rbs201302286k5.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 28 February, 2013
 
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)
 
 
Credit risk
Introduction
181
   
Top and emerging credit risks
181
   
Financial assets
184
Exposure summary
184
Sector concentration
185
Asset quality
189
Debt securities
194
  - IFRS measurement classification by issuer
194
  - AFS reserves by issuer
195
  - Ratings
196
  - Asset-backed securities
197
Equity shares
198
Derivatives
200
  - Summary
200
  - Credit derivatives
201
   
Problem debt management
  
Renegotiations and forbearance
202
Wholesale renegotiations
202
  - Asset quality
202
  - Renegotiation arrangements
203
Retail forbearance
204
  - Arrears status and provisions
204
  - Forbearance arrangements
205
Risk elements in lending (REIL)
207
REIL, provisions and impairments
207
  - Divisional analysis
207
  - Sector and geographical regional analysis
209
  - REIL flow statement
215
  - Impairment provisions flow statement
216
  - Impairment charge analysis
218
   
Key credit portfolios
  
Commercial real estate
220
Residential mortgages
226
Ulster Bank Group (Core and Non-Core)
231
 
 
Risk and balance sheet management (continued)
Credit risk
Introduction
Credit risk is the risk of financial loss due to the failure of a customer or counterparty to meet its obligation to settle outstanding amounts. The credit risk that the Group faces arises mainly from wholesale and retail lending, provision of contingent obligations (such as letters of credit and guarantees) and counterparty credit risk arising from derivative contracts and securities financing transactions entered into with customers. Other material risks covered by the Group's credit risk management framework are:
 
·
Concentration risk - the risk of an outsized loss due to the concentration of credit risk to a specific asset class or product, industry sector, customer or counterparty, or country.
   
·
Settlement risk - the intra-day risk that arises when the Group releases funds prior to confirmed receipt of value from a third party.
   
·
Issuer risk - the risk of loss on a tradable instrument (e.g. bond) due to default by the issuer.
   
·
Wrong way risk - the risk of loss that arises when the risk factors driving the exposure to a counterparty are positively correlated with the probability of default for that counterparty.
   
·
Credit mitigation risk - the risk that credit risk mitigation (for example, taking a legal charge over property to secure a customer loan) is not enforceable or that the value of such mitigation decreases, thus leading to unanticipated losses.  
 
Top and emerging credit risks
The quantum and nature of credit risk assumed across the Group's different businesses vary considerably, while the overall credit risk outcome usually exhibits a high degree of correlation with the macroeconomic environment. The Group therefore remains sensitive to the economic conditions within the geographies in which it operates, in particular the UK, Ireland, the US and the eurozone.
 
The following credit risks continue to be the focus of management attention.
 
Irish property market
The continuing challenging economic climate within Ireland has resulted in impairment levels for Irish portfolios remaining at elevated levels. In particular, high unemployment, austerity measures and general economic uncertainty have reduced real estate lease rentals. This, together with limited liquidity, has depressed asset values and reduced consumer spending with a consequent downward impact on the commercial real estate portfolio as well as broader impacts on Ulster Bank Group's mortgage and small and medium enterprise (SME) lending portfolios. Further details on Ulster Bank Group's credit risk profile can be found on pages 231 to 234.
 
Commercial real estate
While progress has been made in reducing the overall exposure and rebalancing the portfolio, commercial real estate remains a key credit concentration risk for the Group. The Group has continued to strengthen its approach to managing sector concentration risk, with a particular focus on additional controls for the commercial real estate portfolio.
 
However, the credit performance remains sensitive to the economic environment in the UK and Ireland. Although some improvements have been seen in commercial real estate values across prime locations, secondary and tertiary values remain subdued.
 
Risk and balance sheet management (continued)
Credit risk: Top and emerging credit risks (continued)
Refinancing risk remains a focus of management attention and is assessed throughout the credit risk management life cycle. In particular, it is considered as part of the early problem recognition and impairment assessment processes.
 
Further details on the Group's exposure to commercial real estate can be found on page 220.
 
Eurozone troubles
The ongoing impact of the troubles in the eurozone continued to be felt most significantly in the banking sector, where widening credit spreads and regulatory demand for increases in Tier 1 capital and liquidity exacerbated the risk management challenges already posed by the sector's continued weakness, as provisions and write-downs remain elevated.
 
A material percentage of global banking activity in risk mitigation now passes through the balance sheets of the top global players, increasing the systemic risks to the banking sector. The Group's exposures to these banks continue to be closely managed. In particular, the Group has intensified its management of settlement risk through ongoing review of the level of risk and the operational controls in place to manage it, together with proactive actions to reduce limits. The weaker banks in the eurozone also remained subject to heightened scrutiny and the Group's risk appetite for these banks was adjusted throughout 2012.
 
The Group has continued to focus on operational preparations for possible sovereign defaults and/or eurozone exits. The Group has also considered initiatives to determine and reduce redenomination risk. Further actions to mitigate risks and strengthen control in the eurozone typically included taking guarantees or insurance, updating collateral agreements, and tightening certain credit pre-approval processes.
 
The Group has a material exposure to Spanish AFS debt securities issued by banks and other financial institutions of £4.8 billion at 31 December 2012, predominately comprised of covered bonds backed by mortgages. Whilst the exposure was reduced by £1.6 billion during 2012, largely as a result of sales, the portfolio continues to be subject to heightened scrutiny, including undertaking stress analysis.
 
Further details on the Group's approach to managing country risk and the risks faced within the eurozone can be found on pages 243 to 289.
 
 
Risk and balance sheet management (continued)
Credit risk: Top and emerging credit risks (continued)
 
Shipping
The downturn observed in the shipping sector since 2008 has continued, with an oversupply of vessels leading to lower asset prices and charter rates. The Group has continued to manage exposures within this portfolio intensively, with an increasing number of customers managed under the Group's Watchlist process. The financed fleet comprises modern vessels with experienced operators and despite the difficult market conditions impairments to date have remained low. However, impairment levels remain vulnerable to a continuing underperforming market.
 
Further details on the Group's shipping portfolio can be found on page 188.
 
Retailers
Given the cyclical nature of the retail corporate sector and its sensitivity to stressed economic conditions, the Group has continued to apply heightened scrutiny to this portfolio. Despite some high-profile failures of UK high street retailers, loss experience on the RBS retail portfolio remained low during 2012 as a result of active management. The portfolio is generally well diversified by geography and by counterparty.
 
Central counterparties (CCPs)
New regulation requiring greater use of CCPs for clearing over-the-counter derivatives across the industry is aimed at reducing systemic risk in the banking sector. RBS welcomes this move but recognises that the Group's concentration risk to CCPs will rise thus exchanging concentration risk to individual counterparties for concentration risk to CCPs. CCPs are vulnerable to a significant member default, fraud and increased operational risk if their infrastructure is not developed commensurate with increased activity they undertake.
 
In response to this industry change, the Group has developed a tailored risk appetite and risk control framework. The Group's central counterparty exposure is dominated by a small number of well-established, high quality and reputable clearing houses.
 
Renegotiations and forbearance
RBS uses renegotiations and forbearance as management tools to support viable customers through difficult financial periods in their lives or during business cycles. Used wisely, they can reduce the incidence of personal insolvency, as well as bankruptcies for otherwise successful enterprises. On a broader scale they can also help reduce the impact of "fire sale" pricing on real economic assets. However, they must be used selectively and require additional management vigilance throughout the loan life cycle. The Group has continued to take steps to improve its management and reporting of such loans within both corporate and retail businesses.
 
Further details on forbearance can be found on page 202.
 
Risk and balance sheet management (continued)
Credit risk (continued)
 
Financial assets
Exposure summary
The table below analyses the Group's financial asset exposures, both gross and net of offset arrangements.
 
Gross 
exposure 
IFRS 
offset (1)
Carrying 
value 
Non-IFRS 
offset (2)
Exposure 
post offset 
31 December 2012
£m 
£m 
£m 
£m 
£m 
           
Cash and balances at central banks
79,308 
- 
79,308 
- 
79,308 
Reverse repos
143,207 
(38,377)
104,830 
(17,439)
87,391 
Lending (3)
464,691 
(1,460)
463,231 
(34,941)
428,290 
Debt securities
164,624 
- 
164,624 
- 
164,624 
Equity shares
15,237 
- 
15,237 
- 
15,237 
Derivatives (4)
815,394 
(373,476)
441,918 
(408,004)
33,914 
Settlement balances
8,197 
(2,456)
5,741 
(1,760)
3,981 
Other financial assets
924 
- 
924 
- 
924 
           
Total
1,691,582 
(415,769)
1,275,813 
(462,144)
813,669 
Short positions
(27,591)
- 
(27,591)
- 
(27,591)
           
Net of short positions
1,663,991 
(415,769)
1,248,222 
(462,144)
786,078 
           
31 December 2011
          
           
Cash and balances at central banks
79,396 
- 
79,396 
- 
79,396 
Reverse repos
138,539 
(37,605)
100,934 
(15,246)
85,688 
Lending (3)
517,474 
- 
517,474 
(41,129)
476,345 
Debt securities
209,080 
- 
209,080 
- 
209,080 
Equity shares
15,188 
- 
15,188 
- 
15,188 
Derivatives (4)
1,074,548 
(544,491)
530,057 
(478,848)
51,209 
Settlement balances
9,144 
(1,359)
7,785 
(2,221)
5,564 
Other financial assets
1,309 
- 
1,309 
- 
1,309 
           
Total
2,044,678 
(583,455)
1,461,223 
(537,444)
923,779 
Short positions
(41,039)
- 
(41,039)
- 
(41,039)
           
Net of short positions
2,003,639 
(583,455)
1,420,184 
(537,444)
882,740 
 
Notes:
(1)
Relates to offset arrangements that comply with IFRS criteria and to transactions cleared through and novated to central clearing houses, primarily London Clearing House and US Government Securities Clearing Corporation.
(2)
This reflects the amounts by which the Group's credit risk is reduced through arrangements such as master netting agreements and cash management pooling. In addition, the Group holds collateral in respect of individual loans and advances. This collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant, inventories and trade debtors; and guarantees of lending from parties other than the borrower. The Group also obtains collateral in the form of securities relating to reverse repo and derivative transactions.
(3)
Lending non-IFRS offset includes cash collateral posted against derivative liabilities of £24.6 billion, (31 December 2011 - £31.4 billion) and cash management pooling of £10.3 billion, (31 December 2011 - £9.8 billion).
(4)
Derivative non-IFRS offset includes cash collateral received against derivative assets of £34 billion (31 December 2011 - £37.2 billion). Refer to page 200.
 
 

 
 
Risk and balance sheet management (continued)
Credit risk: Financial assets (continued)
 
Sector concentration
The table below analyses financial assets by sector.
 
 
Reverse 
repos 
Lending
  
Securities
Derivatives 
Other 
Balance 
sheet value 
Other 
offset 
Exposure 
post offset (1)
Core 
Non-Core 
Total 
  
Debt 
Equity 
31 December 2012
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                         
Government (2)
441 
8,485 
1,368 
9,853 
  
97,339 
- 
5,791 
591 
114,015 
(5,151)
108,864 
Financial institutions
- banks (3)
34,783 
30,917 
477 
31,394 
  
11,555 
1,643 
335,521 
79,308 
494,204 
(341,103)
153,101 
 
- other (4)
69,256 
39,658 
2,540 
42,198 
  
50,104 
2,672 
80,817 
5,591 
250,638 
(97,589)
153,049 
Personal
-mortgages
- 
146,770 
2,855 
149,625 
  
- 
- 
- 
- 
149,625 
- 
149,625 
 
- unsecured
- 
31,247 
965 
32,212 
  
- 
- 
- 
4 
32,216 
- 
32,216 
Property
- 
43,602 
28,617 
72,219 
  
774 
318 
4,118 
- 
77,429 
(1,333)
76,096 
Construction
- 
6,020 
2,029 
8,049 
  
17 
264 
820 
- 
9,150 
(1,687)
7,463 
Manufacturing
326 
22,234 
1,553 
23,787 
  
836 
1,639 
1,759 
144 
28,491 
(3,775)
24,716 
Finance leases (5)
- 
9,201 
4,408 
13,609 
  
82 
1 
13 
- 
13,705 
- 
13,705 
Retail, wholesale and repairs
- 
20,842 
1,094 
21,936 
  
461 
1,807 
914 
41 
25,159 
(1,785)
23,374 
Transport and storage
- 
14,590 
3,751 
18,341 
  
659 
 382 
3,397 
2 
22,781 
(3,240)
19,541 
Health, education and leisure
- 
15,770 
935 
16,705 
  
314 
554 
904 
59 
18,536 
(964)
17,572 
Hotels and restaurants
- 
6,891 
986 
7,877 
  
144 
51 
493 
11 
8,576 
(348)
8,228 
Utilities
- 
5,131 
1,500 
6,631 
  
1,311 
638 
3,170 
50 
11,800 
(2,766)
9,034 
Other
24 
26,315 
3,742 
30,057 
  
1,886 
5,380 
4,201 
172 
41,720 
(2,403)
39,317 
                         
Total gross of provisions
104,830 
427,673 
56,820 
484,493 
  
165,482 
15,349 
441,918 
85,973 
1,298,045 
(462,144)
835,901 
Provisions
- 
(10,062)
(11,200)
(21,262)
  
(858)
(112)
- 
- 
(22,232)
n/a 
(22,232)
                         
Total
104,830 
417,611 
45,620 
463,231 
  
164,624 
15,237 
441,918 
85,973 
1,275,813 
(462,144)
813,669 
 
For the notes to this table refer to page 186.
 
Risk and balance sheet management (continued)
Credit risk: Financial assets: Sector concentration (continued)
 
 
Reverse 
repos 
Lending
  
Securities
Derivatives 
Other 
Balance 
sheet value 
Other 
offset 
Exposure 
post offset (1)
Core 
Non-Core 
Total 
  
Debt 
Equity 
31 December 2011
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                         
Government (2)
2,247 
8,359 
1,383 
9,742 
  
125,543 
- 
5,541 
641 
143,714 
(1,098)
142,616 
Financial institutions
- banks (3)
39,345 
43,374 
706 
44,080 
  
16,940 
2,218 
400,261 
79,396 
582,240 
(407,457)
174,783 
 
- other (4)
58,478 
48,598 
3,272 
51,870 
  
60,628 
2,501 
98,255 
7,451 
279,183 
(119,717)
159,466 
Personal
- mortgages
- 
144,171 
5,102 
149,273 
  
- 
- 
- 
- 
149,273 
- 
149,273 
 
- unsecured
- 
32,868 
1,556 
34,424 
  
- 
- 
- 
52 
34,476 
(7)
34,469 
Property
- 
42,994 
38,064 
81,058 
  
573 
175 
4,599 
1 
86,406 
(1,274)
85,132 
Construction
- 
7,197 
2,672 
9,869 
  
50 
53 
946 
- 
10,918 
(1,139)
9,779 
Manufacturing
254 
23,708 
4,931 
28,639 
  
664 
1,938 
3,786 
306 
35,587 
(2,214)
33,373 
Finance leases (5)
- 
8,440 
6,059 
14,499 
  
145 
2 
75 
- 
14,721 
(16)
14,705 
Retail, wholesale and repairs
- 
22,039 
2,339 
24,378 
  
645 
2,652 
1,134 
18 
28,827 
(1,671)
27,156 
Transport and storage
436 
16,581 
5,477 
22,058 
  
539 
74 
3,759 
- 
26,866 
(241)
26,625 
Health, education and leisure
- 
16,073 
1,419 
17,492 
  
310 
21 
885 
- 
18,708 
(973)
17,735 
Hotels and restaurants
- 
7,709 
1,161 
8,870 
  
116 
5 
671 
- 
9,662 
(184)
9,478 
Utilities
- 
6,557 
1,849 
8,406 
  
1,530 
554 
3,708 
30 
14,228 
(450)
13,778 
Other
174 
28,769 
4,721 
33,490 
  
3,785 
5,136 
6,437 
595 
49,617 
(1,003)
48,614 
                         
Total gross of provisions
100,934 
457,437 
80,711 
538,148 
  
211,468 
15,329 
530,057 
88,490 
1,484,426 
(537,444)
946,982 
Provisions
- 
(9,187)
(11,487)
(20,674)
  
(2,388)
(141)
- 
- 
(23,203)
n/a 
(23,203)
                         
Total
100,934 
448,250 
69,224 
517,474 
  
209,080 
15,188 
530,057 
88,490 
1,461,223 
(537,444)
923,779 
 
 
Notes:
(1)
This shows the amount by which the Group's credit risk exposure is reduced through arrangements, such as master netting agreements, which give the Group a legal right to set off the financial asset against a financial liability due to the same counterparty. In addition, the Group holds collateral in respect of individual loans and advances to banks and customers. This collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant, inventories and trade debtors; and guarantees of lending from parties other than the borrower. The Group obtains collateral in the form of securities in reverse repurchase agreements. Cash and securities are received as collateral in respect of derivative transactions.
(2)
Includes central and local government.
(3)
Financial institutions in banks includes £79.3 billion (31 December 2011 - £79.3 billion; 31 December 2010 - £57.0 billion) relating to cash and balances at central banks.
(4)
Loans made by the Group's consolidated conduits to asset owning companies are included within Finance.
(5)
Includes instalment credit.
 

 
 
Risk and balance sheet management (continued)
Credit risk: Financial assets: Sector concentration (continued)
 
Key points
·
Financial asset exposures after offset decreased by £110 billion or 12% to £814 billion, reflecting the Group's focus on reducing its funded balance sheet, primarily in Non-Core, Markets and International Banking.
   
·
Reductions were across all major balance sheet categories: lending (£54 billion), debt securities (£44 billion) and derivatives (£88 billion). Conditions in the financial markets and the Group's focus on risk appetite and sector concentration had a direct impact on the composition of its portfolio during the year.
   
·
Exposures to central and local governments decreased by £34 billion principally in debt securities. This was driven by Markets de-risking its balance sheet, management of the Group Treasury liquidity portfolio as well as overall risk reduction in respect of eurozone exposures. The Group's portfolio comprises exposures to central governments and sub-sovereigns such as local authorities, primarily in the Group's key markets in the UK, Western Europe and the US.
   
·
Exposure to financial institutions was £28 billion lower, across securities, loans and derivatives, driven by economy-wide subdued activity.
 
○
The banking sector is one of the largest in the Group's portfolio. The sector is well diversified geographically and by exposure with derivative exposures being largely collateralised. The sector is tightly controlled through the combination of the single name concentration framework, a suite of credit policies specifically tailored to the sector and country limits. Exposures to the banking sector decreased by £22 billion during the year, primarily due to reduced interbank lending and derivative activity, and a reduction in limits to banks in countries under stress, such as the peripheral eurozone countries.
 
○
Exposure to other financial institutions comprising traded and non-traded products is spread across a wide range of financial companies including insurance, securitisation vehicles, financial intermediaries including broker dealers and central counterparties (CCPs), financial guarantors - monolines and CDPCs - and funds comprising unleveraged, hedge and leveraged funds. The size of the Core portfolio has decreased marginally since 2011. Entities in this sector remain vulnerable to market shocks or contagion from the banking sector. Credit risk in these sectors is managed through the single name concentration, sector concentration and asset and product class frameworks, with specific sector and product caps in place where there is a perception of heightened credit risk, such as committed lending to banks, leveraged funds and insurance holding companies. The Group continues to develop its risk appetite framework for CCPs to reflect increased activity with these entities driven by regulatory requirements. The Group is also managing down its exposures to monolines and CDPCs with the aim of exiting these portfolios.
   
