Interim Management Statement

RNS Number : 5060L

Royal Bank of Scotland Group PLC

07 May 2010

 



Risk and capital management

Presentation of information

The data in this section have been prepared to include only those businesses of ABN AMRO that will be retained by RBS.

Capital

The Group aims to maintain an appropriate level of capital to meet business needs and regulatory requirements.  Capital adequacy and risk management are closely aligned.

	31 March 2010	31 December 2009
Risk asset ratios (proportional)	%	%
Core Tier 1	10.6	11.0
Tier 1	13.7	14.4
Total	15.7	16.3

The Group's regulatory capital resources as calculated in accordance with FSA definitions are set out on the following page.

Risk and capital management (continued)

Capital (continued)

	31 March   2010	31 December   2009
Composition of regulatory capital (proportional)	£m	£m
Tier 1
Ordinary shareholders' equity	70,830	69,890
Minority interests	2,305	2,227
Adjustments for:
- Goodwill and other intangible assets - continuing	(14,683)	(14,786)
- Goodwill and other intangible assets of discontinued businesses	(678)	(238)
- Unrealised losses on available-for-sale (AFS) debt securities	1,654	1,888
- Reserves: revaluation of property and unrealised gains on AFS equities	(209)	(207)
- Reallocation of preference shares and innovative securities	(656)	(656)
- Other regulatory adjustments	(833)	(950)
Less excess of expected losses over provisions net of tax	(2,197)	(2,558)
Less securitisation positions	(1,858)	(1,353)
Less APS first loss	(4,992)	(5,106)
Core Tier 1 capital	48,683	48,151
Preference shares	10,906	11,265
Innovative Tier 1 securities	2,857	2,772
Tax on the excess of expected losses over provisions	876	1,020
Less deductions from Tier 1 capital	(347)	(310)
Total Tier 1 capital	62,975	62,898
Tier 2
Reserves: revaluation of property and unrealised gains on AFS equities	209	207
Collective impairment provisions	769	796
Perpetual subordinated debt	4,301	4,200
Term subordinated debt	18,742	18,120
Minority and other interests in Tier 2 capital	11	11
Less deductions from Tier 2 capital	(5,278)	(5,241)
Less APS first loss	(4,992)	(5,106)
Total Tier 2 capital	13,762	12,987
Supervisory deductions
Unconsolidated Investments
- RBS Insurance	(4,123)	(4,068)
- Other investments	(416)	(404)
Other	(73)	(93)
Deductions from total capital	(4,612)	(4,565)
Total regulatory capital	72,125	71,320
Risk-weighted assets
Credit risk	433,200	410,400
Counterparty risk	55,000	56,500
Market risk	62,000	65,000
Operational risk	35,300	33,900
	585,500	565,800
APS relief	(124,800)	(127,600)
	460,700	438,200

Risk and capital management (continued)

Credit risk

Credit risk is the risk arising from the possibility that the Group will incur losses owing to the failure of customers to meet their financial obligations.  The quantum and nature of credit risk assumed in the Group's different businesses varies considerably, while the overall credit risk outcome usually exhibits a high degree of correlation to the macroeconomic environment.

Credit risk assets

Credit risk assets consist of loans and advances (including overdraft facilities), instalment credit, trade finance, finance lease receivables, trade-related instruments, financial guarantees and traded instruments across all customer types.  Reverse repurchase agreements and issuer risk (primarily debt securities - see page 97) are excluded.  Where relevant, and unless otherwise stated, data reflects the effect of credit mitigation techniques.  During the first quarter, the integration of RBS N.V. onto the Group's risk management and reporting systems was substantially completed.  Prior period figures have been revised to reflect the alignment of RBS N.V. data definitions and specifications with Group standards.

Divisional analysis

	31 March  2010	31 December  2009 (1)
	£m	£m
UK Retail	102,978	103,029
UK Corporate	112,142	110,009
Wealth	17,010	16,553
Global Banking & Markets	204,397	205,588
Global Transaction Services	38,360	32,428
Ulster Bank	43,617	42,042
US Retail & Commercial	54,758	52,104
Other	3,520	3,305
Core	576,782	565,058
Non-Core	154,903	158,499
Group	731,685	723,557

Note:

(1)

Revised.

Key points

●	The total portfolio was relatively stable during the first quarter, with credit risk assets increasing by £8 billion, or 1%.  Sterling weakness (down 6% against US dollar and 3% against a trade-weighted basket) was a contributory factor; the portfolio contracted 1% on a constant currency basis.
●	Growth in the Core portfolio was offset partially by the continuing decline in Non-Core.  The largest increases were in short-term exposures to banks and other financial institutions.

