Annual Report and Accounts 2009 rbs.com GRA09_Cover&Contents_230mm(w).qxp:Cover&Contents_230mm(w) 16/3/10 14:41 Page 2 What’s inside Essential reading 20 Divisional review 01 What we have achieved 22 UK Retail 02 Chairman’s statement 24 UK Corporate 04 Group Chief Executive’s review 26 Wealth 06 Our markets 28 Global Banking & Markets 07 Q&As on progress 30 Global Transaction Services 08 Board of directors and secretary 32 Ulster Bank 10 Executive Committee 34 US Retail & Commercial 36 RBS Insurance 12 Our strategic plan and progress 38 Business Services & Central Functions 14 Roadmap to recovery 40 Non-Core Division & APS 16 How our businesses work together 18 Clearly defined financial targets 42 Corporate Sustainability 44 Fair banking 45 Supporting enterprise 45 Employee engagement 46 Safety and security 46 Global citizenship 47 Community Investment 48 Report and accounts 49 Business review M Why go online? 207 Governance www.rbs.com/annualreport2009 239 Financial statements if you haven’t already tried it, visit our easy-to-use, fully interactive online Annual Report. Many shareholders are 349 Additional information now benefiting from more accessible information and 371 Shareholder information helping the environment too. Essential reading What we have achieved We are one year into our five year turnaround plan and have taken significant steps along the path to recovery. What we have achieved 2009 business achievements Our 2013 vision The problems we faced have been assessed, Enduring customer franchises disclosed and mitigated. • A universal bank, anchored by retail and commercial activities with strong, The essential value of RBS is intact. All our Core complementary investment banking capability businesses are functioning normally, and our customer • A top-tier competitor in our chosen markets franchises are proving resilient. Safer and more focused We have set out the roadmap to recovery, with a clear • Capital and liquidity strength meeting strategy that is supported inside and outside RBS. the highest international standards We now have the tools we need to do the job: the right • Gross reduction in funded assets of £500 billion achieved leadership, appropriate levels of new capital and contingency protection. A valuable, private sector bank We are delivering our Strategic Plan ahead of schedule • Consistently profitable, with sustainable on both value creation (improvement of Core Bank) and shareholder returns targeted at 15% on our tangible equity capital risk reduction (Non-Core run-off). • The Government will have sold or at least The greatest risks are behind us. begun to sell its shares at a profit 2009 key highlights Notes: Significantly lower loss attributable to ordinary and B shareholders £3.6 billion (1) Before tax, amortisation of purchased intangible assets, write-down of goodwill, integration and restructuring (1) Strong Core Bank operating profit £8.3 billion costs, gain on redemption of own debt, strategic disposals, gains on pensions curtailment, bonus tax and RFS Strong Core Bank return on equity (2) 13% Holdings minority interest. Statutory operating loss before tax of £2.6 billion. Total assets reduced by (3) £696 billion (2) Indicative Core attributable profit, taxed at 28% on Funded balance sheet reduced by (3) £143 billion attributable core spot tangible equity (circa 70% of Group tangible equity based on risk-weighted assets). Core Tier 1 ratio (3) 11.0% (3) Pro forma excluding RFS Holdings minority interest. RBS Group Annual Report and Accounts 2009 1 Chairman’s statement Philip Hampton, Chairman Economic backdrop – a deep recession, but signs of recovery Last year was a tumultuous one for the global economy. In our most important market, the UK, gross domestic product shrank by 4.8% in d Watch or listen to real terms. Significant contractions were also registered in the USA Philip Hampton at www.rbs.com/annualreport2009 and, in particular, Ireland. M For biographies see pages 8-11 The recession hurt many of our customers, with unemployment rising sharply and corporate profitability coming under pressure, which in turn led to a marked deterioration in credit quality. In addition, lower interest rates squeezed margins on many of our savings products. Viewed in that context, there are resilient aspects of our performance in another disappointing year of overall losses. More positively, the economic environment started to improve in the second half of the year, with the USA and UK emerging from recession, and many asset prices rising sharply. Expectations for growth in 2010 are muted, and important adjustments still need to take place in the global economy. We plan for the future on a conservative basis. But we take comfort from the fact that we appear to be moving into the recovery phase. External influences – a price worth paying The benefits to RBS of political involvement, in