   
·
The Group's exposure to property and construction sector decreased by £11 billion, principally in commercial real estate lending. The majority of the Group's Core property exposure is within UK Corporate (73%). In relation to property exposure, the UK Corporate and Ulster Bank divisions saw further deterioration in asset quality during the year.
 
Risk and balance sheet management (continued)
Credit risk: Financial assets: Sector concentration (continued)
 
Key points (continued)
·
Retail, wholesale and repairs sector decreased by £4 billion, reflecting de-leveraging of customers in the retail sector. Manufacturing exposure reduced by £9 billion primarily reflecting Non-Core reductions.
   
·
Transport and storage includes the Group's shipping exposures of £11 billion which comprises asset-backed exposures to ocean-going vessels. Excluding the impact of foreign exchange movements, the Group's exposure to the shipping sector decreased marginally during the year. Conditions remained poor across the major shipping market segments in 2012, with low charter rates and vessel values.  A key protection for the Group is the minimum security covenant which is tested each quarter on an individual vessel basis to ensure prompt remedial action is taken if values fall significantly below agreed loan coverage ratios. There was an increase in the number of clients suffering liquidity issues or failing to meet their minimum security covenant and a commensurate rise in referrals to the Group's heightened monitoring process and GRG ('watchlist red'). As at 31 December 2012, 20% of the Group's exposure was classified as watchlist red. The Group's exposure to the shipping sector (including shipping related infrastructure) declined by 3.5% in 2012 as a result of amortisation and foreign exchange movements. At 31 December 2012, £0.7 billion of loans were included in risk elements in lending with an associated provision of £0.2 billion and impairment charge of £0.1 billion for 2012.
   
·
Within lending:
 
○
UK Retail increased its lending to homeowners by £4.1 billion, including first-time buyers, reflecting the impact of the UK government's Funding for Lending Scheme (FLS); unsecured lending balances fell.
 
○
UK Corporate lending decreased by £3.8 billion, reflecting a combination of customer deleveraging with low business confidence and portfolio de-risking, particularly in commercial real estate, which fell by £3.5 billion. Other sectors in aggregate were broadly flat.
 
○
Non-Core continued to make significant progress on its balance sheet strategy by reducing  lending by £24 billion across all sectors, principally property and construction, where commercial real estate lending decreased by £9.4 billion, reflecting repayments and asset sales.
   
·
For further discussion on debt securities and derivatives, see pages 194 and 200 respectively.
 
 
 

 
 
Risk and balance sheet management (continued)
Credit risk: Financial assets (continued)
 
Asset quality: Group
The table below analyses the Group's financial assets excluding debt securities by internal asset quality (AQ) ratings. Debt securities are analysed by external ratings and are therefore excluded from the table below and are set out on page 196.
 
   
Loans and advances
          
 
Cash and 
balances 
at central 
 banks 
Banks
  
Customers
Settlement 
balances and 
other financial 
assets 
Derivatives 
Commitments 
Contingent 
liabilities 
Total 
Reverse 
Repos 
Derivative 
cash 
collateral 
Other 
Total 
Reverse 
Repos 
Derivative 
cash 
collateral 
Other 
Total 
31 December 2012
£m 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                               
AQ1
78,039 
17,806 
3,713 
10,913 
32,432 
  
42,963 
15,022 
39,734 
97,719 
2,671 
100,652 
63,785 
8,113 
383,411 
AQ2
12 
3,556 
4,566 
526 
8,648 
  
710 
704 
13,101 
14,515 
185 
108,733 
20,333 
2,810 
155,236 
AQ3
1,156 
5,703 
2,241 
2,757 
10,701 
  
2,886 
3,917 
25,252 
32,055 
539 
152,810 
23,727 
7,431 
228,419 
AQ4
100 
6,251 
1,761 
2,734 
10,746 
  
14,079 
2,144 
104,060 
120,283 
1,202 
58,705 
40,196 
5,736 
236,968 
AQ5
- 
1,183 
469 
787 
2,439 
  
8,163 
679 
92,147 
100,989 
659 
13,244 
28,165 
2,598 
148,094 
AQ6
- 
282 
39 
357 
678 
  
86 
50 
40,096 
40,232 
73 
2,175 
13,854 
1,380 
58,392 
AQ7
- 
2 
- 
236 
238 
  
1,133 
12 
36,223 
37,368 
191 
3,205 
19,219 
1,275 
61,496 
AQ8
- 
- 
- 
68 
68 
  
4 
2 
12,812 
12,818 
8 
262 
5,688 
185 
19,029 
AQ9
1 
- 
- 
93 
93 
  
23 
7 
17,431 
17,461 
137 
1,360 
1,363 
95 
20,510 
AQ10
- 
- 
- 
- 
- 
  
- 
- 
807 
807 
1 
772 
1,454 
238 
3,272 
Past due
- 
- 
- 
- 
- 
  
- 
249 
10,285 
10,534 
999 
- 
- 
- 
11,533 
Impaired
- 
- 
- 
134 
134 
  
- 
- 
38,365 
38,365 
- 
- 
- 
- 
38,499 
Impairment provision
- 
- 
- 
(114)
(114)
  
- 
- 
(21,148)
(21,148)
- 
- 
- 
- 
(21,262)
                               
 
79,308 
34,783 
12,789 
18,491 
66,063 
  
70,047 
22,786 
409,165 
501,998 
6,665 
441,918 
217,784 
29,861 
1,343,597 
 
 
Risk and balance sheet management (continued)
Credit risk: Financial assets: Asset quality: Core
 
   
Loans and advances
          
 
Cash and 
balances 
at central 
 banks 
Banks
  
Customers
Settlement 
balances and 
other financial 
assets 
Derivatives 
Commitments 
Contingent 
liabilities 
Total 
Reverse 
Repos 
Derivative 
cash 
collateral 
Other 
Total 
Reverse 
Repos 
Derivative 
cash 
collateral 
Other 
Total 
31 December 2012
£m 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                               
AQ1
78,003 
17,806 
3,713 
10,466 
31,985 
  
42,963 
15,022 
32,337 
90,322 
2,671 
99,882 
62,440 
7,822 
373,125 
AQ2
12 
3,556 
4,566 
521 
8,643 
  
710 
704 
10,551 
11,965 
185 
108,107 
20,207 
2,792 
151,911 
AQ3
1,046 
5,703 
2,241 
2,738 
10,682 
  
2,886 
3,917 
21,688 
28,491 
539 
152,462 
23,392 
7,419 
224,031 
AQ4
100 
6,251 
1,761 
2,729 
10,741 
  
14,079 
2,144 
99,771 
115,994 
1,202 
57,650 
39,832 
5,648 
231,167 
AQ5
- 
1,183 
469 
785 
2,437 
  
8,163 
679 
87,429 
96,271 
659 
12,082 
27,501 
2,508 
141,458 
AQ6
- 
282 
39 
356 
677 
  
86 
50 
36,891 
37,027 
73 
1,476 
13,140 
1,353 
53,746 
AQ7
- 
2 
- 
186 
188 
  
1,133 
12 
32,032 
33,177 
191 
2,536 
17,824 
949 
54,865 
AQ8
- 
- 
- 
68 
68 
  
4 
2 
10,731 
10,737 
8 
247 
5,607 
146 
16,813 
AQ9
1 
- 
- 
93 
93 
  
- 
7 
14,979 
14,986 
137 
979 
1,088 
93 
17,377 
AQ10
- 
- 
- 
- 
- 
  
- 
- 
684 
684 
1 
448 
832 
149 
2,114 
Past due
- 
- 
- 
- 
- 
  
- 
249 
9,528 
9,777 
991 
- 
- 
- 
10,768 
Impaired
- 
- 
- 
133 
133 
  
- 
- 
17,418 
17,418 
- 
- 
- 
- 
17,551 
Impairment provision
- 
- 
- 
(113)
(113)
  
- 
- 
(9,949)
(9,949)
- 
- 
- 
- 
(10,062)
                               
 
79,162 
34,783 
12,789 
17,962 
65,534 
  
70,024 
22,786 
364,090 
456,900 
6,657 
435,869 
211,863 
28,879 
1,284,864 
 
 
Risk and balance sheet management (continued)
Credit risk: Financial assets: Asset quality: Non-Core
 
   
Loans and advances
          
 
Cash and 
balances 
at central 
 banks 
Banks
  
Customers
Settlement 
balances and 
other financial 
assets 
Derivatives 
Commitments 
Contingent 
liabilities 
Total 
Reverse 
Repos 
Derivative 
cash 
collateral 
Other 
Total 
Reverse 
Repos 
Derivative 
cash 
collateral 
Other 
Total 
31 December 2012
£m 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                               
AQ1
36 
- 
- 
447 
447 
  
- 
- 
7,397 
7,397 
- 
770 
1,345 
291 
10,286 
AQ2
- 
- 
- 
5 
5 
  
- 
- 
2,550 
2,550 
- 
626 
126 
18 
3,325 
AQ3
110 
- 
- 
19 
19 
  
- 
- 
3,564 
3,564 
- 
348 
335 
12 
4,388 
AQ4
- 
- 
- 
5 
5 
  
- 
- 
4,289 
4,289 
- 
1,055 
364 
88 
5,801 
AQ5
- 
- 
- 
2 
2 
  
- 
- 
4,718 
4,718 
- 
1,162 
664 
90 
6,636 
AQ6
- 
- 
- 
1 
1 
  
- 
- 
3,205 
3,205 
- 
699 
714 
27 
4,646 
AQ7
- 
- 
- 
50 
50 
  
- 
- 
4,191 
4,191 
- 
669 
1,395 
326 
6,631 
AQ8
- 
- 
- 
- 
- 
  
- 
- 
2,081 
2,081 
- 
15 
81 
39 
2,216 
AQ9
- 
- 
- 
- 
- 
  
23 
- 
2,452 
2,475 
- 
381 
275 
2 
3,133 
AQ10
- 
- 
- 
- 
- 
  
- 
- 
123 
123 
- 
324 
622 
89 
1,158 
Past due
- 
- 
- 
- 
- 
  
- 
- 
757 
757 
8 
- 
- 
- 
765 
Impaired
- 
- 
- 
1 
1 
  
- 
- 
20,947 
20,947 
- 
- 
- 
- 
20,948 
Impairment provision
- 
- 
- 
(1)
(1)
  
- 
- 
(11,199)
(11,199)
- 
- 
- 
- 
(11,200)
                               
 
146 
- 
- 
529 
529 
  
23 
- 
45,075 
45,098 
8 
6,049 
5,921 
982 
58,733 
 
 
 

 
 
Risk and balance sheet management (continued)
Credit risk: Financial assets: Asset quality (continued)
 
 
Cash and 
balances 
at central 
 banks 
  
Settlement 
balances and 
other financial 
assets 
Derivatives 
Commit- 
ments 
Contingent 
liabilities 
Total 
Loans and advances
Banks (1)
Customers 
31 December 2011
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                 
Total
                
AQ1
78,692 
74,279 
114,424 
5,152 
482,053 
75,356 
14,076 
844,032 
AQ2
342 
1,881 
15,810 
93 
8,177 
24,269 
3,154 
53,726 
AQ3
223 
1,981 
34,017 
546 
10,827 
23,471 
4,427 
75,492 
AQ4
19 
1,612 
108,262 
760 
14,421 
40,071 
5,847 
170,992 
AQ5
90 
1,261 
118,056 
124 
6,516 
34,593 
4,301 
164,941 
AQ6
9 
188 
50,428 
46 
2,221 
17,153 
1,662 
71,707 
AQ7
8 
432 
33,218 
13 
2,393 
19,163 
1,037 
56,264 
AQ8
7 
30 
12,622 
19 
1,252 
4,159 
276 
18,365 
AQ9
5 
83 
16,429 
324 
1,150 
2,286 
943 
21,220 
AQ10
1 
164 
784 
6 
1,047 
2,354 
221 
4,577 
Past due
- 
2 
11,591 
1,623 
- 
- 
- 
13,216 
Impaired
- 
137 
39,921 
414 
- 
- 
- 
40,472 
Impairment provision
- 
(123)
(20,551)
(26)
- 
- 
- 
(20,700)
                 
 
79,396 
81,927 
535,011 
9,094 
530,057 
242,875 
35,944 
1,514,304 
 
Core
              
                 
AQ1
78,634 
73,689 
95,691 
5,034 
478,177 
69,220 
13,249 
813,694 
AQ2
342 
1,877 
14,158 
91 
7,500 
23,404 
3,122 
50,494 
AQ3
56 
1,967 
30,546 
546 
10,360 
22,319 
4,354 
70,148 
AQ4
18 
1,557 
101,646 
759 
13,475 
38,808 
5,655 
161,918 
AQ5
90 
1,256 
110,911 
124 
5,087 
33,226 
4,092 
154,786 
AQ6
9 
140 
44,012 
46 
1,987 
16,118 
1,634 
63,946 
AQ7
8 
432 
28,953 
13 
796 
17,514 
949 
48,665 
AQ8
7 
20 
10,608 
19 
666 
4,068 
236 
15,624 
AQ9
5 
83 
11,938 
276 
592 
1,769 
898 
15,561 
AQ10
1 
164 
478 
6 
339 
1,274 
180 
2,442 
Past due
- 
2 
10,047 
1,623 
- 
- 
- 
11,672 
Impaired
- 
136 
16,457 
413 
- 
- 
- 
17,006 
Impairment provision
- 
(122)
(9,065)
(25)
- 
- 
- 
(9,212)
                 
 
79,170 
81,201 
466,380 
8,925 
518,979 
227,720 
34,369 
1,416,744 
 
For the note to this table refer to page 193.
 
 
Risk and balance sheet management (continued)
Credit risk: Financial assets: Asset quality (continued)
 
 
Cash and 
balances 
at central 
 banks 
  
Settlement 
balances and 
other financial 
assets 
Derivatives 
Commit- 
ments 
Contingent 
liabilities 
Total 
Loans and advances
Banks (1)
Customers 
31 December 2011
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                 
Non-Core
                
AQ1
58 
590 
18,733 
118 
3,876 
6,136 
827 
30,338 
AQ2
- 
4 
1,652 
2 
677 
865 
32 
3,232 
AQ3
167 
14 
3,471 
- 
467 
1,152 
73 
5,344 
AQ4
1 
55 
6,616 
1 
946 
1,263 
192 
9,074 
AQ5
- 
5 
7,145 
- 
1,429 
1,367 
209 
10,155 
AQ6
- 
48 
6,416 
- 
234 
1,035 
28 
7,761 
AQ7
- 
- 
4,265 
- 
1,597 
1,649 
88 
7,599 
AQ8
- 
10 
2,014 
- 
586 
91 
40 
2,741 
AQ9
- 
- 
4,491 
48 
558 
517 
45 
5,659 
AQ10
- 
- 
306 
- 
708 
1,080 
41 
2,135 
Past due
- 
- 
1,544 
- 
- 
- 
- 
1,544 
Impaired
- 
1 
23,464 
1 
- 
- 
- 
23,466 
Impairment provision
- 
(1)
(11,486)
(1)
- 
- 
- 
(11,488)
                 
 
226 
726 
68,631 
169 
11,078 
15,155 
1,575 
97,560 
 
Note:
(1)
Excluding items in the course of collection from other banks of £1,470 million.
 
Key points
·
In 2012, the Group implemented material updates to certain models, including those used for sovereign and financial institution counterparties, to incorporate more recent data and reflect new regulatory requirements applicable to wholesale internal ratings based modelling. This has resulted in ratings migration from AQ1, primarily to AQ2-AQ5.  The Group had modified various risk frameworks, including risk appetite framework and latent loss assessment in anticipation of   these changes. Further updates, primarily of models used for the corporate counterparties, are planned for 2013. The AQ composition of the corporate portfolio has not changed materially during the year.
   
·
Loans and advances to banks: AQ1 balances decreased by £41.8 billion reflecting the balance sheet reduction, mainly in Markets and also the impact of model changes which resulted in certain counterparties moving to lower AQ bands, primarily to AQ2-AQ4, which increased by £6.8 billion, £8.7 billion and £9.1 billion respectively.
   
·
Loans and advances to customers: Lower internal ratings due to model changes resulted in balances shifting from AQ1 to lower bands. The decrease in AQ5 and AQ6 balances is in line with the overall balance sheet reduction. 
   
·
Derivatives: Balance sheet reductions in Markets and model updates resulted in decrease in AQ1 balances. Increase in AQ2-AQ4 balances reflects the re-grading of counterparties previously included in AQ1.
   
·
Impaired and past due assets, net of impairment provisions, comprise 37% of Non-Core balances. Continued weakness in commercial real estate market overall and difficult conditions in Ireland are significant contributors to this.
 
 

 
 
Risk and balance sheet management (continued)
Credit risk: Financial assets (continued)
Debt securities
IFRS measurement classification by issuer
The table below analyses debt securities by issuer and IFRS measurement classifications. US central and local government includes US federal agencies; financial institutions includes US government sponsored agencies and securitisation entities.
 
 
Central and local government
Banks 
Other 
financial 
institutions 
Corporate 
Total 
  
Of which 
ABS (1)
UK 
US 
Other 
31 December 2012
£m 
£m 
£m 
£m 
£m 
£m 
£m 
  
£m 
                   
Held-for-trading (HFT)
7,692 
17,349 
27,195 
2,243 
21,876 
2,015 
78,370 
  
18,619 
Designated as at fair value
- 
- 
123 
86 
610 
54 
873 
  
516 
Available-for-sale (AFS)
9,774 
19,046 
16,155 
8,861 
23,890 
3,167 
80,893 
  
30,743 
Loans and receivables
5 
- 
- 
365 
3,728 
390 
4,488 
  
3,707 
                   
Long positions
17,471 
36,395 
43,473 
11,555 
50,104 
5,626 
164,624 
  
53,585 
                   
Of which US agencies
- 
5,380 
- 
- 
21,566 
- 
26,946 
  
24,828 
                   
Short positions (HFT)
(1,538)
(10,658)
(11,355)
(1,036)
(1,595)
(798)
(26,980)
  
(17)
                   
Available-for-sale
                  
Gross unrealised gains
1,007 
1,092 
1,187 
110 
660 
120 
4,176 
  
764 
Gross unrealised losses
- 
(1)
(14)
(509)
(1,319)
(4)
(1,847)
  
(1,817)
                   
31 December 2011
                  
                   
Held-for-trading
9,004 
19,636 
36,928 
3,400 
23,160 
2,948 
95,076 
  
20,816 
Designated as at fair value
1 
- 
127 
53 
457 
9 
647 
  
558 
Available-for-sale
13,436 
20,848 
25,552 
13,175 
31,752 
2,535 
107,298 
  
40,735 
Loans and receivables
10 
- 
1 
312 
5,259 
477 
6,059 
  
5,200 
                   
Long positions
22,451 
40,484 
62,608 
16,940 
60,628 
5,969 
209,080 
  
67,309 
                   
Of which US agencies
- 
4,896 
- 
- 
25,924 
- 
30,820 
  
28,558 
                   
Short positions (HFT)
(3,098)
(10,661)
(19,136)
(2,556)
(2,854)
(754)
(39,059)
  
(352)
                   
Available-for-sale
                  
Gross unrealised gains
1,428 
1,311 
1,180 
52 
913 
94 
4,978 
  
1,001 
Gross unrealised losses
- 
- 
(171)
(838)
(2,386)
(13)
(3,408)
  
(3,158)
 
Note:
(1)
Asset-backed securities.
 
Risk and balance sheet management (continued)
Credit risk: Financial assets: Debt securities (continued)
 
AFS reserves by issuer
The table below analyses available-for-sale (AFS) debt securities and related reserves, gross of tax.
 
