Interim Management Statement

RNS Number : 6737V
Royal Bank of Scotland Group PLC
05 November 2010
 

 

Risk and capital management (continued)

 

Other risk exposures

 

Explanatory note

These disclosures provide information on certain elements of the Group's credit market activities, the majority of which reside in Non-Core and, to a lesser extent, Global Banking & Markets, US Retail & Commercial and Group Treasury.  For certain disclosures - credit valuation adjustments, leveraged finance and conduits - the information presented has been analysed between the Group's Core and Non-Core businesses.

 

Asset-backed securities (ABS)

The Group structures, originates, distributes and trades debt in the form of loan, bond and derivative instruments, in all major currencies and debt capital markets in North America, Western Europe, Asia and major emerging markets.  The table below analyses the carrying value of the Group's debt securities.

 


30 September 

 2010 

30 June 

2010 

31 December 

2009 


£bn 

£bn 

£bn 





Securities issued by central and local governments

132.5 

132.8 

134.1 

Asset-backed securities

70.0 

78.7 

87.6 

Securities issued by corporates, US federal agencies and other entities

12.1 

11.9 

13.4 

Securities issued by banks and building societies

11.8 

12.9 

14.0 





Total debt securities

226.4 

236.3 

249.1 

 

The Group's credit market activities gave rise to risk concentrations in ABS. The Group has exposures to ABS which are predominantly debt securities, but can also be held in derivative form. ABS have an interest in an underlying pool of referenced assets. The risks and rewards of the referenced pool are passed onto investors by the issue of securities with varying seniority, by a special purpose entity.  Debt securities include residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), ABS collateralised debt obligations and collateralised loan obligations (CLOs) and other ABS. In many cases the risk associated with these assets is hedged by way of credit derivative protection, purchased over the specific asset or relevant ABS indices. The counterparty to some of these hedge transactions are monoline insurers.

 

The tables on pages 118 to 120 summarise the gross and net exposures and carrying values of these securities by geography - US, UK, Europe other than UK and Rest of the World (RoW) and by measurement classification - held-for-trading (HFT), available-for-sale (AFS), loans and receivables (LAR) and designated as at fair value through profit or loss (DFV) - of the underlying assets at 30 September 2010, 30 June 2010 and 31 December 2009. Gross exposures represent the principal amounts relating to ABS. G10 government RMBS comprises securities that are: (a) guaranteed or effectively guaranteed by the US government, by way of its support for US federal agencies and government sponsored enterprises or (b) guaranteed by the Dutch government. Net exposures represent the carrying value after taking account of the hedge protection purchased from monoline insurers and other counterparties, but exclude the effect of counterparty credit valuation adjustments. The hedge provides credit protection of both principal and interest cash flows in the event of default by the counterparty. The value of this protection is based on the underlying instrument being protected.

 

 

 

Risk and capital management(continued)

 

Other risk exposures: Asset-backed securities (continued)

 

Asset-backed securities by geography and measurement classification

 

The table below analyses the gross exposures, carrying values and net exposures of these ABS by geography of the underlying assets and by measurement classification.


US 

UK 

Other 

 Europe 

 

RoW 

Total 


HFT 

 