Risk and capital management (continued)

Credit risk (continued)

Credit risk assets (continued)

Credit concentration risk (including country risk)

The country risk table below shows credit risk assets exceeding £1 billion by borrowers domiciled in countries with an external rating of A+ and below from either Standard & Poor's or Moody's, and is stated gross of mitigating action, which may have been taken to reduce or eliminate exposure to country risk events.

	Personal	Sovereign	Banks and  financial   institutions	Corporate	Total	Core	Non-Core
	£m	£m	£m	£m	£m	£m	£m
31 March 2010
Italy	25	106	2,269	4,986	7,386	4,281	3,105
India	562	23	1,345	3,007	4,937	3,978	959
China	35	54	1,994	1,192	3,275	2,854	421
Turkey	10	315	722	1,930	2,977	2,171	806
South Korea	1	-	1,492	1,162	2,655	2,582	73
Russia	52	-	214	2,306	2,572	2,041	531
Poland	6	49	73	1,484	1,612	1,443	169
Mexico	1	51	138	1,411	1,601	1,051	550
Romania	499	94	218	770	1,581	41	1,540
Portugal	4	35	362	1,059	1,460	987	473
Brazil	4	-	912	332	1,248	1,094	154
Taiwan	641	-	207	347	1,195	211	984
Kazakhstan	46	-	539	598	1,183	501	682
Hungary	3	-	74	962	1,039	567	472
Indonesia	411	94	157	376	1,038	595	443
31 December 2009 (1)
Italy	27	91	1,704	5,697	7,519	3,921	3,598
India	619	305	1,045	3,144	5,113	4,308	805
China	51	50	1,336	1,102	2,539	2,198	341
Turkey	11	302	628	2,010	2,951	2,190	761
South Korea	1	-	1,575	1,448	3,024	2,916	108
Russia	41	-	172	2,045	2,258	1,782	476
Poland	6	57	85	1,582	1,730	1,617	113
Mexico	1	2	276	1,304	1,583	694	889
Romania	508	102	438	753	1,801	66	1,735
Portugal	5	42	324	1,007	1,378	952	426
Brazil	3	-	902	423	1,328	1,113	215
Taiwan	747	-	164	242	1,153	490	663
Kazakhstan	45	-	400	569	1,014	347	667
Hungary	3	23	60	978	1,064	601	463
Indonesia	286	102	143	452	983	582	401

Note:

(1)

Revised.

Risk and capital management (continued)

Credit risk (continued)

Credit risk assets (continued)

Credit concentration risk (including country risk) (continued)

Key points

●	Under the Group's country risk framework, country exposures continue to be closely managed; both those countries that represent a larger concentration and those that, under the country watch list process, have been identified as exhibiting signs of actual or potential stress. The latter includes countries in the Eurozone facing fiscal pressures and rising debt service costs.
●	The pace of global recovery has picked up somewhat with the US joining Asia as a main growth driver. Private sector demand remains fragile, performance is uneven and significant risks remain. Concerns over advanced sovereign debt levels have deepened, with Greece seeking official financial support and other vulnerable Eurozone sovereigns seeing contagion into bond spreads.  These risks are likely to remain a key medium term theme. Relatively healthier debt ratios and better growth prospects are driving large capital flows into emerging markets, which though positive, carry some risks. Asia remains the best performing region, due to limited public and private sector leverage, though continued export dependency could constrain growth potential.  Latin America is rebounding rapidly, consolidating earlier policy gains. Recovery in Eastern Europe has lagged in most cases, but sovereign vulnerability has eased. Middle Eastern sovereigns, meanwhile, remain generally strong.
●	Credit risk assets relating to Greece were less than £1 billion at 31 March 2010 and 31 December 2009.

Risk and capital management (continued)

Credit risk (continued)

Credit risk assets (continued)

Analysis by industry and geography

Industry analysis plays an important part in assessing potential concentration risk in the loan portfolio.  Particular attention is given to industry sectors where the Group believes there is a high degree of risk or potential for volatility in the future.

The table below analyses credit risk assets by industry sector and geography.

