Annual Report and Accounts 2018 Strategic report Page Segmental structure The Bank has both retail and commercial banking activities. The Strategic Report reportable operating segments are UK Personal & Business Banking Presentation of information 1 (UK PBB), Commercial Banking and Private Banking. RBS Group ring-fencing 1 Performance overview 1 Product offering Board of directors and secretary 2 A wide range of personal products is offered including current Financial review 3 accounts, credit cards and personal loans. This includes a mortgage book of £23.7 billion as at 31 December 2018. Capital and risk management 6 Report of the directors 47 The commercial banking product offering includes a wide range of Statement of directors’ responsibilities 50 services to small and medium sized enterprises (SMEs), mid-corporate Financial statements 51 and large corporate clients. Presentation of information Customer geography On 30 April 2018 following the completion of the first Ring-Fenced The geographic location of customers is predominately within the UK Transfer Scheme (RFTS) the entity formerly known as Adam & with a strategic focus on Scotland. Company plc was renamed The Royal Bank of Scotland plc. The Royal Bank of Scotland plc (the ‘Bank’ or ‘RBS plc’) is a wholly-owned Cost structure subsidiary of NatWest Holdings Ltd (the ‘intermediate holding Substantially all costs are recharges from NatWest. NatWest provides company’, NatWest Holdings or ‘NWH Ltd’). National Westminster the majority of shared services (including technology) and operational Bank Plc (NatWest) is also a wholly-owned subsidiary of NWH Ltd. processes under intra-group agreements. The Bank only directly The ultimate parent company is The Royal Bank of Scotland Group plc employs a small number of Private Banking staff; front office customer (RBSG or the ‘ultimate holding company’). ‘RBS Group’ comprises the facing staff are seconded from NatWest with costs recharged. The ultimate holding company and its subsidiary and associated majority of the operational costs are represented by central service undertakings. and support staff and other administrative expenses. The Bank publishes its financial statements in pounds sterling (‘£’ or Capital structure ‘sterling’). The abbreviations ‘£m’ and ‘£bn’ represent millions and Immediately prior to the business transfers, the Bank was re- thousands of millions of pounds sterling, respectively, and references capitalised as follows; to ‘pence’ represent pence in the United Kingdom (‘UK’). Reference to A £5.8 billion capital contribution was received from NatWest ‘dollars’ or ‘$’ are to United States of America (‘US’) dollars. The Holdings. abbreviations ‘$m’ and ‘$bn’ represent millions and thousands of millions of dollars, respectively, and references to ‘cents’ represent The issuance of £1 billion AT1 instruments and £1.3 billion Tier 2 cents in the US. The abbreviation ‘€’ represents the ‘euro’, and the instruments, both held by NatWest Holdings. abbreviations ‘€m’ and ‘€bn’ represent millions and thousands of The internal capital ratio minimum target of 13% continued to be met; millions of euros, respectively. with a CET 1 ratio at 31 December 2018 of 13.2%. RBS Group ring-fencing The Bank expects to declare a dividend of £1.8 billion in February The UK ring-fencing legislation requires the separation of essential 2019. The payment of this will be reflected in the 2019 Annual Report banking services from investment banking services from 1 January and Accounts, however its impact has been incorporated in the CET 1 2019. RBS Group has placed the majority of the UK and Western ratio and in the associated capital position as it is reasonably European banking business in ring-fenced banking entities under an foreseeable. intermediate holding company, NatWest Holdings. NatWest Markets Plc (NWM Plc) and RBS International (RBSI) are separate banks Performance overview outside the ring-fence, both as subsidiaries of RBSG. The profit for 2018 of £690 million primarily represents eight months of activity for the business transferred in under ring-fencing related NatWest Holdings transfers. This compares with profit for 2017 of £3.3 million which The majority of NWM Plc’s (formerly RBS plc) Personal and Business represents only the Private Banking business of Adam & Company. Banking (PBB) and Commercial Banking business, to be included in the ring-fenced bank, was transferred to the Bank in 2018. This was The operating profit before tax of £976 million includes £566 million followed by the transfer of NatWest Holdings, the Bank’s intermediate relating to UK PBB, £385 million relating to Commercial Banking and holding company to RBSG on 2 July 2018 to create a separate ring- £14 million relating to Private