2022 Annual Report and Accounts
The Royal
Bank of
Scotland plc
Strategic report
RBS plc Annual Report and Accounts 2022 1
Page
Strategic report
Presentation of information
1
Description of business
1
Performance overview
1
Stakeholder engagement and s.172(1) statement
2
Board of directors and secretary
3
Financial review
4
Risk and capital management
6
Report of the directors
75
Statement of directors’ responsibilities
82
Financial statements
83
Presentation of information
The Royal Bank of Scotland plc (‘RBS plc’ or ‘we’) is a wholly-
owned subsidiary of NatWest Holdings Limited (‘NWH Ltd’ or
‘the intermediate holding company’). The term ‘NWH Group’
refers to NWH Ltd and its subsidiary and associated
undertakings. NatWest Group plc is ‘the ultimate holding
company’. The term ‘NatWest Group’ refers to NatWest Group
plc and its subsidiary and associated undertakings.
RBS plc publishes its financial statements in pounds sterling (‘£’
or ‘sterling’). The abbreviations ‘£m’ and ‘£bn’ represent millions
and thousands of millions of pounds sterling (‘GBP’),
respectively, and references to ‘pence’ represent pence where
amounts are denominated in pounds sterling. 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. The abbreviation ‘€’ represents
the ‘euro’, and the abbreviations ‘€m’ and ‘€bn’ represent
millions and thousands of millions of euros, respectively.
Description of business
The principal entities under NWH Ltd are National Westminster
Bank Plc (which wholly owns Coutts & Company and Ulster
Bank Limited), The Royal Bank of Scotland plc and Ulster Bank
Ireland DAC (UBIDAC).
Principal activities and operating segments
RBS plc serves customers across the UK with a range of retail
and commercial banking products and services. A wide range of
personal products are offered including current accounts, credit
cards, personal loans, mortgages and wealth management
services.
On 27 January 2022, NatWest Group announced that a new
business segment, Commercial & Institutional, would be created,
bringing together the Commercial, NatWest Markets and RBSI
businesses to form a single business segment, with common
management and objectives, to best support our customers
across the full non-personal customer lifecycle.
Comparatives have been re-presented. The re-presentation of
operating segments does not change the financial results of RBS
plc.
The reportable operating segments are as follows:
Retail Banking serves personal customers in the UK.
Private Banking serves UK-connected high-net-worth
individuals and their business interests.
Commercial & Institutional offers SME’s, Commercial,
Corporate and Institutional clients comprehensive banking and
financing solutions throughout the UK.
Central items & other comprises corporate treasury activity on
behalf of RBS plc and its fellow subsidiaries and RBS plc’s
corporate service and functions activities.
Performance overview
Profit for 2022 was £1,176 million, compared with £776 million
in 2021, driven by an increase in total income and a decrease in
operating expenses, partially offset by net impairment losses.
Total income in 2022 was £2,071 million, compared with £1,775
million in 2021, reflecting the beneficial impact of interest rate
increases, partially offset by a reduction in lending.
Operating expenses in 2022 were £892 million, compared with
£1,114 million in 2021, primarily reflecting a one-off impairment
of goodwill incurred in 2021, cost efficiencies and continued
headcount reduction.
A net impairment loss of £20 million for 2022, compared with a
net release of £360 million in 2021 principally reflects the latest
macro-economics, including updated scenarios, with more
weight being placed on the downside scenarios. Underlying
book performance remains strong.
An operating profit before tax of £1,159 million was mainly
driven by £523 million in Retail Banking and £762 million profit
in Commercial & Institutional, partially offset by a £65 million
loss in Private Banking.
The CET1 capital ratio decreased in 2022 to 11.6% from 13.7%
reflecting a decrease in CET1 capital, predominantly due to
dividends paid, offset by a £1.1 billion decrease in RWAs.
RWAs decreased to £18.5 billion from £19.6 billion, reflecting a
£0.5 billion decrease in credit risk RWAs as well as a £0.6 billion
decrease in operational risk RWAs following the annual
recalculation in the first quarter of 2022.
Stakeholder engagement and s.172(1) statement
RBS plc Annual Report and Accounts 2022 2
Stakeholder engagement and s.172(1)
statement
This statement describes how the directors have had regard to
the matters set out in section 172(1) (a) to (f) of the Companies
Act 2006 (section 172) when performing their duty to promote
the success of the company.
Board engagement with stakeholders
The Board reviews and confirms its key stakeholder groups for
the purposes of section 172 annually. For 2022, they remained
customers, investors, regulators, colleagues, communities and
suppliers. Examples of how the Board has engaged with key
stakeholders, including the impact on principal decisions, can
be found in this statement and on page 75 (Corporate
governance statement).
Supporting effective Board discussions and
decision-making
NatWest Group’s purpose –
championing potential, helping
people, families and businesses to thrive
– continues to
influence Board discussions and decision-making.
Board and Committee terms of reference reinforce the
importance of considering both NatWest Group’s purpose and
the matters set out in section 172. The Board and Committee
paper template includes a section for authors to explain how
the proposal or update aligns with NatWest Group’s purpose
and a separate section for them to include an assessment of
the relevant stakeholder impacts for the directors to consider.
Directors are mindful that it is not always possible to achieve
an outcome which meets expectations of all stakeholders who
may be impacted. For decisions which are particularly
challenging or complex, an optional page in the paper template
provides directors with further information to support
purposeful decision-making. This additional page uses Blueprint
for Better Business as a base and is aligned to NatWest Group’s
broader purpose framework.
Principal decisions
Principal decisions are those decisions taken by the Board that
are material or of strategic importance to the company, or are
significant to the company’s key stakeholders.
This statement describes an example of a principal decision
taken by the Board during 2022. Further information on the
Board’s principal activities can be found in the Corporate
governance statement on pages 75 to 81.
Key
A – Likely long-term consequences
B – Employee interests
C – Relationships with customers, suppliers and others
D – The impact on community and environment
E – Maintaining a reputation for high standards of business
conduct
F – Acting fairly between members of the company
Case Study – Approving capital distributions
Factors considered: A C
What was the decision-making process?
During 2022, the Board approved two interim dividends. The
Board received comprehensive papers from management and
its decisions were informed by 2022 capital plans as well as
regular updates on the financial and capital positions of RBS
plc.
The Board Risk Committee also reviewed all capital distribution
proposals in advance of Board consideration and
recommended them to the Board for approval.
How did the directors fulfil their duties under section 172
and how were stakeholders considered?
In taking decisions, the directors were mindful of their duties
under section 172. Each dividend proposal included a
stakeholder overview which set out relevant stakeholder
impacts and considerations.
How was NatWest Group’s purpose considered as part of
the decision?
The Board is aware that in taking decisions on capital
distributions, it also needs to consider the financial implications
of those decisions in terms of continuing to support customers
and maintaining financial stability.
Actions and outcomes
The Board approved an interim dividend of £0.2 billion which
was paid on 22 February 2022 and an interim dividend of £0.65
billion which was paid on 29 July 2022 with both interim
dividends payable to NWH Ltd as the sole shareholder.
Further details on how NatWest Group engages with its
stakeholders can be found in the NatWest Group plc 2022
Annual Report and Accounts and at natwestgroup.com.
Board of directors and secretary
RBS plc Annual Report and Accounts 2022 3
Approval of Strategic report
The Strategic report for the year ended 31 December 2022 set out on pages 1 to 74 was approved by the Board of directors on 16
February 2023.
By order of the Board
Jan Cargill
Chief Governance Officer and Company Secretary
16 February 2023
Chairman
Howard Davies
Executive directors
Alison Rose DBE (CEO)
Katie Murray (CFO)
Non-executive directors
Francesca Barnes
Graham Beale
Ian Cormack
Roisin Donnelly
Patrick Flynn
Morten Friis
Yasmin Jetha
Mike Rogers
Mark Seligman
Lena Wilson
Board and committee membership
Nominations Committee
Howard Davies (Chair)
Graham Beale
Patrick Flynn
Morten Friis
Mark Seligman
Lena Wilson
Audit Committee
Patrick Flynn (Chair)
Graham Beale
Ian Cormack
Morten Friis
Mark Seligman
Board Risk Committee
Morten Friis (Chair)
Francesca Barnes
Graham Beale
Ian Cormack
Patrick Flynn
Lena Wilson
Performance and Remuneration Committee
Lena Wilson (Chair)
Ian Cormack
Mike Rogers
Mark Seligman
Senior independent non-executive director
Graham Beale
Chief Governance Officer and Company Secretary
Jan Cargill
Board changes in 2022
Roisin Donnelly (non-executive director) appointed on 1
October 2022.
Robert Gillespie (non-executive director) resigned on 15
December 2022.
For additional detail on the activities of the Committees above,
refer to the Report of the directors.
Auditor
Ernst & Young LLP
Chartered Accountants and Statutory Auditor
25 Churchill Place
London E14 5EY
Registered office
36 St Andrew Square
Edinburgh EH2 2YB
Telephone: +44 (0)131 556 8555
Other principal offices
PO Box 1000
Gogarburn
Edinburgh EH12 1HQ
Telephone +44 (0)131 626 0000
24/25 St Andrew Square
Edinburgh EH2 1AF
The Royal Bank of Scotland plc
Registered in Scotland No. SC083026
Financial review
RBS plc Annual Report and Accounts 2022 4
Financial summary
Summary income statement for the year ended 31 December 2022
Commercial
Central items
31 December
31 December
& Institutional
& other
2022
2021
Variance
£m
£m
£m
£m
£m
%
Net interest income
886
(4)
1,782
1,342
440
33
Non-interest income
252
(34)
289
433
(144)
(33)
Total income
1,138
(38)
2,071
1,775
296
17
Operating expenses
(390)
—
(892)
(1,114)
222
(20)
Profit/(loss) before impairment
losses/releases
748
(38)
1,179
661
518
78
Impairment (losses)/releases
14
(23)
(20)
360
(380)
(106)
Operating profit/(loss) before tax
762
(61)
1,159
1,021
138
14
Tax credit/(charge)
17
(245)
262
(107)
Profit for the year
1,176
776
400
52
Key metrics and ratios
Cost:income ratio (%) (1)
43.1
62.8
Loan impairment rate (bps) (2)
5
(84)
CET1 ratio (%) (3)
11.6
13.7
Leverage ratio (%) (4)
6.4
4.1
Risk weighted assets (£bn)
18.5
19.6
Loan:deposit ratio (%) (5)
46
46
(1) Cost:income ratio is total operating expenses divided by total income.
(2) Loan impairment rate is the loan impairment charge divided by gross customer loans.
(3) Common Equity Tier 1 (CET1) ratio is CET1 capital divided by RWAs.
(4) Leverage ratio is Tier 1 capital divided by total exposure. This is in accordance with changes to the UK’s leverage ratio framework, refer to page 61 for further details.
(5) Loan deposit ratio is total loans divided by total deposits.
RBS plc reported a profit of £1,176 million, compared with £776
million in 2021, driven by an increase in total income and a
decrease in operating expenses, partially offset by net
impairment losses.
Net interest income increased by £440 million to £1,782 million
compared with £1,342 million in 2021, reflecting the beneficial
impact of interest rate increases. This was partially offset by
lending reductions.
Non-interest income decreased by £144 million to £289 million
compared with £433 million in 2021.
Net fees and commissions increased by £70 million, or 25%, to
£348 million primarily due to higher transaction-related fee
income and one-off intra-group fees incurred in 2021.
Other operating income decreased by £214 million to a loss of
£59 million compared with a profit of £155 million in 2021,
primarily reflecting:
the sale of Adam & Company’s investment management
business, including non-repeat of £54 million consideration
received upon the sale in 2021, and a £23 million fair value
loss upon transfer of the remaining business from RBS plc
to Coutts & Co during 2022, and a £14 million reduction in
dividends received;
a £61 million decrease due to losses from economic hedging
resulting from interest rate fluctuations; and a number of
other small movements.
Operating expenses decreased by £222 million to £892 million
compared with £1,114 million in 2021, primarily due to non-
repeat of an £85 million impairment of goodwill incurred in
2021, lower staff costs due to headcount reduction, and lower
premises and equipment costs due to efficiencies and provision
releases.
Net impairment losses of £20 million principally reflects the
latest macro-economics, including updated scenarios, with
more weight being placed on the downside scenarios.
Underlying book performance remains strong. Total impairment
provisions on loans reduced by £60 million to £615 million in the
year. ECL provision coverage ratio remained stable at 1.61%.
Operating profit before tax of £1,159 million included £523
million relating to Retail Banking, which increased by £384
million compared to 2021 reflecting the beneficial impact from
interest rate increases and non-repeat of an £85 million
impairment of goodwill incurred in 2021, partially offset by
lending reduction.
Operating profit before tax in Private Banking decreased by
£84 million to a loss of £65m primarily due to the net impact of
the sale of Adam & Company’s investment management
business.
Operating profit before tax in Commercial & Institutional
increased by £19 million to £762 million, primarily due to an
increase in net interest income due to the beneficial impact of
interest rate increases, partially offset by a reduction in net
impairment releases from £336 million in 2021 to £14 million in
2022.
Operating loss before tax of £61 million in Central items & other
primarily reflects losses from economic hedging driven by
interest rate fluctuations.
Financial review continued
RBS plc Annual Report and Accounts 2022 5
Financial summary
Summary balance sheet as at 31 December 2022
2022
2021
Variance
£m
£m
£m
%
Assets
Cash and balances at central banks
34,323
38,014
(3,691)
(10)
Derivatives
498
220
278
126
Loans to banks - amortised cost
1,071
1,147
(76)
(7)
Loans to customers - amortised cost
37,667
42,035
(4,368)
(10)
Amounts due from holding companies and fellow subsidiaries
21,722
23,941
(2,219)
(9)
Other assets
1,382
738
644
87
Total assets
96,663
106,095
(9,432)
(9)
Liabilities
Bank deposits
986
1,117
(131)
(12)
Customer deposits
83,306
92,144
(8,838)
(10)
Amounts due to holding companies and fellow subsidiaries
3,910
5,216
(1,306)
(25)
Derivatives
2,683
827
1,856
224
Notes in circulation
2,409
2,144
265
12
Other liabilities
708
900
(192)
(21)
Total liabilities
94,002
102,348
(8,346)
(8)
Total equity
2,661
3,747
(1,086)
(29)
Total liabilities and equity
96,663
106,095
(9,432)
(9)
Total assets decreased by £9.4 billion to £96.7 billion at 31
December 2022, compared with £106.1 billion at 31 December
2021, primarily due to a reduction in lending assets due to the
continued run-off of mortgage portfolios, with intermediary new
lending being originated through the NatWest Bank business,
and contraction of Commercial & Institutional lending.
Cash and balances at central banks decreased by £3.7 billion
to £34.3 billion, primarily driven by reduction in customer
deposits and payment of a dividend.
Loans to customers – amortised cost decreased by £4.4 billion
to £37.7 billion, compared with £42.0 billion as at 31 December
2021, driven by:
a £1.6 billion decrease in Retail Banking primarily due to the
continued run-off of mortgage portfolios;
a £2.1 billion decrease in Commercial & Institutional due to
a reduction in business loans and UK Government financial
support scheme repayments; and
a £0.7 billion transfer of the remaining Adam & Company
business to Coutts & Co.
Amounts due from holding companies and fellow subsidiaries
decreased by £2.2 billion to £21.7 billion, primarily due to the
transfer of Adam & Company related balances to Coutts & Co.
Customer deposits decreased by £8.8 billion to £83.3 billion,
driven by:
a £6.4 billion decrease in interest-bearing balances; and
a £2.1 billion decrease due to the transfer of the remaining
Adam & Company business to Coutts & Co.
Amounts due to holding companies and fellow subsidiaries
decreased by £1.3 billion to £3.9 billion, primarily due to
movements on balances with NWB Plc and NWM Plc.
Derivatives liabilities increased by £1.9 billion to £2.7 billion
driven by interest rate rises across all currencies.
Notes in circulation of £2.4 billion represent the value of the
RBS plc banknotes in issue.
Total equity decreased by £1.1 billion to £2.7 billion, compared
with £3.8 billion as at 31 December 2021. The decrease reflects
dividend payments to NWH Ltd and a decrease in cash flow
hedging reserves due to interest rate rises in all currencies,
partly offset by attributable profit for the year.
Risk and capital management
RBS plc Annual Report and Accounts 2022 6
Presentation of information
Where marked as audited in the section header, certain
information in the Risk and capital management section (pages
6 to 74) is within the scope of the Independent auditor’s report.
Risk and capital management is generally conducted on an
overall basis within NatWest Group such that common
policies, procedures, frameworks and models apply across
NatWest Group. Therefore, for the most part, discussion on
these qualitative aspects reflects those in NatWest Group as
relevant for the businesses and operations in RBS plc.
Risk management framework
Introduction
RBS plc operates under NatWest Group’s enterprise-wide risk
management framework, which is centred on the embedding of
a strong risk culture. The framework ensures the governance,
capabilities and methods are in place to facilitate risk
management and decision-making across the organisation.
The framework ensures that RBS plc’s principal risks – which
are detailed in this section – are appropriately controlled and
managed. It sets out the standards and objectives for risk
management as well as defining the division of roles and
responsibilities.
This seeks to ensure a consistent approach to risk management
across RBS plc. It aligns risk management with RBS plc’s
overall strategic objectives.
The framework, which is designed and maintained by NatWest
Group’s independent Risk function, is owned by the NatWest
Group Chief Risk Officer. It is reviewed and approved annually
by the NatWest Group Board. The framework incorporates risk
governance, NatWest Group’s three lines of defence operating
model and the Risk function’s mandate.
Risk appetite, supported by a robust set of principles, policies
and practices, defines the levels of tolerance for a variety of
risks and provides a structured approach to risk-taking within
agreed boundaries.
While all RBS plc colleagues are responsible for managing risk,
the Risk function provides oversight and monitoring of risk
management activities, including the implementation of the
framework and adherence to its supporting policies, standards
and operational procedures. The Chief Risk Officer plays an
integral role in providing the Board with advice on RBS plc’s
risk profile, the performance of its controls and in providing
challenge where a proposed business strategy may exceed risk
tolerance.
In addition, there is a process to identify and manage top and
emerging threats, which are those that could have a significant
negative impact on RBS plc’s ability to meet its strategic
objectives. Both top and emerging threats may incorporate
aspects of – or correlate to – a number of principal risks and
are reported alongside them to the Board on a regular basis.
Page
Presentation of information
6
Risk management framework
Introduction
6
Culture
7
Governance
8
Risk appetite
10
Identification and measurement
treatment and mitigation
11
Mitigation
11
Testing and monitoring
11
Stress testing
11
Credit risk
Definition and sources of risk
15
Governance and risk appetite
15
Identification and measurement
15
Mitigation
15
Assessment and monitoring
16
Problem debt management
16
Forbearance
18
Impairment, provisioning and write-offs
18
Significant increase in credit risk and asset lifetimes
22
Economic loss drivers and UK economic uncertainty
23
Measurement uncertainty and ECL sensitivity analysis
29
Measurement uncertainty and ECL adequacy
31
Banking activities
32
Capital, liquidity and funding risk
Definition and sources
59
Capital, liquidity and funding management
59
Key points
61
Minimum requirements
62
Measurement
63
Non-traded market risk
67
Compliance & conduct risk
69
Financial crime risk
69
Climate risk
70
Operational risk
72
Model risk
73
Reputational risk
74
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 7
Risk management framework continued
Culture
Risk culture is at the heart of RBS plc’s risk management
framework and its risk management practice. In 2022, the
approach to risk culture was refreshed under the new banner
of Intelligent Risk Taking to re-intensify focus on robust risk
management behaviours and practices. RBS plc expects
leaders to act as role models for strong risk behaviours and
practices building clarity, developing capability and motivating
employees to reach the required standards set out in the
Intelligent Risk Taking approach. Colleagues are expected to:
Consistently role-model the values and behaviours in Our
Code, based on strong ethical standards which underpin
Our Purpose.
Empower others to take risks aligned to RBS plc’s strategy,
explore issues from a fresh perspective, and tackle
challenges in new and better ways across organisational
boundaries.
Manage risk in line with appropriate risk appetite.
Ensure each decision made keeps RBS plc, colleagues,
customers, communities and shareholders safe and secure.
Understand their role in managing risk, remaining clear and
capable, grounded in knowledge of regulatory obligations.
Consider risk in all actions and decisions.
Escalate risks and issues early; taking action to mitigate
risks and learning from mistakes and near-misses, reporting
and communicating these transparently.
Challenge others’ attitudes, ideas and actions.
The target Intelligent Risk Taking behaviours are embedded in
NatWest Group’s Critical People Capabilities and are clearly
aligned to the core values of inclusive, curious, robust,
sustainable and ambitious. These aim to act as an effective
basis for a strong risk culture because the Critical People
Capabilities form the basis of all recruitment and selection
processes.
Training
Enabling employees to have the capabilities and confidence to
manage risk is core to NatWest Group’s learning strategy.
NatWest Group offers a wide range of learning, both technical
and behavioural, across the risk disciplines. This training may
be mandatory, role-specific or for personal development.
Mandatory learning for all staff is focused on keeping
employees, customers and NatWest Group safe. This is easily
accessed online and is assigned to each person according to
their role and business area. The system allows monitoring at
all levels to ensure completion.
Our Code
NatWest Group’s conduct guidance, Our Code, provides
direction on expected behaviour and sets out the standards of
conduct that support the values. The code explains the effect of
decisions that are taken and describes the principles that must
be followed.
These principles cover conduct-related issues as well as wider
business activities. They focus on desired outcomes, with
practical guidelines to align the values with commercial
strategy and actions. The embedding of these principles
facilitates sound decision-making and a clear focus on good
customer outcomes.
Where appropriate, if conduct falls short of NatWest Group’s
required standards, the accountability review process is used to
assess how this should be reflected in pay outcomes for the
individuals concerned. The NatWest Group remuneration policy
ensures that the remuneration arrangements for all employees
reflect the principles and standards prescribed by the PRA
rulebook and the FCA handbook. Any employee falling short of
the expected standards would also be subject to internal
disciplinary policies and procedures. If appropriate, the relevant
authority would be notified.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 8
Risk management framework continued
Governance
Committee structure
The diagram shows RBS plc’s risk committee structure in 2022 and the main purposes of each committee.
(1) The NatWest Group Chief Executive Officer also performs the role of RBS plc Chief Executive Officer.
(2) The NatWest Group Chief Risk Officer also performs the role of RBS plc Chief Risk Officer.
(3) The NatWest Group Chief Financial Officer also performs the role of RBS plc Chief Financial Officer.
.
Business and function risk committees
Supports the CEO in
discharging her individual
accountabilities, reflecting the
authority delegated to her by
the RBS plc Board. Reviews,
challenges and debates all
aspects of RBS plc, including
strategic, financial, capital,
risk and operational issues.
Supports the CEO in forming
recommendations to the
Board and committees.
.
Supports the CFO in
overseeing the effective
balance sheet management of
RBS plc, ensuring they
operate within risk appetite,
policies and chosen business
strategy as well as comply
with regulatory and
legal requirements.
Risk committees review and monitor all risks, providing guidance, recommendations
and decisions on risks affecting the businesses and functions.
Asset & Liability
Management
Committee
RBS plc Board
Reviews and considers risk appetite measures for key risks in accordance with the Risk Management Framework. Monitors
performance against risk appetite. Considers any materials risks and approves, as appropriate, actions recommended by the
Board Risk Committee.
Board Risk Committee
Audit Committee
Assists the Board in carrying out
its accounting, internal control
and financial reporting
responsibilities, including
relevant non-financial
disclosures or related controls.
Reviews the effectiveness of the
system of internal controls
relating to financial management
and compliance with financial
reporting, asset safeguarding
and accounting standards.
Provides oversight and advice to the
Board on current and future risk
exposures, future risk exposures and
risk appetite. Oversees the
effectiveness of the risk
management framework within RBS
plc and (with the Audit Committee)
the internal controls required to
manage risk.
Executive Risk
Committee
Supports the CEO in
discharging her risk
management
accountabilities. Reviews
and challenges all material
risk and control matters.
Executive Committee
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 9
Risk management framework continued
Risk management structure
The diagram shows RBS plc’s risk management structure in 2022 and key risk management responsibilities.
(1) Double Independent Non-Executive Directors.
(2) The NatWest Group Chief Executive Officer also performs the role of RBS plc Chief Executive Officer.
(3) The NatWest Group Chief Risk Officer also performs the role of RBS plc Chief Risk Officer.
(4) The RBS plc Chief Risk Officer reports directly to the RBS plc Chief Executive Officer. There is a further secondary reporting line to the chair of the Board Risk Committee and a
right of access to the Committee, including the deputy chair.
(5) The Risk function is independent of the customer-facing business segments and support functions. Its structure is divided into three parts (Directors of Risk, Specialist Risk Directors
and Chief Operating Officer) to facilitate effective management of the risks facing RBS plc. Risk committees in the customer businesses and key functional risk committees oversee
risk exposures arising from management and business activities and focus on ensuring that these are adequately monitored and controlled. The directors of Risk (Retail Banking;
Commercial & Institutional Banking; Financial & Strategic Risk; Non-Financial Risk and Compliance & Conduct) as well as the Director, Financial Crime Risk NatWest Holdings and
the Chief Operating Officer report to the RBS plc Chief Risk Officer.
RBS plc
Chief Executive
Officer
RBS plc
Chief Risk Officer
Director of Risk, Commercial & Institutional Banking
Design and delivery of Commercial & Institutional Banking risk strategy and
service proposition. Oversight of risk management across Commercial &
Institutional Banking.
Chief Operating Officer
Centralised support for the risk management function and model risk
oversight. including framework design and development. Provides specialist
advice on risk culture and risk appetite matters to the Directors of Risk
responsible for business oversight.
Director of Financial & Strategic Risk
Centralised oversight of financial and strategic risks for RBS plc, specialist
advice on top and emerging risks and responsibility for model development.
NatWest Group
Chief Risk Officer
Director of Risk, Retail Banking
Design and delivery of Retail Banking risk strategy and service proposition.
Oversight of risk management across Retail Banking. Supports the Ringfence
DINEDs
(1)
through the identification, documentation, resolution and escalation of any
potential ring-fencing conflicts of interest relating to decisions made by the
Ringfence and Group Chief Risk Officer.
NatWest Group
Chief Executive Officer
Director of Non-Financial Risk
Centralised oversight of non-financial risk across RBS.
Head of Restructuring
Design and delivery of Restructuring strategy and service proposition.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 10
Risk management framework continued
Three lines of defence
NatWest Group uses the industry-standard three lines of
defence model to articulate accountabilities and responsibilities
for managing risk. This supports the embedding of effective risk
management throughout the organisation.
First line of defence
The first line of defence incorporates most roles in NatWest
Group, including those in the customer-facing businesses,
Technology and Services as well as support functions such as
People and Transformation, Legal and Finance.
The first line of defence is empowered to take risks within the
constraints of the risk management framework, policies, risk
appetite statements set by NatWest Group and measures set by
the RBS plc Board.
The first line of defence is responsible for managing its direct
risks, and with the support of specialist functions, it is also
responsible for managing its consequential risks, by identifying,
assessing, mitigating, monitoring and reporting risks.
Second line of defence
The second line of defence comprises the Risk function and is
independent of the first line.
The second line of defence is empowered to design and
maintain the risk management framework and its components.
It undertakes proactive risk oversight and continuous
monitoring activities to confirm that RBS plc engages in
permissible and sustainable risk-taking activities.
The second line of defence advises on, monitors, challenges,
approves and escalates where required and reports on the risk-
taking activities of the first line, ensuring that these are within
the constraints of the risk management framework, policies,
risk appetite statements set by NatWest Group and measures
set by the RBS plc Board.
Third line of defence
The third line of defence is the Internal Audit function and is
independent of the first and second lines.
The third line of defence is responsible for providing
independent assurance to the NatWest Group Board, its
subsidiary legal entity boards and executive management on
the overall design and operating effectiveness of the risk
management framework and its components. This includes the
adequacy and effectiveness of key internal controls,
governance and the risk management in place to monitor,
manage and mitigate the principal risks to NatWest Group and
its subsidiary companies achieving their objectives.
The third line of defence executes its duties freely and
objectively in accordance with the Chartered Institute of
Internal Auditors’ Code of Ethics and International Standards
on independence and objectivity.
Risk appetite
Risk appetite defines the type and aggregate level of risk RBS
plc is willing to accept in pursuit of its strategic objectives and
business plans. Risk appetite supports sound risk-taking, the
promotion of robust risk practices and risk behaviours, and is
calibrated annually.
For certain principal risks, risk capacity defines the maximum
level of risk RBS plc can assume before breaching constraints
determined by regulatory capital and liquidity requirements, the
operational environment, and from a conduct perspective.
Establishing risk capacity helps determine where risk appetite
should be set, ensuring there is a buffer between internal risk
appetite and RBS plc’s ultimate capacity to absorb losses.
Risk appetite framework
The risk appetite framework supports effective risk
management by promoting sound risk-taking through a
structured approach, within agreed boundaries. It also ensures
emerging threats and risk-taking activities that might be out of
appetite are identified, assessed, escalated and addressed in a
timely manner.
To facilitate this, a detailed annual review of the framework
is carried out. The review includes:
Assessing the adequacy of the framework compared to
internal and external expectations.
Ensuring the framework remains effective and acts as a
strong control environment for risk appetite.
Assessing the level of embedding of risk appetite across the
organisation.
The Board reviews and approves the risk appetite framework
annually.
Establishing risk appetite
In line with the risk appetite framework, risk appetite is
maintained across RBS plc through risk appetite statements.
These are in place for all principal risks and describe the extent
and type of activities that can be undertaken.
Risk appetite statements consist of qualitative statements of
appetite supported by risk limits and triggers that operate as a
defence against excessive risk-taking. Risk measures and their
associated limits are an integral part of the risk appetite
approach and a key part of embedding risk appetite in day-to-
day risk management decisions. A clear tolerance for each
principal risk is set in alignment with business activities.
The annual process of reviewing and updating risk appetite
statements is completed alongside the business and financial
planning process. This ensures that plans and risk appetite are
appropriately aligned.
The Board sets risk appetite for all principal risks to help ensure
RBS plc is well placed to meet its priorities and long-term,
targets even in challenging economic environments. This
supports RBS plc in remaining resilient and secure as it pursues
its strategic business objectives.
RBS plc’s risk profile is continually monitored and frequently
reviewed. Management focus is concentrated on all principal
risks as well as the top and emerging threats that may
correlate to them. Risk profile relative to risk appetite is
reported regularly to senior management and the Board.
NatWest Group policies directly support the qualitative aspects
of risk appetite. They define the qualitative expectations,
guidance and standards that stipulate the nature and extent of
permissible risk-taking and are consistently applied across
NatWest Group and its subsidiaries.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 11
Risk management framework continued
Identification and measurement
Identification and measurement within the risk management
process comprises:
Regular assessment of the overall risk profile, incorporating
market developments and trends, as well as external and
internal factors.
Monitoring of the risks associated with lending and credit
exposures.
Assessment of trading and non-trading portfolios.
Review of potential risks in new business activities and
processes.
Analysis of potential risks in any complex and unusual
business transactions.
The financial and non-financial risks that RBS plc faces are
detailed in the NatWest Group Risk Directory. This provides a
common risk language to ensure consistent terminology is used
across RBS plc. The NatWest Group Risk Directory is subject to
annual review to ensure it continues to fully reflect the risks
that RBS plc faces.
Mitigation
Mitigation is a critical aspect of ensuring that risk profile
remains within risk appetite. Risk mitigation strategies are
discussed and agreed within RBS plc.
When evaluating possible strategies, costs and benefits, residual
risks (risks that are retained) and secondary risks (those that
arise from risk mitigation actions themselves) are also
considered. Monitoring and review processes are in place to
evaluate results. Early identification, and effective management
of changes in legislation and regulation are critical to the
successful mitigation of compliance and conduct risk. The
effects of all changes are managed to ensure the timely
achievement of compliance. Those changes assessed as having
a high or medium-high impact are managed more closely.
Emerging threats that could affect future results and
performance are also closely monitored. Action is taken to
mitigate potential risks as and when required. Further in-depth
analysis, including the stress testing of exposures, is also
carried out.
Testing and monitoring
Specific activities relating to compliance and conduct, credit
and financial crime are subject to testing and monitoring by the
risk function. This confirms to both internal and external
stakeholders – including the Board, senior management, the
customer-facing businesses, Internal Audit and RBS plc’s
regulators – that risk policies and procedures are being
correctly implemented and that they are operating adequately
and effectively. Selected key controls are also reviewed for
adequacy and effectiveness. Thematic reviews and targeted
reviews are also carried out where relevant to ensure
appropriate customer outcomes.
Independent testing and monitoring is also completed on
principal risk processes and controls – including controls within
the scope of Section 404 of the Sarbanes-Oxley Act 2002.
The NatWest Group Risk Testing & Monitoring Forum assesses
and validates the annual plan as well as the ongoing
programme of reviews.
Stress testing
Stress testing – capital management
Stress testing is a key risk management tool and a fundamental
component of NatWest Group’s approach to capital
management. It is used to quantify and evaluate the potential
impact of specified changes to risk factors on the financial
strength of NatWest Group, including its capital position.
Stress testing includes:
Scenario testing, which examines the impact of a
hypothetical future state to define changes in risk factors.
Sensitivity testing, which examines the impact of an
incremental change to one or more risk factors.
The process for stress testing consists of four broad stages:
Define
scenarios
Identify macro and NatWest Group-
specific vulnerabilities and risks.
Define and calibrate scenarios to
examine risks and vulnerabilities.
Formal governance process to agree
scenarios.
Assess
impact
Translate scenarios into risk drivers.
Assess impact to current and projected
P&L and balance sheet across NatWest
Group.
Calculate
results and
assess
implications
Aggregate impacts into overall results.
Results form part of the risk
management process.
Scenario results are used to inform
NatWest Group’s business and capital
plans.
Develop and
agree
management
actions
Scenario results are analysed by
subject matter experts. Appropriate
management actions are then
developed.
Scenario results and management
actions are reviewed by the relevant
Executive Risk Committees and Board
Risk Committees and agreed by the
relevant Boards.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 12
Risk management framework continued
Stress testing is used widely across NatWest Group. The
diagram below summarises key areas of focus.
Specific areas that involve capital management include:
Strategic financial and capital planning
– by assessing the
impact of sensitivities and scenarios on the capital plan and
capital ratios.
Risk appetite
– by gaining a better understanding of the
drivers of, and the underlying risks associated with, risk
appetite.
Risk monitoring
– by monitoring the risks and horizon-
scanning events that could potentially affect NatWest
Group’s financial strength and capital position.
Risk mitigation
– by identifying actions to mitigate risks, or
those that could be taken, in the event of adverse changes
to the business or economic environment. Principal risk
mitigating actions are documented in NatWest Group’s
recovery plan.
Capital sufficiency – going concern forward-looking view
Going concern capital requirements are examined on a
forward-looking basis – including as part of the annual
budgeting process – by assessing the resilience of capital
adequacy and leverage ratios under hypothetical future states.
These assessments include assumptions about regulatory and
accounting factors (such as IFRS 9). They incorporate
economic variables and key assumptions on balance sheet and
P&L drivers, such as impairments, to demonstrate that NatWest
Group and its operating subsidiaries maintain sufficient capital.
A range of future states are tested. In particular, capital
requirements are assessed:
Based on a forecast of future business performance, given
expectations of economic and market conditions over the
forecast period.
Based on a forecast of future business performance under
adverse economic and market conditions over the forecast
period. Scenarios of different severity may be examined.
The examination of capital requirements under both normal
and adverse economic and market conditions enables NatWest
Group to determine whether its projected business
performance meets internal plans and regulatory capital
requirements.
The potential impact of normal and adverse economic and
market conditions on capital requirements is assessed through
stress testing, the results of which are not only used widely
across NatWest Group but also by the regulators to set specific
capital buffers. NatWest Group takes part in stress tests run by
regulatory authorities to test industry-wide vulnerabilities under
crystallising global and domestic systemic risks.
Stress and peak-to-trough movements are used to help assess
the amount of capital NatWest Group needs to hold in stress
conditions in accordance with the capital risk appetite
framework.
Internal assessment of capital adequacy
An internal assessment of material risks is carried out annually
to enable an evaluation of the amount, type and distribution of
capital required to cover these risks. This is referred to as the
Internal Capital Adequacy Assessment Process (ICAAP). The
ICAAP consists of a point-in-time assessment of exposures and
risks at the end of the financial year together with a forward-
looking stress capital assessment. The ICAAP is approved by
the Board and submitted to the PRA.
The ICAAP is used to form a view of capital adequacy
separately to the minimum regulatory requirements. The ICAAP
is used by the PRA to assess NatWest Group’s specific capital
requirements through the Pillar 2 framework.
Capital allocation
NatWest Group has mechanisms to allocate capital across its
legal entities and businesses. These aim to optimise the use of
capital resources taking into account applicable regulatory
requirements, strategic and business objectives and risk
appetite. The framework for allocating capital is approved by
the CFO with support from the Asset & Liability Management
Committee.
Governance
Capital management is subject to substantial review and
governance. The Board approves the capital plans, including
those for key legal entities and businesses as well as the results
of the stress tests relating to those capital plans.
Stress testing – liquidity
Liquidity risk monitoring and contingency planning
A suite of tools is used to monitor, limit and stress test the
liquidity and funding risks on the balance sheet. Limit
frameworks are in place to control the level of liquidity risk,
asset and liability mismatches and funding concentrations.
Liquidity and funding risks are reviewed at significant legal
entity and business levels daily, with performance reported to
the Asset & Liability Management Committee on a regular
basis. Liquidity Condition Indicators are monitored daily. This
ensures any build-up of stress is detected early and the
response escalated appropriately through recovery planning.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 13
Risk management framework continued
Internal assessment of liquidity
Under the liquidity risk management framework, NatWest
Group maintains the Internal Liquidity Adequacy Assessment
Process. This includes assessment of net stressed liquidity
outflows under a range of severe but plausible stress scenarios.
Each scenario evaluates either an idiosyncratic, market-wide or
combined stress event as described in the table below.
Type
Description
Idiosyncratic
scenario
The market perceives NatWest Group to be
suffering from a severe stress event, which
results in an immediate assumption of
increased credit risk or concerns over
solvency.
Market-wide
scenario
A market stress event affecting all participants
in a market through contagion, potential
counterparty failure and other market risks.
NatWest Group is affected under this scenario
but no more severely than any other
participants with equivalent exposure.
Combined
scenario
This scenario models the combined impact of
an idiosyncratic and market stress occurring
at once, severely affecting funding markets
and the liquidity of some assets.
NatWest Group uses the most severe outcome to set the
internal stress testing scenario which underpins its internal
liquidity risk appetite. This complements the regulatory liquidity
coverage ratio requirement.
Stress testing – recovery and resolution planning
The NatWest Group recovery plan explains how NatWest Group
and its subsidiaries – as a consolidated group – would identify
and respond to a financial stress event and restore its financial
position so that it remains viable on an ongoing basis.
The recovery plan ensures risks that could delay the
implementation of a recovery strategy are highlighted and
preparations are made to minimise the impact of these risks.
Preparations include:
Developing a series of recovery indicators to provide early
warning of potential stress events.
Clarifying roles, responsibilities and escalation routes to
minimise uncertainty or delay.
Developing a recovery playbook to provide a concise
description of the actions required during recovery.
Detailing a range of options to address different stress
conditions.
Appointing dedicated option owners to reduce the risk of
delay and capacity concerns.
The plan is intended to enable NatWest Group to maintain
critical services and products it provides to its customers,
maintain its core business lines and operate within risk appetite
while restoring NatWest Group’s financial condition. It is
assessed for appropriateness on an ongoing basis and is
updated annually. The plan is reviewed and approved by the
Board prior to submission to the PRA each year. Individual
recovery plans are also prepared for NatWest Holdings Limited,
NatWest Markets Plc, RBS International Limited and NatWest
Markets N.V.. These plans detail the recovery options, recovery
indicators and escalation routes for each entity.
Fire drill simulations of possible recovery events are used to
test the effectiveness of NatWest Group and individual legal
entity recovery plans. The fire drills are designed to replicate
possible financial stress conditions and allow senior
management to rehearse the responses and decisions that may
be required in an actual stress event. The results and lessons
learnt from the fire drills are used to enhance NatWest Group’s
approach to recovery planning.
Under the resolution assessment part of the PRA rulebook,
NatWest Group is required to carry out an assessment of its
preparations for resolution, submit a report of the assessment
to the PRA and publish a summary of this report.
Resolution would be implemented if NatWest Group was
assessed by the UK authorities to have failed and the
appropriate regulator put it into resolution. The process of
resolution is owned and implemented by the Bank of England
(as the UK resolution authority). NatWest Group ensures
ongoing maintenance and enhancements of its resolution
capabilities, in line with regulatory requirements.
Stress testing – market risk
Non-traded market risk
Non-traded exposures are reported to the PRA on a quarterly
basis. This provides the regulator with an overview of NatWest
Group’s banking book interest rate exposure. The report
includes detailed product information analysed by interest rate
driver and other characteristics, including accounting
classification, currency and counterparty type.
Scenario analysis based on hypothetical adverse scenarios is
performed on non-traded exposures as part of the Bank of
England and European Banking Authority stress test exercises.
NatWest Group also produces an internal scenario analysis as
part of its financial planning cycles.
Non-traded exposures are capitalised through the ICAAP. This
covers gap risk, basis risk, credit spread risk, pipeline risk,
structural foreign exchange risk, prepayment risk, equity risk
and accounting volatility risk. The ICAAP is completed with a
combination of value and earnings measures. The total non-
traded market risk capital requirement is determined by adding
the different charges for each sub risk type. The ICAAP
methodology captures at least ten years of historical volatility,
produced with a 99% confidence level. Methodologies are
reviewed by NatWest Group Model Risk and the results are
approved by the NatWest Group Technical Asset & Liability
Management Committee.
Non-traded market risk stress results are combined with those
for other risks into the capital plan presented to the Board. The
cross-risk capital planning process is conducted once a year,
with a planning horizon of five years. The scenario narratives
cover both regulatory scenarios and macroeconomic scenarios
identified by NatWest Group.
Vulnerability-based stress testing begins with the analysis of a
portfolio and expresses its key vulnerabilities in terms of
plausible vulnerability scenarios under which the portfolio
would suffer material losses. These scenarios can be historical,
macroeconomic or forward-looking/hypothetical. Vulnerability-
based stress testing is used for internal management
information and is not subject to limits. The results for relevant
scenarios are reported to senior management.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 14
Risk management framework continued
Internal scenarios
During 2022, NatWest Group ran a number of internal
scenarios developed in the immediate aftermath of Russia’s
invasion of Ukraine.
These scenarios considered different outcomes to the conflict,
including an assumed broadening of the conflict, and how
those might manifest in terms of macroeconomic impact. This
included commodity market and associated inflationary
pressures, supply chain impacts, financial sector linkages and
broader knock-on impacts to the UK labour and asset markets.
Impacts on operational aspects to NatWest Group were also
considered.
Applying the macro-scenarios to NatWest Group’s earnings,
capital, liquidity and funding positions did not result in a breach
of any regulatory thresholds.
Regulatory stress testing
The Bank of England returned to the annual cyclical scenario
(ACS) stress test framework in 2022 and published the scenario
on 26 September 2022. This follows two years of COVID-19
crisis-related stress testing and the decision to postpone the
test in March following Russia’s invasion of Ukraine. NatWest
Group has participated in this stress test and the results will be
published in summer 2023 and, along with other relevant
information, will be used to help inform NatWest Group capital
buffers (both the UK countercyclical capital buffer rate and PRA
buffers).
The 2022 stress test aims to assess the impact of a UK and
global macroeconomic stress on UK banks, spanning a five-
year period from Q3 2022 to Q2 2027. It is a coherent ‘tail risk’
scenario designed to be severe and broad enough to assess the
resilience of UK banks to a range of adverse shocks.
The stress scenario is broadly similar to the 2019 ACS and
more severe overall than the global financial crisis, with the key
difference being elevated levels of inflation. Annual UK inflation
averages around 11% over the first three years of the scenario,
while peaking at 17% in early 2023 and does not begin to fall
until the second half of the year.
The stress is based on an end-of-June 2022 balance sheet
starting position.
Further details on the scenario and ACS Stress test can be
found at https://www.bankofengland.co.uk/stress-
testing/2022/key-elements-of-the-2022-stress-test
Following the UK’s exit from the European Union on 31
December 2020, only relevant European subsidiaries of
NatWest Group will take part in the European Banking
Authority stress tests going forward. NatWest Group itself will
not participate.
NatWest Group also took part in the Bank of England’s Climate
Biennial Exploratory Scenario conducted in late 2021 and early
2022.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 15
Credit risk
Definition (audited)
Credit risk is the risk that customers, counterparties or issuers
fail to meet their contractual obligation to settle outstanding
amounts.
Sources of risk (audited)
The principal sources of credit risk are lending and related
financial guarantees and undrawn commitments. Through its
payments activities RBS plc is also exposed to settlement risk.
Governance (audited)
The Credit Risk function provides oversight and challenge of
frontline credit risk management activities.
Governance activities include:
Defining credit risk appetite measures for the management
of concentration risk and credit policy to establish the key
causes of risk in the process of providing credit and the
controls that must be in place to mitigate them.
Approving and monitoring operational limits for business
segments and credit limits for customers.
Oversight of the first line of defence to ensure that credit
risk remains within the appetite set by the Board and that
controls are being operated adequately and effectively.
Assessing the adequacy of expected credit loss (ECL)
provisions including approving key IFRS 9 inputs (such as
significant increase in credit risk (SICR) thresholds) and any
necessary in-model and post model adjustments through
NatWest Group and business unit provisions and model
committees.
Development and approval of credit grading models.
Risk appetite
Credit risk appetite aligns to the strategic risk appetite set by
the Board and is set and monitored through risk appetite
frameworks tailored to the Group’s Personal and Wholesale
segments.
Personal
The Personal credit risk appetite framework sets limits that
control the quality and concentration of both existing and new
business for each relevant business segment. These risk
appetite measures consider the segments’ ability to grow
sustainably and the level of losses expected under stress. Credit
risk is further controlled through operational limits specific to
customer or product characteristics.
Wholesale
For Wholesale credit, the framework has been designed to
reflect factors that influence the ability to operate within risk
appetite. Tools such as stress testing and economic capital are
used to measure credit risk volatility and develop links between
the framework and risk appetite limits.
Four formal frameworks are used, classifying, measuring and
monitoring credit risk exposure across single name, sector and
country concentrations and product and asset classes with
heightened risk characteristics.
The framework is supported by a suite of transactional
acceptance standards that set out the risk parameters within
which businesses should operate.
Credit policy standards are in place for both the Wholesale and
Personal portfolios. They are expressed as a set of mandatory
controls.
Identification and measurement
Credit stewardship (audited)
Risks are identified through relationship management and
credit stewardship of customers and portfolios. Credit risk
stewardship takes place throughout the customer relationship,
beginning with the initial approval. It includes the application of
credit assessment standards, credit risk mitigation and
collateral, ensuring that credit documentation is complete and
appropriate, carrying out regular portfolio or customer reviews
and problem debt identification and management.
Asset quality (audited)
All credit grades map to an asset quality (AQ) scale, used for
financial reporting. This AQ scale is based on Basel probability
of defaults. Performing loans are defined as AQ1-AQ9 (where
the probability of default (PD) is less than 100%) and defaulted
non-performing loans as AQ10 or Stage 3 under IFRS 9 (where
the PD is 100%). Loans are defined as defaulted when the
payment status becomes 90 days past due, or earlier if there is
clear evidence that the borrower is unlikely to repay, for
example bankruptcy or insolvency.
Mitigation
Mitigation techniques, as set out in the appropriate credit
policies and transactional acceptance standards, are used in
the management of credit portfolios across RBS plc. These
techniques mitigate credit concentrations in relation to an
individual customer, a borrower group or a collection of related
borrowers. Where possible, customer credit balances are
netted against obligations. Mitigation tools can include
structuring a security interest in a physical or financial asset
and the use of guarantees and similar instruments (for
example, credit insurance) from related and third parties.
Property is used to mitigate credit risk across a number of
portfolios, in particular residential mortgage lending and
commercial real estate (CRE).
The valuation methodologies for collateral in the form of
residential mortgage property and CRE are detailed below.
Residential mortgages – RBS plc takes collateral in the form of
residential property to mitigate the credit risk arising from
mortgages. RBS plc values residential property individually
during the loan underwriting process, either by obtaining an
appraisal by a suitably qualified appraiser (for example Royal
Institution of Chartered Surveyors (RICS)) or using a statistically
valid model. In both cases, a sample of the valuation outputs
are periodically reviewed by an independent RICS qualified
appraiser. RBS plc updates Retail Banking UK residential
property values quarterly using country (Scotland, Wales and
Northern Ireland) or English regional specific Office for National
Statistics House Price indices.
