rbs201102246k6.htm
 
FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

 
 
Report of Foreign Private Issuer
 
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
 
For February 24, 2011
 
Commission File Number: 001-10306

 
The Royal Bank of Scotland Group plc

 
RBS, Gogarburn, PO Box 1000
Edinburgh EH12 1HQ

 
(Address of principal executive offices)
 
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
 
Form 20-F X
  
Form 40-F ___
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):_________

 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):_________


Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.


Yes
   ___
No X
 
 
If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- ________

 
 
The following information was issued as a Company announcement in London, England and is furnished pursuant to General Instruction B to the General Instructions to Form 6-K:

 
 
Risk and balance sheet management (continued)

Balance sheet management: Funding and liquidity risk

The Group’s balance sheet composition is a function of the broad array of product offerings and diverse markets served by its Core divisions. The structural integrity of the balance sheet is augmented as needed through active management of both asset and liability portfolios. The objective of these activities is to optimise liquidity transformation in normal business environments while ensuring adequate coverage of all cash requirements under extreme stress conditions.

Diversification of the Group’s funding base is central to the liquidity management strategy. The Group’s businesses have developed large customer franchises based on strong relationship management and high quality service. These customer franchises are strongest in the UK, US and Ireland but extend into Europe, Asia and Latin America. Customer deposits provide large pools of stable funding to support the majority of the Group’s lending. It is a strategic objective to improve the Group’s loan to deposit ratio to 100%, or better, by 2013.

The Group also accesses professional markets funding by way of public and private debt issuances on an unsecured and secured basis. These debt issuance programmes are spread across multiple currencies and maturities to appeal to a broad range of investor types and preferences around the world. This market based funding supplements the Group’s structural liquidity needs and in some cases achieves certain capital objectives.

The table below shows the composition of primary funding sources, excluding repurchase agreements.

 
31 December 2010
  
30 September 2010
  
31 December 2009
 
£m 
% 
  
£m 
% 
  
£m 
% 
                 
Deposits by banks
                
  - cash collateral
28,074 
3.8 
  
38,084 
5.0 
  
32,552 
4.0 
  - other
37,864 
5.1 
  
42,102 
5.5 
  
83,090 
10.3 
                 
 
65,938 
8.9 
  
80,186 
10.5 
  
115,642 
14.3 
                 
Debt securities in issue
                
  - commercial paper
26,235 
3.5 
  
30,424 
4.0 
  
44,307 
5.5 
  - certificates of deposits
37,855 
5.1 
  
50,497 
6.6 
  
58,195 
7.2 
  - medium-term notes and other bonds
131,026 
17.7 
  
131,003 
17.2 
  
125,800 
15.6 
  - covered bonds
4,100 
0.6 
  
2,400 
0.3 
  
- 
- 
  - other securitisations
19,156 
2.6 
  
20,759 
2.7 
  
18,027 
2.2 
                 
 
218,372 
29.5 
  
235,083 
30.8 
  
246,329 
30.5 
                 
Subordinated liabilities
27,053 
3.7 
  
27,890 
3.6 
  
31,538 
3.9 
                 
Total wholesale funding
311,363 
42.1 
  
343,159 
44.9 
  
393,509 
48.7 
                 
Customer deposits
                
  - cash collateral
10,433 
1.4 
  
9,219 
1.2 
  
9,934 
1.2 
  - other
418,166 
56.5 
  
411,420 
53.9 
  
404,317 
50.1 
                 
Total customer deposits
428,599 
57.9 
  
420,639 
55.1 
  
414,251 
51.3 
                 
Total funding
739,962 
100.0 
  
763,798 
100.0 
  
807,760 
100.0 



Risk and balance sheet management (continued)

Balance sheet management: Funding and liquidity risk (continued)

Key points
·
The Group has continued to reduce reliance on wholesale funding and diversify funding sources. Deposits by banks reduced by 18% in Q4 2010 and 43% since 31 December 2009.
   
·
The Group has increased the proportion of its funding from customer deposits during 2010, from 51% at 31 December 2009 to 58% at 31 December 2010.
   
·
The Group was able to reduce short-term wholesale funding by £93 billion from £250 billion to £157 billion (including £63 billion of deposits from banks) during the year and from £178 billion at 30 September 2010 (including £77 billion of deposits from banks). Short-term wholesale funding excluding derivative collateral decreased from £216 billion at 31 December 2009 to £129 billion at 31 December 2010.