Banking, each reflecting strong margins fenced bank. achieved in a competitive market. Profile post Ring-Fenced Transfer Scheme (RFTS) Total income of £1,755 million included net interest income (£1,300 As at 31 December 2018, total assets were £94.5 billion. The business million), net fees and commission income (£343 million), and other can be summarised as follows: operating income (£111 million). Of this total income approximately A top 10 UK banking entity by asset size. 63% was from UK PBB, 35% from Commercial Banking and 2% from Approximately four million customers who have access to RBS Private Banking, Group-wide shared services including telephony, digital, mobile and online. Operating expenses of £754 million primarily reflected inter-company Customers are served through a Scottish network of branches and recharges (£485 million), strategic costs of £15 million and litigation ATM services, a presence in England & Wales and relationship and conduct charges of £124 million primarily relating to an increased management structures in Business Banking, Commercial and Private provision for PPI. Banking. 1 RBS plc Annual Report and Accounts 2018 Board of directors and secretary Approval of Strategic Report Chief Governance & Regulatory Officer and Board Counsel The Strategic Report for the year ended 31 December 2018 set out on Aileen Taylor (Company Secretary) (appointed 27 April 2018) pages 1 to 46 was approved by the Board of directors on 14 February 2019. Preparation for ring-fencing During 2018 in preparation for ring-fencing, a number of changes were made to the composition of the Bank’s board of directors and secretary to align the membership with National Westminster Bank Plc, the other main ring-fenced UK bank in the RBS Group. At the same time as the By order of the Board new directors and secretary were appointed the previous members as Aileen Taylor follows resigned. Company secretary 14 February 2019 Non-executive director resignations: Alexa Henderson (19 January 2018) Chairman Francesca Barnes* (27 April 2018) Howard Davies The Rt Hon Lord William Waldegrave of North Hill, PC (27 April 2018) Executive directors Mark Lund (27 April 2018) Ross McEwan Linda Urquhart OBE (27 April 2018) Katie Murray Alison Rose-Slade *re-appointed on 1 May 2018 Non-executive directors Executive director resignations: Francesca Barnes Robert Gillespie Graham Storrie (27 April 2018) Graham Beale Yasmin Jetha Michael Regan (27 April 2018) Ian Cormack Baroness Noakes Peter Flavel (27 April 2018) Alison Davis Mike Rogers Patrick Flynn Mark Seligman Fiona Mackay who was previously the company secretary also Morten Friis Dr Lena Wilson resigned on 27 April 2018. Changes to the governance committees Chairman In addition to the changes to the Bank’s board of directors and Howard Davies (appointed 27 April 2018) secretary above the committee membership and calendar was also Nominations (Chairman) updated to be in alignment with National Westminster Bank Plc, the Executive directors other main UK ring-fenced bank in the RBS Group. Ross McEwan (appointed 27 April 2018) Other board changes in 2018: Executive (Chairman) Sandy Crombie (non-executive director) resigned on 1 January 2018 Katie Murray (appointed 1 January 2019) Ewen Stevenson (executive director) resigned on 30 September 2018 Executive Penny Hughes (non-executive director) resigned on 30 May 2018 Brendan Nelson (non-executive director) resigned on 31 December Alison Rose-Slade (appointed 3 December 2018) 2018. Executive Auditors Independent non-executive directors Ernst & Young LLP Francesca Barnes (resigned on 27 April and re-appointed 1 May 2018) Chartered Accountants and Statutory Auditor Graham Beale (appointed 1 May 2018) 25 Churchill Place Audit, Nominations, Risk London E14 5EY Ian Cormack (appointed 1 May 2018) Registered office Audit, Remuneration, Risk 36 St Andrew Square Edinburgh EH2 2YB Alison Davis (appointed 27 April 2018) Telephone: +44 (0)131 556 8555 Remuneration Principal offices Patrick Flynn (appointed 1 June 2018) PO Box 1000 Audit (Chairman), Risk Gogarburn Morten Friis (appointed 27 April 2018) Edinburgh EH12 1HQ Audit, Risk Telephone +44 (0)131 626 0000 Robert Gillespie (appointed 27 April 2018) 24/25 St Andrew Square Remuneration (Chairman), Nominations, Risk Edinburgh EH2 1AF Yasmin Jetha (appointed 27 April 2018) The Royal Bank of Scotland plc Remuneration Registered in Scotland No. SC083026 Baroness Noakes (appointed 27 April 2018) Risk (Chairman), Audit, Nominations Key: Mike Rogers (appointed 27 April 2018) Audit member of the Audit Committee Remuneration Executive member of the Executive Committee Mark Seligman (appointed 27 April 2018) Nominations member of the Nominations Committee Remuneration member of the Performance and Remuneration