Non-Core and GRG Divtsional Risk and Audit Committee 27 July 2012 GRG Financial Update 02 2012 Author/Sponsor Declan Hourican, Chief Finance and Administrative Officer GRG Purpose of Paper: High level view of key GRG metrics containing: Executive summary of GRG Dashboard covering finance, risk and operational metrics Financial summary Portfolio summary )3 )3 Points for Noting Net of new cases Total have decreased by ?14.8bn, from ?94.9bn to ?80.1bn as at June. Additional incremental contribution, net of expenses, of ?162.8m YTD June (?1.2bn December FY 2011). Securing an upside portfolio, with 316 equity stakes with a fair value of ?0.7bn and 2658 Property Panicipations as at June 2012. As at June 2012, the GRG Portfolio case numbers have continued to decrease to 12,062 cases (FY 2011 12,499), with assets under management increasing month on month to ?61.9bn (?65.2bn FY 2011). We expect case volumes to continue to decline in H2 but we are unsure if we will hit ?55bn expected portfolio size due to poor economic conditions. Cost income ratio of 19.0% as at YTD June 2012 (adjusted for market movements on SIG equities and WR property FV write-downs. Financiais - Ail tinanciai infolmalion reflects Incremental income earned by GRG and is in ettect shadow income. The income is pan or owisionai income submissions for the IMS. Pontoiio - cases are managed by GRG but case values sit divisional balance sheet can, citizens ulster, Non Core) 'note RWA equivalent quoted is snown on a on basis, Action Requested For information Distribution DRAC members and attendees fi RBS GRG Executive Pack - Quarterly Report June 2012 Extract of GRG EXCO Pack for Non- Core 8- GRG DRAC GRG :xecum Pack -Quil\eny Reno" 3m 7 cm"; Executive Summary .......................................................................................................................................................................................... 3 Executive – ExCo Dashboard .......................................................................................................................................................................... 4 Contribution & Value Add Summary per Division June 2012 ....................................................................................................................... 5 Capital Management Summary as at end of May 2012 .................................................................................................................................. 5 Financial Report ................................................................................................................................................................................................ 6 Business Report.............................................................................................................................................................................................. 11 GRG Executive Pack - Quarterly Report – Information Classification is STRICTLY CONFIDENTIAL 2 Executive Summary The report provides an overview of RBS GRG business as at the end of June unless otherwise stated. The value added by GRG, as well as the key operational highlights, were as follows; „ Main Challenges: • Focus on Capital and Non Core Run-off continue to remain the top two GRG priorities. H1 RWA reduction is equal to £14.8bn, net of new cases. Non Core portfolio reduction equates to £4.9bn of utilised balances. • Macro Economic Environment - GRG Risk/EMEA continue to be engaged via a number of working groups and forums in relation to a potential Eurozone event. A Eurozone Distress Communication Plan has also been developed for GRG. • FSA – The swap miss-selling investigation is consuming a large amount of time both dealing with customer complaints/issues and also attending internal meetings on the subject. This has impacted c.2206 customers over c.3303 trades. • Bank Systems Major Incident - GRG are fully engaged in various incident calls around the recent systems issues. Significant impact on GRGI and they have been unable to focus on anything else for c.3 weeks. • FSA taking a punitive view on the capital treatment of West Register and owned assets which will have an adverse effect on the business model and capital held for owned assets. „ Contribution to Group