AFS 

LAR 

DFV 


£m 

£m 

£m 

£m 

£m 


£m 

£m 

£m 

£m 












30 September 2010











Gross exposure











RMBS: G10 governments

20,924 

17 

6,592 

27,533 


11,519 

16,014 

RMBS: covered bond

137 

208 

8,580 

8,925 


8,925 

RMBS: prime

1,897 

4,324 

1,845 

196 

8,262 


2,836 

5,291 

134 

RMBS: non-conforming

1,241 

2,109 

92 

3,442 


679 

1,331 

1,432 

RMBS: sub-prime

852 

499 

141 

221 

1,713 


934 

565 

214 

CMBS

2,883 

1,704 

1,667 

100 

6,354 


3,203 

1,553 

1,393 

205 

CDOs

11,776 

141 

466 

12,386 


7,519 

4,746 

121 

CLOs

5,936 

106 

1,312 

424 

7,778 


1,673 

5,674 

431 

Other ABS

2,847 

1,346 

2,715 

2,675 

9,583 


1,971 

4,967 

2,645 













48,493 

10,454 

23,410 

3,619 

85,976 


30,334 

49,066 

6,370 

206 












Carrying value











RMBS: G10 governments

21,276 

17 

6,167 

27,460 


11,526 

15,934 

RMBS: covered bond

141 

215 

7,864 

8,220 


8,220 

RMBS: prime

1,493 

3,751 

1,279 

192 

6,715 


2,152 

4,470 

92 

RMBS: non-conforming

1,030 

1,993 

92 

3,115 


550 

1,133 

1,432 

RMBS: sub-prime

654 

336 

120 

202 

1,312 


718 

387 

207 

CMBS

2,843 

1,463 

1,085 

75 

5,466 


2,448 

1,383 

1,409 

226 

CDOs

2,606 

89 

262 

2,957 


920 

1,924 

113 

CLOs

5,142 

74 

899 

284 

6,399 


1,004 

5,022 

373 

Other ABS

2,697 

1,144 

2,557 

1,970 

8,368 


1,157 

4,450 

2,761 













37,882 

9,082 

20,325 

2,723 

70,012 


20,475 

42,923 

6,387 

227 












Net exposure











RMBS: G10 governments

21,276 

17 

6,167 

27,460 


11,526 

15,934 

RMBS: covered bond

141 

215 

7,864 

8,220 


8,220 

RMBS: prime

1,321 

3,107 

732 

184 

5,344 


787 

4,464 

92 

RMBS: non-conforming

1,027 

1,993 

92 

3,112 


547 

1,133 

1,432 

RMBS: sub-prime

304 

242 

112 

171 

829 


300 

322 

207 

CMBS

1,146 

1,310 

679 

50 

3,185 


905 

841 

1,393 

46 

CDOs

600 

49 

242 

891 


308 

470 

113 

CLOs

1,268 

64 

762 

45 

2,139 


708 

1,058 

373 

Other ABS

2,203 

916 

2,555 

1,970 

7,644 


561 

4,441 

2,642 













29,286 

7,913 

19,205 

2,420 

58,824 


15,642 

36,883 

6,252 

47 

 



 

Risk and capital management(continued)

 

Other risk exposures: Asset-backed securities (continued)

 

Asset-backed securities by geography and measurement classification (continued)

 


US 

UK 

Other 

 Europe 

RoW 

Total 


HFT 

AFS 

LAR 

DFV 


£m 

£m 

£m 

£m 

£m 


£m 

£m 

£m 

£m 












30 June 2010











Gross exposure











RMBS: G10 governments

23,790 

16 

6,283 

30,089 


9,973 

20,116 

RMBS: covered bond

127 

193 

7,975 

8,295 


8,295 

RMBS: prime

1,942 

4,869 

2,681 

849 

10,341 


4,886 

5,277 

177 

RMBS: non-conforming

1,255 

2,205 

118 

3,578 


594 

1,483 

1,499 

RMBS: sub-prime

1,244 

394 

175 

246 

2,059 


1,049 

779 

231 

CMBS

3,802 

1,873 

1,524 

96 

7,295 


3,827 

1,712 

1,540 

216 

CDOs

14,714 

129 

484 

15,327 


10,119 

5,078 

129 

CLOs

9,216 

114 

1,608 

378 

11,316 


4,410 

6,424 

482 

Other ABS

3,512 

1,199 

3,016 

2,013 

9,740 


1,496 

5,081 

3,163 













59,602 

10,992 

23,864 

3,582 

98,040 


36,354 

54,245 

7,221 

220 












Carrying value











RMBS: G10 governments

24,461 

16 

5,799 

30,276 


10,077 

20,199 

RMBS: covered bond

131 

195 

7,290 

7,616 


7,616 

RMBS: prime

1,724 

3,884 

2,253 

256 

8,117 


3,359 

4,597 

161 

RMBS: non-conforming

961 

2,084 

118 

3,163 


426 

1,238 

1,499 

RMBS: sub-prime

674 

254 

143 

227 

1,298 


596 

482 

220 

CMBS

3,337 

1,556 

1,026 

70 

5,989 


2,764 

1,549 

1,444 

232 

CDOs

3,566 

64 

291 

3,921 


1,768 

2,029 

124 

CLOs

7,996 

82 

1,159 

235 

9,472 


3,351 

5,682 

438 

Other ABS

3,010 

1,085 

2,820 

1,938 

8,853 


1,273 

4,317 

3,262 













45,860 

9,220 

20,899 

2,726 

78,705 


23,614 

47,709 

7,148 

234 












Net exposure











RMBS: G10 governments

24,461 

16 

5,799 

30,276 


10,077 

20,199 

RMBS: covered bond

131 

195 

7,290 

7,616 


7,616 

RMBS: prime

1,669 

3,001 

1,452 

176 

6,298 


1,538 

4,597 

162 

RMBS: non-conforming

958 

2,084 

118 

3,160 


423 

1,238 

1,499 

RMBS: sub-prime

237 

242 

135 

194 

808 


236 

352 

220 

CMBS

2,608 

1,398 

663 

46 

4,715 


863 

1,986 

1,444 

422 

CDOs

1,098 

23 

269 

1,390 


722 

544 

124 

CLOs

1,297 

56 

920 

43 

2,316 


451 

1,426 

438 

Other ABS

2,475 

1,057 

2,792 

1,937 

8,261 


812 

4,318 

3,131 













34,934 

8,072 

19,438 

2,396 

64,840 


15,122 

42,276 

7,018 

424 

 



 

Risk and capital management(continued)

 

Other risk exposures: Asset-backed securities (continued)

 

Asset-backed securities by geography and measurement classification (continued)

 