Within the Private Banking segment, properties securing loans
greater than £2.5 million are revalued every three years.
The current indexed value of the property is a component of
the ECL provisioning calculation.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 16
Credit risk continued
Commercial real estate valuations – RBS plc has an actively
managed panel of chartered surveying firms that cover the
spectrum of geography and property sectors in which RBS plc
takes collateral. Suitable RICS registered valuers for particular
assets are typically contracted through a service agreement to
ensure consistency of quality and advice. In the UK, an
independent third-party market indexation is applied to update
external valuations for commercial property once they are
more than a year old. For obligations in excess of £2.5 million
and where the charged property has a book value in excess of
£0.5 million, a formal valuation review is commissioned at least
every three years.
Assessment and monitoring
Practices for credit stewardship – including credit assessment,
approval and monitoring as well as the identification and
management of problem debts – differ between the Personal
and Wholesale portfolios.
Personal
Personal customers are served through a lending approach
that entails offering a large number of small-value loans. To
ensure that these lending decisions are made consistently, RBS
plc analyses internal credit information as well as external data
supplied by credit reference agencies (including historical debt
servicing behaviour of customers with respect to both RBS plc
and other lenders). RBS plc then sets its lending rules
accordingly, developing different rules for different products.
The process is then largely automated, with each customer
receiving an individual credit score that reflects both internal
and external behaviours and this score is compared with the
lending rules set. For relatively high-value, complex personal
loans, including some residential mortgage lending, specialist
credit managers make the final lending decisions. These
decisions are made within specified delegated authority limits
that are issued dependent on the experience of the individual.
Underwriting standards and portfolio performance are
monitored on an ongoing basis to ensure they remain adequate
in the current market environment and are not weakened
materially to sustain growth.
The actual performance of each portfolio is tracked relative to
operational limits. The limits apply to a range of credit risk-
related measures including projected credit default rates across
products and the loan-to-value (LTV) ratio of the mortgage
portfolios. Where operational limits identify areas of concern
management action is taken to adjust credit or business
strategy.
Wholesale
Wholesale customers – including corporates, banks and other
financial institutions – are grouped by industry sectors and
geography as well as by product/asset class and are managed
on an individual basis. Customers are aggregated as a single
risk when sufficiently interconnected.
A credit assessment is carried out before credit facilities are
made available to customers. The assessment process is
dependent on the complexity of the transaction. Credit
approvals are subject to environmental, social and governance
risk policies which restrict exposure to certain highly carbon
intensive industries as well as those with potentially heightened
reputational impacts. Customer specific climate risk
commentary is now mandatory.
In response to COVID-19, a new framework was introduced to
categorise clients in a consistent manner across the Wholesale
portfolio, based on the effect of COVID-19 on their financial
position and outlook in relation to the sector risk appetite. This
framework has been retained, updated and aligned with the
Risk of Credit Loss framework (further details below) to
consider viability impacts more generally beyond those directly
related to COVID-19 and classification via the framework is
now mandatory and must be refreshed at least annually. The
framework extends to all Wholesale borrowing customers in
assessing whether customers exhibit a SICR, if support is
considered to be granting forbearance and the time it would
take for customers to return to operating within transactional
acceptance standards.
For lower risk transactions below specific thresholds, credit
decisions can be approved through self-sanctioning within the
business. This process is facilitated through an auto-decision
making system, which utilises scorecards, strategies and policy
rules.
For all other transactions credit is only granted to customers
following joint approval by an approver from the business and
the credit risk function or by two credit officers. The joint
business and credit approvers act within a delegated approval
authority under the Wholesale Credit Authorities Framework
Policy. The level of delegated authority held by approvers is
dependent on their experience and expertise with only a small
number of senior executives holding the highest approval
authority. Both business and credit approvers are accountable
for the quality of each decision taken, although the credit risk
approver holds ultimate sanctioning authority.
Transactional acceptance standards provide detailed
transactional lending and risk acceptance metrics and
structuring guidance. As such, these standards provide a
mechanism to manage risk appetite at the
customer/transaction level and are supplementary to the
established credit risk appetite.
Credit grades and loss given default (LGD) are reviewed and if
appropriate reapproved annually. The review process assesses
borrower performance, including reconfirmation or adjustment
of risk parameter estimates; the adequacy of security;
compliance with terms and conditions; and refinancing risk.
Problem debt management
Personal
Early problem identification
Pre-emptive triggers are in place to help identify customers
that may be at risk of being in financial difficulty. These triggers
are both internal, using RBS plc’s data, and external using
information from credit reference agencies. Proactive contact is
then made with the customer to establish if they require help
with managing their finances. By adopting this approach, the
aim is to prevent a customer’s financial position deteriorating
which may then require intervention from the Collections and
Recoveries teams.
Personal customers experiencing financial difficulty are
managed by the Collections team. If the Collections team is
unable to provide appropriate support after discussing suitable
options with the customer, management of that customer
moves to the Recoveries team. If at any point in the collections
and recoveries process, the customer is identified as being
potentially vulnerable, the customer will be separated from the
regular process and supported by a specialist team to ensure
the customer receives appropriate support for their
circumstances.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 17
Credit risk continued
Collections
When a customer exceeds an agreed limit or misses a regular
monthly payment the customer is contacted by RBS plc and
requested to remedy the position. If the situation is not
regularised then, where appropriate, the Collections team will
become more involved and the customer will be supported by
skilled debt management staff who endeavour to provide
customers with bespoke solutions. Solutions include short-term
account restructuring, refinance loans and forbearance which
can include interest suspension and ‘breathing space’. All
treatments available to customers experiencing financial
difficulties are reviewed to ensure they remain appropriate for
customers impacted by current economic conditions. In the
event that an affordable and sustainable agreement with a
customer cannot be reached, the debt will transition to the
Recoveries team. For provisioning purposes, under IFRS 9,
exposure to customers managed by the Collections team is
categorised as Stage 2 and subject to a lifetime loss
assessment, unless it is 90 days past due or has triggered any
other unlikeliness to pay indicators, in which case it is
categorised as Stage 3.
Recoveries
The Recoveries team will issue a notice of intention to default to
the customer and, if appropriate, a formal demand, while also
registering the account with credit reference agencies where
appropriate. Following this, the customer’s debt may then be
placed with a third-party debt collection agency, or
alternatively a solicitor, in order to agree an affordable
repayment plan with the customer. An option that may also be
considered, is the sale of unsecured debt. Exposures subject to
formal debt recovery are defaulted and, under IFRS 9,
categorised as Stage 3.
Wholesale
Early problem identification
Each segment and sector have defined early warning indicators
to identify customers experiencing financial difficulty, and to
increase monitoring if needed. Early warning indicators may be
internal, such as a customer’s bank account activity, or
external, such as a publicly-listed customer’s share price. If
early warning indicators show a customer is experiencing
potential or actual difficulty, or if relationship managers or
credit officers identify other signs of financial difficulty, they
may decide to classify the customer within the Risk of Credit
Loss framework. Broader macro-economic trends including
commodity prices, foreign exchange rates and consumer and
government spend are also tracked, helping inform decisions
on sector risk appetite. Customer level early warning indicators
are regularly reviewed to ensure alignment with prevailing
economic conditions, ensuring both the volume and focus of
alerts is aligned to the point-in-time risk within each sector.
The aligned Risk of Credit Loss and viability framework
This framework focuses on all Wholesale customers to provide
early identification of credit deterioration, support intelligent
risk-taking, ensure fair and consistent customer outcomes and
provide key insights into Wholesale lending portfolios. Expert
judgment is applied by experienced credit risk officers to
classify cases into categories that reflect progressively
deteriorating credit risk to RBS plc. There are two
classifications in the framework that apply to non-defaulted
customers who are in financial stress – Heightened Monitoring
and Risk of Credit Loss. For the purposes of provisioning, all
exposures categorised as Heightened Monitoring or Risk of
Credit Loss are categorised as Stage 2 and subject to a lifetime
loss assessment. The framework also applies to those
customers that have met RBS plc’s default criteria (AQ10
exposures). Defaulted exposures are categorised as Stage 3
impaired for provisioning purposes.
Heightened Monitoring customers are performing customers
that have met certain characteristics, which have led to
significant credit deterioration. Collectively, characteristics
reflect circumstances that may affect the customer’s ability to
meet repayment obligations. Characteristics include trading
issues, covenant breaches, material PD downgrades and past
due facilities.
Heightened Monitoring customers require pre-emptive actions
(outside the customer’s normal trading patterns) to return or
maintain their facilities within RBS plc’s current risk appetite.
Risk of Credit Loss customers are performing customers that
have met the criteria for Heightened Monitoring and also pose
a risk of credit loss to RBS plc in the next 12 months should
mitigating action not be taken or not be successful.
Once classified as either Heightened Monitoring or Risk of
Credit Loss, a number of mandatory actions are taken in
accordance with policies. Actions include a review of the
customer’s credit grade, facility and security documentation
and the valuation of security. Depending on the severity of the
financial difficulty and the size of the exposure, the customer
relationship strategy is reassessed by credit officers, by
specialist credit risk or relationship management units in the
relevant business or by Restructuring. Agreed customer
management strategies are regularly monitored by both the
business and credit teams. The largest Risk of Credit Loss
exposures are regularly reviewed by a Risk of Credit Loss
forum. The forum members are experienced credit, business
and restructuring specialists. The purpose of the forum is to
review and challenge the strategies undertaken for customers
that pose the largest risk of credit loss to RBS plc.
Appropriate corrective action is taken when circumstances
emerge that may affect the customer’s ability to service its debt
(refer to Heightened Monitoring characteristics). Corrective
actions may include granting a customer various types of
concessions. Any decision to approve a concession will be a
function of specific appetite, the credit quality of the customer,
the market environment and the loan structure and security. All
customers granted forbearance are classified Heightened
Monitoring as a minimum.
Other potential outcomes of the relationship review are to:
return the customer to a satisfactory status, offer additional
lending and continue monitoring, transfer the relationship to
Restructuring if appropriate, or exit the relationship.
The aligned Risk of Credit Loss and viability framework does
not apply to problem debt management for business banking
customers. These customers are, where necessary, managed
by specialist problem debt management teams, depending on
the size of exposure or by the business banking recoveries
team where a loan has been impaired.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 18
Credit risk continued
Restructuring
Where customers are categorised as Risk of Credit Loss and
the lending exposure is above £1 million, relationships are
supported by the Restructuring team. The objective of
Restructuring is to protect RBS plc’s capital. Restructuring does
this by working with corporate and commercial customers in
financial difficulty to help them understand their options and
how their restructuring or repayment strategies can be
delivered. Helping viable customers return to financial health
and restoring a normal banking relationship is always the
preferred outcome, however, where this is not possible, RBS plc
will work with customers to achieve a solvent outcome.
Throughout this period, the mainstream relationship manager
will remain an integral part of the customer relationship.
Insolvency is considered as a last resort and if deemed
necessary, RBS plc will work to recover its capital in a fair and
efficient manner, while upholding the fair treatment of
customers and RBS plc’s core values.
Forbearance (audited)
Forbearance takes place when a concession is made on the
contractual terms of a loan/debt in response to a customer’s
financial difficulties.
The aim of forbearance is to support and restore the customer
to financial health while minimising risk. To ensure that
forbearance is appropriate for the needs of the customer,
minimum standards are applied when assessing, recording,
monitoring and reporting forbearance.
A credit exposure may be forborne more than once, generally
where a temporary concession has been granted and
circumstances warrant another temporary or permanent
revision of the loan’s terms.
Loans are reported as forborne until they meet the exit criteria
as detailed in the appropriate regulatory guidance. These
include being classified as performing for two years since the
last forbearance event, making regular repayments and the
loan/debt being less than 30 days past due.
Types of forbearance
Personal
In the Personal portfolio, forbearance may involve payment
concessions and loan rescheduling (including extensions in
contractual maturity) and capitalisation of arrears.
Forbearance support is provided for both mortgages and
unsecured lending.
Wholesale
In the Wholesale portfolio, forbearance may involve covenant
waivers, amendments to margins, payment concessions and
loan rescheduling (including extensions in contractual maturity),
capitalisation of arrears, and debt forgiveness or debt-for-
equity swaps.
Monitoring of forbearance
Personal
For Personal portfolios, forborne loans are separated and
regularly monitored and reported while the forbearance
strategy is implemented, until they exit forbearance.
Wholesale
In the Wholesale portfolio, customer PDs and facility LGDs are
reassessed prior to finalising any forbearance arrangement.
The ultimate outcome of a forbearance strategy is highly
dependent on the co-operation of the borrower and a viable
business or repayment outcome. Where forbearance is no
longer appropriate, RBS plc will consider other options such as
the enforcement of security, insolvency proceedings or both,
although these are options of last resort.
Provisioning requirements on forbearance are detailed in the
Provisioning for forbearance section.
Credit grading models
Credit grading models is the collective term used to describe all
models, frameworks and methodologies used to calculate PD,
exposure at default (EAD), LGD, maturity and the production of
credit grades.
Credit grading models are designed to provide:
An assessment of customer and transaction characteristics.
A meaningful differentiation of credit risk.
Accurate internal default rate, loss and exposure estimates
that are used in the capital calculation or wider risk
management purposes.
Impairment, provisioning and write-offs
(audited)
In the overall assessment of credit risk, impairment provisioning
and write-offs are used as key indicators of credit quality.
RBS plc’s IFRS 9 provisioning models, which use existing Basel
models as a starting point, incorporate term structures and
forward-looking information. Regulatory conservatism within
the Basel models has been removed as appropriate to comply
with the IFRS 9 requirement for unbiased ECL estimates.
Five key areas may materially influence the measurement of
credit impairment under IFRS 9 – two of these relate to model
build and three relate to model application:
Model build:
The determination of economic indicators that have
most influence on credit loss for each portfolio and the
severity of impact (this leverages existing stress testing
models which are reviewed annually).
The build of term structures to extend the
determination of the risk of loss beyond 12 months that
will influence the impact of lifetime loss for exposures in
Stage 2.
Model application:
The assessment of the SICR and the formation of a
framework capable of consistent application.
The determination of asset lifetimes that reflect
behavioural characteristics while also representing
management actions and processes (using historical
data and experience).
The choice of forward-looking economic scenarios and
their respective probability weights.
Refer to Accounting policy 2.2 for further details.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 19
Credit risk continued
IFRS 9 ECL model design principles (audited)
Modelling of ECL for IFRS 9 follows the conventional approach
to divide the estimation of credit losses into its component parts
of PD, LGD and EAD.
To meet IFRS 9 requirements, the PD, LGD and EAD
parameters differ from their Pillar 1 internal ratings based (IRB)
counterparts in the following aspects:
Unbiased – material regulatory conservatism has been
removed from IFRS 9 parameters to produce unbiased
estimates.
Point-in-time – IFRS 9 parameters reflect actual economic
conditions at the reporting date instead of long-run average
or downturn conditions.
Forward-looking – IFRS 9 PD estimates and, where
appropriate, EAD and LGD estimates reflect forward-
looking economic conditions.
Lifetime measurement – IFRS 9 PD, LGD and EAD are
provided as multi-period term structures up to exposure
lifetimes instead of over a fixed one-year horizon.
IFRS 9 requires that at each reporting date, an entity shall
assess whether the credit risk on an account has increased
significantly since initial recognition. Part of this assessment
requires a comparison to be made between the current lifetime
PD (i.e. the PD over the remaining lifetime at the reporting
date) and the equivalent lifetime PD as determined at the date
of initial recognition.
For assets originated before IFRS 9 was introduced,
comparable lifetime origination PDs did not exist. These have
been retrospectively created using the relevant model inputs
applicable at initial recognition.
PD estimates
Personal models
Personal PD models follow a discrete multi-horizon survival
approach, predicting quarterly PDs up to lifetime at account
level, with a key driver being scores from related IRB PD
models. Forward-looking economic information is brought in by
economic response models, which leverage the existing stress
test model suite. The current suite of PD models was
introduced in 2022 replacing the previous, first-generation
models to remediate a range of model weaknesses.
Wholesale models
Wholesale PD models use a point-in-time/through-the-cycle
framework to convert one-year regulatory PDs into point-in-
time estimates that reflect economic conditions at the reporting
date. The framework utilises credit cycle indices (CCIs) for a
comprehensive set of region/industry segments. Further detail
on CCIs is provided in the Economic loss drivers section.
One year point-in-time PDs are extended to forward-looking
lifetime PDs using a conditional transition matrix approach and
a set of econometric forecasting models.
LGD estimates
The general approach for the IFRS 9 LGD models is to leverage
corresponding IRB LGD models with bespoke adjustments to
ensure estimates are unbiased and, where relevant, forward-
looking.
Personal
Forward-looking information has only been incorporated for the
secured portfolios, where changes in property prices can be
readily accommodated. Analysis has shown minimal impact of
economic conditions on LGDs for the other Personal portfolios.
Wholesale
Forward-looking economic information is incorporated into
LGD estimates using the existing CCI framework. For low
default portfolios, including sovereigns and banks, loss data is
too scarce to substantiate estimates that vary with economic
conditions. Consequently, for these portfolios, LGD estimates
are assumed to be constant throughout the projection horizon.
EAD estimates
Personal
The IFRS 9 Personal modelling approach for EAD is dependent
on product type.
Revolving products use the existing Basel models as a basis,
with appropriate adjustments incorporating a term structure
based on time to default.
Amortising products use an amortising schedule, where a
formula is used to calculate the expected balance based on
remaining terms and interest rates.
Analysis has indicated that there is minimal impact on EAD
arising from changes in the economy for all Personal portfolios
except mortgages. Therefore, forward-looking information is
only incorporated in the mortgage EAD model (through
forecast changes in interest rates).
Wholesale
For Wholesale, EAD values are projected using product specific
credit conversion factors (CCFs), closely following the product
segmentation and approach of the respective Basel model.
However, the CCFs are estimated over multi-year time horizons
and contain no regulatory conservatism or downturn
assumptions.
No explicit forward-looking information is incorporated, on the
basis of analysis showing the temporal variation in CCFs is
mainly attributable to changes in exposure management
practices rather than economic conditions.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 20
Credit risk continued
Governance and post model adjustments (audited)
The IFRS 9 PD, EAD and LGD models are subject to RBS plc’s
model risk policy that stipulates periodic model monitoring,
periodic re-validation and defines approval procedures and
authorities according to model materiality. Various post model
adjustments were applied where management judged they
were necessary to ensure an adequate level of overall ECL
provision. All post model adjustments were subject to formal
approval through provisioning governance, and were
categorised as follows (business level commentary is provided
below):
Deferred model calibrations – ECL adjustments where PD
model monitoring indicated that actual defaults were below
estimated levels but where it was judged that an implied
ECL release was not supportable due to the influence of
government support schemes on default levels in the past
two years. As a consequence, any potential ECL release
was deferred and retained on the balance sheet until
modelled ECL levels are affirmed by new model parallel
runs or similar analyses.
Economic uncertainty – ECL adjustments primarily arising
from uncertainties associated with the high inflation
environment as well as supply chain disruption, along with
the residual effect of COVID-19 and government support
schemes. In all cases, management judged that additional
ECL was required until further credit performance data
became available as the full effects of these issues matures.
Other adjustments – ECL adjustments where it was judged
that the modelled ECL required amendment.
Post model adjustments will remain a key focus area of RBS
plc’s ongoing ECL adequacy assessment process. A holistic
framework has been established including reviewing a range of
economic data, external benchmark information and portfolio
performance trends with a particular focus on segments of the
portfolio (both commercial and consumer) that are likely to be
more susceptible to the high inflation environment and supply
chain disruption.
ECL post model adjustments
The table below shows ECL post model adjustments.
Retail Banking
Commercial
Mortgages
Other
& Institutional
Total
2022
£m
£m
£m
£m
Deferred model calibrations
—
—
—
—
Economic uncertainty
11
11
38
60
Other adjustments
—
5
2
7
Total
11
16
40
67
Of which:
- Stage 1
4
6
9
19
- Stage 2
2
10
30
42
- Stage 3
5
—
1
6
2021
Deferred model calibrations
11
17
11
39
Economic uncertainty
14
18
88
120
Other adjustments
10
—
—
10
Total
35
35
99
169
Of which:
- Stage 1
2
—
3
5
- Stage 2
26
30
96
152
- Stage 3
7
5
—
12
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 21
Credit risk continued
Post model adjustments have reduced significantly since 31
December 2021, with notable shifts in all categories. This
reflected:
Removal of deferred model calibration post model
adjustments following the implementation of new models as
well as COVID-19 adjustments no longer being required.
Economic uncertainty adjustments significantly reduced as
many COVID-19 adjustments were no longer required, plus
the deteriorating economic outlook and improved modelling
approaches, resulted in increases in modelled ECL.
Retail Banking – The judgemental post model adjustment
for deferred model calibrations of £28 million held at 31
December 2021 was no longer required due to the
implementation of new PD models across the Retail
portfolios implemented during the year, negating the need
for management judgement on PD calibration adjustments.
The post model adjustments for economic uncertainty were
held at a broadly consistent level to 31 December 2021,
totalling £22 million (2021 – £33 million). The primary
element of the economic uncertainty adjustment was a £16
million ECL uplift to capture the risk on segments of the
Retail portfolio that are more susceptible to the effects of a
high inflation environment and the impacts on affordability.
This focuses on key affordability lenses, including customers
with lower incomes in fuel poverty, over-indebted
borrowers and customers vulnerable to a potential
mortgage rate shock impact on their affordability. This
adjustment superseded the previously held £5 million for
COVID-19 payment holiday high-risk customers and the £14
million judgemental ECL release holdback at 31 December
2021. The current post model adjustment allocates more
ECL to Stage 1 given the forward-looking nature of the
risks on affordability driven by the high inflation
environment, whereas the previous COVID-19 post model
adjustments were focused on Stage 2, due to specific
customer events (for example, high-risk payment holiday
cases migrated into Stage 2).
Other judgmental overlays included a £5 million uplift to
reflect forward-looking provisions relating to credit cards
EAD and limit utilisation modelling considerations. The £2
million post model adjustment previously held for cladding
risk was removed due to management’s view on the
positive developments in this segment.
Commercial & Institutional – The post model adjustment for
economic uncertainty reduced from £88 million to £38
million during the year. It included an overlay of £24 million
to cover the residual risks from COVID-19, including the risk
that government support schemes could affect future
recoveries and concerns surrounding associated debt, to
customers that have utilised government support schemes.
Inflation and supply chain issues present significant
headwinds for a number of sectors which are not fully
captured in the models. A £14 million mechanistic
adjustment, via a sector-level downgrade, was applied to
the sectors that were considered most at risk from these
headwinds.
The judgemental overlay for deferred model calibrations on
the business banking portfolio was removed as COVID-19
no longer impedes the mechanistic modelling approach.
Other adjustments consisted of a £2 million overlay to
mitigate the effect of operational timing delays in the
identification and flagging of a SICR.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 22
Credit risk continued
Significant increase in credit risk (SICR)
(audited)
Exposures that are considered significantly credit deteriorated
since initial recognition are classified in Stage 2 and assessed
for lifetime ECL measurement (exposures not considered
deteriorated carry a 12 month ECL). RBS plc has adopted a
framework to identify deterioration based primarily on relative
movements in lifetime PD supported by additional qualitative
backstops. The principles applied are consistent across RBS plc
and align to credit risk management practices, where
appropriate.
The framework comprises the following elements:
IFRS 9 lifetime PD assessment (the primary driver) – on
modelled portfolios the assessment is based on the relative
deterioration in forward-looking lifetime PD and is assessed
monthly. To assess whether credit deterioration has
occurred, the residual lifetime PD at balance sheet date
(which PD is established at date of initial recognition (DOIR))
is compared to the current PD. If the current lifetime PD
exceeds the residual origination PD by more than a
threshold amount deterioration is assumed to have occurred
and the exposure transferred into Stage 2 for a lifetime loss
assessment. For Wholesale, a doubling of PD would indicate
a SICR subject to a minimum PD uplift of 0.1%. For Personal
portfolios, the criteria vary by risk band, with lower risk
exposures needing to deteriorate more than higher risk
exposures, as outlined in the following table:
Qualitative high-risk backstops – the PD assessment is
complemented with the use of qualitative high-risk
backstops to further inform whether significant deterioration
in lifetime risk of default has occurred. The qualitative high-
risk backstop assessment includes the use of the mandatory
30+ days past due backstop, as prescribed by IFRS 9
guidance, and other features such as forbearance support,
Wholesale exposures managed within the Risk of Credit Loss
framework, and adverse credit bureau results for Personal
customers.
Persistence (Personal and business banking customers only)
– the persistence rule ensures that accounts which have met
the criteria for PD driven deterioration are still considered to
be significantly deteriorated for three months thereafter.
This additional rule enhances the timeliness of capture in
Stage 2. The persistence rule is applied to PD driven
deterioration only.
The criteria are based on a significant amount of empirical
analysis and seek to meet three key objectives:
Criteria effectiveness – the criteria should be effective in
identifying significant credit deterioration and prospective
default population.
Stage 2 stability – the criteria should not introduce
unnecessary volatility in the Stage 2 population.
Portfolio analysis – the criteria should produce results which
are intuitive when reported as part of the wider credit
portfolio.
Monitoring the effect on relative PD deterioration when
originating new lending at times of weaker economic outlook
(therefore, higher PDs at initial recognition) is important to
ensure SICR criteria remains effective.
Provisioning for forbearance (audited)
Personal
The methodology used for provisioning in respect of Personal
forborne loans will differ depending on whether the loans are
performing or non-performing and which business is managing
them due to local market conditions.
Granting forbearance will only change the arrears status of the
loan in specific circumstances, which can include capitalisation
of principal and interest in arrears, where the loan may be
returned to the performing book if the customer has
demonstrated an ability to meet regular payments and is likely
to continue to do so.
The loan would continue to be reported as forborne until it
meets the exit criteria set out by the appropriate regulatory
guidance.
For ECL provisioning, all forborne but performing exposures
are categorised as Stage 2 and are subject to a lifetime loss
provisioning assessment. Where the forbearance treatment
includes the cessation of interest on the customer balance (i.e.
non-accrual), this will be treated as a Stage 3 default.
For non-performing forborne loans, the Stage 3 loss
assessment process is the same as for non-forborne loans.
Wholesale
Provisions for forborne loans are assessed in accordance with
normal provisioning policies. The customer’s financial position
and prospects – as well as the likely effect of the forbearance,
including any concessions granted, and revised PD or LGD
gradings – are considered in order to establish whether an
impairment provision increase is required.
Wholesale loans granted forbearance are individually credit
assessed in most cases. Performing loans subject to
forbearance treatment are categorised as Stage 2 and subject
to a lifetime loss assessment.
Forbearance may result in the value of the outstanding debt
exceeding the present value of the estimated future cash flows.
This difference will lead to a customer being classified as non-
performing.
Personal
risk bands
PD bandings (based
on residual lifetime
PD calculated at
DOIR)
PD deterioration
threshold criteria
Risk band A
<0.762%
PD@DOIR + 1%
Risk band B
<4.306%
PD@DOIR + 3%
Risk band C
>=4.306x%
1.7x PD@DOIR
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 23
Credit risk continued
In the case of non-performing forborne loans, an individual loan
impairment provision assessment generally takes place prior to
forbearance being granted. The amount of the loan impairment
provision may change once the terms of the forbearance are
known, resulting in an additional provision charge or a release
of the provision in the period the forbearance is granted.
The transfer of Wholesale loans from impaired to performing
status follows assessment by relationship managers and credit.
When no further losses are anticipated and the customer is
expected to meet the loan’s revised terms, any provision is
written-off or released and the balance of the loan can be
returned to performing status once exit criteria, as set out by
regulatory guidance, is met.
Asset lifetimes (audited)
The choice of initial recognition and asset duration is another
critical judgment in determining the quantum of lifetime losses
that apply.
The date of initial recognition reflects the date that a
transaction (or account) was first recognised on the balance
sheet; the PD recorded at that time provides the baseline
used for subsequent determination of SICR as detailed
above.
For asset duration, the approach applied (in line with IFRS 9
requirements) is:
Term lending – the contractual maturity date, reduced for
behavioural trends where appropriate (such as, expected
prepayment and amortisation).
Revolving facilities – for Personal portfolios (except credit
cards), asset duration is based on behavioural life and this
is normally greater than contractual life (which would
typically be overnight). For Wholesale portfolios, asset
duration is based on annual customer review schedules
and will be set to the next review date.
In the case of credit cards, the most significant judgment is to
reflect the operational practice of card reissuance and the
associated credit assessment as enabling a formal re-
origination trigger. As a consequence, a capped lifetime
approach of up to 36 months is used on credit card balances. If
the approach was uncapped the ECL impact is estimated at
approximately £19 million (2021 – £10 million). However, credit
card balances originated under the 0% balance transfer
product, and representing approximately 14% of performing
card balances, have their ECL calculated on a behavioural
lifetime approach as opposed to being capped at a maximum
of three years.
The capped approach reflects RBS plc practice of a credit-
based review of customers prior to credit card issuance and
complies with IFRS 9. Benchmarking information indicates that
peer UK banks use behavioural approaches in the main for
credit card portfolios with average durations between three
and ten years. Across Europe, durations are shorter and are, in
some cases, as low as one year.
Economic loss drivers (audited)
Introduction
The portfolio segmentation and selection of economic loss
drivers for IFRS 9 follow closely the approach used in stress
testing. To enable robust modelling the forecasting models for
each portfolio segment (defined by product or asset class and
where relevant, industry sector and region) are based on a
selected, small number of economic variables, (typically three
to four) that best explain the temporal variations in portfolio
loss rates. The process to select economic loss drivers involves
empirical analysis and expert judgment.
The most material economic loss drivers are shown in the table
below.
Portfolio
Economic loss drivers
UK retail
mortgages
UK unemployment rate, sterling swap rate,
UK house price index, UK household debt
to income
UK retail
unsecured
UK unemployment rate, sterling swap rate,
UK household debt to income
UK corporates
UK stock price index, UK GDP, Bank of
England base rate
UK commercial
real estate
UK stock price index, UK commercial
property price index, UK GDP, Bank of
England base rate
(1) This is not an exhaustive list of economic loss drivers but shows the most material
drivers for the most significant portfolios.
Economic scenarios
At 31 December 2022, the range of anticipated future
economic conditions was defined by a set of four internally
developed scenarios and their respective probabilities. In
addition to the base case, they comprised upside, downside
and extreme downside scenarios. The scenarios primarily
reflected the current risks faced by the economy, particularly
related to high inflation resulting in a fall in real household
income, economic slowdown, a rise in unemployment and asset
price declines.
For 2022, the four scenarios were deemed appropriate in
capturing the uncertainty in economic forecasts and the non-
linearity in outcomes under different scenarios. These four
scenarios were developed to provide sufficient coverage across
potential rises in unemployment, inflation, asset price declines
and the degree of permanent damage to the economy, around
which there remains pronounced levels of uncertainty.
Upside – This scenario assumes a robust growth through 2023
as consumers dip into excess savings built up since the COVID-
19 pandemic and further helped by fiscal support and strong
business investment. The labour market remains resilient, with
the unemployment rate remaining below pre-COVID-19 levels.
Inflation retraces sharply and that does not necessitate
significantly more tightening. The housing market slows down
compared to the previous year but still remains robust.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 24
Credit risk continued
Base case – High inflation and significant monetary policy
tightening leads to a mild recession in 2023. Fiscal support
remains key in containing the impact. Unemployment rate rises
modestly but job losses are contained. Inflation moderates over
medium-term and falls to the target levels in 2024. Housing
market experiences price decline and lower activity but the
extent of the decline is lower than that experienced during
prior stresses.
Since 31 December 2021, the outlook has deteriorated as
energy prices surged and cost of living crisis intensified. As a
result, the base case is more pessimistic. The mild recession in
2023 contrasts with last year’s assumption of a muted growth.
House price correction contrasts with previous year’s
assumptions of a modest growth. In previous scenario,
unemployment rate was expected to increase very modestly
while inflation and interest rate rises last year were also
relatively muted.
Downside – Inflation rises on the back of further energy price
spikes. The high inflation environment leads to the economy
falling under recession. As demand dries up, inflation rapidly
declines. Policy rates are raised initially but then quickly eased
to assist in recovery. Unemployment is more than the base
case scenario while house prices experience declines
comparable to previous episodes of stress.
Extreme downside – This scenario assumes high and persistent
inflation. Households see the highest recorded decline in real
income. Policy rate rises to levels last seen in early 2000.
Resulting economic recession is deep and leads to widespread
job losses. House prices lose approximately a third of their
value while unemployment rate rises to level above those seen
during the 2008 financial crisis.
The previous year’s extreme downside also included a deep
recession, labour market deterioration and asset price falls, but
the current scenario explores these risks in a high inflation,
high rates environment.
The tables and commentary below provide details of the key
economic loss drivers under the four scenarios.
The main macroeconomic variables for each of the four
scenarios used for ECL modelling are set out in the main
macroeconomic variables table below. The compound annual
growth rate (CAGR) for GDP is shown. It also shows the five-
year average for unemployment and the Bank of England base
rate. The house price index and commercial real estate figures
show the total change in each asset over five years.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 25
Credit risk continued
Economic loss drivers (audited)
Main macroeconomic variables
2022
2021
Extreme
Weighted
Extreme
Weighted
Upside
Base case
Downside
downside
average
Upside
Base case
Downside
downside
average
Five-year summary
%
%
%
%
%
%
%
%
%
%
GDP - CAGR
1.6
0.8
0.2
(0.2)
0.7
2.4
1.7
1.4
0.6
1.8
Unemployment - average
3.9
4.6
5.1
7.2
5.0
3.5
4.2
4.8
6.7
4.2
House price index - total change
21.5
(1.3)
(6.0)
(22.4)
(1.3)
22.7
12.1
4.3
(5.3)
12.8
Bank of England base rate - average
2.6
3.3
1.5
4.9
3.1
1.5
0.8
0.7
(0.5)
0.9
Commercial real estate price - total change
(0.1)
(14.4)
(17.2)
(38.3)
(16.1)
18.2
7.2
5.5
(6.4)
9.5
Consumer price index - CAGR
2.4
3.0
3.1
7.0
3.6
2.7
2.5
3.1
1.5
2.6
UK stock price index - total change
22.6
13.9
1.8
(8.5)
9.5
36.6
24.9
12.5
0.2
24.7
World GDP - CAGR
3.7
3.3
1.6
1.0
2.7
3.5
3.2
2.6
0.6
3.1
Probability weight
18.6
45.0
20.8
15.6
30.0
45.0
20.0
5.0
(1) The five year period starts after Q3 2022 for 31 December 2022 and Q3 2021 for 31 December 2021.
(2) CAGR and total change figures are not comparable with 31 December 2021 data, as the starting quarters are different.
Probability weightings of scenarios
A subjective approach for assigning probability weight was
used during COVID-19 due to the scale of the economic effect
of COVID-19 and the range of recovery paths. Similarly, a
subjective approach was used at 30
September 2022, to reflect
the deteriorating outlook and shifting balance of risks in the
given set of scenarios. However, RBS plc’s quantitative
approach to IFRS 9 multiple economic scenarios (MES) involves
selecting a suitable set of discrete scenarios to characterise the
distribution of risks in the economic outlook and assigning
appropriate probability weights. This quantitative approach has
been reinstated and is used for 31 December 2022.
The approach involves comparing UK GDP paths for RBS plc’s
scenarios against a set of 1,000 model runs, following which, a
percentile in the distribution is established that most closely
corresponded to the scenario. Probability weight for base case
is set first based on judgement, while probability weights for the
alternate scenarios are assigned based on these percentiles
scores.
The assigned probability weights were judged to be aligned
with the subjective assessment of balance of the risks in the
economy. Since 31 December 2021, high inflation posed
significant challenge to the economy and there is considerable
uncertainty to the economic outlook, with respect to
persistence and range of outcomes on inflation and its
subsequent effects on household real income and economic
activity. Given that backdrop, RBS plc judges it appropriate to
assign higher probability weights on downside-biased scenarios
than at 31 December 2021. It presents good coverage to the
range of outcomes assumed in the scenarios, including the
potential for a robust recovery on the upside and exceptionally
challenging outcomes on the downside. A 18.6% weighting was
applied to the upside scenario, a 45.0% weighting applied to the
base case scenario, a 20.8% weighting applied to the downside
scenario and a 15.6% weighting applied to the extreme
downside scenario. Compared to 30 June 2022, the probability
weights were broadly similar, but with additional modest
downside skew.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 26
Credit risk continued
Economic loss drivers
UK gross domestic product (£bn)
Q1 2022 Q1 2023 Q1 2024 Q1 2025 Q1 2026 Q1 2027
2000
2100
2200
2300
2400
2500
Upside Base case Downside Extreme downside
Bank of England base rate (%)
Q1 2019 Q1 2020 Q1 2021 Q1 2022 Q1 2023 Q1 2024 Q1 2025 Q1 2026 Q1 2027
0
1
2
3
4
5
6
7
Upside Base case Downside Extreme downside
UK unemployment rate (%)
Q1 2019 Q1 2020 Q1 2021 Q1 2022 Q1 2023 Q1 2024 Q1 2025 Q1 2026 Q1 2027
0
1
2
3
4
5
6
7
8
9
Upside Base case Downside Extreme downside
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 27
Credit risk continued
Annual figures (audited)
GDP - annual growth
Commercial real estate price - four quarter change
Extreme
Weighted
Extreme
Weighted
Upside
Base case
Downside
downside
average
Upside
Base case
Downside
downside
average
%
%
%
%
%
%
%
%
%
%
2022
4.4
4.4
4.4
4.4
4.4
2022
(2.6)
(2.6)
(2.6)
(2.6)
(2.6)
2023
2.2
(0.9)
(2.8)
(3.1)
(1.1)
2023
2.1
(8.4)
(19.7)
(22.4)
(11.0)
2024
1.9
0.7
(0.4)
(1.6)
0.4
2024
1.9
(0.5)
2.8
(29.1)
(3.2)
2025
1.2
1.0
1.9
1.2
1.3
2025
2.7
1.3
3.7
6.7
2.6
2026
1.2
1.4
1.2
1.2
1.3
2026
2.2
1.0
3.8
8.5
2.6
2027
1.4
1.5
1.1
1.2
1.4
2027
0.6
1.0
2.3
8.6
2.0
Unemployment rate - annual average
Consumer price index - four quarter change
Extreme
Weighted
Extreme
Weighted
Upside
Base case
Downside
downside
average
Upside
Base case
Downside
downside
average
%
%
%
%
%
%
%
%
%
%
2022
3.8
3.8
3.8
3.8
3.8
2022
11.2
11.2
11.2
11.2
11.2
2023
3.9
4.4
5.0
6.0
4.7
2023
2.2
3.7
6.0
17.0
6.0
2024
3.9
4.9
5.7
8.4
5.4
2024
1.0
2.7
1.0
8.8
3.1
2025
4.0
4.8
5.2
8.0
5.2
2025
2.0
2.0
2.0
2.7
2.1
2026
4.0
4.6
5.0
7.4
5.0
2026
2.0
1.9
2.0
2.3
2.0
2027
4.0
4.3
5.1
6.7
4.8
2027
2.0
1.9
2.0
2.0
2.0
House price index - four quarter change
UK stock price index - four quarter change
Extreme
Weighted
Extreme
Weighted
Upside
Base case
Downside
downside
average
Upside
Base case
Downside
downside
average
%
%
%
%
%
%
%
%
%
%
2022
6.9
6.9
6.9
6.9
6.9
2022
(3.4)
(3.4)
(3.4)
(3.4)
(3.4)
2023
7.5
(7.8)
(13.7)
(10.4)
(6.6)
2023
9.1
4.1
(20.6)
(45.0)
(7.8)
2024
4.5
(0.9)
(7.7)
(15.2)
(3.2)
2024
4.0
1.9
9.7
24.9
5.9
2025
3.0
2.9
4.8
(8.3)
1.8
2025
4.5
4.0
8.8
16.7
6.4
2026
3.5
3.4
8.3
7.2
4.8
2026
4.9
4.4
7.0
11.0
5.8
2027
3.4
3.4
6.3
6.6
4.3
2027
4.0
4.3
6.6
9.9
5.4
Bank of England base rate - annual average
Extreme
Weighted
Upside
Base case
Downside
downside
average
%
%
%
%
%
2022
1.49
1.49
1.49
1.49
1.49
2023
3.27
3.94
2.94
5.38
3.83
2024
2.71
3.75
1.00
5.95
3.33
2025
2.29
3.25
1.00
5.28
2.92
2026
2.25
3.00
1.00
4.46
2.67
2027
2.06
2.75
1.00
3.64
2.40
Worst points
31 December 2022
31 December 2021
Extreme
Weighted
Extreme
Weighted
Downside
downside
average
Downside
downside
average
%
Quarter
%
Quarter
%
%
Quarter
%
Quarter
%
GDP
(3.9)
Q4 2023
(5.4)
Q4 2023
(1.5)
(1.8)
Q1 2022
(7.9)
Q1 2022
—
Unemployment rate (peak)
6.0
Q1 2024
8.5
Q3 2024
5.4
5.4
Q1 2023
9.4
Q4 2022
4.5
House price index
(21.3)
Q1 2025
(31.7)
Q3 2025
(10.6)
(3.0)
Q3 2023
(26.0)
Q2 2023
—
Bank of England base rate
4.0
Q1 2023
6.0
Q1 2024
4.1
1.5
Q4 2022
(0.5)
Q2 2022
1.2
Commercial real estate price
(26.8)
Q4 2023
(50.3)
Q3 2024
(21.8)
(2.5)
Q1 2022
(29.8)
Q3 2022
—
Consumer price index
15.7
Q1 2023
17.0
Q4 2023
11.7
7.9
Q4 2022
4.3
Q1 2022
5.5
UK stock price index
(24.0)
Q4 2023
(47.3)
Q4 2023
(11.7)
(12.2)
Q1 2022
(37.1)
Q2 2022
(1.2)
(1) For the unemployment rate, the figures show the peak levels. For the Bank of England base rate, the figures show highest or lowest levels. For the consumer price index, the figures
show the highest annual percentage change. For other parameters, the figures show falls relative to the starting period. The calculations are performed over five years, with a
starting point of Q3 2022 for 31 December 2022 scenarios.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 28
Credit risk continued
Economic loss drivers (audited)
Use of the scenarios in Personal lending
Personal lending follows a discrete scenario approach. The PD
and LGD values for each discrete scenario are calculated using
product specific economic response models. Each account has
a PD and LGD calculated as probability weighted averages
across the suite of economic scenarios.
Use of the scenarios in Wholesale lending
The Wholesale lending ECL methodology is based on the
concept of CCIs. The CCIs represent, similar to the exogenous
component in Personal, all relevant economic loss drivers for a
region/industry segment aggregated into a single index value
that describes the loss rate conditions in the respective
segment relative to its long-run average. A CCI value of zero
corresponds to loss rates at long-run average levels, a positive
CCI value corresponds to loss rates below long-run average
levels and a negative CCI value corresponds to loss rates above
long-run average levels.
The individual economic scenarios are translated into forward-
looking projections of CCIs using a set of econometric models.
Subsequently the CCI projections for the individual scenarios
are averaged into a single central CCI projection according to
the given scenario probabilities. The central CCI projection is
then overlaid with an additional mean reversion assumption to
gradually revert to the long-run average CCI value of zero in
the outer years of the projection horizon.
Finally, ECL is calculated using a Monte Carlo approach by
averaging PD and LGD values arising from many CCI paths
simulated around the central CCI projection.
The rationale for the Wholesale approach is the long-standing
observation that loss rates in Wholesale portfolios tend to follow
regular cycles. This allows RBS plc to enrich the range and
depth of future economic conditions embedded in the final ECL
beyond what would be obtained from using the discrete macro-
economic scenarios alone.
Business banking, while part of the Wholesale segment for
reporting purposes, utilises the Personal lending rather than the
Wholesale lending methodology.
UK economic uncertainty
The high inflation environment and supply chain disruption are
presenting significant headwinds for some businesses and
sectors. These are a result of various factors and in many
cases are compounding and look set to remain a feature of the
economic environment into 2023. RBS plc has considered
where these are most likely to affect the customer base.
Furthermore, the rising cost of borrowing during 2022 for both
businesses and consumers presents an additional affordability
challenge for many borrowers.
The effects of these risks are not expected to be fully captured
by forward-looking credit modelling, particularly given the
unique high inflation environment, low unemployment base-
case outlook. Any incremental ECL effects for these risks will
be captured via post model adjustments and are detailed
further in the Governance and post model adjustments section.
Model monitoring and enhancement
Throughout 2022, default rates in the UK Personal and
Wholesale portfolios moderately increased but remained
generally at, or somewhat below, pre-COVID-19 levels. This is
based on a normalised view removing the effects of the new
definition of default, introduced from 1 January 2022, in
accordance with new prudential regulation. As in 2021, model
recalibrations to adjust for overprediction have been deferred
where applicable, based on the judgment that default rate
actuals may still be supressed as a result of government
support provided throughout COVID-19.
The suite of UK Personal PD models and some Personal LGD
models were redeveloped in 2022 removing the need for a
number of previously applied post model ECL adjustments to
account for model weaknesses.
In Wholesale lending, new economic response models were
introduced in 2022 for the UK corporate segments, that follow
an improved modelling approach and put higher weight on
stock price indices compared to previous models.
The economic response models for Personal and Wholesale do
not include direct inflation drivers, due to low inflation seen
throughout the data history available for modelling (typically
starting in early 2000s with some variation across products).
The effect of inflation is deemed to be partially reflected
through other drivers present in the models, especially in
Wholesale lending, where new models with a higher weight on
stock price indices were introduced for the most material
portfolios.
As detailed in the Governance and post model adjustments
section, ECL adjustments were applied where management
judged inflation risk was not fully reflected through the models.
The use of direct inflation drivers in the economic response
models will be reviewed considering additional credit outcome
data in 2023.
Government guarantees
A number of support schemes were introduced in response to
COVID-19 with the UK government guaranteeing part of the
loan. The Bounce Back Loan Scheme is 100% guaranteed. For
the Coronavirus Business Interruption Loan Scheme and the
Coronavirus Large Business Interruption Loan Scheme the
government guarantee is 80%. RBS plc recognises lower LGDs
for these lending products as a result, with 0% applied to the
government-guaranteed part of the exposure. RBS plc does not
directly adjust the measurement of PD due to the government
guarantee and continues to move exposures into Stage 2 and
Stage 3 where a significant deterioration in credit risk or a
default is identified.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 29
Credit risk continued
Measurement uncertainty and ECL sensitivity
analysis (audited)
The recognition and measurement of ECL is complex and
involves the use of significant judgment and estimation,
particularly in times of economic volatility and uncertainty. This
includes the formulation and incorporation of multiple forward-
looking economic conditions into ECL to meet the measurement
objective of IFRS 9. The ECL provision is sensitive to the model
inputs and economic assumptions underlying the estimate.
The focus of the simulations is on ECL provisioning
requirements on performing exposures in Stage 1 and Stage 2.
The simulations are run on a stand-alone basis and are
independent of each other; the potential ECL impacts reflect
the simulated impact at 31 December 2022. Scenario impacts
on SICR should be considered when evaluating the ECL
movements of Stage 1 and Stage 2. In all scenarios the total
exposure was the same but exposure by stage varied in each
scenario.
Stage 3 provisions are not subject to the same level of
measurement uncertainty – default is an observed event as at
the balance sheet date. Stage 3 provisions therefore were not
considered in this analysis.
The impact arising from the base case upside, downside and
extreme downside scenarios was simulated. These scenarios
are used in the methodology for Personal multiple economic
scenarios as described in the Economic loss drivers section. In
the simulations, RBS plc has assumed that the economic macro
variables associated with these scenarios replace the existing
base case economic assumptions, giving them a 100%
probability weighting and therefore serving as a single
economic scenario.
These scenarios were applied to all modelled portfolios in the
analysis below, with the simulation impacting both PDs and
LGDs. Post model adjustments included in the ECL estimates
that were modelled were sensitised in line with the modelled
ECL movements, but those that were judgmental in nature,
primarily those for deferred model calibrations and economic
uncertainty, were not (refer to the Governance and post model
adjustments section). As expected, the scenarios create
differing impacts on ECL by portfolio and the impacts are
deemed reasonable. In this simulation, it is assumed that
existing modelled relationships between key economic variables
and loss drivers hold, but in practice other factors would also
have an impact, for example, potential customer behaviour
changes and policy changes by lenders that might impact on
the wider availability of credit.