 
31 December 2012
  
31 December 2011
 
UK 
US 
Other (1)
Total 
  
UK 
US 
Other (1)
Total 
 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                   
Government (2)
9,774 
19,046 
16,155 
44,975 
  
13,436 
20,848 
25,552 
59,836 
Banks
1,085 
357 
7,419 
8,861 
  
1,391 
376 
11,408 
13,175 
Other financial institutions
2,861 
10,613 
10,416 
23,890 
  
3,100 
17,453 
11,199 
31,752 
Corporate
1,318 
719 
1,130 
3,167 
  
1,105 
131 
1,299 
2,535 
                   
Total
15,038 
30,735 
35,120 
80,893 
  
19,032 
38,808 
49,458 
107,298 
                   
Of which ABS
3,558 
14,209 
12,976 
30,743 
  
3,659 
20,256 
16,820 
40,735 
                   
AFS reserves (gross)
667 
763 
(1,277)
153 
  
845 
486 
(1,815)
(484)
 
Notes:
(1)
Includes eurozone countries as detailed in the Country risk section of this report (page 243).
(2)
Includes central and local government.
 
Key points
·
Debt securities decreased by £44.5 billion or 21% during the year, principally due to a reduction of £26.4 billion in available-for-sale (AFS) across the Group and £16.7 billion of HFT positions within Markets reflecting a combination of de-risking strategies and active balance sheet management.
   
·
HFT: The £16.7 billion decrease comprised £13.3 billion of central and local government, £1.3 billion of financial institutions, £1.2 billion of banks and £0.9 billion of corporate:
 
○
Decrease in UK and US government bonds of £1.3 billion and £2.3 billion respectively reflected maturities and disposals in line with Markets balance sheet management strategy and unwinding of positions.
 
○
Reduction in other government bonds principally French, Italian, Swiss and Japanese, was partially offset by moves to German and Belgian bonds.
·
AFS: Decreased by £26.4 billion, comprising £14.9 billion of central and local government, other financial institutions £7.8 billion, banks £4.3 billion and offset by an increase in corporate of £0.6 billion:
 
○
UK and US government bonds fell by £3.7 billion and £1.8 billion respectively, primarily due to disposals. 
 
○
Group Treasury reduced its liquidity portfolio, reflecting smaller balance sheet, resulting in lower government bonds primarily German and French (£6.0 billion)
 
○
Japanese government bonds fell by £2.2 billion as smaller collateral was required following a change in clearing status from direct (self-clearing) to agency.
 
○
Reduction in ABS: US agency decrease reflected maturities and disposals in light of favourable market conditions in the US, Markets, and US Retail & Commercial; and Non-Core strategic reductions also contributed to the decrease in bonds issued by financial institutions.
 
○
Bank bonds decreased by £4.3 billion of which £1.7 billion related to Spanish covered bonds reflecting disposals by Group Treasury, and lower positions in Australian and German securities reflected the close out of positions and maturities, respectively.
 
Risk and balance sheet management (continued)
Credit risk: Financial assets: Debt securities (continued)
 
Ratings
The table below analyses debt securities by issuer and external ratings. Ratings are based on the lowest of Standard and Poor's, Moody's and Fitch.
 
 
Central and local government
Banks 
Other 
financial 
institutions 
Corporate 
Total 
 
Total 
Of which 
ABS 
UK 
US 
Other 
31 December 2012
£m 
£m 
£m 
£m 
£m 
£m 
£m 
% 
£m 
                   
AAA
17,471 
31 
17,167 
2,304 
11,502 
174 
48,649 
30 
10,758 
AA to AA+
- 
36,357 
7,424 
1,144 
26,403 
750 
72,078 
44 
28,775 
A to AA-
- 
6 
11,707 
2,930 
3,338 
1,976 
19,957 
12 
2,897 
BBB- to A-
- 
- 
6,245 
4,430 
4,217 
1,643 
16,535 
10 
7,394 
Non-investment grade
- 
- 
928 
439 
3,103 
614 
5,084 
3 
2,674 
Unrated
- 
1 
2 
308 
1,541 
469 
2,321 
1 
1,087 
                   
 
17,471 
36,395 
43,473 
11,555 
50,104 
5,626 
164,624 
100 
53,585 
                   
31 December 2011
                  
                   
AAA
22,451 
45 
32,522 
5,155 
15,908 
452 
76,533 
37 
17,156 
AA to AA+
- 
40,435 
2,000 
2,497 
30,403 
639 
75,974 
36 
33,615 
A to AA-
- 
1 
24,966 
6,387 
4,979 
1,746 
38,079 
18 
6,331 
BBB- to A-
- 
- 
2,194 
2,287 
2,916 
1,446 
8,843 
4 
4,480 
Non-investment grade
- 
- 
924 
575 
5,042 
1,275 
7,816 
4 
4,492 
Unrated
- 
3 
2 
39 
1,380 
411 
1,835 
1 
1,235 
                   
 
22,451 
40,484 
62,608 
16,940 
60,628 
5,969 
209,080 
100 
67,309 
 
Key points
·
AAA rated debt securities decreased as France and Austria were downgraded to AA+ in the first half of the year and also reflected the Group's reduced holdings of UK government bonds.  Additionally, certain Spanish covered bonds were downgraded in H1 2012.
   
·
The decrease in A to AA- debt securities related to downgrades of Italy and Spain to BBB+ and BBB- respectively, in H1 2012, along with a downgrade of selected banks.
   
·
Non-investment grade and unrated debt securities decreased by £2.2 billion and accounted for 4% of the portfolio.
 

 
 
Risk and balance sheet management (continued)
Credit risk: Financial assets: Debt securities (continued)
 
Asset-backed securities
The table below summarises the rating levels of ABS carrying values.
 
RMBS
              
 
Government 
sponsored 
or similar (1)
Prime 
Non- 
conforming 
Sub-prime 
MBS 
covered 
bond 
 
CMBS 
CDOs 
CLOs 
ABS 
covered 
bond 
ABS 
other 
Total 
31 December 2012
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                       
AAA
2,454 
2,854 
1,487 
11 
639 
396 
92 
1,181 
165 
1,479 
10,758 
AA to AA+
23,692 
613 
88 
26 
102 
2,551 
7 
887 
340 
469 
28,775 
A to AA-
201 
302 
275 
33 
155 
808 
74 
146 
20 
883 
2,897 
BBB- to A-
990 
53 
141 
86 
4,698 
441 
32 
291 
8 
654 
7,394 
Non-investment grade (2)
20 
641 
454 
330 
136 
304 
421 
133 
- 
235 
2,674 
Unrated (3)
- 
108 
8 
298 
- 
23 
94 
388 
- 
168 
1,087 
                       
 
27,357 
4,571 
2,453 
784 
5,730 
4,523 
720 
3,026 
533 
3,888 
53,585 
                       
Of which in Non-Core
- 
651 
404 
154 
- 
780 
494 
2,228 
- 
850 
5,561 
                       
31 December 2011
                      
                       
AAA
4,169 
3,599 
1,488 
105 
2,595 
647 
135 
2,171 
625 
1,622 
17,156 
AA to AA+
29,252 
669 
106 
60 
379 
710 
35 
1,533 
321 
550 
33,615 
A to AA-
131 
506 
110 
104 
2,567 
1,230 
161 
697 
100 
725 
6,331 
BBB- to A-
- 
39 
288 
93 
1,979 
333 
86 
341 
- 
1,321 
4,480 
Non-investment grade (2)
21 
784 
658 
396 
- 
415 
1,370 
176 
- 
672 
4,492 
Unrated (3)
- 
148 
29 
146 
- 
56 
170 
423 
- 
263 
1,235 
                       
 
33,573 
5,745 
2,679 
904 
7,520 
3,391 
1,957 
5,341 
1,046 
5,153 
67,309 
                       
Of which in Non-Core
- 
837 
477 
308 
- 
830 
1,656 
4,227 
- 
1,861 
10,196 
 
Notes:
(1)
Includes US agency and Dutch government guaranteed securities.
(2)
Includes HFT £1,177 million (31 December 2011 - £1,682 million), DFV £7 million (31 December 2011 - nil), AFS £1,173 million (31 December 2011 - £2,056 million) and LAR £317 million (31 December 2011 - £754 million).
(3)
Includes HFT £808 million (31 December 2011 - £804 million), AFS £149 million (31 December 2011 - £249 million) and LAR £130 million (31 December 2011 - £182 million).
 

 
 
Risk and balance sheet management (continued)
Credit risk: Financial assets (continued)
Equity shares
The table below analyses holdings of equity shares for Eurozone countries and other countries with balances more than £100 million holdings of equity shares by country, issuer and measurement classification. The HFT portfolios in Markets comprise positions in the Markets Derivative Products Solutions business primarily for economic hedging of liabilities including debt issuances and equity derivatives. The AFS portfolios include  capital stock in the Federal Home Loans Bank (a government sponsored entity, included in Other FI) and the Federal Reserve Bank together £0.7 billion, that US Retail & Commercial are required to hold and a number of individually small holdings in unlisted companies, mainly acquired through loan renegotiations in GRG.
 
 
31 December 2012
 
HFT/DFV (1)
  
AFS
            
Countries
Banks 
£m 
Other 
FI (2)
£m 
Corporate 
£m 
Total 
£m 
  
Banks 
£m 
Other 
FI (2)
£m 
Corporate 
£m 
Total 
£m 
  
Total 
£m 
  
AFS 
reserves 
£m 
  
HFT short 
 positions 
£m 
                               
Ireland
- 
126 
47 
173 
  
- 
17 
- 
17 
  
190 
  
- 
  
(3)
Spain
18 
- 
110 
128 
  
- 
- 
33 
33 
  
161 
  
(41)
  
- 
Italy
7 
1 
33 
41 
  
- 
5 
- 
5 
  
46 
  
- 
  
(15)
Greece
- 
- 
6 
6 
  
- 
- 
- 
- 
  
6 
  
- 
  
- 
Portugal
- 
- 
5 
5 
  
- 
- 
- 
- 
  
5 
  
- 
  
- 
                               
Eurozone
  periphery
25 
127 
201 
353 
  
- 
22 
33 
55 
  
408 
  
(41)
  
(18)
                               
Netherlands
20 
197 
465 
682 
  
- 
- 
156 
156 
  
838 
  
(19)
  
(21)
France
10 
75 
142 
227 
  
- 
1 
104 
105 
  
332 
  
23 
  
(10)
Luxembourg
14 
196 
77 
287 
  
- 
6 
3 
9 
  
296 
  
1 
  
(1)
Germany
33 
1 
106 
140 
  
- 
- 
- 
- 
  
140 
  
- 
  
(54)
Belgium
- 
23 
6 
29 
  
- 
3 
- 
3 
  
32 
  
1 
  
(1)
Other
18 
3 
110 
131 
  
- 
- 
- 
- 
  
131 
  
- 
  
(14)
                               
Total eurozone
120 
622 
1,107 
1,849 
  
- 
32 
296 
328 
  
2,177 
  
(35)
  
(119)
                               
Countries
                              
US
208 
619 
2,663 
3,490 
  
307 
419 
- 
726 
  
4,216 
  
7 
  
(132)
UK
372 
163 
2,648 
3,183 
  
35 
51 
155 
241 
  
3,424 
  
73 
  
(35)
Japan
24 
67 
973 
1,064 
  
- 
2 
- 
2 
  
1,066 
  
- 
  
(1)
South Korea
32 
72 
880 
984 
  
- 
- 
- 
- 
  
984 
  
- 
  
- 
China
331 
147 
357 
835 
  
- 
14 
3 
17 
  
852 
  
7 
  
(3)
India
29 
68 
220 
317 
  
- 
- 
- 
- 
  
317 
  
- 
  
- 
Taiwan
2 
31 
259 
292 
  
- 
- 
- 
- 
  
292 
  
- 
  
(11)
Australia
77 
45 
159 
281 
  
- 
- 
- 
- 
  
281 
  
- 
  
(17)
Canada
14 
25 
200 
239 
  
- 
- 
2 
2 
  
241 
  
2 
  
(277)
Hong Kong
2 
81 
97 
180 
  
- 
- 
4 
4 
  
184 
  
2 
  
- 
Russia
16 
4 
158 
178 
  
- 
- 
- 
- 
  
178 
  
- 
  
- 
Romania
- 
123 
- 
123 
  
- 
- 
- 
- 
  
123 
  
- 
  
- 
MDB and
  supranationals (3)
- 
- 
156 
156 
  
- 
- 
- 
- 
  
156 
  
- 
  
- 
Other
74 
50 
567 
691 
  
- 
37 
18 
55 
  
746 
  
28 
  
(16)
                               
Total
1,301 
2,117 
10,444 
13,862 
  
342 
555 
478 
1,375 
  
15,237 
  
84 
  
(611)
 
For the notes to this table refer to page 199.
 
Risk and balance sheet management (continued)
Credit risk: Financial assets: Equity shares (continued)
 
 
31 December 2011
 
HFT/DFV (1)
  
AFS
            
Countries
Banks 
£m 
Other 
FI (2)
£m 
Corporate 
£m 
Total 
£m 
  
Banks 
£m 
Other 
FI (2)
£m 
Corporate 
£m 
Total 
£m 
  
Total 
£m 
  
AFS 
reserves 
£m 
  
HFT short 
 positions 
£m 
                               
Ireland
- 
7 
208 
215 
  
- 
6 
- 
6 
  
221 
  
- 
  
(4)
Spain
55 
2 
75 
132 
  
- 
- 
72 
72 
  
204 
  
(4)
  
(16)
Italy
11 
1 
51 
63 
  
- 
5 
- 
5 
  
68 
  
- 
  
(4)
Greece
- 
1 
2 
3 
  
- 
- 
- 
- 
  
3 
  
- 
  
(22)
Portugal
- 
- 
- 
- 
  
- 
- 
5 
5 
  
5 
  
- 
  
(1)
                               
Eurozone periphery
66 
11 
336 
413 
  
- 
11 
77 
88 
  
501 
  
(4)
  
(47)
                               
Netherlands
1 
67 
671 
739 
  
- 
55 
- 
55 
  
794 
  
(76)
  
(82)
France
12 
15 
117 
144 
  
3 
2 
97 
102 
  
246 
  
20 
  
(62)
Luxembourg
- 
201 
90 
291 
  
383 
3 
- 
386 
  
677 
  
17 
  
- 
Germany
23 
4 
114 
141 
  
- 
- 
- 
- 
  
141 
  
- 
  
(186)
Belgium
2 
8 
4 
14 
  
- 
15 
1 
16 
  
30 
  
10 
  
(10)
Other
18 
15 
102 
135 
  
- 
- 
- 
- 
  
135 
  
- 
  
(58)
                               
Total eurozone
122 
321 
1,434 
1,877 
  
386 
86 
175 
647 
  
2,524 
  
(33)
  
(445)
                               
Countries
                              
US
120 
97 
1,442 
1,659 
  
323 
575 
52 
950 
  
2,609 
  
128 
  
(544)
UK
420 
217 
2,785 
3,422 
  
33 
215 
64 
312 
  
3,734 
  
40 
  
(145)
Japan
43 
82 
1,289 
1,414 
  
- 
1 
- 
1 
  
1,415 
  
- 
  
(3)
South Korea
2 
47 
299 
348 
  
- 
- 
- 
- 
  
348 
  
- 
  
(3)
China
510 
228 
637 
1,375 
  
- 
13 
- 
13 
  
1,388 
  
4 
  
(6)
India
35 
14 
314 
363 
  
- 
- 
- 
- 
  
363 
  
- 
  
- 
Taiwan
2 
37 
226 
265 
  
- 
- 
- 
- 
  
265 
  
- 
  
(4)
Australia
95 
90 
406 
591 
  
- 
- 
14 
14 
  
605 
  
2 
  
(219)
Canada
- 
4 
148 
152 
  
- 
- 
2 
2 
  
154 
  
2 
  
(449)
Hong Kong
10 
45 
100 
155 
  
- 
- 
 3 
3 
  
158 
  
(2)
  
(2)
Russia
30 
- 
215 
245 
  
- 
- 
- 
- 
  
245 
  
- 
  
(2)
Romania
1 
45 
- 
46 
  
- 
- 
- 
- 
  
46 
  
- 
  
- 
MDB and
  supranationals (3)
- 
- 
233 
233 
  
- 
- 
- 
- 
  
233 
  
- 
  
- 
Other
86 
381 
600 
1,067 
  
- 
3 
31 
34 
  
1,101 
  
26 
  
(158)
                               
Total
1,476 
1,608 
10,128 
13,212 
  
742 
893 
341 
1,976 
  
15,188 
  
167 
  
(1,980)
 
Notes:
(1)
Designated as at fair value through profit or loss (DFV) balances are £533 million (31 December 2011 - £773 million) of which nil banks (31 December 2011 - nil), £61 million other financial institutions (31 December 2011 - £81 million) and £472 million corporate (31 December 2011 - £692 million).
(2)
Other financial institutions including government sponsored entities (GSEs).
(3)
MDB - Multilateral development banks.
 
Risk and balance sheet management (continued)
Credit risk: Financial assets (continued)
 
Derivatives
Summary
The table below analyses the fair value of the Group's derivatives by type of contract. Master netting arrangements in respect of mark-to-market (mtm) positions and collateral shown below do not result in a net presentation in the Group's balance sheet under IFRS.
 
31 December 2012
    
 
Notional (1)
      
31 December 2011
 
GBP 
USD 
Euro 
Other 
Total 
Assets 
Liabilities 
  
Notional 
Assets 
Liabilities 
 
£bn 
£bn 
£bn 
£bn 
£bn 
£m 
£m 
  
£bn 
£m 
£m 
                       
Interest rate (2)
5,144 
10,395 
11,343 
6,601 
33,483 
363,453 
345,565 
  
38,727 
422,553 
406,784 
Exchange rate
370 
1,987 
716 
1,625 
4,698 
63,068 
70,481 
  
4,482 
74,526 
81,022 
Credit
4 
320 
202 
27 
553 
11,005 
10,353 
  
1,054 
26,836 
26,743 
Other (3)
18 
50 
27 
16 
111 
4,392 
7,941 
  
123 
6,142 
9,560 
                       
           
441,918 
434,340 
    
530,057 
524,109 
Counterparty mtm netting
      
(373,906)
(373,906)
    
(441,626)
(441,626)
Cash collateral
          
(34,099)
(24,633)
    
(37,222)
(31,368)
Securities collateral
        
(5,616)
(8,264)
    
(5,312)
(8,585)
                       
           
28,297 
27,537 
    
45,897 
42,530 
 
Notes:
(1)
Exchange traded contracts were £2,497 billion, principally interest rate. Trades are generally closed out daily hence mark-to-market was insignificant (assets - £41 million; liabilities - £255 million).
(2)
Interest rate notional includes £15,864 billion (31 December 2011 - £16,377 billion) relating to contracts with central clearing houses.
(3)
Comprises equity and commodity derivatives.
 
Key points
·
Net exposure, after taking account of position and collateral netting arrangements, decreased by 38% (liabilities decreased by 35%) due to lower derivative fair values, driven by market movements, including foreign exchange rates and increased use of compression cycles.
·
Interest rate contracts decreased due to the increased use of compression cycles reflecting a greater number of market participants and hence trade-matching and the effect of exchange rate movements. This was partially offset by downward shifts in interest rate yields.
·
The decrease in exchange rate contracts reflected the impact of exchange rate movements and trade maturities. This was partially offset by higher trade volumes reflecting hedge funds taking advantage of market uncertainty.
·
Credit derivatives decreased due to a managed risk reduction and an increase in trades compressed through compression cycles.
 
