rbs201202236k6.htm
 
FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

 
 
Report of Foreign Private Issuer
 
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
 
For February 23, 2012
 
Commission File Number: 001-10306

 
The Royal Bank of Scotland Group plc

 
RBS, Gogarburn, PO Box 1000
Edinburgh EH12 1HQ

 
(Address of principal executive offices)
 
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
 
Form 20-F X
  
Form 40-F ___
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):_________

 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):_________


Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.


Yes
   ___
No X
 
 
If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- ________

 
 
The following information was issued as a Company announcement in London, England and is furnished pursuant to General Instruction B to the General Instructions to Form 6-K:

 
 

 
Risk and balance sheet management (continued)
 
Risk management: Credit risk
Credit risk is the risk of financial loss due to the failure of a customer to meet its obligation to settle outstanding amounts. The quantum and nature of credit risk assumed across the Group's different businesses vary considerably, while the overall credit risk outcome usually exhibits a high degree of correlation with the macroeconomic environment.
 
Loans and advances to customers by sector
In the table below loans and advances exclude disposal groups and repurchase agreements. Totals for disposal groups are also presented.
 
 
 
 
31 December 2011
  
30 September 2011
  
31 December 2010
 
Core 
Non- 
Core (1)
Total 
  
Core 
Non- 
Core (1)
Total 
  
Core 
Non- 
Core (1)
Total 
 
£m 
£m 
£m 
  
    £m 
£m 
£m 
  
£m 
£m 
£m 
                       
Central and local government
8,359 
1,383 
9,742 
  
8,097 
1,507 
9,604 
  
6,781 
1,671 
8,452 
Finance
46,452 
3,229 
49,681 
  
48,094 
4,884 
52,978 
  
46,910 
7,651 
54,561 
Residential mortgages
138,509 
5,102 
143,611 
  
143,941 
5,319 
149,260 
  
140,359 
6,142 
146,501 
Personal lending
31,067 
1,556 
32,623 
  
32,152 
2,810 
34,962 
  
33,581 
3,891 
37,472 
Property
38,704 
38,064 
76,768 
  
44,072 
40,628 
84,700 
  
42,455 
47,651 
90,106 
Construction
6,781 
2,672 
9,453 
  
7,992 
3,062 
11,054 
  
8,680 
3,352 
12,032 
Manufacturing
23,201 
4,931 
28,132 
  
24,816 
5,233 
30,049 
  
25,797 
6,520 
32,317 
Service industries and
  business activities
                      
  - retail, wholesale and repairs
21,314 
2,339 
23,653 
  
22,207 
2,427 
24,634 
  
21,974 
3,191 
25,165 
  - transport and storage
16,454 
5,477 
21,931 
  
16,236 
6,009 
22,245 
  
15,946 
8,195 
24,141 
  - health, education and
    Recreation
13,273 
1,419 
14,692 
  
16,224 
1,515 
17,739 
  
17,456 
1,865 
19,321 
  - hotels and restaurants
7,143 
1,161 
8,304 
  
7,841 
1,358 
9,199 
  
8,189 
1,492 
9,681 
  - utilities
6,543 
1,849 
8,392 
  
8,212 
1,725 
9,937 
  
7,098 
2,110 
9,208 
  - other
24,228 
3,772 
28,000 
  
24,744 
4,479 
29,223 
  
24,464 
5,530 
29,994 
Agriculture, forestry and fishing
3,471 
129 
3,600 
  
3,767 
135 
3,902 
  
3,758 
135 
3,893 
Finance leases and
  instalment credit
8,440 
6,059 
14,499 
  
8,404 
7,467 
15,871 
  
8,321 
8,529 
16,850 
Interest accruals
675 
116 
791 
  
661 
152 
813 
  
831 
278 
1,109 
                       
Gross loans
394,614 
79,258 
473,872 
  
417,460 
88,710 
506,170 
  
412,600 
108,203 
520,803 
                       
Gross loans including disposal
  groups
414,063 
80,005 
494,068 
  
417,510 
90,389 
507,899 
  
412,851 
113,001 
525,852 
                       
Loan impairment provisions
(8,292)
(11,468)
(19,760)
  
(8,748)
(11,849)
(20,597)
  
(7,740)
(10,315)
(18,055)
                       
Loan impairment provisions
  including disposal groups
(9,065)
(11,486)
(20,551)
  
(8,748)
(11,867)
(20,615)
  
(7,740)
(10,351)
(18,091)
                       
Net loans
386,322 
67,790 
454,112 
  
408,712 
76,861 
485,573
  
404,860 
97,888 
502,748 
                       
Net loans including disposal
  groups
404,998 
68,519 
473,517 
  
408,762 
78,522 
487,284 
  
405,111 
102,650 
507,761 
 
 
Note:
 
(1)
Non-Core includes amounts relating to RFS MI of £0.4 billion at 31 December 2011 (30 September 2011 - £0.6 billion; 31 December 2010 - £0.6 billion)
 
Key points
 
·
Gross loans and advances including disposal groups decreased by £31.8 billion during 2011 and £13.8 billion in Q4 2011, predominantly in Non-Core.
·
Non-Core disposal strategy led to gross loans decreasing by £33 billion (Q4 2011 - £10.4 billion). Property accounted for 40% of this decrease.

 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Risk elements in lending
The table below analyses the Group's risk elements in lending (REIL) without taking account of any security held which could reduce the eventual loss should it occur, nor of any provisions. REIL is split into UK and overseas, based on the location of the lending office.
 
 
 
31 December 2011
  
30 September 2011
  
31 December 2010
 
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
Total 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
                       
Impaired loans (1)
                      
  - UK
8,291 
7,284 
15,575 
  
9,222 
7,471 
16,693 
  
8,575 
7,835 
16,410 
  - Overseas
7,015 
16,157 
23,172 
  
6,695 
16,274 
22,969 
  
4,936 
14,355 
19,291 
                       
 
15,306 
23,441 
38,747 
  
15,917 
23,745 
39,662 
  
13,511 
22,190 
35,701 
                       
Accruing loans past due
  90 days or more (2)
                      
  - UK
1,192 
508 
1,700 
  
1,648 
580 
2,228 
  
1,434 
939 
2,373 
  - Overseas
364 
34 
398 
  
580 
256 
836 
  
262 
262 
524 
                       
 
1,556 
542 
2,098 
  
2,228 
836 
3,064 
  
1,696 
1,201 
2,897 
                       
Total REIL
16,862 
23,983 
40,845 
  
18,145 
24,581 
42,726 
  
15,207 
23,391 
38,598 
                       
REIL including disposal groups
    
42,394 
      
42,752 
      
38,651 
                       
REIL as a % of gross
  loans and advances (3)
4.4% 
30.1% 
8.6% 
  
4.3% 
27.4% 
8.4% 
  
3.7% 
20.8% 
7.3% 
Provisions as a % of REIL
50% 
48% 
49% 
  
49% 
48% 
49% 
  
52% 
44% 
47% 
 
Notes:
 
(1)
All loans against which an impairment provision is held.
(2)
Loans where an impairment event has taken place but no impairment provision recognised. This category is used for fully collateralised non-revolving credit facilities.
(3)
Includes disposal groups and excludes reverse repos.
 
 
Key points
 
·
REIL, including disposal groups, increased by £3.7 billion in the year.
   
·
Ulster Bank Group's non-performing loans increased significantly by £3.5 billion (Core - £1.9 billion; Non-Core - £1.6 billion). This principally related to residential mortgages (£0.6 billion, 39% increase) and commercial real estate (£2.4 billion, 25% increase), reflecting the continued deteriorating conditions in property sectors in Ireland. The Non-Core REIL increase related to Ulster Bank was partially offset by run-off in other Non-Core donating divisions in the year.
   
·
UK Corporate REIL increased by £1.0 billion, principally due to extended work-out periods associated with corporate loan restructuring arrangements. 
   
·
REIL declined marginally (£0.4 billion) during Q4 2011 principally reflecting Non-Core GBM write-offs.
   
·
Disposal groups REIL at 31 December 2011 of £1.5 billion comprised impaired loans of £1.3 billion; and accruing loans of £0.2 billion in relation to the UK branch based businesses, of which £1 billion was in UK Corporate and £0.5 billion in UK Retail.
 
For sector, geography and divisional analysis of loans, REIL and impairments, refer to Appendix 3.
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Loans, REIL and impairments by division
The following tables analyse loans and advances to banks and customers (excluding reverse repos) and related REIL, provisions, impairments, write-offs and coverage ratios by division.
 