	UK	Western  Europe   (excl.   UK)	North   America	Asia   Pacific	Latin   America	Other (1)	Total	Core		Non-Core
	£m	£m	£m	£m	£m	£m	£m	£m		£m
31 March 2010
Personal	117,991	22,891	39,371	3,057	78	1,379	184,767	164,252		20,515
Banks and financial institutions	38,957	76,341	27,481	17,306	9,621	5,335	175,041	153,428		21,613
Property	61,829	27,374	8,544	2,162	3,074	664	103,647	59,356		44,291
Transport and storage	14,725	8,419	7,725	5,728	2,786	7,473	46,856	31,460		15,396
Manufacturing	9,339	14,515	8,683	3,099	1,476	3,898	41,010	30,069		10,941
Wholesale and retail trade	16,691	7,633	5,093	1,557	779	1,038	32,791	24,981		7,810
Public sector	11,790	4,111	6,019	1,373	311	928	24,532	21,237		3,295
TMT (2)	6,947	7,789	5,180	2,314	651	1,467	24,348	15,220		9,128
Building	10,243	7,799	2,097	1,059	211	964	22,373	17,632		4,741
Tourism and leisure	11,567	2,808	2,533	832	621	448	18,809	15,318		3,491
Business services	10,196	3,028	2,678	832	1,287	711	18,732	15,362		3,370
Power, water and waste	4,961	4,871	3,744	1,250	1,142	999	16,967	10,936		6,031
Natural resources and nuclear	2,488	2,840	5,551	1,353	1,019	3,074	16,325	12,514		3,811
Agriculture and fisheries	3,061	925	1,263	92	68	78	5,487	5,017		470
	320,785	191,344	125,962	42,014	23,124	28,456	731,685	576,782		154,903

For notes to this table refer to page 95.

Risk and capital management (continued)

Credit risk (continued)

Credit risk assets (continued)

Analysis by industry and geography (continued)

	UK	Western  Europe   (excl.   UK)	North   America	Asia   Pacific	Latin   America	Other (1)	Total	Core		Non-Core
	£m	£m	£m	£m	£m	£m	£m	£m		£m
31 December 2009 (3)
Personal	118,050	23,596	37,679	3,072	63	1,368	183,828	163,549		20,279
Banks and financial institutions	40,415	75,937	24,273	15,739	10,004	5,182	171,550	149,166		22,384
Property	62,507	27,802	8,323	2,480	2,902	429	104,443	58,009		46,434
Transport and storage	14,887	7,854	7,265	5,475	2,592	7,168	45,241	30,030		15,211
Manufacturing	9,283	13,998	7,690	3,483	1,559	3,848	39,861	30,249		9,612
Wholesale and retail trade	15,712	7,642	5,573	1,531	843	1,344	32,645	24,787		7,858
Public sector	11,171	5,120	5,899	2,452	300	723	25,665	22,219		3,446
TMT (2)	7,716	8,689	5,039	2,117	697	1,502	25,760	15,424		10,336
Building	10,520	7,607	1,882	985	203	897	22,094	16,945		5,149
Tourism and leisure	11,581	2,922	2,626	786	632	499	19,046	15,439		3,607
Business services	9,206	2,337	2,605	790	1,259	533	16,730	13,980		2,750
Power, water and waste	4,810	4,950	3,470	1,212	1,625	965	17,032	10,836		6,196
Natural resources and nuclear	2,592	2,999	5,447	1,355	1,442	2,375	16,210	11,149		5,061
Agriculture and fisheries	937	667	1,615	92	59	82	3,452	3,276		176
	319,387	192,120	119,386	41,569	24,180	26,915	723,557	565,058		158,499

Notes:

(1)	'Other' comprises Central and Eastern Europe, Middle East, Central Asia and Africa.
(2)	Telecommunication, media and technology.
(3)	Revised.

Key point

●	The largest increases were in the Core portfolios in the UK and North America, the latter in part reflecting the weakening of sterling against the US dollar during the quarter.

Risk and capital management (continued)

Credit risk (continued)

Credit risk assets (continued)

Credit risk asset quality

Internal reporting and oversight of risk assets is principally differentiated by credit grades.  Customers are assigned credit grades based on various credit grading models that reflect the key drivers of default for the customer type.  All credit grades across the Group map to both a Group level asset quality scale used for external financial reporting and a master grading scale for wholesale exposures used for internal management reporting across portfolios.  Accordingly, the measurement of risk is easily aggregated and can be reported at increasing levels of granularity depending on audience and business need.

		31 March 2010					31 December 2009 (1)
Asset quality band	Probability of default range	Core	Non-Core	Total	%  of total		Core	Non-Core	Total	%  of total
		£m	£m	£m			£m	£m	£m
AQ1	0% - 0.03%	159,418	21,430	180,848	24.7		149,132	23,226	172,358	23.8
AQ2	0.03% - 0.05%	17,640	3,269	20,909	2.9		18,029	3,187	21,216	2.9
AQ3	0.05% - 0.10%	30,598	5,865	36,463	5.0		26,703	7,613	34,316	4.7
AQ4	0.10% - 0.38%	80,384	14,983	95,367	13.0		78,144	18,154	96,298	13.3
AQ5	0.38% - 1.08%	91,522	23,493	115,015	15.7		92,908	24,977	117,885	16.3
AQ6	1.08% - 2.15%	73,858	18,684	92,542	12.7		76,206	18,072	94,278	13.0
AQ7	2.15% - 6.09%	42,078	15,059	57,137	7.8		44,643	15,732	60,375	8.3
AQ8	6.09%-17.22%	17,819	4,226	22,045	3.0		18,923	4,834	23,757	3.4
AQ9	17.22% - 100%	12,610	8,693	21,303	2.9		11,589	8,074	19,663	2.7
AQ10	100%	18,665	24,960	43,625	6.0		16,756	22,666	39,422	5.5
Other (2)		32,190	14,241	46,431	6.3		32,025	11,964	43,989	6.1
		576,782	154,903	731,685	100.0		565,058	158,499	723,557	100.0

Notes:

(1)	Revised.
(2)	'Other' largely comprises assets covered by the standardised approach for which a probability of default equivalent to those assigned to assets covered by the internal ratings based approach is not available.