US 

UK 

Other 

 Europe 

RoW 

Total 


HFT 

AFS 

LAR 

DFV 


£m 

£m 

£m 

£m 

£m 


£m 

£m 

£m 

£m 












31 December 2009











Gross exposure











RMBS: G10 governments

26,644 

17 

7,016 

94 

33,771 


13,536 

20,235 

RMBS: covered bond

49 

297 

9,019 

9,365 


9,365 

RMBS: prime

2,965 

5,276 

4,567 

222 

13,030 


6,274 

5,761 

848 

147 

RMBS: non-conforming

1,341 

2,138 

128 

3,607 


635 

1,498 

1,474 

RMBS: sub-prime

1,668 

724 

195 

561 

3,148 


1,632 

1,020 

479 

17 

CMBS

3,422 

1,781 

1,420 

75 

6,698 


2,936 

1,842 

1,711 

209 

CDOs

12,382 

329 

571 

27 

13,309 


9,080 

3,923 

305 

CLOs

9,092 

166 

2,169 

1,173 

12,600 


5,346 

6,581 

673 

Other ABS

3,587 

1,980 

5,031 

1,569 

12,167 


2,912 

5,252 

3,985 

18 













61,150 

 12,708 

30,116 

3,721 

107,695 


42,351 

55,477 

9,475 

392 












Carrying value











RMBS: G10 governments

26,984 

17 

6,870 

33 

33,904 


13,397 

20,507 

RMBS: covered bond

50 

288 

8,734 

9,072 


9,072 

RMBS: prime

2,696 

4,583 

4,009 

212 

11,500 


5,133 

5,643 

583 

141 

RMBS: non-conforming

958 

1,957 

128 

3,043 


389 

1,180 

1,474 

RMBS: sub-prime

977 

314 

146 

387 

1,824 


779 

704 

324 

17 

CMBS

3,237 

1,305 

924 

43 

5,509 


2,279 

1,637 

1,377 

216 

CDOs

3,275 

166 

400 

27 

3,868 


2,064 

1,600 

203 

CLOs

6,736 

112 

1,469 

999 

9,316 


3,296 

5,500 

520 

Other ABS

2,886 

1,124 

4,369 

1,187 

9,566 


1,483 

4,621 

3,443 

19 


 

 

 

 

 


 

 

 

 


47,799 

9,866 

27,049 

2,888 

87,602 


28,820 

50,464 

7,924 

394 












Net exposure











RMBS: G10 governments

26,984 

17 

6,870 

33 

33,904 


13,397 

20,507 

RMBS: covered bond

50 

288 

8,734 

9,072 


9,072 

RMBS: prime

2,436 

3,747 

3,018 

172 

9,373 


3,167 

5,480 

584 

142 

RMBS: non-conforming

948 

1,957 

128 

3,033 


379 

1,180 

1,474 

RMBS: sub-prime

565 

305 

137 

290 

1,297 


529 

427 

324 

17 

CMBS

2,245 

1,228 

595 

399 

4,467 


1,331 

1,556 

1,377 

203 

CDOs

743 

124 

382 

26 

1,275 


521 

550 

203 

CLOs

1,636 

86 

1,104 

39 

2,865 


673 

1,672 

520 

Other ABS

2,117 

839 

4,331 

1,145 

8,432 


483 

4,621 

3,309 

19 


 

 

 

 

 


 

 

 

 


37,724 

8,591 

25,299 

2,104 

73,718 


20,480 

45,065 

7,791 

382 

 



 

Risk and capital management(continued)

 

Other risk exposures: Asset-backed securities (continued)

 

Asset-backed securities by rating

 

The table below summarises the ratings of ABS carrying values.  Credit ratings are based on those from rating agencies Standard & Poor's (S&P), Moody's and Fitch and have been mapped onto the S&P scale.

 


AAA 

AA to AA+ 

A to AA- 

BBB- to A- 

Non 

investment 

 grade 

 

Unrated 

Total 


£m 

£m 

£m 

£m 

£m 

£m 

£m 









30 September 2010








Carrying value








RMBS: G10 governments

25,883 

1,555 

22 

27,460 

RMBS: covered bond

7,649 

309 

262 

8,220 

RMBS: prime

4,852 

496 

260 

196 

846 

65 

6,715 

RMBS: non-conforming

1,748 

115 

115 

451 

649 

37 

3,115 

RMBS: sub-prime

312 

150 

227 

48 

476 

99 

1,312 

CMBS

3,131 

479 

1,156 

434 

258 

5,466 

CDOs

514 

422 

317 

217 

1,376 

111 

2,957 

CLOs

2,437 

1,830 

648 

850 

275 

359 

6,399 

Other ABS

3,499 

1,235 

904 

1,702 

333 

695 

8,368 










50,025 

6,591 

3,911 

3,898 

4,213 

1,374 

70,012 









30 June 2010








Carrying value








RMBS: G10 governments

28,773 

1,375 

128 

30,276 

RMBS: covered bond

7,297 

85 

111 

16 

107 

7,616 

RMBS: prime

5,887 

761 

566 

157 

717 

29 

8,117 

RMBS: non-conforming

1,823 

168 

72 

385 

704 

11 

3,163 

RMBS: sub-prime

357 

114 

223 

17 

513 

74 

1,298 

CMBS

3,678 

509 

1,095 

438 

254 

15 

5,989 

CDOs

717 

507 

297 

582 

1,631 

187 

3,921 

CLOs

4,556 

2,649 

1,184 

595 

432 

56 

9,472 

Other ABS

3,242 

1,199 

1,172 

2,042 

365 

833 

8,853 










56,330 

7,367 

4,848 

4,232 

4,616 

1,312 

78,705 









31 December 2009








Carrying value








RMBS: G10 governments

33,779 

125 

33,904 

RMBS: covered bond

8,645 

360 

67 

9,072 

RMBS: prime

9,211 

676 

507 

547 

558 

11,500 

RMBS: non-conforming

1,981 

197 

109 

160 

594 

3,043 

RMBS: sub-prime

578 

121 

306 

87 

579 

153 

1,824 

CMBS

3,441 

599 

1,022 

298 

147 

5,509 

CDOs

615 

944 

254 

944 

849 

262 

3,868 

CLOs

2,718 

4,365 

607 

260 

636 

730 

9,316 

Other ABS

4,099 

1,555 

1,014 

1,947 

152 

799 

9,566 


 