 
Gross 
loans 
banks 
Gross 
loans 
customers 
REIL 
Provisions 
REIL as a % 
of gross 
customer 
loans 
Provisions 
as a % 
of REIL 
YTD 
Impairment 
charge 
YTD 
Amounts 
written-off 
31 December 2011
£m 
£m 
£m 
£m 
% 
% 
£m 
£m 
UK Retail
628 
103,377 
4,087 
2,344 
4.0 
57 
788 
823 
UK Corporate
672 
96,647 
3,972 
1,608 
4.1 
40 
782 
653 
Wealth
2,422 
16,913 
211 
81 
1.2 
38 
25 
11 
Global Transaction Services
3,464 
15,767 
218 
234 
1.4 
107 
166 
79 
Ulster Bank
2,079 
34,052 
5,523 
2,749 
16.2 
50 
1,384 
124 
US Retail & Commercial
208 
51,436 
1,006 
451 
2.0 
45 
247 
371 
                 
Retail & Commercial
9,473 
318,192 
15,017 
7,467 
4.7 
50 
3,392 
2,061 
Global Banking & Markets
30,072 
75,493 
1,845 
947 
2.4 
51 
11 
76 
RBS Insurance and other
3,829 
929 
- 
- 
- 
- 
- 
- 
                 
Core
43,374 
394,614 
16,862 
8,414 
4.3 
50 
3,403 
2,137 
Non-Core
619 
79,258 
23,983 
11,469 
30.3 
48 
3,838 
2,390 
                 
Group
43,993 
473,872 
40,845 
19,883 
8.6 
49 
7,241 
4,527 
                 
Total including disposal groups
44,080 
494,068 
42,394 
20,674 
8.6 
49 
7,241 
4,527 
                 
30 September 2011
                
UK Retail
434 
110,086 
4,651 
2,661 
4.2 
57 
597 
658 
UK Corporate
70 
109,977 
4,904 
1,961 
4.5 
40 
549 
498 
Wealth
2,326 
17,037 
198 
71 
1.2 
36 
13 
8 
Global Transaction Services
3,707 
19,545 
240 
201 
1.2 
84 
119 
66 
Ulster Bank
2,791 
35,546 
5,556 
2,567 
15.6 
46 
1,057 
63 
US Retail & Commercial
186 
49,477 
955 
469 
1.9 
49 
193 
267 
                 
Retail & Commercial
9,514 
341,668 
16,504 
7,930 
4.8 
48 
2,528 
1,560 
Global Banking & Markets
35,900 
73,921 
1,641 
943 
2.2 
57 
(49)
51 
RBS Insurance and other
6,604 
1,871 
- 
- 
- 
- 
- 
- 
                 
Core
52,018 
417,460 
18,145 
8,873 
4.3 
49 
2,479 
1,611 
Non-Core
709 
88,710 
24,581 
11,850 
27.7 
48 
3,108 
1,409 
                 
Group
52,727 
506,170 
42,726 
20,723 
8.4 
49 
5,587 
3,020 
                 
Total including disposal groups
52,822 
507,899 
42,752 
20,741 
8.4 
49 
5,587 
3,020 
                 
31 December 2010
                
UK Retail
408 
108,405 
4,620 
2,741 
4.3 
59 
1,160 
1,135 
UK Corporate
72 
111,672 
3,967 
1,732 
3.6 
44 
761 
349 
Wealth
2,220 
16,130 
223 
66 
1.4 
30 
18 
9 
Global Transaction Services
3,047 
14,437 
146 
147 
1.0 
101 
8 
49 
Ulster Bank
2,928 
36,858 
3,619 
1,633 
9.8 
45 
1,161 
48 
US Retail & Commercial
145 
48,516 
913 
505 
1.9 
55 
483 
547 
                 
Retail & Commercial
8,820 
336,018 
13,488 
6,824 
4.0 
51 
3,591 
2,137 
Global Banking & Markets
46,073 
75,981 
1,719 
1,042 
2.3 
61 
146 
87 
RBS Insurance and other
2,140 
601 
- 
- 
- 
- 
- 
- 
                 
Core
57,033 
412,600  
15,207 
7,866 
3.7 
52 
3,737 
2,224 
Non-Core
1,003 
108,203  
23,391 
10,316 
21.6 
44 
5,407 
3,818 
                 
Group
58,036 
520,803 
38,598 
18,182 
7.4 
47 
9,144 
6,042 
                 
Total including disposal groups
58,687 
525,852 
38,651 
18,218 
7.3 
47 
9,144 
6,042 
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Risk elements in lending
The tables below details the movement in REIL for the year ended 31 December 2011.
 
 
 
Impaired loans
  
Other loans (1)
  
REIL
 
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
Total 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
                       
At 1 January 2011
13,511 
22,190 
35,701 
  
1,696 
1,201 
2,897 
  
15,207 
23,391 
38,598 
Transfers to disposal groups
(1,287)
- 
(1,287)
  
(238)
- 
(238)
  
(1,525)
- 
(1,525)
Intra-group transfers
300 
(300)
- 
  
149 
(149)
- 
  
449 
(449)
- 
Currency translation and
  other adjustments
(158)
(496)
(654)
  
(14)
- 
(14)
  
(172)
(496)
(668)
Additions
8,379 
8,698 
17,077 
  
2,585 
1,059 
3,644 
  
10,964 
9,757 
20,721 
Transfers
645 
381 
1,026 
  
(362)
(352)
(714)
  
283 
29 
312 
Disposals and restructurings
(407)
(1,470)
(1,877)
  
(9)
(97)
(106)
  
(416)
(1,567)
(1,983)
Repayments
(3,540)
(3,172)
(6,712)
  
(2,251)
(1,120)
(3,371)
  
(5,791)
(4,292)
(10,083)
Amounts written-off
(2,137)
(2,390)
(4,527)
  
- 
- 
- 
  
(2,137)
(2,390)
(4,527)
                       
At 31 December 2011
15,306 
23,441 
38,747 
  
1,556 
542 
2,098 
  
16,862 
23,983 
40,845 
 
 
 
Impaired loans
  
Other loans (1)
  
REIL
 
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
Total 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
                       
At 1 January 2011
13,511 
22,190 
35,701 
  
1,696 
1,201 
2,897 
  
15,207 
23,391 
38,598 
Intra-group transfers
300 
(300)
- 
  
81 
(81)
- 
  
381 
(381)
- 
Currency translation and
  other adjustments
- 
(167)
(167)
  
(5)
(3)
(8)
  
(5)
(170)
(175)
Additions
6,261 
6,910 
13,171 
  
2,143 
827 
2,970 
  
8,404 
7,737 
16,141 
Transfers
400 
312 
712 
  
(217)
(235)
(452)
  
183 
77 
260 
Disposals and restructurings
(373)
(1,206)
(1,579)
  
(9)
(97)
(106)
  
(382)
(1,303)
(1,685)
Repayments
(2,571)
(2,585)
(5,156)
  
(1,461)
(776)
(2,237)
  
(4,032)
(3,361)
(7,393)
Amounts written-off
(1,611)
(1,409)
(3,020)
  
- 
- 
- 
  
(1,611)
(1,409)
(3,020)
                       
At 30 September 2011
15,917 
23,745 
39,662 
  
2,228 
836 
3,064 
  
18,145 
24,581 
42,726 
Transfers to disposal groups
(1,287)
- 
(1,287)
  
(238)
- 
(238)
  
(1,525)
- 
(1,525)
Intra-group transfers
- 
- 
- 
  
68 
(68)
- 
  
68
(68)
- 
Currency translation and
  other adjustments
(158)
 (329)
(487)
  
(9)
3 
(6)
  
(167)
(326)
(493)
Additions
2,118 
1,788 
3,906 
  
442 
232 
674 
  
2,560 
2,020 
4,580 
Transfers
245 
69 
314 
  
(145)
(117)
(262)
  
100 
(48)
52 
Disposals and restructurings
(34)
(264)
(298)
          
(34)
(264)
(298)
Repayments
(969)
(587)
(1,556)
  
(790)
(344)
(1,134)
  
(1,759)
(931)
(2,690)
Amounts written-off
(526)
(981)
(1,507)
  
- 
- 
- 
  
(526)
(981)
(1,507)
                       
At 31 December 2011
15,306 
23,441 
38,747 
  
1,556 
542 
2,098 
  
16,862 
23,983 
40,845 
 
Note:
 
(1)
Accruing loans past due 90 days or more.
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Impairment provisions
 
Movement in loan impairment provisions
The following tables show the movement in impairment provisions for loans and advances to banks and customers.
 