Key points

●	The increase in AQ1, in part, reflects the growth in bank and financial institution exposures.
●	AQ10 exposures include non-performing loans and other defaulted credit exposures, including derivative receivables.

Risk and capital management (continued)

Credit risk (continued)

Debt securities

The table below analyses debt securities by external ratings.

	UK and US   government	Other   government	Bank and   building   society	Asset-backed   securities	Corporate	Other	Total
	£m	£m	£m	£m	£m	£m	£m
31 March 2010
AAA	51,175	54,031	3,821	59,172	1,855	-	170,054
AA and above	-	16,821	4,051	9,579	1,318	-	31,769
A and above	-	11,507	5,137	4,836	1,967	-	23,447
BBB- and above	-	4,214	982	4,567	2,338	-	12,101
Non-investment grade	-	357	276	3,934	2,662	-	7,229
Unrated	-	1,568	317	2,297	2,627	707	7,516
	51,175	88,498	14,584	84,385	12,767	707	252,116
31 December 2009
AAA	49,820	44,396	4,012	65,067	2,263	-	165,558
AA and above	-	22,003	4,930	8,942	1,429	-	37,304
A and above	-	13,159	3,770	3,886	1,860	-	22,675
BBB- and above	-	3,847	823	4,243	2,187	-	11,100
Non-investment grade	-	353	169	3,515	2,042	-	6,079
Unrated	-	504	289	1,949	2,601	1,036	6,379
	49,820	84,262	13,993	87,602	12,382	1,036	249,095

Key points

●	67% (31 December 2009 - 66%) of the portfolio is AAA rated; 94% (31 December 2009 - 95%) is investment grade. Securities issued by central and local governments comprised 55% (31 December 2009 - 54%) of the portfolio.
●	See note 12 on page 84 for additional information.

Risk and capital management (continued)

Credit risk (continued)

Loans and advances to customers by geography and industry

The following table analyses the balance sheet carrying value of loans and advances to customers (excluding reverse repurchase agreements and stock borrowing) by industry and geography.

	31 March 2010			31 December  2009
	Core	Non-Core	Total
	£m	£m	£m	£m
UK Domestic
Central and local government	3,391	95	3,486	3,174
Finance	18,211	2,557	20,768	17,023
Individuals - home	92,302	1,838	94,140	92,583
Individuals - other	23,727	1,005	24,732	25,245
Other commercial and industrial comprising:
-  Manufacturing	8,091	2,551	10,642	11,425
-  Construction	4,703	2,723	7,426	7,780
-  Service industries and business activities	39,561	11,421	50,982	51,660
-  Agriculture, forestry and fishing	2,762	127	2,889	2,913
-  Property	20,958	26,326	47,284	48,859
Finance leases and instalment credit	5,326	10,851	16,177	16,186
Interest accruals	537	146	683	893
	219,569	59,640	279,209	277,741
UK International
Central and local government	1,769	127	1,896	1,455
Finance	13,209	4,059	17,268	18,255
Individuals - home	69	7	76	1
Individuals - other	410	-	410	505
Other commercial and industrial comprising:
-  Manufacturing	5,547	779	6,326	6,292
-  Construction	2,443	541	2,984	2,824
-  Service industries and business activities	24,070	4,196	28,266	26,951
-  Agriculture, forestry and fishing	188	10	198	171
-  Property	16,924	6,533	23,457	22,935
Interest accruals	-	-	-	2
	64,629	16,252	80,881	79,391
Europe
Central and local government	237	1,150	1,387	1,498
Finance	3,727	1,538	5,265	4,877
Individuals - home	12,111	6,309	18,420	21,773
Individuals - other	1,564	1,461	3,025	2,886
Other commercial and industrial comprising:
-  Manufacturing	7,432	7,989	15,421	15,920
-  Construction	1,953	1,245	3,198	3,113
-  Service industries and business activities	19,597	9,160	28,757	28,971
-  Agriculture, forestry and fishing	841	377	1,218	1,093
-  Property	12,753	8,279	21,032	20,229
Finance leases and instalment credit	409	1,011	1,420	1,473
Interest accruals	144	198	342	411
	60,768	38,717	99,485	102,244

