The Bank’s high-level plan for responding to the latest prudential expectations was also approved by the Board, covering deliverables across governance, risk management, scenario analysis and stress testing and disclosure. While there is much to do, the Board is encouraged by the internal mobilisation reported and is committed to its role in addressing and overseeing climate risks within the Bank’s overall business strategy and risk appetite.

 

 

 

48

 

Governance and compliance

 

 

 

How stakeholder interests have influenced decision making

RBSG plc recognises the importance of engaging with stakeholders to help inform its strategy and Board decision-making. Relevant stakeholder interests, including those of colleagues, customers, suppliers and others are taken into account by the Board when it takes decisions. We define principal decisions as those that are material, or of strategic importance to RBSG plc, and also those that are significant to any of our key stakeholder groups. In making its decisions, the Board considers the outcomes of relevant stakeholder engagement, as well as the need to maintain a reputation for high standards of business conduct, the need to act fairly between the members of RBSG plc and the long-term consequences of its decisions.

 

The following case studies provide some examples of how stakeholder interests have been taken into account in Board discussions and principal decisions.

 

1 – Purpose

The interests of stakeholders have been central to the Board’s consideration of Purpose during 2019. The Board believes RBS needs to be a purpose-led bank which responds to the changing needs of all of its stakeholders, because when they succeed, RBS will too. Purpose will be embedded in decision-making across the organisation, in order for the Bank to generate long-term value for shareholders and to contribute to wider society and the communities in which it operates.

 

There was an extensive period of stakeholder engagement on our Purpose during 2018 and 2019. A wide range of colleagues were involved, including the NextGen talent group and employee led networks. Board members heard some of this feedback directly by attending the Colleague Advisory Panel, and listening to colleagues helped inform (and at times, alter) the Board’s views on the Bank’s core Purpose.

 

This feedback, alongside Board oversight tools such as colleague survey results and the Banking Standards Board Survey, helped directors to satisfy themselves that the areas of focus being considered for our Purpose were aligned to the organisation’s values, and would support an open and inclusive culture which values and embeds continuous learning.

 

As the Purpose continued to develop it was also tested with customers, investors, regulators and other stakeholders, through external market research. A summary of the output of this stakeholder engagement was shared with the Board confirming the proposed Purpose was well received.

 

2 – CEO Appointment

As described in the report of the Group Nominations and Governance Committee on pages 70 and 71, in 2019 the Board approved the appointment of Alison Rose as Group Chief Executive Officer with effect from 1 November 2019. From the outset, the Board placed stakeholder interests at the core of its objectives in the search for Ross McEwan’s successor.

 

The Group Nominations and Governance Committee, on behalf of the Board, agreed a role specification which required candidates to demonstrate broad and authoritative banking and strategic experience that would serve to deliver long term sustainable growth to the business for the benefit of its shareholders and wider stakeholders. A rigorous search process was undertaken, involving the consideration of both internal and external candidates. Alison Rose was identified as the strongest candidate on the basis of the role specification criteria.

 

In reaching its decision, the interests of the Bank’s customers were a key focus for the Board, particularly each candidate’s ability to lead a business that would be recognised as truly customer centric. The Board also ensured that colleague interests were taken into account when agreeing the critical capabilities used to assess potential candidates. These required candidates to demonstrate the strong ethical and moral principles needed to lead the culture and values of RBS Group. The Board ensured that the Bank’s regulators, another of its key stakeholder groups, were kept regularly apprised of progress during the search.

 

The Board will continue to ensure that its nominations process is based on the principles of fairness, respect and inclusion and that all nominations and appointments are made on the basis of individual competence, skills and expertise measured against identified objective criteria and taking into account a broad range of stakeholder interests.

 

3 – Capital Distributions

During 2019, the directors agreed to seek approval from shareholders to undertake a directed buyback of shares, equivalent to 4.99% of RBSG plc’s issued share capital, from UKGI. They also approved a final 2018 year-end dividend of 3.5p and special dividend of 7.5p in February 2019; and a 2019 interim ordinary dividend of 2.0p and a special dividend of 12.0p in August 2019.

 

In making their decisions, the directors took into account RBSG plc’s very strong capital position, achieved through organic capital build and optimising its capital usage and confirmed their strong desire to distribute excess capital back to shareholders.