 

 

 

 

 

 


65,067 

8,942 

3,886 

4,243 

3,515 

1,949 

87,602 

 



 

Risk and capital management (continued)

 

Other risk exposures: Asset-backed securities (continued)

 

Asset-backed securities by rating (continued)

 

Key points

·

ABS carrying values decreased by 11%, from £78.7 billion at 30 June 2010 to £70.0 billion at 30 September 2010, principally due to sales and maturities of £18.6 billion, foreign exchange movements of £1.1 billion, partially offset by additions of £10.9 billion and fair value increases of £0.1 billion.



·

US government-backed securities were £21.3 billion at 30 September 2010 (30 June 2010 - £24.5 billion; 31 December 2009 - £27.0 billion). This  comprised:




·

HFT securities of £11.5 billion up from £10.1 billion at 30 June 2010, reflecting reinvestment by GBM mortgage trading of US agency positions following market developments.




·

AFS exposures of £9.8 billion (30 June 2010 - £14.4 billion; 31 December 2009 - £13.6 billion) of liquidity portfolios in US Retail & Commercial; the decrease reflected balance sheet restructuring during the quarter.




·

Dutch government guaranteed RMBS exposures in Group Treasury's liquidity portfolio increased by £0.4 billion to £6.2 billion at 30 September 2010 reflecting exchange rate movements.




·

Covered bonds, significantly all issued by Dutch and Spanish financial institutions, also in Group Treasury's liquidity portfolio, increased by £0.6 billion to £8.2 billion, mainly due to exchange rate movements.



·

CDOs and CLOs decreased by £1.0 billion and £3.1 billion to £3.0 billion and £6.4 billion respectively, reflecting monoline related restructuring as well as disposals of US positions in Non-Core.




·

AAA rated assets decreased from £56.3 billion at 30 June 2010 to £50.0 billion at 30 September 2010, primarily as a result of disposals of US agency and prime securities as well as CLOs.

·

Life-to-date net valuation losses on ABS held at 30 September 2010, including impairment provisions, were £16.0 billion (30 June 2010 - £19.3 billion; 31 December 2009 - £20.1 billion) comprising:





·

RMBS: £3.1 billion (30 June 2010 - £3.9 billion; 31 December 2009 - £3.6 billion), of which £0.2 billion (30 June 2010 - £0.6 billion; 31 December 2009 - £0.7 billion) was in US sub-prime and £2.6 billion (30 June 2010 - £2.9 billion; 31 December 2009 - £2.3 billion) on European assets of which £1.1 billion related to Group Treasury's AFS liquidity portfolio, reflecting recent market events.





·

CMBS: £0.9 billion (30 June 2010 - £1.3 billion; 31 December 2009 - £1.2 billion) of primarily European assets.





·

CDOs and CLOs of £9.4 billion (30 June 2010 - £11.4 billion; 31 December 2009 - £9.4 billion) and £1.4 billion (30 June 2010 - £1.8 billion; 31 December 2009 - £3.3 billion) respectively, significantly all relating to US assets in Non-Core. Many of these assets have market hedges in place giving rise to a significant difference between the carrying value and the net exposure. The decrease in CDOs and CLOs primarily reflects monoline related restructuring as well as small disposals of US positions.





·

Other ABS: £1.2 billion (30 June 2010 - £0.9 billion; 31 December 2009 - £2.6 billion).



 

Risk and capital management(continued)

 

Other risk exposures: Credit valuation adjustments

 

Credit valuation adjustments (CVA) represent an estimate of the adjustment to arrive at fair value that a market participant would make to incorporate the credit risk inherent in counterparty derivative exposures.  The table below details the Group's CVA by type of counterparty.

 


30 September 

2010 

30 June 

2010 

31 March 

2010 

31 December 

2009 


£m 

£m 

£m 

£m 






Monoline insurers

2,678 

3,599 

3,870 

3,796 

CDPCs

622 

791 

465 

499 

Other counterparties

1,937 

1,916 

1,737 

1,588 






Total CVA adjustments

5,237 

6,306 

6,072 

5,883 

 

Monoline insurers

 

The table below summarises the Group's exposure to monolines, all of which are in Non-Core.