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

 
Debt 
 securities 
 in issue 
Subordinated 
liabilities 
Total 
  
 
£m 
£m 
£m 
% 
         
31 December 2010
        
Less than 1 year
94,048 
964 
95,012 
38.7 
1-5 years
71,955 
9,230 
81,185 
33.1 
More than 5 years
52,369 
16,859 
69,228 
28.2 
         
 
218,372 
27,053 
245,425 
100.0 

30 September 2010
        
Less than 1 year
99,714 
1,660 
101,374 
38.5 
1-5 years
90,590 
10,371 
100,961 
38.4 
More than 5 years
44,779 
15,859 
60,638 
23.1 
         
 
235,083 
27,890 
262,973 
100.0 

31 December 2009
        
Less than 1 year
136,901 
2,144 
139,045 
50.0 
1-5 years
70,437 
4,235 
74,672 
26.9 
More than 5 years
38,991 
25,159 
64,150 
23.1 
         
 
246,329 
31,538 
277,867 
100.0 

Key points
·
The Group has improved its funding and liquidity position by extending the average maturity of debt securities in issue.
   
·
The proportion of debt instruments with a remaining maturity of greater than one year has increased in 2010 from 50% at 31 December 2009 to 61% at 31 December 2010.


Risk and balance sheet management (continued)

Balance sheet management: Funding and liquidity risk (continued)

Long-term debt issuances
The table below shows debt securities issued by the Group with an original maturity of one year or more. The Group also executes other long-term funding arrangements (predominately term repurchase agreements) not reflected in the tables below.
           
Year ended
31 December 
 2010 
 
Quarter ended
  
31 March 
2010 
30 June 
2010 
30 September 
 2010 
31 December 
 2010 
 
£m 
£m 
£m 
£m 
  
£m 
             
Public
            
  - unsecured
3,976 
1,882 
6,254 
775 
  
12,887 
  - secured
- 
1,030 
5,286 
1,725 
  
8,041 
Private
            
  - unsecured
4,158 
2,370 
6,299 
4,623 
  
17,450 
             
Gross issuance
8,134 
5,282 
17,839 
7,123 
  
38,378 

           
Year ended 
31 December 
 2009 
 
Quarter ended
  
31 March 
2009 
30 June 
2009 
30 September 
 2009 
31 December 
 2009 
 
£m 
£m 
£m 
£m 
  
£m 
             
Public
            
  - unsecured
- 
3,123 
4,062 
1,201 
  
8,386 
  - unsecured: guaranteed
8,804 
4,520 
858 
5,481 
  
19,663 
Private
            
  - unsecured
1,637 
2,654 
6,053 
4,551 
  
14,895 
  - unsecured: guaranteed
6,493 
2,428 
- 
6,538 
  
15,459 
             
Gross issuance
16,934 
12,725 
10,973 
17,771 
  
58,403 


Risk and balance sheet management (continued)

Balance sheet management: Funding and liquidity risk: Long-term debt issuances (continued)
The table below shows the original maturity and currency breakdown of long-term debt securities issued in 2010.
 
£m 
% 
     
Original maturity
    
1-2 years
1,698 
4.4 
2-3 years 
3,772 
9.8 
3-4 years
5,910 
15.4 
4-5 years
559 
1.5 
5-10 years
14,187 
37.0 
> 10 years
12,252 
31.9 
     
 
38,378 
100.0 

Currency
    
     
GBP
4,107 
10.7 
EUR
19,638 
51.2 
USD
9,760 
25.4 
Other
4,873 
12.7 
     
 
38,378 
100.0 

Key points
·
Term debt issuances exceeded the Group’s original plans of £20-£25 billion in 2010 as investor appetite for both secured and unsecured funding allowed the Group to accelerate plans to extend the maturity profile of its wholesale funding.
   
·
Execution was strong across G10 currencies and diversified across the yield curve.
   
·
There were term issuances of £4.5 billion in 2011 to date.

Credit Guarantee Scheme
The table below shows the residual maturity of the Group’s outstanding term funding issued under the UK Government’s Credit Guarantee Scheme at 31 December 2010.