Risk and capital management (continued)

Credit risk (continued)

Loans and advances to customers by geography and industry (continued)

	31 March 2010			31 December  2009
	Core	Non-Core	Total
	£m	£m	£m	£m
US
Central and local government	206	64	270	260
Finance	9,453	857	10,310	11,295
Individuals - home	22,750	4,390	27,140	26,159
Individuals - other	7,780	3,620	11,400	10,972
Other commercial and industrial comprising:
-  Manufacturing	5,755	1,316	7,071	7,095
-  Construction	498	134	632	622
-  Service industries and business activities	15,095	4,032	19,127	18,583
-  Agriculture, forestry and fishing	32	-	32	27
-  Property	1,677	3,906	5,583	5,286
Finance leases and instalment credit	2,465	-	2,465	2,417
Interest accruals	215	90	305	298
	65,926	18,409	84,335	83,014
Rest of the World
Central and local government	922	30	952	1,273
Finance	8,526	598	9,124	8,936
Individuals - home	399	177	576	391
Individuals - other	1,456	460	1,916	2,063
Other commercial and industrial comprising:
-  Manufacturing	2,859	995	3,854	3,942
-  Construction	81	189	270	421
-  Service industries and business activities	4,846	2,728	7,574	7,911
-  Agriculture, forestry and fishing	6	-	6	75
-  Property	334	1,878	2,212	2,117
Finance leases and instalment credit	9	31	40	27
Interest accruals	85	22	107	124
	19,523	7,108	26,631	27,280
Total
Central and local government	6,525	1,466	7,991	7,660
Finance	53,126	9,609	62,735	60,386
Individuals - home	127,631	12,721	140,352	140,907
Individuals - other	34,937	6,546	41,483	41,671
Other commercial and industrial comprising:
-  Manufacturing	29,684	13,630	43,314	44,674
-  Construction	9,678	4,832	14,510	14,760
-  Service industries and business activities	103,169	31,537	134,706	134,076
-  Agriculture, forestry and fishing	3,829	514	4,343	4,279
-  Property	52,646	46,922	99,568	99,426
Finance leases and instalment credit	8,209	11,893	20,102	20,103
Interest accruals	981	456	1,437	1,728
Loans and advances to customers - gross	430,415	140,126	570,541	569,670
Loan impairment provisions	(7,259)	(9,410)	(16,669)	(15,016)
Total loans and advances to customers	423,156	130,716	553,872	554,654

Risk and capital management (continued)

Credit risk (continued)

Risk elements in lending (REIL) and potential problem loans (PPL)

The table below analyses the Group's loans that are classified as REIL and PPL.

	31 March 2010				31 December 2009
	Core	Non-Core	Total		Core	Non-Core	Total
	£m	£m	£m		£m	£m	£m
Loans accounted for on a non-accrual basis (2):
-  Domestic	6,535	7,738	14,273		6,348	7,221	13,569
-  Foreign	4,268	14,534	18,802		4,383	13,859	18,242
	10,803	22,272	33,075		10,731	21,080	31,811
Accruing loans past due  90 days or more (3):
-  Domestic	1,315	1,144	2,459		1,135	1,089	2,224
-  Foreign	421	581	1,002		223	731	954
	1,736	1,725	3,461		1,358	1,820	3,178
Total REIL	12,539	23,997	36,536		12,089	22,900	34,989
PPL (4):
-  Domestic	150	140	290		137	287	424
-  Foreign	188	115	303		135	365	500
Total PPL	338	255	593		272	652	924
Total REIL and PPL	12,877	24,252	37,129		12,361	23,552	35,913
REIL as a % of gross lending to customers   excluding reverse repos (5)	2.9%	16.5%	6.3%		2.8%	15.1%	6.1%
REIL and PPL as a % of gross lending to   customers excluding reverse repos (5)	3.0%	16.7%	6.4%		2.9%	15.5%	6.2%

Notes:

(1)	'Domestic' consists of the UK domestic transactions of the Group.  'Foreign' comprises the Group's transactions conducted through the offices outside the UK and those offices in the UK specifically organised to service international banking transactions.
(2)	All loans against which an impairment provision is held are reported in the non-accrual category.
(3)	Loans where an impairment event has taken place but no impairment recognised.  This category is used for fully collateralised non-revolving credit facilities.
(4)	Loans for which an impairment has occurred but no impairment provision is necessary.  This category is used for fully collateralised advances and revolving credit facilities where identification as 90 days overdue is not feasible.
(5)	Includes gross loans relating to disposal groups.

Key points

●	REIL increased by 4%, with rises in Non-Core and Ulster being partly offset by reductions in GBM.
●	REIL and PPL represent 6.4% of gross loans to customers, up from 6.2% at year-end.