 
Year ended
 
31 December 2011
  
31 December 2010
 
Core 
Non- 
Core 
RFS MI 
Total 
  
Core 
Non- 
Core 
RFS MI 
Total 
 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                   
At beginning of period
7,866 
10,316 
- 
18,182 
  
6,921 
8,252 
2,110 
17,283 
Transfers to disposal groups
(773)
- 
- 
(773)
  
- 
(72)
- 
(72)
Intra-group transfers
177 
(177)
- 
- 
  
(568)
568 
- 
- 
Currency translation and
  other adjustments
(76)
(207)
- 
(283)
  
(16)
59 
- 
43 
Disposals
- 
- 
8 
8 
  
- 
(20)
(2,152)
(2,172)
Amounts written-off
(2,137)
(2,390)
- 
(4,527)
  
(2,224)
(3,818)
- 
(6,042)
Recoveries of amounts
  previously written-off
167 
360 
- 
527 
  
213 
198
- 
411 
Charge to income statement
                  
  - continued
3,403 
3,838 
- 
7,241 
  
3,737 
5,407
- 
9,144 
  - discontinued
- 
- 
(8)
(8)
  
- 
- 
42 
42 
Unwind of discount
(213)
(271)
- 
(484)
  
(197)
(258)
- 
(455)
                   
At end of period
8,414 
11,469 
- 
19,883 
  
7,866 
10,316 
- 
18,182 
 
 
 
Quarter ended
 
31 December 2011
  
30 September 2011
  
31 December 2010
 
Core 
Non- 
Core 
RFS 
MI 
Total 
  
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
RFS 
MI 
Total 
 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                           
At beginning of period
8,873 
11,850 
- 
20,723 
  
8,752 
12,007 
20,759 
  
7,791 
9,879 
- 
17,670 
Transfers to disposal
  groups
(773)
- 
- 
(773)
  
- 
- 
- 
  
- 
(5)
 
- 
(5)
Intra-group transfers
- 
- 
- 
- 
  
- 
- 
- 
  
(217)
217 
- 
- 
Currency translation and
  other adjustments
(75)
(162)
- 
(237)
  
(90)
(285)
(375)
  
147 
(235)
- 
(88)
Disposals
- 
- 
(3)
(3)
  
- 
- 
- 
  
- 
(3)
(3)
(6)
Amounts written-off
(526)
(981)
- 
(1,507)
  
(593)
(497)
(1,090)
  
(745)
(771)
- 
(1,516)
Recoveries of amounts
  previously written-off
48 
99 
- 
147 
  
39 
55 
94 
  
29 
67 
- 
96 
Charge to income
   statement
                          
  - continued
924 
730 
- 
1,654 
  
817 
635 
1,452 
  
912 
1,243 
- 
2,155 
  - discontinued
- 
- 
3 
3 
  
- 
- 
- 
  
- 
- 
3 
3 
Unwind of discount
(57)
(67)
- 
(124)
  
(52)
(65)
(117)
  
(51)
(76)
- 
(127)
                           
At end of period
8,414 
11,469 
- 
19,883 
  
8,873 
11,850 
20,723 
  
7,866 
10,316 
- 
18,182 
 
Key points
 
·
Impairment provisions excluding £0.8 billion relating to disposal groups increased by £1.7 billion during 2011.
   
·
Ulster Bank Group's provisions increased by £3.1 billion during the year (Core - £1.1 billion; Non-Core - £2.0 billion), with REIL coverage increasing to 53% (Core - 50%; Non-Core - 54%) from 44% at the end of 2010, predominantly reflecting the deterioration in value of the commercial real estate development portfolio.
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Impairment provisions (continued)
 
Movement in loan impairment provisions (continued)
The following table analyses impairment provisions in respect of loans and advances to banks and customers.
 
 
 
31 December 2011
  
30 September 2011
  
31 December 2010
 
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
Total 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
                       
Latent loss
1,339 
647 
1,986 
  
1,516 
751 
2,267 
  
1,653 
997 
2,650 
Collectively assessed
4,279 
861 
5,140 
  
4,675 
1,114 
5,789 
  
4,139 
1,157 
5,296 
Individually assessed
2,674 
9,960 
12,634 
  
2,557 
9,984 
12,541 
  
1,948 
8,161 
10,109 
                       
Customer loans
8,292 
11,468 
19,760 
  
8,748 
11,849 
20,597 
  
7,740 
10,315 
18,055 
Bank loans
122 
1 
123 
  
125 
1 
126 
  
126 
1 
127 
                       
Total provisions
8,414 
11,469 
19,883 
  
8,873 
11,850 
20,723 
  
7,866 
10,316 
18,182 
                       
% of loans (1)
2.2% 
14.4% 
4.2% 
  
2.1% 
13.2% 
4.1% 
  
1.9% 
9.1% 
3.4% 
 
Note:
 
(1)
Customer provisions as a percentage of gross loans and advances to customers including assets of disposal groups and excluding reverse repos.
 
Impairment charge
The following table analyses the impairment charge for loans and securities.
 
 
 
Year ended
 
31 December 2011
  
31 December 2010
 
Core 
Non-Core 
RFS MI 
Total 
  
Core 
Non-Core 
Total 
 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
                 
Latent loss
(252)
(293)
- 
(545)
  
(5)
(116)
(121)
Collectively assessed
2,075 
516 
- 
2,591 
  
2,258 
812 
3,070 
Individually assessed
1,580 
3,615 
- 
5,195 
  
1,489 
4,719 
6,208 
                 
Customer loans
3,403 
3,838 
- 
7,241 
  
3,742 
5,415 
9,157 
Bank loans
- 
- 
- 
- 
  
(5)
(8)
(13)
Securities - sovereign debt impairment and
  related interest rate hedge adjustments
1,268 
- 
- 
1,268 
  
- 
- 
- 
Securities - other
117 
81 
2 
200 
  
44 
68 
112 
                 
Charge to income statement
4,788 
3,919 
2 
8,709 
  
3,781 
5,475 
9,256 
                 
Charge relating to customer loans as a %
  of gross customer loans (1)
0.8% 
4.8% 
- 
1.5% 
  
0.9% 
4.9% 
1.7% 
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Impairment charge (continued)
 
 
 
Quarter ended
 
31 December 2011
  
30 September 2011
  
31 December 2010
 
Core 
Non- 
Core 
RFS MI 
Total 
  
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
Total 
 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
                         
Latent loss
(87)
(103)
- 
(190)
  
(33)
(27)
(60)
  
(68)
(48)
(116)
Collectively assessed
478 
113 
- 
591 
  
548 
141 
689 
  
559 
170 
729 
Individually assessed
533 
720 
- 
1,253 
  
302 
521 
823 
  
426 
1,129 
1,555 
                         
Customer loans
924 
730 
- 
1,654 
  
817 
635 
1,452 
  
917 
1,251 
2,168 
Bank loans
- 
- 
- 
- 
  
- 
- 
- 
  
(5)
(8)
(13)
Securities - sovereign debt
  impairment and related
  interest rate hedge
  adjustments
224 
- 
- 
224 
  
202 
- 
202 
  
- 
- 
- 
Securities - other
17 
21 
2 
40 
  
37 
47 
84 
  
19  
(33)
(14)
                         
Charge to income
  statement
1,165 
751 
2 
1,918 
  
1,056 
682 
1,738 
  
931 
1,210 
2,141 
                         
Charge relating to
  customer loans as a % of
  gross customer loans (1)
0.9% 
3.7% 
- 
1.3% 
  
0.8% 
2.8% 
1.1% 
  
0.9% 
4.4% 
1.6% 
 
Note:
 
(1)
Customer loan impairment charge as a percentage of gross loans and advances to customers including assets of disposal groups and excluding reverse purchase agreements.
 
Key points
 
·
The impairment charge, excluding securities, decreased by £1.9 billion or 21% compared with 2010, driven largely by a £1.6 billion reduction in Non-Core, despite continuing challenges in Ulster Bank and corporate real estate portfolios.
   
·
The Group's customer loan impairment charge as a percentage of loans and advances was 1.5% compared with 1.7% for 2010.
   
·
The securities impairment in 2011 primarily reflects an impairment charge of £1.3 billion in respect of the Group's holdings of Greek sovereign bonds and related interest rate hedges.
 
Risk and balance sheet management (continued)
 
Risk management: Restructuring and forbearance
 
Wholesale loan restructuring
The total amount of wholesale restructurings that achieved legal completion in 2011 was £8.6 billion. In addition, a further £14.7 billion was in the process of being completed at 31 December 2011. Restructured loans, related internal asset quality bands, sector breakdown and types of restructuring are set out below.
 
 
31 December 2011
AQ1-AQ9 (1)
£m 
  
AQ10 (2)
£m 
AQ10 (2)
Provision 
coverage 
% 
         
Wholesale restructurings by sector
        
Property
1,980 
  
2,600 
18 
Transport
686 
  
694 
11 
Non-bank financial institutions
228 
  
420 
65 
Retail and leisure
503 
  
148 
24 
Other
1,078 
  
251 
28 
         
Total
4,475 
  
4,113 
22 
 
Notes:
 
(1)
Probability of default less than 100%.
(2)
Probability of default is 100%.
 
The incidence of the main types of restructuring is analysed below.
 