Residual maturity
£m 
%
     
Q1 2011
196 
0.5 
Q2 2011
1,224 
2.9 
Q4 2011
18,728 
45.2 
Q1 2012
15,593 
37.6 
Q2 2012
5,714 
13.8 
     
 
41,455 
100.0 

Key points
·
The Group had £41.5 billion term funding outstanding at 31 December 2010 (2009 - £45.2 billion) of which £20.1 billion matures in 2011.
   
·
The Group’s funding plan for 2011 incorporates these maturities along with other structural balance sheet changes.


Risk and balance sheet management (continued)

Balance sheet management: Funding and liquidity risk (continued)

Special Liquidity Scheme
The Group does not use the Special Liquidity Scheme (SLS) to fund its business activities. The Group’s outstanding liabilities under the SLS are used to fund elements of its liquidity portfolio. Balances under the SLS continued to reduce in 2010.

Liquidity portfolio
The table below shows the composition of the Group’s liquidity portfolio. The Group has refined the presentation of this portfolio. Treasury bills and other government bonds which were previously reported under the Central Group Treasury portfolio, as well as unencumbered collateral and other liquid assets are now included in their respective asset classes.

 
31 December 
2010 
30 September 
2010 
30 June 
2010 
31 December 
2009 
Liquidity portfolio
£m 
£m 
£m 
£m 
         
Cash and balances at central banks
53,661 
56,661 
29,591 
51,500 
Treasury bills
14,529 
15,167 
16,086 
30,010 
Central and local government bonds (1)
        
  - AAA rated governments (2)
41,435 
31,251 
41,865 
30,140 
  - AA- to AA+ rated governments
3,744 
1,618 
1,438 
2,011 
  - governments rated below AA
1,029 
1,189 
1,149 
1,630 
  - local government
5,672 
5,981 
5,692 
5,706 
 
51,880 
40,039 
50,144 
39,487 
Unencumbered collateral (3)
        
  - AAA rated
17,836 
16,071 
16,564 
20,246 
  - below AAA rated and other high quality assets
16,693 
22,636 
24,584 
29,418 
 
34,529 
38,707 
41,148 
49,664 
         
Total liquidity portfolio
154,599 
150,574 
136,969 
170,661 

Notes:
(1)
Includes FSA eligible government bonds of £34.7 billion at 31 December 2010.
(2)
Includes AAA rated US government guaranteed agencies.
(3)
Includes secured assets eligible for discounting at central banks, comprising loans and advances and debt securities.

Key points
·
The Group’s liquidity portfolio increased by £4 billion to £155 billion in the quarter, as the Group increased its holdings of highly rated sovereign securities. The liquidity portfolio at the end of 2009 reflected the build up of liquid assets as a prudent measure ahead of the legal separation of RBS N.V. and ABN AMRO in April 2010.  Following the successful separation, the liquid assets and associated short-term wholesale funding were managed down to business as usual levels.
   
·
The Group has maintained its liquidity portfolio at or near its strategic target of £150 billion. The final level of the portfolio will be influenced by balance sheet size, maturity profile and regulatory requirements.
   
·
The Group anticipates that the composition of the liquidity portfolio will vary over time based on changing regulatory requirements and internal evaluation of liquidity needs under stress.


Risk and balance sheet management (continued)

Balance sheet management: Funding and liquidity risk (continued)

Funding and liquidity metrics
The Group continues to improve and augment funding and liquidity risk management practices in light of market experience and emerging regulatory and industry standards. The Group monitors a range of funding and liquidity indicators for the consolidated Group as well as its principal subsidiaries. These metrics encompass short and long-term liquidity requirements under stress and normal operating conditions. Two important structural ratios are described on the following pages.

The table below shows the Group’s net stable funding ratio estimated by applying the Basel III guidance issued in December 2010. This measure seeks to show the proportion of structural term assets which are funded by stable funding including customer deposits, long-term wholesale funding, and equity.