Performance: • Net of new cases Total RWA’s have decreased by £14.8bn, from £94.9bn to £80.1bn as at June. • Additional incremental contribution, net of expenses, of £162.8m YTD June (£1.2bn December FY 2011). • Securing an upside portfolio, with 316 equity stakes with a fair value of £0.7bn and 2,658 Property Participations as at June 2012. • As at June 2012, the GRG Portfolio case numbers have continued to decrease to 12,062 cases (FY 2011 12,499), with assets under management increasing slightly month on month to £61.9bn (£65.2bn FY 2011). • We expect case volumes to continue to decline in H2 but we are unsure if we will hit £55bn expected portfolio size due to poor economic conditions. • Cost income ratio of 19.0% as at YTD June 2012 (adjusted for market movements on SIG equities and WR property FV write-downs. „ Operational and Regulatory Risk: • The top risk themes remain Data Quality/Capital, ensuring a suitable oversight model for Ireland, embedding a robust Second Line of Defence, KYC/AML remediation, and the Group Policy Framework. • The CEC process is underway for GRG. Operational Risk Assessments have started in Real Estate Restructuring and Credit Risk. In terms of GPF implementation the DPSO's are in the process of being appointed across GRG in order to gain line of sight on Policy Implementation in GRG. • The volume of open addressing and past due issues has increased during the month. Of the six new addressing issues raised in June, four were raised by GRGI and two raised by RBS Americas. • Following the recent systems incident, the Head of Operational Risk, GRG has been to Dublin to assist with the GRGI response. „ People: • Gross turnover is at 11.5% June YTD (9.9% June 2011). We have had 5 senior resignations since the bonus vestings. Note:- RWA equivalent quoted is shown on a CT1 basis. GRG Executive Pack - Quarterly Report – Information Classification is STRICTLY CONFIDENTIAL 3 Executive – ExCo Dashboard Value-Added Portfolio Headcount Value Added by GRG GRG Portfolio by Value (£m) and Volume as of end of June 2012 Income Statement Additional Incremental Contribution, net of Expenses £163m (YTD June) Estimated Expected Loss Mitigation on RTS/De-risked Cases YTD Error! Not a valid link. Error! Not a valid link. Global GRG Headcount (includes secondees) Error! Not a valid link. £0.6bn (YTD May) Reduction in Exposure on RTS/De-risked cases Balance Sheet Limits Reduction £4.4bn (YTD May) Income Statement Additional Incremental Contribution – The additional incremental contribution of £163m represents the additional Income that GRG have earned on cases net of expenses as per GRG P&L statement for June 2012 YTD. Expected Loss Mitigation on RTS/De-risked cases is £0.6bn and represents the best estimate of how much potential loss has been avoided. The Expected Loss mitigation is calculated by taking the difference in EL on entry to and exit from GRG. Balance Sheet Reduction in Exposure on RTS/De-risked cases – The reduction in exposure has been calculated as the difference in the Exposure on entry to and exit from GRG on RTS and Exit cases. The cumulative YTD figure is £4.4bn for RTS/de-risked cases. RTS & De-risked cases do not include Telford. Stressed Losses Error! Not a valid link. Operational Risk Highlights (incl. SOX) Error! Not a valid link. Stress losses within MIB and CBD have remained relatively flat. MIB includes RBS and RBS NV. Overall risk The Operational Risk (OR) profile across GRG has been significantly impacted by the group wide IT incident and this has been a key operational risk focus for the function. Other focus areas for the Operational Risk function remain Risk Assessment, Operational Risk Appetite, Scenario Analysis although progress on these has been impacted by the incident. Risk Assessments have commenced in RER and Credit Risk. In addition a key focus this month has also been on progressing the H1 2012 Control Environment Certification process. GNEPs There were no GRG-owned GNEPs in June. However, GRG has been materially impacted by the ‘major’ Business Services IT outage which occurred at the end of June. Major delays to overnight transaction processing in NatWest, RBS, Ulster Bank were caused by multiple failures in batch processing and the Group has been running a major recovery incident since