 

There is regular interaction with key stakeholders in relation to capital distributions. Engagement with institutional shareholders prior to the Board’s decisions had indicated a desire for RBSG plc to return excess capital in an efficient way. Institutional shareholders also indicated a desire for us to help UKGI reduce its stake through directed buybacks and other directed capital distribution methods and voted in favour of resolutions to do this at both a General Meeting and AGM in 2019. In considering dividends, the directors have ensured that RBSG plc always has capacity to participate in a directed buyback of UKGI’s shares to the full extent allowed. Regulators also confirmed they had no objection. Passing regulatory stress tests and operating within our capital and double leverage risk appetite were key determinants in the resumption of dividends. Resuming dividends also sent a positive message to colleagues about the overall financial strength of RBSG plc.

 

The Board will continue to take key stakeholders’ views into account in considering further capital distributions, whilst promoting the long-term sustainable success of RBSG plc.

 

49

 

Business review

 

	Page
Presentation of information	50
Segmental reporting	50
Competition	51
Financial summary	52
Segment performance	58

 

Presentation of information

In the Report and Accounts, unless specified otherwise, the terms ‘the company’ and ‘RBSG plc’ mean The Royal Bank of Scotland Group plc; ‘RBS’ and ‘RBS Group’ mean the company and its subsidiary and associated undertakings; ‘NWH Ltd’ means NatWest Holdings Limited; ‘NWB Plc’ means National Westminster Bank Plc; ‘RBS plc’ means The Royal Bank of Scotland plc; ‘NWM Plc’ means NatWest Markets Plc and ‘UBI DAC’ means Ulster Bank Ireland DAC.

 

The company publishes its financial statements in pounds sterling (‘£’ or ‘sterling’). The abbreviations ‘£m’ and ‘£bn’ represent millions and thousands of millions of pounds sterling, respectively, and references to ‘pence’ represent pence in the United Kingdom (‘UK’). Reference to ‘dollars’ or ‘$’ are to United States of America (‘US’) dollars. The abbreviations ‘$m’ and ‘$bn’ represent millions and thousands of millions of dollars, respectively, and references to ‘cents’ represent cents in the US. The abbreviation ‘€’ represents the ‘euro’, and the abbreviations ‘€m’ and ‘€bn’ represent millions and thousands of millions of euros, respectively.

 

This section includes a discussion on our operating results for the year ended 31 December 2019, including a comparative discussion on our operating results for the year ended 31 December 2018. For a discussion on our operating results for the year ended 31 December 2018 including a comparative discussion on our operating results for the year ended 31 December 2017, refer to “Business Review” on pages 37 to 58 in the Annual Report on Form 20-F (File No. 001-10306) filed with the Securities and Exchange Commission on 28 February 2019 and to “Business Review” on pages 38 to 58 in the Form 6-K (File No. 001-10306) filed with the Securities and Exchange Commission on 30 April 2019.

 

Segmental reporting

Re-segmentation

Effective from 1 January 2019, Business Banking was transferred from UK Personal & Business Banking (UK PBB) to Commercial Banking as the nature of the business, including distribution channels, products and customers, are more closely aligned to the Commercial Banking business. Concurrent with the transfer, UK PBB was renamed UK Personal Banking and the previous franchise combining UK PBB and Ulster Bank RoI was renamed Personal & Ulster. Reportable segmental comparatives have been restated and filed on Form 6-K on 30 April 2019.

 

Franchises

RBS continues to deliver on its plan to build a strong, simple and fair bank for both customers and shareholders. To help develop and deliver this strategy, in the fourth quarter of 2019, Commercial & Private Banking (CPB), combining the reportable segments of Commercial Banking and Private Banking ceased to operate as one business area and the franchise Personal & Ulster, combining the reportable segments of UK Personal Banking and Ulster Bank RoI was also disbanded. The reportable operating segments remain unchanged and no comparatives have been restated and filed on Form 6-K on 30 April 2019.

 

Reportable operating segments

The reportable operating segments are as follows. For full business descriptions see Note 4 on page 212.

·          UK Personal Banking

·          Ulster Bank RoI

·          Commercial Banking

·          Private Banking

·          RBS International (RBSI)

·          NatWest Markets (NWM)

·          Central items & other

 

Allocation of central items

RBS allocates all central costs relating to Services and Functions to the business using appropriate drivers, these are reported as indirect costs in the segmental income statements. Assets and risk-weighted assets held centrally, mainly relating to RBS Treasury, are allocated to the business using appropriate drivers.