 
31 December 2011
Loans 
 by value 
% 
   
Wholesale restructurings by type of arrangement
  
Variation in margin
12 
Payment holidays and loan rescheduling
87 
Forgiveness of all or part of the outstanding debt
31 
Other
8 
 
Note:
 
(1)
The total above exceeds 100% as an individual case can involve more than one type of arrangement.
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Restructuring and forbearance (continued)
 
Retail forbearance
Retail mortgage accounts in forbearance arrangements at 31 December 2011 totalled £6.6 billion. The mortgage arrears information for retail accounts in forbearance and related provision arrangements are shown in the table below.
 
 
 
No missed
payments
  
1-3 months
in arrears
  
>3 months
in arrears
  
Total
    
 
Balance 
Provision 
  
Balance 
Provision 
  
Balance 
Provision 
  
Balance 
Provision 
  
Accounts 
forborne 
31 December 2011
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
% 
                           
Arrears status and
  provisions
                          
UK Retail (1,2)
3,677 
16 
  
351 
13 
  
407 
59 
  
4,435 
88 
  
4.7 
Ulster Bank (1,2)
893 
78 
  
516 
45 
  
421 
124 
  
1,830 
247 
  
9.1 
Citizens
- 
- 
  
91 
10 
  
89 
10 
  
180 
20 
  
0.8 
Wealth
121 
- 
  
- 
- 
  
2 
- 
  
123 
- 
  
1.3 
                           
Total
4,691 
94 
  
958 
68 
  
919 
193 
  
6,568 
355 
  
4.4 
 
Notes:
 
(1)
Includes all forbearance arrangements regardless of whether or not the customer is experiencing financial difficulty.
(2)
Comprises the current stock position of forbearance deals agreed since January 2008 for UK Retail and since July 2008 for Ulster Bank.
(3)
Refer to page 173 for details of the proportion of UK Retail and Citizens mortgage loans that have missed three or more payments, compared to the forbearance population above.
 
 
 
 
UK Retail (1)
Ulster Bank 
Citizens 
Wealth 
Total (2)
31 December 2011
£m 
£m 
£m 
£m 
£m 
           
Forbearance arrangements
          
Interest only conversions
1,269 
795 
- 
3 
2,067 
Term extensions - capital repayment and interest only
1,805 
58 
- 
97 
1,960 
Payment concessions/holidays
198 
876 
180 
- 
1,254 
Capitalisation of arrears
864 
101 
- 
- 
965 
Other
517 
- 
- 
23 
540 
           
Total
4,653 
1,830 
180 
123 
6,786 
 
Notes:
 
(1)
For unsecured portfolios in UK Retail, 1.1% of the total unsecured population was subject to forbearance at 31 December 2011.
(2)
As an individual case can include more than one type of arrangement, the analysis in the table on forbearance arrangements exceeds the total forbearance.
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Debt securities
The table below analyses debt securities by issuer and measurement classification. The categorisation of debt securities has been revised to include asset-backed securities (ABS) by class of issuer. The main changes are to US central and local government which includes US federal agencies, and financial institutions which now includes US government sponsored agencies and securitisation entities. 2010 data are presented on the revised basis.
 
 
 
Central and local government
Banks 
Other 
financial 
institutions 
Corporate 
Total 
Of which 
ABS 
UK 
US 
Other 
 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                 
31 December 2011
                
Held-for-trading
9,004 
19,636 
36,928 
3,400 
23,160 
2,948 
95,076 
20,816 
Designated as at fair value
1 
- 
127 
53 
457 
9 
647 
558 
Available-for-sale
13,436 
20,848 
25,552 
13,175 
31,752 
2,535 
107,298 
40,735 
Loans and receivables
10 
- 
1 
312 
5,259 
477 
6,059 
5,200 
                 
Long positions
22,451 
40,484 
62,608 
16,940 
60,628 
5,969 
209,080 
67,309 
                 
Of which US agencies
- 
4,896 
- 
- 
25,924 
- 
30,820 
28,558 
                 
Short positions (HFT)
(3,098)
(10,661)
(19,136)
(2,556)
(2,854)
(754)
(39,059)
(352)
                 
Available-for-sale
                
Gross unrealised gains
1,428 
1,311 
1,180 
52 
913 
94 
4,978 
1,001 
Gross unrealised losses
- 
- 
(171)
(838)
(2,386)
(13)
(3,408)
(3,158)
                 
30 September 2011
                
                 
Held-for-trading
8,434 
20,120 
47,621 
4,216 
27,511 
4,666 
112,568 
24,123 
Designated as at fair value
1 
- 
140 
4 
7 
10 
162 
1 
Available-for-sale
13,328 
20,032 
28,976 
17,268 
28,463 
2,334 
110,401 
41,091 
Loans and receivables
10 
- 
- 
274 
5,764 
478 
6,526 
5,447 
                 
Long positions
21,773 
40,152 
76,737 
21,762 
61,745 
7,488 
229,657 
70,662 
                 
Of which US agencies
- 
5,311 
- 
- 
27,931 
- 
33,242 
30,272 
                 
Short positions (HFT)
(2,896)
(12,763)
(21,484)
(2,043)
(4,437)
(1,680)
(45,303)
(895)
                 
Available-for-sale
                
Gross unrealised gains
1,090 
1,240 
1,331 
310 
1,117 
81 
5,169 
1,242 
Gross unrealised losses
- 
- 
(124)
(1,039)
(2,371)
(24)
(3,558)
(3,114)
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Debt securities (continued)
 
 
 
Central and local government
Banks 
Other 
financial 
institutions 
Corporate 
Total 
Of which 
ABS 
UK 
US 
Other 
31 December 2010
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                 
Held-for-trading
5,097 
15,648 
42,828 
5,486 
23,711 
6,099 
98,869 
21,988 
Designated as at fair value
1 
117 
262 
4 
8 
10 
402 
119 
Available-for-sale
8,377 
22,244 
32,865 
16,982 
29,148 
1,514 
111,130 
42,515 
Loans and receivables
11 
- 
- 
1 
6,686 
381 
7,079 
6,203 
                 
Long positions
13,486 
38,009 
75,955 
22,473 
59,553 
8,004 
217,480 
70,825 
                 
Of which US agencies
- 
6,811 
- 
- 
21,686 
- 
28,497 
25,375 
                 
Short positions (HFT)
(4,200)
(10,943)
(18,913)
(1,844)
(3,356)
(1,761)
(41,017)
(1,335)
                 
Available-for-sale
                
Gross unrealised gains
349 
525 
700 
143 
827 
51 
2,595 
1,057 
Gross unrealised losses
(10)
(2)
(618)
(786)
(2,626)
(55)
(4,097)
(3,396)
 
 
Key points
 
·
Held-for-trading debt securities decreased by £3.8 billion during the year due to a reduction in trading volumes. A managed reduction in sovereign exposures in the eurozone and other countries, in response to the current economic environment, was offset by an increase in UK and US government bonds.
   
·
The Group's available-for-sale portfolio decreased by £3.8 billion. An increase in UK government bonds of £5.1 billion, principally in Group Treasury partially offset reductions in holdings of securities issued by other central and local governments and banks.
 
The table below analyses available-for-sale debt securities and related reserves, gross of tax.
 
 
 
31 December 2011
  
31 December 2010
 
US 
UK 
Other (1)
Total 
  
US 
UK 
Other (1)
Total 
 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                   
Central and local
  Government
20,848 
13,436 
25,552 
59,836 
  
22,244 
8,377 
32,865 
63,486 
Banks
376 
1,391 
11,408 
13,175 
  
704 
4,297 
11,981 
16,982 
Other financial institutions
17,453 
3,100 
11,199 
31,752 
  
15,973 
1,662 
11,513 
29,148 
Corporate
131 
1,105 
1,299 
2,535 
  
65 
438 
1,011 
1,514 
                   
Total
38,808 
19,032 
49,458 
107,298 
  
38,986 
14,774 
57,370 
111,130 
                   
Of which ABS
20,256 
3,659 
16,820 
40,735 
  
20,872 
4,002 
17,641 
42,515 
                   
AFS reserves (gross)
486 
845 
(1,815)
(484)
  
(304)
158 
(2,559)
(2,705)
 
Note:
 
(1)
Includes eurozone countries that are detailed on pages 186 to 203.

 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Debt securities (continued)
 
The table below analyses debt securities by issuer and external ratings. Ratings are based on the lowest of S&P, Moody's and Fitch.
 