 
31 December 2010
  
30 September 2010
  
31 December 2009
  
   
ASF(1) 
    
ASF(1) 
    
ASF(1) 
Weighting 
 
£bn 
£bn 
  
£bn 
£bn 
  
£bn 
£bn 
% 
                   
Equity
76 
76 
  
77 
77 
  
80 
80 
100 
Wholesale funding > 1 year
154 
154 
  
165 
165 
  
144 
144 
100 
Wholesale funding < 1 year
157 
- 
  
178 
- 
  
250 
- 
- 
Derivatives
424 
- 
  
543 
- 
  
422 
- 
- 
Repurchase agreements
115 
- 
  
129 
- 
  
106 
- 
- 
Deposits
                  
  - Retail and SME - more stable
172 
155 
  
168 
151 
  
166 
149 
90 
  - Retail and SME - less stable
51 
41 
  
51 
41 
  
50 
40 
80 
  - Other
206 
103 
  
202 
101 
  
199 
99 
50 
Other (2)
98 
- 
  
116 
- 
  
105 
- 
- 
                   
Total liabilities and equity
1,453 
529 
  
1,629 
535 
  
1,522 
512 
  
                   
Cash
57 
- 
  
61 
- 
  
52 
- 
- 
Inter bank lending
58 
- 
  
60 
- 
  
49 
- 
- 
Debt securities:
                  
  - < 1 year
43 
- 
  
45 
- 
  
69 
- 
- 
  - central and local governments AAA to AA-
   > 1 year
89 
4 
  
95 
5 
  
84 
4 
5 
  - other eligible bonds > 1 year
75 
15 
  
79 
16 
  
87 
17 
20 
  - other bonds > 1 year
10 
10 
  
7 
7 
  
9 
9 
100 
Derivatives
427 
- 
  
549 
- 
  
438 
- 
- 
Reverse repurchase agreements
95 
- 
  
93 
- 
  
76 
- 
- 
Customer loans and advances
                  
  - < 1 year
125 
63 
  
151 
75 
  
153 
77 
50 
  - residential mortgages >1 year
145 
94 
  
142 
92 
  
137 
89 
65 
  - retail loans > 1 year
22 
19 
  
22 
19 
  
24 
20 
85 
  - other  > 1 year
211 
211 
  
213 
213 
  
241 
241 
100 
Other (3)
96 
96 
  
112 
112 
  
103 
103 
100 
                   
Total assets
1,453 
512 
  
1,629 
539 
  
1,522 
560 
  
                   
Undrawn commitments
267 
13 
  
267 
13 
  
289 
14 
5 
                   
Total assets and undrawn commitments
1,720 
525 
  
1,896 
552 
  
1,811 
574 
  
Net stable funding ratio
  
101%
    
97%
    
89%
  

Risk and balance sheet management (continued)

Balance sheet management: Funding and liquidity risk (continued)

Funding and liquidity metrics (continued)

Notes:
(1)
Available stable funding.
(2)
Deferred tax, insurance liabilities and other liabilities.
(3)
Prepayments, accrued income, deferred tax and other assets.
(4)
Prior periods have been revised to reflect the Basel III guidance.

Key points
·
The Group’s estimated net stable funding ratio improved to 101% at 31 December 2010, from 89% at 31 December 2009 and 97% at 30 September 2010, primarily due to a decrease in wholesale funding with maturity of less than one year and a reduction in customer loans.
   
·
The Group’s net stable funding ratio calculation will continue to be refined over time in line with regulatory developments.

The table below shows quarterly trends in the loan to deposit ratio and customer funding gap.

 
Loan to
deposit ratio (1)
  
Customer 
 funding gap (1) 
 
Group 
Core 
  
Group 
 
% 
% 
  
£bn 
         
31 December 2010
117 
96 
  
74 
30 September 2010
126 
101 
  
107 
30 June 2010
128 
102 
  
118 
31 March 2010
131 
102 
  
131 
31 December 2009
135 
104 
  
142 
30 September 2009
142 
108 
  
164 
30 June 2009
145 
110 
  
178 
31 March 2009
150 
118 
  
225 
31 December 2008
151 
118 
  
233 

Note:
(1)
Excludes repurchase agreements and bancassurance deposits to 31 March 2010 and loans are net of provisions.

Key points
·
The Group’s loan to deposit ratio improved significantly by 900 basis points in the fourth quarter 2010 to 117%. The customer funding gap narrowed by £33 billion in the fourth quarter 2010 and £68 billion over the year, to £74 billion at 31 December 2010, due primarily to a reduction in Non-Core customer loans and increased customer deposits.
 
 
·
The loan to deposit ratio for the Group’s Core business at 31 December 2010 improved to 96% from 104% at 31 December 2009.
   
·
It is a strategic objective to improve the Group’s loan to deposit ratio to 100%, or better, by 2013.


Risk and balance sheet management (continued)

Balance sheet management: Interest rate risk

The tables below show the structural interest rate VaR for the Group’s retail and commercial businesses and other non-traded portfolios by currency.