 

Non-IFRS financial information

RBS prepares its financial statements in accordance with IFRS as issued by the IASB and as adopted by the European Union, which constitutes a body of generally accepted accounting principles (GAAP). This document contains a number of adjusted or alternative performance measures, also known as non-GAAP or non-IFRS performance measures. These measures are adjusted for certain items which management believe are not representative of the underlying performance of the business and which distort period-on-period comparison. These non-IFRS financial measures are not measures within the scope of IFRS and are not a substitute for IFRS financial measures. Refer to the section, ‘Non-IFRS financial measures’, on pages 267 to 270 for further information and calculations of non-IFRS financial measures included throughout this document, and, where relevant, the most directly comparable IFRS financial measures.

 

RBS Group ring-fencing

The UK ring-fencing legislation required the separation of essential banking services from investment banking services from 1 January 2019. RBS Group has placed the majority of the UK and Ireland banking business in ring-fenced banking entities under an intermediate holding company, NatWest Holdings Limited. The Western European corporate business continues to be transferred from the ring-fenced bank entities to NatWest Markets N.V. (NWM N.V.), a subsidiary of NatWest Markets Plc (NWM Plc). NWM Plc and RBS International Ltd (RBSI Ltd) are separate banks outside the ring-fence, both subsidiaries of RBSG plc.

 

NatWest Markets N.V.

NWM N.V. began transacting new business on 25 March 2019 to ensure continuity of service to European Economic Area (EEA) customers when the UK leaves the European Union (EU). The activities transferred primarily relate to Markets and Corporate Lending portfolios for EEA customers previously served from NWM Plc and the ring-fenced bank. NWM N.V. Group was acquired by NWM Plc and became a part of NWM Group with effect from 29 November 2019.

 

On 16 June 2019, the merger of Alawwal bank and SABB was completed, with NWM N.V. receiving an aggregate 10.8% shareholding in SABB on behalf of itself and its consortium partners.

 

RBS Group’s economic interest in the merged entity, amounting to 4.1%, was then sold to NWM Plc, and the balance of shares was transferred separately to RFS Holdings B.V. consortium partners, as part of the unwind of those arrangements. On 29 November 2019, RBSH Group transferred to become a subsidiary of NWM Plc following regulatory approval. At the same time, the liquidation of RFS Holdings B.V. commenced.

 

 

50

 

Business review

 

 

 

Competition

Introduction

In an environment in which central banks have maintained very low interest rates for an unusually long period or introduced negative rates, competitive dynamics have changed in some of the principal markets in which we operate. In this environment an ability to attract and manage funding remains a critical competitive advantage. Other key competitive factors include cost management, growing digital sales focus, branch network re-shaping, and product simplification. Cost management remains a key focus, as banks seek to simplify their organisational and IT architectures while at the same time investing to ensure that they can meet customers’ evolving channel preferences. Customers have increasingly focused on the use of internet and mobile as sales and service channels for certain types of products. Therefore, competitive position and performance increasingly depends on the possession of user-friendly, diverse and efficient online solutions.

 

UK Personal Banking

In the personal banking business, RBS competes with a range of providers including UK banks and building societies, major retailers and life assurance companies, as well as the UK subsidiaries of major international banks. In the mortgage market, RBS competes with UK banks, building societies and specialist lenders. Increasingly, the ambitions of non-traditional players in the UK market are gaining credibility, with new entrants active and seeking to build their platforms either through organic growth or in some cases by acquiring businesses made available through the restructuring of incumbents.

Entrants with new business models such as peer-to-peer lending platforms, while currently small, continue to grow rapidly and are emerging as significant competitors. Such competitors often target specific elements of the value chain, providing specialised services to particular customer segments.

 

In the UK credit card market, large retailers and specialist card issuers are active in addition to the UK banks. In addition to physical distribution channels, providers compete through direct marketing activity and digital channels.

 

RBS distributes life assurance products to banking customers in competition with independent advisors and life assurance companies.

 

Ulster Bank RoI

In the Republic of Ireland, Ulster Bank RoI competes in retail and commercial banking with the major Irish banks, and with other UK and international banks in the market.