RBS plc’s core criterion to identify a SICR is founded on PD
deterioration, as discussed above. Under the simulations, PDs
change and result in exposures moving between Stage 1 and
Stage 2 contributing to the ECL impact.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 30
Credit risk continued
Measurement uncertainty and ECL sensitivity analysis (audited)
Moderate
Moderate
Extreme
Base
upside
downisde
downside
2022
Actual
scenario
scenario
scenario
scenario
Stage 1 modelled loans (£m)
Retail Banking - mortgages
11,470
11,534
12,099
11,395
10,603
Retail Banking - unsecured
1,613
1,650
1,746
1,604
1,334
Wholesale - property
7,311
7,528
7,608
7,101
5,504
Wholesale - non-property
10,123
10,758
11,104
8,908
6,474
Stage 1 modelled ECL (£m)
Retail Banking - mortgages
4
4
5
4
4
Retail Banking - unsecured
34
34
34
34
28
Wholesale - property
19
15
12
23
23
Wholesale - non-property
30
29
25
33
33
Stage 1 coverage (%)
Retail Banking - mortgages
0.03%
0.03%
0.04%
0.04%
0.04%
Retail Banking - unsecured
2.11%
2.06%
1.95%
2.12%
2.10%
Wholesale - property
0.26%
0.20%
0.16%
0.32%
0.42%
Wholesale - non-property
0.30%
0.27%
0.23%
0.37%
0.51%
Stage 2 modelled loans (£m)
Retail Banking - mortgages
2,273
2,209
1,644
2,348
3,140
Retail Banking - unsecured
605
568
472
614
884
Wholesale - property
1,062
845
765
1,272
2,869
Wholesale - non-property
3,932
3,297
2,951
5,147
7,581
Stage 2 modelled ECL (£m)
Retail Banking - mortgages
7
7
5
7
10
Retail Banking - unsecured
72
69
57
74
101
Wholesale - property
25
17
12
32
120
Wholesale - non-property
72
56
45
86
196
Stage 2 coverage (%)
Retail Banking - mortgages
0.31%
0.32%
0.30%
0.30%
0.32%
Retail Banking - unsecured
11.90%
12.15%
12.08%
12.05%
11.43%
Wholesale - property
2.35%
2.01%
1.57%
2.52%
4.18%
Wholesale - non-property
1.83%
1.70%
1.52%
1.67%
2.59%
Stage 1 and Stage 2 modelled loans (£m)
Retail Banking - mortgages
13,743
13,743
13,743
13,743
13,743
Retail Banking - unsecured
2,218
2,218
2,218
2,218
2,218
Wholesale - property
8,373
8,373
8,373
8,373
8,373
Wholesale - non-property
14,055
14,055
14,055
14,055
14,055
Stage 1 and Stage 2 modelled ECL (£m)
Retail Banking - mortgages
11
11
10
11
14
Retail Banking - unsecured
106
103
91
108
129
Wholesale - property
44
32
24
55
143
Wholesale - non-property
102
85
70
119
229
Stage 1 and Stage 2 coverage (%)
Retail Banking - mortgages
0.08%
0.08%
0.07%
0.08%
0.10%
Retail Banking - unsecured
4.78%
4.64%
4.10%
4.87%
5.82%
Wholesale - property
0.53%
0.38%
0.29%
0.66%
1.71%
Wholesale - non-property
0.73%
0.60%
0.50%
0.85%
1.63%
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 31
Credit risk continued
Measurement uncertainty and ECL sensitivity analysis (audited) continued
Moderate
Moderate
Extreme
Base
upside
downside
downside
Actual
scenario
scenario
scenario
scenario
Reconciliation to Stage 1 and Stage 2 ECL (£m)
ECL on modelled exposures
263
231
195
293
515
ECL on non-modelled exposures
2
2
2
2
2
Total Stage 1 and Stage 2 ECL (£m)
265
233
197
295
517
Variance – (lower)/higher to actual total Stage 1 and Stage 2 ECL (£m)
(32.0)
(68.0)
30
252
Reconciliation to Stage 1 and Stage 2 flow exposure (£m)
Modelled loans
38,389
38,389
38,389
38,389
38,389
Non-modelled loans
97
97
97
97
97
Other assets classes
32,976
32,976
32,976
32,976
32,976
(1) Variations in future undrawn exposure values across the scenarios are modelled, however the exposure position reported is that used to calculate modelled ECL as at 31 December
2022 and therefore does not include variation in future undrawn exposure values.
(2) Reflects ECL for all modelled exposure in scope for IFRS 9. The analysis excludes non-modelled portfolios.
(3) All simulations are run on a stand-alone basis and are independent of each other, with the potential ECL impact reflecting the simulated impact as at 31 December 2022. The
simulations change the composition of Stage 1 and Stage 2 exposure but total exposure is unchanged under each scenario as the loan population is static.
(4) Refer to the Economic loss drivers section for details of economic scenarios.
(5) Refer to the RBS plc 2021 Annual Report and Accounts for 2021 comparatives.
During 2022, overall modelled ECL increased reflecting a
deteriorating view on economic outlook. Judgmental ECL
post model adjustments, although reduced in value terms
since 31 December 2021, continued to reflect economic
uncertainty with the expectation of increased defaults in
2023 and beyond, and represented 10% of total ECL (2021
– 24%).
If the economics were as negative as observed in the
extreme downside, total Stage 1 and Stage 2 ECL was
simulated to increase by £0.3 billion (approximately 95%). In
this scenario, Stage 2 exposure increased significantly and
was the key driver of the simulated ECL rise. The
movement in Stage 2 balances in the other simulations was
less significant.
In the Wholesale portfolio, there was a significant increase
in ECL under both a moderate and extreme downside
scenario. The Wholesale property ECL increase was driven
by commercial real estate prices which show negative
growth until 2024 and significant deterioration in the stock
index. The non-property increase was mainly due to GDP
contraction and significant deterioration in the stock index.
Measurement uncertainty and ECL adequacy
The changes in the economic outlook and scenarios used in the
IFRS 9 MES framework at 31 December 2022 resulted in an
increase in modelled ECL. Given that continued uncertainty
remains due to the high inflation environment and supply chain
disruption, RBS plc utilised a framework of quantitative and
qualitative measures to support the directional change and
levels of ECL coverage, including economic data, credit
performance insights and problem debt trends. This was
particularly important for consideration of post model
adjustments.
As the effects of the high inflation environment and supply chain
disruption evolve during 2022 and into 2023 and government
support schemes have to be serviced, there is a risk of credit
deterioration. However, the income statement effect of this will
be mitigated by the forward-looking provisions retained on the
balance sheet at 31 December 2022.
There are a number of key factors that could drive further
downside to impairments, through deteriorating economic and
credit metrics and increased stage migration as credit risk
increases for more customers. Such factors would include an
adverse deterioration in GDP and unemployment in the
economies in which RBS plc operates.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 32
Credit risk – Banking activities
Introduction
This section details the credit risk profile of RBS plc’s banking activities.
Refer to Accounting policy 2.2 and Note 12 to the financial statements for policies and critical judgments relating to impairment
loss determination.
Financial instruments within the scope of the IFRS 9 ECL framework (audited)
Refer to Note 8 to the financial statements for balance sheet analysis of financial assets that are classified as amortised cost or fair
value through other comprehensive income (FVOCI), the starting point for IFRS 9 ECL framework assessment.
31 December 2022
31 December 2021
Gross
ECL
Net
Gross
ECL
Net
£bn
£bn
£bn
£bn
£bn
£bn
Balance sheet total gross amortised cost and FVOCI
73.7
81.9
In scope of IFRS 9 ECL framework
73.1
81.1
% in scope
99%
99%
Loans to customers - in scope - amortised cost
38.5
0.6
37.9
42.5
0.7
41.8
Loans to customers - in scope - FVOCI
—
—
—
—
—
—
Loans to banks - in scope - amortised cost
1.0
—
1.0
1.1
—
1.1
Total loans - in scope
39.5
0.6
38.9
43.6
0.7
42.9
Stage 1
30.4
0.1
30.3
36.1
—
36.1
Stage 2
8.1
0.2
7.9
6.5
0.3
6.2
Stage 3
1.0
0.3
0.7
1.0
0.4
0.6
Other financial assets - in scope - amortised cost
33.6
—
33.6
37.5
—
37.5
Other financial assets - in scope - FVOCI
—
—
—
—
—
—
Total other financial assets - in scope
33.6
—
33.6
37.5
—
37.5
Stage 1
33.6
—
33.6
37.5
—
37.5
Stage 2
—
—
—
—
—
—
Stage 3
—
—
—
—
—
—
Out of scope of IFRS 9 ECL framework
0.6
na
0.6
0.8
na
0.8
Loans to customers - out of scope - amortised cost
(0.2)
na
(0.2)
0.3
na
0.3
Loans to banks - out of scope - amortised cost
0.1
na
0.1
—
na
—
Other financial assets - out of scope - amortised cost
0.7
na
0.7
0.5
na
0.5
Other financial assets - out of scope - FVOCI
—
na
—
—
na
—
na = not applicable
The assets outside the scope of IFRS 9 ECL framework were as
follows:
Settlement balances, items in the course of collection, cash
balances and other non-credit risk assets of £0.7 billion
(2021 – £0.6 billion). These were assessed as having no ECL
unless there was evidence that they were defaulted.
Fair value adjustments on loans hedged by interest rate
swaps, where the underlying loan was within the IFRS 9 ECL
scope of £(0.2) billion (2021 – £0.2 billion).
In scope assets also include an additional £21.6 billion (2021 –
£23.8 billion) of inter-Group assets not shown in table above.
Contingent liabilities and commitments
In addition to contingent liabilities and commitments disclosed
in Note 20 to the financial statements, reputationally-committed
limits are also included in the scope of the IFRS 9 ECL
framework. Total contingent liabilities (including financial
guarantees) and commitments within IFRS 9 ECL scope of
£19.5 billion (2021 – £20.7 billion) comprised Stage 1 £16.4
billion (2021 – £19.0 billion); Stage 2 £3.0 billion (2021 – £1.6
billion); and Stage 3 £0.1 billion (2021 – £0.1 billion).
The ECL relating to off balance sheet exposures was nil (2021 -
nil). The total ECL in the remainder of the credit risk section of
£0.6 billion included ECL for both on and off balance sheet
exposures.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 33
Credit risk – Banking activities continued
Segment analysis – portfolio summary (audited)
The table below shows gross loans and ECL, by segment and stage, within the scope of the IFRS 9 ECL framework.
Retail
Private
Commercial &
Central items
Banking
Banking
Institutional
& other
Total
2022
£m
£m
£m
£m
£m
Loans - amortised cost and FVOCI
Stage 1
12,985
—
16,472
976
30,433
Stage 2
2,793
—
5,301
—
8,094
Stage 3
576
—
433
—
1,009
Inter-Group
—
—
—
21,638
21,638
16,354
—
22,206
22,614
61,174
ECL provisions (2)
Stage 1
38
—
46
4
88
Stage 2
78
—
99
—
177
Stage 3
205
—
167
—
372
Inter-Group
—
—
—
27
27
321
—
312
31
664
ECL provisions coverage (1, 3)
Stage 1 (%)
0.29
—
0.28
0.41
0.29
Stage 2 (%)
2.79
—
1.87
—
2.19
Stage 3 (%)
35.59
—
38.57
—
36.87
Inter-Group (%)
—
—
—
0.12
0.12
1.96
—
1.41
0.41
1.61
Impairment (releases)/losses
ECL (release)/charge
Stage 1
(30)
1
(27)
(1)
(57)
Stage 2
37
—
(14)
—
23
Stage 3
4
(1)
27
—
30
Inter-Group
—
—
—
24
24
Total
11
—
(14)
23
20
Amounts written-off
50
—
28
—
78
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 34
Credit risk – Banking activities continued
Segment analysis – portfolio summary (audited)
Retail
Private
Commercial &
Central items
Banking
Banking
Institutional
& other
Total
2021
£m
£m
£m
£m
£m
Loans - amortised cost and FVOCI
Stage 1
14,862
631
19,531
1,073
36,097
Stage 2
2,575
25
3,901
—
6,501
Stage 3
499
7
483
—
989
Inter-Group
—
—
—
23,821
23,821
17,936
663
23,915
24,894
67,408
ECL provisions (2)
Stage 1
22
1
20
4
47
Stage 2
111
—
171
—
282
Stage 3
210
1
162
—
373
Inter-Group
—
—
—
5
5
343
2
353
9
707
ECL provisions coverage (1, 3)
Stage 1 (%)
0.14
0.16
0.10
0.37
0.13
Stage 2 (%)
4.33
—
4.37
—
4.34
Stage 3 (%)
42.08
14.29
33.54
—
37.71
Inter-Group (%)
—
—
—
0.02
0.02
1.91
0.30
1.48
0.37
1.61
Impairment (releases)/losses
ECL (release)/charge
Stage 1
(60)
(2)
(199)
3
(258)
Stage 2
13
(1)
(110)
—
(98)
Stage 3
32
—
(27)
—
5
Inter-Group
—
—
—
(9)
(9)
(15)
(3)
(336)
(6)
(360)
Amounts written-off
49
—
256
—
305
(1) ECL provisions coverage is calculated as ECL provisions divided by loans - amortised cost and FVOCI. It is calculated on third party loans and total ECL provisions.
(2) The table shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to the Financial instruments within the scope of the IFRS 9 ECL
framework section for further details. Other financial assets within the scope of the IFRS 9 ECL framework were cash and balances at central banks totalling £33.7 billion (2021 –
£37.5 billion).
(3) The stage allocation of the ECL charge was aligned to the stage transition approach that underpins the analysis in the Flow statement section.
Stage 1 and Stage 2 modelled ECL increased due to
deterioration in forward looking economics, although the
Stage 2 growth was more than offset by reductions in
post model adjustments.
Stage 2 loans increased during 2022 reflecting the
deterioration in forward-looking economics as a result of
the high inflation environment and supply chain disruption
growing throughout the second half of the year.
Underlying flows into default remained subdued during
2022. However, it is expected that defaults will increase in
2023 as growing inflationary pressures on businesses,
consumers and the broader economy continue to evolve.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 35
Credit risk – Banking activities continued
Segmental loans and impairment metrics (audited)
The table below shows gross loans and ECL provisions, by days past due, by segment and stage, within the scope of the ECL
framework.
Gross loans
ECL provisions (2)
Stage 2 (1)
Stage 2 (1)
Not past
Not past
Stage 1
due
1-30 DPD
>30 DPD
Total
Stage 3
Total
Stage 1
due
1-30 DPD
>30 DPD
Total
Stage 3
Total
2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Retail Banking
12,985
2,627
109
57
2,793
576
16,354
38
71
2
5
78
205
321
Commercial &
Institutional
16,472
4,893
173
235
5,301
433
22,206
46
92
4
3
99
167
312
Central items &
other
976
—
—
—
—
—
976
4
—
—
—
—
—
4
Total loans
30,433
7,520
282
292
8,094
1,009
39,536
88
163
6
8
177
372
637
Of which:
Personal
12,985
2,627
109
57
2,793
576
16,354
38
71
2
5
78
205
321
Wholesale
17,448
4,893
173
235
5,301
433
23,182
50
92
4
3
99
167
316
Gross loans
ECL provisions (2)
Stage 2 (1)
Stage 2 (1)
Not past
Not past
Stage 1
due
1-30 DPD
>30 DPD
Total
Stage 3
Total
Stage 1
due
1-30 DPD
>30 DPD
Total
Stage 3
Total
2021
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Retail Banking
14,862
2,308
172
95
2,575
499
17,936
22
98
7
6
111
210
343
Private Banking
631
22
1
2
25
7
663
1
—
—
—
—
1
2
Personal
597
1
1
—
2
7
606
1
—
—
—
—
1
2
Wholesale
34
21
—
2
23
—
57
—
—
—
—
—
—
—
Commercial &
Institutional
19,531
3,776
53
72
3,901
483
23,915
20
166
4
1
171
162
353
Central items &
other
1,073
—
—
—
—
—
1,073
4
—
—
—
—
—
4
Total loans
36,097
6,106
226
169
6,501
989
43,587
47
264
11
7
282
373
702
Of which:
Personal
15,459
2,309
173
95
2,577
506
18,542
23
98
7
6
111
211
345
Wholesale
20,638
3,797
53
74
3,924
483
25,045
24
166
4
1
171
162
357
For the notes to this table refer to the following page.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 36
Credit risk – Banking activities continued
Segmental loans and impairment metrics (audited)
The table below shows ECL and ECL provisions coverage, by days past due, by segment and stage, within the scope of the ECL
framework.
ECL provisions coverage
ECL
Stage 2 (1,2)
Total
Not past
(release) /
Amounts
Stage 1
due
1-30 DPD
>30 DPD
Total
Stage 3
Total
charge
written-off
2022
%
%
%
%
%
%
%
£m
£m
Retail Banking
0.29
2.70
1.83
8.77
2.79
35.59
1.96
11
50
Private Banking
—
—
—
—
—
—
—
—
—
Personal
—
—
—
—
—
—
—
—
—
Wholesale
—
—
—
—
—
—
—
—
—
Commercial & Institutional
0.28
1.88
2.31
1.28
1.87
38.57
1.41
(14)
28
Central items & other
0.41
—
—
—
—
—
0.41
(1)
—
Total loans
0.29
2.17
2.13
2.74
2.19
36.87
1.61
(4)
78
Of which:
Personal
0.29
2.70
1.83
8.77
2.79
35.59
1.96
11
50
Wholesale
0.29
1.88
2.31
1.28
1.87
38.57
1.36
(15)
28
ECL provisions coverage
ECL
Stage 2 (1,2)
Total
Not past
(release) /
Amounts
Stage 1
due
1-30 DPD
>30 DPD
Total
Stage 3
Total
charge
written-off
2021
%
%
%
%
%
%
%
£m
£m
Retail Banking
0.14
4.25
4.07
6.32
4.33
42.08
1.91
(15)
49
Private Banking
0.16
—
—
—
—
14.29
0.30
(3)
—
Personal
0.17
—
—
—
—
14.29
0.33
(2)
—
Wholesale
—
—
—
—
—
—
—
(1)
—
Commercial & Institutional
0.10
4.38
7.55
1.39
4.37
33.54
1.48
(336)
256
Central items & other
0.37
—
—
—
—
—
0.37
3
—
Total loans
0.13
4.32
4.87
4.14
4.34
37.71
1.61
(351)
305
Of which:
Personal
0.15
4.24
4.05
6.32
4.31
41.70
1.86
(17)
49
Wholesale
0.12
4.36
7.55
1.35
4.36
33.54
1.43
(334)
256
(1) 30 DPD – 30 days past due, the mandatory 30 days past due backstop as prescribed by IFRS 9 for a SICR.
(2) ECL provisions on contingent liabilities and commitments are included within the Financial assets section so as not to distort ECL coverage ratios.
Retail Banking – Total ECL coverage remained broadly
stable, but good book coverage increased, reflective of
deteriorating economic outlook in the second half of the
year but with portfolio performance remaining broadly
stable. The implementation of new mortgage IFRS 9
models resulted in lower Stage 3 ECL coverage due to
reduced loss estimates for cases where the customer was
not subject to repossession activity and was the primary
reason for the reduction in overall Retail Banking Stage 3
coverage.
Commercial & Institutional – Balance sheet reduction was
mainly within property and other corporate sectors. There
were continued repayments of COVID-19 government
lending schemes, and also strategic reductions in certain
sectors. Sector appetite continues to be reviewed
regularly, with particular focus on sector clusters and sub-
sectors that are vulnerable to inflationary pressures or
deemed to represent a heightened risk. Stage 1 and Stage
2 modelled ECL increased due to deterioration in forward-
looking economics, although the Stage 2 growth was more
than offset by reductions in post model adjustments and
portfolio reductions. Coverage reduced with the reduction
in COVID-19 post model adjustments, but coverage on
Stage 1 and Stage 2 was significantly above 2019 levels,
reflecting current inflationary and economic pressures.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 37
Credit risk – Banking activities continued
Sector analysis – portfolio summary (audited)
The table below shows financial assets and off-balance sheet exposures gross of ECL and related ECL provisions, impairment and
past due by sector, asset quality and geographical region.
Personal
Wholesale
Total
Credit
Other
Mortgages
cards
personal
Total
Property
Corporate
FI
Sovereign
Total
2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Loans by geography
13,986
902
1,466
16,354
8,482
12,540
1,379
781
23,182
39,536
- UK
13,986
902
1,466
16,354
8,296
10,270
668
640
19,874
36,228
- RoI
—
—
—
—
—
57
—
—
57
57
- Other Europe
—
—
—
—
64
678
1
64
807
807
- RoW
—
—
—
—
122
1,535
710
77
2,444
2,444
Loans by stage and asset quality (2)
13,986
902
1,466
16,354
8,482
12,540
1,379
781
23,182
39,536
Stage 1
11,330
649
1,006
12,985
7,245
8,209
1,290
704
17,448
30,433
- AQ1
174
—
—
174
456
472
431
276
1,635
1,809
- AQ2
—
—
—
—
1,633
372
—
—
2,005
2,005
- AQ3
45
—
—
45
1,527
874
29
407
2,837
2,882
- AQ4
8,323
14
28
8,365
1,442
1,793
770
20
4,025
12,390
- AQ5
2,397
195
349
2,941
1,332
3,278
25
1
4,636
7,577
- AQ6
279
221
411
911
633
774
19
—
1,426
2,337
- AQ7
72
201
170
443
211
626
15
—
852
1,295
- AQ8
26
17
45
88
9
17
1
—
27
115
- AQ9
14
1
3
18
2
3
—
—
5
23
Stage 2
2,240
230
323
2,793
1,058
4,087
79
77
5,301
8,094
- AQ1
15
—
—
15
—
—
—
—
—
15
- AQ2
—
—
—
—
—
2
—
—
2
2
- AQ3
10
—
—
10
4
662
—
—
666
676
- AQ4
1,070
—
16
1,086
106
1,160
47
—
1,313
2,399
- AQ5
628
9
56
693
236
602
4
—
842
1,535
- AQ6
153
31
80
264
302
621
2
77
1,002
1,266
- AQ7
125
123
70
318
291
773
22
—
1,086
1,404
- AQ8
145
59
85
289
97
225
2
—
324
613
- AQ9
94
8
16
118
22
42
2
—
66
184
Stage 3
416
23
137
576
179
244
10
—
433
1,009
- AQ10
416
23
137
576
179
244
10
—
433
1,009
Loans - past due analysis (3,4)
13,986
902
1,466
16,354
8,482
12,540
1,379
781
23,182
39,536
- Not past due
13,552
876
1,318
15,746
8,164
11,901
1,348
781
22,194
37,940
- Past due 1-30 days
164
7
12
183
110
401
23
—
534
717
- Past due 31-90 days
101
6
15
122
126
132
3
—
261
383
- Past due 91-180 days
67
5
12
84
21
7
1
—
29
113
- Past due >180 days
102
8
109
219
61
99
4
—
164
383
Loans - Stage 2
2,240
230
323
2,793
1,058
4,087
79
77
5,301
8,094
- Not past due
2,097
223
307
2,627
905
3,834
77
77
4,893
7,520
- Past due 1-30 days
98
4
7
109
33
140
—
—
173
282
- Past due 31-90 days
45
3
9
57
120
113
2
—
235
292
Weighted average life*
- ECL measurement (years)
8
2
6
5
4
6
3
—
5
5
Weighted average 12 months PDs*
- IFRS 9 (%)
0.91
2.93
4.92
1.35
1.47
1.61
0.41
0.23
1.44
1.40
- Basel (%)
0.84
3.19
2.89
1.13
0.76
1.10
0.31
0.23
0.90
1.00
ECL provisions by geography
86
57
178
321
116
191
5
4
316
637
- UK
86
57
178
321
109
186
5
4
304
625
- RoI
—
—
—
—
—
—
—
—
—
—
- Other Europe
—
—
—
—
1
—
—
—
1
1
- RoW
—
—
—
—
6
5
—
—
11
11
ECL provisions by stage
86
57
178
321
116
191
5
4
316
637
- Stage 1
4
14
20
38
18
27
1
4
50
88
- Stage 2
7
28
43
78
25
72
2
—
99
177
- Stage 3
75
15
115
205
73
92
2
—
167
372
ECL provisions coverage (%)
0.61
6.32
12.14
1.96
1.37
1.52
0.36
0.51
1.36
1.61
- Stage 1 (%)
0.04
2.16
1.99
0.29
0.25
0.33
0.08
0.57
0.29
0.29
- Stage 2 (%)
0.31
12.17
13.31
2.79
2.36
1.76
2.53
—
1.87
2.19
- Stage 3 (%)
18.03
65.22
83.94
35.59
40.78
37.70
20.00
—
38.57
36.87
ECL (release)/charge - Third party
(46)
22
35
11
33
(49)
1
—
(15)
(4)
Amounts written-off
11
16
23
50
6
22
—
—
28
78
For the notes to this table refer to page 40.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 38
Credit risk – Banking activities continued
Sector analysis – portfolio summary (audited)
Personal
Wholesale
Total
Credit
Other
Mortgages (1)
cards
personal
Total
Property
Corporate
FI
Sovereign
Total
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Other financial assets by asset quality (2)
—
—
—
—
—
—
—
33,631
33,631
33,631
- AQ1-AQ4
—
—
—
—
—
—
—
33,631
33,631
33,631
Off-balance sheet
2,778
3,261
1,172
7,211
4,122
7,432
656
95
12,305
19,516
- Loan commitments
2,778
3,261
1,172
7,211
3,985
6,801
549
95
11,430
18,641
- Financial guarantees
—
—
—
—
137
631
107
—
875
875
Off-balance sheet by asset quality (2)
2,778
3,261
1,172
7,211
4,122
7,432
656
95
12,305
19,516
- AQ1-AQ4
2,464
66
1,056
3,586
3,656
4,229
488
95
8,468
12,054
- AQ5-AQ8
304
3,136
113
3,553
463
3,124
168
—
3,755
7,308
- AQ9
—
2
—
2
—
1
—
—
1
3
- AQ10
10
57
3
70
3
78
—
—
81
151
*Not within audit scope.
For the notes to this table refer to page 40.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 39
Credit risk – Banking activities continued
Sector analysis – portfolio summary (audited)
Personal
Wholesale
Total
Credit
Other
Mortgages (1)
cards
personal
Total
Property
Corporate
FI
Sovereign
Total
2021
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Loans by geography
16,260
861
1,421
18,542
9,009
13,798
1,404
834
25,045
43,587
- UK
16,260
861
1,421
18,542
8,909
12,310
558
686
22,463
41,005
- RoI
—
—
—
—
—
37
—
—
37
37
- Other Europe
—
—
—
—
79
743
5
64
891
891
- RoW
—
—
—
—
21
708
841
84
1,654
1,654
Loans by stage and asset quality (2)
16,260
861
1,421
18,542
9,009
13,798
1,404
834
25,045
43,587
Stage 1
13,871
651
937
15,459
8,018
10,535
1,339
746
20,638
36,097
- AQ1
293
—
5
298
332
33
341
276
982
1,280
- AQ2
39
—
—
39
1,460
129
—
—
1,589
1,628
- AQ3
9
—
—
9
1,679
2,302
43
438
4,462
4,471
- AQ4
8,424
7
38
8,469
1,358
2,645
845
29
4,877
13,346
- AQ5
4,661
188
367
5,216
1,913
3,355
61
1
5,330
10,546
- AQ6
318
202
327
847
963
1,211
16
—
2,190
3,037
- AQ7
85
223
138
446
298
829
32
2
1,161
1,607
- AQ8
31
30
57
118
12
27
1
—
40
158
- AQ9
11
1
5
17
3
4
—
—
7
24
Stage 2
2,024
188
365
2,577
782
3,012
47
83
3,924
6,501
- AQ1
11
—
—
11
—
—
—
—
—
11
- AQ2
—
—
—
—
—
15
—
—
15
15
- AQ3
2
—
—
2
—
37
—
—
37
39
- AQ4
584
—
9
593
13
106
—
—
119
712
- AQ5
703
12
76
791
223
908
3
—
1,134
1,925
- AQ6
171
38
127
336
100
648
16
83
847
1,183
- AQ7
124
103
65
292
377
855
24
—
1,256
1,548
- AQ8
345
27
69
441
41
356
4
—
401
842
- AQ9
84
8
19
111
28
87
—
—
115
226
Stage 3
365
22
119
506
209
251
18
5
483
989
- AQ10
365
22
119
506
209
251
18
5
483
989
Loans - past due analysis (3,4)
16,260
861
1,421
18,542
9,009
13,798
1,404
834
25,045
43,587
- Not past due
15,711
835
1,275
17,821
8,795
13,189
1,393
834
24,211
42,032
- Past due 1-30 days
212
6
20
238
91
415
7
—
513
751
- Past due 31-90 days
111
6
12
129
28
52
1
—
81
210
- Past due 91-180 days
49
5
10
64
19
32
1
—
52
116
- Past due >180 days
177
9
104
290
76
110
2
—
188
478
Loans - Stage 2
2,024
188
365
2,577
782
3,012
47
83
3,924
6,501
- Not past due
1,791
180
338
2,309
742
2,927
45
83
3,797
6,106
- Past due 1-30 days
153
4
16
173
12
40
1
—
53
226
- Past due 31-90 days
80
4
11
95
28
45
1
—
74
169
Weighted average life*
- ECL measurement (years)
8
2
5
5
6
6
5
1
6
5
Weighted average 12 months PDs*
- IFRS 9 (%)
0.26
3.99
2.63
0.61
0.53
1.50
0.37
0.23
1.04
0.86
- Basel (%)
0.91
3.47
3.06
1.18
0.85
1.34
0.33
0.24
1.07
1.12
ECL provisions by geography
127
53
165
345
93
256
4
4
357
702
- UK
127
53
165
345
89
249
4
4
346
691
- RoI
—
—
—
—
—
—
—
—
—
—
- Other Europe
—
—
—
—
—
4
—
—
4
4
- RoW
—
—
—
—
4
3
—
—
7
7
ECL provisions by stage
127
53
165
345
93
256
4
4
357
702
- Stage 1
2
11
10
23
5
15
—
4
24
47
- Stage 2
33
27
51
111
22
147
2
—
171
282
- Stage 3
92
15
104
211
66
94
2
—
162
373
ECL provisions coverage (%)
0.78
6.16
11.61
1.86
1.03
1.86
0.28
0.48
1.43
1.61
- Stage 1 (%)
0.01
1.69
1.07
0.15
0.06
0.14
—
0.54
0.12
0.13
- Stage 2 (%)
1.63
14.36
13.97
4.31
2.81
4.88
4.26
—
4.36
4.34
- Stage 3 (%)
25.21
68.18
87.39
41.70
31.58
37.45
11.11
—
33.54
37.71
ECL (release)/charge - Third party
(11)
(6)
—
(17)
(152)
(178)
(5)
1
(334)
(351)
Amounts written-off
5
19
25
49
132
124
—
—
256
305
For the notes to this table refer to the following page.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 40
Credit risk – Banking activities continued
Sector analysis – portfolio summary continued (audited)
Other financial assets by asset quality (2)
—
—
—
—
—
—
—
37,472
37,472
37,472
- AQ1-AQ4
—
—
—
—
—
—
—
37,472
37,472
37,472
Off-balance sheet
3,103
3,278
1,195
7,576
4,570
7,857
567
94
13,088
20,664
- Loan commitments
3,103
3,278
1,191
7,572
4,440
7,107
507
94
12,148
19,720
- Financial guarantees
—
—
4
4
130
750
60
—
940
944
Off-balance sheet by asset quality (2)
3,103
3,278
1,195
7,576
4,570
7,857
567
94
13,088
20,664
- AQ1-AQ4
2,564
41
1,058
3,663
3,998
4,125
461
94
8,678
12,341
- AQ5-AQ8
535
3,179
135
3,849
568
3,658
106
—
4,332
8,181
- AQ9
—
1
—
1
1
1
—
—
2
3
- AQ10
4
57
2
63
3
73
—
—
76
139
*Not within audit scope.
(1) Includes a portion of Private Banking lending secured against residential real estate, in line with ECL calculation methodology. Private Banking mortgages are reported in UK,
reflecting the country of lending origination.
(2) AQ bandings are based on Basel PDs and mapping is as follows:
Internal asset quality band
Probability of default range
Indicative S&P rating
AQ1
0.000% - 0.034%
AAA to AA
AQ2
0.034% - 0.048%
AA to AA-
AQ3
0.048% - 0.095%
A+ to A
AQ4
0.095% - 0.381%
BBB+ to BBB-
AQ5
0.381% - 1.076%
BB+ to BB
AQ6
1.076% - 2.153%
BB- to B+
AQ7
2.153% - 6.089%
B+ to B
AQ8
6.089% - 17.222%
B- to CCC+
AQ9
17.222% - 100.00%
CCC to C
AQ10
100.00%
D
£0.1 billion (2021 – £0.1 billion) AQ10 Personal balances primarily relate to loan commitments, the drawdown of which is effectively prohibited.
(3) 30 DPD – 30 days past due, the mandatory 30 days past due backstop prescribed by IFRS 9 for a SICR.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 41
Credit risk – Banking activities continued
Sector analysis – portfolio summary (audited)
The table below shows ECL by stage, for the Personal portfolios and key sectors of the Wholesale portfolios that continue to be
affected by COVID-19.
Off-balance sheet
Loans - amortised cost and FVOCI
Loan
Contingent
ECL provisions
Stage 1
Stage 2
Stage 3
Total
commitments
liabilities
Stage 1
Stage 2
Stage 3
Total
2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Personal
12,985
2,793
576
16,354
7,211
—
38
78
205
321
Mortgages
11,330
2,240
416
13,986
2,778
—
4
7
75
86
Credit cards
649
230
23
902
3,261
—
14
28
15
57
Other personal
1,006
323
137
1,466
1,172
—
20
43
115
178
Wholesale
17,448
5,301
433
23,182
11,430
875
51
98
167
316
Property*
7,245
1,058
179
8,482
3,985
137
18
25
73
116
Financial institutions
1,290
79
10
1,379
549
107
1
2
2
5
Sovereign
704
77
—
781
95
—
4
—
—
4
Corporate
8,209
4,087
244
12,540
6,801
631
27
72
92
191
Of which:
Agriculture*
569
203
12
784
201
7
3
5
4
12
Airlines and aerospace*
77
163
—
240
382
112
—
2
—
2
Automotive*
503
44
8
555
190
20
1
1
2
4
Chemicals*
48
3
—
51
39
1
—
—
—
—
Health
1,101
236
39
1,376
78
3
3
8
15
26
Industrials*
164
274
8
446
203
59
1
2
5
8
Land transport & logistics*
579
189
43
811
327
59
1
3
8
12
Leisure*
612
850
44
1,506
342
49
5
33
18
56
Mining & metals*
16
190
—
206
190
3
—
1
—
1
Oil and gas*
340
48
3
391
527
109
2
2
3
7
Power utilities*
367
2
5
374
428
62
—
—
1
1
Retail*
1,360
459
16
1,835
671
72
4
3
8
15
Shipping*
18
22
—
40
18
8
—
1
—
1
Water & waste*
23
32
—
55
90
22
—
—
—
—
Total
30,433
8,094
1,009
39,536
18,641
875
88
177
372
637
2021
Personal
15,459
2,577
506
18,542
7,572
4
23
111
211
345
Mortgages
13,871
2,024
365
16,260
3,103
—
2
33
92
127
Credit cards
651
188
22
861
3,278
—
11
27
15
53
Other personal
937
365
119
1,421
1,191
4
10
51
104
165
Wholesale
20,638
3,924
483
25,045
12,148
940
24
171
162
357
Property*
8,018
782
209
9,009
4,440
130
5
22
66
93
Financial institutions
1,339
47
18
1,404
507
60
—
2
2
4
Sovereign
746
83
5
834
94
—
4
—
—
4
Corporate
10,535
3,012
251
13,798
7,107
750
15
147
94
256
Of which:
Agriculture*
617
248
8
873
181
8
2
7
3
12
Airlines and aerospace*
154
197
—
351
248
120
—
10
—
10
Automotive*
476
54
6
536
188
11
—
2
2
4
Chemicals*
64
1
—
65
25
1
—
—
—
—
Health
1,264
356
44
1,664
186
2
2
18
20
40
Industrials*
361
66
7
434
382
68
1
2
4
7
Land transport & logistics*
450
166
4
620
438
121
—
11
1
12
Leisure*
927
859
74
1,860
339
58
2
63
27
92
Mining & metals*
112
3
—
115
119
129
—
—
—
—
Oil and gas*
314
31
1
346
473
30
1
6
1
8
Power utilities*
608
3
—
611
353
48
—
—
—
—
Retail*
1,595
229
27
1,851
836
74
1
4
8
13
Shipping*
45
23
14
82
20
8
—
—
3
3
Water & waste*
136
41
—
177
243
18
—
—
—
—
Total
36,097
6,501
989
43,587
19,720
944
47
282
373
702
* Wholesale sectors marked with an asterisk contain an element of exposure classified as Heightened climate-related risk. Elements of the personal mortgage portfolio are also exposed
to heightened climate-related risk This is not within the audit scope.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 42
Credit risk – Banking activities continued
Wholesale forbearance (audited)
The table below shows Wholesale forbearance, Heightened Monitoring and Risk of Credit Loss by sector. Personal forbearance is
disclosed in the Personal portfolio section. This table show current exposure but reflects risk transfers where there is a guarantee
by another customer
Other
Property
FI
corporate
Total
2022
£m
£m
£m
£m
Forbearance (flow)
235
1
406
642
Forbearance (stock)
303
1
939
1,243
Heightened Monitoring and Risk of Credit Loss
364
44
609
1,017
2021
Forbearance (flow)
274
1
859
1,134
Forbearance (stock)
317
2
1,112
1,431
Heightened Monitoring and Risk of Credit Loss
377
2
904
1,283
Sector analysis – Portfolio summary (audited)
Loans by geography and sector – In line with RBS plc’s
strategic focus, exposures continued to be mainly in the
UK. In Personal, balance sheet reduction was driven by
mortgages where redemptions and repayments exceeded
new lending. In Wholesale. balance sheet reduction was
mainly in property and other corporate sectors. There were
continued repayments of COVID-19 government lending
schemes, and also strategic reductions in certain sectors.
Repayment performance under COVID-19 government
lending schemes continues to be closely tracked and
exposure continues to decrease, due to scheduled
repayment activity and account closures. Exposures under
the BBLS that benefit from the 100% government
guarantee, account for approximately 70% of remaining
government scheme exposures. BBLS missed repayment
rate and recoveries stock increased but volumes continue
to be in line with other lenders.
Loans by stage – In both Wholesale and Personal,
deterioration in forward-looking economics resulted in a
larger proportion of accounts exhibiting a SICR compared
to 2021. There was, therefore, a migration of exposures
from Stage 1 into Stage 2 during 2022. Personal customers
who had accessed payment holiday support, and where
their risk profile was identified as relatively high, are no
longer collectively migrated into Stage 2. The relevance of
this collective SICR identification was no longer considered
as pertinent in the context of the current high inflation
environment and related uncertainty.
Loans – Past due analysis – The implementation of the new
regulatory default definition included refinements to the
days past due calculations. This contributed to an increase
in arrears in H1 2022 in Personal, however this moderated
through the year. In Wholesale, there was an increase in
past due 1-30 days in corporates.
Weighted average 12 months PDs – In Personal, the Basel II
point-in-time PDs improved slightly during 2022 due to a
stable credit performance in the portfolios. For IFRS 9 PDs,
there were increases across mortgages and other personal
lending as a result of new PD model implementations during
the year, coupled with the deteriorating economic outlook
in the second half of the year. For credit cards, the new
IFRS 9 PD model implementation drove a net reduction in
PD levels, primarily resulting from more accurate modelling
of defaults driven by shifts in general unemployment. In
Wholesale, the Basel II PDs were based on a through-the-
cycle approach and improved reflecting positive portfolio
performance. The IFRS 9 PDs increased due the
deterioration in forward looking economics. For further
details refer to the Asset quality section.
ECL provision by geography – In line with loans by
geography, the vast majority of ECL related to exposures in
the UK.
ECL provisions by stage – As mentioned above, Stage 1 and
Stage 2 modelled ECL increased due to deterioration in
forward-looking economics, although the Stage 2 growth
was more than offset by reductions in post model
adjustments. Stage 3 provisions have yet to be materially
affected by the high inflation environment and supply chain
disruption, with increases relating to the introduction of the
new regulatory definition of default, largely offset by write
offs.
ECL provisions coverage – Overall provisions coverage
reduced, due to a change in product mix and a decrease in
judgemental post model adjustments which more than
offset increases from the deteriorating economic outlook.
The ECL charge and loss rate – ECL charge and loss rate
was low, with charges from a deterioration in forward-
looking economics countered by reductions in post model
adjustments and the continued stable portfolio performance
and low default trends.
Other financial assets by asset quality – Consisting of cash
and balances at central banks, these assets were within the
AQ1-AQ4 bands.
Off-balance sheet exposures by asset quality – In Personal,
undrawn exposures were reflective of available credit lines
in credit cards and current accounts. Additionally, the
mortgage portfolio had undrawn exposures, where a formal
offer had been made to a customer but had not yet drawn
down; the value increased in line with the pipeline of offers.
There was also a legacy portfolio of flexible mortgages
where a customer had the right and ability to draw down
further funds. The asset quality was aligned to the wider
portfolio. Off-balance sheet exposures reduced compared
to 2021 and were primarily loan commitments in the AQ1-
AQ4 bandings.
Wholesale forbearance – Forbearance flow and stock
decreased compared to 2021 levels, noting that 2021 was
adversely affected by COVID-19.
Heightened Monitoring and Risk of Credit Loss – Economic
headwinds continue to drive an uncertain outlook. Risk of
Credit Loss framework exposures, and average inflows
decreased in 2022 compared to 2021, noting again that
2021 was adversely affected by COVID-19.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 43
Credit risk – Banking activities continued
Credit risk enhancement and mitigation (audited)
The table below shows exposures of modelled portfolios within the scope of the ECL framework and related credit risk
enhancement and mitigation (CREM).
Gross
Maximum credit risk
CREM by type
CREM coverage
Exposure post
CREM
exposure
ECL
Total
Stage 3
Financial (1)
Property
Other (2)
Total
Stage 3
Total
Stage 3
2022
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
Financial assets
Cash and balances at central banks
33.7
—
33.7
—
—
—
—
—
—
33.7
—
Loans - amortised cost (3)
39.5
0.6
38.9
0.7
1.7
24.4
3.9
30.0
0.7
8.9
—
Personal
(4)
16.3
0.3
16.0
0.4
—
13.9
—
13.9
0.4
2.1
—
Wholesale
(5)
23.2
0.3
22.9
0.3
1.7
10.5
3.9
16.1
0.3
6.8
—
Total financial assets
73.2
0.6
72.6
0.7
1.7
24.4
3.9
30.0
0.7
42.6
—
Contingent liabilities and
commitments
Personal (6,7)
7.2
—
7.2
0.1
—
2.5
—
2.5
0.1
4.7
—
Wholesale
12.3
—
12.3
0.1
0.2
2.6
0.6
3.4
—
8.9
0.1
Total off-balance sheet
19.5
—
19.5
0.2
0.2
5.1
0.6
5.9
0.1
13.6
0.1
Total exposure
92.7
0.6
92.1
0.9
1.9
29.5
4.5
35.9
0.8
56.2
0.1
2021
Financial assets
Cash and balances at central banks
37.5
—
37.5
—
—
—
—
—
—
37.5
—
Loans - amortised cost (3)
43.5
0.7
42.8
0.6
2.4
27.3
4.4
34.1
0.6
8.7
—
Personal
(4)
18.5
0.3
18.2
0.3
—
16.2
—
16.2
0.3
2.0
—
Wholesale
(5)
25.0
0.4
24.6
0.3
2.4
11.1
4.4
17.9
0.3
6.7
—
Total financial assets
81.0
0.7
80.3
0.6
2.4
27.3
4.4
34.1
0.6
46.2
—
Contingent liabilities and
commitments
Personal (6,7)
7.6
—
7.6
—
—
2.8
—
2.8
—
4.8
—
Wholesale
13.1
—
13.1
0.1
0.2
2.9
0.7
3.8
—
9.3
0.1
Total off-balance sheet
20.7
—
20.7
0.1
0.2
5.7
0.7
6.6
—
14.1
0.1
Total exposure
101.7
0.7
101.0
0.7
2.6
33.0
5.1
40.7
0.6
60.3
0.1
(1) Includes cash and securities collateral.
(2) Includes guarantees, charges over trade debtors, other asset finance related physical collateral as well as the amount by which credit risk exposure is reduced through netting
arrangements, mainly cash management pooling, which give RBS plc a legal right to set off the financial asset against a financial liability due to the same counterparty.
(3) RBS plc holds collateral in respect of individual loans – amortised cost to banks and customers. This collateral includes mortgages over property (both personal and commercial);
charges over business assets such as plant and equipment, inventories and trade debtors; and guarantees of lending from parties other than the borrower. Collateral values are
capped at the value of the loan.
(4) Stage 3 mortgage exposures have relatively limited uncovered exposure reflecting the security held. On unsecured credit cards and other personal borrowing, the residual
uncovered amount reflects historical experience of continued cash recovery post default through ongoing engagement with customers.
(5) Stage 3 exposures post credit risk enhancement and mitigation in Wholesale mainly represent enterprise value and the impact of written down collateral values; an individual
assessment to determine ECL will consider multiple scenarios and in some instances allocate a probability weighting to a collateral value in excess of the written down value.
(6) Personal Stage 3 balances primarily relate to loan commitments, the draw down of which is effectively prohibited.
(7) The Personal gross exposure value includes £0.2 billion (2021 – £0.3 billion) in respect of pipeline mortgages where a committed offer has been made to a customer but where the
funds have not yet been drawn down. When drawn down, the exposure would be covered by a security over the borrower’s property.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 44
Credit risk – Banking activities continued
Personal portfolio (audited)
Disclosures in the Personal portfolio section include drawn exposure (gross of provisions).
2022
2021
Retail
Private
Retail
Private
Banking
Banking
Total
Banking
Banking
Total
Personal lending
£m
£m
£m
£m
£m
£m
Mortgages
13,986
—
13,986
15,680
571
16,251
Of which:
Owner occupied
12,565
—
12,565
14,090
507
14,597
Buy-to-let
1,421
—
1,421
1,590
64
1,654
Interest only - variable
1,535
—
1,535
1,921
174
2,095
Interest only - fixed
1,687
—
1,687
1,784
250
2,034
Mixed (1)
1,022
—
1,022
1,169
1
1,170
Impairment provisions (2)
86
—
86
126
—
126
Other personal lending (3)
2,368
—
2,368
2,245
37
2,282
Impairment provisions (2)
231
—
231
213
2
215
Total personal lending
16,354
—
16,354
17,925
608
18,533
Mortgage LTV ratios
- Total portfolio
41%
—
41%
44%
58%
44%
- Stage 1
41%
—
41%
43%
58%
44%
- Stage 2
44%
—
44%
46%
57%
46%
- Stage 3
42%
—
42%
46%
54%
46%
- Buy-to-let
43%
—
43%
45%
58%
45%
- Stage 1
42%
—
42%
45%
58%
45%
- Stage 2
44%
—
44%
49%
0%
49%
- Stage 3
45%
—
45%
49%
70%
50%
Gross new mortgage lending (4)
979
—
979
1,129
85
1,214
Of which:
Owner occupied
912
—
912
1,075
74
1,149
Weighted average LTV (5)
65%
—
65%
64%
67%
64%
Buy-to-let
67
—
67
54
11
65
Weighted average LTV (5)
61%
—
61%
60%
70%
62%
Interest only variable rate
8
—
8
13
21
34
Interest only fixed rate
86
—
86
104
31
135
Mixed (1)
43
—
43
70
—
70
Mortgage forbearance
Forbearance flow
30
—
30
87
3
90
Forbearance stock
272
—
272
367
—
367
Current
176
—
176
231
—
231
1-3 months in arrears
25
—
25
36
—
36
>3 months in arrears
71
—
71
100
—
100
(1)
Includes accounts which have an interest only sub-account and a capital and interest sub-account to provide a more comprehensive view of interest only exposures.
(2)
Retail Banking excludes a non-material amount of provisions held on relatively small legacy portfolios.
(3)
(4)
Comprises unsecured lending except for Private Banking, which includes both secured and unsecured lending. It excludes loans that are commercial in nature.
Retail Banking excludes additional lending to existing customers.
(5)
The new lending LTV in the comparative has been amended to reflect LTV at time of lending origination rather than LTV at reporting period.
The mortgage portfolio reduced during 2022 as repayments
and redemptions exceeded new business.
LTV ratios improved as house prices increased as a result
of housing market demand.