that time. The impact on customers including in the affected Divisions including GRG has been significant and widely reported in the national media. The majority of batch processing is now up to date for RBS and NatWest with customer account transaction and account balances up to date. GRG UK continues to deal with residual issues but are largely back to BAU. However, in Ulster Bank, the batch processing is not expected to be up to date until week commencing 9th July. GRG Ireland has been running a ‘major’ incident since the event occurred and GRG Operational Risk has been involved and continue to provide support. The key GRGI focus is now on operational readiness preparation for when the batch update has caught up. Risk issues The volume of open addressing and past due issues has increased in June. The six new addressing issues raised this month were self-identified by the business and risk, and relate to a number of policy standards with no concentration on any one standard. We expect the operational risk gap closing activities to continue to influence the trend going forward. The major addressing issue relates to non compliance with the revised Anti Money Laundering Policy in relation to Customer Due Diligence processes and the issue is not expected to close until the end of next year. The volume of past due issues has increased mainly due to new past dues owned by COO and regulatory risk. Team Headcount UK Property GRGI Europe Americas Asia Rainbow Centrals SIG Total 389 113 407 63 94 16 19 194 34 1329 Key Ratios Q2 2012 (FY 2011 comparison) GRG portfolio: £61.9bn as of June (£65.2bn FY 2011) Cost/income ratio: 19% as at Q2 2012 (10% FY 2011 ) Average value of cases: £5.1m as of Q2 2012 (£5.2m FY 2011) Average number of cases per staff: 9 as of June (10 FY 2011) % of upsides to new cases: 41% as of June (26% FY 2011) Brand Split Number of Cases (Q2 2012) % of Total Portfolio (Q2 2012) NV 293 2% RBS 6,999 58% Citizens 2,090 17% Ulster 2,680 22% TOTAL 12,062 100% Operational Risk losses. No actual net loss recorded against GRG YTD. There is a potential loss of £29,031,453.99 relating to a legal event raised also as a GNEP in Sept 2011. This relates to a litigation case filed against GRG in relation to a loan agreement. The claim has been rejected by the Courts but is now subject to appeal." GRG Executive Pack - Quarterly Report – Information Classification is STRICTLY CONFIDENTIAL 4 Contribution & Value Add Summary per Division June 2012 Division Jun YTD Income (£m) Jun YTD Costs (£m) Jun YTD Contribution (£m) Jun YTD Cost/Income Ratio Limit Reduction for RTS/Exit cases (£m) Utilisation Reduction for RTS/Exit cases (£m) RWA Reduction for RTS/Exit cases (£m) Capital Deduct* Reduction for RTS/Exit cases (£m) Citizens* 13.3 (4.0) 9.3 30.1% 84 92 227 11 281 MIB 65.4 (7.8) 57.6 11.9% 261 258 605 70 958 CBD 74.0 (19.6) 54.4 26.5% 663 466 689 48 925 Ulster 2.5 (0.3) (2.2) 12.0% 10 10 18 1 20 Non Core 82.7 (43.5) 39.2 52.6% 3,332 2,691 6,764 497 8,841 Total 237.9 (75.2) 162.8 31.6% 4,350 3,517 8,303 627 11,025 Notional RWA** Reduction for RTS/Exit cases (£m) Capital Management Summary as at end of May 2012 EAD (£m) June Portfolio Value (£m) Expected Loss (£m) RWA (£m) Capital Deduct (£m) Total RWA** (RWA + Notional RWA) Citizens 1,352 1,145 183 1,928 183 2,840 MIB 8,247 7,383 1,282 14,498 338 16,066 CBD 12,663 12,561 2,521 14,172 1,253 20,362 Ulster 5,592 5,086 2,056 7,344 873 11,707 Non Core 35,692 35,722 16,206 19,734 6,185 43,334 Total 63,548 61,897 22,248 57,676 8,832 94,310 Division Split Value add data is one month in arrears and excludes Citizens as non material *This represents the reduction in Expected Loss and regulatory reduction (net of provisions) **Total RWA = RWA + Notional RWA Notional RWA = Capital Deduct / 10% (Core) + Capital deduct / 12% (Non Core) x 50% EL CT1 Please note, EAD does not include WR and SIG. GRG Executive Pack - Quarterly Report – Information Classification is STRICTLY CONFIDENTIAL 5 'n'fi RBS Flnanmal Report m. Glohll Group Pamolio mm (Em) m2, Glob-l mum-mm Gmup cm Numb": in 5mm "my arm-n pamuu [any mm mm yams GRG Dumohu "messed mm my>> a: 04 Ao'z 9mlink. Newcases mum a; <Financial Report FR4. Portfolio by Business - Case Numbers FR5. Portfolio by Business - Case Values Error! Not a valid link. Error! Not