Risk and capital management (continued)

Credit risk (continued)

Risk elements in lending and potential problem loans (continued)

	REIL	PPL	REIL & PPL	Total   provision	Total   provision as   % of REIL	Total   provision   as % of   REIL & PPL
	£m	£m	£m	£m	%	%
31 March 2010
UK Retail	4,706	-	4,706	2,810	60	60
UK Corporate	2,496	106	2,602	1,367	55	53
Wealth	219	45	264	58	26	22
Global Banking & Markets	1,237	177	1,414	1,298	105	92
Global Transaction Services	184	7	191	184	100	96
Ulster Bank	2,987	3	2,990	1,157	39	39
US Retail & Commercial	710	-	710	523	74	74
Core	12,539	338	12,877	7,397	59	57
Non-Core	23,997	255	24,252	9,430	39	39
	36,536	593	37,129	16,827	46	45
31 December 2009
UK Retail	4,641	-	4,641	2,677	58	58
UK Corporate	2,330	97	2,427	1,271	55	52
Wealth	218	38	256	55	25	21
Global Banking & Markets	1,800	131	1,931	1,289	72	67
Global Transaction Services	197	4	201	189	96	94
Ulster Bank	2,260	2	2,262	962	43	43
US Retail & Commercial	643	-	643	478	74	74
Core	12,089	272	12,361	6,921	57	56
Non-Core	22,900	652	23,552	8,252	36	35
	34,989	924	35,913	15,173	43	42

Key points

●	Provision coverage increased during the first quarter from 43% and 42% to 46% and 45% on REIL and REIL & PPL respectively, with increases in both Core and Non-Core.
●	Coverage in Core improved across most divisions, with the exception of Ulster.

Analysis of loan impairment provisions on loans to customers

	31 March 2010				31 December 2009
	Core	Non-Core	Total		Core	Non-Core	Total
	£m	£m	£m		£m	£m	£m
Latent loss	2,017	809	2,826		2,005	735	2,740
Collectively assessed	3,783	1,164	4,947		3,509	1,266	4,775
Individually assessed	1,459	7,437	8,896		1,272	6,229	7,501
Total (1)	7,259	9,410	16,669		6,786	8,230	15,016

Note:

(1)	Excludes £158 million relating to loans and advances to banks (31 December 2009 - £157 million).

Risk and capital management (continued)

Funding and liquidity risk

The Group's liquidity policy is designed to ensure that at all times the Group can meet its obligations as they fall due.

Liquidity management within the Group addresses the overall balance sheet structure and the control, within prudent limits, of risk arising from the mismatch of maturities across the balance sheet and from the exposure to undrawn commitments and other contingent obligations.

Loan to deposit ratio (net of provisions): The Group monitors the loan to deposit ratio as a key metric.  This ratio has improved from 135% at 31 December 2009 to 131% at 31 March 2010 for the Group and from 104% at 31 December 2009 to 102% at 31 March 2010 for the Core business.  The Group has a target of 100% for 2013.  The gap between customer loans and customer deposits (excluding repos and bancassurance) narrowed by £11 billion from £142 billion at 31 December 2009 to £131 billion at 31 March 2010, due primarily to growth in deposits and a reduction in Non-Core assets.

Short-term wholesale funding: The overall reliance on wholesale funding with less than 1 year residual maturity has reduced from £249 billion (including £110 billion of deposits from banks) at 31 December 2009 to £222 billion (including £94 billion of deposits from banks) at 31 March 2010.

Undrawn commitments: The Group has been actively managing down the amount of undrawn commitments that it is exposed to.  Undrawn commitments have decreased from £289 billion at 31 December 2009 to £283 billion at 31 March 2010.

Liquidity reserves: The Group is targeting a liquidity pool of £150 billion by 2013.  The table below analyses the breakdown of these assets which comprise government securities, other liquid assets and a pool of unencumbered assets that are available for securitisation to raise funds if and when required. 

	31 March  2010	31 December  2009
Liquidity reserves	£m	£m
Central Group Treasury portfolio	25,212	19,655
Treasury bills	19,810	27,547
Other government securities	14,333	10,205
Government securities	59,355	57,407
Cash and central bank balances	42,008	51,500
Unencumbered collateral (1)	46,370	42,055
Other liquid assets	17,158	19,699
	164,891	170,661

Note:

(1)	Includes secured assets which are eligible for discounting at central banks.

Risk and capital management (continued)

Funding and liquidity risk (continued)

Repo agreements: At 31 March 2010 the Group had £81 billion (31 December 2009 - £68 billion) of customer secured funding and £48 billion (31 December 2009 - £38 billion) of bank secured funding, which includes borrowing using central bank funding schemes.  With markets continuing to stabilise through the first quarter of 2010, the Group has reduced its reliance on secured funding from central bank liquidity schemes.