 
Average 
Period end 
Maximum 
Minimum 
 
£m 
£m 
£m 
£m 
         
31 December 2010
57.5 
96.2 
96.2 
30.0 
31 December 2009
85.5 
101.3 
123.2 
53.3 

 
31 December 
2010 
31 December 
2009 
 
£m 
£m 
     
EUR
32.7 
32.2 
GBP
79.3 
111.2 
USD
120.6 
42.1 
Other
9.7 
9.0 

Key points
·
Interest rate exposure at 31 December 2010 was slightly lower than at the end of 2009. The exposure in 2010 was on average 33% below the average for 2009.
   
·
In general, actions taken throughout 2010 to mitigate earnings sensitivity from interest rate movements were executed in US dollars, hence the year on year shift in VaR by currency.

Sensitivity of net interest income
The Group seeks to mitigate the effect of prospective interest rate movements which could reduce future net interest income through its management of market risk in the Group’s retail and commercial businesses, whilst balancing the cost of such hedging activities on the current net revenue stream. Hedging activities also consider the impact on market value sensitivity under stress.

The following table shows the sensitivity of net interest income over the next twelve months to an immediate up and down 100 basis points change to all interest rates.  In addition the table includes a 100 basis point steepening and flattening of the yield curves over a one year horizon.
 
31 December 
2010 
31 December 
2009 
 
£m 
£m 
     
+ 100bp shift in yield curves
232 
510 
– 100bp shift in yield curves
(352)
(687)
Steepener
(30)
  
Flattener
(22)
  

Key points
·
The Group executed transactions in 2010 to reduce the exposure to rising rates related to capital raised in December 2009.
   
·
Actions taken during the year increased the current base level of net interest income, while reducing the Group’s overall asset sensitivity.
   

Risk and balance sheet management (continued)

Balance sheet management: Structural foreign currency exposures

The Group does not maintain material non-trading open currency positions other than the structural foreign currency translation exposures arising from its investments in foreign subsidiaries and associated undertakings and their related currency funding.

The table below details the Group’s structural foreign currency exposures.

 
Net assets 
 of overseas 
 operations 
RFS 
Holdings 
 minority 
 interest 
Net 
investments 
in foreign 
 operations 
Net 
 investment 
 hedges 
Structural 
 foreign 
 currency 
 exposures 
pre-economic 
hedges 
Economic 
 hedges (1)
Residual 
structural 
foreign 
currency 
exposures 
 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
31 December 2010
              
US dollar
17,137 
2 
17,135 
(1,820)
15,315 
(4,058)
11,257 
Euro
8,443 
33 
8,410 
(578)
7,832 
(2,305)
5,527 
Other non-sterling
5,320 
 244 
5,076 
(4,135)
941 
- 
941 
               
 
30,900 
279 
30,621 
(6,533)
24,088 
(6,363)
17,725 
               
31 December 2009
              
US dollar
15,589 
(2)
15,591 
(3,846)
11,745 
(5,696)
6,049 
Euro
21,900 
13,938 
7,962 
(2,351)
5,611 
(3,522)
2,089 
Other non-sterling
5,706 
511 
5,195 
(4,001)
1,194 
- 
1,194 
               
 
43,195 
14,447 
28,748 
(10,198)
18,550 
(9,218)
9,332 

Note:
(1)
The economic hedges represent US dollar and euro preference shares in issue that are treated as equity under IFRS, and do not qualify as hedges for accounting purposes.

Key points
·
Changes in foreign currency exchange rates will affect equity in proportion to the structural foreign currency exposure. A 5% strengthening in foreign currencies against sterling would result in a gain of £1,270 million (31 December 2009 - £980 million) recognised in equity, while a 5% weakening in foreign currencies would result in a loss of £1,150 million (31 December 2009 - £880 million) recognised in equity.
   
·
Structural foreign currency exposures have increased in sterling terms due to exchange rate movements and reduced hedging. The increased exposures more effectively offset retranslation movements in RWAs, reducing the sensitivity of the Group’s capital ratios to exchange rate movements.
 
 
Signatures


 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.







 
 
Date: 24 February 2011
 
 
THE ROYAL BANK OF SCOTLAND GROUP plc (Registrant)
 
 
 
By:
/s/ Jan Cargill
 
 
Name:
Title:
Jan Cargill
Deputy Secretary