a valid link. „ „ FR4. Portfolio by Business – Case Numbers June 2012: • • • • • • • • • • • BRG: 3,434 cases; CRU: 152 cases; Recs: 1,172 cases; Americas: 89 cases; EMEA: 280 cases; Asia: 79 cases; Citizens: 2,090 cases; GRGI: 2,680 cases; Divestment: 1,594 cases; Property: 176 cases; SIG: 316 equity positions. Total GRG Cases: 12,062 „ FR5. Portfolio by Business Case Values March 2012: • • • • • • • • • • • FR6. Cumulative Contribution „ GRG Portfolio as at end of June 2012 Core (£m) Non-Core (£m) Total (£m) APS 5,045 12,061 17,107 Non-APS 11,638 10,194 21,832 Partially 9,460 13,499 22,959 Total 26,143 35,754 61,897 GRG Executive Pack - Quarterly Report – Information Classification is STRICTLY CONFIDENTIAL CRU: £5.9bn; Recs: £1.9bn; Americas: £3.7bn; EMEA: £9.2bn; Asia: £1.3bn; Citizens: £1.4bn; GRGI: £18.4bn; Divestment: £1.9bn; Property: £13.0bn; SIG: £0.7bn. Total GRG Value: £61.9bn FR7. Core / Non-Core (APS coverage) Error! Not a valid link. BRG: £4.4bn; FR6. Cumulative Contribution (£m): GRG’s achieved cumulative contribution of £(17)m Q2 2012. (FV losses on SIG & WR partially offset other income in the quarter resulting in a £17m contribution loss.) „ FR7. Core, Non-Core (£m): GRG’s portfolio totals £61.9bn: • • Core: £26.1bn; and Non-Core: £35.8bn. 7 'n'fi RBS PLL Maw-mum a v-(Bm mum Q2 2012 Dunn (m 1- Amncas 's Amancas '0 swe 5 ux :1 .14 Pmpen e1 7 my a: In The ma'omy 01 Largest Income camnbmors ve'ale reahsed and unveahsed gams an 5K3 p05 lens and large me on dea's operaung mom a! :21 am 15 cm re'ales mm on May Lake secunues mm rememmg GBP3 3m 0! meres| payments losses due |o movements shave pnee vemem shave pnee resulung unreahsed losses down due to law vame \osses Gm mm. new gimme" connozum Financial Report FR9. Profit and Loss Summary – June 2012 June 2012 YTD June 2012 YTD Actual Budget GRG Interest 55,833 38,096 17,737 62,653 GRG Fee 71,336 70,265 1,071 461,188 Notional Fee 1,954 182 1,772 690 Other Upside 0 0 0 0 6,961 2,258 4,703 3,446 SIG Realised Gain/(Loss) 139,680 0 139,680 140,482 SIG Unrealised Gain/(Loss) (76,267) 2,414 (78,680) 266,904 1,991 203 1,788 (29) (82,379) 13,125 (95,504) 6,722 Margin Enhancement 45,531 44,733 798 67,874 Treasury / FM Products / FX 3,495 3,699 (204) 4,107 69,793 237,929 17,227 192,201 52,565 45,727 34,353 1,048,391 (66,128) (75,137) 49,009 (68,151) (451) (268) (184) (237) Travel & Entertaining (1,341) (1,475) 134 (1,631) Legal & Professional (2,538) (5,532) 2,994 (6,913) £'000s Variance June 2011 YTD Actual Income Property Participation SIG Non-Investment West Register Property Other Total Income Expenses Staff Premises & Equipment Training (251) (613) 361 (98) Total Expenses (4,448) (75,157) (4,076) (87,100) (372) 11,943 (3,286) (80,316) Contribution 162,772 105,101 57,670 968,074 Other Upsides taken 2011 Direct Equity 19 Equity Options 8 3 PPFA 471 574 Other 111 136 Total 609 736 GRG Executive Pack - Quarterly Report – Information Classification is STRICTLY CONFIDENTIAL 23 9 Financial Report FR10. Global Restructuring Group – Provisions Error! Not a valid link. Financial Report FR11. Global Restructuring Group – Stress Loss Analysis – as at end of June 2012 (excludes WR, SIG) Error! Not a valid link.Error! Not a valid link.Error! Not a valid link. GRG Executive Pack - Quarterly Report – Information Classification is STRICTLY CONFIDENTIAL „ MIB: Stressed losses in June for MIB were £2,821m, slightly up on Q1 2012, £2,723m. MIB Non Core stressed losses were £1,787m, a small increase from £1,768m Q1 2012. „ CBD: Stressed losses in June for CBD were £1,844m, marginally up from £1,838m in Q1 2012. Non Core CBD stressed losses were £749m, a significant decrease from £829m in Q1 2012. 10 „ Ulster: Stressed losses for May were £2,862m, up from £2,555m in Q1 2012. Ulster Core increased to £890m from £788m in Q1 2012, with Non Core moving to 1,972m from £1,767m in Q1 2012. • Ulster June stressed loss data not currently available Business Report BR1. Headcount (includes secondees) Error! Not a valid link. Error! Not a valid link. Error! Not a valid link. GRG Executive Pack - Quarterly Report – Information Classification is STRICTLY CONFIDENTIAL „ BR1. GRG Headcount: The headcount, including secondees, as at end of June 2012 is 1,329 FTE’s and is analysed by business area and function. 11