Wholesale funding breakdown

The tables below analyses the composition of the Group's sources of wholesale funding and the maturity profile of the Group's debt securities in issue and subordinated debt. 

	31 March 2010			31 December 2009
	£m	%		£m	%
Deposits by banks (1)	100,168	12.6		115,642	14.3
Debt securities in issue:
-  Commercial paper	36,588	4.6		44,307	5.5
-  Certificates of deposits	57,369	7.2		58,195	7.2
-  Medium term notes and other bonds	126,610	15.9		125,800	15.6
-  Securitisations	18,645	2.3		18,027	2.2
	239,212	30.0		246,329	30.5
Subordinated liabilities	31,936	4.0		31,538	3.9
Total wholesale funding	371,316	46.6		393,509	48.7
Customer deposits (1)	425,102	53.4		414,251	51.3
	796,418	100.0		807,760	100.0

Note:

(1)	Excludes repurchase agreements and stock lending.

	31 March 2010					31 December 2009
	Debt  securities   in issue	Subordinated debt	Total			Debt  securities  in issue	Subordinated  debt	Total
	£m	£m	£m	%		£m	£m	£m	%
Less than one year	126,102	1,835	127,937	47.2		136,901	2,144	139,045	50.0
1-5 years	73,842	6,079	79,921	29.5		70,437	4,235	74,672	26.9
More than 5 years	39,268	24,022	63,290	23.3		38,991	25,159	64,150	23.1
	239,212	31,936	271,148	100.0		246,329	31,538	277,867	100.0

Risk and capital management (continued)

Funding and liquidity risk (continued)

Wholesale funding breakdown (continued)

Key points

●	During the first quarter of 2010, the Group issued £8 billion of public, private and/or structured unguaranteed debt securities with a maturity greater than one year.
●	Debt securities with a remaining maturity of less than 1 year have decreased during the quarter by £11 billion to £126 billion at 31 March 2010, down from £137 billion at 31 December 2009 reflecting continued deleveraging within the Group.
●	As a result of the above, the proportion of debt instruments with a remaining maturity of greater than one year has increased from 50% at 31 December 2009 to 53% at 31 March 2010.
●	The Group has recently received approval from the UK Financial Services Authority for a €15 billion covered bond programme which is ready to launch.

Net stable funding ratio

The net stable funding ratio shows the proportion of structural term assets which are funded by stable funding including customer deposits, long-term wholesale funding, and equity. The measure has remained stable at 90%. The Group's measurement basis will be reassessed as regulatory proposals are developed and industry standards implemented.

	31 March 2010			31 December 2009
		ASF(1)			ASF(1)		Weighting
	£bn	£bn		£bn	£bn		%
Equity	81	81		80	80		100
Wholesale lending > 1 year	149	149		144	144		100
Wholesale lending < 1 year	222	-		249	-		-
Derivatives	444	-		422	-		-
Repos	129	-		106	-		-
Customer deposits	425	361		415	353		85
Other (deferred taxation, insurance liabilities, etc)	133	-		106	-		-
Total liabilities and equity	1,583	591		1,522	577
Cash	42	-		52	-		-
Inter bank lending	57	-		49	-		-
Debt securities	252	50		249	50		20
Derivatives	462	-		438	-		-
Reverse repos	96	-		76	-		-
Advances < 1 year	138	69		139	69		50
Advances >1 year	416	416		416	416		100
Other (prepayments, accrued income, deferred taxation)	120	120		103	103		100
Total assets	1,583	655		1,522	638
Net stable funding ratio		90%			90%

Note:

(1)	Available Stable Funding.

Risk and capital management (continued)

Market risk 

Market risk arises from changes in interest rates, foreign currency, credit spread, equity prices and risk related factors such as market volatilities.  The Group manages market risk centrally within its trading and non-trading portfolios through a comprehensive market risk management framework.  This framework includes limits based on, but not limited, to VaR, scenario analysis, position and sensitivity analyses.

At the Group level, the risk appetite is expressed in the form of a combination of VaR, sensitivity and scenario limits.  VaR is a technique that produces estimates of the potential change in the market value of a portfolio over a specified time horizon at given confidence levels.  For internal risk management purposes, the Group's VaR assumes a time horizon of one trading day and confidence level of 99%.  The Group's VaR model is based on a historical simulation model, utilising data from the previous two years trading results.

The VaR disclosure is broken down into trading and non-trading, where trading VaR relates to the main trading activities of the Group and non-trading reflects the VaR associated with reclassified assets, money market business and the management of internal funds flow within the Group's businesses.