The existing mortgage stock and new business were closely
monitored against agreed risk appetite parameters. These
included loan-to-value ratios, buy-to-let concentrations,
new-build concentrations and credit quality. Affordability
assessments and assumptions were continuously reviewed
considering inflationary pressure, interest rate rises and
taxation changes during the year.
Unsecured lending increased during 2022, with resilient
customer demand after the easing of COVID-19 restrictions.
As noted previously, ECL increased, for further detail of
movements in ECL provisions at product level refer to the
Flow statements section.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 45
Credit risk – Banking activities continued
Personal portfolio (audited)
Mortgage LTV distribution by stage
The table below shows gross mortgage lending and related ECL by LTV band for Retail Banking. Mortgage lending not within the
scope of IFRS 9 ECL reflected portfolios carried at fair value.
Mortgages
ECL provisions
ECL provisions coverage (2)
Not
within
Of
which:
IFRS 9
gross
ECL
new
Stage 1
Stage 2
Stage 3
scope
Total
lending
Stage 1
Stage 2
Stage 3
Total (1)
Stage 1
Stage 2
Stage 3
Total
2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
%
%
%
%
≤50%
7,896
1,448
280
11
9,635
280
2
3
44
49
0.0
0.2
15.0
0.5
>50% and ≤70%
2,779
674
121
2
3,576
298
1
3
25
29
0.0
0.4
20.6
0.9
>70% and ≤80%
380
62
10
—
452
176
—
—
4
4
0.1
0.6
30.1
1.3
>80% and ≤90%
207
55
3
—
265
177
1
—
1
2
0.3
0.6
44.9
2.6
>90% and ≤100%
48
1
2
—
51
48
—
—
1
1
0.1
1.2
54.6
35.3
>100%
1
—
—
—
1
—
—
—
—
—
—
—
—
—
Total with LTVs
11,311
2,240
416
13
13,980
979
4
6
75
85
0.0
0.3
17.4
0.6
Other
19
—
—
—
19
—
—
—
—
—
—
—
—
—
Total
11,330
2,240
416
13
13,999
979
4
6
75
85
0.0
0.3
17.4
0.6
2021
≤50%
8,416
1,158
224
12
9,810
324
1
17
54
72
—
1.5
24.7
0.8
>50% and ≤70%
3,909
755
130
2
4,796
373
1
13
29
43
—
1.7
22.3
1.0
>70% and ≤80%
745
89
20
—
854
249
—
2
5
7
—
2.0
23.0
1.1
>80% and ≤90%
160
14
5
—
179
139
—
—
2
2
—
2.6
28.9
4.3
>90% and ≤100%
45
3
2
—
50
44
—
—
1
1
—
6.2
36.9
13.2
>100%
1
1
1
—
3
—
—
—
—
—
—
—
—
—
Total with LTVs
13,276
2,020
382
14
15,692
1,129
2
32
91
125
—
1.6
23.9
0.8
Other
2
—
—
—
2
—
—
—
—
—
—
—
—
—
Total
13,278
2,020
382
14
15,694
1,129
2
32
91
125
—
1.6
23.9
0.8
(1)
Excludes a non-material amount of provisions held on relatively small legacy portfolios.
(2)
ECL provisions coverage is ECL provisions divided by mortgages.
ECL coverage rates increased through the LTV bands
with Retail Banking having only limited exposures in the
highest LTV bands. The reduced coverage level in the
lower LTV bands for Retail Banking, relative to 31
December 2021, reflected the implementation of a new
IFRS 9 LGD model with a modelling approach that now
captures a reduced loss expectation from non-
repossession recovery action.
Continued stable portfolio performance alongside the
new IFRS 9 PD and LGD model implementations resulted
in reduced coverage across most LTV bands in Stage 2
and Stage 3. The increased ECL across Stage 1 LTV
bands was mainly due to higher Stage 1 PDs as a result
of the new PD model implementation and also the
proportionate allocation of the economic uncertainty post
model adjustment to Stage 1.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 46
Credit risk – Banking activities continued
Commercial real estate (CRE)
The CRE portfolio comprises exposures to entities involved in the development of, or investment in, commercial and residential
properties (including house builders but excluding housing associations, construction and the building materials sub-sector). The
sector is reviewed regularly by senior executive committees. Reviews include portfolio credit quality, capital consumption and
control frameworks.
2022
2021
By sub-sector
£m
£m
Investment
Residential (1)
1,193
1,264
Office (2)
781
970
Retail (3)
848
1,134
Industrial (4)
511
489
Mixed/other (5)
105
136
3,438
3,993
Development
Residential (1)
372
425
Office (2)
12
11
Retail (3)
37
22
Industrial (4)
19
20
Mixed/other (5)
4
5
444
483
Total (6)
3,882
4,476
(1)
Properties including houses, flats and student accommodation.
(2)
Properties including offices in central business districts, regional headquarters and business parks.
(3)
Properties including high street retail, shopping centres, restaurants, bars and gyms.
(4)
Properties including distribution centres, manufacturing and warehouses.
(5)
Properties that do not fall within the other categories. Mixed generally relates to a mixture of retail/office with residential.
(6)
100% (2021 – 100%) of the total exposure relates to the UK.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 47
Credit risk – Banking activities continued
Commercial real estate (audited)
CRE LTV distribution by stage
The table below shows CRE current exposure and related ECL by LTV band.
Current exposure (gross of provisions) (1,2)
ECL provisions
ECL provisions coverage (4)
Not within
IFRS 9 ECL
Stage 1
Stage 2
Stage 3
scope (3)
Total
Stage 1
Stage 2
Stage 3
Total (1)
Stage 1
Stage 2
Stage 3
Total
2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
%
%
%
%
≤50%
1,448
249
17
—
1,714
9
3
6
18
0.6
1.2
35.3
1.1
>50% and ≤70%
728
334
8
—
1,070
3
10
3
16
0.4
3.0
37.5
1.5
>70% and ≤100%
10
15
73
—
98
—
—
29
29
—
—
39.7
29.6
>100%
17
4
8
—
29
—
1
5
6
—
25.0
62.5
20.7
Total with LTVs
2,203
602
106
—
2,911
12
14
43
69
0.5
2.3
40.6
2.4
Total portfolio average LTV (%)
46%
53%
83%
—
49%
—
—
—
—
—
—
—
—
Other (5)
426
92
9
—
527
2
2
5
9
0.5
2.2
55.6
1.7
Development (6)
232
198
14
—
444
1
4
6
11
0.4
2.0
42.9
2.5
Total
2,861
892
129
—
3,882
15
20
54
89
0.5
2.2
41.9
2.3
2021
≤50%
1,758
123
18
—
1,899
1
3
5
9
0.1
2.4
27.8
0.5
>50% and ≤70%
1,071
247
16
—
1,334
1
4
2
7
0.1
1.6
12.5
0.5
>70% and ≤100%
25
78
48
—
151
—
1
8
9
—
1.3
16.7
6.0
>100%
9
3
15
—
27
—
—
12
12
—
—
80.0
44.4
Total with LTVs
2,863
451
97
—
3,411
2
8
27
37
0.1
1.8
27.8
1.1
Total portfolio average LTV (%)
45%
58%
85%
—
48%
Other (5)
484
87
11
—
582
1
2
5
8
0.2
2.3
45.5
1.4
Development (6)
377
91
15
—
483
—
3
6
9
—
3.3
40.0
1.9
Total
3,724
629
123
—
4,476
3
13
38
54
0.1
2.1
30.9
1.2
(1)
Comprises gross lending, interest rate hedging derivatives and other assets carried at fair value that are managed as part of the overall CRE portfolio.
(2)
The exposure in Stage 3 mainly relates to legacy assets.
(3)
Includes exposures relating to non-modelled portfolios and other exposures carried at fair value, including derivatives.
(4)
ECL provisions coverage is ECL provisions divided by current exposure.
(5)
Relates mainly to business banking, rate risk management products and unsecured corporate lending.
(6)
Relates to the development of commercial and residential properties. LTV is not a meaningful measure for this type of lending activity.
Overall – The majority of the CRE portfolio was located and
managed in the UK. Business appetite and strategy was
aligned across RBS plc.
2022 trends – The commercial property cycle turned
around mid-year as rising interest rates started to put
upward pressure on property yields. Commercial property
values declined by an average of approximately 20% from
their mid-year peak, ending the year approximately 14%
lower. The industrial sector saw values fall fastest to date,
yet it continues to attract strong occupier demand and
may, therefore, be the first sector to see values stabilise.
Secondary offices which don’t match modern sustainability
standards appear most at risk from further value loss. The
residential sector has yet to show significant value declines,
but transaction activity has slowed materially and is
expected to remain weak until values have adjusted. The
spike in mortgage costs last year would be expected to
push prices down across the market in 2023. In contrast,
residential rents appreciated rapidly in 2022 and
professionally managed rental assets are expected to be
relatively robust in 2023.
Credit quality – Credit quality was stable for the first nine
months of the year but the impacts from the increase in
base rate, projected capital value falls, inflationary
pressures and concerns over recession for some customers
began to materialise. Inflows into the Risk of Credit Loss
framework picked up in Q4, but remained relatively low in
volume terms, compared to previous downturns.
Risk appetite – Lending appetite is subject to regular review
with some level of tightening undertaken in 2022. Demand
for facilities reduced significantly in Q4 as the market
reacted to the various negative news points.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 48
Credit risk – Banking activities continued
Flow statements (audited)
The flow statements that follow show the main ECL and related
income statement movements. They also show the changes in
ECL as well as the changes in related financial assets used in
determining ECL. Due to differences in scope, exposures may
differ from those reported in other tables, principally in relation
to exposures in Stage 1 and Stage 2. These differences do not
have a material ECL effect. Other points to note:
Financial assets include treasury liquidity portfolios,
comprising balances at central banks and debt securities, as
well as loans. Both modelled and non-modelled portfolios
are included.
Stage transfers (for example, exposures moving from Stage
1 into Stage 2) are a key feature of the ECL movements,
with the net re-measurement cost of transitioning to a
worse stage being a primary driver of income statement
charges. Similarly, there is an ECL benefit for accounts
improving stage.
Changes in risk parameters shows the reassessment of the
ECL within a given stage, including any ECL overlays and
residual income statement gains or losses at the point of
write-off or accounting write-down.
Other (P&L only items) includes any subsequent changes in
the value of written-down assets (for example, fortuitous
recoveries) along with other direct write-off items such as
direct recovery costs. Other (P&L only items) affects the
income statement but does not affect balance sheet ECL
movements.
Amounts written-off represent the gross asset written-down
against accounts with ECL, including the net asset write-
down for any debt sale activity.
There were flows from Stage 1 into Stage 3 including
transfers due to unexpected default events.
The effect of any change in post model adjustments during
the year is typically reported under changes in risk
parameters, as are any effects arising from changes to the
underlying models. Refer to the section on Governance and
post model adjustments for further details.
All movements are captured monthly and aggregated.
Interest suspended post default is included within Stage 3
ECL with the movement in the value of suspended interest
during the year reported under currency translation and
other adjustments.
Stage 1
Stage 2
Stage 3
Total
Financial
Financial
Financial
Financial
assets
ECL
assets
ECL
assets
ECL
assets
ECL
RBS plc total
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2022
70,490
47
6,580
282
1,071
373
78,141
702
Currency translation and other adjustments
259
0
19
1
(1)
(8)
278
(7)
Inter-Group transfers
(587)
(1)
(43)
(1)
(4)
—
(634)
(2)
Transfers from Stage 1 to Stage 2
(8,380)
(35)
8,380
35
—
—
—
—
Transfers from Stage 2 to Stage 1
5,323
131
(5,323)
(131)
—
—
—
—
Transfers to Stage 3
(99)
(1)
(713)
(51)
812
52
—
—
Transfers from Stage 3
106
5
240
19
(346)
(24)
—
—
Net re-measurement of ECL on stage transfer
(110)
168
—
55
113
Changes in risk parameters
44
(91)
—
41
(6)
Other changes in net exposure
(3,520)
8
(1,269)
(53)
(410)
(21)
(5,200)
(66)
Other (P&L only items)
1
(1)
—
(45)
(45)
Income statement (releases)/charges
(57)
23
30
(4)
Amounts written-off
—
—
(1)
(1)
(77)
(77)
(78)
(78)
Unwinding of discount
—
—
(19)
(19)
At 31 December 2022
63,592
88
7,870
177
1,045
372
72,507
637
Net carrying amount
63,504
7,693
673
71,870
At 1 January 2021
58,821
84
14,192
633
1,616
628
74,629
1,345
2021 movements
11,669
(37)
(7,612)
(351)
(545)
(255)
3,512
(643)
At 31 December 2021
70,490
47
6,580
282
1,071
373
78,141
702
Net carrying amount
70,443
6,298
698
77,439
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 49
Credit risk – Banking activities continued
Flow statements (audited)
Stage 1
Stage 2
Stage 3
Total
Financial
Financial
Financial
Financial
assets
ECL
assets
ECL
assets
ECL
assets
ECL
Retail Banking - mortgages
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2022
13,516
3
2,056
33
391
92
15,963
128
Currency translation and other adjustments
—
(1)
—
1
(3)
(4)
(3)
(4)
Transfers from Stage 1 to Stage 2
(2,115)
(2)
2,115
2
—
—
—
—
Transfers from Stage 2 to Stage 1
1,383
13
(1,383)
(13)
—
—
—
—
Transfers to Stage 3
(9)
—
(296)
(11)
305
11
—
—
Transfers from Stage 3
9
—
126
9
(135)
(9)
—
—
Net re-measurement of ECL on stage transfer
(12)
10
(4)
(6)
Changes in risk parameters
4
(18)
10
(4)
Other changes in net exposure
(1,310)
(1)
(344)
(5)
(107)
—
(1,761)
(6)
Other (P&L only items)
—
—
(30)
(30)
Income statement (releases)/charges
(9)
(13)
(24)
(46)
Amounts written-off
—
—
(1)
(1)
(10)
(10)
(11)
(11)
Unwinding of discount
—
—
(11)
(11)
At 31 December 2022
11,474
4
2,273
7
441
75
14,188
86
Net carrying amount
11,470
2,266
366
14,102
At 1 January 2021
13,900
2
3,664
47
442
92
18,006
141
2021 movements
(384)
1
(1,608)
(14)
(51)
—
(2,043)
(13)
At 31 December 2021
13,516
3
2,056
33
391
92
15,963
128
Net carrying amount
13,513
2,023
299
15,835
ECL levels for mortgages reduced during the year, primarily
as a result of reducing portfolio balances alongside the
implementation of new IFRS 9 models in Q1 2022.
More specifically, in H1 2022, strong credit performance
resulted in the migration of assets from Stage 2 into Stage 1,
with an associated decrease from lifetime ECL to a 12
month ECL. ECL levels increased in the second half of the
year as the economic outlook deteriorated, increasing IFRS
9 PDs and the level of migrations from Stage 1 into Stage 2.
The economic uncertainty post model adjustment allocated
more ECL to Stage 1 given the forward-looking nature of
the inflation threat on customer affordability, whereas the
previous COVID-19 post model adjustment was focused on
Stage 2 (for example, high risk payment holiday cases
migrated into Stage 2). Refer to the Governance and post
model adjustments section for more information.
The Stage 3 inflow was amplified by the adoption of the new
regulatory definition of default in January 2022. However,
Stage 3 ECL levels decreased since 31 December 2021,
primarily due to reduced LGD estimates as a result of the
new model implementation in Q1 2022 alongside stable
underlying default levels. The relatively small ECL cost for
net re-measurement on stage transfer included the effect of
risk targeted ECL adjustments, when previously in Stage 2.
Refer to the Governance and post model adjustments
section for further details.
Write-off typically occurs once the repossessed property has
been sold and there is a residual shortfall balance remaining
outstanding. This would typically be within five years from
default but can be longer.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 50
Credit risk – Banking activities continued
Flow statements (audited)
Stage 1
Stage 2
Stage 3
Total
Financial
Financial
Financial
Financial
assets
ECL
assets
ECL
assets
ECL
assets
ECL
Retail Banking - other personal unsecured
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2022
912
9
393
52
119
103
1,424
164
Currency translation and other adjustments
(1)
(1)
1
—
2
2
2
1
Transfers from Stage 1 to Stage 2
(487)
(12)
487
12
—
—
—
—
Transfers from Stage 2 to Stage 1
373
37
(373)
(37)
—
—
—
—
Transfers to Stage 3
(7)
—
(61)
(17)
68
17
—
—
Transfers from Stage 3
1
1
7
3
(8)
(4)
—
—
Net re-measurement of ECL on stage transfer
(29)
46
22
39
Changes in risk parameters
7
(7)
5
5
Other changes in net exposure
180
8
(92)
(9)
(17)
(5)
71
(6)
Other (P&L only items)
—
—
(3)
(3)
Income statement (releases)/charges
(14)
30
19
35
Amounts written-off
—
—
—
—
(23)
(23)
(23)
(23)
Unwinding of discount
—
—
(2)
(2)
At 31 December 2022
971
20
362
43
141
115
1,474
178
Net carrying amount
951
319
26
1,296
At 1 January 2021
717
10
685
77
117
98
1,519
185
2021 movements
195
(1)
(292)
(25)
2
5
(95)
(21)
At 31 December 2021
912
9
393
52
119
103
1,424
164
Net carrying amount
903
341
16
1,260
Overall, there was a modest ECL increase, mainly due to
portfolio growth in the personal loan portfolio during 2022
and Stage 3 ECL, linked to the adoption of the new
regulatory definition of default in January 2022, with
underlying Stage 3 inflows remaining stable.
Similar to the other personal portfolios, after reductions in
the first half of the year, Stage 2 ECL levels increased in the
second half of the year as the economic outlook
deteriorated, increasing IFRS 9 PDs and the level of
migrations from Stage 1 into Stage 2.
Unsecured retail lending balances grew since 31 December
2021, in line with industry trends in the UK, as unsecured
borrowing demand increased.
Write-off occurs once recovery activity with the customer
has been concluded or there are no further recoveries
expected, but no later than six years after default.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 51
Credit risk – Banking activities continued
Flow statements (audited)
Stage 1
Stage 2
Stage 3
Total
Financial
Financial
Financial
Financial
assets
ECL
assets
ECL
assets
ECL
assets
ECL
Retail Banking - credit cards
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2022
644
10
196
27
22
14
862
51
Currency translation and other adjustments
1
1
—
(1)
—
1
1
1
Transfers from Stage 1 to Stage 2
(277)
(8)
277
8
—
—
—
—
Transfers from Stage 2 to Stage 1
181
18
(181)
(18)
—
—
—
—
Transfers to Stage 3
(5)
—
(22)
(8)
27
8
—
—
Transfers from Stage 3
—
—
2
1
(2)
(1)
—
—
Net re-measurement of ECL on stage transfer
(10)
30
7
27
Changes in risk parameters
5
—
3
8
Other changes in net exposure
98
(2)
(29)
(11)
(7)
—
62
(13)
Other (P&L only items)
—
—
—
—
Income statement (releases)/charges
(7)
19
10
22
Amounts written-off
—
—
—
—
(16)
(16)
(16)
(16)
Unwinding of discount
—
—
(1)
(1)
At 31 December 2022
642
14
243
28
24
15
909
57
Net carrying amount
628
215
9
852
At 1 January 2021
574
11
313
42
31
20
918
73
2021 movements
70
(1)
(117)
(15)
(9)
(6)
(56)
(22)
At 31 December 2021
644
10
196
27
22
14
862
51
Net carrying amount
634
169
8
811
ECL remained broadly stable during 2022 reflecting the
stable portfolio performance alongside the unwind of ECL
held for COVID-19 related risks in the first half of the year
offset in the second half of the year, when the economic
outlook deteriorated, increasing IFRS 9 PDs and the level of
migrations from Stage 1 into Stage 2.
Credit card balances grew since 31 December 2021, in line
with industry trends in the UK, as unsecured borrowing
demand increased.
Reflecting the strong credit performance observed during
2022, Stage 3 inflows remained subdued and the effect of
the adoption of the new regulatory definition of default was
minimal for credit cards.
Charge-off (analogous to partial write-off) typically occurs
after 12 missed payments.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 52
Credit risk – Banking activities continued
Flow statements (audited)
Stage 1
Stage 2
Stage 3
Total
Financial
Financial
Financial
Financial
assets
ECL
assets
ECL
assets
ECL
assets
ECL
Commercial & Institutional total
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2022
19,156
20
3,922
171
516
162
23,594
353
Currency translation and other adjustments
179
(1)
19
—
2
(5)
200
(6)
Inter-group transfers
—
—
—
—
—
—
—
—
Transfers from Stage 1 to Stage 2
(5,454)
(13)
5,454
13
—
—
—
—
Transfers from Stage 2 to Stage 1
3,356
63
(3,356)
(63)
—
—
—
—
Transfers to Stage 3
(37)
—
(318)
(15)
355
15
—
—
Transfers from Stage 3
66
4
65
7
(131)
(11)
—
—
Net re-measurement of ECL on stage transfer
(57)
80
31
54
Changes in risk parameters
27
(66)
23
(16)
Other changes in net exposure
(741)
3
(795)
(28)
(274)
(15)
(1,810)
(40)
Other (P&L only items)
—
—
(12)
(12)
Income statement (releases)/charges
(27)
(14)
27
(14)
Amounts written-off
—
—
—
—
(28)
(28)
(28)
(28)
Unwinding of discount
—
—
(5)
(5)
At 31 December 2022
16,525
46
4,991
99
440
167
21,956
312
Net carrying amount
16,479
4,892
273
21,644
Exposure reduction was mainly within property and other
corporate sectors. There were continued repayments of
COVID-19 government lending schemes, and also strategic
reductions in certain sectors.
Stage 1 and Stage 2 ECL levels increased in the second half
of the year as the economic outlook deteriorated, increasing
IFRS 9 PDs and the level of migrations from Stage 1 into
Stage 2.
Stage 2 ECL increases were more than offset by reductions
in post model adjustments.
There were significant flows into Stage 3 due to defaults on
government scheme lending, with exposure reductions
where payments on guarantees have been received.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 53
Credit risk – Banking activities continued
Flow statements (audited)
Stage 1
Stage 2
Stage 3
Total
Financial
Financial
Financial
Financial
assets
ECL
assets
ECL
assets
ECL
assets
ECL
Commercial & Institutional - corporate
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2022
9,668
15
2,960
146
280
99
12,908
260
Currency translation and other adjustments
169
—
9
(1)
1
(8)
179
(9)
Inter-group transfers
—
—
—
—
—
—
—
—
Transfers from Stage 1 to Stage 2
(4,266)
(9)
4,266
9
—
—
—
—
Transfers from Stage 2 to Stage 1
2,716
52
(2,716)
(52)
—
—
—
—
Transfers to Stage 3
(17)
—
(204)
(10)
221
10
—
—
Transfers from Stage 3
17
3
37
5
(54)
(8)
—
—
Net re-measurement of ECL on stage transfer
(47)
60
22
35
Changes in risk parameters
13
(61)
7
(41)
Other changes in net exposure
(322)
1
(566)
(25)
(174)
(5)
(1,062)
(29)
Other (P&L only items)
—
—
(13)
(13)
Income statement (releases)/charges
(33)
(26)
11
(48)
Amounts written-off
—
—
—
—
(22)
(22)
(22)
(22)
Unwinding of discount
—
—
(3)
(3)
At 31 December 2022
7,965
28
3,786
71
252
92
12,003
191
Net carrying amount
7,937
3,715
160
11,812
The reduction in exposure was due to continued repayments
of COVID-19 government lending schemes, and also
strategic reductions in certain sectors.
Stage 1 and Stage 2 ECL levels increased in the second half
of the year as the economic outlook deteriorated, increasing
IFRS 9 PDs and the level of migrations from Stage 1 into
Stage 2.
Stage 2 ECL increases were more than offset by reductions
in post model adjustments.
The flows into Stage 3 were due to defaults on government
scheme lending, with exposure reductions where payments
on guarantees have been received.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 54
Credit risk – Banking activities continued
Flow statements (audited)
Stage 1
Stage 2
Stage 3
Total
Financial
Financial
Financial
Financial
assets
ECL
assets
ECL
assets
ECL
assets
ECL
Commercial & Institutional - property
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2022
8,245
5
794
22
226
61
9,265
88
Currency translation and other adjustments
1
(2)
—
2
—
2
1
2
Inter-group transfers
—
—
—
—
—
—
—
—
Transfers from Stage 1 to Stage 2
(1,101)
(3)
1,101
3
—
—
—
—
Transfers from Stage 2 to Stage 1
553
9
(553)
(9)
—
—
—
—
Transfers to Stage 3
(8)
—
(109)
(5)
117
5
—
—
Transfers from Stage 3
20
1
27
2
(47)
(3)
—
—
Net re-measurement of ECL on stage transfer
(9)
18
9
18
Changes in risk parameters
16
(4)
15
27
Other changes in net exposure
(399)
1
(198)
(3)
(112)
(9)
(709)
(11)
Other (P&L only items)
—
—
—
—
Income statement (releases)/charges
8
11
15
34
Amounts written-off
—
—
—
—
(6)
(6)
(6)
(6)
Unwinding of discount
—
—
(2)
(2)
At 31 December 2022
7,311
18
1,062
26
178
72
8,551
116
Net carrying amount
7,293
1,036
106
8,435
Stage 1 and Stage 2 ECL levels increased in the second half
of the year as the economic outlook deteriorated, increasing
IFRS 9 PDs and the level of migrations from Stage 1 into
Stage 2.
Stage 2 ECL increases were partially offset by reductions in
post model adjustments.
The flows into Stage 3 were due to defaults on government
scheme lending, with exposure reductions where payments
on guarantees have been received.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 55
Credit risk – Banking activities continued
Flow statements (audited)
Stage 1
Stage 2
Stage 3
Total
Financial
Financial
Financial
Financial
assets
ECL
assets
ECL
assets
ECL
assets
ECL
Commercial & Institutional - other
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2022
1,243
—
168
3
10
2
1,421
5
Currency translation and other adjustments
11
—
9
—
—
—
20
—
Inter-group transfers
—
—
—
—
—
—
—
—
Transfers from Stage 1 to Stage 2
(88)
(1)
88
1
—
—
—
—
Transfers from Stage 2 to Stage 1
86
3
(86)
(3)
—
—
—
—
Transfers to Stage 3
(13)
—
(5)
—
18
—
—
—
Transfers from Stage 3
29
—
—
—
(29)
—
—
—
Net re-measurement of ECL on stage transfer
(2)
1
1
—
Changes in risk parameters
—
—
—
—
Other changes in net exposure
(19)
—
(31)
—
11
—
(39)
—
Other (P&L only items)
—
—
—
—
Income statement (releases)/charges
(2)
1
1
—
Amounts written-off
—
—
—
—
—
—
—
—
Unwinding of discount
—
—
—
—
At 31 December 2022
1,249
—
143
2
10
3
1,402
5
Net carrying amount
1,249
141
7
1,397
Stage 1 and Stage 2 ECL levels increased in the second half
of the year as the economic outlook deteriorated, increasing
IFRS 9 PDs and the level of migrations from Stage 1 into
Stage 2.
Stage 2 ECL increases were more than offset by reductions
in post model adjustments.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 56
Credit risk – Banking activities continued
Stage 2 decomposition – arrears status and contributing factors
The tables below show Stage 2 decomposition for the Personal and Wholesale portfolios.
UK mortgages
Credit cards
Other
Total
2022
£m
ECL
£m
ECL
£m
ECL
£m
ECL
Personal
Currently >30 DPD
29
1
2
1
6
2
37
4
Currently <=30 DPD
2,211
6
228
27
317
41
2,756
74
- PD deterioration
1,859
6
177
22
188
25
2,224
53
- PD persistence
99
—
37
3
32
3
168
6
- Other driver (adverse credit, forbearance etc)
253
—
14
2
97
13
364
15
Total Stage 2
2,240
7
230
28
323
43
2,793
78
2021
Personal
Currently >30 DPD
73
2
2
1
7
3
82
6
Currently <=30 DPD
1,951
31
186
26
358
48
2,495
105
- PD deterioration
640
14
110
19
179
29
929
62
- PD persistence
612
8
52
4
149
16
813
28
- Other driver (adverse credit, forbearance etc)
699
9
24
3
30
3
753
15
Total Stage 2
2,024
33
188
27
365
51
2,577
111
The deterioration in economic outlook during the second half
of the year resulted in increased account level IFRS 9 PDs at
the year end. Consequently, compared to 2021, a larger
proportion of accounts exhibited significant PD deterioration
causing Stage 2 exposures to increase significantly since 30
June 2022.
Personal customers who had accessed COVID-19 payment
holiday support, and where their risk profile was identified as
relatively high risk are no longer collectively migrated into
Stage 2, given the lack of default emergence from these
segments and with the focus of high risk segment monitoring
now shifting to the effects of a high inflation environment on
customers.
Accounts that are less than 30 days past due continue to
represent the vast majority of the Stage 2 population. As
expected, ECL coverage was higher in accounts that were
more than 30 days past due than those in Stage 2 for other
reasons.
Property
Corporate
FI
Other
Total
2022
£m
ECL
£m
ECL
£m
ECL
£m
ECL
£m
ECL
Wholesale
Currently >30 DPD
120
1
111
2
2
—
—
—
233
3
Currently <=30 DPD
938
24
3,976
70
77
2
77
—
5,068
96
- PD deterioration
568
14
3,420
57
70
2
77
—
4,135
73
- PD persistence
17
—
50
1
1
—
—
—
68
1
- Other driver (forbearance, RoCL etc)
353
10
506
12
6
—
—
—
865
22
Total Stage 2
1,058
25
4,087
72
79
2
77
—
5,301
99
2021
Wholesale
Currently >30 DPD
25
—
41
1
—
—
—
—
66
1
Currently <=30 DPD
757
22
2,971
146
47
2
83
—
3,858
170
- PD deterioration
209
13
1,782
117
39
2
82
—
2,112
132
- PD persistence
31
1
114
5
1
—
—
—
146
6
- Other driver (forbearance, RoCL etc)
517
8
1,075
24
7
—
1
—
1,600
32
Total Stage 2
782
22
3,012
147
47
2
83
—
3,924
171
The deteriorating economic outlook, including lower growth
in GDP and the stock index as well as a reduction in
commercial real estate prices, resulted in a significant
increase in IFRS 9 PDs. Consequently, compared to 2021, a
larger proportion of exposure exhibited a SICR and migrated
into Stage 2, resulting in an increase in Stage 2 exposure.
PD deterioration remained the primary trigger for identifying
a SICR and Stage 2 treatment, proportionally increasing due
to the deteriorating economic outlook.
There was a decrease in Risk of Credit Loss partially due to
PD deterioration being the primary trigger. Overall, there
was a decrease in flows on to the Risk of Credit Loss
framework.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 57
Credit risk – Banking activities continued
Stage 2 decomposition by a significant increase in credit risk trigger
UK mortgages
Credit cards
Other
Total
2022
£m
%
£m
%
£m
%
£m
%
Personal trigger (1)
PD movement
1,881
84.0
180
78.3
195
60.4
2,256
80.8
PD persistence
99
4.4
37
16.1
32
9.9
168
6.0
Adverse credit bureau recorded with credit reference
agency
204
9.1
12
5.2
17
5.3
233
8.3
Forbearance support provided
21
0.9
—
—
3
0.9
24
0.9
Customers in collections
20
0.9
—
—
—
—
20
0.7
Collective SICR and other reasons (2)
13
0.6
1
0.4
76
23.5
90
3.2
Days past due >30
2
0.1
—
—
—
—
2
0.1
2,240
100
230
100
323
100
2,793
100
2021
Personal trigger (1)
PD movement
698
34.6
111
59.1
186
51.0
995
38.7
PD persistence
616
30.4
52
27.7
149
40.8
817
31.7
Adverse credit bureau recorded with credit reference
agency
533
26.3
16
8.5
14
3.8
563
21.8
Forbearance support provided
39
1.9
1
0.5
5
1.4
45
1.7
Customers in collections
15
0.7
1
0.5
2
0.5
18
0.7
Collective SICR and other reasons (2)
117
5.8
7
3.7
9
2.5
133
5.2
Days past due >30
6
0.3
—
—
—
—
6
0.2
2,024
100
188
100
365
100
2,577
100
During the first half of the year, the stable credit
performance of the portfolio resulted in either decreased or
stable account level IFRS 9 PDs for most products. UK
mortgages was the exception, where the implementation of
a new IFRS 9 PD model in Q1 2022 increased the proportion
of accounts exhibiting significant PD deterioration.
However, in the second half of the year, the economic
uncertainty and high inflation environment, which is
reflected in the recent updates to the IFRS 9 MES scenarios,
resulted in PDs increasing again. This is reflected both in an
increase in Stage 2 across all products compared to 31
December 2021 and an increased proportion of Stage 2
driven by PD deterioration.
Personal customers who had accessed COVID-19 payment
holiday support, and where their risk profile was identified
as relatively high risk are no longer collectively migrated into
Stage 2, given the lack of default emergence from these
segments and with the focus of high risk segment
monitoring now shifting to the effects of a high inflation
environment on customers.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 58
Credit risk – Banking activities continued
Stage 2 decomposition by a significant increase in credit risk trigger continued
Property
Corporate
FI
Other
Total
2022
£m
%
£m
%
£m
%
£m
%
£m
%
Wholesale trigger (1)
PD movement
578
54.6
3,447
84.3
71
89.8
77
100.0
4,173
78.7
PD persistence
18
1.7
50
1.2
1
1.3
—
—
69
1.3
Risk of Credit Loss
271
25.6
192
4.7
3
3.8
—
—
466
8.8
Forbearance support provided
18
1.7
137
3.4
—
—
—
—
155
2.9
Customers in collections
4
0.4
11
0.3
—
—
—
—
15
0.3
Collective SICR and other reasons (2)
72
6.8
184
4.5
3
3.8
—
—
259
4.9
Days past due >30
97
9.2
66
1.6
1
1.3
—
—
164
3.1
1,058
100
4,087
100
79
100
77
100
5,301
100
2021
Wholesale trigger (1)
PD movement
217
27.7
1,816
60.3
39
83.0
83
100.0
2,155
55.0
PD persistence
31
4.0
115
3.8
1
2.1
—
—
147
3.7
Risk of Credit Loss
361
46.1
618
20.5
3
6.4
—
—
982
25.0
Forbearance support provided
31
4.0
130
4.3
—
—
—
—
161
4.1
Customers in collections
6
0.8
19
0.6
—
—
—
—
25
0.6
Collective SICR and other reasons (2)
121
15.5
309
10.3
4
8.5
—
—
434
11.1
Days past due >30
15
1.9
5
0.2
—
—
—
—
20
0.5
782
100
3,012
100
47
100
83
100
3,924
100
(1) The table is prepared on a hierarchical basis from top to bottom, for example, accounts with PD deterioration may also trigger backstop(s) but are only reported under PD
deterioration.
(2) Includes customers where a PD assessment cannot be undertaken due to missing PDs.
PD deterioration continued to be the primary trigger of
migration of exposures from Stage 1 into Stage 2. There
was an increase in cases triggering PD deterioration
reflecting the deteriorating economic outlook.
Moving exposures on to the Risk of Credit Loss framework
remained an important backstop indicator of a SICR. The
exposures classified under the Stage 2 Risk of Credit Loss
framework decreased over the period due to the increase in
PD deterioration and a decrease in flows on to the Risk of
Credit Loss framework.
PD persistence related to the Business Banking portfolio
only. A reduction in PDs in 2021 meant that some Business
Banking customers returned to Stage 1 in early 2022,
although a number of these customers returned through PD
movement in the second half of the year due to the
deteriorating economic outlook.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 59
Capital, liquidity and funding risk
NWH Group continually ensures a comprehensive approach is
taken to the management of capital, liquidity and funding,
underpinned by frameworks, risk appetite and policies, to
manage and mitigate capital, liquidity and funding risks. The
framework ensures the tools and capability are in place to
facilitate the management and mitigation of risk ensuring the
Group operates within its regulatory requirements and risk
appetite.
Definitions (audited)
Regulatory capital consists of reserves and instruments issued
that are available, have a degree of permanency and are
capable of absorbing losses. A number of strict conditions set
by regulators must be satisfied to be eligible as capital.
Capital risk is the risk that there is or will be insufficient capital
and other loss absorbing debt instruments to operate effectively
including meeting minimum regulatory requirements, operating
within Board approved risk appetite and supporting its strategic
goals.
Liquidity consists of assets that can be readily converted to
cash within a short timeframe with a reliable value. Liquidity
risk is the risk of being unable to meet financial obligations as
and when they fall due.
Funding consists of on-balance sheet liabilities that are used to
provide cash to finance assets. Funding risk is the risk of not
maintaining a diversified, stable and cost-effective funding
base.
Liquidity and funding risks arise in a number of ways, including
through the maturity transformation role that banks perform.
The risks are dependent on factors such as:
Maturity profile;
Composition of sources and uses of funding;
The quality and size of the liquidity portfolio;
Wholesale market conditions; and
Depositor and investor behaviour.
Sources of risk (audited)
Capital
The eligibility of instruments and financial resources as
regulatory capital is laid down by applicable regulation. Capital
is categorised by applicable regulation under two tiers (Tier 1
and Tier 2) according to the ability to absorb losses, degree of
permanency and the ranking of absorbing losses. There are
three broad categories of capital across these two tiers:
CET1 capital - CET1 capital must be perpetual and capable
of unrestricted and immediate use to cover risks or losses
as soon as these occur. This includes ordinary shares issued
and retained earnings.
Additional Tier 1 (AT1) capital - This is the second type of
loss absorbing capital and must be capable of absorbing
losses on a going concern basis. These instruments are
either written down or converted into CET1 capital when
the CET1 ratio falls below a pre-specified level.
Tier 2 capital - Tier 2 capital is the bank entities’
supplementary capital and provides loss absorption on a
gone concern basis. Tier 2 capital absorbs losses after Tier
1 capital. It typically consists of subordinated debt securities
with a minimum maturity of five years at the point of
issuance.
Minimum requirement for own funds and eligible liabilities
(MREL)
In addition to capital, other specific loss absorbing instruments,
including senior notes issued by RBS plc, may be used to cover
certain gone concern capital requirements which, is referred to
as MREL. Gone concern refers to the situation in which
resources must be available to enable an orderly resolution, in
the event that the Bank of England (BoE) deems that RBS plc
has failed or is likely to fail.
Liquidity
Liquidity risk within RBS plc is managed as part of the UK
Domestic Liquidity Sub-Group (UK DoLSub), which is regulated
by the PRA and comprises NWH Group’s three licensed deposit
taking UK banks: The Royal Bank of Scotland plc, National
Westminster Bank Plc and Coutts & Company. Ulster Bank
Limited was removed from the UK DoLSub effective 1 January
2022 and its banking licence was revoked following regulatory
approval on 29 December 2022.
NWH Group maintains a prudent approach to the definition of
liquidity resources. NWH Group manages its liquidity to ensure
it is always available when and where required, taking into
account regulatory, legal and other constraints.
Liquidity resources of the UK DoLSub are divided into primary
and secondary liquidity as follows:
Primary liquid assets include cash and balances at central
banks, Treasury bills and other high quality government
and US agency bonds.
Secondary liquid assets are eligible as collateral for local
central bank liquidity facilities. These assets include own-
issued securitisations or whole loans that are retained on
balance sheet and pre-positioned with a central bank so
that they may be converted into additional sources of
liquidity at very short notice.
Funding
NWH Group maintains a diversified set of funding sources,
including customer deposits, wholesale deposits and term debt
issuance. RBS plc also retains access to central bank funding
facilities.
Managing capital requirements: regulated entities
In line with paragraph 135 of IAS 1 ‘Presentation of Financial
Statements’, RBS plc manages capital having regard to
regulatory requirements. Regulatory capital is monitored and
reported on an individual regulated bank legal entity basis
(‘bank entities’), as relevant in the jurisdiction for large
subsidiaries of NatWest Group. NatWest Group itself is
monitored and reported on a consolidated basis.
Capital management
Capital management is the process by which the bank entities
ensure that they have sufficient capital and other loss
absorbing instruments to operate effectively including meeting
minimum regulatory requirements, operating within Board
approved risk appetite, maintaining credit ratings and
supporting strategic goals. Capital management is critical in
supporting the bank entities’ businesses and is also considered
at NatWest Group level. It is enacted through a NatWest Group-
wide end to end framework.
Capital planning is integrated into RBS plc’s wider annual
budgeting process and is assessed and updated at least
monthly. As a key operating entity, capital plans are produced
and managed for RBS plc.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 60
Capital, liquidity and funding risk continued
This is summarised below. Other elements of capital
management, including risk appetite and stress testing, are set
out on pages 10 and 11.
Produce
capital
plans
Capital plans are produced for RBS plc, its
key operating entities and its businesses
over a five year planning horizon under
expected and stress conditions. Stressed
capital plans are produced to support
internal stress testing in the ICAAP for
regulatory purposes.
Shorter term forecasts are developed
frequently in response to actual
performance, changes in internal and
external business environment and to
manage risks and opportunities.
Assess
capital
adequacy
Capital plans are developed to maintain
capital of sufficient quantity and quality to
support RBS plc’s business, its subsidiaries
and strategic plans over the planning horizon
within approved risk appetite, as determined
via stress testing, and minimum regulatory
requirements.
Capital resources and capital requirements
are assessed across a defined planning
horizon.
Impact assessment captures input from
across RBS plc including from businesses.
Inform
capital
actions
Capital planning informs potential capital
actions including buybacks, redemptions,
dividends and new issuance to external
investors or via internal transactions.
Decisions on capital actions will be influenced
by strategic and regulatory requirements, risk
appetite, costs and prevailing market
conditions.
As part of capital planning, RBS plc will
monitor its portfolio of issued capital
securities and assess the optimal blend and
most cost effective means of financing.
Capital planning is one of the tools that NatWest Group uses to
monitor and manage capital risk on a going and gone concern
basis, including the risk of excessive leverage.
Liquidity risk management
NWH Group manages its liquidity risk taking into account
regulatory, legal and other constraints to ensure sufficient
liquidity is available where required to cover liquidity stresses.
Liquidity risk within RBS plc is managed as part of the UK
DoLSub.
The size of the liquidity portfolio held in the UK DoLSub is
determined by referencing NWH Group’s liquidity risk appetite.
The NWH Group retains a prudent approach to setting the
composition of the liquidity portfolio, which is subject to internal
policies and limits over quality of counterparty, maturity mix
and currency mix.
NWB Plc manages the majority of the UK DoLSub portfolio, for
which the NatWest Group Treasurer is responsible.
Funding risk management
NWH Group manages funding risk through a comprehensive
framework which measures and monitors the funding risk on
the balance sheet.
The asset and liability types broadly match. Customer deposits
provide more funding than customer loans utilise.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 61
Capital, liquidity and funding risk continued
Key points
CET1 ratio
The CET1 ratio decreased 210 basis points over the period due to
a £0.5 billion decrease in CET1 capital and offset by a £1.1 billion
decrease in RWAs. The CET1 decrease reflects the attributable
profit in the period of £1.1 billion, offset by the following items:
dividends paid of £0.7 billion;
foreseeable charges of £0.7 billion; and
a £0.1 billion decrease in the IFRS 9 transitional adjustment on
expected credit losses.
RWA
Total RWAs decreased by £1.1 billion to £18.5 billion mainly
reflecting:
A decrease in credit risk RWAs of £0.5 billion, primarily due to
repayments and expired facilities within Commercial &
Institutional in addition to improved risk metrics within Retail
Banking. This was partially offset by an increase due to model
adjustments applied as a result of new regulation applicable
to IRB models from 1 January 2022 in addition to increased
exposures within Retail Banking.
A decrease in operational risk RWAs of £0.6 billion due to the
annual recalculation in Q1 2022.
Leverage
The leverage ratio at 31 December 2022 is 6.4% and has been
calculated in accordance with changes to the UK’s leverage ratio
framework. As at 31 December 2021, the UK leverage ratio was
7.0%, which was calculated under the prior year’s UK leverage
methodology. The key driver of the decrease is a £0.5 billion
decrease in Tier 1 capital. This is offset by a £3.0 billion decrease
in leverage exposure primarily due to reduced balance sheet
exposures.
Liquidity portfolio
The liquidity portfolio decreased by £5.2 billion YTD as of 31
December 2022 to £37.7 billion with primary liquidity decreasing
by £4.0 billion to £31.2 billion. The decrease in primary liquidity is
driven by reduction in customer deposits, partially offset by a
decrease in lending. The reduction in secondary liquidity is due to
a reduction in the pre-positioned collateral at the Bank of
England.
Liquidity coverage ratio
The UK DoLSub Liquidity Coverage Ratio (LCR) decreased during
the year to 131% driven by a decrease in the liquidity portfolio
and a lower than proportionate reduction in net outflows. The
decrease in liquidity portfolio was primarily driven by growth in
customer lending and reduced customer deposits.
NSFR
The UK DoLSub net stable funding ratio (NSFR) was 137%
compared to 151% in prior year. The decrease is due to lower
deposits combined with higher lending.
13.7%
11.6%
2021
2022
£19.6bn
£18.5bn
2021
2022
7.0%
6.4%
2021
2022
£42.9bn
£37.7bn
2021
2022
169%
131%
2021
2022
151%
137%
2021
2022
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 62
Capital, liquidity and funding risk continued
Minimum requirements
Capital adequacy ratios
The bank entities are subject to minimum capital requirements relative to RWAs. The table below summarises the minimum ratios
of capital to RWAs that the UK bank entities are expected to meet.
Type
CET1
Total Tier 1
Total capital
Minimum capital requirements
4.5%
6.0%
8.0%
Capital conservation buffer
2.5%
2.5%
2.5%
Countercyclical capital buffer (1) (2)
0.9%
0.9%
0.9%
Total (3)
7.9%
9.4%
11.4%
(1) The Financial Policy Committee increased the UK CCyB rate from 0% to 1% effective from 13 December 2022. A further increase from 1% to 2% is anticipated from 5 July 2023.
(2) In June 2022, the Central Bank of Ireland announced that the CCyB on Irish exposures will increase from 0% to 0.5%, applicable from 15 June 2023. This is the first step towards a
gradual increase which, conditional on macro-financial developments, would see a CCyB of 1.5% announced by mid-2023, which is expected to be applicable from June 2024.
(3) The minimum requirements do not include any capital that the bank entities may be required to hold as a result of the Pillar 2 assessment.
Leverage ratio
Following the publication of the new UK leverage ratio framework on 8 October 2021 certain NatWest Group legal entities that are
not currently in scope of the minimum leverage ratio requirements are expected to manage their leverage ratio at the same level
as firms in scope and will be subject to the minimum requirement from 1 January 2023. There is also an expectation that non-
scope firms, which includes RBS plc, should manage their leverage ratio in line with the minimum requirement.
Liquidity and funding ratios
The table below summarises the minimum requirements for key liquidity and funding metrics under the PRA framework. RBS plc is
a member of the UK DoLSub which is presented below.
Type
Liquidity coverage ratio (LCR)
100%
Net stable funding ratio (NSFR)
100%
.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 63
Capital, liquidity and funding risk continued
Measurement
Capital, RWAs and leverage
The table below sets out the key Capital and leverage ratios on a PRA transitional basis.
2022
2021
Capital adequacy ratios
%
%
CET1 (1)
11.6
13.7
Tier 1
16.8
18.6
Total
25.4
26.1
Capital
£m
£m
CET1 (1)
2,149
2,682
Tier 1
3,119
3,651
Total
4,715
5,106
RWAs
Credit risk
15,136
15,634
Counterparty credit risk
—
—
Market risk
8
7
Operational risk
3,396
3,951
Total RWAs
18,540
19,592
Leverage
Tier 1 capital (£m)
3,119
3,651
Leverage exposure (£m) (2)
48,957
88,670
Leverage ratio (%) (1) (3)
6.4
4.1
(1) Includes an IFRS 9 transitional adjustment of £71 million (2021 - £126 million). Excluding this adjustment, the CET1 ratio would be 11.2% (2021 – 13.1%) and the leverage ratio would
be 6.2% (2021 – 4.0%).
(2) Leverage exposure is broadly aligned to the accounting value of on and off-balance sheet exposures albeit subject to specific adjustments for derivatives, securities financing
positions and off-balance sheet exposures.
(3) The leverage ratio for December 2022 has been calculated in accordance with current PRA rules. The comparatives reflect the previous CRR framework which was applicable to
RBS plc prior to 1 January 2022. As at 31 December 2021, the UK leverage ratio for RBS plc would have been 7.0%, reflecting PRA’s UK leverage methodology in 2021.
Liquidity key metrics
Liquidity within RBS plc is managed and regulated as part of the UK DoLSub. The table below sets out the key liquidity and related
metrics for the UK DoLSub.