Derivative fair values are driven by complex factors such as changes in foreign exchange rates, interest rates, credit default swap spreads and other underlying rates. At 31 December 2012, derivative fair values were in a net asset position of £7.6 billion. More specifically:
·
Group Treasury issues long term fixed rate debt that is hedged with floating rate interest rate swaps and also uses swaps to hedge fixed rate indefinite maturity liabilities such as equity and customer accounts. As interest rates have fallen over recent years the fair value of these swaps has increased. This net asset position is mirrored by the net liability position relating to the difference between the fair value and carrying value on fixed rate loans and current accounts.
·
Within Markets the hedging of issued notes, more exotic derivatives and long dated zero coupon inflation structures have led to a positive fair value which is not offset by other derivatives or hedges.
 
Risk and balance sheet management (continued)
Credit risk: Financial assets: Derivatives (continued)
 
Credit derivatives
The Group trades credit derivatives as part of its client led business and to mitigate credit risk. The Group's credit derivative exposures relating to proprietary trading are minimal. The table below analyses the Group's bought and sold protection.
 
 
31 December 2012
  
31 December 2011
 
Notional
  
Fair value
  
Notional
  
Fair value
 
Bought 
Sold 
  
Bought 
Sold 
  
Bought 
Sold 
  
Bought 
Sold 
Group
£bn 
£bn 
  
£bn 
£bn 
  
£bn 
£bn 
  
£bn 
£bn 
                       
Client-led trading & residual risk
250.7 
240.7 
  
3.4 
3.1 
  
401.0 
390.5 
  
17.0 
16.5 
Credit hedging - banking
  book (1)
5.4 
0.4 
  
0.1 
- 
  
15.6 
4.7 
  
0.1 
0.1 
Credit hedging - trading book
                      
  - rates
9.4 
5.8 
  
0.1 
0.1 
  
21.2 
17.1 
  
0.9 
1.7 
  - credit and mortgage markets
22.4 
16.0 
  
0.9 
0.7 
  
42.9 
28.4 
  
2.3 
1.7 
  - other
1.4 
0.6 
  
- 
- 
  
0.9 
0.1 
  
- 
- 
                       
Total excluding APS
289.3 
263.5 
  
4.5 
3.9 
  
481.6 
440.8 
  
20.3 
20.0 
APS
- 
- 
  
- 
- 
  
131.8 
- 
  
(0.2)
- 
                       
 
289.3 
263.5 
  
4.5 
3.9 
  
613.4 
440.8 
  
20.1 
20.0 
 
Core
                      
                       
 
Client-led trading
231.4 
228.4 
  
3.0 
2.7 
  
371.0 
369.4 
  
14.6 
14.0 
 
Credit hedging - banking book
1.7 
- 
  
- 
- 
  
2.2 
1.0 
  
- 
0.1 
 
Credit hedging - trading book
                      
  - rates
7.8 
4.6 
  
0.1 
0.1 
  
19.9 
16.2 
  
0.9 
1.7 
  - credit and mortgage markets
13.9 
13.6 
  
0.2 
0.2 
  
4.6 
4.0 
  
0.3 
0.2 
  - other
1.3 
0.5 
  
- 
- 
  
0.7 
0.1 
  
- 
- 
                       
 
256.1 
247.1 
  
3.3 
3.0 
  
398.4 
390.7 
  
15.8 
16.0 
 
Non-Core
                      
                       
Residual risk
19.3 
12.3 
  
0.4 
0.4 
  
30.0 
21.1 
  
2.4 
2.5 
Credit hedging - banking
  book (1)
3.7 
0.4 
  
0.1 
- 
  
13.4 
3.7 
  
0.1 
- 
Credit hedging - trading book
                      
  - rates
1.6 
1.2 
  
- 
- 
  
1.3 
0.9 
  
- 
- 
  - credit and mortgage markets
8.5 
2.4 
  
0.7 
0.5 
  
38.3 
24.4 
  
2.0 
1.5 
  - other
0.1 
0.1 
  
- 
- 
  
0.2 
- 
  
- 
- 
                       
 
33.2 
16.4 
  
1.2 
0.9 
  
83.2 
50.1 
  
4.5 
4.0 
 
By counterparty
                      
                       
Central government (APS)
- 
- 
  
- 
- 
  
131.8 
- 
  
(0.2)
- 
Monoline insurers
4.6 
- 
  
0.4 
- 
  
8.6 
- 
  
0.6 
- 
CDPCs (2)
21.0 
- 
  
0.2 
- 
  
24.5 
- 
  
0.9 
- 
Banks
127.2 
128.6 
  
2.3 
2.8 
  
204.1 
202.1 
  
8.5 
10.2 
Other financial institutions
135.8 
134.9 
  
1.4 
1.1 
  
234.8 
231.6 
  
10.5 
9.5 
Corporates
0.7 
- 
  
0.2 
- 
  
9.6 
7.1 
  
(0.2)
0.3 
                       
 
289.3 
263.5 
  
4.5 
3.9 
  
613.4 
440.8 
  
20.1 
20.0 
 
Notes:
(1)
Credit hedging in the banking book principally relates to portfolio management in Non-Core.
(2)
Credit derivative product company.
 
Risk and balance sheet management (continued)
Credit risk: (continued)
 
Problem debt management
While the principles of identifying, managing and providing for problem debts are broadly similar for wholesale and retail customers, the procedures differ based on the nature of the assets, as discussed below.
 
Renegotiations and forbearance
Loan modifications take place in a variety of circumstances including but not limited to a customer's current or potential credit deterioration. Where the contractual payment terms of a loan have been changed because of the customer's financial difficulties, it is classified as 'renegotiated' in the wholesale portfolio and as 'forbearance' in the retail portfolio.
 
Wholesale renegotiations
As part of the Group's problem debt management process, a number of renegotiation options are available when a wholesale customer is facing financial difficulties and corrective action is deemed necessary. The vast majority of wholesale loan renegotiations take place within GRG. However, within its early problem management framework, the Group may agree various remedial measures with customers whose loans are performing but who are experiencing temporary financial difficulties.
 
Asset quality
The data presented in the tables below include loans renegotiated during 2011 and 2012 which individually exceed thresholds set at divisional level, ranging from nil to £10 million. This population captures approximately 68% of that proportion of the wholesale portfolio which is either on Watchlist or under GRG stewardship. We continue to refine our approach relating to renegotiated loans and as part of the 2012 review, the amounts in-progress and completed renegotiations relating to 2011 have been revised.
 
The table below shows the value of loans (excluding loans where the Group has initiated recovery procedures) where renegotiations were completed during the year and, sets out related internal asset quality bands, sector breakdowns and renegotiation types.
 
 
31 December 2012
  
31 December 2011 (revised)
 
Performing 
£m 
Non- 
Performing 
£m 
Non- 
performing 
 provisions 
 coverage 
% 
  
Performing 
£m 
Non- 
Performing 
£m 
Non- 
performing 
 provisions 
 coverage 
% 
               
Sector
              
Property
1,954 
3,288 
18 
  
2,166 
3,215 
25 
Transport
832 
99 
23 
  
771 
670 
10 
Telecommunications, media
  and technology
237 
341 
46 
  
57 
33 
30 
Retail and leisure
487 
111 
34 
  
331 
433 
10 
Other (1)
792 
245 
28 
  
893 
792 
42 
               
 
4,302 
4,084 
22 
  
4,218 
5,143 
25 
 
Note:
(1)
SME business within Wealth is now reported within Wholesale forbearance.
 
Risk and balance sheet management (continued)
Credit risk: Problem debt management: Wholesale renegotiations (continued)
Renegotiation arrangements
The table below analyses the incidence of the main types of renegotiation by loan value.
 
Arrangement type
31 December 
2012 
% 
 
31 December 
2011 
(revised) 
% 
     
Variation in margin
9 
12 
Payment concessions and loan rescheduling
69 
92 
Forgiveness of all or part of the outstanding debt
29 
33 
Other (2)
20 
9 
 
Note:
(1)
The total above exceeds 100% as an individual case can involve more than one type of arrangement.
(2)
Main types of "other" concessions include formal "standstill" agreements, release of security and amendments to negative pledge.  2012 saw the completion of a small number of material standstill agreements, accounting for the higher proportion of the "Other" modification type.
 
Key points
●
Renegotiations completed during 2012, subject to thresholds as explained above, were £8.4 billion (31 December 2011 - £9.4 billion). The volume of renegotiations continues at a high level as difficult economic conditions persist in the UK and Ireland, particularly in real estate markets and the Group continues its active problem debt management. Renegotiations are likely to remain significant: at 31 December 2012 loans totalling £13.7 billion (31 December 2011 - £11.7 billion) were in the process of being renegotiated but had not yet reached legal completion (these loans are not included in the tables above). Of these 69% were non-performing loans, with an associated provision coverage of 32%, and 31% were performing loans. The principal types of arrangements being offered include variation in margin, payment concessions and loan rescheduling and forgiveness of all or part of the outstanding debt.
   
●
Loans renegotiated during 2011 and 2012 outstanding at 31 December 2012 were £17.7 billion, of which £9.3 billion relates to arrangements completed during 2011.
   
●
Additional provisions charged during 2012 relating to loans renegotiated during 2011 totalled £0.2 billion and provision coverage of those loans at 31 December 2012 was 25%.
   
●
Of the loans renegotiated by the GRG during 2011 and 2012 (£14.5 billion), 6% had been returned to satisfactory by 31 December 2012.
   
●
Renegotiated loans disclosed in the table above may have been subject of one or more covenants waivers or modifications. In addition loans totalling £3.5 billion were granted financial covenant concessions only during the year. Such loans are not included in the table above as these concessions do not affect a loan's contractual cash flows.
   
●
Year-on-year analysis of renegotiated loans may be skewed by individual material cases reaching legal completion during a given year. This is particularly relevant when comparing the value of renegotiations completed in the property and transport sectors in 2012 with previous years.
 
Risk and balance sheet management (continued)
Credit risk: Problem debt management: Wholesale renegotiations (continued)
 
Key points
●
In 2012 renegotiations were more prevalent in the Group's most significant corporate sectors and in those industries experiencing difficult markets, notably property and transport as the Group seeks to support viable customers. The majority of renegotiations granted to borrowers in the property sector were payment concessions and loan rescheduling. During 2012 there has been an increase in the number of renegotiations in the shipping sector as poor economic conditions persist.
   
●
84% of 'completed' and 93% of 'in progress' renegotiated cases were managed by GRG.
   
●
Provisions for the non-performing loans disclosed above are individually assessed and renegotiations are taken into account when determining the level of provision. The provision coverage is affected by the timing of write-offs and provisions. In some cases loans are fully or partially written off on the completion of a renegotiation. Non-performing renegotiated loans also include loans against which no provision is held and where these cases are large they can have a significant impact on the provision coverage within a specific sector.
 
 
Retail forbearance
Arrears status and provisions
The mortgage arrears information for retail accounts in forbearance, related provision and type of arrangements are shown in the tables below.
 
 
No missed
payments
  
1-3 months
in arrears
  
>3 months
in arrears
  
Total
 
Balance 
Provision 
  
Balance 
Provision 
  
Balance 
Provision 
  
Balance 
Provision 
Forborne 
balances 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
% 
                         
31 December 2012
                        
UK Retail (1,2)
4,006 
20 
  
388 
16 
  
450 
64 
  
4,844 
100 
4.9 
Ulster Bank (1,2)
915 
100 
  
546 
60 
  
527 
194 
  
1,988 
354 
10.4 
RBS Citizens (3)
- 
- 
  
179 
25 
  
160 
10 
  
339 
35 
1.6 
Wealth (4)
38 
- 
  
- 
- 
  
7 
- 
  
45 
- 
0.5 
                         
 
4,959 
120 
  
1,113 
101 
  
1,144 
268 
  
7,216 
489 
4.9 
                         
31 December 2011
                        
                         
UK Retail (1,2)
3,677 
16 
  
351 
13 
  
407 
59 
  
4,435 
88 
4.7 
Ulster Bank (1,2)
893 
78 
  
516 
45 
  
421 
124 
  
1,830 
247 
9.1 
RBS Citizens (3)
- 
- 
  
91 
10 
  
89 
10 
  
180 
20 
0.8 
Wealth
121 
- 
  
- 
- 
  
2 
- 
  
123 
- 
1.3 
                         
 
4,691 
94 
  
958 
68 
  
919 
193 
  
6,568 
355 
4.4 
 
Notes:
(1)
Includes all forbearance arrangements whether relating to the customer's lifestyle changes or financial difficulty.
(2)
Includes the current stock position of forbearance deals agreed since early 2008 for UK Retail and early 2009 for Ulster Bank.
(3)
Forbearance stock reported at 31 December 2012 now includes home equity loans and lines as well as the residential mortgage portfolio.
(4)
SME business within Wealth is now reported within Wholesale forbearance.
 
 
Risk and balance sheet management (continued)
Credit risk: Problem debt management: Retail forbearance (continued)
 
Forbearance arrangements
The incidence of the main types of retail forbearance on the balance sheet as at 31 December 2012 is analysed below. This includes forbearance arrangements agreed during 2012 and balance at the year end. For a small proportion of mortgages, more than one forbearance type applies.
 
 
UK Retail 
Ulster Bank 
RBS 
Citizens (1)
Wealth (2)
Total (3)
31 December 2012
£m 
£m 
£m 
£m 
£m 
           
Interest only conversions - temporary and permanent
1,220 
924 
- 
6 
2,150 
Term extensions - capital repayment and interest only
2,271 
183 
- 
27 
2,481 
Payment concessions
215 
762 
339 
9 
1,325 
Capitalisation of arrears
932 
119 
- 
- 
1,051 
Other
452 
- 
- 
3 
455 
           
 
5,090 
1,988 
339 
45 
7,462 
 
31 December 2011
          
           
Interest only conversions - temporary and permanent
1,269 
795 
- 
3 
2,067 
Term extensions - capital repayment and interest only
1,805 
58 
- 
97 
1,960 
Payment concessions
198 
876 
180 
- 
1,254 
Capitalisation of arrears
864 
101 
- 
- 
965 
Other
517 
- 
- 
23 
540 
           
 
4,653 
1,830 
180 
123 
6,786 
 
The table below shows forbearance agreed during 2012 analysed between performing and non-performing.
 
UK Retail 
Ulster Bank 
RBS 
Citizens (1)
Wealth (2)
Total (3)
31 December 2012
£m 
£m 
£m 
£m 
£m 
           
Performing forbearance in the year
1,809 
2,111 
88 
18 
4,026 
Non-performing forbearance in the year
184 
1,009 
71 
2 
1,266 
           
Total forbearance in the year (4)
1,993 
3,120 
159 
20 
5,292 
 
Note:
(1)
Forbearance stock reported at 31 December 2012 now includes home equity loans and lines as well as the residential mortgage portfolio.
(2)
SME business within Wealth is now reported within Wholesale forbearance.
(3)
As an individual case can include more than one type of arrangement, the analysis in the table on forbearance arrangements exceeds the total value of cases subject to forbearance.
(4)
Includes all deals agreed during the year (new customers and renewals) regardless of whether they remain active at the year end.
 
 
Risk and balance sheet management (continued)
 
Credit risk: Problem debt management: Retail forbearance (continued)
 
Key points
 
UK Retail
·
The reported numbers for forbearance in UK Retail capture all instances where a change has been made to the contractual payment terms including those where the customer is up-to-date on payments and there is no obvious evidence of financial stress. The reported figures include stock dating back to 1 January 2008.
   
·
At 31 December 2012, stock levels of £4.8 billion represent 4.9% of the total mortgage assets; this represents a 9.2% increase in forbearance stock since 31 December 2011. Of these, approximately 83% were up-to-date with payments (compared with approximately 97% of the mortgage population not subject to forbearance activity). Forbearance flow has remained stable year on year.
   
·
The most frequently occurring forbearance types were term extensions (47% of assets subject to forbearance at 31 December 2012), interest only conversions (25%) and capitalisations of arrears (19%). The stock of cases subject to interest only conversions reflects legacy policy. In 2009, UK Retail ceased providing this type of forbearance treatment for customers in financial difficulty and no longer permits interest only conversions on residential mortgages where the customer is current on payments.
   
·
The provision cover on performing assets subject to forbearance was about five times that on assets not subject to forbearance.
 
Ulster Bank
·
The reported numbers for forbearance in Ulster Bank Group capture all instances where a change has been made to the contractual payment terms including those where the customer is up-to-date on payments and there is no obvious evidence of financial stress. The reported figures include stock dating back to early 2009.
   
·
Ulster Bank Group continues to assist customers in the difficult economic environment. Mortgage forbearance treatments have been in place since 2009 and are aimed at assisting customers in financial difficulty. At 31 December 2012, 10.4% of total mortgage assets (£1.9 billion) were subject to a forbearance arrangement, an increase from 9.1% (£1.8 billion) at 31 December 2011. The majority of these forbearance arrangements were in the performing book (73%).
   
·
The majority of the forbearance arrangements offered by Ulster Bank currently are temporary concessions, accounting for 85% of assets subject to forbearance at 31 December 2012. These are offered for periods of one to three years and incorporate different levels of repayment based on the customer's ability to pay. The additional treatment options developed by Ulster Retail will lead to a shift to more long term arrangements over time.
   
·
Of these temporary forbearance types, the largest category at 31 December 2012 was interest only conversions, which accounted for 46% of total assets subject to forbearance. The other categories of temporary forbearance were payment concessions: reduced repayments (36%); and payment holidays (38%).
   
·
The flow by forbearance type remained stable when compared with 2011 was a modest reduction, 3%, in customers seeking assistance for the first time year on year.
   
·
The provision cover on performing assets subject to forbearance is approximately eight times higher than that on performing assets not subject to forbearance.
 
Risk and balance sheet management (continued)
Credit risk: Problem debt management (continued)
 
Risk elements in lending (REIL)
REIL, provisions and impairments
The tables below analyse gross loans and advances to banks and customers (excluding reverse repos) and the related debt management measures and ratios by division.
 
Divisional analysis
       
Credit metrics
Year-to-date
  
 
Gross loans to
REIL 
Provisions 
REIL as a % 
of gross 
loans to 
customers 
Provisions 
as a % 
of REIL 
  
Impairment 
charge 
Amounts 
written-off 
  
Banks 
Customers 
  
31 December 2012
£m 
£m 
£m 
£m 
% 
% 
£m 
£m 
  
                   
UK Retail
695 
113,599 
4,569 
2,629 
4.0 
58 
529 
599 
  
UK Corporate
746 
107,025 
5,452 
2,432 
5.1 
45 
836 
514 
  
Wealth
1,545 
17,074 
248 
109 
1.5 
44 
46 
15 
  
International Banking
4,827 
42,342 
422 
391 
1.0 
93 
111 
445 
  
Ulster Bank
632 
32,652 
7,533 
3,910 
23.1 
52 
1,364 
72 
  
US Retail & Commercial
435 
51,271 
1,146 
285 
2.2 
25 
83 
391 
  
                   
Retail & Commercial
8,880 
363,963 
19,370 
9,756 
5.3 
50 
2,969 
2,036 
  
Markets
16,805 
29,787 
396 
305 
1.3 
77 
25 
109 
  
Direct Line Group and other
5,232 
3,006 
- 
1 
- 
- 
1 
- 
  
                   
Core
30,917 
396,756 
19,766 
10,062 
5.0 
51 
2,995 
2,145 
  
Non-Core
477 
56,343 
21,374 
11,200 
37.9 
52 
2,320 
2,121 
  
                   
Group
31,394 
453,099 
41,140 
21,262 
9.1 
52 
5,315 
4,266 
  
 
31 December 2011
                
                 
UK Retail
628 
110,659 
4,599 
2,678 
4.2 
58 
788 
823 
UK Corporate
806 
110,729 
5,001 
2,062 
4.5 
41 
790 
658 
Wealth
2,422 
16,913 
211 
81 
1.2 
38 
25 
11 
International Banking
3,411 
57,729 
1,632 
851 
2.8 
52 
168 
125 
Ulster Bank
2,079 
34,052 
5,523 
2,749 
16.2 
50 
1,384 
124 
US Retail & Commercial
208 
51,562 
1,007 
455 
2.0 
45 
248 
373 
                 
Retail & Commercial
9,554 
381,644 
17,973 
8,876 
4.7 
49 
3,403 
2,114 
Markets
29,991 
31,490 
414 
311 
1.3 
75 
- 
23 
Direct Line Group and other
3,829 
929 
- 
- 
- 
- 
- 
- 
                 
Core
43,374 
414,063 
18,387 
9,187 
4.4 
50 
3,403 
2,137 
Non-Core
706 
80,005 
24,007 
11,487 
30.0 
48 
3,838 
2,390 
                 
Group
44,080 
494,068 
42,394 
20,674 
8.6 
49 
7,241 
4,527 
 
 

 
 
Risk and balance sheet management (continued)
Credit risk: Problem debt management: REIL, provisions and impairments (continued)
 
Key points
 
·
Total REIL decreased by £1.3 billion to £41.1 billion compared with December 2011 as improvements in International Banking and in Non-Core were partially offset by the continued increase in REIL in UK Corporate and Ulster Bank Core mortgage and corporate portfolios.
   