the widest possible sense, are significantly larger than the costs. Put simply, if RBS hadn’t received government support, it wouldn’t be here today. Moreover, the extent of the support it received means we are in a position to rebuild carefully on our strengths. “I hope that the Group’s results give you the This support has come at a price, most notably the divestments we are clarity about our performance and direction that required to make as part of our settlement with the European Commission. enables you to share the confidence I have in These partly relate to the Commission’s views on market share, with a the brighter future for RBS.” particular focus on our small and medium-sized enterprise (SME) business in the UK, and will lead to the sale of the RBS branch network 2009 was a year of profound change and in England and Wales, and, the NatWest branches in Scotland. Other divestments are intended to act as a deterrent to companies seeking substantial challenges for RBS. But, in the state aid, most notably the required sale of our insurance business. course of the year, we have put in place the building blocks of our recovery plan and have This is not how we would have chosen to change RBS, because our absolute priority is restoring value for investors, including the UK taxpayer. begun the process of restoring the company Collectively, the businesses we will sell represent under 15% of the to good health. The Group now has appropriate Group, and the disposals are a distraction we would have preferred to levels of new capital and our job is to make it avoid. However, we have four years to make all our disposals. In that work on behalf of shareholders. time frame, we are confident we can minimise any adverse impact and we expect to get proper value for shareholders. The Government’s Asset Protection Scheme (APS) comes with a high price tag, but is a worthwhile investment on two counts. First, it enables us to pass the Financial Services Authority’s stress tests. The insurance element of the scheme is the only way we could realistically achieve that. Second, it fills the hole in our capital ratios created by the losses we made in 2009, the further charges we expect to make in 2010, and the associated increase in risk-weighted assets from pro-cyclicality and regulatory change. We need the support of the APS if we are to accomplish our goals. It is the Board’s view that the restructured terms of the APS, which were endorsed by independent shareholders in December 2009, represent a better outcome for shareholders than the outline agreement reached in February 2009, when market conditions were much more uncertain and difficult. It insures fewer assets and costs less. We do not expect to claim 2 RBS Group Annual Report and Accounts 2009 Essential reading Chairman’s statement losses under the APS, but it does provide valuable protection in the Governance – comprehensive change to Board event of more challenging economic conditions. We have also agreed and Executive Management how, if we wish to do so, we can cancel the scheme at any stage. We have made comprehensive changes to the Board and the Executive Finally, the fees have substantially reduced and we retain our deferred Management team. The Board is now the right size – smaller – and tax assets. combines the skills and experience we need to rebuild the company. Sir Sandy Crombie, Bruce Van Saun, and Phillip Scott all joined in 2009, Shareholders – rebuilding confidence and trust while Penny Hughes joined in 2010. We know that we have to rebuild confidence and trust with investors. We believe the best way to do that is to combine clear performance Our strategy involves the introduction of new management disciplines to targets with improved disclosure. Enhanced transparency will enable ensure that the RBS of tomorrow will be fundamentally different from the shareholders – both government and private – to measure and judge RBS of yesterday – in risk, in focus on customers and in accountability. performance as we work to restore the Group’s financial performance. Our new Board Risk Committee is a good example of the changes we UK Financial Investments has been a demanding, engaged and active have already set in motion. It will regularly analyse the risk profile of the shareholder, most prominently on remuneration issues. However, it has Group, identify any longer term threats and make recommendations to at all times acted in a manner consistent with its status as an arm’s the Board as appropriate. length, commercial investor, which intends to sell its interests in RBS at the earliest attractive time. Serving our communities We are acutely aware of our responsibility to repay the support we’ve Remuneration reform – leading the way received and to enable the UK taxpayer to exit from the investment in Throughout 2009, one of the biggest challenges we faced was RBS.