2022
UK DoLSub
Liquidity coverage ratio
131%
Stressed outflow coverage (1)
131%
Net stable funding ratio
137%
2021
Liquidity coverage ratio
169%
Stressed outflow coverage (1)
195%
Net stable funding ratio
151%
(1) Stressed outflow coverage (SOC) is an internal measure calculated by reference to liquid assets as a percentage of net stressed contractual and behavioural outflows over three
months under the worst of three severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination of both as per ILAAP. This assessment is performed in
accordance with PRA guidance.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 64
Capital, liquidity and funding risk continued
Leverage exposure
From 1 January 2022, the leverage metrics for UK entities are calculated in accordance with the Leverage ratio (CRR) part of the
PRA Rulebook.
2022
2021
Leverage
£m
£m
Cash and balances at central banks
34,323
38,014
Derivatives
498
220
Financial assets
60,460
67,123
Other assets
1,382
738
Total assets
96,663
106,095
Derivatives
- netting and variation margin
194
—
- potential future exposures
808
218
Securities financing transactions gross up
—
—
Undrawn commitments
6,544
8,982
Regulatory deductions and other adjustments
1,109
129
Exclusion of core UK-group exposures
(23,797)
(26,754)
Claims on central banks
(31,656)
—
Exclusion of bounce back loans
(908)
—
Leverage exposure
48,957
88,670
Liquidity portfolio (audited)
The table below shows the liquidity portfolio by product, with primary liquidity aligned to internal stressed outflow coverage and
regulatory Liquidity coverage ratio (LCR) categorisation. Secondary liquidity comprises assets eligible for discount at central banks,
which do not form part of the liquid asset portfolio for LCR or internal stressed outflow purposes.
2022
2021
UK DoLSub
RBS plc
UK DoLSub
RBS plc
£m
£m
£m
£m
Cash and balances at central banks
103,708
31,184
136,154
35,220
AAA to AA- rated governments
9,843
—
21,123
—
A+ and lower rated governments
—
—
—
—
Government guaranteed issuers, public sector entities and government
sponsored entities
100
—
174
—
International organisations and multilateral development banks
1,021
—
1,466
—
Level 1 bonds
10,964
—
22,763
—
LCR level 1 eligible assets
114,672
31,184
158,917
35,220
LCR level 2 eligible assets
—
—
—
—
Non-LCR eligible assets
—
—
—
—
Primary liquidity
114,672
31,184
158,917
35,220
Secondary liquidity (1)
63,849
6,541
76,573
7,634
Total liquidity value
178,521
37,725
235,490
42,854
(1) Comprises assets eligible for discounting at the Bank of England and other central banks.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 65
Capital, liquidity and funding risk continued
Funding sources (audited)
The table below shows the carrying values of the principal funding sources based on contractual maturity. Balance sheet captions
include balances held at all classifications under IFRS 9.
2022
2021
Short-term
Long-term
Short-term
Long-term
less than
more than
less than
more than
1 year
1 year
Total
1 year
1 year
Total
£m
£m
£m
£m
£m
£m
Bank deposits
986
—
986
1,117
—
1,117
Customer deposits
Personal
36,320
200
36,520
38,190
145
38,335
Corporate
35,077
1
35,078
39,556
2
39,558
Non-bank financial institutions (NBFI)
11,708
—
11,708
14,251
—
14,251
83,105
201
83,306
91,997
147
92,144
Amounts due to holding company and fellow subsidiaries (1)
Bank and customer deposits
1,640
—
1,640
2,856
248
3,104
MREL
5
403
408
4
383
387
Subordinated liabilities
1,507
—
1,507
2
1,425
1,427
3,152
403
3,555
2,862
2,056
4,918
Total funding
87,243
604
87,847
95,976
2,203
98,179
Of which: available in resolution
(2)
1,915
1,815
(1) Amounts due to holding companies and fellow subsidiaries relating to non-financial instruments of £355 million (2021 - £298 million) have been excluded from the table.
(2) Eligible liabilities (as defined in the Banking Act 2009 as amended from time to time) that meet the eligibility criteria set out in the regulations, rules, policies, guidelines, or
statements of the Bank of England including the Statement of Policy published by the Bank of England in December 2021 (updating June 2018).
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 66
Capital, liquidity and funding risk continued
Contractual maturity (audited)
The table shows the residual maturity of third party financial instruments, based on contractual date of maturity of RBS plc’s
banking activities, including third party and intercompany hedging derivatives. Mandatory fair value through profit or loss
(MFVTPL) assets and held-for-trading (HFT) liabilities have been excluded from the maturity analysis and are shown in total in the
table below.
Banking activities
Less than
1-3
3-6
6 months
More than
MFVTPL
1 month
months
months
- 1 year
Subtotal
1-3 years
3-5 years
5 years
Total
and HFT
Total
2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Cash and balances at central banks
34,323
—
—
—
34,323
—
—
—
34,323
—
34,323
Derivatives
—
9
28
71
108
147
110
116
481
17
498
Loans to banks - amortised cost
793
2
276
—
1,071
—
—
—
1,071
—
1,071
Loans to customers - amortised cost (1)
5,646
2,383
1,515
2,327
11,871
7,142
4,771
14,498
38,282
—
38,282
Personal
533
334
435
813
2,115
2,748
2,194
9,319
16,376
—
16,376
Corporate
4,588
2,044
1,076
1,508
9,216
4,345
2,566
5,166
21,293
—
21,293
Non-bank financial institutions
525
5
4
6
540
49
11
13
613
—
613
Other assets (2)
—
—
—
—
—
—
—
—
—
68
68
Total financial assets
40,762
2,394
1,819
2,398
47,373
7,289
4,881
14,614
74,157
85
74,242
2021
Total financial assets
46,268
3,507
1,959
2,553
54,287
7,051
4,761
15,944
82,043
133
82,176
2022
Bank deposits
986
—
—
—
986
—
—
—
986
—
986
Customer deposits
80,967
1,349
475
314
83,105
200
—
1
83,306
—
83,306
Personal
35,965
84
125
146
36,320
200
—
—
36,520
—
36,520
Corporate
33,484
1,122
316
155
35,077
—
—
1
35,078
—
35,078
Non-bank financial institutions
11,518
143
34
13
11,708
—
—
—
11,708
—
11,708
Derivatives
1
160
165
445
771
1,270
367
116
2,524
159
2,683
Notes in circulation
2,409
—
—
—
2,409
—
—
—
2,409
—
2,409
Lease liabilities
1
1
2
4
8
14
12
73
107
—
107
Total financial liabilities
84,364
1,510
642
763
87,279
1,484
379
190
89,332
159
89,491
2021
Total financial liabilities
93,293
1,552
209
278
95,332
466
170
271
96,239
126
96,365
(1) Loans to customers excludes £615 million (2021 - £675 million) of ECL provisions.
(2) Other assets relating to non-financial instruments of £1,314 million (2021 - £653 million) have been excluded from the table.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 67
Non-traded market risk
Definition (audited)
Non-traded market risk is the risk to the value of assets or
liabilities outside the trading book, or the risk to income, that
arises from changes in market prices such as interest rates,
foreign exchange rates and equity prices, or from changes in
managed rates.
Sources of risk (audited)
Non-traded market risk in this entity is very low.
RBS plc’s non-traded market risk exposure largely comprises
structural interest rate risk arising from asset and liability
hedging.
Governance, risk appetite and controls
For general information on governance, risk appetite and
controls in RBS plc, refer to pages 8 to 11. For further
information specific to non-traded market risk, refer to the non-
traded market risk section of the NatWest Group Annual Report
and Accounts.
Measurement
Non-traded internal VaR (1-day 99%) (audited)
The following table shows one-day internal banking book value-at-risk (VaR) at a 99% confidence level, split by risk type. VaR
values for each year are calculated based on one-day values for each of the 12 month-end reporting dates.
VaR is a statistical estimate of the potential change in the market value of a portfolio (and, thus, the impact on the income
statement) over a specified time horizon at a given confidence level. For further information on non-traded VaR metrics, refer to
the non-traded market risk section of the NatWest Group Annual Report and Accounts.
2022
2021
Average
Period-end
£m
£m
Interest rate
1.1
0.6
Credit spread
—
—
Structural foreign exchange rate
2.3
2.7
Equity
0.1
0.1
Pipeline risk (1)
0.4
0.1
Diversification (2)
(1.1)
(0.6)
Total
2.8
2.9
(1) Pipeline risk is the risk of loss arising from personal customers owning an option to draw down a loan – typically a mortgage – at a committed rate, where interest rate changes
may result in greater or fewer customers than anticipated taking up the committed offer.
(2) RBS plc benefits from diversification across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between
the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.
There were no material movements in non-traded VaR year-on-year.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 68
Non-traded market risk continued
Interest rate risk
Non-traded interest rate risk (NTIRR) arises from the provision
to customers of a range of banking products with differing
interest rate characteristics. When aggregated, these products
form portfolios of assets and liabilities with varying degrees of
sensitivity to changes in market interest rates. Mismatches can
give rise to volatility in net interest income as interest rates
vary. NTIRR comprises three primary risk types: gap risk, basis
risk and option risk.
To manage exposures within its risk appetite, RBS plc
aggregates interest rate positions and hedges its residual
exposure, primarily with interest rate swaps.
Structural hedging aims to reduce gap risk and the sensitivity
of earnings to interest rate shocks. It also provides some
protection against prolonged periods of falling rates.
For further information on the types and sources of non-traded
interest rate risk as well as on the purpose and methodology of
the structural hedging carried out, refer to the non-traded
market risk section of the NatWest Group Annual Report and
Accounts.
Non-traded interest rate risk can be measured from either an
economic value-based or earnings-based perspective, or a
combination of the two. RBS plc uses VaR as its value-based
approach and sensitivity of net interest earnings as its
earnings-based approach. For further detail on these
measurement approaches, refer to the non-traded market risk
section of the NatWest Group Annual Report and Accounts.
Structural hedging
RBS plc has a significant pool of stable, non and low interest-
bearing liabilities, principally comprising current accounts and
savings, in addition to its equity and reserves.
NatWest Group has a policy of hedging these balances, either
by investing directly in longer-term fixed-rate assets (primarily
fixed-rate mortgage loans) or by using interest rate swaps, in
order to provide a consistent and predictable revenue stream.
At 31 December 2022, RBS plc’s structural hedge had a
notional of £45 billion (2021 – £40 billion) with an average life of
approximately three years.
Sensitivity of net interest earnings
Net interest earnings are sensitive to changes in the level of
interest rates, mainly because maturing structural hedges are
replaced at higher or lower rates and changes to coupons on
managed rate customer products do not match changes in
market rates of interest or central bank policy rates.
Earnings sensitivity is derived from a market-implied forward
rate curve, which will incorporate expected changes in central
bank policy rates such as the Bank of England base rate. A
simple scenario is shown that projects forward earnings over a
12-month period based on the 31 December 2022 balance
sheet. An earnings projection is derived from the market-
implied rate curve, which is then subject to interest rate shocks.
The difference between the market implied projection and the
shock gives an indication of underlying sensitivity to interest
rate movements.
The sensitivity of net interest earnings table below shows the
expected impact of an immediate upward or downward change
of 25 basis points and an upward change of 100 basis points to
all interest rates. The sensitivity to a downward 100-basis-point
shift in the yield curve has been introduced for 2022. This shift
was not presented for 2021, when yield curves were already
close to zero (or were negative in euros).
Reported sensitivities should not be considered a forecast of
future performance in these rate scenarios. Actions that could
reduce interest earnings sensitivity include changes in pricing
strategies on customer loans and deposits as well as hedging.
Management action may also be taken to stabilise total income
also taking into account non-interest income.
Shifts in yield curve
2022 (1)
+25 basis
points
£m
-25 basis
points
£m
+100 basis
points
£m
-100 basis
points
£m
12-month
interest
earnings
sensitivity
26
(32)
106
(135)
2021
12-month
interest
earnings
sensitivity
53
(51)
195
(1) Earnings sensitivity considers only the main drivers, namely structural hedging and
margin management.
Sensitivity of cash flow hedging reserves to interest rate
movements
Interest rate swaps are used to implement the structural
hedging programme. Generally, these swaps are booked in
hedge accounting relationships. Changes in the valuation of
swaps that are in effective cash flow hedge accounting
relationships are recognised in cash flow hedge reserves. The
main driver of RBS plc’s cash flow hedge reserve sensitivity is
the interest rate swaps that form part of the structural hedge.
The table below shows an estimate of the sensitivity of cash
flow hedge reserves to a parallel shift in all rates. In this
analysis, interest rates have not been floored at zero. Cash flow
hedges are assumed to be fully effective. For further
information on the assumptions and methodology relating to
this table, refer to the corresponding table in the NatWest
Group Annual Report and Accounts.
2022
+25 basis
points
£m
-25 basis
points
£m
+100 basis
points
£m
-100 basis
points
£m
Cash flow hedge
reserves
(177)
179
(696)
727
2021
Cash flow hedge
reserves
(171)
173
(672)
707
Accounting volatility risk
Accounting volatility risk arises when an exposure is accounted
for at amortised cost but economically hedged by a derivative
that is accounted for at fair value. Although this is not an
economic risk, the difference in accounting between the
exposure and the hedge creates volatility in the income
statement. For information on how this risk is managed, refer
to the non-traded market risk section of the NatWest Group
Annual Report and Accounts.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 69
Compliance and conduct risk
Definition
Compliance risk is the risk that RBS plc fails to observe the
letter and spirit of all relevant laws, codes, rules, regulations
and standards of good market practice.
Conduct risk is the risk of inappropriate behaviour towards
customers, or in the markets in which RBS plc operates, which
leads to unfair or inappropriate customer outcomes.
The consequences of failing to meet compliance and/or
conduct responsibilities can be significant and could result, for
example, in legal action, regulatory enforcement, material
financial loss and/or reputational damage.
Sources of risk
Compliance and conduct risks exist across all stages of RBS
plc’s relationships with its customers and arise from a variety of
activities including product design, marketing and sales,
complaint handling, staff training, and handling of confidential
inside information.
As set out in Note 20 to the financial statements, members of
NatWest Group are party to legal proceedings and are subject
to investigation and other regulatory action in the UK, the US
and other jurisdictions.
Key developments in 2022
Further progress was made on the compliance agenda
during 2022. The first line of defence ring-fencing hub –
established to provide an aggregated view of ring-fencing
compliance and risk management – continues to work
across business segments, functions and legal entities.
From a conduct risk perspective, the focus on consumer
protection increased significantly during 2022, given cost-
of-living challenges and their impact on customers in
vulnerable situations. The FCA’s increased expectations
under its Consumer Duty initiative was also a key
development, and the establishment of the consumer duty
‘One Bank’ programme will ensure continued focus upon
the required ‘paradigm shift’ in the levels of consumer
protection.
More generally, work is also ongoing to further enhance the
conduct and compliance risk framework aligned to a wider
programme of work on the overall risk management
framework.
Governance
RBS plc defines appropriate standards of compliance and
conduct and ensures adherence to those standards through its
risk management framework. Relevant compliance and
conduct matters are escalated through the Executive Risk
Committee and Board Risk Committee.
Risk appetite
Risk appetite for compliance and conduct risks is set at Board
level. Risk appetite statements articulate the levels of risk that
legal entities, businesses and functions work within when
pursuing their strategic objectives and business plans.
A range of controls are operated to ensure the business
delivers good customer outcomes and are conducted in
accordance with legal and regulatory requirements. A suite of
policies addressing compliance and conduct risks set
appropriate standards across RBS plc. Examples include
policies relating to customers in vulnerable situations,
complaints management, cross-border activities and market
abuse. Continuous monitoring and targeted assurance are
carried out as appropriate.
Monitoring and measurement
Compliance and conduct risks are measured and managed
through continuous assessment and reporting to RBS plc’s
senior risk committees and at Board level. The compliance and
conduct risk framework facilitates the consistent monitoring
and measurement of compliance with laws and regulations and
the delivery of consistently good customer outcomes. The first
line of defence is responsible for effective risk identification,
reporting and monitoring, with oversight, challenge and review
by the second line. Compliance and conduct risk management
is also integrated into RBS plc’s strategic planning cycle.
Mitigation
Activity to mitigate the most material compliance and conduct
risks is carried out across RBS plc with specific areas of focus
in the customer-facing businesses and legal entities. Examples
of mitigation include the consideration of customer needs in
business and product planning, targeted training, conflicts of
interest management, market conduct surveillance, complaints
management, mapping of priority regulatory requirements and
independent monitoring activity. Internal policies help support a
strong customer focus across RBS plc.
Financial crime risk
Definition
Financial crime risk is the risk that RBS plc's products and
services are intentionally or unintentionally used to facilitate
financial crime in the form of money laundering, terrorist
financing, bribery and corruption, sanctions and tax evasion, as
well as external or internal fraud.
Sources of risk
Financial crime risk may be present if RBS plc’s customers,
employees or third parties undertake or facilitate financial
crime, or if RBS plc’s products or services are used intentionally
or unintentionally to facilitate such crime. Financial crime risk is
an inherent risk across all lines of business.
Key developments in 2022
Significant investment continued to be made to support
delivery of the multi-year transformation plan across
financial crime risk management.
Enhancements were made to technology and data analytics
to improve the effectiveness of systems used to monitor
customers and transactions.
A financial crime and fraud goal was rolled out to
approximately 55,000 colleagues across RBS plc.
Financial crime roadshows were held throughout the year
to further embed financial crime risk management culture
and behaviours.
Systematic Anti-Money Laundering Programme
assessment. In January 2022, NatWest Group, of which RBS
plc is a part of, received the Skilled Person’s final report in
connection with governance arrangements for two financial
crime change programmes in respect of which the Skilled
Person had been appointed under section 166 of the
Financial Services and Markets Act 2000 to provide
assurance. The FCA confirmed in March 2022 that the
section 166 review had been concluded.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 70
Financial crime risk continued
Governance
The Financial Crime Executive Steering Group, which is jointly
chaired by the NatWest Group Chief Risk Officer and the Group
Chief Information Officer (previously the Chief Administration
Officer), is the core governance committee for financial crime
risk (excluding fraud). It oversees financial crime risk
management, operational performance, and transformation
matters including decision-making and escalations to the
Executive Risk Committee, Board Risk Committee and NatWest
Group Executive Committee.
The Fraud Executive Steering Group, which is chaired by the
Chief Information Officer, is the core governance committee for
fraud. It oversees fraud risk management, operational
performance, and investment matters including decision-
making and escalations to relevant senior committees.
Risk appetite
There is no appetite to operate in an environment where
systems and controls do not enable the effective identification,
assessment, monitoring, management and mitigation of
financial crime risk. RBS plc’s systems and controls must be
comprehensive and proportionate to the nature, scale and
complexity of its businesses
RBS plc operates a framework with preventative and detective
controls designed to mitigate the risk that it could facilitate
financial crime. These controls are supported by a suite of
policies, procedures and guidance to ensure they operate
effectively.
Monitoring and measurement
Financial crime risks are identified and reported through
continuous risk management and regular reporting to senior
risk committees and the RBS plc Board. Quantitative and
qualitative data is reviewed and assessed to measure whether
financial crime risk is within risk appetite.
Mitigation
Through the financial crime framework, relevant policies,
systems, processes and controls are used to mitigate and
manage financial crime risk. This includes the use of dedicated
screening and monitoring systems and controls to identify
people, organisations, transactions and behaviours that may
require further investigation or other actions. Centralised
expertise is available to detect and disrupt threats to RBS plc
and its customers.
Intelligence is shared with law enforcement, regulators and
government bodies to strengthen national and international
defences against those who would misuse the financial system
for criminal motives.
Climate risk
Definition
Climate risk is the threat of financial loss or adverse non-
financial impacts associated with climate change and the
political, economic and environmental responses to it.
Sources of risk
Physical risks may arise from climate and weather-related
events such as heatwaves, droughts, floods, storms and sea
level rises. They can potentially result in financial losses,
impairing asset values and the creditworthiness of borrowers.
RBS plc could be exposed to physical risks directly by the
effects on its property portfolio and, indirectly, by the impacts
on the wider economy as well as on the property and business
interests of its customers.
Transition risks may arise from the process of adjustment
towards a low-carbon economy. Changes in policy, technology
and sentiment could prompt reassessment of customers’
financial risk and may lead to falls in the value of a large range
of assets. RBS plc could be exposed to transition risks directly
through the costs of adaptation within economic sectors and
markets as well as supply chain disruption leading to financial
impacts on it and its customers. Potential indirect effects
include the erosion of RBS plc’s competitiveness, profitability,
reputational damage and liability risk.
Key developments in 2022
The enhancement of scenario generation capability, building
on our internal scenario analysis capability developed over
2021 that supported risk management and participation in
the PRA Climate Biennial Exploratory Scenario (CBES).
To support the management of credit risk, the application of
first generation qualitative climate risk scorecards within
customer conversations, and initiation of testing of
enhanced scorecards including quantitative elements.
Improved oversight of management of climate-related risk
through regular reporting and review of climate risk appetite
measures and key risk indicator trends informing monthly
risk committee updates.
The assessment of potential greenwashing risks driven by a
hypothetical risk scenario where increased competition in
the green finance market leads to less efficient product
designs and diminished robustness of governance.
The preparation of an initial iteration of the NatWest Group
Climate Transition plan including identification and analysis
of potential impacts associated with proposed actions.
Governance
The NatWest Group Board is responsible for monitoring and
overseeing climate-related risk within NatWest Group’s overall
business strategy and risk appetite. The potential impact,
likelihood and preparedness of climate-related risk are reported
regularly to the NatWest Group Board Risk Committee and the
NatWest Group Board.
The NatWest Group Chief Risk Officer shares accountability
with the NatWest Group CEO under the Senior Managers and
Certification Regime for identifying and managing the financial
risks arising from climate change. This includes ensuring that
the financial risks from climate change are adequately reflected
in risk management frameworks, and that NatWest Group can
identify, measure, monitor, manage and report on its exposure
to these risks.
The Climate Change Executive Steering Group is responsible
for overseeing the direction of and progress against NatWest
Group’s climate-related commitments. During 2022, the
Executive Steering Group focused on overseeing the
preparation of the initial iteration of NatWest Group’s Climate
Transition Plan, progression in establishing partnerships and
opportunities including oversight of progress against the
NatWest Group climate and sustainable funding and financing
target, and ensuring the effective management of climate-
related risks. The Executive Steering Group will continue to
supervise strategic implementation and delivery, supported by
the Climate Centre of Excellence.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 71
Climate risk continued
Risk appetite
NatWest Group’s ambition is to be a leading bank in the UK in
helping to address climate change. This ambition is
underpinned by activity to reduce the climate impact of
financing activity by at least 50% by 2030 and to achieve net
zero by 2050.
Work continued in 2022 to mature NatWest Group’s climate-
related risk capabilities in accordance with the risk
management framework. In December 2022, the NatWest
Group Board approved the adoption of enhanced climate risk
appetite measures into the enterprise-wide risk management
framework, which are designed to provide a heightened focus
on balance sheet exposure to financed emissions.
Combined with segment-specific risk measures, this suite of
metrics will enable reporting of climate risk appetite to senior
risk management forums and links risk management to
NatWest Group’s strategic goals and priorities.
Monitoring and measurement
NatWest Group focused on developing the capabilities to use
scenario analysis to identify the most material climate risks and
opportunities for its customers, seeking to harness insights to
inform risk management practices and maximise the
opportunities arising from a transition to a low-carbon
economy.
Scenario analysis allows NatWest Group to test a range of
possible future climate pathways and understand the nature
and magnitude of the risks they present. The purpose of
scenario analysis is not to forecast the future but to understand
and prepare to manage risks that could arise.
Key priorities in 2022 have included enhancing our climate
scenario analysis capabilities to both address ongoing
regulatory expectations and building on the infrastructure
required by NatWest Group to meet current and future climate
scenario analysis objectives. NatWest Group made significant
investment in developing a variety of internal scenario analysis
tools which support the development of commercial strategy,
products and services and help manage risks, including
managing exposures efficiently and removing unmitigated risks
from future climate impacts.
NatWest Group recognises a number of key use cases for
climate scenario analysis, including, but not restricted to, the
following:
Regulatory stress testing requirements.
Heightened climate risk sector classifications.
Sector/sub-sector risk appetite.
Lending pricing.
Portfolio management.
Strategic decision-making.
NatWest Group made material progress in developing internal
climate modelling capabilities, building on the learnings from
our internal scenario analysis carried out in 2021 and
participation in the CBES. NatWest Group has enhanced its
scenario generation capabilities to support future integration of
climate risk into strategic planning, Internal Capital Adequacy
Assessment Processes (ICAAP) and IFRS 9. Modelling
infrastructure to execute scenarios matured in 2022, giving
increased flexibility for scenario analysis capability for short,
medium and long-term scenarios. Incorporation into the
NatWest Group strategic plan and ICAAP ensures that NatWest
Group factors climate into strategic planning and appropriately
capitalises for the most material source of climate risk over the
capital planning horizon. Developing internal methodologies
also enhances the capacity to integrate scenario analysis with
customer journeys. This builds on NatWest Group’s ability not
only to effectively develop tools for risk management but also
to develop products and processes that support NatWest
Group’s customers’ transition.
NatWest Group also focused on developing an internal
methodology for forecasting its counterparties’ corporate
transition risk via counterparty level modelling infrastructure
and climate risk customer scorecards. NatWest Group is
actively targeting the minimisation of reliance on third party
models, whilst recognising there is likely to be some reliance on
them over the medium-to-long term given the specialist and
evolving nature of climate financial risk management.
Enhancement of this infrastructure links very closely with the
scenario analysis noted above. Further information on this can
be found in NatWest Group’s 2022 Climate-related Disclosures
Report.
Internal scenario analysis, carried out to support participation
in the CBES, focused on the application of three climate
scenarios (early policy action, late policy action and no
additional action and a counterfactual scenario) to quantify
climate risk across NatWest Group’s lending portfolio. This
showed that NatWest Group was most exposed to a late
transition scenario with a concentrated period of losses
between 2030 and 2035, the point at which disruptive transition
policy is implemented, resulting in an economic recession. The
early action scenario resulted in more gradual losses through
the stress horizon, with the earlier onset of transition curtailing
impairments in comparison to the sharp onset in the late action
scenario. A key conclusion for transition risk is that supporting
customers’ transition to net zero is critical to manage NatWest
Group’s exposures to transition risk.
The effects of physical risk were explored through the no
additional action scenario which produced lower total
cumulative impairments compared to the early action and late
action scenarios. This comparatively lower level of impairments
is reflective of NatWest Group’s diversified book and
geographic exposure. NatWest Group’s results broadly aligned
with the key findings and aggregate outcome for banks (across
both physical and transition risk). However, NatWest Group
recognises the industry data and methodology limitations for
physical risk and therefore recognises that the no additional
action scenario does not capture the severe long-term effects
of irreversible climate change. Further information on results,
limitations and conclusions can be found in NatWest Group’s
2022 Climate-related Disclosures Report.
There are a number of challenges with climate scenario
analysis, for example in relation to climate data. NatWest
Group continues to participate in a number of industry forums
including the United Nations Principles for Responsible Banking,
which provides a unique framework for banks to align strategy
and practice with the Sustainable Development Goals and Paris
Climate Agreement. In addition, NatWest Group is also
represented on the Climate Financial Risk Forum established by
the PRA and FCA to shape the financial services industry’s
response to the challenges posed by climate risk and continues
to work with a number of UK and international bodies to
develop climate scenario analysis best practices.
NatWest Group is continuing to make progress in embedding
climate risk analytics as appropriate across customer journeys
and in supporting decision-making at customer and strategic
portfolio levels. Leveraging qualitative and quantitative outputs
from scenario analysis, will enable NatWest Group to integrate
outcomes into risk appetite measures and customer origination
processes. Developing the ability to incorporate these outcomes
enables NatWest Group to manage and mitigate both the risks
but also the opportunities that are presented by climate risk.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 72
Operational risk
Definition
Operational risk is the risk of loss resulting from inadequate or
failed internal processes, people and systems, or external
events. It arises from day-to-day operations and is relevant to
every aspect of the business.
Sources of risk
Operational risk may arise from a failure to manage operations,
systems, transactions and assets appropriately. This can take
the form of human error, an inability to deliver change
adequately or on time, the non-availability of technology
services, or the loss of customer data. Systems failure, theft of
RBS plc property, information loss and the impact of natural, or
man-made, disasters as well as the threat of cyber-attacks are
sources of operational risk. Operational risk can also arise from
a failure to account for changes in law or regulations or to take
appropriate measures to protect assets.
Key developments in 2022
A review of the NatWest Group Risk Directory was
completed, allowing greater risk visibility and improved risk
reporting.
The NatWest Group Impact Classification Matrix was
updated to align to industry materiality, ensuring focus on
the most material risks.
An Early Event Escalation Process was implemented to
ensure material events are escalated in a timely manner.
A Risk & Control Self Assessment approach was developed
to identify risks across end-to-end processes, refocusing
existing risk assessment, towards materiality.
A payments review has been initiated by NatWest Group in
late 2022 to assess control enhancements in response to
manual payment risk.
Governance
The risk governance arrangements in place for operational risk
are aligned to the requirements set out in the NatWest Board
approved enterprise-wide risk management framework and are
consistent with achieving safety, soundness and sustainable
risk outcomes.
Aligned to this, a strong operational risk management function
is vital to support RBS plc’s ambitions to serve its customers
better. Improved management of operational risk against
defined appetite is vital for stability and reputational integrity.
Risk appetite
Operational risk appetite supports effective management of all
operational risks. It expresses the level and types of operational
risk NatWest Group is willing to accept to achieve its strategic
objectives and business plans. NatWest Group’s operational risk
appetite statement encompasses the full range of operational
risks faced by its legal entities, businesses and functions.
Mitigation
The Control Environment Certification (CEC) process is a half-
yearly self-assessment by the CEOs of NatWest Group’s
customer-facing business areas, as well as the heads of the
bank’s support functions. It provides a consistent and
comparable view on the adequacy and effectiveness of the
internal control environment.
CEC covers material risks and the underlying key controls,
including financial, operational and compliance controls, as well
as supporting risk management frameworks. The CEC
outcomes, including forward-looking assessments for the next
two half-yearly cycles and progress on control environment
improvements, are reported to the NatWest Group Audit
Committee and Board Risk Committee. They are also shared
with external auditors.
The CEC process helps to ensure compliance with the NatWest
Group Policy Framework, Sarbanes-Oxley 404 requirements
concerning internal control over financial reporting, and certain
requirements of the UK Corporate Governance Code.
Risks are mitigated by applying key preventative and detective
controls, an integral step in the risk self assessment
methodology which determines residual risk exposure. Control
owners are accountable for the design, execution, performance
and maintenance of key controls. Key controls are regularly
assessed for adequacy and tested for effectiveness. The results
are monitored and, where a material change in performance is
identified, the associated risk is re-evaluated.
Monitoring and measurement
Risk and control self assessments are used across all business
areas and support functions to identify and assess material
operational risks, conduct risks and key controls. All risks and
controls are mapped to NatWest Group’s Risk Directory. Risk
assessments are refreshed at least annually to ensure they
remain relevant and capture any emerging risks and also
ensure risks are reassessed.
The process is designed to confirm that risks are effectively
managed in line with risk appetite. Controls are tested at the
appropriate frequency to verify that they remain fit-for-purpose
and operate effectively to reduce identified risks.
RBS plc uses the standardised approach to calculate its Pillar 1
operational risk capital requirement. This is based on
multiplying three years’ average historical gross income by
coefficients set by the regulator based on business line. As part
of the wider Internal Capital Adequacy Assessment Process an
operational risk economic capital model is used to assess Pillar
2A, which is a risk-sensitive add-on to Pillar 1. The model uses
historical loss data (internal and external) and forward-looking
scenario analysis to provide a risk-sensitive view of RBS plc’s
Pillar 2A capital requirement.
Scenario analysis is used to assess how severe but plausible
operational risks will affect RBS plc. It provides a forward-
looking basis for evaluating and managing operational risk
exposures.
Refer to the Capital, liquidity and funding risk section for
operational risk capital requirement figures.
Operational resilience
RBS plc manages and monitors operational resilience through
its risk and control self assessment methodology. This is
underpinned by setting and monitoring of risk indicators and
performance metrics for the operational resilience of key
business services. Progress continues on embedding regulator
expectations for operational resilience, with involvement in a
number of industry-wide operational resilience forums. This
enables a cross-sector view of the operational resilience risk
profile and the pace of ongoing innovation and change, both
internally and externally.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 73
Operational risk continued
NatWest Group operates layered security controls and its
network architecture is designed to provide inherent protection
against threats. This approach avoids reliance on any one type
or method of security control. Minimum security control
requirements are set out in Key Risk policies, standards,
processes and procedures. Through 2023 NatWest Group will
monitor and manage the threat landscape focusing on:
Attack Surface Vulnerabilities – such as the rising number
of zero-days and code vulnerabilities impacting
organisations.
Initial Access Brokers and Nation States – increasingly
sophisticated attacks from ransomware gangs and ongoing
challenges following Russia’s invasion of Ukraine which has
raised international tensions increasing the likelihood of
disruptive cyber-attacks.
As cyberattacks evolve and become more sophisticated,
NatWest Group continues to invest in additional capability
designed to defend against emerging threats.
Event and loss data management
The operational risk event and loss data management process
ensures RBS plc captures and records operational risk financial
and non-financial events that meet defined criteria. Loss data is
used for regulatory and industry reporting and is included in
capital modelling when calculating economic capital for
operational risk. The most serious events are escalated in a
simple, standardised process to all senior management, by way
of an Early Event Escalation Process.
All financial impacts associated with an operational risk event
are reported against the date they were recorded in RBS plc’s
financial accounts.
A single event can result in multiple losses (or recoveries) that
may take time to crystallise. Losses and recoveries with a
financial accounting date in 2022 may relate to events that
occurred, or were identified in, prior years.
Model risk
Definition
Model risk is the potential for adverse consequences from
model errors and/or the inappropriate use of modelled outputs
to inform business decisions. A model is defined as a
quantitative method, system, or approach that applies
statistical, economic, financial, accounting, mathematical or
data science theories, techniques and assumptions to process
input data into quantitative estimates.
Sources of risk
RBS plc uses a variety of models in the course of its business
activities. Examples include the use of model outputs to support
customer decisioning, measuring and assessing risk exposures
(including credit, market, and climate risk), as well as
calculating regulatory capital and liquidity requirements.
Model applications may give rise to different risks depending on
the business segment in which they are used. Model risk is
therefore assessed separately for each business segment in
addition to the overall assessment made for NatWest Group.
Key developments in 2022
Model risk management practices have continued to evolve,
driven through a dedicated Model Management
Programme. This has delivered an enhanced model
management committee structure, a new model risk
governance team operating model and an improved model
inventory.
Aligned to the implementation of the enterprise-wide risk
management framework, new model risk procedures were
approved to support the identification, assessment and
monitoring of model risk.
NatWest Group provided a comprehensive response to the
PRA’s Consultation Paper on Model Risk Management
(CP6/22). A self-assessment of NatWest Group’s current
Model Risk Policy compared to the PRA’s draft Supervisory
Statement was completed and gaps identified. A
programme of work will be established in 2023 to continue
to evolve the bank’s model risk management framework in
line with regulatory expectations and industry best practice.
Governance
A governance framework is in place to ensure policies and
processes relating to models are appropriate and effective.
Two roles are key to this – model risk owners and model risk
Officers. Model risk owners are responsible for model approval
and ongoing performance monitoring. Model risk officers, in the
second line, are responsible for oversight, including ensuring
that models are independently validated prior to use and on an
ongoing basis aligned to the model’s risk rating.
A new NatWest Group Model Risk Oversight Committee will
further enhance model risk governance by providing a direct
escalation route to the NatWest Group Executive Risk
Committee and, where applicable, onwards to the NatWest
Group Board Risk Committee.
Risk appetite
Model risk appetite is set in order to limit the level of model risk
that RBS plc is willing to accept in the course of its business
activities. It is approved by the NatWest Holdings Group Board.
Business areas are responsible for monitoring performance
against appetite and remediating models outside appetite.
Monitoring and measurement
Policies and procedures related to the development, validation,
approval, implementation and use and ongoing monitoring of
models are in place to ensure adequate control across the
lifecycle of an individual model.
Validation of material models is conducted by an independent
risk function comprising of skilled, well-informed subject matter
experts. This is completed for new models or amendments to
existing models and as part of an ongoing periodic programme
to assess model performance. The frequency of periodic
validation is aligned to the risk rating of the model. The
independent validation focuses on a variety of model features,
including modelling approach, the nature of the assumptions
used, the model’s predictive ability and complexity, the data
used in the model, its implementation and its compliance with
regulation.
The level of risk relating to an individual model is assessed
through a model risk rating. A quantitative approach is used to
determine the risk rating of each model, based on the model’s
materiality and validation rating. This approach provides the
basis for model risk appetite measures and enables model risk
to be robustly monitored and managed.
Risk and capital management continued
RBS plc Annual Report and Accounts 2022 74
Model risk continued
Ongoing performance monitoring is conducted by model
owners and overseen by the model validators to ensure
parameter estimates and model constructs remain fit for
purpose, model assumptions remain valid and that models are
being used consistently with their intended purpose. This allows
timely action to be taken to remediate poor model performance
and/or any control gaps or weaknesses.
If a model risk issue arises due to an operational control
weakness (and the residual risk meets the operational risk
thresholds, then an Operational risk issue would be raised.
Mitigation
By their nature – as approximations of reality – model risk is
inherent in the use of models. It is managed by refining or
redeveloping models where appropriate – either due to
changes in market conditions, business assumptions or
processes – and by applying adjustments to model outputs
(either quantitative or based on expert opinion). Enhancements
may also be made to the process within which the model
output is used in order to further limit risk levels.
Reputational risk
Definition
Reputational Risk is defined as the risk of damage to
stakeholder trust due to negative consequences arising from
internal actions or external events.
Sources of risk
Reputational risks can originate from internal actions and
external events. The three primary drivers of reputational risk
have been identified as: failure in internal execution; a conflict
between RBS plc’s values and the public agenda; and
contagion (when RBS plc’s reputation is damaged by failures in
the wider financial sector).
Key developments in 2022
A new reputational risk policy was implemented to manage
reputational risk at an organisational level.
The NatWest Group Reputational Risk Register was further
embedded into the organisation, the results of which are
reported to the NatWest Group Reputational Risk
Committee.
All Environmental, Social & Ethical (ESE) risk acceptance
criteria have undergone review to align with our Purpose.
Governance
A reputational risk policy supports reputational risk
management across NatWest Group plc. The RBS plc
reputational risk committee reviews relevant issues at an
individual business or entity level, while the NatWest Group
Reputational Risk Committee – opines on material, issues,
cases, sectors and themes that represent material reputational
risks. The NatWest Group Board Risk Committee oversees the
identification and reporting of reputational risk.
Risk appetite
NatWest Group manages and articulates its appetite for
reputational risk through a qualitative reputational risk appetite
statement and quantitative measures. NatWest Group seeks to
identify, measure and manage risk aligned to stakeholder trust.
However, reputational risk is inherent in RBS plc’s operating
environment and public trust is a specific factor in setting
reputational risk appetite.
Monitoring and measurement
Relevant internal and external factors are monitored through
regular reporting to the RBS plc reputational risk committee at
and escalated, where appropriate, to the NatWest Group
Reputational Risk Committee or the NatWest Group Board Risk
Committee.
Mitigation
Standards of conduct are in place across NatWest Group
requiring strict adherence to policies, procedures and ways of
working to ensure business is transacted in a way that meets –
or exceeds – stakeholder expectations.
External events that could cause reputational damage are
identified and mitigated through NatWest Group’s Top and
Emerging Threats process (where sufficiently material) as well
as through the NatWest Group and business segment-level risk
registers.
NatWest Group has in recent years been the subject of
investigations and reviews by a number of regulators and
governmental authorities, some of which have resulted in past
fines, settlements and public censure. Refer to the Litigation
and regulatory matters section of Note 20 to the financial
statements for details of material matters currently affecting
NatWest Group.
Report of the directors
RBS plc Annual Report and Accounts 2022 75
The directors present their report together with the audited
accounts for the year ended 31 December 2022.
Other information incorporated into this report by reference
can be found at:
Page/Note
Stakeholder engagement and s.172(1) statement
2
Board of directors and secretary
3
Financial review
4
Share capital and reserves
Note
17
Segmental analysis
Note
4
Post balance sheet events
Note
27
RBS plc structure
The Royal Bank of Scotland plc (‘RBS plc’) is a wholly-owned
subsidiary of NatWest Holdings Limited (‘NWH Ltd’ or ‘the
parent company’). NatWest Group plc (‘NWG plc’) is ‘the
ultimate holding company’. The term ‘NatWest Group’ refers to
NatWest Group plc and its subsidiary and associated
undertakings. NatWest Group plc is incorporated in Great
Britain and has its registered office at 36 St Andrew Square,
Edinburgh, EH2 2YB. Details of the principal subsidiary
undertakings of RBS plc are shown in Note 28 to the accounts.
The financial statements of NatWest Group plc can be obtained
from Legal, Governance and Regulatory Affairs, Gogarburn,
Edinburgh, EH12 1HQ, the Registrar of Companies or at
natwestgroup.com.
Activities
RBS plc is engaged principally in providing a wide range of
banking and other financial services in the UK.
Results and dividends
The profit attributable to the ordinary shareholders of RBS plc
for the year ended 31 December 2022 amounted to £1,122
million compared with a profit of £722 million for the year
ended 31 December 2021, as set out in the income statement
on page 95.
No ordinary shares were issued in 2022 or 2021.
In 2022, RBS plc paid an ordinary dividend of £0.85 billion to
NWH Ltd (2021 - £2.1 billion).
Employees
At 31 December 2021, RBS plc employed 1,200 people
(excluding temporary staff). National Westminster Bank Plc
(NWB Plc) provides the majority of shared services (including
technology) and operational processes under intra-group
agreements. Details of related costs are included in Note 3 to
the accounts.
References to colleagues in this report mean all members of
the workforce (for example, contractors, agency workers).
Corporate governance statement
For the financial year ended 31 December 2022 RBS plc has
again chosen to report against the Wates Corporate
Governance Principles for Large Private Companies (the Wates
Principles), published by the Financial Reporting Council (FRC)
in December 2018 and available on the FRC website. The
disclosures below explain how RBS plc has applied the Wates
Principles in the context of its corporate governance
arrangements.
1. Purpose and leadership
Purpose
NatWest Group’s purpose is established by the NatWest Group
plc Board, promoted across NatWest Group and cascaded to
subsidiaries including RBS plc. NatWest Group’s strategy is also
set and approved by the NatWest Group plc Board.
In February 2020 following an extensive period of stakeholder
engagement, the NatWest Group plc Board approved NatWest
Group’s purpose and strategy.
NatWest Group’s purpose is ‘we champion potential, helping
people, families and businesses to thrive’. The focus on purpose
has strengthened the Board’s consideration of the interests of
all stakeholders and papers presented to the Board set out how
it supports NatWest Group’s purpose. An example of how
purpose has guided Board decisions and discussions can be
found in the section 172 statement on page 2.
In April 2022 the Board received an assessment of progress on
embedding purpose and updates on each of the focus areas of
enterprise, climate and financial capability/learning. Directors
considered the outputs of a colleague opinion survey which had
demonstrated good progress on embedding NatWest Group’s
purpose and values.
The Board received a further purpose update in December
2022. This included an overview of NatWest Group’s evolution
to becoming a purpose-led bank, an assessment of progress on
embedding purpose, achievements to date, external
perceptions of progress and future priorities. The directors
received a further update on the three focus areas and
considered a broader stakeholder overview aligned to the
Blueprint for Better Business framework
Strategy
The Board of directors of NWH Ltd reviews and sets the
strategic direction of the NWH Group and, as appropriate, the
strategies for each of its businesses, within the parameters set
by the NatWest Group plc Board. The Board also oversees the
execution of NWH Group strategy and holds executive
management to account for its delivery.
Further information on NatWest Group’s progress against its
purpose and strategy can be found in the NatWest Group plc
2022 Annual Report and Accounts.
Values and culture
In December 2021 the Board approved NatWest Group’s
refreshed values (Inclusive, Curious, Robust, Sustainable and
Ambitious), ahead of their launch in February 2022. The Board
received regular updates on how the values were embedding
within the organisation through One Bank Transformation
spotlights, Our View colleague survey results and culture
measurement reports.
Further information on NatWest Group’s values can be found in
the NatWest Group plc 2022 Annual Report and Accounts on
page 47.
Report of the directors continued
RBS plc Annual Report and Accounts 2022 76
The Board assesses and monitors culture in several ways.
During 2022 it received:
Colleague Advisory Panel reports which provided feedback
following the Panel’s meetings. Topics included
remuneration (executive pay and the wider workforce),
NatWest Group’s values, customers in vulnerable situations
and future skills;
One bank transformation spotlights on organisation, skills
and culture which included updates on the transition
towards a simpler organisational design and creating and
embedding a One Bank culture;
2022 Our View colleague survey results. Key measures
included culture, purpose, building capability, inclusion,
engagement and leadership;
Culture measurement reports which used an integrated
suite of qualitative, quantitative, internal and external data
sources to support NatWest Group in assessing the
effectiveness and impact of its culture journey; and
Board business insights packs which included metrics to
demonstrate how NatWest Group is delivering for
colleagues (including building capability, diversity and
inclusion and learning).
The activities described above have supported the Board in
meeting the Wates Principle 1 requirement to ensure that
purpose, values, strategy and culture are aligned, within the
wider NatWest Group governance structure.
2. Board composition
The Board has 13 directors comprising the Chairman, two
executive directors and 10 independent non-executive
directors, one of whom is the Senior Independent Director.
The names of the current directors and secretary are shown on
page 3. Their biographies are available at natwestgroup.com
(NatWest Holdings Limited section).
Chairman
The role of the Chairman is to lead the Board and ensure its
overall effectiveness. This is distinct and separate from that of
the CEO who manages the business day-to-day.
The Board considers that the Chairman was independent on
appointment and that all the non-executive directors are
independent. Non-executive director independence and
individual directors’ continuing contribution to RBS plc are
considered at least annually.
Balance and diversity
The Board operates a boardroom inclusion policy which aims to
promote diversity and inclusion in the composition of the
Boards of directors of NatWest Group plc, NWH Ltd, NWB Plc
and RBS plc. This policy reflects NatWest Group’s values, its
inclusion guidelines and relevant legal or voluntary code
requirements.
The policy includes measurable objectives which exist to ensure
that the Boards, and any Committees they delegate
nominations responsibilities to, follow an inclusive process when
making decisions on nominations and appointments. The policy
includes targets which aspire to meet those set out in the UK
Listing Rules along with the recommendations of the FTSE
Women Leaders Review and the Parker Review. The policy also
acknowledges NatWest Group’s ambition to have gender
balance in our global top three levels (CEO-3 and above) by
2030.
Throughout 2022 the Board met the recommendation of the
Parker Review with at least one member of the Board being
from an ethnic minority background and it intends to continue
to meet that recommendation.
As at 31 December 2022:-
the Board RBS plc exceeded the recommendation of the
FTSE Women Leaders Review of 40% female representation
on board by 2025, with 46% of the Board being female; and
with a female CEO and CFO, RBS plc met the FTSE Women
Leaders Review recommendation that companies should
have at least one woman in the Chair or Senior
Independent Director roles on the Board and/or one woman
in the Chief Executive Officer or Finance Director role by
the end of 2025.
A copy of the boardroom inclusion policy is available at
natwestgroup.com.
Size and structure
NWH Limited is the holding company for NatWest Group’s ring-
fenced operations, which include the Retail and Private Banking
businesses and certain aspects of the Commercial &
Institutional businesses. A common board structure is operated
such that directors of NWH Ltd are also directors of RBS plc
and NWB Plc. Known collectively as the NWH Sub Group, the
boards of these three entities meet concurrently.
An integral part of NatWest Group’s governance arrangements
is the appointment of three double independent non-executive
directors (DINEDs) to the Boards and Board Committees, of the
NWH Sub Group. They are Francesca Barnes, Graham Beale,
and Ian Cormack.
The DINEDs are independent in two respects: (i) independent of
management as non-executives; and (ii) independent of the rest
of NatWest Group by virtue of their NWH Sub Group only
directorships.
The DINEDs play a critical role in NatWest Group’s ring-fencing
governance structure, and are responsible for exercising
appropriate oversight of the independence and effectiveness of
the NWH Sub Group’s governance arrangements, including the
ability of each board to take decisions independently. When the
Commercial & Institutional business was stood up during 2022,
the DINEDs considered and provided input on the changes
proposed specifically from a ring-fenced bank perspective,
ahead of NatWest Group plc and NWH Ltd Board discussions.