·
Non-Core REIL decreased by £2.6 billion or 11% reflecting a mixture of repayments and write-offs within UK Corporate, Markets and International Banking corporate portfolios.
   
·
Conditions in Ireland remain difficult and economic indicators continue to be weak, this is reflected in the Ulster Bank credit metrics with Core REIL increasing by £2.0 billion since 31 December 2011, primarily within mortgage and commercial real estate portfolios, to £7.5 billion and is now 23.1% of loans and advances to customers.  Impairments continue to outpace write-offs.
   
·
The provision coverage increased to 52% at 31 December 2012 from 49% at 31 December 2011 as the economic conditions remain challenging particularly in relation to Ulster Bank and commercial real estate portfolio's.
   
·
The impairment charge for 2012 of £5.3 billion was 27% lower than in 2011. The main drivers were lower impairment across Non-Core portfolios (down £1.5 billion or 40%) mainly as a result of lower impairments across Ulster Bank's commercial real estate portfolio (down £1.3 billion or 58%) and continued improvement across Core UK portfolios.
 
·              Commercial real estate lending metrics were as follows:
 
 
Total
  
Non-Core
 
31 December
2012
31 December
2011
  
31 December
2012
31 December
2011
           
Lending (gross)
£63.0bn
£74.8bn
  
£26.4bn
£34.3bn
Of which REIL
£22.1bn
£22.9bn
  
£17.1bn
£18.8bn
Provisions
£10.1bn
£9.5bn
  
£8.3bn
£8.2bn
REIL as a % of gross loans to customers
35.1%
30.6%
  
64.8%
54.8%
Provisions as a % of REIL
46%
41%
  
49%
44%
 
Note:
(1)
Excludes property related lending to customers in other sectors managed by Real Estate Finance.
 
Ulster Bank is a significant contributor to Non-Core commercial real estate lending. For further information refer to the section on Ulster Bank Group (Core and Non-Core).
 
 
 
 
Risk and balance sheet management (continued)
Credit risk: Problem debt management: REIL, provisions and impairments (continued)
 
Sector and geographical regional analysis - Group
The tables below analyse gross loans and advances to banks and customers (excluding reverse repos) and the related debt management by sector and geography (by location of lending office) for the Group, Core and Non-Core.
 
       
Credit metrics
    
31 December 2012
Gross 
loans 
£m 
REIL 
£m 
Provisions 
£m 
REIL 
as a % 
of gross 
loans 
% 
Provisions 
as a % 
of REIL 
% 
Provisions 
as a % 
of gross 
loans 
% 
  
Impairment 
charge 
£m 
Amounts 
written-off 
£m 
                 
Government (1)
9,853 
- 
- 
- 
- 
- 
- 
- 
Finance
42,198 
592 
317 
1.4 
54 
0.8 
145 
380 
Personal
- mortgages
149,625 
6,549 
1,824 
4.4 
28 
1.2 
948 
461 
 
- unsecured
32,212 
2,903 
2,409 
9.0 
83 
7.5 
631 
793 
Property
72,219 
21,223 
9,859 
29.4 
46 
13.7 
2,212 
1,080 
Construction
8,049 
1,483 
640 
18.4 
43 
8.0 
94 
182 
Manufacturing
23,787 
755 
357 
3.2 
47 
1.5 
134 
203 
Finance leases (2)
13,609 
442 
294 
3.2 
67 
2.2 
44 
263 
Retail, wholesale and repairs
21,936 
1,143 
644 
5.2 
56 
2.9 
230 
176 
Transport and storage
18,341 
834 
336 
4.5 
40 
1.8 
289 
102 
Health, education and leisure
16,705 
1,190 
521 
7.1 
44 
3.1 
144 
100 
Hotels and restaurants
7,877 
1,597 
726 
20.3 
45 
9.2 
176 
102 
Utilities
6,631 
118 
21 
1.8 
18 
0.3 
(4)
- 
Other
30,057 
2,177 
1,240 
7.2 
57 
4.1 
323 
395 
Latent
- 
- 
1,960 
- 
- 
- 
(74)
- 
                 
 
453,099 
41,006 
21,148 
9.1 
52 
4.7 
5,292 
4,237 
                 
of which:
                
UK
                
  - residential mortgages
109,530 
2,440 
457 
2.2 
19 
0.4 
122 
32 
  - personal lending
20,498 
2,477 
2,152 
12.1 
87 
10.5 
479 
610 
  - property
53,730 
10,521 
3,944 
19.6 
37 
7.3 
964 
490 
  - construction
6,507 
1,165 
483 
17.9 
41 
7.4 
100 
158 
  - other
122,029 
3,729 
2,611 
3.1 
70 
2.1 
674 
823 
Europe
                
  - residential mortgages
17,836 
3,092 
1,151 
17.3 
37 
6.5 
526 
50 
  - personal lending
1,905 
226 
208 
11.9 
92 
10.9 
38 
13 
  - property
14,634 
10,347 
5,766 
70.7 
56 
39.4 
1,264 
441 
  - construction
1,132 
289 
146 
25.5 
51 
12.9 
(11)
12 
  - other
27,424 
4,451 
2,996 
16.2 
67 
10.9 
817 
539 
US
                
  - residential mortgages
21,929 
990 
208 
4.5 
21 
0.9 
298 
377 
  - personal lending
8,748 
199 
48 
2.3 
24 
0.5 
109 
162 
  - property
3,343 
170 
29 
5.1 
17 
0.9 
(11)
83 
  - construction
388 
8 
1 
2.1 
13 
0.3 
- 
12 
  - other
29,354 
352 
630 
1.2 
179 
2.1 
(86)
149 
RoW
                
  - residential mortgages
330 
27 
8 
8.2 
30 
2.4 
2 
2 
  - personal lending
1,061 
1 
1 
0.1 
100 
0.1 
5 
8 
  - property
512 
185 
120 
36.1 
65 
23.4 
(5)
66 
  - construction
22 
21 
10 
95.5 
48 
45.5 
5 
- 
  - other
12,187 
316 
179 
2.6 
57 
1.5 
2 
210 
                 
 
453,099 
41,006 
21,148 
9.1 
52 
4.7 
5,292 
4,237 
                 
Banks
31,394 
134 
114 
0.4 
85 
0.4 
23 
29 
 
For the notes to this table refer to page 214.


Risk and balance sheet management (continued)
Credit risk: Problem debt management: REIL, provisions and impairments (continued)
 
Sector and geographical regional analysis - Group (continued)
 
       
Credit metrics
    
31 December 2011
Gross 
loans 
£m 
REIL 
£m 
Provisions 
£m 
REIL 
as a % 
of gross 
loans 
% 
Provisions 
as a % 
of REIL 
% 
Provisions 
as a % 
of gross 
loans 
% 
  
Impairment 
charge 
£m 
Amounts 
written-off 
£m 
                 
Government (1)
9,742 
- 
- 
- 
- 
- 
- 
- 
Finance
51,870 
1,062 
726 
2.0 
68 
1.4 
89 
87 
Personal
- mortgages
149,273 
5,270 
1,396 
3.5 
26 
0.9 
1,076 
516 
 
- unsecured
34,424 
3,070 
2,456 
8.9 
80 
7.1 
782 
1,286 
Property
81,058 
22,101 
8,994 
27.3 
41 
11.1 
3,669 
1,171 
Construction
9,869 
1,943 
761 
19.7 
39 
7.7 
140 
244 
Manufacturing
28,639 
913 
525 
3.2 
58 
1.8 
227 
215 
Finance leases (2)
14,499 
794 
508 
5.5 
64 
3.5 
112 
170 
Retail, wholesale and repairs
24,378 
1,067 
549 
4.4 
51 
2.3 
180 
172 
Transport and storage
22,058 
606 
154 
2.7 
25 
0.7 
78 
43 
Health, education and leisure
17,492 
1,192 
502 
6.8 
42 
2.9 
304 
98 
Hotels and restaurants
8,870 
1,490 
675 
16.8 
45 
7.6 
334 
131 
Utilities
8,406 
88 
23 
1.0 
26 
0.3 
3 
3 
Other
33,490 
2,661 
1,217 
7.9 
46 
3.6 
792 
391 
Latent
- 
- 
2,065 
- 
- 
- 
(545)
- 
                 
 
494,068 
42,257 
20,551 
8.6 
49 
4.2 
7,241 
4,527 
                 
of which:
                
UK
                
  - residential mortgages
106,388 
2,262 
431 
2.1 
19 
0.4 
180 
25 
  - personal lending
22,008 
2,717 
2,209 
12.3 
81 
10.0 
645 
1,007 
  - property
60,041 
11,147 
3,837 
18.6 
34 
6.4 
1,411 
493 
  - construction
7,589 
1,427 
560 
18.8 
39 
7.4 
187 
228 
  - other
132,548 
4,635 
2,943 
3.5 
63 
2.2 
514 
655 
Europe
                
  - residential mortgages
18,946 
2,205 
713 
11.6 
32 
3.8 
467 
10 
  - personal lending
2,464 
209 
180 
8.5 
86 
7.3 
25 
126 
  - property
16,384 
10,314 
4,947 
63.0 
48 
30.2 
2,296
504 
  - construction
1,754 
362 
185 
20.6 
51 
10.5 
(62)
- 
  - other
34,497 
4,261 
2,873 
12.4 
67 
8.3 
1,267 
293 
US
                
  - residential mortgages
23,237 
770 
240 
3.3 
31 
1.0 
426 
481 
  - personal lending
8,441 
143 
66 
1.7 
46 
0.8 
112 
153 
  - property
3,783 
329 
92 
8.7 
28 
2.4 
(2)
139 
  - construction
457 
121 
10 
26.5 
8 
2.2 
9 
16 
  - other
37,015 
517 
895 
1.4 
173 
2.4 
(175)
180 
RoW
                
  - residential mortgages
702 
33 
12 
4.7 
36 
1.7 
3 
- 
  - personal lending
1,511 
1 
1 
0.1 
100 
0.1 
- 
- 
  - property
850 
311 
118 
36.6 
38 
13.9 
(36)
35 
  - construction
69 
33 
6 
47.8 
18 
8.7 
6 
- 
  - other
15,384 
460 
233 
3.0 
51 
1.5 
(32)
182 
                 
 
494,068 
42,257 
20,551 
8.6 
49 
4.2 
7,241 
4,527 
                 
Banks
44,080 
137 
123 
0.3 
90 
0.3 
- 
- 
 
For notes to this table refer to page 214.
 
Risk and balance sheet management (continued)
Credit risk: Problem debt management: REIL, provisions and impairments (continued)
 
Sector and geographical regional analysis - Core
 
       
Credit metrics
    
31 December 2012
Gross 
loans 
£m 
REIL 
£m 
Provisions 
£m 
REIL 
as a % 
of gross 
loans 
% 
Provisions 
as a % 
of REIL 
% 
Provisions 
as a % 
of gross 
loans 
% 
  
Impairment 
charge 
£m 
Amounts 
written-off 
£m 
                 
Government (1)
8,485 
- 
- 
- 
- 
- 
- 
- 
Finance
39,658 
185 
149 
0.5 
81 
0.4 
54 
338 
Personal
- mortgages
146,770 
6,229 
1,691 
4.2 
27 
1.2 
786 
234 
 
- unsecured
31,247 
2,717 
2,306 
8.7 
85 
7.4 
568 
718 
Property
43,602 
4,672 
1,674 
10.7 
36 
3.8 
748 
214 
Construction
6,020 
757 
350 
12.6 
46 
5.8 
119 
60 
Manufacturing
22,234 
496 
225 
2.2 
45 
1.0 
118 
63 
Finance leases (2)
9,201 
159 
107 
1.7 
67 
1.2 
35 
41 
Retail, wholesale and repairs
20,842 
791 
439 
3.8 
55 
2.1 
181 
129 
Transport and storage
14,590 
440 
112 
3.0 
25 
0.8 
72 
21 
Health, education and leisure
15,770 
761 
299 
4.8 
39 
1.9 
109 
67 
Hotels and restaurants
6,891 
1,042 
473 
15.1 
45 
6.9 
138 
56 
Utilities
5,131 
10 
5 
0.2 
50 
0.1 
- 
- 
Other
26,315 
1,374 
794 
5.2 
58 
3.0 
190 
175 
Latent
- 
- 
1,325 
- 
- 
- 
(146)
- 
                 
 
396,756 
19,633 
9,949 
4.9 
51 
2.5 
2,972 
2,116 
                 
of which:
                
UK
                
  - residential mortgages
109,511 
2,440 
457 
2.2 
19 
0.4 
122 
32 
  - personal lending
20,443 
2,454 
2,133 
12.0 
87 
10.4 
474 
594 
  - property
35,532 
2,777 
896 
7.8 
32 
2.5 
395 
181 
  - construction
5,101 
671 
301 
13.2 
45 
5.9 
109 
47 
  - other
108,713 
2,662 
1,737 
2.4 
65 
1.6 
499 
379 
Europe
                
  - residential mortgages
17,446 
3,060 
1,124 
17.5 
37 
6.4 
521 
24 
  - personal lending
1,540 
143 
138 
9.3 
97 
9.0 
29 
11 
  - property
4,896 
1,652 
685 
33.7 
41 
14.0 
350 
6 
  - construction
513 
60 
39 
11.7 
65 
7.6 
4 
10 
  - other
22,218 
2,280 
1,711 
10.3 
75 
7.7 
362 
267 
US
                
  - residential mortgages
19,483 
702 
102 
3.6 
15 
0.5 
141 
176 
  - personal lending
8,209 
119 
34 
1.4 
29 
0.4 
65 
112 
  - property
2,847 
112 
13 
3.9 
12 
0.5 
3 
27 
  - construction
384 
5 
- 
1.3 
- 
- 
1 
3 
  - other
28,267 
252 
432 
0.9 
171 
1.5 
(111)
90 
RoW
                
  - residential mortgages
330 
27 
8 
8.2 
30 
2.4 
2 
2 
  - personal lending
1,055 
1 
1 
0.1 
100 
0.1 
- 
1 
  - property
327 
131 
80 
40.1 
61 
24.5 
- 
- 
  - construction
22 
21 
10 
95.5 
48 
45.5 
5 
- 
  - other
9,919 
64 
48 
0.6 
75 
0.5 
1 
154 
                 
 
396,756 
19,633 
9,949 
4.9 
51 
2.5 
2,972 
2,116 
                 
Banks
30,917 
133 
113 
0.4 
85 
0.4 
23 
29 
 
For the notes to this table refer to page 214.
 
Risk and balance sheet management (continued)
Credit risk: Problem debt management: REIL, provisions and impairments (continued)
 
Sector and geographical regional analysis - Core (continued)
 
       
Credit metrics
    
31 December 2011
Gross 
loans 
£m 
REIL 
£m 
Provisions 
£m 
REIL 
as a % 
of gross 
loans 
% 
Provisions 
as a % 
of REIL 
% 
Provisions 
as a % 
of gross 
loans 
% 
  
Impairment 
charge 
£m 
Amounts 
written-off 
£m 
                 
Government (1)
8,359 
- 
- 
- 
- 
- 
- 
- 
Finance
48,598 
745 
579 
1.5 
78 
1.2 
207 
44 
Personal
- mortgages
144,171 
4,890 
1,216 
3.4 
25 
0.8 
776 
198 
 
- unsecured
32,868 
2,960 
2,364 
9.0 
80 
7.2 
715 
935 
Property
42,994 
4,132 
1,133 
9.6 
27 
2.6 
469 
167 
Construction
7,197 
841 
286 
11.7 
34 
4.0 
179 
143 
Manufacturing
23,708 
490 
242 
2.1 
49 
1.0 
106 
125 
Finance leases (2)
8,440 
172 
110 
2.0 
64 
1.3 
31 
68 
Retail, wholesale and repairs
22,039 
679 
345 
3.1 
51 
1.6 
208 
119 
Transport and storage
16,581 
342 
60 
2.1 
18 
0.4 
47 
29 
Health, education and leisure
16,073 
691 
257 
4.3 
37 
1.6 
170 
55 
Hotels and restaurants
7,709 
1,005 
386 
13.0 
38 
5.0 
209 
60 
Utilities
6,557 
22 
1 
0.3 
5 
- 
- 
- 
Other
28,769 
1,282 
668 
4.5 
52 
2.3 
538 
194 
Latent
- 
- 
1,418 
- 
- 
- 
(252)
- 
                 
 
414,063 
18,251 
9,065 
4.4 
50 
2.2 
3,403 
2,137 
                 
of which:
                
UK
                
  - residential mortgages
104,965 
2,210 
420 
2.1 
19 
0.4 
174 
24 
  - personal lending
21,881 
2,680 
2,179 
12.2 
81 
10.0 
657 
828 
  - property
35,431 
2,984 
744 
8.4 
25 
2.1 
378 
114 
  - construction
5,707 
655 
236 
11.5 
36 
4.1 
160 
138 
  - other
114,878 
2,571 
1,648 
2.2 
64 
1.4 
366 
398 
Europe
                
  - residential mortgages
18,393 
2,121 
664 
11.5 
31 
3.6 
437 
10 
  - personal lending
1,972 
143 
125 
7.3 
87 
6.3 
(8)
22 
  - property
4,846 
1,037 
365 
21.4 
35 
7.5 
162 
10 
  - construction
1,019 
72 
43 
7.1 
60 
4.2 
13 
- 
  - other
24,414 
2,430 
1,806 
10.0 
74 
7.4 
915 
183 
US
                
  - residential mortgages
20,311 
526 
120 
2.6 
23 
0.6 
162 
164 
  - personal lending
7,505 
136 
59 
1.8 
43 
0.8 
66 
85 
  - property
2,413 
111 
24 
4.6 
22 
1.0 
16 
43 
  - construction
412 
98 
1 
23.8 
1 
0.2 
- 
5 
  - other
34,971 
345 
583 
1.0 
169 
1.7 
26 
96 
RoW
                
  - residential mortgages
502 
33 
12 
6.6 
36 
2.4 
3 
- 
  - personal lending
1,510 
1 
1 
0.1 
100 
0.1 
- 
- 
  - property
304 
- 
- 
- 
  
- 
(87)
- 
  - construction
59 
16 
6 
27.1 
38 
10.2 
6 
- 
  - other
12,570 
82 
29 
0.7 
35 
0.2 
(43)
17 
                 
 
414,063 
18,251 
9,065 
4.4 
50 
2.2 
3,403 
2,137 
                 
Banks
43,374 
136 
122 
0.3 
90 
0.3 
- 
- 
 
For the notes to this table refer to page 214.
 