 


30 September 

2010 

30 June 

2010 

31 March 

2010 

31 December 

2009 


£m 

£m 

£m 

£m 






Gross exposure to monolines

4,445 

5,495 

6,189 

6,170 

Hedges with financial institutions

(70)

(73)

(548)

(531)

Credit valuation adjustment

(2,678)

(3,599)

(3,870)

(3,796)






Net exposure to monolines

1,697 

1,823 

1,771 

1,843 






CVA as a % of gross exposure

60% 

65% 

63% 

62% 






Counterparty and credit risk RWAs

£19.1bn 

£25.5bn*

£8.6bn 

£13.7bn 

* revised

 

The net effect to the income statement relating to monoline exposures is shown below:

 


30 September 

2010 

30 June 

2010 

31 March 

2010 

31 December 

2009 







Credit valuation adjustment at beginning of quarter

(3,599)

(3,870)

(3,796)

(6,300)

Credit valuation adjustment at end of quarter

(2,678)

(3,599)

(3,870)

(3,796)






Decrease/(increase) in credit valuation adjustment

921 

271 

(74)

2,504 

Net (debit)/credit relating to realisation, hedges, foreign

  exchange and other movements

(687)

(270)

214 

(2,125)

Net credit relating to reclassified debt securities

(16)






Net credit/(debit) to income statement (1)

218 

 

Note:

(1)

Comprises £8 million of reversals of impairment losses and £19 million of other income relating to reclassified debt securities.  Income from trading activities was £191 million in Q3 2010. 



 

Risk and capital management (continued)

 

Other risk exposures: Credit valuation adjustments (continued)

 

Monoline insurers (continued)

The table below summarises monoline exposures by rating.  Credit ratings are based on those from rating agencies, Standard & Poor's and Moody's.  Where the ratings differ, the lower of the two is taken.

 


Notional: 

protected 

 assets 

Fair value: 

protected 

 assets 

Gross 

 exposure 

CVA 

Hedges 

Net 

 exposure 


£m 

£m 

£m 

£m 

£m 

£m 








30 September 2010







A to AA-

6,641 

5,616 

1,025 

376 

649 

Non investment grade

8,661 

5,241 

3,420 

2,302 

70 

1,048 









15,302 

10,857 

4,445 

2,678 

70 

1,697 








Of which:







CDOs

1,146 

230 

916 

602 



RMBS



CMBS

4,226 

2,284 

1,942 

1,336 



CLOs

6,969 

6,265 

704 

273 



Other ABS

2,407 

1,742 

665 

343 



Other

551 

334 

217 

124 











15,302 

10,857 

4,445 

2,678 










30 June 2010







A to AA-

7,474 

6,342 

1,132 

439 

693 

Non investment grade

12,247 

7,884 

4,363 

3,160 

73 

1,130 









19,721 

14,226 

5,495 

3,599 

73 

1,823 








Of which:







CDOs

1,658 

496 

1,162 

836 



RMBS



CMBS

4,496 

2,335 

2,161 

1,565 



CLOs

10,321 

9,167 

1,154 

648 



Other ABS

2,708 

1,924 

784 

419 



Other

535 

301 

234 

131 











19,721 

14,226 

5,495 

3,599 










31 December 2009







A to AA-

7,143 

5,875 

1,268 

378 

890 

Non investment grade

12,598 

7,696 

4,902 

3,418 

531 

953 









19,741 

13,571 

6,170 

3,796 

531 

1,843 








Of which:







CDOs

2,284 

797 

1,487 

1,059 



RMBS

82 

66 

16 



CMBS

4,253 

2,034 

2,219 

1,562 



CLOs

10,007 

8,584 

1,423 

641 



Other ABS

2,606 

1,795 

811 

410 



Other

509 

295 

214 

122 











19,741 

13,571 

6,170 

3,796 



 



 

Risk and capital management (continued)

 

Other risk exposures: Credit valuation adjustments (continued)

 

Monoline insurers (continued)

 

Key points

·

The decrease in CVA held against exposures to monoline insurers reflects the reduction in exposure due to a combination of restructuring of certain exposures, higher prices of underlying reference instruments, primarily CLOs and CMBS, and the strengthening of sterling against the US dollar.



·

The CVA decreased on a total and relative basis reflecting the reduction in exposure and tightening credit spreads.



·

The majority of the current exposure is to monoline counterparties that are classified as sub-investment grade.



·

Counterparty and credit RWAs decreased by £6.3 billion in the quarter due to restructuring of certain exposures (c. £5 billion) and foreign exchange effects.



·

The net loss on realisation, hedges and foreign exchange movements was driven by a combination of realised losses arising from restructuring certain exposures and foreign currency movements. The net effect of reclassified debt securities reflects the difference between accounting impairments and mark-to-market losses that would have been reported on the assets had they been accounted for on a fair value through profit or loss basis.

 

The Group also has indirect exposures to monoline insurers through wrapped securities and other assets with credit enhancement from monoline insurers. These securities are traded with the benefit of this credit enhancement.  Any deterioration in the credit rating of the monoline is reflected in the fair value of these assets.