The DINEDs also have an enhanced role in managing any
conflicts which may arise between the interests of RBS plc and
other members of NatWest Group.
All NWH Sub Group directors who are not DINEDs are directors
of NatWest Group plc. All DINEDs attend NatWest Group plc
Board and relevant Board Committee meetings as observers.
The governance arrangements for the Boards and Board
Committees of NatWest Group plc and the NWH Sub Group
have been designed to enable NatWest Group plc to exercise
appropriate oversight and to ensure that, as far as is
reasonably practicable, the NWH Sub Group is able to take
decisions independently of the wider Group.
Report of the directors continued
RBS plc Annual Report and Accounts 2022 77
The Board is structured to ensure that the directors provide
RBS plc with the appropriate balance of skills, experience,
knowledge and diversity, as well as independence. Given the
nature of NWH Group’s businesses, experience of banking and
financial services is clearly of benefit and the Board has a
number of directors with substantial experience in those areas.
In December 2022 the Nominations Committee, in conjunction
with the NWG Nominations & Governance Committee,
reviewed, and the Boards approved, an updated version of the
NatWest Group plc and NWH Sub Group Board skills matrix. A
summary view of the NatWest Group plc Board skills matrix is
available on page 93 of the NatWest Group plc 2022 Annual
Report and Accounts.
The Board skills matrix reflects directors’ self-assessment of the
skills and experience they bring to Board discussions, in line
with pre-determined criteria aligned to current and future
strategic priorities.
Board Committees also comprise directors with a variety of
skills and experience so that no undue reliance is placed on any
one individual.
The Senior Independent Director acts as a sounding board for
the Chairman and as an intermediary for other directors when
necessary.
Along with the Chairman and executive directors, the non-
executive directors are responsible for ensuring the Board fulfils
its responsibilities under its terms of reference.
The independent non-executive directors combine broad
business and commercial experience with independent and
objective judgment. They provide constructive challenge,
strategic guidance and specialist advice to the executive
directors and the executive management team, and hold
management to account.
The balance between non-executive and executive directors
enables the Board to provide clear and effective leadership
across NWH Group’s business activities and ensures no one
individual or small group of individuals dominates the Board’s
decision-making.
The Board monitors the commitments of the Chairman and
directors and is satisfied that they are able to allocate sufficient
time to enable them to discharge their duties and
responsibilities effectively. Any additional external appointments
require prior Board approval.
Each new director receives a formal induction programme on
joining the Board, which is co-ordinated by the Chief
Governance Officer and Company Secretary and tailored to
suit the requirements of the individual concerned. This includes
visits to NatWest Group’s major businesses and functions and
meetings with directors and senior management. Meetings with
external auditors, counsel and stakeholders are also arranged
as appropriate.
Roisin Donnelly joined the Board on 1 October 2022 and the
Chief Governance Officer and Company Secretary worked
closely with Ms Donnelly to devise a comprehensive induction
programme which was tailored to her needs and flexible to
respond to areas of focus which emerged as the programme
progressed. Priorities included early engagement with key
stakeholders, upskilling on the financial services industry and
regulation, and developing an understanding of NatWest
Group’s structure and business operations, and its strategic
priorities.
All new directors receive a copy of the non-executive director
handbook. The handbook operates as a consolidated
governance support manual for directors of NatWest Group plc
and the NWH Sub Group, providing both new and current
directors with a single source of information relevant to their
role. It covers a range of topics including NatWest Group’s
corporate structure; the Board and Board Committee operating
model; Board policies and processes and a range of technical
guidance on relevant matters including directors’ duties,
conflicts of interest, and the UK Senior Managers and
Certification Regime. The handbook forms part of a wider
library of reference materials available via an online resources
portal.
The Board is supported in its succession planning activities,
including the recruitment of non-executive directors, by the
Nominations Committee, which is responsible for considering
and making recommendations to the Board in respect of Board
appointments.
The Nominations Committee reviews the structure, size and
composition of the Board, and makes recommendations to the
Board in relation to any necessary changes, having regard to
the overall balance of skills, knowledge, experience and
diversity on the Board, the length of service of the Board as a
whole; and the requirement to keep membership regularly
refreshed. The Nominations Committee considers Board
composition and succession planning at least annually. The
NatWest Group plc Group Nominations and Governance
Committee also approves all appointments to the Board,
reflecting RBS plc’s position as a subsidiary within NatWest
Group.
Evaluation
A review of the effectiveness of the Board, including the
Chairman, individual directors and Board Committees, is
conducted annually.
Progress following the 2021 evaluation
A number of actions were progressed during 2022 in response
to the findings of the 2021 external evaluation.
In December 2022 the directors noted the progress made
against the 2021 evaluation actions, which were consistent
across the NatWest Group plc and NWH Sub Group Boards and
are described in more detail on page 104 of the NatWest Group
plc 2022 Annual Report and Accounts.
2022 Performance evaluation
In 2022, the Board and Committee evaluation
was internally facilitated by the Chief Governance Officer and
Company Secretary.
Key findings, recommendations and actions were aligned
across NatWest Group plc and the NWH Sub Group and a
summary of the outcomes and actions arising from the 2022
evaluation can be found on pages 104 to 105 of the NatWest
Group plc 2022 Annual Report and Accounts.
In December 2022, the Board agreed an action plan in
response to the 2022 evaluation recommendations and
implementation of the actions will be overseen by the
Nominations Committee during 2023.
The Chairman met each director individually to discuss their
own performance and continuing professional development and
establish whether each director continues to contribute
effectively to the company’s long-term sustainable success. The
Chairman also shared peer feedback provided by directors as
part of the evaluation process.
Report of the directors continued
RBS plc Annual Report and Accounts 2022 78
Separately, the Senior Independent Director, together with the
NatWest Group plc Senior Independent Director, sought
feedback on the Chairman’s performance from the non-
executive directors, executive directors and other key internal
and external stakeholders and discussed it with the Chairman.
This included peer feedback provided by directors as part of
the evaluation process.
Directors’ training and development is co-ordinated by the
Chief Governance Officer and Company Secretary.
Directors have access to a wide range of briefing and training
sessions and other professional development opportunities.
Directors undertake the training they consider necessary to
assist them in carrying out their duties and responsibilities. The
non-executive directors discuss professional development with
the Chairman at least annually.
During 2022 the Board training programme covered supply
chain diversity, digital currencies, regulatory updates, the
Takeover Code, capital, financial crime, inside information,
climate, ring-fencing rules and a cyber risk ‘war game’.
In addition, directors broadened their knowledge and
understanding of the risks facing NatWest Group by
participating in a Board dinner discussion with executive
management on top and emerging risks. A number of directors
also accepted an invitation to the full Board to join meetings of
the Technology and Innovation Committee which covered
areas of broader interest, including a session on data strategy.
3. Director responsibilities
Accountability
All directors receive guidance on their statutory duties under
the Companies Act 2006 and are supported in the discharge of
their duties by the Chief Governance Officer and Company
Secretary.
Each director has a role profile which clearly articulates their
responsibilities and accountabilities and any additional
regulatory responsibilities and accountabilities are set out in
their statement of responsibilities. In 2022 the Chairman’s and
non-executive directors’ role profiles were refreshed and
updated to ensure they continue to accurately reflect their role
and responsibilities and are in line with best practice.
NatWest Group also produces and maintains a document called
‘Our Governance’ which sets out the governance, systems and
controls applicable to NatWest Group plc and the NWH Sub
Group. Our Governance is made available to all directors and is
reviewed and approved by the Board at least annually.
The directors’ conflicts of interest policy sets out procedures to
ensure that the Board’s management of conflicts of interest
and its powers for authorising certain conflicts are operating
effectively. This includes the management of conflicts that may
arise during Board decisions where the interests of RBS plc
conflict with the interests of other members of NatWest Group.
Each director is required to notify the Board of any actual or
potential situational or transactional conflict of interest and to
update the Board with any changes to the facts and
circumstances surrounding such conflicts.
Situational conflicts can be authorised by the Board in
accordance with the Companies Act 2006 and the company’s
Articles of Association. The Board considers each request for
authorisation on a case by case basis and has the power to
impose conditions or limitations on any authorisation granted
as part of the process.
RBS plc maintains a register of directors’ interests and
appointments, which is reviewed annually by the Board, and
there is discussion of directors’ conflicts in Board meetings, as
required.
The Board
The Board is the main decision-making forum for RBS plc. The
Board is collectively responsible for the long-term success of
RBS plc and the delivery of sustainable value to its
shareholders. The Board’s role is to provide leadership of RBS
plc. It monitors and maintains the consistency of RBS plc’s
activities within the strategic direction of NatWest Group and,
as appropriate, the strategies approved by NWH Ltd for each of
the businesses within the NWH Group. It reviews and approves
risk appetite for key risks in accordance with the NatWest
Group risk appetite framework (being a component part of the
NWH risk management framework); and it monitors
performance against risk appetite for RBS plc. It approves RBS
plc’s key financial objectives and keeps the capital and liquidity
positions of RBS plc under review.
The Board’s terms of reference include a formal schedule of
matters specifically reserved for the Board’s decision and are
reviewed at least annually. An internal review confirmed the
Board had fulfilled its remit as set out in its terms of reference
during 2022.
The Board held eight scheduled meetings and three strategy
sessions with executive management during 2022.
At each scheduled Board meeting the directors receive reports
from the Chairman, Board Committee Chairs, CEO, CFO, Chief
Risk Officer and other members of the executive management
team, as appropriate. Business reviews from the CEOs of the
Retail Banking, Wealth and Commercial & Institutional
businesses included updates on progress against strategy and
spotlights on current topics including the cost of living, Ukraine,
climate, unsecured lending growth in retail, and mortgages. In
addition to the business CEOs, a number of other senior
executives attended Board meetings throughout the year to
present reports to the Board. This provided the Board with an
opportunity to engage directly with management on key issues
and supported succession planning. The Board also welcomed
external presenters and advisers to Board meetings, who
provided useful insights and perspectives.
Board Committees
The Board has established a number of Board Committees with
particular responsibilities. The Audit, Risk, Performance &
Remuneration, and Nominations Committees of NWH Ltd
operate as committees of each of NWH Ltd, NWB Plc and RBS
plc, with meetings running concurrently.
The Audit Committee
comprises at least three independent
non-executive directors, two of whom are DINEDs. The
Committee assists the Board in discharging its responsibilities in
relation to the disclosure of financial affairs. It also reviews
accounting and financial reporting and regulatory compliance
practices of RBS plc, RBS plc’s system of standards of internal
controls, and monitors RBS plc’s processes for internal audit
and external audit.
The Board Risk Committee comprises at least four independent
non-executive directors, one of whom is the Chairman of the
Audit Committee and two of whom are DINEDs. It provides
oversight and advice to the Board in relation to current and
potential future risk exposures, future risk profile, and the
approval and effectiveness of the risk management framework
and (in conjunction with the Audit Committee) internal controls
required to manage risk.
Report of the directors continued
RBS plc Annual Report and Accounts 2022 79
The Performance and Remuneration Committee
(RemCo)
comprises at least four independent non-executive directors,
one of whom is a DINED. It assists the NatWest Group plc
Performance and Remuneration Committee with the oversight
and implementation of NatWest Group’s remuneration policy
and also considers and makes recommendations on
remuneration arrangements for senior executives of RBS plc.
The Nominations Committee
comprises the Chairman, Senior
Independent Director and at least three further independent
non-executive directors. It is responsible for assisting the Board
in the formal selection and appointment of directors. It reviews
the structure, size and composition of the Board, and
membership and chairmanship of Board Committees.
Executive Committee
The Executive Committee comprises RBS plc’s most senior
executives and supports the CEO to discharge her individual
accountabilities including matters relating to strategy,
financials, risk, customer and operational issues, and culture
and values.
Integrity of information
All directors receive accurate, timely and clear information on
all relevant matters and have access to the advice and services
of the Chief Governance Officer and Company Secretary. In
addition, all directors are able, if necessary, to obtain
independent professional advice at RBS plc’s expense.
The Board and Committee paper template includes a section
for authors to explain how the proposal or update aligns with
NatWest Group’s purpose and a separate section for them to
include an assessment of the relevant stakeholder impacts for
the directors to consider. This aligns with the directors’ duties
under section 172(1) of the Companies Act 2006 and further
details on how the directors have complied with their section
172(1) duties can be found on page 2 of the Strategic report.
Directors are mindful that it is not always possible to achieve
an outcome which meets the expectations of all stakeholders
who may be impacted. For decisions which are particularly
challenging or complex, an optional page in the Board and
Committee paper template provides directors with further
information to support purposeful decision-making. This
additional page uses the Blueprint for Better Business
framework as a base and is aligned to NatWest Group’s
broader purpose framework.
4. Opportunity and risk
The role of the Board is to promote the long-term sustainable
success of RBS plc.
The Board held three strategy sessions with the executive
management team in 2022. Within the context of a wider
discussion at NatWest Group level, this provided an opportunity
for the Board to assess opportunities and risks to the future
success of the business, the sustainability of the business model
and how its governance contributes to the delivery of its
strategy.
The Board reviews the effectiveness of the risk management
and internal control systems – including the nature and extent
of the risks taken in pursuit of strategic objectives. The Board
also reviews and approves risk appetite for RBS plc’s principal
risks in accordance with the NatWest Group risk appetite
framework; monitors performance against risk appetite for RBS
plc; and considers any material risks and approves, as
appropriate, recommended actions escalated by the Board Risk
Committee.
RBS plc’s risk strategy is informed and shaped by an
understanding of the risk landscape including the principal risks
it takes in carrying out business activities as well as the risks
and uncertainties arising from the external economic, political
and regulatory environments.
RBS plc operates within NatWest Group’s integrated risk
management framework. This is centred around the
embedding of a strong risk culture and is designed to ensure
the tools and capability are in place to facilitate sound risk
management and decision-making. As part of the enterprise-
wide framework RBS plc complies with NatWest Group’s risk
appetite framework, which is approved annually by the
NatWest Group plc Board. NatWest Group’s risk appetite is set
in line with overall strategy. RBS plc also complies with the
NatWest Group policy framework. The purpose of the policy
framework is to ensure that NatWest Group establishes and
maintains policies that adequately address the risks inherent in
its business activities.
Further information on NatWest Group’s integrated enterprise-
wide risk management framework including risk culture, risk
appetite, risk identification, risk measurement and risk
mitigation, as well as NWH Ltd risk governance, can be found
in the risk and capital management section of this report
(pages 6 to 74).
5. Remuneration
The NatWest Group remuneration policy provides a consistent
policy across all NatWest Group companies and ensures
compliance with regulatory requirements. The remuneration
policy is aligned with the business strategy, objectives, values
and long-term interests of RBS plc. The policy supports a
culture where individuals are rewarded for delivering sustained
performance in line with risk appetite and for demonstrating
the right conduct and behaviours.
The RemCo reviews remuneration for executives of RBS plc
and considers reports on the wider workforce including annual
pay outcomes and diversity information. The RemCo helps to
ensure that the remuneration policies, procedures and
practices being applied are appropriate for RBS plc.
Executive remuneration structures incentivise individuals to
deliver sustainable performance based on strategic objectives
for NatWest Group and the relevant business area.
Performance is assessed against a balanced scorecard of
financial and non-financial measures and variable pay is
subject to deferral as well as malus and clawback provisions to
ensure rewards are justified in the long-term.
The approach to performance management provides clarity for
colleagues on how their contribution links to NatWest Group’s
purpose and colleagues are set goals across a balanced
scorecard of measures. NatWest Group continues to pay
colleagues fairly for the work they do, supported by simple and
transparent pay structures in line with industry best practices.
NatWest Group keeps policies and processes under review to
ensure it does so.
Report of the directors continued
RBS plc Annual Report and Accounts 2022 80
This clarity and certainty on how pay is delivered helps to
improve colleagues’ financial wellbeing, which is a core priority
in NatWest Group’s wellbeing plans. In 2022 NatWest Group
made a number of interventions to support colleagues in
response to the cost of living crisis. In the UK, NatWest Group’s
rates of pay continue to exceed the Living Wage Foundation
benchmarks and it takes a similar approach across the major
hubs outside of the UK.
NatWest Group helps colleagues to have an awareness of the
financial and economic factors affecting its performance
through quarterly ‘Results Explained’ communications and
Workplace Live events with the Group CEO and Group CFO.
Further information on the remuneration policy, pay ratios and
employee share plans can be found in the Directors’
remuneration report of the NatWest Group plc 2022 Annual
Report and Accounts. Gender and Ethnicity Pay Gap
information can be found in the Strategic report section of the
NatWest Group plc 2022 Annual Report and Accounts and at
natwestgroup.com, along with the steps being taken to build an
inclusive and engaged workforce.
6. Stakeholder relationships and engagement
In February 2022 the Board approved its annual objectives and
confirmed the Board’s key stakeholder groups – customers,
investors, regulators, colleagues, communities and suppliers.
The Board’s agenda and engagement plans were structured to
enhance the Board’s understanding of these stakeholders’
views and interests. This in turn has informed Board discussions
and decision-making.
For further information on stakeholder engagement activities
undertaken within NatWest Group which impacted RBS plc, see
page 2 and pages 36 to 39 of the NatWest Group plc 2022
Annual Report and Accounts, and below under Additional
colleague-related disclosures (workforce engagement including
the Colleague Advisory Panel).
Engagement with Colleagues, Suppliers, Customers and
Others
For further details on the Board’s engagement with colleagues,
customers, suppliers and others, and how these stakeholders’
interests have influenced Board discussions and principal
decisions, see page 2 of the Strategic report which includes a
section 172(1) statement and signposts to further information
contained in the NatWest Group plc 2022 Annual Report and
Accounts.
Additional colleague-related disclosures
Informing and consulting colleagues
NatWest Group listens to colleagues and uses this insight to
attract, engage and retain the talent it needs for the future.
The Colleague Listening Strategy contributes to a deeper
understanding of colleague sentiment and includes colleague
opinion surveys; a Colleague Advisory Panel (CAP) that
connects colleagues directly with the Board; the Colleague
Experience Squad, a group of colleagues who volunteer to
provide feedback on colleague products and services; and
‘Workplace’, NatWest Group’s social media platform. NatWest
Group also tracks metrics and key performance indicators
which can be benchmarked with sector and high-performing
comparisons.
Over 48,000 colleagues (82%) participated in the September
2022 Our View survey. The 82% response rate was one of the
highest seen by NatWest Group in the last 10 years. In the face
of an unprecedented external environment, the results
remained strong and showed overall resilience.
However, lead
measures in culture, wellbeing and purpose fell marginally, with
inclusion measures remaining stable and, despite the
challenging backdrop, the measure on building capability
improved. Across all comparable categories, NatWest Group
sits an average of six percentage points above the Global
Financial Services Norm (GFSN) and two percentage points
above the Global High Performance Norm (GHPN).
Regular interactions with employee representatives such as
trade unions, elected employee bodies and works councils are
a vital means of transparency and engagement for NatWest
Group. These sessions are frequently used to discuss
developments and updates on the progress of strategic
priorities: in 2022, for example, topics included ‘ways of
working’ and ‘health and safety in the context of the
pandemic’. NatWest Group is also committed to respecting
employees’ rights of freedom of association across all of its
business.
In addition, through the CAP established in 2018, colleagues
can engage directly with senior management and the Board on
topics which are important to them, thereby strengthening the
voice of colleagues in the Boardroom. The CAP is made up of
28 colleagues who are self-nominated or part of an employee
representative body. In September 2022 Mike Rogers
succeeded Lena Wilson as CAP Chair, and the panel’s
membership was refreshed. New members received training on
the role of the CAP and their responsibilities as members.
Although members were randomly selected, the membership
was cross-checked to ensure the panel was in the main
reflective of the bank’s population covering a variety of
business areas, organisational levels and locations, working
patterns and employee-led networks.
The CAP met with representatives from the Board twice in
2022 to discuss issues such as wellbeing, remuneration
(including executives and the wider workforce), NatWest
Group’s values, customers in vulnerable situations and future
skills.
The CAP continues to be highly regarded by those who attend
and has proven to be an effective way of establishing two-way
dialogue between colleagues and Board members. The Board
discusses colleague feedback received from the CAP and the
CAP Chair provides feedback on this discussion to the Panel to
ensure a continuous feedback loop.
Disability Smart
NatWest Group makes workplace adjustments to support
colleagues with disabilities to succeed. If a colleague becomes
disabled NatWest Group will, wherever possible, make
adjustments to support them in their existing role or re-deploy
them to a more suitable alternative role.
The NatWest Group Careers site gives comprehensive insights
into NatWest Group jobs, culture, locations and application
processes. It also hosts a variety of blog content to portray
stories of what it is like to work at NatWest Group. The
company also makes sure that candidates can easily request
adjustments or help to complete their application or
assessment.
Report of the directors continued
RBS plc Annual Report and Accounts 2022 81
Internal control over financial reporting
The internal controls over financial reporting for RBS plc are
consistent with those at NatWest Group level. RBS plc has
designed and assessed the effectiveness of its internal control
over financial reporting as of 31 December 2022 based on the
criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission in the 2013 publication of
‘Internal Control – Integrated Framework’. Any deficiencies
identified are reported to the RBS plc Audit Committee along
with management’s remediation plans.
NatWest Group's auditors have audited the effectiveness of
NatWest Group's internal control over financial reporting and
have given an unqualified opinion.
Directors’ interests
Where directors of RBS plc are also directors of NatWest Group
plc, their interests in the shares of the ultimate holding
company at 31 December 2022 are shown in the Corporate
governance, Annual report on remuneration section of the
NatWest Group 2022 Annual Report and Accounts. None of the
directors held an interest in the loan capital of the ultimate
holding company, or in the shares of RBS plc, during the period
from 1 January 2022 to 17 February 2023.
Directors’ indemnities
In terms of section 236 of the Companies Act 2006 (the
‘Companies Act’), Qualifying Third Party Indemnity Provisions
have been issued by the ultimate holding company to its
directors, members of RBS plc’s Executive Committee,
individuals authorised by the PRA/FCA and certain directors
and/or officers of NatWest Group subsidiaries.
Going concern
RBS plc’s business activities and financial position, the factors
likely to affect its future development and performance and its
objectives and policies in managing the financial risks to which
it is exposed, and its capital, are discussed in the Financial
review. RBS plc’s regulatory capital resources and significant
developments in 2022 , and anticipated future developments
are detailed in the Capital, liquidity and funding section on
pages 59 to 66. This section also describes RBS plc’s funding
and liquidity profile, including changes in key metrics and the
build up of liquidity reserves.
The directors have prepared the financial statements on a
going concern basis after assessing the principal risks,
forecasts, projections and other relevant evidence over the
twelve months from the date the financial statements are
approved.
Political donations
During 2022, no political donations were made in the UK or EU,
nor any political expenditure incurred in the UK or EU.
Directors’ disclosure to auditors
Each of the directors at the date of approval of this report
confirms that:
(a) so far as the director is aware, there is no relevant audit
information of which RBS plc’s auditors are unaware; and
(b) the director has taken all the steps that he/she ought to
have taken as a director to make himself/herself aware of any
relevant audit information and to establish that RBS plc’s
auditors are aware of that information.
This confirmation is given and should be interpreted in
accordance with the provisions of section 418 of the
Companies Act.
Auditors
Ernst & Young LLP (EY LLP) are RBS plc’s auditors and have
indicated their willingness to continue in office. A resolution to
re-appoint EY LLP as RBS plc’s auditors will be proposed at the
forthcoming Annual General Meeting.
By order of the Board
Jan Cargill
Chief Governance Officer and Company Secretary
16 February 2023
The Royal Bank of Scotland plc
is registered in Scotland No. SC083026
Statement of directors’ responsibilities
RBS plc Annual Report and Accounts 2022 82
This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 84 to 94.
The directors are responsible for the preparation of the Annual Report and Accounts. The directors are required by the Companies
Act 2006 to prepare company financial statements, for each financial year in accordance with UK adopted International
Accounting Standards. They are responsible for preparing financial statements that present fairly the financial position, financial
performance and cash flows of the Bank. In preparing those financial statements, the directors are required to:
select suitable accounting policies and then apply them consistently;
make judgments and estimates that are reasonable, relevant and reliable; and
state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained
in the financial statements
prepare the financial statements on a going concern basis unless it is inappropriate to presume that the company will continue
in business.
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the
financial position of the Bank and to enable them to ensure that the Annual Report and Accounts complies with the Companies Act
2006. They are also responsible for safeguarding the assets of the Bank and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
Under applicable law and regulations, the directors are also responsible for preparing a Strategic report and Directors’ report, that
comply with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and
financial information included on the company’s website.
The directors confirm that to the best of their knowledge:
the financial statements, prepared in accordance with UK adopted International Accounting Standards, give a true and fair
view of the assets, liabilities, financial position and profit or loss of the Bank taken as a whole; and
the Strategic report and Directors’ report (incorporating the Financial review) include a fair review of the development and
performance of the business and the position of the Bank taken as a whole, together with a description of the principal risks
and uncertainties that they face.
By order of the Board
Howard Davies
Alison Rose-Slade DBE
Katie Murray
Chairman
Chief Executive Officer
Chief Financial Officer
16 February 2023
Board of directors
Chairman
Executive directors
Non-executive directors
Howard Davies
Alison Rose-Slade DBE
Katie Murray
Francesca Barnes
Graham Beale
Ian Cormack
Roisin Donnelly
Patrick Flynn
Morten Friis
Yasmin Jetha
Mike Rogers
Mark Seligman
Lena Wilson
Financial statements
RBS plc Annual Report and Accounts 2022 83
Page
Independent auditor’s report
84
Income statement
95
Statement of comprehensive income
95
Balance sheet
96
Statement of changes in equity
97
Cash flow statement
98
Accounting policies
99
Notes on the accounts
1
Net interest income
104
2
Non-interest income
104
3
Operating expenses
105
4
Segmental analysis
106
5
Pensions
107
6
Auditor’s remuneration
107
7
Tax
108
8
Financial instruments - classification
110
9
Financial instruments - fair value of financial instruments not carried at fair value
113
10
Financial instruments - maturity analysis
114
11
Derivatives
116
12
Loan impairment provisions
120
13
Investments in Group undertakings
121
14
Other assets
121
15
Subordinated liabilities
16
Other liabilities
121
17
Share capital and reserves
123
18
Unconsolidated structured entities
123
19
Capital resources
124
20
Memorandum items
125
21
Analysis of changes in financing during the year
127
22
Analysis of cash and cash equivalents
127
23
Directors’ and key management remuneration
128
24
Transactions with directors and key management
128
25
Related parties
129
26
Ultimate holding company
129
27
Post balance sheet events
129
28
Related undertakings
130
Independent auditors’ report to the members of
The Royal Bank of Scotland plc
RBS plc Annual Report and Accounts 2022 84
Opinion
We have audited the financial statements of The Royal Bank of Scotland plc (the “Bank”) for the year ended 31 December 2022
which comprise the Income statement, the Statement of comprehensive income, the Balance Sheet, the Statement of changes in
equity, the Cash flow statement, the Accounting policies and the related notes 1 to 28, and the Risk and capital management
section of the Strategic report identified as ‘audited’. The financial reporting framework that has been applied in their preparation
is applicable law and UK adopted international accounting standards.
In our opinion, the financial statements:
give a true and fair view of the Bank’s affairs as at 31 December 2022 and of its profit for the year then ended;
have been properly prepared in accordance with UK adopted international accounting standards; and
have been prepared in accordance with the requirements of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements
section of our report. We are independent of the Bank in accordance with the ethical requirements that are relevant to our audit of
the financial statements in the UK, including the FRC’s Ethical Standard as applied to public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the
preparation of the financial statements is appropriate. Our evaluation of the directors’ assessment of the Bank’s ability to continue
to adopt the going concern basis of accounting included:
In conjunction with our walkthrough of the Bank’s financial close process, we confirmed our understanding of management’s
Going Concern assessment process and also engaged with management early to ensure all key factors were considered in their
assessment;
We evaluated management’s going concern assessment which included reviewing their evaluation of long-term business and
strategic plans, capital adequacy, liquidity and funding positions. It also assessed these positions considering internal stress tests
which included consideration of principal and emerging risks. The Bank’s risk profile and risk management practices were
considered including credit risk, market risk, compliance and conduct risk, climate risk and operational risk;
We evaluated management’s assessment by considering the Bank’s ability to continue in operation and meets its liabilities under
different scenarios including the impact of the Bank’s strategic plans and the current uncertain geopolitical and economic
outlook. We used economic specialists in assessing the macroeconomic assumptions in the forecast through benchmarking to
institutional forecasts, HMT consensus and peer comparative economic forecasts;
Considered the results of the Bank’s stress testing and Bank of England 2022 solvency stress test; and
We reviewed the Bank’s going concern disclosures included in the annual report in order to assess that the disclosures were
appropriate and in conformity with the reporting standards.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the Bank’s ability to continue as a going concern over the twelve months
from the date when the financial statements are authorised for issue.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of
this report. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the
Bank’s ability to continue as a going concern.
Independent auditors’ report to the members of The Royal Bank of Scotland plc continued
RBS plc Annual Report and Accounts 2022 85
An overview of the scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope
for the Bank. This enables us to form an opinion on the financial statements. We take into account the size and risk profile of the
component and its activities, the organisation of the Bank and effectiveness of NWG Group-wide controls, changes in the business
environment and other factors such as recent internal audit results when assessing the level of work to be performed at each
component.
In assessing the risk of material misstatement to the Bank financial statements, and to ensure we had adequate quantitative
coverage of significant accounts in the financial statements, of the five reporting components of the Bank, we selected three
components based on size and risk, which represent the principal business units within the Bank.
The scoping for the current year is as follows:
Component
Scope
Key locations
Retail Banking
Full
United Kingdom
Commercial Banking
Full
United Kingdom
Central items and other (including Services, and Treasury)
Full
United Kingdom, India
The table below illustrates the coverage obtained from the work performed by our audit teams. We considered total assets, total
equity and total income to verify we had appropriate overall coverage.
Full scope (1)
Specific scope (2)
Other procedures (3)
Total
Total assets
100%
0%
0%
100%
Total equity
87%
0%
13%
100%
Total income
100%
0%
0%
100%
(1) Full scope: audit procedures on all significant accounts.
(2) Specific scope: audit procedures on selected accounts.
(3) Other procedures: considered in analytical procedures.
Involvement with component teams
In establishing our overall approach to the Bank audit, we determined the type of work that needed to be undertaken at each of
the components by us, as the primary audit engagement team, or by component auditors from other EY global network firms
operating under our instruction. The primary audit engagement team interacted regularly with the component audit teams where
appropriate throughout the course of the audit, which included holding planning meetings, maintaining regular communications on
the status of the audits, reviewing key working papers and taking responsibility for the scope and direction of the audit process.
The primary audit team continued to follow a programme of oversight visits that has been designed to ensure that the Senior
Statutory Auditor, or another Group audit partner, has ongoing interaction with all full scope and specific scope locations outside
the United Kingdom. The primary team interacted regularly with the component teams and maintained a continuous and open
dialogue with component teams, as well as holding formal closing meetings quarterly, to ensure that the primary team were fully
aware of their progress and results of their procedures. The primary team also reviewed key working papers and were responsible
for the scope and direction of the audit process. This, together with the additional procedures at Group level, gave us appropriate
evidence for our opinion on the Group financial statements.
Independent auditors’ report to the members of The Royal Bank of Scotland plc continued
RBS plc Annual Report and Accounts 2022 86
An overview of the scope of our audit
Climate change
Stakeholders are increasingly interested in how climate change will impact the Company. The Company has determined that the
most significant future impacts from climate change on its operations will be from credit risk, operational risk, reputational risk,
conduct risk and regulatory compliance risk. These are explained in the required Task Force for Climate related Financial
Disclosures in the Strategic Report, and in the Climate Risk section within the Risk and capital management section. The Company
has also explained their climate commitments in the Strategic Report. All of these disclosures form part of the “Other information”,
rather than the audited financial statements. Our procedures on these unaudited disclosures therefore consisted solely of
considering whether they are materially inconsistent with the financial statements or our knowledge obtained in the course of the
audit or otherwise appear to be materially misstated, in line with our responsibilities on “Other information”.
The Company has explained in the Accounting Policy note how they have reflected the impact of climate change in their financial
statements, and the significant judgements and estimates relating to climate change. These disclosures also explain the uncertainty
regarding policy response, including the effect of wider geo-political uncertainty on governmental ambitions regarding climate
transition and the effect of decarbonisation on wider economic growth and customer behaviours. Many of the impacts arising will
be longer term in nature, with an inherent level of uncertainty, and have limited effect on accounting judgments and estimates for
the current period under the requirements of UK adopted international accounting standards. The Company has also explained
within the Accounting Policies, their approach to quantifying the impact of climate transition policy on macroeconomic factors in
the future years, and the limitations on the ability to make a reliable estimate for 2022 reporting.
Our audit effort in considering the impact of climate change on the financial statements was focused on evaluating the Company’s
assessment of the impact of climate risk, their climate commitments and the significant judgements and estimates disclosed in the
Accounting Policies, and whether these have been appropriately reflected in the asset values where these are impacted by future
cash flows, and in the timing and nature of liabilities recognised following the requirements of UK adopted international accounting
standards. As part of this evaluation, we performed our own risk assessment, supported by our climate change specialists, to
determine the risk of material misstatement in the financial statements from climate change which needed to be considered in our
audit. We also evaluated the Directors’ considerations of climate change risks in their assessment of going concern and viability
and associated disclosures. Where considerations of climate change were relevant to our assessment of going concern, these are
described above.
Based on our work we have considered the impact of climate change on the financial statements to impact certain key audit
matters. Details of our procedures and findings are included in our explanation of key audit matters below.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of
resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit
of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.
Independent auditors’ report to the members of The Royal Bank of Scotland plc continued
RBS plc Annual Report and Accounts 2022 87
Risk
Our response to the risk
Expected Credit Loss Provisions
At 31 December 2022 the Bank reported
total gross loans of £61.2 billion (2021: £67.4
billion) and £664 million of expected credit
losses (ECL) (2021: £707 million).
Management’s judgments and estimates are
especially subjective due to significant
uncertainty associated with the assumptions
used. These include the current geopolitical
and economic outlook and the impact of
climate change which were both considered
in our risk assessment. Aspects with
increased complexity in respect of the timing
and measurement of ECL include:
Staging - Allocation of assets to stage 1, 2,
or 3 on a timely basis using criteria in
accordance with IFRS 9;
Model estimations - Accounting
interpretations, modelling assumptions and
data used to build and run the Probability of
Default (‘PD’), Loss Given Default (‘LGD’)
and Exposure at Default (‘EAD’) models that
calculate the ECL;
Economic scenarios - Inputs, assumptions
and weightings used to estimate the impact
of multiple economic scenarios particularly
those influenced by including any changes to
scenarios required through 31 December
2022;
Adjustments - Appropriateness,
completeness and valuation of model
adjustments which represent approximately
10% of total ECL including any adjustments
due to the ongoing geopolitical and
economic uncertainty, and the identification
of vulnerable customers which increases the
risk of management override; and
Individual provisions - Measurement of
individual provisions including the
assessment of multiple scenarios considering
the impact of current geopolitical and
economic outlook on exit strategies,
collateral valuations and time to collect.
Controls testing - We evaluated the design and operating effectiveness of
controls across the processes relevant to ECL, including the judgments and
estimates noted. These controls, among others, included those over:
the allocation of assets into stages including management’s monitoring of
stage effectiveness;
model governance including monitoring and model validation;
data accuracy and completeness;
credit monitoring;
multiple economic scenarios;
the governance and review of post-model adjustments;
individual provisions; and
production of journal entries and disclosures.
In evaluating the governance process, we observed the executive finance and
risk committee meetings where the inputs, assumptions and adjustments to the
ECL were discussed and approved, among other procedures.
Overall assessment - We performed an overall assessment of the ECL provision
levels by stage to determine if they were reasonable by considering the overall
credit quality of the Bank’s portfolios, risk profile, impact of the current
geopolitical and economic outlook and climate change on the Bank’s
customers. We performed peer benchmarking where available to assess overall
staging and provision coverage levels. We also performed sensitivity analysis to
assess the impact of changing assumptions on the ECL provision
Based on our assessment of the key judgments we used EY specialists to
support the audit team in the areas of economics, modelling and collateral and
business valuations.
Staging - We evaluated the criteria used to allocate a financial asset to stage 1,
2 or 3 in accordance with IFRS 9; this included peer benchmarking to assess
staging levels. We recalculated the assets in stage 1, 2 and 3 to assess if they
were allocated to the appropriate stage and performed sensitivity analysis to
assess the impact of different criteria on the ECL and also considered the
impact of performing collective staging downgrades to industries and
geographic regions particularly impacted by climate change.
To test credit monitoring which drives the probability of default estimates used
in the staging calculation, we recalculated the risk ratings for a sample of
performing loans and focused our testing on high risk industries, such as
commercial real estate and leisure. We also assessed the timing of the annual
review performed by management on each wholesale loan exposure in our
sample to evaluate whether it appropriately considered risk factors by
considering independent publicly available information.
Model estimations - We performed a risk assessment on all models involved in
the ECL calculation to select a sample of models to test, which included new
models implemented in the year. We involved EY modelling specialists to assist
us to test this sample of ECL models by testing the assumptions, inputs and
formulae used. This included a combination of assessing model design and
formulae, alternative modelling techniques, recalculating the PD, LGD and EAD,
and model implementation. We also considered the results of the Bank’s
internal model validation results. We performed an assessment of the extent to
which model methodologies developed using historic experience were able to
respond to the current economic conditions, including Consumer Price Index
and Bank of England base rates. Where we identified model limitations, we
tested the extent to which these effects have been appropriately captured in
Post Model Adjustments.
To evaluate data quality, we agreed a sample of ECL calculation data points to
source systems, including balance sheet date data used to run the models and
historic loss data to monitor models. We also tested the ECL data points from
the calculation engine through to the general ledger and disclosures.
Independent auditors’ report to the members of The Royal Bank of Scotland plc continued
RBS plc Annual Report and Accounts 2022 88
Risk
Our response to the risk
Expected Credit Loss Provisions continued
Economic scenarios - We involved EY economic specialists to assist us in
evaluating the base case and alternative economic scenarios, including
evaluating probability weights and considering contrary evidence by comparing
these to other scenarios from a variety of external sources. This assessment
included the latest developments related to the current geopolitical and
economic outlook at 31 December 2022. We assessed whether forecasted
macroeconomic variables, such as GDP, unemployment rate, Consumer Price
Index, Bank of England base rates and the House Price Index were complete
and appropriate. With the support of our modelling specialists we evaluated the
correlation and translation of the macroeconomic factors to the ECL.
Post Model Adjustments (PMAs) - We evaluated and tested the appropriateness,
adequacy and completeness of PMAs held at year end, including those applied
in response to the current geopolitical and economic outlook and the impact of
certain economic factors. This included challenging the identification of retail
customers vulnerable to price and rate increases and the identification of
commercial sub-sectors more susceptible to inflation and supply chain issues as
well as the method by which those PMAs were measured. We have also
challenged those PMAs which continued to be applied as a result of COVID-19
related to recovery periods and the associated debt issued to borrowers that
obtained government supported loans during Covid-19. With our modelling
specialists, we assessed the risk of bias and the completeness of these
adjustments by considering the data, judgments, methodology, sensitivities, and
governance of these adjustments as well as considering model shortcomings.
Individual provisions - We recalculated and challenged the scenarios,
assumptions and cash flows for a sample of individual provisions including the
alternative scenarios and evaluating probability weights assigned, involving EY
valuation specialists where appropriate. The sample was based on a number of
factors, identified with reference to external sources, including higher risk
sectors such as commercial real estate, agriculture, oil and gas, mining, retail,
leisure and aviation, and materiality. We considered the impact of the current
geopolitical and economic outlook and climate change had on collateral
valuations and time to collect as well as whether planned exit strategies
remained viable.
Disclosure - We tested the data flows used to populate the disclosures and
assessed the adequacy of disclosures for compliance with the accounting
standards and regulatory considerations.
Key observations communicated to the NatWest Holdings (NWH) Group Audit Committee (1)
We are satisfied that provisions for the impairment of loans were reasonable and recognised in accordance with IFRS 9. We
highlighted the following matters to the NWH Group Audit Committee:
Overall provision levels were reasonable which also considered available peer information and our understanding of
the credit environment;
Control deficiencies were identified in the processes used to calculate the ECL for which compensating controls were
identified to mitigate a risk of material misstatement;
Our testing of models and model assumptions identified some instances of over and under estimation. We aggregated
these differences and were satisfied that the overall estimate recorded was reasonable;
The post-model adjustments recorded were within a reasonable range to reflect risk in the portfolios;
We recalculated the staging of retail and wholesale exposures in material portfolios and noted no material differences.
We also performed sensitivity analysis on the staging criteria and noted that substantial changes would be needed to
the criteria to result in a material difference; and
For individually assessed impairments, in a few instances we identified judgmental differences in respect of the extent
of the impairment identified, however, none of these differences, individually or in aggregate, were considered
material.
Relevant references in the Annual Report and Accounts
Credit Risk section of the Risk and capital management section
Accounting policies
Note 12 to the financial statements
(1) NWH Audit Committee covers the ring-fenced bank legal entities of NatWest Group, including RBS plc.
Independent auditors’ report to the members of The Royal Bank of Scotland plc continued
RBS plc Annual Report and Accounts 2022 89
Risk
Our response to the risk
Future profitability estimates impacting the recognition of Deferred tax
At 31 December 2022, the Bank had a
deferred tax asset balance of £1.0 billion
(2021: £0.2 billion).
The recognition of deferred tax assets is
based on estimates of future profitability for
the entity which require significant
management judgment and include the risk
of management bias. The recognition of
deferred tax considers the future profit
forecasts of the legal entities as well as
interpretation of recent changes to tax
rates and laws.
The judgments and assumptions used are
especially complex and subjective due to
their forward-looking nature and inherent
uncertainties. These include:
Revenue forecasts which are
inherently challenging due to the
current uncertain geopolitical and
economic outlook which are
driven by delivery of the bank’s
strategy;
Cost forecasts given the strategic
ambitions of the bank and
potential headwinds from inflation
and supply chain issues; and
Macroeconomic and model
assumptions used in forecasting
(growth rates, macroeconomic
assumptions, etc.) including the
current uncertain geopolitical and
economic outlook.
Controls testing: We evaluated the design and operating effectiveness of controls
over the preparation and review of the legal entity forecasts, the significant
assumptions, inputs and judgments underpinning these, as well as other significant
tax adjustments applied in the DTA model. This included testing controls over the
selection of macroeconomic assumptions in addition to controls over the
preparation and review of the revenue and cost projections. In evaluating the
governance processes, we reviewed the Board meeting materials and minutes
where forecasts were discussed and approved, and we observed the committee
meetings where the DTA model and outcomes were discussed and approved.
Macroeconomic and model assumptions: With the support of our internal
economic specialists, we tested whether macroeconomic assumptions used in the
Bank’s forecasts were reasonable by comparing these to other scenarios from a
variety of external sources. We evaluated how the long-term growth rates used
by management compared to our ranges which were developed using external
market data.
Revenue forecasts: We evaluated the underlying business strategies, comparing to
expected market trends considering anticipated balance sheet changes and
historic performance. We obtained an understanding of the Bank’s strategy
and the extent to which decisions had been factored into the forecasts, where
appropriate, in accordance with the relevant accounting standards.
Cost forecasts: We tested how previous management forecasts, including the
impact of cost reduction programmes, compared to actual results to evaluate the
accuracy of the forecasting process. We also tested the reasonableness of key
performance indicators against peers with the help of our valuation specialists to
assess the reasonableness of the Bank’s cost forecast.
Deferred Tax Model: With the support of our taxation specialists, we reviewed the
deferred tax model including an assessment of the time horizon used for the
recoverability of losses and other temporary differences.
Key observations communicated to the NWH Group Audit Committee
We are satisfied that management methodologies judgements and assumptions supporting the recognition of deferred tax asssets
were reasonable and in accordance with IFRS. We highlighted the following matters to the NWH Group Audit Committee
There is inherent uncertainty in predicting revenue and costs over the five-year forecast period, particularly with respect
to the impact of the current macro-economic environment on the ability of the bank to achieve strategic objectives, the
impact of regulatory and climate change developments, and the impact of competition and disruption in banking
business models over an extended period.
We are satisfied that management has exercised appropriate judgment in assessing the extent to which it is probable
that there will be future taxable profits to recover deferred tax assets; and
Control deficiencies were identified in the process to assess the ability to recognise deferred tax assets for which
compensating controls were identified to mitigate the risk of material misstatement.
Relevant references in the Annual Report and Accounts
Note 14 to the financial statements
Independent auditors’ report to the members of The Royal Bank of Scotland plc continued
RBS plc Annual Report and Accounts 2022 90
Risk
Our response to the risk
Provisions for customer redress, litigation and other regulatory matters
At 31 December 2022, the Bank has reported
£0.1 billion (2021: £0.2 billion) of provisions
for liabilities and charges, including £0.1
billion (2021: £0.2 billion) for customer
redress, litigation and other regulatory
matters as detailed in Note 16 of the financial
statements.
Regulatory scrutiny and the continued
litigious environment give rise to a high level
of management judgment in determining
appropriate provisions and disclosures for
specific customer redress, litigation and other
regulatory matters. Management judgment is
needed to determine whether a present
obligation exists and a provision should be
recorded at 31 December 2022 in
accordance with the accounting criteria set
out under IAS 37.
The most significant areas of judgment are:
Judgment and risk of management
bias - Auditing the adequacy of
these provisions is complex because
judgment is involved in the selection
and use of assumptions in the
estimation of specific customer,
redress, litigation and other
regulatory matters. There is also a
risk of management bias in the
determination of whether an
outflow in respect of identified
material customer redress, litigation
and other regulatory matters is
probable and can be estimated
reliably; and
Disclosure - Judgment is required to
assess the adequacy of disclosures
of provisions and contingent
liabilities given the underlying
estimation uncertainty in the
provisions, and other uncertainties
and assumptions.
Controls testing: We evaluated the design and operating effectiveness of
controls over the identification, estimation, monitoring and disclosure of
provisions and other uncertainties and assumptions related to customer
redress, litigation and other regulatory matters considering the potential for
management override of controls. The controls tested, among others, included
those to identify and monitor claims, determine when a provision is required
and to ensure the completeness and accuracy of data used to estimate
provisions.
Examination of regulatory correspondence: We examined the relevant
regulatory and legal correspondence to assess developments in certain cases.
We also considered regulatory developments to identify actual or possible non-
compliance with laws and regulations that might have a material effect on the
financial statements. For cases which were settled during the period, we
compared the actual outflows with the provision that had been recorded,
considered whether further risk existed, and evaluated the level of disclosures
provided.
Inquiry of legal counsel: For significant legal matters, we received confirmations
from the Bank’s external legal counsel to evaluate the likelihood of the
obligation and management’s estimate of the outflow at year-end. We also
conducted inquiries with internal legal counsel over the existence of the legal
obligations and related provision. We performed a test for unrecorded
provisions to assess if there were cases not considered in the provision estimate
by assessing against external legal confirmations and discussing with internal
counsel.
Testing of assumptions: Where appropriate, we involved our conduct risk and
forensics specialists to assist us in evaluating the provision for specific customer
redress, litigation and other regulatory matters. We tested the underlying data
and assumptions used in the determination of the provisions recorded, including
expected claim rates, legal costs, and the timing of settlement. We evaluated
the accuracy of management’s historical estimates by comparing the actual
settlement to the provision and considered peer bank settlement in similar
cases. We assessed the reasonableness of the assumptions used by
management by comparing to the results of our independently performed
benchmarking and sensitivity analysis. We also developed our own range of
reasonable alternative estimates and compared them to management’s
provision. We tested utilisations of remaining provisions during the year and
assessed the sufficiency of the remaining provisions yet to be paid for specific
customer redress, litigation and other regulatory matters.
Disclosure: We evaluated the disclosures provided on customer redress,
litigation and other regulatory matters to assess whether they complied with
accounting standards.
Key observations communicated to the NWH Group Audit Committee
We are satisfied that provisions for customer redress, litigation and other regulatory matters are reasonable and recognised in
accordance with IFRS. We concurred with the recognition, measurement and level of disclosures of provisions and contingent
liabilities relating to customer redress, litigation and other regulatory matters. We did not identify any material unrecorded
provisions. We highlighted the following matters to the NWH Group Audit Committee:
The level of provisions by their nature incorporates significant judgments to be made and may change as a result of future
developments; and
Continued vigilance in assessing conduct risks from the impact of cost-of-living crisis and Consumer Duty Act, which may not
manifest until after the current economic conditions take effect or implementation, respectively.