Risk and balance sheet management (continued)
Credit risk: Problem debt management: REIL, provisions and impairments (continued)
 
Sector and geographical regional analysis - Non-Core
 
       
Credit metrics
    
31 December 2012
Gross 
loans 
£m 
REIL 
£m 
Provisions 
£m 
REIL 
as a % 
of gross 
loans 
% 
Provisions 
as a % 
of REIL 
% 
Provisions 
as a % 
of gross 
loans 
% 
  
Impairment 
charge 
£m 
Amounts 
written-off 
£m 
                 
Government (1)
1,368 
- 
- 
- 
- 
- 
- 
- 
Finance
2,540 
407 
168 
16.0 
41 
6.6 
91 
42 
Personal
- mortgages
2,855 
320 
133 
11.2 
42 
4.7 
162 
227 
 
- unsecured
965 
186 
103 
19.3 
55 
10.7 
63 
75 
Property
28,617 
16,551 
8,185 
57.8 
49 
28.6 
1,464 
866 
Construction
2,029 
726 
290 
35.8 
40 
14.3 
(25)
122 
Manufacturing
1,553 
259 
132 
16.7 
51 
8.5 
16 
140 
Finance leases (2)
4,408 
283 
187 
6.4 
66 
4.2 
9 
222 
Retail, wholesale and repairs
1,094 
352 
205 
32.2 
58 
18.7 
49 
47 
Transport and storage
3,751 
394 
224 
10.5 
57 
6.0 
217 
81 
Health, education and leisure
935 
429 
222 
45.9 
52 
23.7 
35 
33 
Hotels and restaurants
986 
555 
253 
56.3 
46 
25.7 
38 
46 
Utilities
1,500 
108 
16 
7.2 
15 
1.1 
(4)
- 
Other
3,742 
803 
446 
21.5 
56 
11.9 
133 
220 
Latent
- 
- 
635 
- 
- 
- 
72 
- 
                 
 
56,343 
21,373 
11,199 
37.9 
52 
19.9
2,320 
2,121 
                 
of which:
                
UK
                
  - residential mortgages
19 
- 
- 
- 
- 
- 
- 
- 
  - personal lending
55 
23 
19 
41.8 
83 
34.5 
5 
16 
  - property
18,198 
7,744 
3,048 
42.6 
39 
16.7 
569 
309 
  - construction
1,406 
494 
182 
35.1 
37 
12.9 
(9)
111 
  - other
13,316 
1,067 
874 
8.0 
82 
6.6 
175 
444 
Europe
                
  - residential mortgages
390 
32 
27 
8.2 
84 
6.9 
5 
26 
  - personal lending
365 
83 
70 
22.7 
84 
19.2 
9 
2 
  - property
9,738 
8,695 
5,081 
89.3 
58 
52.2 
914 
435 
  - construction
619 
229 
107 
37.0 
47 
17.3 
(15)
2 
  - other
5,206 
2,171 
1,285 
40.7 
59 
24.7 
455 
272 
US
                
  - residential mortgages
2,446 
288 
106 
11.8 
37 
4.3 
157 
201 
  - personal lending
539 
80 
14 
14.8 
18 
2.6 
44 
50 
  - property
496 
58 
16 
11.7 
28 
3.2 
(14)
56 
   - construction
4 
3 
1 
75.0 
33 
25.0 
(1)
9 
  - other
1,087 
100 
198 
9.2 
198 
18.2 
25 
59 
RoW
                
  - residential mortgages
- 
- 
- 
- 
- 
- 
- 
- 
  - personal lending
6 
- 
- 
- 
- 
- 
5 
7 
  - property
185 
54 
40 
29.2 
74 
21.6 
(5)
66 
  - construction
- 
- 
- 
      
- 
- 
  - other
2,268 
252 
131 
11.1 
52 
5.8 
1 
56 
                 
 
56,343 
21,373 
11,199 
37.9 
52 
19.9 
2,320 
2,121 
                 
Banks
477 
1 
1 
0.2 
100 
0.2 
- 
- 
 
For the notes to this table refer to page 214.
 
Risk and balance sheet management (continued)
Credit risk: Problem debt management: REIL, provisions and impairments (continued)
 
Sector and geographical regional analysis - Non-Core (continued)
 
       
Credit metrics
    
31 December 2011
Gross 
loans 
£m 
REIL 
£m 
Provisions 
£m 
REIL 
as a % 
of gross 
loans 
% 
Provisions 
as a % 
of REIL 
% 
Provisions 
as a % 
of gross 
loans 
% 
  
Impairment 
charge 
£m 
Amounts 
written-off 
£m 
                 
Government (1)
1,383 
- 
- 
- 
- 
- 
- 
- 
Finance
3,272 
317 
147 
9.7 
46 
4.5 
(118)
43 
Personal
- mortgages
5,102 
380 
180 
7.4 
47 
3.5 
300 
318 
 
- unsecured
1,556 
110 
92 
7.1 
84 
5.9 
67 
351 
Property
38,064 
17,969 
7,861 
47.2 
44 
20.7 
3,200 
1,004 
Construction
2,672 
1,102 
475 
41.2 
43 
17.8 
(39)
101 
Manufacturing
4,931 
423 
283 
8.6 
67 
5.7 
121 
90 
Finance leases (2)
6,059 
622 
398 
10.3 
64 
6.6 
81 
102 
Retail, wholesale and repairs
2,339 
388 
204 
16.6 
53 
8.7 
(28)
53 
Transport and storage
5,477 
264 
94 
4.8 
36 
1.7 
31 
14 
Health, education and leisure
1,419 
501 
245 
35.3 
49 
17.3 
134 
43 
Hotels and restaurants
1,161 
485 
289 
41.8 
60 
24.9 
125 
71 
Utilities
1,849 
66 
22 
3.6 
33 
1.2 
3 
3 
Other
4,721 
1,379 
549 
29.2 
40 
11.6 
254 
197 
Latent
- 
- 
647 
- 
- 
- 
(293)
- 
                 
 
80,005 
24,006 
11,486 
30.0 
48 
14.4 
3,838 
2,390 
                 
of which:
                
UK
                
  - residential mortgages
1,423 
52 
11 
3.7 
21 
0.8 
6 
1 
  - personal lending
127 
37 
30 
29.1 
81 
23.6 
(12)
179 
  - property
24,610 
8,163 
3,093 
33.2 
38 
12.6 
1,033 
379 
  - construction
1,882 
772 
324 
41.0 
42 
17.2 
27 
90 
  - other
17,670 
2,064 
1,295 
11.7 
63 
7.3 
148 
257 
Europe
                
  - residential mortgages
553 
84 
49 
15.2 
58 
8.9 
30 
- 
  - personal lending
492 
66 
55 
13.4 
83 
11.2 
33 
104 
  - property
11,538 
9,277 
4,582 
80.4 
49 
39.7 
2,134 
494 
  - construction
735 
290 
142 
39.5 
49 
19.3 
(75)
- 
  - other
10,083 
1,831 
1,067 
18.2 
58 
10.6 
352 
110 
US
                
  - residential mortgages
2,926 
244 
120 
8.3 
49 
4.1 
264 
317 
  - personal lending
936 
7 
7 
0.7 
100 
0.7 
46 
68 
  - property
1,370 
218 
68 
15.9 
31 
5.0 
(18)
96 
  - construction
45 
23 
9 
51.1 
39 
20.0 
9 
11 
  - other
2,044 
172 
312 
8.4 
181 
15.3 
(201)
84 
RoW
                
  - residential mortgages
200 
- 
- 
- 
- 
- 
- 
- 
  - personal lending
1 
- 
- 
- 
- 
- 
- 
- 
  - property
546 
311 
118 
57.0 
38 
21.6 
51 
35 
  - construction
10 
17 
- 
170.0 
- 
- 
- 
- 
  - other
2,814 
378 
204 
13.4 
54 
7.2 
11 
165 
                 
 
80,005 
24,006 
11,486 
30.0 
48 
14.4 
3,838 
2,390 
                 
Banks
706 
1 
1 
0.1 
100 
0.1 
- 
- 
 
Notes:
(1)
Includes central and local government.
(2)
Includes instalment credit.
 
Risk and balance sheet management (continued)
Credit risk: Problem debt management: REIL, provisions and impairments (continued)
 
REIL flow statement
REIL are stated without giving effect to any security held that could reduce the eventual loss should it occur or to any provisions marked.
 
 
UK 
Retail 
UK 
Corporate 
Wealth 
International 
Banking 
Ulster 
Bank 
US Retail & 
Commercial 
Markets 
Core 
Non- 
Core 
Total 
 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                     
At 1 January 2012
4,599 
5,001 
211 
1,632 
5,523 
1,007 
414 
18,387 
24,007 
42,394 
Currency translation
  and other
  adjustments
53 
(6)
(1)
(227)
(115)
(47)
184 
(159)
(487)
(646)
Additions
1,771 
4,362 
111 
286 
3,299 
660 
56 
10,545 
5,800 
16,345 
Transfers (1)
(33)
7 
- 
(110)
- 
- 
6 
(130)
70 
(60)
Transfers to
  performing book
- 
(133)
(8)
(624)
- 
- 
(75)
(840)
(1,035)
(1,875)
Repayments
(1,222)
(3,265)
(50)
(90)
(1,102)
(83)
(80)
(5,892)
(4,860)
(10,752)
Amounts written-off
(599)
(514)
(15)
(445)
(72)
(391)
(109)
(2,145)
(2,121)
(4,266)
                     
At 31 December 2012
4,569 
5,452 
248 
422 
7,533 
1,146 
396 
19,766 
21,374 
41,140 
 
 
 
Non-Core (by donating divisions)
 
UK 
Corporate 
International 
Banking 
Ulster 
Bank 
US Retail & Commercial 
Other 
Total 
 
£m 
£m 
£m 
£m 
£m 
£m 
             
At 1 January 2012
3,685 
8,051 
11,675 
486 
110 
24,007 
Currency translation and other adjustments
(57)
(104)
(231)
(20)
(75)
(487)
Additions
1,542 
2,210 
1,713 
323 
12 
5,800 
Transfers (1)
11 
59 
- 
- 
- 
70 
Transfers to performing book
(171)
(863)
- 
- 
(1)
(1,035)
Repayments
(1,798)
(1,379)
(1,618)
(62)
(3)
(4,860)
Amounts written-off
(590)
(1,067)
(140)
(309)
(15)
(2,121)
             
At 31 December 2012
2,622 
6,907 
11,399 
418 
28 
21,374 
 
Note:
(1)
Represents transfers to/from REIL from/to potential problem loans.
 
 
 
 
 
 
Risk and balance sheet management (continued)
Credit risk: Problem debt management: REIL, provisions and impairments (continued)
 
Impairment provisions flow statement
The movement in loan impairment provisions by division is shown in the table below.
 
 
UK 
Retail 
UK 
Corporate 
Wealth 
International 
Banking 
Ulster 
Bank 
US 
R&C (1)
  
Total 
R&C (1)
Markets 
Central 
Items 
  
Total 
Core 
Non-Core 
RFS MI 
Group 
£m 
£m 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                               
At 1 January 2012
2,679 
2,061 
81 
851 
2,749 
455 
  
8,876 
311 
- 
  
9,187 
11,487 
- 
20,674 
Currency translation
  and other adjustments
12 
87 
- 
(131)
(54)
53 
  
(33)
77 
- 
  
44 
(369)
- 
(325)
Disposal of subsidiaries
- 
- 
- 
- 
- 
- 
  
- 
- 
- 
  
- 
(1)
(4)
(5)
Amounts written-off
(599)
(514)
(15)
(445)
(72)
(391)
  
(2,036)
(109)
- 
  
(2,145)
(2,121)
- 
(4,266)
Recoveries of amounts
  previously written-off
96 
18 
- 
9 
2 
85 
  
210 
1 
- 
  
211 
130 
- 
341 
Charged to income statement
                              
  - continuing operations
529 
836 
46 
111 
1,364 
83 
  
2,969 
25 
1 
  
2,995 
2,320 
- 
5,315 
  - discontinued operations
- 
- 
- 
- 
- 
- 
  
- 
- 
- 
  
- 
- 
4 
4 
Unwind of discount (2)
(88)
(56)
(3)
(4)
(79)
- 
  
(230)
- 
- 
  
(230)
(246)
- 
(476)
                               
At 31 December 2012
2,629 
2,432 
109 
391 
3,910 
285 
  
9,756 
305 
1 
  
10,062 
11,200 
- 
21,262 
                               
Individually assessed
                              
  - banks
- 
- 
- 
6 
- 
- 
  
6 
107 
- 
  
113 
1 
- 
114 
  - customers
- 
1,024 
96 
270 
1,213 
46 
  
2,649 
189 
1 
  
2,839 
9,805 
- 
12,644 
Collectively assessed
2,439 
1,111 
- 
- 
2,110 
125 
  
5,785 
- 
- 
  
5,785 
757 
- 
6,542 
Latent
190 
297 
13 
115 
587 
114 
  
1,316 
9 
- 
  
1,325 
637 
- 
1,962 
                               
 
2,629 
2,432 
109 
391 
3,910 
285 
  
9,756 
305 
1 
  
10,062 
11,200 
- 
21,262 
 
Notes:
(1)
Retail & Commercial.
(2)
Recognised in interest income.
 
 

 
 
Risk and balance sheet management (continued)
Credit risk: Problem debt management: REIL, provisions and impairments (continued)
 
Impairment provisions flow statement (continued)
 
Non-Core (by donating division)
 
UK 
Corporate 
International 
Banking 
Ulster 
Bank 
US 
R&C 
Other 
Total 
£m 
£m 
£m 
£m 
£m 
£m 
             
At 1 January 2012
1,633 
3,027 
6,363 
416 
48 
11,487 
Currency translation and other adjustments
(100)
(58)
(107)
(89)
(15)
(369)
Disposal of subsidiaries
- 
-  
- 
(1)
- 
(1)
Amounts written-off
(590)
(1,067)
(140)
(309)
(15)
(2,121)
Recoveries of amounts previously written-off
21 
38 
4 
63 
4 
130 
Charged to income statement
            
  - continuing operations
241 
913 
983 
177 
6 
2,230 
Unwind of discount
(38)
(38)
(170)
- 
- 
(246)
             
At 31 December 2012
1,167 
2,815 
6,933 
257 
28 
11,200 
             
Individually assessed
            
  - banks
- 
1 
- 
- 
- 
1 
  - customers
688 
2,604 
6,481 
24 
8 
9,805 
Collectively assessed
422 
- 
225 
92 
18 
757 
Latent
57 
210 
227 
141 
2 
637 
             
 
1,167 
2,815 
6,933 
257 
28 
11,200 
 
Key points
●
Within Core, increase in collectively assessed provisions related primarily to Ulster Bank's mortgage and corporate portfolio reflecting a continuation of difficult conditions in Ireland.
   
●
Non-Core individually assessed provisions decreased by £0.2 billion reflecting write-offs in Markets and UK Corporate.
 
 

 
Risk and balance sheet management (continued)
Credit risk: Problem debt management: REIL, provisions and impairments (continued)
 
Impairment charge analysis
 
31 December 2012
UK 
Retail 
UK 
Corporate 
Wealth 
International 
Banking 
Ulster 
Bank 
US 
R&C (1)
  
Total 
R&C (1)
Markets 
Central 
Items 
  
Total 
Core 
Non-Core 
Group 
£m 
£m 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
                             
Individually assessed
- 
554 
42 
137 
457 
15 
  
1,205 
28 
1 
  
1,234 
1,935 
3,169 
Collectively assessed
544 
317 
- 
(1)
787 
237 
  
1,884 
- 
- 
  
1,884 
312 
2,196 
Latent loss
(15)
(35)
4 
(48)
120 
(169)
  
(143)
(3)
- 
  
(146)
73 
(73)
                             
Loans to customers
529 
836 
46 
88 
1,364 
83 
  
2,946 
25 
1 
  
2,972 
2,320 
5,292 
Loans to banks
- 
- 
- 
23 
- 
- 
  
23 
- 
- 
  
23 
- 
23 
Securities
                            
  - other
- 
2 
- 
- 
- 
8 
  
10 
12 
39 
  
61 
(97)
(36)
                             
Charge to income statement
529 
838 
46 
111 
1,364 
91 
  
2,979 
37 
40 
  
3,056 
2,223 
5,279 
 
31 December 2011
                            
                             
Individually assessed
- 
612 
24 
233 
637 
64 
  
1,570 
10 
- 
  
1,580 
3,615 
5,195 
Collectively assessed
798 
392 
- 
- 
655 
230 
  
2,075 
- 
- 
  
2,075 
516 
2,591 
Latent loss
(10)
(213)
1 
(65)
92 
(46)
  
(241)
(11)
- 
  
(252)
(293)
(545)
                             
Loans to customers
788 
791 
25 
168 
1,384 
248 
  
3,404 
(1)
- 
  
3,403 
3,838 
7,241 
Securities
                            
  - sovereign debt (2)
- 
- 
- 
- 
- 
- 
  
- 
- 
1,268 
  
1,268 
- 
1,268 
  - other
- 
2 
- 
- 
- 
78 
  
80 
39 
(2)
  
117 
81 
198 
                             
Charge to income statement
788 
793 
25 
168 
1,384 
326 
  
3,484 
38 
1,266 
  
4,788 
3,919 
8,707 
 
Notes:
(1)
Retail & Commercial.
(2)
Includes related interest rate hedge instruments.
 
 
 
Risk and balance sheet management (continued)
Credit risk: Problem debt management: REIL, provisions and impairments (continued)
 
Impairment charge analysis (continued)
 
31 December 2012
Non-Core (by donating division)
UK 
Corporate 
International 
Banking 
Ulster 
Bank 
US 
R&C 
Other 
Total 
£m 
£m 
£m 
£m 
£m 
£m 
             
Individually assessed
206 
913 
842 
(25)
(1)
1,935 
Collectively assessed
71 
- 
25 
208 
8 
312 
Latent loss
(37)
1 
116 
(6)
(1)
73 
             
Loans to customers
240 
914 
983 
177 
6 
2,320 
Securities
- 
(97)
- 
- 
- 
(97)
             
Charge to income statement
240 
817 
983 
177 
6 
2,223 
 
31 December 2011
            
             
Individually assessed
512 
679 
2,426 
(3)
1 
3,615 
Collectively assessed
129 
- 
29 
372 
(14)
516 
Latent loss
(113)
- 
(106)
(66)
(8)
(293)
             
Loans to customers
528 
679 
2,349 
303 
(21)
3,838 
Securities
- 
78 
-
-
3 
81 
             
Charge to income statement
528 
757 
2,349 
303 
(18)
3,919 
 
 
Risk and balance sheet management (continued)
Credit risk (continued)
 
Key credit portfolios
 
Commercial real estate
The commercial real estate lending portfolio totalled £63.0 billion at 31 December 2012, an £11.8 billion or 16% decrease from £74.8 billion at 31 December 2011. The commercial real estate sector comprises exposures to entities involved in the development of, or investment in, commercial and residential properties (including housebuilders). The analysis of lending utilisations below excludes rate risk management and contingent obligations.
 