 
 
Central and local  government
Banks 
Other 
financial 
institutions 
Corporate 
Total 
% of 
total 
Of which 
ABS 
UK 
US 
Other 
31 December 2011
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                   
AAA
22,451 
45 
32,522 
5,155 
15,908 
452 
76,533 
37 
17,156 
AA to AA+
-   
40,435 
2,000 
2,497 
30,403 
639 
75,974 
36 
33,615 
A to AA-
- 
1 
24,966 
6,387 
4,979 
1,746 
38,079 
18 
6,331 
BBB- to A-
- 
- 
2,194 
2,287 
2,916 
1,446 
8,843 
4 
4,480 
Non-investment grade
- 
- 
924 
575 
5,042 
1,275 
7,816 
4 
4,492 
Unrated
- 
3 
2 
39 
1,380 
411 
1,835 
1 
1,235 
                   
 
22,451 
40,484 
62,608 
16,940 
60,628 
5,969 
209,080 
100 
67,309 
                   
30 September 2011
                  
                   
AAA
21,773 
27 
43,712 
9,363 
14,120 
553 
89,548 
39 
18,771 
AA to AA+
- 
40,094 
4,247 
4,279 
31,785 
661 
81,066 
35 
35,954 
A to AA-
- 
9 
25,043 
5,087 
4,783 
1,894 
36,816 
16 
5,670 
BBB- to A-
- 
- 
2,460 
2,032 
3,873 
2,104 
10,469 
5 
4,431 
Non-investment grade
- 
- 
1,242 
709 
5,242 
1,778 
8,971 
4 
4,619 
Unrated
- 
22 
33 
292 
1,942 
498 
2,787 
1 
1,217 
                   
 
21,773 
40,152 
76,737 
21,762 
61,745 
7,488 
229,657 
100 
70,662 
                   
31 December 2010
                  
                   
AAA
13,486 
38,009 
44,123 
10,704 
39,388 
878 
146,588 
67 
51,235 
AA to AA+
- 
- 
18,025 
3,511 
6,023 
616 
28,175 
13 
6,335 
A to AA-
- 
- 
9,138 
4,926 
2,656 
1,155 
17,875 
8 
3,244 
BBB- to A-
- 
- 
2,845 
1,324 
3,412 
2,005 
9,586 
5 
3,385 
Non-investment grade
- 
- 
1,770 
1,528 
5,522 
2,425 
11,245 
5 
4,923 
Unrated
- 
- 
54 
480 
2,552 
925 
4,011 
2 
1,703 
                   
 
13,486 
38,009 
75,955 
22,473 
59,553 
8,004 
217,480 
100 
70,825 
 
Key points
 
·
The decrease in AAA rated debt securities relates to the downgrading of US government and agencies to AA+ by S&P during the year.
   
·
The proportion of debt securities rated A to AA- increased to 18%, principally reflecting the Japanese government downgrade in 2011.
   
·
Non-investment grade and unrated debt securities now account for 5% of the debt securities portfolio, down from 7% at the start of the year.
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Asset-backed securities
 
 
 
RMBS (1)
              
 
Government 
sponsored 
or similar (2)
Prime 
Non- 
conforming 
Sub-prime 
MBS 
covered 
bond 
 
CMBS (3)
CDOs (4)
CLOs (5)
ABS 
covered 
bonds 
ABS 
other 
Total 
31 December 2011
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                       
AAA
4,169 
3,599 
1,488 
105 
2,595 
647 
135 
2,171 
625 
1,622 
17,156 
AA to AA+
29,252 
669 
106 
60 
379 
710 
35 
1,533 
321 
550 
33,615 
A to AA-
131 
506 
110 
104 
2,567 
1,230 
161 
697 
100 
725 
6,331 
BBB- to A-
- 
39 
288 
93 
1,979 
333 
86 
341 
- 
1,321 
4,480 
Non-investment grade
21 
784 
658 
396 
- 
415 
1,370 
176 
- 
672 
4,492 
Unrated
- 
148 
29 
146 
- 
56 
170 
423 
- 
263 
1,235 
                       
 
33,573 
5,745 
2,679 
904 
7,520 
3,391 
1,957 
5,341 
1,046 
5,153 
67,309 
                       
Of which in Non-Core
- 
837 
477 
308 
- 
830 
1,656 
4,227 
- 
1,861 
10,196 
                       
30 September 2011
                      
                       
AAA
4,391 
4,152 
1,509 
144 
3,462 
893 
194 
2,198 
651 
1,177 
18,771 
AA to AA+
31,037 
117 
111 
97 
1,162 
839 
125 
1,496 
407 
563 
35,954 
A to AA-
137 
603 
124 
175 
1,680 
1,326 
166 
569 
367 
523 
5,670 
BBB- to A-
- 
147 
295 
59 
1,553 
383 
92 
601 
- 
1,301 
4,431 
Non-investment grade
- 
768 
676 
486 
- 
327 
1,516 
170 
- 
676 
4,619 
Unrated
- 
146 
47 
213 
- 
67 
134 
331 
- 
279 
1,217 
                       
 
35,565 
5,933 
2,762 
1,174 
7,857 
3,835 
2,227 
5,365 
1,425 
4,519 
70,662 
                       
Of which in Non-Core
- 
269 
463 
276 
- 
1,158 
1,953 
4,698 
- 
1,976 
10,793 
 
For the notes to this table refer to page 161.

Risk and balance sheet management (continued)
 
Risk management: Credit risk: Asset-backed securities (continued)
 
 
 
RMBS (1)
              
 
Government 
sponsored 
or similar (2)
Prime 
Non- 
conforming 
Sub-prime 
MBS 
covered 
bond 
 
CMBS (3)
CDOs (4)
CLOs (5)
ABS 
covered 
bonds 
ABS 
other 
Total 
31 December 2010
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                       
AAA
28,835 
4,355 
1,754 
317 
7,107 
2,789 
444 
2,490 
989 
2,155 
51,235 
AA to AA+
1,529 
147 
144 
116 
357 
392 
567 
1,786 
681 
616 
6,335 
A to AA-
- 
67 
60 
212 
408 
973 
296 
343 
190 
695 
3,244 
BBB- to A-
- 
82 
316 
39 
- 
500 
203 
527 
- 
1,718 
3,385 
Non-investment grade
- 
900 
809 
458 
- 
296 
1,863 
332 
- 
265 
4,923 
Unrated
- 
196 
52 
76 
- 
- 
85 
596 
- 
698 
1,703 
                       
 
30,364 
5,747 
3,135 
1,218 
7,872 
4,950 
3,458 
6,074 
1,860 
6,141 
70,825 
                       
Of which in Non-Core
- 
81 
336 
379 
- 
1,278 
3,159 
5,094 
- 
2,386 
12,713 
Notes:
 
(1)
Residential mortgage-backed securities.
(2)
Includes US agency and Dutch government guaranteed securities.
(3)
Commercial mortgage-backed securities.
(4)
Collateralised debt obligations.
(5)
Collateralised loan obligations.
 
For analyses of ABS by geography and measurement classification, refer to Appendix 3.
 
Key points
 
·
Carrying value of total ABS decreased by £3.5 billion during 2011. US government sponsored RMBS of £3.6 billion, reflecting a move towards G10 government generally, partially off-set by decrease in European exposure. There were reductions across all other portfolios.
   
·
The decrease in AAA rated debt securities mainly relates to the downgrading of US government and agencies to AA+ by S&P during the year.
   
·
CDOs and CLOs decreased by £2.2 billion principally reflecting asset reductions in Non-Core.
   
·
The decrease in CMBS of £1.6 billion, primarily reflecting restructuring of monoline exposures.
   
·
The average mark on total ABS was 83%, broadly the same as 2010 and 2009.
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Derivatives
The Group's derivative assets by internal grading scale and residual maturity are analysed below. Master netting arrangements in respect of mark-to-market (mtm) positions and collateral shown below do not result in a net presentation in the Group's balance sheet under IFRS.
 
 
   
31 December 2011
30 September 
2011 
Total 
31 December 
2010 
Total 
Asset
quality
Probability
of default range
0-3 
months 
3-6 
months 
6-12 
months 
1-5 
years 
Over 5 
years 
Total 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                   
AQ1
0% - 0.034%
24,580 
10,957 
17,178 
126,107 
302,800 
481,622 
517,097 
408,489 
AQ2
0.034% - 0.048%
326 
236 
431 
2,046 
5,138 
8,177 
7,265 
2,659 
AQ3
0.048% - 0.095%
975 
390 
459 
2,811 
6,184 
10,819 
14,523 
3,317 
AQ4
0.095% - 0.381%
1,465 
782 
713 
4,093 
7,368 
14,421 
10,405 
3,391 
AQ5
0.381% - 1.076%
890 
93 
219 
1,787 
3,527 
6,516 
13,709 
4,860 
AQ6
1.076% - 2.153%
121 
30 
81 
803 
1,186 
2,221 
2,471 
1,070 
AQ7
2.153% - 6.089%
101 
29 
56 
1,674 
533 
2,393 
3,368 
857 
AQ8
6.089% - 17.222%
16 
21 
11 
143 
1,061 
1,252 
1,174 
403 
AQ9
17.222% - 100%
5 
8 
7 
254 
876 
1,150 
1,140 
450 
AQ10
100%
13 
20 
35 
658 
321 
1,047 
1,192 
1,581 
                   
   
28,492 
12,566 
19,190 
140,376 
328,994 
529,618 
572,344 
427,077 
Counterparty mtm netting
          
(441,626)
(473,256)
(330,397)
Cash collateral held against derivative exposures
      
(37,222)
(38,202)
(31,096)
                   
Net exposure
          
50,770 
60,886 
65,584 
                       
 
At 31 December 2011, the Group also held collateral in the form of securities of £5.3 billion (30 September 2011 - £5.5 billion; 31 December 2010 - £2.9 billion) against derivative positions.
 