 

Commercial Banking

Competition for corporate, institutional and business customers in the UK is from UK banks, from specialised global and regional investment banks and from large foreign universal banks that offer combined investment and commercial banking capabilities as well as from new entrants and non-bank challengers. In asset finance and invoice finance, the bank competes with banks and specialist finance providers, both captive and non-captive. In the small business banking market, the bank competes with other UK banks, specialist finance providers and building societies. In all of these areas, entrants with new technology-based business model are also showing rapid growth.

 

RBS International

RBS International competes with other UK and international banks to offer offshore banking services as well as domestic banking services in the Channel Islands, Gibraltar and the Isle of Man.

 

Private Banking

Coutts and Adam & Company compete as private banks with UK clearing and private banks, asset managers and with international private banks. Competition in wealth management remains strong as banks maintain their focus on competing for affluent and high net worth customers.

 

NatWest Markets

NatWest Markets focuses on the needs of large corporates operating in the UK and Western Europe as well as global financial institution customers. NatWest Markets provides financing and risk management for these customers, and trades with financial institutions and counterparties for distribution and market making. There are sales and trading operations in Amsterdam, London, the US and Singapore and offices in a select number of countries. NatWest Markets, therefore, competes with large domestic banks, major international banks and a number of investment banks that offer risk management, trading solutions and debt financing to financial institutions and UK and European corporate customers.

 

RBS Group’s product proposition is built around its core strength of supporting customers across currencies, rates and financing. Key competitive factors in this market include the ability to develop digital innovation, such as automation across flow products, the expertise and markets insight of employees and delivering value-adding bespoke solutions for customers.

 

With an evolving regulatory landscape and continued pressure on margins, competition in this market remains strong. Many market participants are also revising their strategy in order to ensure they deliver sustainable returns.

 

RBS – Annual Report on Form 20-F 2019

51

 

 

Business review

 

 

 

Financial summary continued

RBS’s financial statements are prepared in accordance with IFRS. Selected data under IFRS for each of the last five years is presented below.

 

	2019	2018*	2017*	2016*	2015*
Summary consolidated income statement	£m	£m	£m	£m	£m
Net interest income	8,047	8,656	8,987	8,708	8,767
Non-interest income	6,206	4,746	4,146	3,882	4,156
Total income	14,253	13,402	13,133	12,590	12,923
Operating expenses	(9,325)	(9,645)	(10,401)	(16,194)	(16,353)
Profit/(loss) before impairment (losses)/releases	4,928	3,757	2,732	(3,604)	(3,430)
Impairment (losses)/releases	(696)	(398)	(493)	(478)	727
Operating profit/(loss) before tax	4,232	3,359	2,239	(4,082)	(2,703)
Tax charge	(432)	(1,208)	(731)	(1,107)	(3)
Profit/(loss) from continuing operations	3,800	2,151	1,508	(5,189)	(2,706)
Profit/(loss) from discontinued operations, net of tax	—	—	—	—	1,541
Profit/(loss) for the year	3,800	2,151	1,508	(5,189)	(1,165)
Attributable to:
Ordinary shareholders	3,133	1,622	752	(6,955)	(1,979)
Preference shareholders	39	182	234	260	297
Dividend access share	—	—	—	1,193	—
Paid-in equity holders	367	355	487	303	108
Non-controlling interests	261	(8)	35	10	409
	3,800	2,151	1,508	(5,189)	(1,165)
Performance key metrics and ratios	2019	2018	Variance
Return on tangible equity (%)	9.4	4.8	4.6
Net interest margin (1)	1.79	1.98	(19bps)
Bank net interest margin (RBS NIM excluding NWM) (%) (2)	1.99	2.09	(10bps)
Average interest earning assets (RBS excluding NWM) (£m)	413,112	409,106	4,006
Cost:income ratio (%) (3)	65.1	71.7	(6.6)
Earning per share (pence) - basic	26.0p	13.5p	12.5p

 

*Restated for IAS12 ‘income taxes’ refer to accounting policy 1, Other amendments to IFRS, for further details.

 

Notes:

(1)	Net interest margin is net interest income of the banking business as a percentage of interest earning assets (IEA) of the banking business.
(2)	Bank net interest margin is net interest income of the banking business less the NatWest Markets (NWM) element as a percentage of interest-earning assets of the banking business less the NWM element.
(3)	Cost:income ratio is total operating expenses less operating lease depreciation divided by total income less operating lease depreciation.

 

RBS – Annual Report on Form 20-F 2019

52