 

Credit derivative product companies (CDPC)

 

A summary of the Group's exposure to CDPCs, which is all in Non-Core, at 30 September 2010, is detailed below:

 


30 September 

 2010 

30 June 

 2010 

31 March 

 2010 

31 December 

 2009 


£m 

£m 

£m 

£m 






Gross exposure to CDPCs

1,467 

1,747 

1,243 

1,275 

Credit valuation adjustment

(622)

(791)

(465)

(499)






Net exposure to CDPCs

845 

956 

778 

776 






CVA as a % of gross exposure

42% 

45% 

37% 

39%






Counterparty and credit risk RWAs

£8.1bn 

£8.8bn 

£7.9bn 

£7.5bn 






Capital deductions

£297m 

£292m 

£309m 

£347m 

 



 

Risk and capital management (continued)

 

Other risk exposures: Credit valuation adjustments (continued)

 

Credit derivative product companies (continued)

 

The table below summarises CDPC exposures by rating.

 


Notional 

 amount: 

protected assets 

Fair value: 

protected 

reference assets 

Gross 

exposure 

Credit 

 valuation 

 adjustment 

Net exposure 

 to CDPCs 


£m 

£m 

£m 

£m 

£m 







30 September 2010






AAA

1,070 

1,060 

10 

A to AA-

637 

618 

19 

11 

Non investment grade

19,468 

18,286 

1,182 

476 

706 

Rating withdrawn

3,426 

3,170 

256 

132 

124 








24,601 

23,134 

1,467 

622 

845 







30 June 2010






AAA

1,128 

1,115 

13 

BBB- to A-

668 

642 

26 

14 

12 

Non investment grade

20,051 

18,655 

1,396 

586 

810 

Rating withdrawn

3,742 

3,430 

312 

182 

130 








25,589 

23,842 

1,747 

791 

956 







31 December 2009






AAA

1,658 

1,637 

21 

16 

BBB- to A-

1,070 

1,043 

27 

18 

Non investment grade

17,696 

16,742 

954 

377 

577 

Rating withdrawn

3,926 

3,653 

273 

108 

165 








24,350 

23,075 

1,275 

499 

776 

 

Credit ratings are based on those from rating agencies S&P and Moody's.   Where the ratings differ, the lower of the two is taken.

 

The net income statement effect arising from CDPC exposures is shown below.  

 


30 September 

 2010 

30 June 

 2010 

31 March 

 2010 

31 December 

2009 


£m 

£m 

£m 

£m 






Credit valuation adjustment  at beginning of quarter

(791)

(465)

(499)

(592)

Credit valuation adjustment at end of quarter

(622)

(791)

(465)

(499)






Decrease/(increase) in credit valuation adjustment

169 

(326)

34 

93 

Net (debit)/credit relating to hedges, foreign exchange and

  other movements

(184)

270 

(66)

(205)






Net debit to income statement (income from trading activities)

(15)

(56)

(32)

(112)

 



 

Risk and capital management (continued)

 

Other risk exposures: Credit valuation adjustments (continued)

 

Credit derivative product companies (continued)

 

Key points

·

Exposure to CDPCs decreased over the period due to a combination of tighter credit spreads of the referenced assets and the strengthening of sterling against the US and Canadian dollar, partially offset by an increase in the relative value of senior tranches compared to the underlying reference portfolios.



·

CVA decreased both on a total and relative basis, reflecting the decreased exposure.



·

The Group has predominantly traded senior tranches with CDPCs. The average attachment and detachment points were 13% and 48% respectively at 30 September 2010 (30 June 2010 - 13% and 50% respectively), and the majority of the reference portfolios are investment grade.



·

Counterparty and credit RWAs relating to gross CDPC exposures decreased by £0.7 billion in the quarter whereas capital deductions increased marginally.

 

Other counterparties

 

The net income statement effect arising from the change in level of CVA for all other counterparties and related trades is shown in the table below.

 


30 September 

 2010 

30 June 

 2010 

31 March 

 2010 

31 December 

2009 


£m 

£m 

£m 

£m 






Credit valuation adjustment at the beginning of the quarter

(1,916)

(1,737)

(1,588)

(1,856)

Credit valuation adjustment at the end of the quarter

(1,937)

(1,916)

(1,737)

(1,588)






(Increase)/decrease in credit valuation adjustment

(21)

(179)

(149)

268 

Net credit/(debit) relating to hedges, foreign exchange and

  other movements

37 

185 

12 

(204)






Net credit/(debit) to income statement (income from trading

  activities)

16 

(137)

64 

 

Key points

·

The increase in CVA was primarily driven by an increase in exposure, reflecting market movements and rating downgrades of certain counterparties in the quarter. This was partially offset by the tightening of credit spreads.



·

Gains on hedges are the primary driver of the £37 million credit to the income statement in Q3 2010.

 


 

Risk and capital management (continued)

 

Other risk exposures: Leveraged finance

 

The table below details the Group's global markets sponsor-led leveraged finance exposures, all in Non-Core, by industry and geography.  