Relevant references in the Annual Report and Accounts
Accounting policies
Note 16 and 20 to the financial statements
Independent auditors’ report to the members of The Royal Bank of Scotland plc continued
RBS plc Annual Report and Accounts 2022 91
Risk
Our response to the risk
IT access management
The IT environment is complex and
pervasive to the operations of the Bank due
to the large volume of transactions
processed in numerous locations on a daily
basis with extensive reliance on automated
controls. Appropriate IT controls are
required to ensure that applications process
data as expected and that changes are
made in an appropriate manner. This risk is
also impacted by the greater dependency
on third parties, increasing use of cloud
platforms, decommissioning of legacy
systems, and migration to new systems.
Such controls contribute to mitigating the
risk of potential fraud or errors as a result
of changes to applications and data.
The Bank has implemented user access
management controls across IT applications,
databases and operating systems. We have
identified user access-related deficiencies in
the past and whilst the number of
deficiencies has reduced year over year, the
risk of inappropriate access remains.
We evaluated the design and operating effectiveness of IT general controls over
the applications, operating systems and databases that are relevant to financial
reporting.
Controls testing
We tested user access by assessing the controls in place for in-scope
applications, in particular testing the addition and periodic recertification of
users’ access. We continue to focus on key controls enforced by the Group’s
user access management tools, including the completeness of user data,
automated identification of movers and leavers and the adequacy of the overall
control environment.
During the current audit period, the Identity and Access Management tool used
in NatWest Markets was decommissioned and replaced with the Group’s
strategic tool. We tested the governance process around the migration and
onboarding of users to the Identity and Access Management tool and noted no
deficiencies, with the suite of access management controls supported by the
two tools remaining consistent throughout the year.
A number of systems are outsourced to third party service providers. For these
systems, we tested IT general controls through evaluating the relevant Service
Organisation Controls (“SOC”) reports (where available). This included
assessing the timing of the reporting, the controls tested by the service auditor
and whether they address relevant IT risks. We also tested required
complementary user entity controls performed by management. Where a SOC
report was not available we identified and reviewed compensating business
controls to address risks to financial reporting. Several systems have been
migrated to a cloud-hosted infrastructure model, however access management
processes and controls remained in-house and they formed part of our testing.
Where control deficiencies were identified, we tested remediation activities
performed by management and compensating controls in place and assessed
what additional testing procedures were necessary to mitigate any residual risk.
We also performed a further analysis of access management deficiencies
identified by EY, Management and Internal Audit to revalidate our overall
approach to access management testing.
Key observations communicated to the NWH Group Audit Committee
We are satisfied that IT controls impacting financial reporting are designed and operating effectively. The following matters were
reported to the NWH Group Audit Committee:
We have seen an overall reduction in the number of discrete IT control deficiencies identified compared to prior year;
Improvements were made to further standardise access management processes and controls across the Bank, which was
one of the drivers for the reduced number of deficiencies; and
Particular attention should continue to be paid to controls over user access management including ensuring the
completeness and accuracy of the data used to perform access controls. Where issues were noted in relation to access
management these were remediated by year end or mitigated by compensating controls. We performed additional testing in
response to deficiencies identified, where required.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the
audit and in forming our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the
economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of
our audit procedures.
We determined materiality for the Bank to be £57 million (2021: £35 million), which is 5% (2021: 5%) of the profit before tax of the
Bank of £1,159 million (2021: £1,021 million) adjusted for non-recurring conduct and litigation costs. We believe removing these
non-recurring charges reflects the most useful measure for users of the financial statements and is consistent with the prior year.
The 5% basis used for Bank materiality is consistent with the wider industry and is the standard for listed and regulated entities.
Independent auditors’ report to the members of The Royal Bank of Scotland plc continued
RBS plc Annual Report and Accounts 2022 92
Performance materiality
The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low
level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our assessment of the Bank’s overall control environment, our judgment was
that performance materiality was 75% (2021: 75%) of our planning materiality, namely £43 million (2021: £27 million). We have
based the percentage of performance materiality from the prior year considering on a number of considerations, including the
number and amount of identified misstatements, the effectiveness of the control environment and other factors affecting the entity
and its financial reporting. Audit work at component teams for the purpose of obtaining audit coverage over significant financial
statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for
each component is based on the relative scale and risk of the component to the Bank as a whole and our assessment of the risk of
misstatement at that component. In the current year, the range of performance materiality allocated by the primary audit
engagement team to components was between £8 million and £23 million (2021: £8 million to £27 million).
Reporting threshold
An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £3 million (2021:
£2 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted
reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of
other relevant qualitative considerations in forming our opinion.
Other information
The other information comprises the information included in the Annual Report and Accounts, including the Strategic report,
Report of the directors, and Statement of directors’ responsibilities, other than the financial statements and our auditor’s report
thereon. The directors are responsible for the other information contained within the annual report.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated
in this report, we do not express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge obtained in the course of the audit or otherwise appears to be
materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine
whether this gives rise to a material misstatement in the financial statements themselves or a material misstatement of the other
information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information,
we are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
the information given in the Strategic report and the Report of the directors for the financial year for which the financial
statements are prepared is consistent with the financial statements; and
the Strategic report and the Report of the directors have been prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the Bank and its environment obtained in the course of the audit, we have not
identified material misstatements in the Strategic report or the Report of the directors.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to
you if, in our opinion:
adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not
visited by us; or
the financial statements are not in agreement with the accounting records and returns; or
certain disclosures of directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit
Responsibilities of directors
As explained more fully in the Statement of directors’ responsibilities, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors
determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Bank’s ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors
either intend to liquidate the Bank or to cease operations, or have no realistic alternative but to do so.
Independent auditors’ report to the members of The Royal Bank of Scotland plc continued
RBS plc Annual Report and Accounts 2022 93
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a
high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial
statements.
Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our
responsibilities, outlined below, to detect irregularities, including fraud. The risk of not detecting a material misstatement due to
fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for
example, forgery or intentional misrepresentations, or through collusion. The extent to which our procedures are capable of
detecting irregularities, including fraud is detailed below.
However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the
Bank and management.
We obtained an understanding of the legal and regulatory frameworks that are applicable to the Bank and determined that the
most significant are the regulations, licence conditions and supervisory requirements of the Prudential Regulation Authority
(PRA) and the Financial Conduct Authority (FCA); and Companies Act 2006.
We understood how the Bank is complying with those frameworks by making inquiries of management, internal audit and those
responsible for legal and compliance matters. We also reviewed correspondence between the Bank and regulatory bodies;
reviewed minutes of the Board and Risk Committees; and gained an understanding of the Bank’s governance framework.
Conducted a review of correspondence with and reports from the regulators, including the Prudential Regulation Authority
(‘PRA’) and Financial Conduct Authority (‘FCA’).
Carried out an assessment of matters reported on the group’s whistleblowing programmes where these related to the financial
statements.
We assessed the susceptibility of the Bank’s financial statements to material misstatement, including how fraud might occur by
considering the controls established to address risks identified to prevent or detect fraud. We also identified the risks of fraud in
our key audit matters as described above and identified areas that we considered when performing our fraud procedures, such
as cybersecurity, segregation of duties testing, user access testing and the appropriateness of sources used when performing
confirmation testing on accounts such as cash, loans and securities. Our procedures over our key audit matters and other
significant accounting estimates included challenging management on the assumptions and judgements made in determining
these estimates.
Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations. Our
procedures involved inquiries of legal counsel, executive management, and internal audit. We also tested controls and
performed procedures to respond to the fraud risks as identified in our key audit matters. These procedures were performed by
both the primary team and component teams with oversight from the primary team.
Identified and tested journal entries, including those posted with certain descriptions or unusual characteristics, backdated
journals or posted by infrequent and unexpected users.
The Bank operates in the banking industry which is a highly regulated environment. As such, the Senior Statutory Auditor
considered the experience and expertise of the engagement team to ensure that the team had the appropriate competence
and capabilities, involving specialists where appropriate.
A further description of our responsibilities for the audit of the financial statements is located on the
Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s
report.
Independent auditors’ report to the members of The Royal Bank of Scotland plc continued
RBS plc Annual Report and Accounts 2022 94
Other matters we are required to address
Following the recommendation from the Audit Committee we were appointed by the Bank on 4 May 2016 to audit the financial
statements of the Bank for the year ending 31 December 2016 and subsequent financial periods.
The period of total uninterrupted engagement including previous renewals and reappointments is 7 years, covering the periods
from our appointment through 31 December 2022.
The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Bank and we remain independent of
the Bank in conducting the audit.
The audit opinion is consistent with the additional report to the Audit Committee
Use of our report
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to
state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for
the opinions we have formed.
Simon Michaelson (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London, United Kingdom
16 February 2023
Consolidated income statement for the year ended
31 December 2022
RBS plc Annual Report and Accounts 2022 95
2022
2021
Note
£m
£m
Interest receivable
2,036
1,449
Interest payable
(254)
(107)
Net interest income
1
1,782
1,342
Fees and commissions receivable
455
413
Fees and commissions payable
(107)
(135)
Other operating income
(59)
155
Non-interest income
2
289
433
Total income
2,071
1,775
Staff costs
(58)
(120)
Premises and equipment
1
(32)
Other administrative expenses
(814)
(838)
Depreciation and amortisation
(21)
(124)
Operating expenses
3
(892)
(1,114)
Profit before impairment losses/releases
1,179
661
Impairment (losses)/releases
12
(20)
360
Operating profit before tax
1,159
1,021
Tax credit/(charge)
7
17
(245)
Profit for the year
1,176
776
Attributable to:
Ordinary shareholders
1,122
722
Paid-in equity holders
54
54
1,176
776
Statement of comprehensive income for the year
ended 31 December 2022
2022
2021
£m
£m
Profit for the year
1,176
776
Items that do qualify for reclassification
FVOCI financial assets
—
1
Cash flow hedges (1)
(1,803)
(766)
Currency translation
2
(2)
Tax
492
222
(1,309)
(545)
Other comprehensive loss after tax
(1,309)
(545)
Total comprehensive (loss)/income for the year
(133)
231
Attributable to:
Ordinary shareholders
(187)
177
Paid-in equity holders
54
54
(133)
231
(1) The unrealised losses on cash flow hedge reserves is mainly driven by deferment of losses on GBP net received fixed swaps as interest rates have increased.
The accompanying notes on pages 104 to 130, the accounting policies on pages 99 to 103 and the audited sections of the Financial review
and Risk and capital management on pages 4 to 74 form an integral part of these financial statements.
Balance sheet as at 31 December 2022
RBS plc Annual Report and Accounts 2022 96
2022
2021
Note
£m
£m
Assets
Cash and balances at central banks
8
34,323
38,014
Derivatives
11
498
220
Loans to banks - amortised cost
8
1,071
1,147
Loans to customers - amortised cost
8
37,667
42,035
Amounts due from holding companies and fellow subsidiaries
8
21,722
23,941
Other assets
14
1,382
738
Total assets
96,663
106,095
Liabilities
Bank deposits
8
986
1,117
Customer deposits
8
83,306
92,144
Amounts due to holding companies and fellow subsidiaries
8
3,910
5,216
Derivatives
11
2,683
827
Notes in circulation
2,409
2,144
Other liabilities
16
708
900
Total liabilities
94,002
102,348
Total equity
2,661
3,747
Total liabilities and equity
96,663
106,095
The accompanying notes on pages 104 to 130, the accounting policies on pages 99 to 103 and the audited sections of the Financial
review and Risk and capital management on pages 6 to 74 form an integral part of these financial statements.
The accounts were approved by the Board of directors on 16 February 2023 and signed on its behalf by:
Howard Davies Alison Rose-Slade DBE Katie Murray The Royal Bank of Scotland plc
Chairman Chief Executive Officer Chief Financial Officer Registration No. SC083026
Statement of changes in equity for the year ended
31 December 2022
RBS plc Annual Report and Accounts 2022 97
2022
2021
£m
£m
Called-up share capital - at 1 January and 31 December
20
20
Paid-in equity - at 1 January
969
969
Redeemed
(499)
—
Issued
500
—
At 31 December
970
969
FVOCI reserve - at 1 January
(3)
(4)
Unrealised gains
—
1
At 31 December
(3)
(3)
Cash flow hedging reserve - at 1 January
(168)
376
Amount recognised in equity
(2)
(1,952)
(564)
Amount transferred from equity to earnings
149
(202)
Tax
492
222
At 31 December
(1,479)
(168)
Foreign exchange reserve - at 1 January
(2)
—
Retranslation of net assets
2
(2)
At 31 December
—
(2)
Retained earnings - at 1 January
2,931
4,309
Profit attributable to ordinary shareholders and other equity owners
1,176
776
Ordinary dividends paid
(850)
(2,100)
Paid-in equity dividends paid
(54)
(54)
Redemption of paid-in equity
- gross
(41)
—
- tax
(9)
—
At 31 December
3,153
2,931
Total equity at 31 December
2,661
3,747
Attributable to:
Ordinary shareholders
1,691
2,778
Paid-in equity holders
970
969
2,661
3,747
(1) The total distributable reserves for RBS plc is £1,671 million (2021 – £2,758 million).
(2) The unrealised losses on cash flow hedge reserves is mainly driven by deferment of losses on GBP net received fixed swaps as interest rates have increased.
The accompanying notes on pages 104 to 130, the accounting policies on pages 99 to 103 and the audited sections of the Financial
review and Risk and capital management on pages 4 to 74 form an integral part of these financial statements.
Cash flow statement for the year ended
31 December 2022
RBS plc Annual Report and Accounts 2022 98
2022
2021
Note
£m
£m
Cash flows from operating activities
Operating profit before tax
1,159
1,021
Adjustments for:
Impairment losses/(releases)
20
(360)
Depreciation and amortisation
21
124
Write-down of investment in group undertakings
—
3
Change in fair value taken to profit or loss on other liabilities and subordinated liabilities
(110)
(67)
Elimination of foreign exchange differences
(336)
37
Other non-cash items
158
(199)
Dividends receivable from subsidiaries
(8)
(22)
Profit on sale of subsidiaries and associates
—
(34)
Loss/(profit) on sale of net assets/liabilities
24
(4)
Loss/(profit) on sale of property, plant and equipment
1
(5)
Interest payable on MRELs and subordinated liabilities
95
86
Charges and releases on provisions
(10)
67
Defined benefit pension schemes
7
9
Net cash flows from trading activities
1,021
656
Increase in derivative assets
(2,230)
(39)
Increase in loans to banks
(5)
(44)
Decrease in loans to customers
3,750
6,928
Increase in amounts due from holding companies and fellow subsidiaries
(2,862)
(285)
Decrease in other assets
88
34
Decrease in bank deposits
(131)
(35)
(Decrease)/increase in customer deposits
(6,599)
7,516
(Decrease)/increase in amounts due to holding companies and fellow subsidiaries
(1,073)
741
Increase in derivative liabilities
1,856
39
Increase in notes in circulation
265
501
Decrease in other liabilities
(205)
(170)
Changes in operating assets and liabilities
(7,146)
15,186
Income tax paid
(228)
(50)
Net cash flows from operating activities (1,2)
(6,353)
15,792
Cash flows from investing activities
Purchase of other financial assets
—
(1)
Sale of property, plant and equipment
8
20
Purchase of property, plant and equipment
(21)
(5)
Disposal of net assets and liabilities
270
155
Profit on disposal of net assets and liabilities
—
4
Disposal of subsidiaries and associates
—
54
Dividends received from subsidiaries
8
22
Net cash flows from investing activities
265
249
Cash flows from financing activities
Movement in MRELs
(16)
(16)
Movement in subordinated liabilities
(78)
(70)
Movement in paid-in equity
(40)
—
Dividends paid
(904)
(2,154)
Net cash flows from financing activities
21
(1,038)
(2,240)
Effects of exchange rate changes on cash and cash equivalents
547
(19)
Net (decrease)/increase in cash and cash equivalents
(6,579)
13,782
Cash and cash equivalents at 1 January
60,208
46,426
Cash and cash equivalents at 31 December
22
53,629
60,208
(1) Includes interest received of £2,058 million (2021 - £1,426 million) and interest paid of £215 million (2021 - £103 million).
(2) The total cash outflow for leases is £12 million (2021 - £14 million), including payment of principal amount of £9 million (2021 - £11 million) which are included in the operating
activities in the cash flow statement.
The accompanying notes on pages 104 to 130, the accounting policies on pages 99 to 103 and the audited sections of the Financial
review and Risk and capital management on pages 4 to 74 form an integral part of these financial statements.
Accounting policies
RBS plc Annual Report and Accounts 2022 99
1. Presentation of financial statements
The Royal Bank of Scotland plc (RBS plc) is incorporated in the UK and registered in Scotland. The financial statements are
presented in the functional currency, pounds sterling.
The audited financial statements include audited sections of the Risk and capital management section. The directors have prepared
the financial statements on a going concern basis after assessing the principal risks, forecasts, projections and other relevant
evidence over the twelve months from the date the financial statements are approved (see the Report of the directors) and in
accordance with UK adopted International Accounting Standards (IAS). The critical and significant accounting policies and related
judgments are set out below.
The financial statements are presented on a historical cost basis except for certain financial instruments which are stated at fair
value.
The effect of the amendments to IFRS effective from 1 January 2022 on our financial statements was immaterial.
How Climate risk affects our accounting judgments and estimates
We make use of reasonable and supportable information to make accounting judgments and estimates. This includes information
about the observable effects of the physical and transition risks of climate change on the current creditworthiness of borrowers,
asset values and market indicators. It also includes the effect on our competitiveness and profitability. Many of the effects arising
from climate change will be longer term in nature, with an inherent level of uncertainty, and have limited effect on accounting
judgments and estimates for the current period. Some physical and transition risks can manifest in the shorter term. The following
items represent the most significant effects:
The classification of financial instruments linked to climate, or other sustainability indicators: consideration is given to whether
the effect of climate related terms prevent the instrument cashflows being solely payments of principal and interest.
The measurement of expected credit loss considers the ability of borrowers to make payments as they fall due. Future
cashflows are discounted, so long dated cashflows are less likely to affect current expectations on credit loss. Our assessment
of sector specific risks, and whether additional adjustments are required, include expectations on the ability of those sectors to
meet their financing needs in the market. Changes in credit stewardship and credit risk appetite that stem from climate
considerations, such as oil and gas, will directly affect our positions.
The assessment of deferred tax is based upon value in use. This represents the value of future cashflows and uses our five-year
revenue and cost forecasts and the expectation of long term economic growth beyond this period. The five-year forecast takes
account of management’s current expectations on competitiveness and profitability. The long term growth rate reflects
external indicators which will include market expectations of climate risk. We do not consider any additional adjustments to this
indicator.
The use of market indicators as inputs to fair value is assumed to include current information and knowledge regarding the
effect of climate risk.
2. Critical accounting policies
The judgments and assumptions involved in our accounting policies that are considered by the Board to be the most important to
the portrayal of our financial condition are noted below. The use of estimates, assumptions or models that differ from those
adopted by us would affect our reported results. Management’s consideration of uncertainty is outlined in the relevant sections of
this document, including the ECL estimate in the Risk and capital management section.
Information used for significant estimate
Key financial estimates are based on management's latest five-year revenue and cost forecasts. Changes in judgments and
assumptions could result in a material adjustment to those estimates in future reporting periods. Consideration of this source of
estimate uncertainty has been set out in the notes below (as applicable).
Policy
Judgment
Estimate
Further
information
Deferred tax
Determination of whether sufficient taxable
profits will be generated in future years to
recover DTA.
Our estimates are based on the five-year
revenue and cost forecasts (which include
inherent uncertainties).
Note 7
Loan
impairment
provisions
Definition of default against which to apply PD,
LGD and EAD models.
Criteria for a significant increase in credit risk.
Identification of risks not captured by the
models.
ECL estimates contain a number of
measurement uncertainties (such as the
selection of multiple economic scenarios) and
disclosures include sensitivities to show impact
on other reasonably possible scenarios.
Note 12
Provisions
for liabilities
and charges
Determination of whether a present obligation
exists in respect of customer redress, litigation
and other regulatory, property and other
provisions.
Legal proceedings often require a high degree
of judgment and these are likely to change as
the matter progresses.
Provisions remain sensitive to the assumptions
used in the estimate. We consider a wide range
of possible outcomes. It is often not practically
to meaningfully quantify ranges of possible
outcomes, given the uncertainties involved.
Note 15
Accounting policies continued
RBS plc Annual Report and Accounts 2022 100
2.1. Deferred tax
Deferred tax is the tax expected to be payable or recoverable
in respect of temporary differences between the carrying
amount of an asset or liability for accounting purposes and the
carrying amount for tax purposes. Deferred tax liabilities are
generally recognised for all taxable temporary differences and
deferred tax assets are recognised to the extent their recovery
is probable.
Deferred tax is not recognised on temporary differences that
arise from initial recognition of an asset or a liability in a
transaction (other than a business combination) that at the time
of the transaction affects neither accounting nor taxable profit
or loss. Deferred tax is calculated using tax rates expected to
apply in the periods when the assets will be realised or the
liabilities settled, based on tax rates and laws enacted, or
substantively enacted, at the balance sheet date.
Deferred tax assets and liabilities are offset where we have a
legally enforceable right to offset and where they relate to
income taxes levied by the same taxation authority either on an
individual RBS plc company or on RBS plc companies in the
same tax group that intend, in future periods, to settle current
tax liabilities and assets on a net basis or on a gross basis
simultaneously.
Deferred tax asset recoverability is based on the level of
supporting offsetable deferred tax liabilities we have and of our
future taxable profits. These future taxable profits are based on
our five-year revenue and cost forecasts and the expectation of
long term economic growth beyond this period. The five-year
forecast takes account of management’s current expectations
on competitiveness and profitability. The long term growth rate
reflects external indicators which will include market
expectations on climate risk. We do not consider any additional
adjustments to this indicator.
2.2. Loan impairment provisions: expected credit losses
(ECL)
At each balance sheet date each financial asset or portfolio of
financial assets measured at amortised cost or at fair value
through other comprehensive income, issued financial
guarantee and loan commitment (other than those classified as
held for trading) is assessed for impairment. Any change in
impairment is reported in the income statement.
Loss allowances are forward-looking, based on 12-month ECL
where there has not been a significant increase in credit risk
rating, otherwise allowances are based on lifetime expected
losses.
ECL are a probability-weighted estimate of credit losses. The
probability is determined by the risk of default which is applied
to the cash flow estimates. In the absence of a change in credit
rating, allowances are recognised when there is a reduction in
the net present value of expected cash flows. Following a
significant increase in credit risk, ECL are adjusted from 12
months to lifetime. This will lead to a higher impairment charge.
The measurement of expected credit loss considers the ability
of borrowers to make payments as they fall due. Future
cashflows are discounted, so long dated cashflows are less
likely to affect current expectations on credit loss. Our
assessment of sector specific risks, and whether additional
adjustments are required, include expectations of the ability of
those sectors to meet their financing needs in the market.
Changes in credit stewardship and credit risk appetite that
stem from climate considerations, such as oil and gas, will
directly affect our positions.
Judgment is exercised as follows:
Models – in certain low default portfolios, Basel parameter
estimates are also applied for IFRS 9.
Non-modelled portfolios – use a standardised capital
requirement under Basel II. Under IFRS 9, they have
bespoke treatments for the identification of significant
increase in credit risk. Benchmark PDs, EADs and LGDs are
reviewed annually for appropriateness. The ECL calculation
is based on expected future cash flows, which is typically
applied at a portfolio level.
Multiple economic scenarios (MES)
– the central, or base,
scenario is most critical to the ECL calculation, independent
of the method used to generate a range of alternative
outcomes and their probabilities.
Significant increase in credit risk - IFRS 9 requires that at
each reporting date, an entity shall assess whether the
credit risk on an account has increased significantly since
initial recognition. Part of this assessment requires a
comparison to be made between the current lifetime PD
(i.e. the current probability of default over the remaining
lifetime) with the equivalent lifetime PD as determined at
the date of initial recognition.
On restructuring where a financial asset is not derecognised,
the revised cash flows are used in re-estimating the credit loss.
Where restructuring causes derecognition of the original
financial asset, the fair value of the replacement asset is used
as the closing cash flow of the original asset.
Where, in the course of the orderly realisation of a loan, it is
exchanged for equity shares or property, the exchange is
accounted for as the sale of the loan and the acquisition of
equity securities or investment property. Where our acquired
interest is in equity shares, relevant polices for control,
associates and joint ventures apply.
Impaired financial assets are written off and therefore
derecognised from the balance sheet when we conclude that
there is no longer any realistic prospect of recovery of part, or
all, of the loan. For financial assets that are individually
assessed for impairment, the timing of the write-off is
determined on a case-by-case basis. Such financial assets are
reviewed regularly and write-off will be prompted by
bankruptcy, insolvency, re-negotiation, and similar events.
The typical time frames from initial impairment to write-off for
our collectively assessed portfolios are:
Retail mortgages: write-off usually occurs within five years,
or earlier, when an account is closed, but can be longer
where the customer engages constructively,
Credit cards: the irrecoverable amount is typically written
off after twelve arrears cycles or at four years post default
any remaining amounts outstanding are written off,
Overdrafts and other unsecured loans: write-off occurs
within six years,
Commercial loans: write-offs are determined in the light of
individual circumstances; and Business loans are generally
written off within five years.
2.3. Provisions and contingent liabilities
We recognise a provision for a present obligation resulting from
a past event when it is more likely than not that we will be
required to pay to settle the obligation and the amount of the
obligation can be estimated reliably.
Accounting policies continued
RBS plc Annual Report and Accounts 2022 101
Provision is made for restructuring costs, including the costs of
redundancy, when we have a constructive obligation. An
obligation exists when we have a detailed formal plan for the
restructuring and have raised a valid expectation in those
affected either by starting to implement the plan or by
announcing its main features.
We recognise any onerous cost of the present obligation under
a contract as a provision. An onerous cost is the unavoidable
cost of meeting our contractual obligations that exceed the
expected economic benefits. When we intend to vacate a
leasehold property or right of use asset, the asset would be
tested for impairment and a provision may be recognised for
the ancillary contractual occupancy costs.
Contingent liabilities are possible obligations arising from past
events, whose existence will be confirmed only by uncertain
future events, or present obligations arising from past events
that are not recognised because either an outflow of economic
benefits is not probable, or the amount of the obligation cannot
be reliably measured. Contingent liabilities are not recognised
but information about them is disclosed unless the possibility of
any outflow of economic benefits in settlement is remote.
3. Significant accounting polices
3.1. Revenue recognition
Interest receivable and payable are recognised in the income
statement using the effective interest rate method: for all
financial instruments measured at amortised cost, debt
instruments measured as fair value through other
comprehensive income and the effective part of any related
accounting hedging instruments.
Other interest relating to financial instruments measured at fair
value is recognised as part of the movement in fair value and is
reported in other operating income. Fees in respect of services
are recognised as the right to consideration accrues through
the performance of each distinct service obligation to the
customer. The arrangements are generally contractual and the
cost of providing the service is incurred as the service is
rendered. The price is usually fixed and always determinable.
3.2. Staff costs
Employee costs, such as salaries, paid absences, and other
benefits are recognised over the period in which the employees
provide the related services to us. Employees may receive
variable compensation in cash, in deferred cash or debt
instruments or in ordinary shares of NatWest Group plc subject
to deferral, forfeiture and clawback criteria. We operate a
number of share-based compensation schemes under which
we grant awards of NatWest Group plc shares and share
options to our employees. Such awards are generally subject to
vesting conditions.
Defined contribution pension scheme
A scheme where we pay fixed contributions and there is no
legal or constructive obligation to pay further contributions or
benefits. Contributions are recognised in the income statement
as employee service costs accrue.
3.3. Tax
Tax encompassing current tax and deferred tax is recognised
the income statement except when taxable items are
recognised in other comprehensive income or equity . Tax
consequences arising from servicing financial instruments
classified as equity are recognised in the income statement.
Current tax is tax payable or recoverable in respect of the
taxable profit or loss for the year arising in the income
statement, other comprehensive income or equity. Provision is
made for current tax at rates enacted, or substantively
enacted, at the balance sheet date.
Accounting for taxes is judgmental and carries a degree of
uncertainty because tax law is subject to interpretation, which
might be questioned by the relevant tax authority. We
recognise the most likely current and deferred tax liability or
asset, assessed for uncertainty using consistent judgments and
estimates. Current and deferred tax assets are only recognised
where their recovery is deemed probable, and current and
deferred tax liabilities are recognised at the amount that
represents the best estimate of the probable outcome having
regard to their acceptance by the tax authorities.
3.4. Financial instruments
Financial instruments are measured at fair value on initial
recognition on the balance sheet.
Monetary financial assets are classified into one of the following
subsequent measurement categories (subject to business model
assessment and review of contractual cash flow for the
purposes of sole payments of principal and interest where
applicable):
amortised cost measured at cost using the effective interest
rate method, less any impairment allowance;
fair value through other comprehensive income (FVOCI)
measured at fair value, using the effective interest rate
method and changes in fair value through other
comprehensive income;
mandatory fair value through profit or loss measured at fair
value and changes in fair value reported in the income
statement; or
designated at fair value through profit or loss measured at
fair value and changes in fair value reported in the income
statement.
Classification by business model reflects how we manage our
financial assets to generate cash flows. A business model
assessment helps to ascertain the measurement approach
depending on whether cash flows result from holding financial
assets to collect the contractual cash flows, from selling those
financial assets, or both.
Business model assessment of assets is made at portfolio level,
being the level at which they are managed to achieve a
predefined business objective. This is expected to result in the
most consistent classification of assets because it aligns with
the stated objectives for the portfolio, its risk management,
manager’s remuneration and the ability to monitor sales of
assets from a portfolio. When a significant change to our
business is communicated to external parties, we reassess our
business model for managing those financial assets. We
reclassify financial assets if we have a significant change to the
business model. A reclassification is applied prospectively from
the reclassification date.
The contractual terms of a financial asset; any leverage
features; prepayment and extension terms; and discounts or
penalties to interest rates that are part of meeting
environmental, social and governance targets as well as other
contingent and leverage features, non-recourse arrangements
and features that could modify the timing and/or amount of the
contractual cash flows that might reset the effective rate of
interest; are considered in determining whether cash flows are
solely payments of principal and interest.
Certain financial assets may be designated at fair value
through profit or loss (DFV) upon initial recognition if such
designation eliminates, or significantly reduces, accounting
mismatch.
Equity shares are measured at fair value through profit or loss
unless specifically elected as at fair value through other
comprehensive income (FVOCI).
Accounting policies continued
RBS plc Annual Report and Accounts 2022 102
Upon disposal, the cumulative gains or losses in fair value
through other comprehensive income reserve are recycled to
the income statement for monetary assets and for non-
monetary assets the cumulative gains or losses are transferred
directly to retained earnings.
Regular way purchases and sales of financial assets classified
as amortised cost are recognised on the settlement date; all
other regular way transactions in financial assets are
recognised on the trade date.
Financial liabilities are classified into one of following
measurement categories:
amortised cost measured at cost using the effective interest
rate method;
held for trading (HFT) measured at fair value and changes
in fair value reported in income statement; or
designated at fair value through profit or loss (DFV)
measured at fair value and changes in fair value reported in
the income statement except changes in fair value
attributable to the credit risk component recognised in
other comprehensive income when no accounting
mismatch occurs. These are not subject to recycling to
income statement.
3.5. Derecognition
A financial asset is derecognised (removed from the balance
sheet) when the contractual right to receive cash flows from
the asset has expired or when it has been transferred and the
transfer qualifies for derecognition. Conversely, an asset is not
derecognised in a contract under which we retain substantially
all the risks and rewards of ownership.
A financial liability is removed from the balance sheet when the
obligation is paid, or is cancelled, or expires. Cancellation
includes the issuance of a substitute instrument on substantially
different terms.
3.6. Capital instruments
We classify a financial instrument that we issue as a liability if it
is a contractual obligation to deliver cash or another financial
asset, or to exchange financial assets or financial liabilities on
potentially unfavourable terms and as equity if we evidence a
residual interest in our assets after the deduction of liabilities.
Incremental costs and related tax that are directly attributable
to an equity transaction are deducted from equity.
3.7. Derivatives and hedging
Derivatives are reported on the balance sheet at fair value.
We use derivatives to manage its own risk such as interest
rate. Not all derivatives used to manage risk are in hedge
accounting relationships (an IFRS method to reduce accounting
mismatch from changes in fair value of the derivatives reported
in the income statement).
Gains and losses arising from changes in the fair value of
derivatives that are not in hedge relationships and derivatives
that are managed together with financial instruments
designated at fair value are included in Other operating
income.
Hedge Accounting
We enter into two types of hedge accounting relationships (see
later). Hedge accounting relationships are designated and
documented at inception in line with the requirements of IAS 39
Financial instruments – Recognition and Measurement. The
documentation identifies the hedged item, the hedging
instrument and details of the risk that is being hedged and the
way in which effectiveness will be assessed at inception and
during the period of the hedge.
When designating a hedging relationship, we consider: the
economic relationship between the hedged item (including the
risk being hedged) and the hedging instrument; the nature of
the risk; the risk management objective and strategy for
undertaking the hedge; and the appropriateness of the method
that will be used to assess hedge effectiveness.
Designated hedging relationships must be expected to be highly
effective both on a prospective and retrospective basis.
Effectiveness is assessed by reference to the degree of
offsetting between the changes in fair value or cash flows
attributable to the hedged risk and the changes in fair value of
the designated hedging derivatives.
Fair value hedge
-
the gain or loss on the hedging instrument
and the hedged item attributable to the hedged risk is
recognised in the income statement. Where the hedged item is
measured at amortised cost, the balance sheet amount of the
hedged item is also adjusted.
Cash flow hedge - the effective portion of the designated hedge
relationship is recognised in other comprehensive income and
the ineffective portion in the income statement. When the
hedged item (forecasted cash flows) results in the recognition
of a financial asset or financial liability, the cumulative gain or
loss is reclassified from equity to the income statement in the
same periods in which the hedged forecasted cash flows affect
the income statement.
Discontinuation of hedge accounting
Hedge accounting is discontinued if the hedge no longer meets
the criteria for hedge accounting i.e. the hedge is not highly
effective in offsetting changes in fair value or cash flows
attributable to the hedged risk, consistent with the documented
risk management strategy; the hedging instrument expires or is
sold, terminated or exercised; or if hedge designation is
revoked.
For fair value hedging any cumulative adjustment is amortised
to the income statement over the life of the hedged item.
Where the hedge item is no longer on the balance sheet the
adjustment to the hedged item is reported in the income
statement.
For cash flow hedging the cumulative unrealised gain or loss is
reclassified from equity to the income statement when the
hedged cash flows occur or, if the forecast transaction results
in the recognition of a financial asset or financial liability, when
the hedged forecast cash flows affect the income statement.
Where a forecast transaction is no longer expected to occur,
the cumulative unrealised gain or loss is reclassified from equity
to the income statement immediately.
Accounting policies continued
RBS plc Annual Report and Accounts 2022 103
4. Future accounting developments
International Financial Reporting Standards
Effective 1 January 2023
IFRS 17 Insurance Contracts (Amendments to IFRS 17
Insurance Contracts);
Deferred Tax related to Assets and Liabilities arising from a
Single Transaction (Amendments to IAS 12);
Definition of Accounting Estimates (Amendments to IAS 8);
and
Disclosure of Accounting Policies (Amendments to IAS 1
and IFRS Practice Statement 2).
Effective 1 January 2024
Classification of Liabilities as Current or Non-current
(Amendments to IAS 1);
Non-current Liabilities with Covenants (Amendments to IAS
1)
Lease Liability in a sale and Leaseback (Amendments to
IFRS 16).
We are assessing the effect of adopting these standards and
amendments on our financial statements but do not expect the
effect to be material.
Notes to the financial statements
RBS plc Annual Report and Accounts 2022 104
1 Net interest income
2022
2021
£m
£m
Balances at central banks and loans to banks - amortised cost
411
122
Loans to customers - amortised cost
1,305
1,292
Amounts due from holding company and fellow subsidiaries
320
35
Interest receivable
2,036
1,449
Balances with banks
2
2
Customer deposits
142
42
Amounts due to holding company and fellow subsidiaries
107
60
Other financial liabilities
3
3
Interest payable
254
107
Net interest income
1,782
1,342
Interest income on financial instruments measured at amortised cost and debt instruments classified as FVOCI is measured using
the effective interest rate which allocates the interest income or interest expense over the expected life of the asset or liability at
the rate that exactly discounts all estimated future cash flows to equal the instrument's initial carrying amount. Calculation of the
effective interest rate takes into account fees payable or receivable that are an integral part of the instrument's yield, premiums or
discounts on acquisition or issue, early redemption fees and transaction costs. All contractual terms of a financial instrument are
considered when estimating future cash flows.
For accounting policy information see Accounting policy 3.1.
2 Non-interest income
2022
2021
£m
£m
Net fees and commissions (1)
348
278
Other operating income
Profit on disposal of subsidiaries and associates (2)
—
34
Hedge ineffectiveness
(10)
(10)
Net (loss)/income from economic hedging
(20)
41
(Loss)/gain on disposal of amortised cost assets and liabilities (3)
(23)
20
(Loss)/profit on sale pf property, plant and equipment
(1)
5
Dividend income
8
22
Other income
(13)
43
(59)
155
Non-interest income
289
433
(1) Refer to Note 4 for further analysis.
(2) 2021 relates to profit on sale of Adam & Company’s investment management business.
(3) 2022 includes £23 million loss on transfer of remaining Adam & Company’s business to Coutts.
For accounting policy information see Accounting policy 3.1.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 105
3 Operating expenses
2022
2021
£m
£m
Wages, salaries and other staff costs
44
102
Social security costs
5
6
Pension costs
9
12
- defined benefit schemes (see Note 5)
7
9
- defined contribution schemes
2
3
Staff costs
58
120
Premises and equipment (1)
(1)
32
Other administrative expenses (2,3)
814
838
Depreciation and amortisation (4)
21
124
Administrative expenses
834
994
Operating expenses
892
1,114
(1) 2022 includes release of property provisions due to lease exits and change in economic assumptions.
(2) Includes £759 million (2021 - £763 million) recharges from other NatWest Group entities, mainly NWB Plc which provides the majority of shared services (including technology) and
operational processes.
(3) Includes litigation costs. Further details are provided in Note 16.
(4) 2021 includes impairment of goodwill of £85 million.
For accounting policy information see Accounting policy 3.2.
1,200 front office customer-facing staff (2021 – 1,500) are contractually employed by NWB Plc with all related staff costs paid by
RBS plc and no staff (2021 – 100) contractually employed by and paid by RBS plc.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 106
4 Segmental analysis
Reportable operating segments
On 27 January 2022, NatWest Group announced that a new
business segment, Commercial & Institutional, would be
created, bringing together the Commercial, NatWest Markets
and RBSI businesses to form a single business segment, with
common management and objectives, to best support our
customers across the full non-personal customer lifecycle.
Comparatives have been re-presented. The re-presentation of
operating segments does not change the consolidated financial
results of NatWest Group.
The business is organised into the following reportable
segments: Retail Banking, Private Banking, Commercial &
Institutional and Central items & other.
Retail Banking serves personal customers in the UK.
Private Banking serves UK connected high-net-worth
individuals and their business interests.
Commercial & Institutional offers SME’s and Corporate and
Institutional clients comprehensive banking and financing
solutions throughout the UK.
Central items & other comprises corporate treasury activity on
behalf of RBS plc and its fellow subsidiaries and RBS plc’s
corporate service and functions activities.
Retail
Private
Commercial &
Central items
Banking
Banking
Institutional
& other
Total
2022
£m
£m
£m
£m
£m
Net interest income
877
23
886
(4)
1,782
Net fees and commissions
88
6
254
—
348
Other operating income
—
(23)
(2)
(34)
(59)
Total income
965
6
1,138
(38)
2,071
Depreciation and amortisation
(11)
(2)
(8)
—
(21)
Other operating expenses
(420)
(69)
(382)
—
(871)
Impairment (losses)/releases
(11)
—
14
(23)
(20)
Operating profit/(loss)
523
(65)
762
(61)
1,159
2021
Net interest income
637
27
642
36
1,342
Net fees and commissions
74
10
194
—
278
Other operating income
—
64
13
78
155
Total income
711
101
849
114
1,775
Depreciation and amortisation
(104)
(4)
(16)
—
(124)
Other operating expenses
(483)
(81)
(426)
—
(990)
Impairment releases
15
3
336
6
360
Operating profit
139
19
743
120
1,021
Total revenue (1)
Retail
Private
Commercial &
Central items
Banking
Banking
Institutional
& other
Total
2022
£m
£m
£m
£m
£m
External
800
6
860
766
2,432
Inter-segment
32
3
27
(62)
—
Total
832
9
887
704
2,432
2021
External
807
95
783
332
2,017
Inter-segment
(22)
9
42
(29)
—
Total
785
104
825
303
2,017
(1) Total revenue comprises interest receivable, fees and commissions receivable and other operating income.
Total income
Retail
Private
Commercial &
Central items
Banking
Banking
Institutional
& other
Total
2022
£m
£m
£m
£m
£m
External
933
3
1,111
24
2,071
Inter-segment
32
3
27
(62)
—
Total
965
6
1,138
(38)
2,071
2021
External
732
92
807
144
1,775
Inter-segment
(21)
9
42
(30)
—
Total
711
101
849
114
1,775
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 107
4 Segmental analysis continued
Analysis of net fees and commissions
Retail
Private
Commercial &
Central items
Banking
Banking
Institutional
& other
Total
2022
£m
£m
£m
£m
£m
Fees and commissions receivable
- Payment services
59
1
132
—
192
- Credit and debit card fees
78
—
51
—
129
- Lending and financing
2
—
82
—
84
- Other
9
5
36
—
50
Total
148
6
301
—
455
Fees and commissions payable
(60)
—
(47)
—
(107)
Net fees and commissions
88
6
254
—
348
2021
Fees and commissions receivable
- Payment services
59
2
123
—
184
- Credit and debit card fees
67
—
36
—
103
- Lending and financing
2
1
99
—
102
- Other
10
7
7
—
24
Total
138
10
265
—
413
Fees and commissions payable
(64)
—
(71)
—
(135)
Net fees and commissions
74
10
194
—
278
Retail
Private
Commercial &
Central items
Banking
Banking
Institutional
& other
Total
2022
£m
£m
£m
£m
£m
Assets
19,548
2
22,321
54,792
96,663
Liabilities
39,084
21
48,878
6,019
94,002
2021
Assets
20,893
2,800
24,168
58,234
106,095
Liabilities
39,143
2,541
57,256
3,408
102,348
All of RBS plc’s activities, by location of offices, are based in the UK.
5 Pensions
Eligible employees of RBS plc can participate in membership of the NatWest Group operated pension schemes. The principal
defined benefit scheme is the NatWest Group Pension Fund (the Main section). The Main section was closed to new entrants in
October 2006 and since then employees have been offered membership to the RBS Group Retirements Savings Plan, a defined
contribution pension scheme. The NatWest Group pension schemes are further disclosed in the NatWest Group 2022 Annual Report
and Accounts.
For accounting policy information see Accounting policy 3.2.
6 Auditor’s remuneration
Amounts payable to RBS plc’s auditor for statutory audit and other services are set out below:
2022
2021
£m
£m
Fees payable for the audit of RBS plc’s annual accounts
4.2
3.9
Fees payable to the auditor for other services to RBS plc
—
—
Total audit and audit-related assurance service fees
4.2
3.9
Fees payable to the auditor for non-audit services are disclosed in the consolidated financial statements of NatWest Group plc.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 108
7 Tax
2022
2021
£m
£m
Current Tax
Charge for the year
(252)
(232)
Over provision in respect of prior years
2
12
(250)
(220)
Deferred Tax
Charge for the year
(61)
(46)
UK tax rate change impact (1)
(3)
42
Increase/(decrease) in the carrying value of deferred tax assets in respect of UK losses
331
(14)
Under provision in respect of prior years (2)
—
(7)
Tax credit/(charge) for the year
17
(245)
(1) It was announced in the UK Government’s budget on 27 October 2021 that the main UK banking surcharge will decrease from 8% to 3% from 1 April 2023. This legislative change
was enacted on 24 February 2022.
(2) Prior year tax adjustments incorporate refinements to tax computations made on submission and agreement with the tax authorities.
The actual tax charge differs from the expected tax charge, computed by applying the standard rate of UK corporation tax of 19%
(2021 – 19%), as follows:
2022
2021
£m
£m
Expected tax charge
(220)
(194)
Non-deductible goodwill impairment
—
(16)
Items not allowed for tax:
- losses on disposals and write downs
(6)
(3)
- UK bank levy
(2)
(3)
- regulatory and legal actions
—
(1)
- other disallowable items
(6)
(1)
Non-taxable items
2
11
Increase/(decrease) in the carrying value of deferred tax assets in respect of:
- UK losses
331
(14)
Banking surcharge
(91)
(81)
Tax on paid-in equity dividends
10
10
UK tax rate change impact
(3)
42
Adjustments in respect of prior years
2
5
Actual tax credit/(charge)
17
(245)
For accounting policy information see Accounting policy 3.3.
Deferred tax
RBS plc makes provision for deferred tax on temporary differences where tax recognition occurs at a different time from
accounting recognition. Deferred tax assets of £1,048 million were recognised as at 31 December 2022 (2021 - £289 million).
2022
2021
£m
£m
Deferred tax liability
—
—
Deferred tax asset
(1,048)
(289)
Net deferred tax asset
(1,048)
(289)
Net deferred tax asset comprised:
Accelerated
Tax losses
capital
Expense
Financial
carried
allowances
provisions
instruments (1)
forward
Other
Total
£m
£m
£m
£m
£m
£m
At 1 January 2021
(39)
(1)
155
(200)
(7)
(92)
Charge/(credit) to income statement
8
(6)
—
24
(1)
25
Charge to other comprehensive income
—
—
(222)
—
—
(222)
At 31 December 2021
(31)
(7)
(67)
(176)
(8)
(289)
Charge/(credit) to income statement
9
4
(5)
(276)
1
(267)
Credit to other comprehensive income
—
—
(492)
—
—
(492)
At 31 December 2022
(22)
(3)
(564)
(452)
(7)
(1,048)
(1) The in-year movement predominantly relates to cash flow hedges.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 109
7 Tax continued
Critical accounting policy: Deferred tax
The deferred tax assets of £1,048 million as at 31 December 2022 (2021 - £289 million) principally comprises losses which arose in
the UK, and temporary differences. These deferred tax assets are recognised to the extent that it is probable that there will be
future taxable profits to recover them.
It was announced in the UK Government’s budget on 27 October 2021 that the UK banking surcharge will decrease from 8% to 3%
from 1 April 2023. This legislative change was enacted on 24 February 2022. RBS plc’s closing deferred tax assets and liabilities
have therefore been recalculated taking into account this change of rate and the applicable period the deferred tax assets and
liabilities are expected to crystallise.
Judgment – RBS plc has considered the carrying value of deferred tax assets and concluded that, based on management’s
estimates, sufficient taxable profits will be generated in future years to recover recognised deferred tax assets.
Estimate - These estimates are partly based on forecast performance beyond the horizon for management’s detailed plans. They
have regard to inherent uncertainties, such as climate change.
UK tax losses - Under UK tax rules, tax losses can be carried forward indefinitely. As the recognised tax losses arose prior to 1
April 2015, credit in future periods is given against 25% of profits at the main rate of UK corporation tax, excluding the Banking
Surcharge rate introduced by The Finance (No. 2) Act 2015.
RBS plc – A deferred tax asset of £452 million (2021 - £176 million) has been recognised in respect of losses of £1,821 million of
total losses of £3,692 million carried forward at 31 December 2022. The losses were transferred from NatWest Markets Plc as a
consequence of the ring fencing regulations. RBS plc expects the deferred tax asset to be utilised against future taxable profits by
the end of 2029.
Deferred tax assets of £468 million (2021 - £814 million) have not been recognised in respect of tax losses carried forward of
£1,871 million (2021 - £3,257 million). The tax losses can be carried forward indefinitely.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 110
8 Financial instruments - classification
Judgment: classification of financial assets
Classification of financial assets between amortised cost and fair value through other comprehensive income requires a degree of
judgment in respect of business models and contractual cashflows.
The business model criteria is assessed at a portfolio level to determine whether assets are classified as held to collect or held
to collect and sell. Information that is considered in determining the applicable business model includes the portfolio’s policies
and objectives, how the performance and risks of the portfolio are managed, evaluated and reported to management; and the
frequency, volume and timing of sales in prior periods, sales expectation for future periods, and the reasons for sales.