As part of the ongoing review and analysis of the suitability of the VaR model, a methodology enhancement to the US ABS VaR was approved and incorporated into the regulatory model in Q1 2010. The enhancement replaced the absolute spread-based approach with a relative price-based mapping scheme. The enhancement better reflects the risk in the context of position changes, downgrades and vintage as well as improving differentiation between prime, Alt-A and sub-prime exposures.

All VaR models have limitations, which include:

●	Historical simulation VaR may not provide the best estimate of future market movements.  It can only provide a prediction of the future based on events that occurred in the time series horizon.  Therefore, events more severe than those in the historical data series cannot be predicted;
●	VaR that uses a 99% confidence level does not reflect the extent of potential losses beyond that percentile;
●	VaR that uses a one-day time horizon will not fully capture the profit and loss implications of positions that cannot be liquidated or hedged within one day; and
●	The Group computes the VaR of trading portfolios at the close of business.  Positions may change substantially during the course of the trading day and intra-day profit and losses will be incurred.

These limitations mean that the Group cannot guarantee that profits or losses will not exceed the VaR. 

Risk and capital management (continued)

Market risk (continued)

Traded portfolios

The table below analyses the VaR for the Group's trading portfolios segregated by type of market risk exposure.

	31 March 2010 (1)					31 December 2009 (1)
	Average	Period end	Maximum	Minimum		Average	Period end	Maximum	Minimum
	£m	£m	£m	£m		£m	£m	£m	£m
Interest rate	47.5	54.4	64.2	32.5		38.8	50.5	59.8	28.1
Credit spread	148.8	163.3	191.5	113.0		165.4	174.8	194.7	146.7
Currency	18.6	22.2	24.7	13.9		18.9	20.7	25.5	14.6
Equity	11.3	8.2	17.3	6.6		11.1	13.1	19.8	2.7
Commodity	10.6	10.8	14.0	8.3		14.9	8.9	32.1	6.6
Diversification		(126.4)					(86.1)
Total	140.6	132.5	204.7	103.0		158.8	181.9	188.8	128.7
Core	87.2	82.4	145.4	58.9		112.9	127.3	135.4	92.8
CEM (2)	37.5	33.6	41.2	30.3		38.5	38.6	41.0	34.3
Core excluding CEM	79.5	73.5	108.7	53.6		93.0	97.4	116.5	70.6
Non-Core	84.6	87.1	98.8	63.2		78.0	84.8	100.3	58.6

Notes:

(1)	As of and for the quarter ended.
(2)	Counterparty Exposure Management.

Key points

●	Overall period end market exposure across the asset classes declined as we realigned positions in light of our perception of market opportunity and observed changes in market liquidity.
●	The credit spread and Core VaR have decreased significantly in Q1 2010 compared with Q4 2009 due to the implementation in January of the relative price-based mapping scheme described above.
●	The Non-Core VaR also decreased due to the implementation of the price mapping scheme, but this was more than offset by the weakening of sterling against the US dollar.
●	The diversification effect increased in Q1 2010 compared to the previous quarter, reducing the overall level of risk.  This was primarily due to underlying position changes in interest rate trading and counterparty exposure management.  There was also a small increase in diversification benefit following the implementation of the new ABS VaR model.

Risk and capital management (continued)

Market risk (continued)

Non-traded portfolios

The table below analyses the VaR for the Group's non-trading portfolios segregated by type of market risk exposure.

	31 March 2010 (1)					31 December 2009 (1)
	Average	Period end	Maximum	Minimum		Average	Period end	Maximum	Minimum
	£m	£m	£m	£m		£m	£m	£m	£m
Interest rate	12.2	13.4	15.8	9.0		13.2	16.5	17.2	9.5
Credit spread	175.9	161.8	226.9	157.0		226.5	213.3	240.1	213.3
Currency	1.4	0.9	4.9	0.3		1.6	0.6	7.0	0.5
Equity	1.6	0.8	7.3	0.2		2.8	2.3	3.4	1.7
Diversification		(27.1)					(26.0)
Total	168.2	149.8	216.2	147.6		216.2	206.7	232.1	201.5
Core	93.2	76.2	145.7	76.2		131.0	129.4	140.7	115.7
Non-Core	90.2	101.2	107.1	79.6		99.1	87.6	107.9	80.3

Note:

(1)	As of and for the quarter ended.

Key points

●	As for traded VaR, the non-traded credit spread and Core VaR have decreased significantly during the quarter due to the to the implementation of the relative price-based mapping scheme in the VaR methodology discussed above.
●	Available-for-sale asset sales also contributed to this VaR reduction.
●	The Q1 2010 period end Non-Core VaR increased due to the implementation in March of the US ABS VaR methodology for the European managed non-traded portfolios. The Non-Core banking book is dominated by positions booked in Europe, comprising both US and European ABS.  In this instance the VaR relating to the US ABS position increased as a result of greater volatility in the time series.

 

END

 

 

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