The table below analyses the fair value of the Group's derivatives by type of contract.
 
 
 
31 December 2011
  
30 September 2011
  
31 December 2010
 
Notional 
Assets 
Liabilities 
  
Notional 
Assets 
Liabilities 
  
Notional 
Assets 
Liabilities 
Contract type
£bn 
£m 
£m 
  
£bn 
£m 
£m 
  
£bn 
£m 
£m 
                       
Interest rate
38,722 
422,156 
406,709 
  
42,732 
424,130 
407,814 
  
39,760 
311,731 
299,209 
Exchange rate
4,479 
74,492 
80,980 
  
5,329 
107,024 
112,184 
  
4,854 
83,253 
89,375 
Credit
  derivatives
1,054 
26,836 
26,743 
  
1,343 
33,884 
31,574 
  
1,357 
26,872 
25,344 
Equity and
  commodity
123 
6,134 
9,551 
  
120 
7,306 
10,218 
  
179 
5,221 
10,039 
                       
   
529,618 
523,983 
    
572,344 
561,790 
    
427,077 
423,967 
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Derivatives (continued)
 
Key points
 
31 December 2011 compared with 31 December 2010
 
·
Net exposure declined by 23%, despite an increase in derivative carrying values, primarily due to the increased use of netting arrangements.
   
·
Interest rate contracts increased due to continued reductions in interest rate yields and the depreciation of sterling against the US dollar. This was partially offset by the appreciation of sterling against the euro.
   
·
Exchange rate contracts decreased due to a reduction in trade volumes and the appreciation of sterling against the euro. This was partially offset by the depreciation of sterling against the US dollar.
   
·
Credit derivatives remained flat as the increase from the widening of credit spreads and the depreciation of sterling against the US dollar was offset by a reduction in trade volume.
 
31 December 2011 compared with 30 September 2011
 
·
Net exposure, after taking account of position and collateral netting arrangements, decreased by 17% due to lower derivative fair values, primarily driven by market movements.
   
·
Interest rate contract fair values remained flat reflecting the combined effect of exchange rate movements and movements in indices.
   
·
Exchange rate contracts decreased due to a reduction in trade volumes and exchange rate volatilities. The appreciation of sterling against the euro was partially offset by the depreciation of sterling against the US dollar.
   
·
Credit derivative fair values decreased due to a tightening of credit spreads, partially offset by the depreciation of sterling against the US dollar.
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Derivatives (continued)
The Group's exposures to monolines and credit derivative product companies (CDPCs) by credit rating are summarised below: ratings are based on the lower of S&P and Moody's. All of these exposures are held within Non-Core.
 
Exposures to monoline insurers
 
 
 
Notional: 
 protected 
 assets 
Fair value: 
reference 
 protected 
assets 
Gross 
 exposure 
Credit 
valuation 
adjustment 
(CVA)
Hedges 
Net 
 exposure 
 
£m 
£m 
£m 
£m 
£m 
£m 
             
31 December 2011
            
A to AA-
4,939 
4,243 
696 
252 
- 
444 
Non-investment grade
3,623 
2,431 
1,192 
946 
71 
175 
             
 
8,562 
6,674 
1,888 
1,198 
71 
619 
             
Of which:
            
CMBS
946 
674 
272 
247 
    
CDOs
500 
57 
443 
351 
    
CLOs
4,616 
4,166 
450 
177 
    
Other ABS
1,998 
1,455 
543 
334 
    
Other
502 
322 
180 
89 
    
             
 
8,562 
6,674 
1,888 
1,198 
    
             
30 September 2011
            
A to AA-
5,411 
4,735 
676 
259 
- 
417 
Non-investment grade
7,098 
3,684 
3,414 
2,568 
70 
776 
             
 
12,509 
8,419 
4,090 
2,827 
70 
1,193 
             
Of which:
            
CMBS
3,954 
1,879 
2,075 
1,599 
    
CDOs
988 
156 
832 
619 
    
CLOs
4,806 
4,348 
458 
183 
    
Other ABS
2,275 
1,758 
517 
309 
    
Other
486 
278 
208 
117 
    
             
 
12,509 
8,419 
4,090 
2,827 
    
             
31 December 2010
            
A to AA-
6,336 
5,503 
833 
272 
- 
561 
Non-investment grade
8,555 
5,365 
3,190 
2,171 
71 
948 
             
 
14,891 
10,868 
4,023 
2,443 
71 
1,509 
             
Of which:
            
CMBS
4,149 
2,424 
1,725 
1,253 
    
CDOs
1,133 
256 
877 
593 
    
CLOs
6,724 
6,121 
603 
210 
    
Other ABS
2,393 
1,779 
614 
294 
    
Other
492 
288 
204 
93 
    
             
 
14,891 
10,868 
4,023 
2,443 
    
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Derivatives: Exposures to monoline insurers (continued)
 
Key points
 
31 December 2011 compared with 31 December 2010
 
·
The exposure to monolines declined, primarily due to the restructuring of some exposures, partially offset by lower prices of underlying reference instruments.
   
·
The CVA decreased in line with the reduction in exposure partially offset by the impact of wider credit spreads.
 
31 December 2011 compared with 30 September 2011
 
·
The exposure to monolines declined, primarily due to the restructuring of some exposures. The CVA decreased in line with the reduction in exposure.
 
Exposure to CDPCs
 
 
Notional: 
protected 
 assets 
Fair value: 
reference 
protected 
assets 
Gross 
exposure 
Credit 
valuation 
adjustment 
Net 
exposure 
 
£m 
£m 
£m 
£m 
£m 
           
31 December 2011
          
AAA
213 
212 
1 
- 
1 
A to AA-
646 
632 
14 
3 
11 
Non-investment grade
19,671 
18,151 
1,520 
788 
732 
Unrated
3,974 
3,613 
361 
243 
118 
           
 
24,504 
22,608 
1,896 
1,034 
862 
           
30 September 2011
          
AAA
211 
209 
2 
- 
2 
A to AA-
640 
614 
26 
15 
11 
Non-investment grade
19,294 
17,507 
1,787 
902 
885 
Unrated
3,985 
3,552 
433 
316 
117 
           
 
24,130 
21,882 
2,248 
1,233 
1,015 
           
31 December 2010
          
AAA
213 
212 
1 
- 
1 
A to AA-
644 
629 
15 
4 
11 
Non-investment grade
20,066 
19,050 
1,016 
401 
615 
Unrated
4,165 
3,953 
212 
85 
127 
           
 
25,088 
23,844 
1,244 
490 
754 
 
Key points
 
31 December 2011 compared with 31 December 2010
 
·
The exposure to CDPCs increased, primarily driven by wider credit spreads of the underlying reference loans and bonds.
·
The CVA increased in line with the increase in exposure.
 
31 December 2011 compared with 30 September 2011
 
·
The exposure to CDPCs decreased over the period, primarily driven by tighter credit spreads of the underlying reference loans and bonds, together with a decrease in the relative value of senior tranches, compared with the underlying reference portfolios.
·
The CVA decreased in line with the decrease in exposure.
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Commercial real estate
 
The commercial real estate lending portfolio totalled £74.8 billion at 31 December 2011, a 14% year-on-year decrease (31 December 2010 - £87.4 billion). The commercial real estate sector comprises exposure to entities involved in the development of or investment in commercial and residential properties (including homebuilders). The analysis below excludes rate risk management and contingent obligations.
 