 


30 September 2010


30 June 2010


31 December 2009


Americas 

UK 

Other 

Europe 

RoW 

Total 


Americas 

UK 

Other 

Europe 

RoW 

Total 


Americas 

UK 

Other 

Europe 

RoW 

Total 


£m 

£m 

£m 

£m 

£m 


£m 

£m 

£m 

£m 

£m 


£m 

£m 

£m 

£m 

£m 



















Gross exposure:


















TMT (1)

871 

1,513 

775 

519 

3,678 


1,044 

1,592 

849 

531 

4,016 


1,781 

1,656 

1,081 

605 

5,123 

Industrial

393 

1,052 

1,249 

312 

3,006 


726 

1,110 

1,334 

334 

3,504 


1,584 

1,523 

1,781 

207 

5,095 

Retail

437 

1,060 

63 

1,568 


24 

380 

1,083 

60 

1,547 


17 

476 

1,354 

71 

1,918 

Other

198 

1,100 

771 

216 

2,285 


235 

1,301 

1,022 

231 

2,789 


244 

1,527 

1,168 

191 

3,130 




















1,470 

4,102 

3,855 

1,110 

10,537 


2,029 

4,383 

4,288 

1,156 

11,856 


3,626 

5,182 

5,384 

1,074 

15,266 



















Net exposure:


















TMT (1)

795 

1,325 

759 

401 

3,280 


928 

1,430 

845 

428 

3,631 


1,502 

1,532 

1,045 

590 

4,669 

Industrial

274 

949 

1,083 

302 

2,608 


535 

1,001 

1,178 

329 

3,043 


524 

973 

1,594 

205 

3,296 

Retail

424 

1,006 

60 

1,498 


24 

366 

1,028 

57 

1,475 


17 

445 

1,282 

68 

1,812 

Other

197 

1,025 

765 

216 

2,203 


233 

1,232 

1,013 

232 

2,710 


244 

1,461 

1,147 

191 

3,043 




















1,274 

3,723 

3,613 

979 

9,589 


1,720 

4,029 

4,064 

1,046 

10,859 


2,287 

4,411 

5,068 

1,054 

12,820 



















Of which:


















Drawn

938 

3,260 

2,829 

806 

7,833 


1,313 

3,604 

3,332 

870 

9,119 


1,944 

3,737 

3,909 

950 

10,540 

Undrawn

336 

463 

784 

173 

1,756 


407 

425 

732 

176 

1,740 


343 

674 

1,159 

104 

2,280 




















1,274 

3,723 

3,613 

979 

9,589 


1,720 

4,029 

4,064 

1,046 

10,859 


2,287 

4,411 

5,068 

1,054 

12,820 

 

Notes:

(1)

Telecommunications, media and technology.

(2)

All of the above are classified as loans and receivables, except for £153 million (30 June 2010 - £154 million; 31 December 2009 - £143 million) that is classified as held-for-trading.

 


 

Risk and capital management (continued)

 

Other risk exposures: Leveraged finance (continued)

 

The table below analyses the movements in leveraged finance exposures.

 


30 September 2010

30 June 

2010 

31 March 

2010 


Drawn 

Undrawn 

Total 


£m 

£m 

£m 

£m 

£m 







Balance at beginning of quarter

9,119 

1,740 

10,859 

11,609 

12,820 

Transfers

(29)

(29)

68 

Sales and restructurings

(1,203)

(60)

(1,263)

(573)

(929)

Repayments and facility reductions

(196)

48 

(148)

(120)

(387)

Funded deals

(1)

Changes in fair value

41 

41 

17 

(2)

Accretion of interest

15 

13 

Net recoveries/(impairment provisions)

268 

(198)

Exchange and other movements

85 

27 

112 

(425)

284 







Balance at end of quarter

7,833 

1,756 

9,589 

10,859 

11,609 

 

Key points

·

The Group's exposure to leveraged finance has reduced primarily as a result of sales of £1.3 billion, as part of the active management in line with the Non-Core strategy.



·

Credit impairments in the quarter were £85 million which were more than offset by recoveries of £93 million.



·

Approximately 90% of the above exposures represent senior lending.

 

Not included in the table above are:

·

UK Corporate leveraged finance net exposures of £6.5 billion at 30 September 2010 (30 June 2010 - £7.2 billion; 31 March 2010 - £7.5 billion) related to debt and banking facilities provided to UK mid-corporates. Of this £3.8 billion (30 June 2010 - £4.0 billion; 31 March 2010 - £4.2 billion) relates specifically to debt transactions financing UK mid-market buyouts, supplementing equity capital provided by third party private equity investors.  The balance was senior debt transactions to mid-corporate clients supporting acquisitions, recapitalisations or general corporate purposes where higher leverage criteria were met.



·

Ulster Bank leveraged finance net exposure was £0.6 billion (30 June 2010 - £0.6 billion; 31 March 2010 - £0.6 billion). 

 



 

Risk and capital management (continued)

 

Other risk exposures: Special purpose entities

 

The table below sets out the asset categories, together with the carrying value of the assets and associated liabilities for those securitisations and other asset transfers, other than conduits (discussed below), where the assets continue to be recorded on the Group's balance sheet.

 


30 September 2010


30 June 2010


31 December 2009


Assets 

Liabilities 


Assets 

Liabilities 


Assets 

Liabilities 


£m 

£m 


£m 

£m 


£m 

£m 










Residential mortgages

74,351 

18,164 


71,022 

15,012 


69,927 

15,937 

Credit card receivables

4,059 

1,592 


4,148 

1,585 


2,975 

1,592 

Other loans

31,364 

1,003 


34,097 

986 


36,448 

1,010 

Finance lease receivables

582 

582 


621 

621 


597 

597 

 

Assets are significantly greater than liabilities, as all notes issued by funding-related own asset securitisation SPEs are purchased by Group companies.