 
31 December 2012
  
31 December 2011
 
Investment 
Development 
Total 
  
Investment 
Development 
Total 
By division (1)
£m 
£m 
£m 
  
£m 
£m 
£m 
               
Core
              
UK Corporate
22,504 
4,091 
26,595 
  
25,101 
5,023 
30,124 
Ulster Bank
3,575 
729 
4,304 
  
3,882 
881 
4,763 
US Retail & Commercial
3,857 
3 
3,860 
  
4,235 
70 
4,305 
International Banking
849 
315 
1,164 
  
872 
299 
1,171 
Markets
630 
57 
687 
  
141 
61 
202 
               
 
31,415 
5,195 
36,610 
  
34,231 
6,334 
40,565 
               
Non-Core
              
UK Corporate
2,651 
983 
3,634 
  
3,957 
2,020 
5,977 
Ulster Bank
3,383 
7,607 
10,990 
  
3,860 
8,490 
12,350 
US Retail & Commercial
392 
- 
392 
  
901 
28 
929 
International Banking
11,260 
154 
11,414 
  
14,689 
336 
15,025 
               
 
17,686 
8,744 
26,430 
  
23,407 
10,874 
34,281 
               
Total
49,101 
13,939 
63,040 
  
57,638 
17,208 
74,846 
 
 
 
Investment
  
Development
  
 
Commercial 
Residential 
  
Commercial 
Residential 
Total 
By geography (1)
£m 
£m 
  
£m 
£m 
£m 
             
31 December 2012
            
UK (excluding NI) (2)
25,864 
5,567 
  
839 
4,777 
37,047 
Ireland (ROI and NI) (2)
4,651 
989 
  
2,234 
5,712 
13,586 
Western Europe (other)
5,995 
370 
  
22 
33 
6,420 
US
4,230 
981 
  
- 
15 
5,226 
RoW
454 
- 
  
65 
242 
761 
             
 
41,194 
7,907 
  
3,160 
10,779 
63,040 
             
31 December 2011
            
             
UK (excluding NI) (2)
28,653 
6,359 
  
1,198 
6,511 
42,721 
Ireland (ROI and NI) (2)
5,146 
1,132 
  
2,591 
6,317 
15,186 
Western Europe (other)
7,649 
1,048 
  
9 
52 
8,758 
US
5,552 
1,279 
  
59 
46 
6,936 
RoW
785 
35 
  
141 
284 
1,245 
             
 
47,785 
9,853 
  
3,998 
13,210 
74,846 
 
For the notes to these tables refer to the following page.
 
Risk and balance sheet management (continued)
 
Credit risk: Key credit portfolios: Commercial real estate (continued)
 
 
Investment
  
Development
  
 
Core 
Non-Core 
  
Core 
Non-Core 
Total 
By geography (1)
£m 
£m 
  
£m 
£m 
£m 
             
31 December 2012
            
UK (excluding NI) (2)
23,312 
8,119 
  
4,184 
1,432 
37,047 
Ireland (ROI and NI) (2)
2,877 
2,763 
  
665 
7,281 
13,586 
Western Europe (other)
403 
5,962 
  
24 
31 
6,420 
US
4,629 
582 
  
15 
- 
5,226 
RoW
194 
260 
  
307 
- 
761 
             
 
31,415 
17,686 
  
5,195 
8,744 
63,040 
             
31 December 2011
            
             
UK (excluding NI) (2)
25,904 
9,108 
  
5,118 
2,591 
42,721 
Ireland (ROI and NI) (2)
3,157 
3,121 
  
793 
8,115 
15,186 
Western Europe (other)
422 
8,275 
  
20 
41 
8,758 
US
4,521 
2,310 
  
71 
34 
6,936 
RoW
227 
593 
  
332 
93 
1,245 
             
 
34,231 
23,407 
  
6,334 
10,874 
74,846 
 
By sub-sector (1)
UK 
(excl NI) (2)
£m 
Ireland 
(ROI and 
 NI) (2)
£m 
Western 
Europe 
£m 
US 
£m 
RoW 
£m 
Total 
£m 
             
31 December 2012
            
Residential
10,344 
6,701 
403 
996 
242 
18,686 
Office
6,112 
1,132 
1,851 
99 
176 
9,370 
Retail
7,529 
1,492 
1,450 
117 
129 
10,717 
Industrial
3,550 
476 
143 
4 
39 
4,212 
Mixed/other
9,512 
3,785 
2,573 
4,010 
175 
20,055 
             
 
37,047 
13,586 
6,420 
5,226 
761 
63,040 
             
31 December 2011
  
             
Residential
12,870 
7,449 
1,100 
1,325 
319 
23,063 
Office
7,155 
1,354 
2,246 
404 
352 
11,511 
Retail
8,709 
1,641 
1,891 
285 
275 
12,801 
Industrial
4,317 
507 
520 
24 
105 
5,473 
Mixed/other
9,670 
4,235 
3,001 
4,898 
194 
21,998 
             
 
42,721 
15,186 
8,758 
6,936 
1,245 
74,846 
 
Notes:
(1)
Excludes commercial real estate lending in Wealth as these loans are generally supported by personal guarantees in addition to collateral. This portfolio, which totalled £1.4 billion at 31 December 2012 (31 December 2011 - £1.3 billion), continues to perform in line with expectations and requires minimal provisions.
(2)
ROI: Republic of Ireland; NI: Northern Ireland.
 
Risk and balance sheet management (continued)
Credit risk: Key credit portfolios: Commercial real estate (continued)
 
Key points
·
In line with the Group's strategy, the overall exposure to commercial real estate fell during 2012 across all geographies. The overall mix in terms of geography, sub-sector and investment versus development remained broadly unchanged.
   
·
Most of the decrease was in Non-Core and was due to repayments, asset sales, and write-offs. The Non-Core portfolio totalled £26.4 billion (42% of the portfolio) at 31 December 2012 (31 December 2011 - £34.3 billion or 46% of the portfolio).
   
·
The growth in Markets was caused by an increase in the inventory of US commercial real estate loans earmarked for securitisation as commercial mortgage-backed securities (CMBS). CMBS warehouse activity is tightly controlled with limits on maximum portfolio size and holding period, and marked-to-market on a daily basis.
   
·
With the exception of exposure in Spain and Ireland, the Group had minimal commercial real estate exposure in the peripheral eurozone countries. Exposure in Spain was predominantly in the Non-Core portfolio and totalled £1.6 billion (31 December 2011 - £2.3 billion), of which 31% (31 December 2011 - 55%) was in default. The majority of the portfolio is managed by GRG. The Spanish portfolio has already been subject to material provisions, which are regularly assessed by reference to re-appraised asset values. Asset values vary significantly by type and geographic location. Refer to the Ulster Bank Group (Core and Non-Core) section on page 234 for details on the exposure in Ireland.
   
·
The UK portfolio is focused on London and the South East at approximately 43% (31 December 2011 - 44%) with the remainder spread across other UK Regions.
   
·
Speculative lending, defined by the Group as short-term lending to property developers without sufficient pre-let revenue at origination to support investment financing after practical completion, represented less than 1% of the portfolio at 31 December 2012. The Group's appetite for originating speculative commercial real estate lending is very limited and any such business requires senior management approval.
   
·
The commercial real estate sector is expected to remain challenging in key markets and new business will be accommodated from run-off of existing Core exposure. Over £5.5 billion of loans in UK Corporate (Core and Non-Core) have been repaid over the last 12 months whilst the risk profile of the remaining performing book has remained relatively unchanged.
 
Risk and balance sheet management (continued)
Credit risk: Key credit portfolios: Commercial real estate (continued)
 
Maturity profile of portfolio
UK 
Corporate 
Ulster Bank 
US Retail & 
 Commercial 
International 
Banking 
Markets 
Total 
£m 
£m 
£m 
£m 
£m 
£m 
             
31 December 2012
            
Core
            
< 1 year (1)
8,639 
3,000 
797 
216 
59 
12,711 
1-2 years 
3,999 
284 
801 
283 
130 
5,497 
2-3 years
3,817 
215 
667 
505 
- 
5,204 
> 3 years
9,597 
805 
1,595 
160 
498 
12,655 
Not classified (2)
543 
- 
- 
- 
- 
543 
             
Total
26,595 
4,304 
3,860 
1,164 
687 
36,610 
             
Non-Core
            
< 1 year (1)
2,071 
9,498 
138 
4,628 
- 
16,335 
1-2 years
192 
1,240 
79 
3,714 
- 
5,225 
2-3 years
99 
38 
43 
1,137 
- 
1,317 
> 3 years
1,058 
214 
132 
1,935 
- 
3,339 
Not classified (2)
214 
- 
- 
- 
- 
214 
             
Total
3,634 
10,990
392 
11,414 
- 
26,430 
 
31 December 2011
            
             
Core
            
< 1 year (1)
8,268 
3,030 
1,056 
142 
- 
12,496 
1-2 years
5,187 
391 
638 
218 
60 
6,494 
2-3 years
3,587 
117 
765 
230 
133 
4,832 
> 3 years
10,871 
1,225 
1,846 
581 
9 
14,532 
Not classified (2)
2,211 
- 
- 
- 
- 
2,211 
             
Total
30,124 
4,763 
4,305 
1,171 
202 
40,565 
             
Non-Core
            
< 1 year (1)
3,224 
11,089 
293 
7,093 
- 
21,699 
1-2 years
508 
692 
163 
3,064 
- 
4,427 
2-3 years
312 
177 
152 
1,738 
- 
2,379 
> 3 years
1,636 
392 
321 
3,126 
- 
5,475 
Not classified (2)
297 
- 
- 
4 
- 
301 
             
Total
5,977 
12,350 
929 
15,025 
- 
34,281 
 
Notes:
(1)
Includes on demand and past due assets.
(2)
Predominantly comprises overdrafts and multi-option facilities for which there is no single maturity date.
 
Key points
·
The overall maturity profile has remained relatively unchanged over the last 12 months.
   
·
Non-Core exposure maturing in under one year has reduced from £21.7 billion in 2011 to £16.3 billion in 2012.
   
·
The majority of Ulster Bank's commercial real estate portfolio was categorised as under 1 year, owing to the high level of non-performing assets in the portfolio as Ulster Bank includes most renegotiated facilities as on demand.
   
·
Refinancing risk remains a focus of management attention and is assessed throughout the credit risk management life cycle.
 
Risk and balance sheet management (continued)
Credit risk: Key credit portfolios: Commercial real estate (continued)
 
Portfolio by AQ band
AQ1-AQ2 
£m 
AQ3-AQ4 
£m 
AQ5-AQ6 
£m 
AQ7-AQ8 
£m 
AQ9 
£m 
AQ10 
£m 
Total 
£m 
               
31 December 2012
              
Core
767 
6,011 
16,592 
6,575 
1,283 
5,382 
36,610 
Non-Core
177 
578 
3,680 
3,200 
1,029 
17,766 
26,430 
               
 
944 
6,589 
20,272 
9,775 
2,312 
23,148 
63,040 
               
31 December 2011
              
               
Core
1,094 
6,714 
19,054 
6,254 
3,111 
4,338 
40,565 
Non-Core
680 
1,287 
5,951 
3,893 
2,385 
20,085 
34,281 
               
 
1,774 
8,001 
25,005 
10,147 
5,496 
24,423 
74,846 
 
Key points
·
There has been an overall decrease in AQ10 during the year with reductions in Non-Core partially offset by increases in Ulster Bank and UK Corporate. The increase in defaulted exposure in UK Corporate is a result of a small number of significant individual cases. The high proportion of the portfolio in the AQ10 band was driven by exposures in Non-Core (Ulster Bank and International Banking) and Core (Ulster Bank). The AQ1-AQ9 profile remained relatively unchanged.
   
·
Of the total portfolio of £63.0 billion at 31 December 2012, £28.1 billion (31 December 2011 - £34.7 billion) was managed within the Group's standard credit processes and £5.1 billion (31 December 2011 - £5.9 billion) was receiving varying degrees of heightened credit management under the Group's Watchlist process. A further £29.8 billion (31 December 2011 - £34.3 billion) was managed within GRG and included Watchlist and non-performing exposures. The decrease in the portfolio managed by GRG was driven by Non-Core reductions.
 
Risk and balance sheet management (continued)
Credit risk: Key credit portfolios: Commercial real estate (continued)
The table below analyses commercial real estate (Core and Non-Core) lending by loan-to-value (LTV) which represents loan value before provisions. Due to market conditions in Ireland and to a lesser extent in the UK, there is a shortage of market-based data. In the absence of external valuations, the Group deploys a range of alternative approaches to assess property values, including internal expert judgement and indexation.
 
 
Ulster Bank
  
Rest of the Group
  
Group
Loan-to-value
Performing 
£m 
Non- 
performing 
 £m 
Total 
£m 
  
Performing 
£m 
Non- 
performing 
 £m 
Total 
£m 
  
Performing 
£m 
Non- 
performing 
 £m 
Total 
£m 
                       
31 December 2012
                      
<= 50%
183 
24 
207 
  
7,210 
281 
7,491 
  
7,393 
305 
7,698 
> 50% and <= 70%
326 
102 
428 
  
12,161 
996 
13,157 
  
12,487 
1,098 
13,585 
> 70% and <= 90%
462 
250 
712 
  
6,438 
1,042 
7,480 
  
6,900 
1,292 
8,192 
> 90% and <= 100%
466 
141 
607 
  
1,542 
2,145 
3,687 
  
2,008 
2,286 
4,294 
> 100% and <= 110%
103 
596 
699 
  
1,019 
1,449 
2,468 
  
1,122 
2,045 
3,167 
> 110% and <= 130%
326 
630 
956 
  
901 
1,069 
1,970 
  
1,227 
1,699 
2,926 
> 130% and <= 150%
274 
878 
1,152 
  
322 
913 
1,235 
  
596 
1,791 
2,387 
> 150%
963 
7,290 
8,253 
  
595 
1,962 
2,557 
  
1,558 
9,252 
10,810 
                       
Total with LTVs
3,103 
9,911 
13,014 
  
30,188 
9,857 
40,045 
  
33,291 
19,768 
53,059 
Minimal security (1)
7 
1,461 
1,468 
  
3 
13 
16 
  
10 
1,474 
1,484 
Other (2)
97 
715 
812 
  
6,494 
1,191 
7,685 
  
6,591 
1,906 
8,497 
                       
Total
3,207 
12,087 
15,294 
  
36,685 
11,061 
47,746 
  
39,892 
23,148 
63,040 
                       
Total portfolio
  average LTV (3)
131% 
286% 
249% 
  
65% 
125% 
80% 
  
71% 
206% 
122% 
 
31 December 2011
                      
                       
<= 50%
272 
32 
304 
  
7,091 
332 
7,423 
  
7,363 
364 
7,727 
> 50% and <= 70%
479 
127 
606 
  
14,105 
984 
15,089 
  
14,584 
1,111 
15,695 
> 70% and <= 90%
808 
332 
1,140 
  
10,042 
1,191 
11,233 
  
10,850 
1,523 
12,373 
> 90% and <= 100%
438 
201 
639 
  
2,616 
1,679 
4,295 
  
3,054 
1,880 
4,934 
> 100% and <= 110%
474 
390 
864 
  
1,524 
1,928 
3,452 
  
1,998 
2,318 
4,316 
> 110% and <= 130%
527 
1,101 
1,628 
  
698 
1,039 
1,737 
  
1,225 
2,140 
3,365 
> 130% and <= 150%
506 
1,066 
1,572 
  
239 
912 
1,151 
  
745 
1,978 
2,723 
> 150%
912 
7,472 
8,384 
  
433 
2,082 
2,515 
  
1,345 
9,554 
10,899 
                       
Total with LTVs
4,416 
10,721 
15,137 
  
36,748 
10,147 
46,895 
  
41,164 
20,868 
62,032 
Minimal security (1)
72 
1,086 
1,158 
  
- 
- 
- 
  
72 
1,086 
1,158 
Other (2)
193 
625 
818 
  
8,994 
1,844 
10,838 
  
9,187 
2,469 
11,656 
                       
Total
4,681 
12,432 
17,113 
  
45,742 
11,991 
57,733 
  
50,423 
24,423 
74,846 
                       
Total portfolio
  average LTV (3)
120% 
264% 
222% 
  
69% 
129% 
82% 
  
75% 
203% 
116% 
 
Notes:
(1)
In 2012, the Group reclassified loans with limited or non-physical security (defined as LTV>1,000%) as minimal security, for which a majority are commercial real estate development loans in Ulster Bank. Total portfolio average LTV is quoted net of loans with minimal security given that the anticipated recovery rate is less than 10%. Provisions are marked against these loans where required to reflect asset quality and recovery profile. 2011 presentation has been revised.
(2)
Other performing loans of £6.6 billion (2011 - £9.2 billion) include general corporate lending, typically unsecured, to commercial real estate companies, and major UK homebuilders. The credit quality of these exposures is consistent with that of the performing portfolio overall. Other non-performing loans of £1.9 billion (2011 - £2.5 billion) are subject to the Group's standard provisioning policies.
(3)
Weighted average by exposure.
 
Risk and balance sheet management (continued)
Credit risk: Key credit portfolios: Commercial real estate (continued)
 
Key points
·
81% of the commercial real estate portfolio categorised as LTV > 100% was in Ulster Bank Group (Core - 15%; Non-Core - 43%) and International Banking (Non-Core - 23%). A majority of the portfolios are managed within GRG and are subject to review at least quarterly.  Significant levels of provisions have been taken against these portfolios. Provisions as a percentage of REIL for the Ulster Bank Group commercial real estate portfolio were 58% at 31 December 2012 (31 December 2011 - 53%).
   
·
The average interest coverage ratios for UK Corporate (Core and Non-Core) and International Banking (Non-Core) were 2.96x and 1.30x respectively, at 31 December 2012 (31 December 2011 - 2.71x and 1.25x, respectively). The US Retail & Commercial portfolio is managed on the basis of debt service coverage, which includes scheduled principal amortisation. The average debt service coverage for this portfolio was 1.34x at 31 December 2012 (31 December 2011 - 1.24x). As a number of different approaches are used within the Group and across geographies to calculate interest coverage ratios, they may not be comparable for different portfolio types and organisations.
 
Residential mortgages
The majority of the Group's secured lending exposures are in the UK, Ireland and the US. The analysis below includes both Core and Non-Core.
 
 
31 December 
2012 
31 December 
2011 
 
£m 
£m 
     
UK Retail
99,062 
96,388 
Ulster Bank
19,162 
20,020 
RBS Citizens (1)
21,538 
24,153 
     
 
139,762 
140,561 
 
Note:
(1)
2011 has been revised to include legacy serviced by others portfolio.
 
Risk and balance sheet management (continued)
Credit risk: Key credit portfolios: Residential mortgages (continued)
The table below shows LTVs for the Group's residential mortgage portfolio split between performing (AQ1-AQ9) and non-performing (AQ10), with the average calculated on a weighted value basis. Loan balances are as at the end of the year whereas property values are calculated using property index movements since the last formal valuation.
 