 
 
31 December 2011
  
31 December 2010
 
Investment 
Development 
Total 
  
Investment 
Development 
Total 
By division
£m 
£m 
£m 
  
£m 
£m 
£m 
               
Core
              
UK Corporate
25,101 
5,023 
30,124 
  
24,879 
5,819 
30,698 
Ulster Bank
3,882 
881 
4,763 
  
4,284 
1,090 
5,374 
US Retail &
  Commercial
4,235 
70 
4,305 
  
4,322 
93 
4,415 
Global Banking &
  Markets
1,013 
360 
1,373 
  
1,131 
644 
1,775 
               
 
34,231 
6,334 
40,565 
  
34,616 
7,646 
42,262 
               
Non-Core
              
UK Corporate
3,957 
2,020 
5,977 
  
7,591 
3,263 
10,854 
Ulster Bank
3,860 
8,490 
12,350 
  
3,854 
8,760 
12,614 
US Retail &
  Commercial
901 
28 
929 
  
1,325 
70 
1,395 
Global Banking &
  Markets
14,689 
336 
15,025 
  
19,906 
379 
20,285 
               
 
23,407 
10,874 
34,281 
  
32,676 
12,472 
45,148 
               
Total
57,638 
17,208 
74,846 
  
67,292 
20,118 
87,410 
 
 
 
 
Investment
  
Development
  
 
Commercial 
Residential 
  
Commercial 
Residential 
Total 
By geography
£m 
£m 
  
£m 
£m 
£m 
             
31 December 2011
            
UK (excluding NI) (1)
28,653 
6,359 
  
1,198 
6,511 
42,721 
Ireland (ROI & NI) (1)
5,146 
1,132 
  
2,591 
6,317 
15,186 
Western Europe
7,649 
1,048 
  
9 
52 
8,758 
US
5,552 
1,279 
  
59 
46 
6,936 
RoW
785 
35 
  
141 
284 
1,245 
             
 
47,785 
9,853 
  
3,998 
13,210 
74,846 
             
31 December 2010
            
UK (excluding NI) (1)
32,334 
7,255 
  
1,520 
8,288 
49,397 
Ireland (ROI & NI) (1)
5,056 
1,148 
  
2,785 
6,578 
15,567 
Western Europe
10,568 
643 
  
25 
42 
11,278 
US
7,345 
1,296 
  
69 
175 
8,885 
RoW
1,622 
25 
  
138 
498 
2,283 
             
 
56,925 
10,367 
  
4,537 
15,581 
87,410 
 
Note:
 
(1)
ROI: Republic of Ireland; NI: Northern Ireland.
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Commercial real estate (continued)
 
 
 
Investment
  
Development
  
 
Core 
Non-Core 
  
Core 
Non-Core 
Total 
By geography
£m 
£m 
  
£m 
£m 
£m 
             
31 December 2011
            
UK (excluding NI)
25,904 
9,108 
  
5,118 
2,591 
42,721 
Ireland (ROI & NI)
3,157 
3,121 
  
793 
8,115 
15,186 
Western Europe
422 
8,275 
  
20 
41 
8,758 
US
4,521 
2,310 
  
71 
34 
6,936 
RoW
227 
593 
  
332 
93 
1,245 
             
 
34,231 
23,407 
  
6,334 
10,874 
74,846 
             
31 December 2010
            
UK (excluding NI)
26,168 
13,421 
  
5,997 
3,811 
49,397 
Ireland (ROI & NI)
3,159 
3,044 
  
963 
8,401 
15,567 
Western Europe
409 
10,802 
  
25 
42 
11,278 
US
4,636 
4,005 
  
173 
71 
8,885 
RoW
244 
1,404 
  
488 
147 
2,283 
             
 
34,616 
32,676 
  
7,646 
12,472 
87,410 
 
 
 
By sub-sector
UK 
(excl NI)
£m 
Ireland 
(ROI & NI)
£m 
Western 
Europe 
£m 
US 
£m 
RoW 
£m 
Total 
£m 
             
31 December 2011
            
Residential
12,871 
7,449 
1,096 
1,325 
319 
23,060 
Office
7,155 
1,354 
2,248 
404 
352 
11,513 
Retail
8,709 
1,641 
1,893 
285 
275 
12,803 
Industrial
4,317 
507 
520 
24 
105 
5,473 
Mixed/other
9,669 
4,235 
3,001 
4,898 
194 
21,997 
             
 
42,721 
15,186 
8,758 
6,936 
1,245 
74,846 
             
31 December 2010
  
             
Residential
15,543 
7,726 
685 
1,471 
523 
25,948 
Office
8,539 
1,178 
2,878 
663 
891 
14,149 
Retail
10,607 
1,668 
1,888 
1,025 
479 
15,667 
Industrial
4,912 
515 
711 
80 
106 
6,324 
Mixed/other
9,796 
4,480 
5,116 
5,646 
284 
25,322 
             
 
49,397 
15,567 
11,278 
8,885 
2,283 
87,410 
 
Note:
 
(1)
Excludes commercial real estate lending in Wealth as these loans are generally supported by personal guarantees in addition to collateral. This portfolio, which totalled £1.3 billion at 31 December 2011 continues to perform in line with expectations and requires minimal provision.
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Commercial real estate (continued)
 
Key points
 
·
In line with the Group's strategy, exposure to commercial real estate was reduced during 2011, affecting mainly the UK and Western Europe given that these regions account for the majority of the portfolio. Overall this portfolio decreased circa 25% in the two years to 31 December 2011.
   
·
Most of the decrease is in Non-Core due to run-off and asset sales. The Non-Core portfolio totalled £34.3 billion (46% of the portfolio) at 31 December 2011 (31 December 2010 - £45.1 billion, or 52% of the portfolio) and includes exposures in Ulster Bank as discussed on page 180.
   
·
With the exception of exposure in Spain and in Ireland, the Group has minimal commercial real estate exposure to other eurozone periphery countries. Exposure in Spain is predominantly in the Non-Core portfolio and totals £2.3 billion, of which 36% is in AQ1-AQ9. The remainder of the Spanish portfolio has already been subject to material write-off and provision levels have been assessed based on re-appraised values. There are significant differences in values based on geographic location and asset type.
   
·
The UK portfolio is focused on London and the South East (44%), with the remainder well spread across the UK regions.
   
·
Short-term lending to property developers without sufficient pre-let revenue at origination to support investment financing after practical completion is classified as speculative. Speculative lending at origination represents approximately 1% of the portfolio. The Group's appetite for originating speculative commercial real estate lending is very limited and any such business requires senior management approval.
   
·
The commercial real estate market is expected to remain challenging in key markets and new business will be accommodated from run-off of existing Core exposure. As liquidity in the market remains tight, the Group is focusing on re-financings and supporting its existing client base.
 

 
Risk management: Credit risk: Commercial real estate (continued)
 
 
Maturity profile of portfolio
UK Corporate 
Ulster Bank 
US Retail & 
 Commercial 
Global Banking & Markets 
Total 
£m 
£m 
£m 
£m 
£m 
           
31 December 2011
          
Core
          
< 1 year (1)
8,268 
3,030 
1,056 
142 
12,496 
1-2 years 
5,187 
391 
638 
278 
6,494 
2-3 years
3,587 
117 
765 
363 
4,832 
> 3 years
10,871 
1,225 
1,846 
590 
14,532 
Not classified (2)
2,211 
- 
- 
- 
2,211 
           
Total
30,124 
4,763 
4,305 
1,373 
40,565 
           
Non-Core
          
< 1 year (1)
3,224 
11,089 
293 
7,093 
21,699 
1-2 years
508 
692 
163 
3,064 
4,427 
2-3 years
312 
177 
152 
1,738 
2,379 
> 3 years
1,636 
392 
321 
3,126 
5,475 
Not classified (2)
297 
- 
- 
4 
301 
           
Total
5,977 
12,350 
929 
15,025 
34,281 
 
 
           
           
31 December 2010
          
Core
          
< 1 year (1)
7,563 
2,719 
1,303 
890 
12,475 
1-2 years
5,154 
829 
766 
247 
6,996 
2-3 years
4,698 
541 
751 
221 
6,211 
> 3 years
10,361 
1,285 
1,595 
417 
13,658 
Not classified (2)
2,922 
- 
- 
- 
2,922 
           
Total
30,698 
5,374 
4,415 
1,775 
42,262 
           
Non-Core
          
< 1 year (1)
4,829 
10,809 
501 
3,887 
20,026 
1-2 years
1,727 
983 
109 
6,178 
8,997 
2-3 years
831 
128 
218 
3,967 
5,144 
> 3 years
2,904 
694 
567 
6,253 
10,418 
Not classified (2)
563 
- 
- 
- 
563 
           
Total
10,854 
12,614 
1,395 
20,285 
45,148 
 
Notes:
 
(1)
Includes on demand and past due assets.
(2)
Predominantly comprises multi-option facilities for which there is no single maturity date.
 
Key point
 
·
The majority of Ulster Bank's commercial real estate portfolio is categorised as < 1 year including on demand assets, owing to the high level of non-performing assets in the portfolio. Ulster Bank places most restructured facilities on demand rather than extending the maturity date.
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Commercial real estate (continued)
 
Breakdown of portfolio by AQ band
 
 
31 December 2011
AQ1-AQ2 
£m 
AQ3-AQ4 
£m 
AQ5-AQ6 
£m 
AQ7-AQ8 
£m 
AQ9 
£m 
AQ10 
£m 
Total 
£m 
               
Core
1,094 
6,714 
19,054 
6,254 
3,111 
4,338 
40,565 
Non-Core
680 
1,287 
5,951 
3,893 
2,385 
20,085 
34,281 
               
Total
1,774 
8,001 
25,005 
10,147 
5,496 
24,423 
74,846 
               
31 December 2010
              
               
Core
1,055 
7,087 
20,588 
7,829 
2,171 
3,532 
42,262 
Non-Core
1,003 
2,694 
11,249 
7,608 
4,105 
18,489 
45,148 
               
Total
2,058 
9,781 
31,837 
15,437 
6,276 
22,021 
87,410 
 
Key points
 
·
Approximately 13% of the commercial real estate exposure is within the AQ1-AQ4 bands. This includes unsecured lending to property companies and real estate investment trusts. The high proportion of the exposure in the AQ10 band is driven by Ulster Bank (Core and Non-Core) and GBM (Non-Core). 
   