 

Conduits

Group-sponsored conduits can be divided into multi-seller conduits and own-asset conduits. The Group consolidates both types of conduits where the substance of the relationship between the Group and the conduit vehicle is such that the vehicle is controlled by the Group.  Liquidity commitments from the Group to the conduit exceed the nominal amount of assets funded by the conduit as liquidity commitments are sized to cover the funding cost of the related assets.

 

During the period both multi-seller and own asset conduit assets have been reduced in line with wider Group balance sheet management.  The total assets held by Group-sponsored conduits were £19.8 billion at 30 September 2010 (30 June 2010 - £22.5 billion; 31 December 2009 - £27.4 billion).

 

The exposure to conduits which are consolidated by the Group, the assets held and commercial papers issued by these vehicles is set out below.

 


30 September 2010


30 June 2010


31 December 2009


Core 

Non-Core 

Total 


Core 

Non-Core 

Total 


Core 

Non-Core 

Total 


£m 

£m 

£m 


£m 

£m 

£m 


£m 

£m 

£m 













Total assets

16,183 

3,642 

19,825 


18,645 

3,841 

22,486 


23,409 

3,957 

27,366 

Commercial paper issued

15,430 

2,563 

17,993 


17,987 

2,592 

20,579 


22,644 

2,939 

25,583 













Liquidity and credit

  enhancements:












Deal specific liquidity:












-  drawn

733 

1,104 

1,837 


637 

1,274 

1,911 


738 

1,059 

1,797 

-  undrawn

22,472 

3,277 

25,749 


26,049 

3,367 

29,416 


28,628 

3,852 

32,480 

PWCE (1)

918 

275 

1,193 


1,119 

316 

1,435 


1,167 

341 

1,508 














24,123 

4,656 

28,779 


27,805 

4,957 

32,762 


30,533 

5,252 

35,785 













Maximum exposure to loss (2)

23,205 

4,381 

27,586 


26,686 

4,641 

31,327 


29,365 

4,911 

34,276 

 

Notes:

(1)

Programme-wide credit enhancement.

(2)

Maximum exposure to loss is determined as the Group's total liquidity commitments to the conduits and additionally programme-wide credit support which would absorb first loss on transactions where liquidity support is provided by a third party. Third party maximum exposure to loss is reduced by repo trades conducted with an external counterparty.

 

Risk and capital management (continued)

 

Other risk exposures: Conduits (continued)

 

Multi-seller conduits accounted for 42% of the total liquidity and credit enhancements committed by the Group at 30 September 2010 (30 June 2010 and 31 December 2009 - 43%). The Group's multi-seller conduits have continued to fund the vast majority of their assets solely through asset-backed commercial paper (ABCP) issuance.  There have been no significant systemic failures within the financial markets similar to that experienced in the second half of 2008 following Lehman Brothers bankruptcy filing in September 2008. The improvement in market conditions has allowed these conduits to move towards more normal ABCP funding and reduced the need for backstop funding from the Group.

 

Key points

·

The maturity of the commercial paper issued by the Group's conduits is managed to mitigate the short-term contingent liquidity risk of providing back-up facilities. The Group's limits sanctioned for such liquidity facilities at 30 September 2010 totalled approximately £21.9 billion (30 June 2010 - £24.3 billion; 31 December 2009 - £25.0 billion).  For a very small number of transactions within one multi-seller conduit the liquidity facilities have been provided by third-party banks. This typically occurs on transactions where the third-party bank does not use, or have, its own conduit vehicles.



·

The Group's maximum exposure to loss on its multi-seller conduits is £22.0 billion (30 June 2010 - £24.5 billion; 31 December 2009 - £25.2 billion), being the total amount of the Group's liquidity commitments plus the extent of PWCE of conduit assets for which liquidity facilities were not provided by third parties.



·

The demand for high quality ABCP continued during the period to 30 September 2010 with a higher demand for longer dated paper, compared with the previous quarter.



·

The average maturity of ABCP issued by the Group's conduits at 30 September 2010 was 68.3 days (30 June 2010 - 62.7 days; 31 December 2009 - 58.4 days).



·

The Group holds two own-asset conduits, which have assets that were previously funded by the Group. The Group's maximum exposure to loss on these two conduits was £5.6 billion at 30 September 2010 (30 June 2010 - £6.9 billion; 31 December 2009 - £9.1 billion), with £3.2 billion of ABCP outstanding at that date (30 June 2010 - £4.2 billion; 31 December 2009 - £7.7 billion).



·

Additionally the Group has established an own-asset conduit with a committed liquidity of £26.0 billion (30 June 2010 - £26.0 billion; 31 December 2009 - £25.1 billion) to access the Bank of England's open market operations for contingent funding purposes.

 

The Group also extends liquidity commitments to multi-seller conduits sponsored by other banks, but typically does not consolidate these entities as the Group does not retain the majority of risks and rewards. The Group's exposure from third-party conduits was £136 million (30 June 2010 - £403 million; 31 December 2009 - £587 million) representing deal specific liquidity.

 


This information is provided by RNS
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