The contractual cash flow characteristics of financial assets are assessed with reference to whether the cash flows represent
SPPI. A level of judgment is made in assessing terms that could change the contractual cash flows so that it would not meet the
condition for SPPI, including contingent and leverage features, non-recourse arrangements and features that could modify the
time value of money.
For accounting policy information see Accounting policies notes 3.4, 3.5 and 3.7.
The following tables analyse RBS plc’s financial assets and liabilities in accordance with the categories of financial instruments in
IFRS 9.
Amortised
Other
MFVTPL (1)
FVOCI (1)
cost
assets
Total
Assets
£m
£m
£m
£m
£m
Cash and balances at central banks
34,323
34,323
Derivatives (2)
498
498
Loans to banks - amortised cost (3)
1,071
1,071
Loans to customers - amortised cost (4)
37,667
37,667
Amounts due from holding companies and fellow subsidiaries
—
—
21,610
112
21,722
Other assets
67
1
—
1,314
1,382
31 December 2022
565
1
94,671
1,426
96,663
Cash and balances at central banks
38,014
38,014
Derivatives (2)
220
220
Loans to banks - amortised cost (3)
1,147
1,147
Loans to customers - amortised cost (4)
42,035
42,035
Amounts due from holding companies and fellow subsidiaries
—
—
23,815
126
23,941
Other assets
84
1
1
652
738
31 December 2021
304
1
105,012
778
106,095
Held-for-
Amortised
Other
trading (1)
cost
liabilities
Total
Liabilities
£m
£m
£m
£m
Bank deposits (5)
986
986
Customer deposits
83,306
83,306
Amounts due to holding companies and fellow subsidiaries
—
3,555
355
3,910
Derivatives (2)
2,683
2,683
Notes in circulation
2,409
2,409
Other liabilities (6)
126
582
708
31 December 2022
2,683
90,382
937
94,002
Bank deposits (5)
1,117
1,117
Customer deposits
92,144
92,144
Amounts due to holding companies and fellow subsidiaries
—
4,918
298
5,216
Derivatives (2)
827
827
Notes in circulation
2,144
2,144
Other liabilities (6)
158
742
900
31 December 2021
827
100,481
1,040
102,348
(1) Includes instruments predominantly held at level 2 of the fair value hierarchy.
(2) Includes hedging derivative assets of £480 million (2021 - £171 million) and hedging derivative liabilities of £2,524 million (2021 - £701 million).
(3) Includes items in the course of collection from other banks of £59 million (2021 - £14 million).
(4) Includes finance lease receivables of £1 million (2021 - £5 million).
(5) Includes items in the course of transmission to other banks of £8 million (2021 - £8 million).
(6) Includes lease liabilities of £107 million (2021 - £133 million) held at amortised cost.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 111
8 Financial instruments – classification continued
The below tables include amounts due from/to holding companies and fellow subsidiaries:
2022
2021
Holding
Fellow
Holding
Fellow
companies
subsidiaries
Total
companies
subsidiaries
Total
£m
£m
£m
£m
£m
£m
Assets
Loans to banks - amortised cost
—
18,511
18,511
—
21,322
21,322
Loans to customers - amortised cost
—
3,099
3,099
—
2,493
2,493
Other assets
—
112
112
—
126
126
Amounts due from holding companies and fellow
subsidiaries
—
21,722
21,722
—
23,941
23,941
Derivatives (1)
—
498
498
—
220
220
Liabilities
Bank deposits - amortised cost
—
1,016
1,016
—
2,391
2,391
Customer deposits - amortised cost
—
624
624
—
713
713
Other financial liabilities - subordinated liabilities (2)
1,507
—
1,507
1,427
—
1,427
MREL instruments issued to NatWest Holdings Limited
408
—
408
387
—
387
Other liabilities
15
340
355
—
298
298
Amounts due to holding companies and fellow subsidiaries
1,930
1,980
3,910
1,814
3,402
5,216
Derivatives (1)
—
2,681
2,681
—
826
826
(1) Intercompany derivatives are included within the derivative classification on the balance sheet.
(2) USD $1,850 million fixed rate subordinated notes. See Note 15.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 112
8 Financial instruments – classification continued
Interest rate benchmark reform
RBS plc continues to work on the transition of USD IBOR exposures to risk free rates in advance of the cessation date of 30 June
2023. Derivatives are expected to transition during April and May 2023 and other exposures in line with fallback provisions or
deferred switches using widely accepted methodologies. The instruments yet to transition reflect an insignificant element of RBS
plc’s exposures. Instruments with exposures to other rates transitioned at the end of 2021, or at the first contractual reset date, or
at a date agreed with the counterparty.
The level of exposures without explicit or agreed conversion provisions as of the preceding year were as follows:
Rates subject to IBOR reform
GBP LIBOR
USD IBOR
Other IBOR
Total
2021
£m
£m
£m
£m
Loans to customers - amortised cost
484
447
1
932
Amounts due to holding companies and fellow subsidiaries
—
387
—
387
Loan commitments (1)
62
538
—
600
Derivatives notional (£bn)
—
1.9
—
1.9
(1) Certain loan commitments are multi-currency facilities. Where these are fully undrawn, they are allocated to the principal currency of the facility. Where the facilities are partly
drawn, the remaining loan commitment is allocated to the currency with the largest drawn amount.
AT1 issuances
RBS plc has issued certain capital instruments (AT1) under which reset clauses are linked to IBOR rates subject to reform. Where
under the contractual terms of the instrument the coupon resets to an IBOR rate or to a rate which has IBOR as a specified
component of its pricing structure these are subject to IBOR reform and are shown in Note 17.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 113
9 Financial Instruments: fair value of financial instruments measured at amortised cost
The following table shows the carrying value and fair value of financial instruments measured at amortised cost on the balance
sheet.
Items where fair
value approximates
Fair value hierarchy level
carrying value
Carrying value
Fair value
Level 2
Level 3
2022
£m
£m
£m
£m
£m
Financial assets
Cash and balances at central banks
34,323
Loans to banks
—
1,071
1,071
976
95
Loans to customers
37,667
36,752
—
36,752
Amounts due from holding companies and fellow subsidiaries
21,610
21,610
—
21,610
Other assets
—
2021
Financial assets
Cash and balances at central banks
38,014
Loans to banks
—
1,147
1,147
1,073
74
Loans to customers
42,035
41,471
—
41,471
Amounts due from holding companies and fellow subsidiaries
23,815
23,816
—
23,816
Other assets
1
2022
Financial liabilities
Bank deposits
890
96
89
—
89
Customer deposits
80,001
3,305
3,310
574
2,736
Amounts due to holding companies and fellow subsidiaries
911
2,644
2,637
1,908
729
Notes in circulation
2,409
Other liabilities
—
2021
Financial liabilities
Bank deposits
1,023
94
94
—
94
Customer deposits
89,787
2,357
2,334
654
1,680
Amounts due to holding companies and fellow subsidiaries
568
4,350
4,397
1,862
2,535
Notes in circulation
2,144
Other liabilities
1
The assumptions and methodologies underlying the calculation
of fair values of financial instruments at the balance sheet date
are as follows:
Short-term financial instruments
For certain short-term financial instruments: cash and balances
at central banks, items in the course of collection from other
banks, settlement balances, items in the course of transmission
to other banks, customer demand deposits and notes in
circulation, carrying value is deemed a reasonable
approximation of fair value.
Loans to banks and customers
In estimating the fair value of net loans to customers and banks
measured at amortised cost, RBS plc’s loans are segregated
into appropriate portfolios reflecting the characteristics of the
constituent loans. Two principal methods are used to estimate
fair value:
(a) Contractual cash flows are discounted using a market
discount rate that incorporates the current spread for the
borrower or where this is not observable, the spread for
borrowers of a similar credit standing. This method is used
for portfolios where counterparties have external ratings,
such as institutional and corporate lending.
(b) Expected cash flows (unadjusted for credit losses) are
discounted at the current offer rate for the same or similar
products. The current methodology caps all loan values at
par rather than modelling clients’ option to repay loans
early. This approach is adopted for lending portfolios in
Retail Banking, Commercial & Institutional (SME loans) and
Private Banking in order to reflect the homogeneous nature
of these portfolios.
Bank and customer deposits
Fair values of deposits are estimated using discounted cash
flow valuation techniques. Where required, methodologies can
be revised as additional information and valuation inputs
become available.
For accounting policy information see Accounting policy note
3.4.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 114
10 Financial instruments - maturity analysis
Remaining maturity
The following table shows the residual maturity of financial instruments, based on contractual date of maturity.
2022
2021
Less than
More than
Less than
More than
12 months
12 months
Total
12 months
12 months
Total
£m
£m
£m
£m
£m
£m
Assets
Cash and balances at central banks
34,323
—
34,323
38,014
—
38,014
Derivatives
43
455
498
32
188
220
Loans to banks - amortised cost
1,071
—
1,071
1,147
—
1,147
Loans to customers - amortised cost
11,260
26,407
37,667
14,375
27,660
42,035
Amounts due from holding companies and fellow
subsidiaries (1)
21,610
—
21,610
23,290
525
23,815
Other assets (2)
3
65
68
7
78
85
Liabilities
Bank deposits
986
—
986
1,117
—
1,117
Customer deposits
83,104
202
83,306
91,997
147
92,144
Amounts due to holding companies and fellow subsidiaries (3)
3,152
403
3,555
2,862
2,056
4,918
Derivatives
140
2,543
2,683
4
823
827
Notes in circulation
2,409
—
2,409
2,144
—
2,144
Lease liabilities
9
98
107
12
121
133
(1) Excludes non-financial instruments of £112 million (2021 – £126 million).
(2) Excludes non-financial instruments of £1,314 million (2021 - £653 million).
(3) Excludes non-financial instruments of £355 million (2021 – £298 million).
Liabilities by contractual cash flow maturity with a maturity
of 20 years or less
The tables below show the timing of cash outflows to settle
financial liabilities, prepared on the following basis:
Financial liabilities are included at the earliest date on which
the counterparty can require repayment regardless of whether
or not such early repayment results in a penalty. If repayment
is triggered by, or is subject to, specific criteria such as market
price hurdles being reached, the liability is included at the
earliest possible date that the conditions could be fulfilled
without considering the probability of the conditions being met.
For example, if a structured note automatically
prepays when an equity index exceeds a certain level, the cash
outflow will be included in the less than three months’ period
whatever the level of the index at the year end.
Liabilities with a contractual maturity of greater than 20 years
-
the principal amounts of financial liabilities that are repayable
after 20 years or where the counterparty has no right to
repayment of the principal, are excluded from the table along
with interest payments after 20 years.
The maturity of guarantees and commitments is based on the
earliest possible date they would be drawn in order to evaluate
RBS plc’s liquidity position.
HFT liabilities of £160 million (2021 - £126 million) have been
excluded from the tables.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 115
10 Financial instruments - maturity analysis continued
0-3 months
3-12 months
1-3 years
3-5 years
5-10 years
10-20 years
2022
£m
£m
£m
£m
£m
£m
Liabilities by contractual maturity up to 20 years
Bank deposits
897
—
—
—
89
—
Customer deposits
82,308
799
200
—
—
—
Amounts due to holding companies and fellow subsidiaries
1,651
1,625
424
—
—
—
Derivatives
162
629
1,381
429
137
14
Notes in circulation
2,409
Lease liabilities
3
7
17
14
29
34
87,430
3,060
2,022
443
255
48
Guarantees and commitments notional amount
Guarantees (1)
367
—
—
—
—
—
Commitments (2)
17,125
—
—
—
—
—
17,492
—
—
—
—
—
2021
Liabilities by contractual maturity up to 20 years
Bank deposits
1,117
—
—
—
—
—
Customer deposits
91,569
428
145
—
2
—
Amounts due to holding companies and fellow subsidiaries
2,803
141
1,960
77
53
—
Derivatives
12
50
308
161
136
62
Notes in circulation
2,144
—
—
—
—
—
Lease liabilities
3
8
19
15
27
32
97,648
627
2,432
253
218
94
Guarantees and commitments notional amount
Guarantees (1)
283
—
—
—
—
—
Commitments (2)
22,331
—
—
—
—
—
22,614
—
—
—
—
—
(1) RBS plc is only called upon to satisfy a guarantee when the guaranteed party fails to meet its obligations. RBS plc expects most guarantees it provides to expire unused.
(2) RBS plc has given commitments to provide funds to customers under undrawn formal facilities, credit lines and other commitments to lend subject to certain conditions being met by
the counterparty. RBS plc does not expect all facilities to be drawn, and some may lapse before drawdown.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 116
11 Derivatives
RBS plc uses derivatives to manage its own risk such as foreign exchange risk and interest rate risk.
2022
2021
Notional
Assets
Liabilities
Notional
Assets
Liabilities
£m
£m
£m
£m
£m
£m
Exchange rate contracts
8
—
—
—
—
—
Interest rate contracts
43,140
498
2,683
41,023
220
827
498
2,683
220
827
For accounting policy information see Accounting policies notes 3.4 and 3.7.
RBS plc applies hedge accounting to reduce the accounting
mismatch caused in the income statement by using derivatives
to hedge interest rate risk foreign exchange and the foreign
exchange risk associated with net investment and foreign
operations.
RBS plc’s interest rate hedging relates to the management of
RBS plc’s non-trading structural interest rate risk, caused by
the mismatch between fixed interest rates and floating interest
rates on its financial instruments. RBS plc manages this risk
within approved limits. Residual risk positions are hedged with
derivatives, principally interest rate swaps.
Suitable larger fixed rate financial instruments are subject to
fair value hedging in line with document risk management
strategies.
Cash flow hedges of interest rate risk relate to exposures to the
variability in future interest payments and receipts due to the
movement of benchmark interest rates on forecast transactions
and on financial assets and financial liabilities. This variability in
cash flows is hedged by interest rate swaps, which convert
variable cash flows into fixed. For these cash flow hedge
relationships, the hedged items are actual and forecast variable
interest rate cash flows arising from financial assets and
financial liabilities with interest rates linked to the relevant
benchmark rates, most notably USD LIBOR, EURIBOR, SONIA
and the Bank of England Official Bank Rate. The variability in
cash flows due to movements in the relevant benchmark rate is
hedged; this risk component is identified using the risk
management systems of RBS plc and encompasses the
majority of cash flow variability risk.
Fair value hedges of interest rate risk involve interest rate
swaps transforming the fixed interest rate risk in financial
assets and financial liabilities to floating. The hedged risk is the
risk of changes in the hedged item’s fair value attributable to
changes in the benchmark interest rate risk component of the
hedged item. The significant benchmarks identified as risk
components are USD LIBOR, EURIBOR and SONIA. These risk
components are identified using the risk management systems
of RBS plc and encompass the majority of the hedged item’s
fair value risk.
Exchange rate risk also arises in RBS plc where payments are
denominated in currencies other than the functional currency.
Residual risk positions are hedged with forward foreign
exchange contracts, fixing the exchange rate the payments will
be settled in.
For all cash flow hedging and fair value hedge relationships
RBS plc determines that there is an adequate level of offsetting
between the hedged item and hedging instrument at inception
and on an ongoing basis. This is achieved by comparing
movements in the fair value of the expected highly probable
forecast cash flows/fair value of the hedged item attributable to
the hedged risk with movements in the fair value of the
expected changes in cash flows from the hedging instruments.
The method used for comparing movements is either
regression testing or the dollar offset method. The method for
testing effectiveness and the period over which the test is
performed depends on the applicable risk management
strategy and is applied consistently to each risk management
strategy. Hedge effectiveness is assessed on a cumulative
basis and the determination of effectiveness is in line with the
requirements of IAS39.
RBS plc uses either the actual ratio between the hedged item
and hedging instrument(s) or one that minimises hedge
ineffectiveness to establish the hedge ratio for hedge
accounting. Hedge ineffectiveness is measured in line with the
requirements of IAS39 and recognised in the income statement
as it arises.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 117
11 Derivatives continued
Included in the table above are derivatives held for hedging purposes as follows:
2022
2021
Change in fair
Change in fair
value used for
value used for
hedge
hedge
Notional
Assets
Liabilities
ineffectiveness (1)
Notional
Assets
Liabilities
ineffectiveness (1)
£m
£m
£m
£m
£m
£m
£m
£m
Fair value hedging - interest rate
contracts
3,985
190
109
332
3,787
93
371
133
Cash flow hedging - interest rate
contracts
34,947
290
2,414
(1,814)
25,805
78
330
(792)
38,932
480
2,523
(1,482)
29,592
171
701
(659)
(1) The change in fair value used for hedge ineffectiveness includes instruments that were derecognised in the year.
The following table shows the period in which the notional of hedging contract ends:
0-3
months
3-12
months
1-3
years
3-5
years
5-10
years
10-20
years
20+
years
Total
2022
£m
£m
£m
£m
£m
£m
£m
£m
Fair value hedging
Hedging assets - interest rate risk
7
58
250
208
481
740
289
2,033
Hedging liabilities - interest rate risk
—
1,537
415
—
—
—
—
1,952
Cash flow hedging
Hedging assets - interest rate risk
525
4,393
12,704
12,461
1,748
—
—
31,831
Average fixed interest rate (%)
1.16
0.98
0.84
1.91
0.80
—
—
1.28
Hedging liabilities - interest rate risk
233
1,500
49
468
866
—
—
3,116
Average fixed interest rate (%)
0.38
1.00
0.82
0.79
0.78
—
—
0.86
2021
Fair value hedging
Hedging assets - interest rate risk
11
18
154
283
555
755
268
2,044
Hedging liabilities - interest rate risk
—
—
1,743
—
—
—
—
1,743
Cash flow hedging
Hedging assets - interest rate risk
—
—
10,150
10,936
2,203
—
—
23,289
Average fixed interest rate (%)
—
—
0.85
0.57
0.91
—
—
0.72
Hedging liabilities - interest rate risk
—
—
1,233
49
1,234
—
—
2,516
Average fixed interest rate (%)
—
—
0.24
0.82
0.67
—
—
0.46
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 118
11 Derivatives continued
The table below analyses assets and liabilities, including intercompany subject to hedging derivatives:
Impact on
Carrying value
hedged items
Change in fair value used
Impact on hedged items
of hedged assets
included in
as a basis to determine
ceased to be adjusted for
and liabilities
carrying value
ineffectiveness (1)
hedging gains or losses
2022
£m
£m
£m
£m
Fair value hedging - interest rate
Loans to customers - amortised cost
1,831
(216)
(437)
11
Other financial liabilities - debt securities in issue
408
(12)
25
—
Subordinated liabilities
1,507
(32)
88
—
Total
1,915
(44)
113
—
Cash flow hedging - interest rate
Loans to banks and customers - amortised cost (2)
31,831
2,006
Bank and customer deposits
3,116
(210)
Total
34,947
1,796
2021
£m
£m
£m
£m
Fair value hedging - interest rate
Loans to customers - amortised cost
2,289
228
(182)
12
Other financial liabilities - debt securities in issue
387
12
14
—
Subordinated liabilities
1,427
53
54
—
Total
1,814
65
68
—
Cash flow hedging - interest rate
Loans to banks and customers - amortised cost
23,289
826
Bank and customer deposits
2,516
(63)
Total
25,805
763
(1) The change in fair value used for hedge ineffectiveness includes instruments that were derecognised in the year.
(2) Includes cash and balances at central banks.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 119
11 Derivatives continued
The following shows analysis of the pre-tax cash flow hedge reserve:
2022
2021
Cash flow
Cash flow
hedge reserve
hedge reserve
£m
£m
Continuing
Interest rate risk
(2,058)
(277)
De-designated
Interest rate
4
26
Total
(2,054)
(251)
2022
2021
Cash flow
Cash flow
hedge reserve
hedge reserve
£m
£m
Amount recognised in equity
- Interest rate risk
(1,952)
(564)
Total
(1,952)
(564)
Amount transferred from equity to earnings
- Interest rate risk to net interest income
135
(167)
- Interest rate risk to non-interest income (1)
14
(35)
Total
149
(202)
(1) There was £14 million (2021 - £35 million) reclassified with the cash flow reserve to earnings due to forecasted cash flows that are no longer expected to occur.
Hedge ineffectiveness recognised in other operating income comprised:
2022
2021
£m
£m
Fair value hedging
Loss on the hedged items attributable to the hedged risk
(324)
(114)
Gain on the hedging instruments
332
133
Fair value hedging ineffectiveness
8
19
Cash flow hedging
Interest rate risk
(18)
(29)
Cash flow hedging ineffectiveness
(18)
(29)
Total
(10)
(10)
The main sources of ineffectiveness for interest rate risk hedge accounting relationships are:
the effect of the counterparty credit risk on the fair value of the interest rate swap, which is not reflected in the fair value of the
hedged item attributable to the change in interest rate (fair value hedge);
differences in the repricing basis between the hedging instrument and hedged cash flows (cash flow hedge); and
upfront present values on the hedging derivatives where hedge accounting relationships have been designated after the trade
date (cash flow hedge and fair value hedge).
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 120
12 Loan impairment provisions
Loan exposure and impairment metrics
The table below summarises loan and related credit impairment measures within the scope of ECL framework.
2022
2021
£m
£m
Loans - amortised cost
Stage 1
30,433
36,097
Stage 2
8,094
6,501
Stage 3
1,009
989
Inter-group
21,638
23,821
61,174
67,408
ECL provisions (2)
Stage 1
88
47
Stage 2
177
282
Stage 3
372
373
Inter-group
27
5
664
707
ECL provision coverage (1)
Stage 1 (%)
0.29
0.13
Stage 2 (%)
2.19
4.34
Stage 3 (%)
36.87
37.71
Inter-group (%)
0.12
0.02
1.61
1.61
Impairment (releases)/losses
ECL (release)/charge
Stage 1
(57)
(258)
Stage 2
23
(98)
Stage 3
30
5
Inter-group
24
(9)
20
(360)
Amounts written off
78
305
(1) ECL provisions coverage is calculated as total ECL provisions divided by third party loans – amortised cost and FVOCI.
(2) The table shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to page 32 for Financial instruments within the scope of the IFRS 9
ECL framework for further details. Other financial assets within the scope of the IFRS 9 ECL framework were cash and balances at central banks totalling £33.7 billion (2021 – £37.5
billion).
Credit risk enhancement and mitigation
For information on credit risk enhancement and mitigation held
as securities, refer to Risk and capital management – Credit
risk enhancement and mitigation section.
Critical accounting policy: Loan impairment provisions
Accounting policy 2.2 sets out how the expected loss approach
is applied. At 31 December 2022, customer loan impairment
provisions amounted to £664 million (2021 - £707 million). A
loan is impaired when there is objective evidence that the cash
flows will not occur in the manner expected when the loan was
advanced. Such evidence includes, changes in the credit rating
of a borrower, the failure to make payments in accordance
with the loan agreement, significant reduction in the value of
any security, breach of limits or covenants, and observable
data about relevant macroeconomic measures.
The impairment loss is the difference between the carrying
value of the loan and the present value of estimated future
cash flows at the loan's original effective interest rate.
The measurement of credit impairment under the IFRS
expected loss model depends on management’s assessment of
any potential deterioration in the creditworthiness of the
borrower, its modelling of expected performance and the
application of economic forecasts. All three elements require
judgments that are potentially significant to the estimate of
impairment losses.
For further information and sensitivity analysis, refer to Risk
and capital management – Measurement uncertainty and ECL
sensitivity analysis section.
IFRS 9 ECL model design principles
Refer to Credit risk – IFRS 9 ECL model design principles
section for further details.
Approach for multiple economic scenarios (MES)
The base scenario plays a greater part in the calculation of
ECL than the approach to MES. Refer to Credit risk – Economic
loss drivers – Probability weightings of scenarios section for
further details.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 121
13 Investments in Group undertakings
Investments in Group undertakings are carried at cost less impairment losses as follows.
2022
2021
£m
£m
At 1 January
6
28
Disposals
-
(19)
Impairment of investments
-
(3)
At 31 December
6
6
The 2021 disposal was related to the RBS plc disposal of its subsidiary Adam & Company Investment Management Limited.
The table below shows the principal subsidiaries of RBS plc. Their capital consists of ordinary shares which are unlisted. All of the
subsidiary undertakings are owned by RBS plc directly and have an accounting reference date of 31 December. Refer to Note 28
for details of all subsidiary undertakings.
Country of
incorporation
Nature of
and principal area
business
of operation
The One Account Limited
Service company
Great Britain
14 Other assets
2022
2021
£m
£m
Other financial assets
68
85
Investment in Group undertakings (Note 13)
6
6
Property, plant and equipment
120
145
Accrued income
42
43
Deferred tax (Note 7)
1,048
289
Acceptances
85
154
Other assets
13
16
1,382
738
15 Subordinated liabilities
2022
2021
£m
£m
Dated loan capital
1,507
1,427
1,507
1,427
First call
Maturity
Capital
2022
2021
Dated loan capital
date
date
treatment
£m
£m
$1,850 million
5.182% notes
Dec-23
Dec-28
Tier 2
1,507
1,427
1,507
1,427
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 122
16 Other liabilities
2022
2021
£m
£m
Lease liabilities
107
133
Provisions for liabilities and charges
127
201
Accruals
57
104
Deferred income
45
49
Current tax
265
234
Acceptances
85
154
Other liabilities
22
25
708
900
Redress
Financial
and other
commitments
Litigation (1)
Property
and guarantees
Other
Total
Provisions for liabilities and charges
£m
£m
£m
£m
£m
At 1 January 2022
114
46
23
18
201
Expected credit losses impairment release
—
—
(5)
—
(5)
Charge to income statements
24
2
—
1
27
Releases to income statement
(12)
(17)
—
(8)
(37)
Provisions utilised
(42)
(8)
—
(9)
(59)
At 31 December 2022
84
23
18
2
127
(1) Includes payment protection insurance provision which reflects the estimated cost of PPI redress attributable to claims prior to the Financial Conduct Authority (FCA) complaint
deadline of 29 August 2019. All pre-deadline complaints have been processed which removes complaint volume estimation uncertainty from the provision estimate. NatWest Group
continues to conclude remaining bank-identified closure work and conclude cases with the Financial Ombudsmen Service.
Provisions are liabilities of uncertain timing or amount and are recognised when there is a present obligation as a result of a past
event, the outflow of economic benefit is probable and the outflow can be estimated reliably. Any difference between the final
outcome and the amounts provided will affect the reported results in the period when the matter is resolved.
For accounting policy information see Accounting policy note 2.3.
Critical accounting policy: Provisions for liabilities
The key judgment is involved in determining whether a present obligation exists. There is often a high degree of uncertainty and
judgment is based on the specific facts and circumstances relating to individual events in determining whether there is a present
obligation. Judgment is also involved in estimation of the probability, timing and amount of any outflows. Where RBS plc can look to
another party such as an insurer to pay some or all of the expenditure required to settle a provision, any reimbursement is
recognised when, and only when, it is virtually certain that it will be received.
Estimates - Provisions are liabilities of uncertain timing or amount and are recognised when there is a present obligation as a result
of a past event, the outflow of economic benefit is probable and the outflow can be estimated reliably. Any difference between the
final outcome and the amounts provided will affect the reported results in the period when the matter is resolved.
Customer redress: Provisions reflect the estimated cost of redress attributable to claims where it is determined that a present
obligation exists.
Property: This includes provision for contractual costs associated with vacant properties.
Litigation and other provisions: These materially comprise provisions for property onerous contracts and restructuring costs.
Onerous contract provisions comprise an estimate of the costs involved with fulfilling the terms and conditions of contracts net
of any expected benefits to be received. This includes provision for contractual costs associated with vacant properties.
Redundancy and restructuring provisions comprise the estimated cost of restructuring, including redundancy costs where an
obligation exists. For further information in relation to legal proceedings and discussion of the associated uncertainties, refer to
Note 20.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 123
17 Share capital and reserves
Number of shares
2022
2021
2022
2021
Allotted, called up and fully paid
£m
£m
000s
000s
Ordinary shares of £1
20
20
19,500
19,500
Ordinary shares
No ordinary shares were issued during 2022 or 2021.
In 2022, RBS plc paid an ordinary dividend of £0.85 billion to NWH Ltd (2021 - £2.1 billion).
Paid-in equity
Comprises equity instruments issued by RBS plc other than those legally constituted as shares.
Additional Tier 1 instruments issued by RBS plc having the legal form of debt are classified as equity under IFRS. The coupons on
these instruments are non-cumulative and payable at RBS’s discretion.
2022
2021
£m
£m
Additional Tier 1 instruments
US$1,350 billion 3.9683% instruments callable August 2023 (1)
470
969
GBP£500 million 6.8543% instruments callable May 2027
500
-
970
969
(1) Coupon reset on 15
th
August 2022 from 6.49% to 3.9683%. Instrument was partially redeemed in June 2022.
Capital recognised for regulatory purposes cannot be redeemed without Prudential Regulation Authority consent. This includes
ordinary shares and additional Tier 1 instruments.
For accounting policy information see Accounting policy 3.6.
18 Unconsolidated structured entities
RBS plc has lending to unconsolidated structured entities of £122 million (2021 - £129 million) and loan commitments of £46 million
(2021 – £7 million).
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 124
19 Capital resources
Regulatory capital is assessed against minimum requirements that are set out under the Capital Requirements Regulation on a
legal entity and consolidated basis. Transitional arrangements on the phasing in of end-point capital resources are set by the
relevant regulatory authority.
The capital resources based on the PRA transitional basis for RBS plc are set out below.
2022
2021
Shareholders’ equity (excluding non-controlling interests)
£m
£m
Shareholders’ equity
2,661
3,747
Other equity instruments
(970)
(969)
1,691
2,778
Regulatory adjustments and deductions
Cash flow hedging reserve
1,479
168
Deferred tax assets
(439)
(161)
Prudential valuation adjustments
(2)
(4)
Adjustment under IFRS 9 transitional arrangements
71
126
Foreseeable dividends
(650)
(225)
Insufficient coverage for non-performing exposures
(1)
—
458
(96)
CET1 capital
2,149
2,682
Additional Tier 1 (AT1) capital
Qualifying instruments and related share premium
970
969
970
969
Tier 1 capital
3,119
3,651
Qualifying Tier 2 capital
Qualifying instruments and related share premium
1,537
1,372
Other regulatory adjustments
59
83
Tier 2 capital
1,596
1,455
Total regulatory capital
4,715
5,106
In the management of capital resources, RBS plc is governed
by NatWest Group's policy to maintain a strong capital base, to
expand it as appropriate and to utilise it efficiently throughout
its activities to optimise the return to shareholders while
maintaining a prudent relationship between the capital base
and the underlying risks of the business. In carrying out this
policy, NatWest Group has regard to the supervisory
requirements of the PRA. The PRA uses capital ratios as a
measure of capital adequacy in the UK banking sector,
comparing a bank's capital resources with its risk-weighted
assets (the assets and off-balance sheet exposures are
weighted to reflect the inherent credit and other risks); by
international agreement, the Pillar 1 capital ratios, excluding
capital buffers, should be not less than 8% with a Common
Equity Tier 1 component of not less than 4.5%. RBS plc has
complied with the PRA’s capital requirements throughout the
year.
A number of subsidiaries and sub-groups within NatWest
Group, principally banking entities, are subject to various
individual regulatory capital requirements in the UK and
overseas. Furthermore, the payment of dividends by
subsidiaries and the ability of members of NatWest Group to
lend money to other members of NatWest Group may be
subject to restrictions such as local regulatory or legal
requirements, the availability of reserves and financial and
operating performance.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 125
20 Memorandum items
Contingent liabilities and commitments
The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31
December 2022. Although RBS plc is exposed to credit risk in the event of non-performance of the obligations undertaken by
customers, the amounts shown do not, and are not intended to, provide any indication of RBS plc’s expectation of future losses.
For accounting policy information see Accounting policy note 2.3.
2022
2021
£m
£m
Contingent liabilities and commitments
Guarantees
367
283
Other contingent liabilities
441
498
Standby facilities, credit lines and other commitments
17,202
22,430
18,010
23,211
Banking commitments and contingent obligations, which have
been entered into on behalf of customers and for which there
are corresponding obligations from customers, are not included
in assets and liabilities. RBS plc’s maximum exposure to credit
loss, in the event of its obligation crystallising and all
counterclaims, collateral or security proving valueless, is
represented by the contractual nominal amount of these
instruments included in the table above. These commitments
and contingent obligations are subject to RBS plc’s normal
credit approval processes.
Guarantees – RBS plc gives guarantees on behalf of customers.
A financial guarantee represents an irrevocable undertaking
that RBS plc will meet a customer’s specified obligations to a
third party if the customer fails to do so. The maximum amount
that RBS plc could be required to pay under a guarantee is its
principal amount as in the table above. RBS plc expects most
guarantees it provides to expire unused.
Other contingent liabilities - these include standby letters of
credit, supporting customer debt issues and contingent
liabilities relating to customer trading activities such as those
arising from performance and customs bonds, warranties and
indemnities.
Standby facilities and credit lines - under a loan commitment
RBS plc agrees to make funds available to a customer in the
future. Loan commitments, which are usually for a specified
term may be unconditionally cancellable or may persist,
provided all conditions in the loan facility are satisfied or
waived. Commitments to lend include commercial standby
facilities and credit lines, liquidity facilities to commercial paper
conduits and unutilised overdraft facilities.
Other commitments - these include documentary credits, which
are commercial letters of credit providing for payment by RBS
plc to a named beneficiary against presentation of specified
documents, forward asset purchases, forward deposits placed
and undrawn note issuance and revolving underwriting
facilities, and other short-term trade related transactions.
Capital Support Deed
RBS plc, together with certain other subsidiaries of NatWest
Holdings Ltd, is party to a Capital Support Deed (CSD). Under
the terms of the CSD, RBS plc may be required, if compatible
with its legal obligations, to make distributions on, or
repurchase or redeem, its ordinary shares. The amount of this
obligation is limited to RBS plc’s capital resources in excess of
the capital and financial resources needed to meet its
regulatory requirements. RBS plc may also be obliged to make
onward distribution to its ordinary shareholders of dividends or
other capital distributions received from subsidiaries that are
party to the CSD. The CSD also provides that, in certain
circumstances, funding received by RBS plc from other parties
to the CSD becomes immediately repayable, such repayment
being limited to RBS plc’s available resources.
Trustee and other fiduciary activities
In its capacity as trustee or other fiduciary role, RBS plc may
hold or place assets on behalf of individuals, trusts, companies,
pension schemes and others. The assets and their income are
not included in its financial statements. RBS plc earned fee
income of £5 million (2021 - £8 million) from these activities.
The Financial Services Compensation
Scheme
The Financial Services Compensation Scheme (FSCS), the UK's
statutory fund of last resort for customers of authorised
financial services firms, pays compensation if a firm is unable to
meet its obligations. The FSCS funds compensation for
customers by raising management expenses levies and
compensation levies on the industry. In relation to protected
deposits, each deposit-taking institution contributes towards
these levies in proportion to their share of total protected
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 126
20 Memorandum items continued
deposits on 31 December of the year preceding the scheme
year (which runs from 1 April to 31 March), subject to annual
maxima set by the Prudential Regulation Authority. In addition,
the FSCS has the power to raise levies on a firm that has
ceased to participate in the scheme and is in the process of
ceasing to be authorised for the costs that it would have been
liable to pay had the FSCS made a levy in the financial year it
ceased to be a participant in the scheme.
Litigation and regulatory matters
RBS plc and certain members of NatWest Group are party to
legal proceedings and involved in regulatory matters, including
as the subject of investigations and other regulatory and
governmental action (Matters) in the United Kingdom (UK), the
United States (US), the European Union (EU) and other
jurisdictions.
NatWest Group recognises a provision for a liability in relation
to these Matters when it is probable that an outflow of
economic benefits will be required to settle an obligation
resulting from past events, and a reliable estimate can be made
of the amount of the obligation.
In many of these Matters, it is not possible to determine
whether any loss is probable, or to estimate reliably the amount
of any loss, either as a direct consequence of the relevant
proceedings and regulatory matters or as a result of adverse
impacts or restrictions on NatWest Group’s reputation,
businesses and operations. Numerous legal and factual issues
may need to be resolved, including through potentially lengthy
discovery and document production exercises and
determination of important factual matters, and by addressing
novel or unsettled legal questions relevant to the proceedings in
question, before a liability can reasonably be estimated for any
claim. NatWest Group cannot predict if, how, or when such
claims will be resolved or what the eventual settlement,
damages, fine, penalty or other relief, if any, may be,
particularly for claims that are at an early stage in their
development or where claimants seek substantial or
indeterminate damages.
There are situations where NatWest Group may pursue an
approach that in some instances leads to a settlement
agreement. This may occur in order to avoid the expense,
management distraction or reputational implications of
continuing to contest liability, or in order to take account of the
risks inherent in defending claims or regulatory matters, even
for those Matters for which NatWest Group believes it has
credible defences and should prevail on the merits. The
uncertainties inherent in all such Matters affect the amount and
timing of any potential outflows for both Matters with respect
to which provisions have been established and other contingent
liabilities in respect of any such Matter.
It is not practicable to provide an aggregate estimate of
potential liability for our legal proceedings and regulatory
matters as a class of contingent liabilities.
The future outflow of resources in respect of any Matter may
ultimately prove to be substantially greater than or less than
the aggregate provision that NatWest Group has recognised.
Where (and as far as) liability cannot be reasonably estimated,
no provision has been recognised. NatWest Group expects that
in future periods additional provisions, settlement amounts and
customer redress payments will be necessary, in amounts that
are expected to be substantial in some instances. Please refer
to Note 16 for information on material provisions.
Matters which are, or could be material, in which RBS plc is
currently involved are set out below. We have provided
information on the procedural history of certain Matters, where
we believe appropriate, to aid the understanding of the Matter.
Litigation
Claims by customers regarding NatWest Group’s Global
Restructuring Group (GRG)
NatWest Group is dealing with a number of active and
threatened litigation claims brought by current and former
customers of RBS plc and other NatWest Group companies on
a wide variety of bases who allege that they have suffered
losses as a result of NatWest Group’s treatment of SME
customers by its former Global Restructuring Group. These
include customers who were ineligible, or chose not, to pursue
a complaint through NatWest Group’s designated complaints
process for SME customers, which is now closed.
RBS plc remains exposed to potential new litigation claims from
customers who are dissatisfied with their complaint outcome or
who were ineligible to complain.
Regulatory matters
NatWest Group’s businesses and financial condition can be
affected by the actions of various governmental and regulatory
authorities in the UK, the US, the EU and elsewhere. NatWest
Group has engaged, and will continue to engage, in discussions
with relevant governmental and regulatory authorities,
including in the UK, the US, the EU and elsewhere, on an
ongoing and regular basis, and in response to informal and
formal inquiries or investigations, regarding operational,
systems and control evaluations and issues including those
related to compliance with applicable laws and regulations,
including consumer protection, investment advice, business
conduct, competition/anti-trust, VAT recovery, anti-bribery,
anti-money laundering and sanctions regimes. NatWest Group
expects government and regulatory intervention in financial
services to be high for the foreseeable future, including
increased scrutiny from competition and other regulators in the
retail and SME business sectors.
Any matters discussed or identified during such discussions and
inquiries may result in, among other things, further inquiry or
investigation, other action being taken by governmental and
regulatory authorities, increased costs being incurred by
NatWest Group, remediation of systems and controls, public or
private censure, restriction of NatWest Group’s business
activities and/or fines. Any of the events or circumstances
mentioned in this paragraph or below could have a material
adverse effect on RBS plc, its business, authorisations and
licences, reputation, results of operations or the price of
securities issued by it, or lead to material additional provisions
being taken.
RBS plc is co-operating fully with the matters described below.
Investment advice review
In October 2019, the FCA notified NatWest Group of its
intention to appoint a Skilled Person under section 166 of the
Financial Services and Markets Act 2000 to conduct a review of
whether NatWest Group’s past business review of investment
advice provided during 2010 to 2015 was subject to
appropriate governance and accountability and led to
appropriate customer outcomes. The Skilled Person’s review
has concluded and, after discussion with the FCA, NatWest
Group has now commenced additional review / remediation
work.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 127
21 Analysis of changes in financing during the year
Share capital,
share premium,
Subordinated
and paid-in equity
liabilities
(1)
MRELs
(2)
2022
2021
2022
2021
2022
2021
£m
£m
£m
£m
£m
£m
At 1 January
989
989
1,427
1,464
387
397
Issue of paid-in equity
500
—
Redemption of paid-in equity
(540)
—
Interest on subordinated liabilities
(78)
(70)
Interest on MRELs
(16)
(16)
Net cash flows from financing activities
(40)
—
(78)
(70)
(16)
(16)
Effects of foreign exchange
165
16
45
4
Changes in fair value of subordinated liabilities and MRELs
(85)
(53)
(25)
(14)
Interest on subordinated liabilities and MRELs
78
70
17
16
Other
41
—
—
—
—
—
At 31 December
990
989
1,507
1,427
408
387
(1) Subordinated liabilities are included within amount due to holding companies and fellow subsidiaries.
(2) MRELs balances are included in amounts due to holding companies and fellow subsidiaries.
22 Analysis of cash and cash equivalents
In the cash flow statement, cash and cash equivalents comprises cash and loans to banks with an original maturity of less than
three months that are readily convertible to known amounts of cash and subject to insignificant risk of change in value.
2022
2021
£m
£m
At 1 January
60,208
46,426
Net (decrease)/increase in cash and cash equivalents
(6,579)
13,782
At 31 December
53,629
60,208
Comprising:
Cash and balances at central banks
34,323
38,014
Loans to banks including intragroup balances
19,306
22,194
Cash and cash equivalents
53,629
60,208
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 128
23 Directors' and key management remuneration
The composition of RBS plc’s board of directors is aligned to its intermediate holding company NatWest Holdings Ltd. The directors
are remunerated for their services to NatWest Group as a whole, and their remuneration cannot be apportioned in respect of their
services to RBS plc.
The directors’ emoluments in the table below represent the NWH Group emoluments of the directors.
2022
2021
Directors remuneration
£000
£000
Non-executive directors emoluments
1,950
1,955
Chairman and executive directors emoluments
5,804
4,688
7,754
6,643
Amounts receivable under long-term incentive and share option plans
542
549
8,296
7,192
The total emoluments and amounts receivable under long-term incentive plans and share option plans of the highest paid director
were £3,497,000 (2021 - £2,808,000).
The executive directors may participate in the NatWest Group’s long-term incentive plans, executive share option and sharesave
schemes. Where directors of RBS plc are also directors of NatWest Group plc, details of their share interests can be found in the
NatWest Group 2022 Annual Report and Accounts in line with regulations applying to NatWest Group plc as a premium listed
company.
Compensation of key management
The aggregate remuneration of directors and other members of key management
(1)
during the year was as follows:
2022
2021
£000
£000
Short-term benefits
18,390
14,921
Post-employment benefits
594
683
Share-based payments
1,823
1,967
20,807
17,571
(1) Key management comprises members of the NWH Ltd Executive Committee.
Short term benefits include benefits expected to be settled wholly within twelve months of Balance Sheet date. Post-employment
benefits include defined benefit contributions for active members and pension funding to support contributions to the defined
contribution schemes. Share-based payments include awards vesting under rewards schemes.
24 Transactions with directors and key management
At 31 December 2022, amounts outstanding in relation to transactions, arrangements and agreements entered into by RBS plc, as
defined in UK legislation, were £9,636,586 in respect of loans to eight persons who were directors of RBS plc at any time during the
financial period.
For the purposes of IAS 24 Related party disclosures, key management comprises directors of RBS plc and members of RBS plc’s
Executive Committee. Amounts in the table below are attributed to each person at their highest level of NatWest Group key
management.
2022
2021
£000
£000
Loans to customers - amortised cost
11,172
8,632
Customer deposits
42,932
45,719
Key management have banking relationships with NatWest Group which are entered into in the normal course of business and on
substantially the same terms, including interest rates and security, as for comparable transactions with other persons of a similar
standing or, where applicable, with other employees. These transactions did not involve more than the normal risk of repayment or
present other unfavourable features. Key management had no reportable transactions or balances with the holding companies.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 129
25 Related parties
UK Government
The UK Government through HM Treasury is the ultimate controlling party of NatWest Group plc. The UK Government’s
shareholding is managed by UK Government Investments Limited, a company wholly owned by the UK Government. As a result,
the UK Government and UK Government controlled bodies are related parties of the Group.
At 31 December 2022, HM Treasury’s holding in NatWest Group’s ordinary shares was 45.97%.
RBS plc enters into transactions with many of these bodies. Transactions include the payment of: taxes principally UK corporation
tax (Note 7) and value added tax; national insurance contributions; local authority rates; and regulatory fees and together with
banking transactions such as loans and deposits undertaken in the normal course of banker-customer relationships.
Bank of England facilities
RBS plc may participate in a number of schemes operated by the Bank of England in the normal course of business. RBS plc is a
UK authorised institution and is required to maintain non-interest bearing (cash ratio) deposits with the Bank of England amounting
to 0.403% of their average eligible liabilities in excess of £600 million. RBS plc also has access to Bank of England reserve accounts:
sterling current accounts that earn interest at the Bank of England base rate.
Other related parties
In its role as providers of finance, RBS plc provides development and other types of capital support to businesses. These
investments are made in the normal course of business. To further strategic partnerships, RBS plc may seek to invest in third
parties or allow third parties to hold a minority interest in a subsidiary of NatWest Group. We disclose as related parties where
stakes of 10 per cent or more are held. Ongoing business transactions with these entities are on normal commercial terms.
Other net income/(expenses) represents the share of post-tax results of associates and joint ventures, profit (or loss) on disposal of
subsidiaries, associates and joint ventures, and gains on acquisitions.
Holding companies and fellow subsidiaries
Transactions RBS plc enters with its holding companies and fellow subsidiaries also meet definition of related party transactions.
The table below discloses transactions between RBS plc and fellow subsidiaries of NatWest Group.
2022
2021
£m
£m
Interest receivable
320
35
Interest payable
(107)
(60)
Fees and commissions receivable
36
1
Fees and commissions payable
(27)
(48)
Other administrative expenses
(1)
(759)
(763)
(537)
(835)
(1) Includes internal service recharges of £759m
Amount due from/to holding companies and fellow subsidiaries are shown in Note 9. During the year Coutts & Company acquired
the Adam & Company business from The Royal Bank of Scotland plc for a net consideration value of £270m. This was acquired as
a business under common control and the acquisition method was applied. The transfer was carried out at the fair value of those
assets and liabilities on the day of transfer as would take place with a third party on an arm’s length basis.
26 Ultimate holding company
RBS plc’s ultimate holding company is NatWest Group plc, and its intermediate parent company is NatWest Holdings Ltd ('NWH Ltd
or ‘the intermediate holding company’).
NatWest Group plc is incorporated in the United Kingdom registered in Scotland and NWH Ltd is registered in England. As at 31
December 2022, NatWest Group plc heads the largest group in which RBS plc is consolidated. Copies of the consolidated accounts
may be obtained from Legal, Governance & Regulatory Affairs, NatWest Group plc, Gogarburn, PO Box 1000, Edinburgh EH12
1HQ, the Registrar of Companies or at natwestgroup.com.
Following placing and open offers by NatWest Group plc in December 2008 and April 2009, the UK Government, through HM
Treasury, held 45.97% (at 31 December 2022) of the issued ordinary share capital of the ultimate holding company and is therefore
RBS plc’s ultimate controlling party.
27 Post balance sheet events
There have been no other significant events between 31 December 2022 and the date of approval of these accounts which would
require a change to or additional disclosure in the accounts.
Notes to the financial statements continued
RBS plc Annual Report and Accounts 2022 130
28 Related undertakings
Legal entities and activities at 31 December 2022
In accordance with the Companies Act 2006, RBS plc’s related undertakings and the accounting treatment for each are listed
below. All undertakings are wholly-owned by RBS plc or subsidiaries of RBS plc and are consolidated in NatWest Group’s accounts
by reason of contractual control (Section 1162(2) CA 2006), unless otherwise indicated. RBS plc interest refers to ordinary shares
of equal values and voting rights unless further analysis is provided in the notes. Activities are classified in accordance with Annex I
to the Capital Requirements Directive (CRD V) and the definitions in Article 4 of the UK Capital Requirements Regulation.
The following table details active related undertakings
incorporated in the UK which are 100% owned by RBS plc
and fully consolidated for accounting purposes
The following table details active related undertakings
incorporated in the UK where RBS plc ownership is less than
100%.
Entity Name
Activity
Regulatory
treatment
Notes
Entity Name
Accounting
treatment
Regulatory
treatment
Group
%
Notes
The One Account Ltd
BF
FC
(1)
Oaxaca Ltd
OTH
IA
0
(2)
Key:
BF
Banking and financial institution
FC
Full consolidation
Registered addresses
Country of incorporation
(1)
250 Bishopsgate, London, EC2M 4AA, England
UK
(2)
5 Little Portland Street, London, W1W 7JD
UK