 
UK Retail
  
Ulster Bank
  
RBS Citizens (1)
Loan-to-value
Performing 
£m 
Non- 
performing 
 £m 
Total 
£m 
  
Performing 
£m 
Non- 
performing 
 £m 
Total 
£m 
  
Performing 
£m 
Non- 
performing 
 £m 
Total 
£m 
                       
31 December 2012
                      
<= 50%
22,306 
327 
22,633 
  
2,182 
274 
2,456 
  
4,167 
51 
4,218 
> 50% and <= 70%
27,408 
457 
27,865 
  
1,635 
197 
1,832 
  
4,806 
76 
4,882 
> 70% and <= 90%
34,002 
767 
34,769 
  
2,019 
294 
2,313 
  
6,461 
114 
6,575 
> 90% and <= 100%
7,073 
366 
7,439 
  
1,119 
156 
1,275 
  
2,011 
57 
2,068 
> 100% and <= 110%
3,301 
290 
3,591 
  
1,239 
174 
1,413 
  
1,280 
43 
1,323 
> 110% and <= 130%
1,919 
239 
2,158 
  
2,412 
397 
2,809 
  
1,263 
42 
1,305 
> 130% and <= 150%
83 
26 
109 
  
2,144 
474 
2,618 
  
463 
14 
477 
> 150%
- 
- 
- 
  
3,156 
1,290 
4,446 
  
365 
14 
379 
                       
Total with LTVs
96,092 
2,472 
98,564 
  
15,906 
3,256 
19,162 
  
20,816 
411 
21,227 
Other (2)
486 
12 
498 
  
- 
-  
- 
  
292 
19 
311 
                       
Total
96,578 
2,484 
99,062 
  
15,906 
3,256 
19,162 
  
21,108 
430 
21,538 
                       
Total portfolio
  average LTV (3)
66% 
80% 
67% 
  
108% 
132% 
112% 
  
75% 
86% 
75% 
                       
Average LTV on new originations during  the year
65%
  
74%
  
64%
 
31 December 2011
                      
                       
<= 50%
21,537 
285 
21,822 
  
2,568 
222 
2,790 
  
4,745 
49 
4,794 
> 50% and <= 70%
25,598 
390 
25,988 
  
1,877 
157 
2,034 
  
4,713 
78 
4,791 
> 70% and <= 90%
33,738 
671 
34,409 
  
2,280 
223 
2,503 
  
6,893 
125 
7,018 
> 90% and <= 100%
7,365 
343 
7,708 
  
1,377 
128 
1,505 
  
2,352 
66 
2,418 
> 100% and <= 110%
3,817 
276 
4,093 
  
1,462 
130 
1,592 
  
1,517 
53 
1,570 
> 110% and <= 130%
1,514 
199 
1,713 
  
2,752 
322 
3,074 
  
1,536 
53 
1,589 
> 130% and <= 150%
60 
15 
75 
  
2,607 
369 
2,976 
  
626 
28 
654 
> 150%
- 
- 
- 
  
2,798 
748 
3,546 
  
588 
27 
615 
                       
Total with LTVs
93,629 
2,179 
95,808 
  
17,721 
2,299 
20,020 
  
22,970 
479 
23,449 
Other (2)
567 
13 
580 
  
- 
- 
- 
  
681 
23 
704 
                       
Total
94,196 
2,192 
96,388 
  
17,721 
2,299 
20,020 
  
23,651 
502 
24,153 
                       
Total portfolio
  average LTV (3)
67% 
80% 
67% 
  
104% 
125% 
106% 
  
76% 
91% 
77% 
                       
Average LTV on new originations during  the year
63%
  
74%
  
63%
 
Notes:
(1)
Includes residential mortgages and home equity loans and lines (refer to page 230 for a breakdown of balances).
(2)
Where no indexed LTV is held.
(3)
Average LTV weighted by value is arrived at by calculating the LTV on each individual mortgage and applying a weighting based on the value of each mortgage.
(4)
Excludes mortgage lending in Wealth. This portfolio totalled £8.8 billion (31 December 2011 - £8.3 billion) and continues to perform in line with expectations with minimal provision of £248 million.
 
Risk and balance sheet management (continued)
Credit risk: Key credit portfolios: Residential mortgages (continued)
 
Key points
 
UK Retail
·
The UK Retail mortgage portfolio totalled approximately £99.1 billion at 31 December 2012, an increase of 2.8% from 31 December 2011.
   
·
The assets are mostly prime mortgages and include £7.9 billion, 8% (2011 - £6.9 billion) of residential buy-to-let lending. There is a small legacy portfolio of self-certified mortgages (0.2% of the total mortgage portfolio). Self-certified mortgages were withdrawn in 2004. The interest rate product mix is approximately one third fixed rate with the remainder on variable rate products including those on managed rates.
   
·
UK Retail's mortgage business is subject to prudent underwriting standards. These include an affordability test using a stressed interest rate, credit scoring with different pass marks depending on the loan to value ratio (LTV) as well as a range of specific criteria, for example, LTV thresholds. Changes over the last few years include: a reduction in maximum LTV for prime residential mortgage lending from 100% to 95% in the first quarter of 2008 and from 95% to 90% in the third quarter of 2008 and a tightening of credit scoring pass marks: credit score thresholds were increased in the third quarter of 2009 and again in the third quarter of 2010. In the first quarter of 2011, new scorecards were introduced alongside a further tightening of thresholds, these were tightened still further in the second quarter of 2012.
   
·
Gross new mortgage lending remained strong at £14 billion. The average of individual LTV on new originations was 65.2% weighted by value of lending (31 December 2011 - 63.0%) and 61.3% by volume (31 December 2011 - 58.4%). The ratio of total lending to total property valuations was 56.3% (31 December 2011 - 52.9%). Average LTV by volume is arrived at by calculating the LTV on each individual mortgage with no weighting applied in the calculation of the average. The ratio approach is the sum of all lending divided by the value of all properties held as security against the lending.
   
·
The maximum LTV available to new customers remains at 90%, except for those buying properties under the government-sponsored, and indemnity backed, new build schemes that were launched during the year, where the maximum LTV is 95%. These schemes aim to support the mortgage market, particularly first time buyers, and completions under the scheme totalled £35 million during the year.
   
·
Based on the Halifax Price Index at September 2012, the portfolio average indexed LTV by weighted value of debt outstanding was 66.8% (31 December 2011 - 67.2%) and 58.1% by volume (31 December 2011 - 57.8%). The ratio of total outstanding balances to total indexed property valuations is 48.5% (31 December 2011 - 48.4%).
   
·
The arrears rate (more than three payments in arrears, excluding repossessions and shortfalls post property sale) improved marginally to 1.5% at 31 December 2012 from 1.6% at 31 December 2011. The number of properties repossessed in 2012 was 1,426 compared with 1,671 in 2011. Arrears rates remain sensitive to economic developments and are currently benefiting from low interest rate environment.
   
·
The mortgage impairment charge was £92 million for 2012 compared with £182 million in 2011 primarily due to lower loss rate adjustments on the non-performing back book, and a stable underlying rate of defaults.
 
Risk and balance sheet management (continued)
Credit risk: Key credit portfolios: Residential mortgages (continued)
 
Key points
 
UK Retail (continued)
·
25.6% of the residential owner occupied UK Retail mortgage book is on interest only terms down from 27.3% in 2011. A further 9.1% are on mixed repayments split between a combination of interest only and capital repayments (31 December 2011 - 9.6%). UK Retail withdrew interest only repayment products from sale to residential owner occupied customers with effect from 1 December 2012. Interest only repayment remains an option on buy-to-let mortgages. At 1.6%, the percentage of accounts more than 3 payments in arrears was similar to the 1.4% observed on capital repayment mortgages.
 
Ulster Bank
·
Ulster Bank's residential mortgage portfolio totalled £19.2 billion at 31 December 2012, with 88% in the Republic of Ireland and 12% in Northern Ireland. At constant exchange rates, the portfolio decreased 2% from 31 December 2011 as a result of natural amortisation and limited growth due to low market demand.
   
·
The assets include £2.3 billion of exposure (12%) of residential buy-to-let loans. The interest rate product mix is approximately 91% on a variable rate product (including tracker products) and 9% on a fixed rate.
   
·
16% of the total portfolio is on interest only which reflects legacy policy and is no longer available to residential mortgage customers on a permanent basis. Interest only is permitted on a temporary basis under the suite of forbearance treatments available within Ulster Bank (refer to page 206 for further information). Interest only repayment remains an option for private customers within Northern Ireland on an exception basis.
   
·
Average LTVs increased from 31 December 2011 to 31 December 2012, on a value basis, as a result of decreases in the Central Statistics Office house price index (4%) impacting the Ulster Bank portfolio. The average individual LTV on new originations was stable in 2012 at 74% (weighted by value of lending) and 69.4% by volume (2011 - 67.3%). The volume of business remains very low. The maximum LTV available to Ulster Bank customers is 90% with the exception of a specific Northern Ireland scheme which permits LTVs of up to 95%, in which Ulster Bank's exposure is capped at 85% LTV.
   
·
Refer to the Ulster Bank Group (Core and Non-Core) section on page 233 for commentary on mortgage REIL and repossessions.
 
 
Risk and balance sheet management (continued)
Credit risk: Key credit portfolios: Residential mortgages (continued)
 
Key points (continued)
 
RBS Citizens
·
RBS Citizens mortgage portfolio totalled £21.5 billion at 31 December 2012, a reduction of 11% from 2011 (£24.2 billion). The Core business comprises 89% of the portfolio.
   
·
The portfolio comprises £6.2 billion (Core - £5.8 billion; Non-Core - £0.4 billion) of residential mortgages, of which 1% are in second lien position. There is also £15.3 billion (Core - £13.3 billion; Non-Core - £2.0 billion) of home equity loans and lines. Home equity Core consists of 47% in first lien position while Non-Core consists of 95% in second lien position.
   
·
RBS Citizens lending originates predominantly in the 'footprint states' of New England, Mid Atlantic and Mid West regions. At 31 December 2012, £17.9 billion (83% of the total portfolio) was within footprint.
   
·
The Non-Core portfolio comprises 11% of the mortgage portfolio with the serviced by others (SBO) portfolio being the largest component (75%). The SBO portfolio consists of purchased pools of home equity loans and lines. The full year charge-off rate was 7.4% for 2012 (excluding one-time events, the charge-off rate was 6.8%), which represents a year-on-year improvement (2011 - 8.6%). It is characterised by out-of-footprint geographies, high (95%) second lien concentration, and high LTV exposure (111% weighted average LTV at 31 December 2012).  The SBO book has been closed to new purchases since the third quarter of 2007 and is in run-off, with exposure down from £2.3 billion at 31 December 2011 to £1.8 billion at 31 December 2012. The arrears rate of the SBO portfolio has decreased from 2.3% at 31 December 2011 to 1.9% at 31 December 2012 due primarily to portfolio liquidation (highest risk borrowers have been charged-off), as well as more effective account servicing and collections.
   
·
The current weighted average LTV of the mortgage portfolio decreased from 77% at 31 December 2011 to 75% at 31 December 2012, driven by increases in the Case-Shiller home price index from the third quarter of 2011 to the third quarter of 2012. The current weighted average LTV of the mortgage portfolio, excluding SBO, is 71%.
 
 
Risk and balance sheet management (continued)
Credit risk: Key credit portfolios (continued)
 
Ulster Bank Group (Core and Non-Core)
 
Overview
At 31 December 2012, Ulster Bank Group accounted for 10% of the Group's total gross loans to customers (31 December 2011 - 10%) and 8% of the Group's Core gross loans to customers (31 December 2011 - 8%). Ulster Bank's financial performance continues to be overshadowed by the challenging economic climate in Ireland, with impairments remaining elevated as high unemployment, coupled with higher taxation and limited liquidity in the economy, continues to depress the property market and domestic spending.
 
The impairment charge of £2,340 million for 2012 (31 December 2011 - £3,717 million) was driven by a combination of new defaulting customers and higher provisions on existing defaulted cases due primarily to deteriorating security values. Provisions as a percentage of risk elements in lending increased from 53% in 2011, to 57% in 2012, predominantly as a result of the deterioration in the value of the Non-Core commercial real estate development portfolio. Ulster Bank impairment provisions take into account recovery strategies for its commercial real estate portfolio, as currently there is very limited liquidity in Irish commercial and development property.
 
Core
The impairment charge for the year of £1,364 million (31 December 2011 - £1,384 million) reflects the difficult economic climate in Ireland, with elevated default levels across both mortgage and other corporate portfolios. The mortgage sector accounted for £646 million (47%) of the total 2012 impairment charge.
 
Non-Core
The impairment charge for the year was £976 million, a decrease of £1,357 million (31 December 2011 - £2,333 million), with the commercial real estate sector accounting for £899 million (92%) of the total 2012 impairment charge.
 
Risk and balance sheet management (continued)
Credit risk: Key credit portfolios: Ulster Bank Group (Core and Non-Core) (continued)
 
       
Credit metrics
  
 
Gross 
loans 
REIL 
Provisions 
REIL as a 
% of gross 
loans 
Provisions 
as a % of 
REIL 
Provisions 
as a % of 
gross loans 
  
Impairment 
charge 
Amounts 
written-off 
Sector analysis
£m 
£m 
£m 
% 
% 
% 
£m 
£m 
                 
31 December 2012
                
Core
                
Mortgages
19,162 
3,147 
1,525 
16.4 
48 
8.0 
646 
22 
Commercial real estate
                
  - investment
3,575 
1,551 
593 
43.4 
38 
16.6 
221 
- 
  - development
729 
369 
197 
50.6 
53 
27.0 
55 
2 
Other corporate
7,772 
2,259 
1,394 
29.1 
62 
17.9 
389 
15 
Other lending
1,414 
207 
201 
14.6 
97 
14.2 
53 
33 
                 
 
32,652 
7,533 
3,910 
23.1 
52 
12.0 
1,364 
72 
                 
Non-Core
                
Commercial real estate
                
  - investment
3,383 
2,800 
1,433 
82.8 
51 
42.4 
288 
15 
  - development 
7,607 
7,286 
4,720 
95.8 
65 
62.0 
611 
103 
Other corporate
1,570 
1,230 
711 
78.3 
58 
45.3 
77 
23 
                 
 
12,560 
11,316 
6,864 
90.1 
61 
54.6 
976 
141 
                 
Ulster Bank Group
                
Mortgages
19,162 
3,147 
1,525 
16.4 
48 
8.0 
646 
22 
Commercial real estate
                
  - investment
6,958 
4,351 
2,026 
62.5 
47 
29.1 
509 
15 
  - development
8,336 
7,655 
4,917 
91.8 
64 
59.0 
666 
105 
Other corporate
9,342 
3,489 
2,105 
37.3 
60 
22.5 
466 
38 
Other lending
1,414 
207 
201 
14.6 
97 
14.2 
53 
33 
                 
 
45,212 
18,849 
10,774 
41.7 
57 
23.8 
2,340 
213 
 
 
Risk and balance sheet management (continued)
Credit risk: Key credit portfolios: Ulster Bank Group (Core and Non-Core) (continued)
 
       
Credit metrics
  
 
Gross 
loans 
REIL 
Provisions 
REIL as a 
% of gross 
loans 
Provisions 
as a % of 
REIL 
Provisions 
as a % of 
gross loans 
  
Impairment 
charge 
Amounts 
written-off 
Sector analysis
£m 
£m 
£m 
% 
% 
% 
£m 
£m 
                 
31 December 2011
                
Core
                
Mortgages
20,020 
2,184 
945 
10.9 
43 
4.7 
570 
11 
Commercial real estate
                
  - investment
3,882 
1,014 
413 
26.1 
41 
10.6 
225 
- 
  - development
881 
290 
145 
32.9 
50 
16.5 
99 
16 
Other corporate
7,736 
1,834 
1,062 
23.7 
58 
13.7 
434 
72 
Other lending
1,533 
201 
184 
13.1 
92 
12.0 
56 
25 
                 
 
34,052 
5,523 
2,749 
16.2 
50 
8.1 
1,384 
124 
                 
Non-Core
                
Commercial real estate
                
  - investment
3,860 
2,916 
1,364 
75.5 
47 
35.3 
609 
1 
  - development
8,490 
7,536 
4,295 
88.8 
57 
50.6 
1,551 
32 
Other corporate
1,630 
1,159 
642 
71.1 
55 
39.4 
173 
16 
                 
 
13,980 
11,611 
6,301 
83.1 
54 
45.1 
2,333 
49 
                 
Ulster Bank Group
                
Mortgages
20,020 
2,184 
945 
10.9 
43 
4.7 
570 
11 
Commercial real estate
                
  - investment
7,742 
3,930 
1,777 
50.8 
45 
23.0 
834 
1 
  - development
9,371 
7,826 
4,440 
83.5 
57 
47.4 
1,650 
48 
Other corporate
9,366 
2,993 
1,704 
32.0 
57 
18.2 
607 
88 
Other lending
1,533 
201 
184 
13.1 
92 
12.0 
56 
25 
                 
 
48,032 
17,134 
9,050 
35.7 
53 
18.8 
3,717 
173 
 
Key points
·
Core REIL increased by £2.0 billion during the year, which reflects continued difficult conditions in both the commercial and residential property sectors in Ireland.
   
·
Core mortgage REIL accounted for £1.0 billion of the overall increase, the trend reflecting continued deterioration of macroeconomic factors. However, the number of properties repossessed in 2012 was 127 (81 on a voluntary basis) compared with 161 (123 on a voluntary basis) in 2011.
   
·
Core corporate REIL accounted for £1.0 billion of the overall increase, the movement driven by a small number of renegotiated arrangements for higher value real estate customers.
   
·
Core coverage increased from 50% to 52% as a result of additional impairment charges on the non-performing book due to further deterioration in collateral values. Core coverage is diluted due to the increased REIL relating to corporate renegotiations with lower provision requirements; adjusting for these cases Core coverage would be 56%.
   
·
Non-Core REIL decreased by £0.3 billion reflecting lower defaults as well as recoveries, write-offs of £0.2 billion.
   
·
At 31 December 2012, 60% of REIL was in Non-Core (31 December 2011 - 68%). The majority of Non-Core commercial real estate development portfolio is non-performing with provision coverage of 65%.
 
 
Risk and balance sheet management (continued)
Credit risk: Key credit portfolios: Ulster Bank Group (Core and Non-Core) (continued)
 
Geographical analysis: Commercial real estate
The commercial real estate lending portfolio for Ulster Bank Group (Core and Non-Core) totalled £15.3 billion at 31 December 2012, of which £11.0 billion or 72% was in Non-Core. The geographic split of the total Ulster Bank Group commercial real estate portfolio, based on the location of the underlying security, remained similar to 31 December 2011, with 63% in the Republic of Ireland, 26% in Northern Ireland, 11% in the UK (excluding Northern Ireland).
 
 
Investment
  
Development
    
 
Commercial 
Residential 
  
Commercial 
Residential 
  
Total 
Exposure by geography
£m 
£m 
  
£m 
£m 
  
£m 
               
31 December 2012
              
ROI
3,546 
779 
  
1,603 
3,653 
  
9,581 
NI
1,083 
210 
  
631 
2,059 
  
3,983 
UK (excluding NI)
1,239 
86 
  
82 
290 
  
1,697 
RoW
14 
1 
  
8 
10 
  
33 
               
 
5,882 
1,076 
  
2,324 
6,012 
  
15,294 
               
31 December 2011
              
               
ROI
3,775 
853 
  
1,911 
4,095 
  
10,634 
NI
1,322 
279 
  
680 
2,222 
  
4,503 
UK (excluding NI)
1,371 
111 
  
95 
336 
  
1,913 
RoW
27 
4 
  
- 
32 
  
63 
               
 
6,495 
1,247 
  
2,686 
6,685 
  
17,113 
 
Key points
·
Commercial real estate continues to be the primary sector driving the Ulster Bank Group non-performing loan book. A reduction over the year of £1.8 billion primarily reflects Ulster Bank's continuing strategy to reduce concentration risk to this sector.
   
·
The outlook for the property sector remains challenging. While there may be some signs of stabilisation in main urban centres, the outlook continues to be negative for secondary property locations on the island of Ireland.
   
·
During the year, Ulster Bank experienced further migration of commercial real estate exposures to its problem management framework, where various measures may be agreed to assist customers whose loans are performing but who are experiencing temporary financial  difficulties. For further details on Wholesale renegotiations refer to page 202.
 
Residential mortgages
The mortgage lending portfolio analysis by country of location of the underlying security is set out below.
 
31 December 
 2012 
31 December 
 2011 
 
£m 
£m 
     
ROI
16,873 
17,767 
NO
2,289 
2,253 
     
 
19,162 
20,020 
 

 
 
 
 
 
 
 
 
 
 
 
 

 
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: 28 February 2013
 
 
THE ROYAL BANK OF SCOTLAND GROUP plc (Registrant)
 
 
 
By:
/s/ Jan Cargill
 
 
Name:
Title:
 Jan Cargill
Deputy Secretary