·
Of the total portfolio of £74.8 billion at 31 December 2011, £34.7 billion (2010 - £45.1 billion) is managed within the Group's standard credit processes and £5.9 billion (2010 - £9.2 billion) is receiving varying degrees of heightened credit management under the Group Watchlist process (this includes all Watchlist Amber cases and Watchlist Red cases managed outside the Global Restructuring Group (GRG)). A further £34.3 billion (2010 - £33.1 billion) is managed within the GRG and includes both Watchlist and non-performing exposures. The increase in the portfolio managed by the GRG is driven by Ulster Bank (Core and Non-Core).
 
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Commercial real estate (continued)
 
Breakdown of portfolio by AQ band (continued)
The table below analyses commercial real estate lending by loan-to-value (LTV). Due to market conditions in Ireland and to a lesser extent in the UK, there is a shortage of market based data. In the absence of external valuations, the Group deploys a range of alternative approaches including internal expert judgement and indexation.
 
 
 
Ulster Bank
  
Rest of the Group
  
Group
LTVs at 31 December 2011
AQ1-AQ9 
£m 
AQ10 
 £m 
  
AQ1-AQ9 
£m 
AQ10 
£m 
  
AQ1-AQ9 
£m 
AQ10 
 £m 
                 
<= 50%
81 
28 
  
7,091 
332 
  
7,172 
360 
> 50% and <= 70%
642 
121 
  
14,105 
984 
  
14,747 
1,105 
> 70% and <= 90%
788 
293 
  
10,042 
1,191 
  
10,830 
1,484 
> 90% and <= 100%
541 
483 
  
2,616 
1,679 
  
3,157 
2,162 
> 100% and <= 110%
261 
322 
  
1,524 
1,928 
  
1,785 
2,250 
> 110% and <= 130%
893 
1,143 
  
698 
1,039 
  
1,591 
2,182 
> 130%
1,468 
10,004 
  
672 
2,994 
  
2,140 
12,998 
                 
Total with LTVs
4,674 
12,394 
  
36,748 
10,147 
  
41,422 
22,541 
Other (1)
7 
38 
  
8,994 
1,844 
  
9,001 
1,882 
                 
Total
4,681 
12,432 
  
45,742 
11,991 
  
50,423 
24,423 
                 
Total portfolio average LTV (2)
140% 
259% 
  
69% 
129% 
  
77% 
201% 
 
Notes:
 
(1)
Other performing loans of £9.0 billion include unsecured lending to commercial real estate clients, such as major UK homebuilders. The credit quality of these exposures is consistent with that of the performing portfolio overall. Other non-performing loans of £1.9 billion are subject to the Group's standard provisioning policies.
(2)
Weighted average by exposure.
 
Key points
 
·
Nearly 85% of the commercial real estate portfolio with LTV > 100% is within Ulster Bank (Core and Non-Core) and GBM (Non-Core). A majority of these portfolios are managed within the GRG and are subject to monthly reviews. Significant levels of provisions have been taken against these portfolios; provisions as a percentage of risk elements in lending for the Ulster Bank commercial real estate portfolio were 53% at 31 December 2011 (31 December 2010 - 44%). The reported LTV levels are based on gross loan values. The weighted average LTV for AQ10 excluding Ulster Bank is 129%.
   
·
The average interest coverage (ICR) ratios for UK Corporate (Core and Non-Core) and GBM (Non-Core) investment properties are 2.37x and 1.25x respectively. The US Retail & Commercial portfolio is managed on the basis of debt service coverage, which includes scheduled principal amortisation. The average debt service interest coverage for this portfolio on this basis was 1.24x at 31 December 2011. There are a number of different approaches used within the Group and across the industry to calculate ICR ratios for different portfolio types, and organisations may not therefore be comparable.
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Commercial real estate (continued)
 
Retail assets
The Group's retail lending portfolio includes mortgages, credit cards, unsecured loans, auto finance and overdrafts. The majority of personal lending exposures are in the UK, Ireland and the US. The analysis below includes both Core and Non-Core balances.
 
 
31 December 
 2011 
31 December 
 2010 
Personal credit loans and receivables
£m 
£m 
     
UK Retail
    
  - mortgages
96,388 
92,592 
  - cards, loans and overdrafts
16,004 
18,072 
Ulster Bank
    
  - mortgages
20,020 
21,162 
  - other personal
1,533 
1,017 
Citizens
    
  - mortgages
23,829 
24,575 
  - auto and cards
5,731 
6,062 
  - other (1)
2,111 
3,455 
Other (2)
17,545 
18,123 
     
 
183,161 
185,058 
 
Notes:
 
(1)
Mainly student loans and loans secured by recreational vehicles or marine vessels.
(2)
Personal exposures in other divisions.
 
Residential mortgages
The tables below detail the distribution of residential mortgages by indexed LTV. LTV averages are calculated by transaction volume and transaction value. Refer to the section on Ulster Bank Group on page 179 for analysis of Ulster Bank residential mortgages.
 
 
 
UK Retail
  
Citizens
LTV distribution calculated on a volume basis
2011 
% 
2010 
% 
  
2011 
% 
2010 
% 
           
<= 70%
62.1 
61.6 
  
43.5 
43.4 
> 70% and <= 90%
27.1 
26.2 
  
26.9 
27.6 
> 90% and <= 110%
9.4 
10.4 
  
16.7 
17.2 
> 110% and <= 130%
1.4 
1.7 
  
6.9 
6.0 
> 130%
- 
0.1 
  
6.0 
5.8 
           
Total portfolio average LTV at 31 December
57.8 
58.2 
  
73.8 
75.3 
           
Average LTV on new originations during the year
58.4 
64.2 
  
63.8 
64.8 
 
 
LTV distribution calculated on a value basis
£m 
£m 
  
£m 
£m 
           
<= 70%
47,811 
44,522 
  
9,669 
10,375 
> 70% and <= 90%
34,410 
32,299 
  
7,011 
7,196 
> 90% and <= 110%
11,800 
12,660 
  
3,947 
4,080 
> 110% and <= 130% 
1,713 
1,924 
  
1,580 
1,488 
> 130%
74 
73 
  
1,263 
1,252 
           
Total portfolio average LTV at 31 December
67.2% 
68.1% 
  
75.9% 
75.4% 
           
Average LTV on new originations during the year
63.0% 
68.0% 
  
65.8% 
65.3% 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Residential mortgages (continued)
The table below details residential mortgages which are three months or more in arrears (by volume).
 
 
 
31 December 
 2011 
31 December 
 2010 
Residential mortgages which are three months or more in arrears (by volume)
% 
% 
     
UK Retail (1)
1.6 
1.7 
Citizens
2.0 
1.4 
 
Note:
 
(1)
The 'One Account' current account mortgage is excluded (£5.4 billion - 5.6% of assets) at 31 December 2011, 0.9% of these accounts were 90 days continually in excess of the limit (31 December 2010 - 0.8%). Consistent with the way the Council of Mortgage Lenders publishes member arrears information, the 3+ months arrears rate now excludes accounts in repossession and cases with shortfalls post property sale.
 
UK Retail
Key points
 
·
The UK Retail mortgage portfolio totalled £96.4 billion (98.6% in Core) at 31 December 2011, an increase of 4.1% from 2010, due to continued strong sales growth and lower redemption rates from before the financial crisis.
   
·
Of the total portfolio, 98.6% is designated as Core business, primarily comprising mortgages branded the Royal Bank of Scotland, NatWest, the One Account and First Active. Non-Core comprises Direct Line Mortgages.
   
·
The assets are prime mortgages and include 7.2% (£6.9 billion) of exposure to residential buy-to-let. There is a small legacy self-certification book (0.3% of total assets). Self-certified mortgages were withdrawn from sale in 2004.
   
·
Gross new mortgage lending in 2011 remained strong at £14.7 billion. The average LTV for new business during 2011 declined in comparison to 2010 and the maximum LTV available to new customers remained at 90%. Based on the Halifax House Price index at September 2011, the book average indexed LTV improved marginally when compared to December 2010, with the proportion of balances with an LTV over 100% also lower. Refer to the table on page 172, which details LTV information on a volume and value basis.
   
·
The arrears rate (more than three payments in arrears, excluding repossessions and shortfalls post property sale) has remained broadly stable since late 2009 at 1.6%.
   
·
The number of properties repossessed in 2011 was 1,671, up from 1,392 in 2010.
   
·
The mortgage impairment charge was £187 million for 2011, an increase of 2% from 2010. A significant part of the mortgage impairment charge related to reduced expectations of cash recovery on already defaulted debt. It also included an additional provision charge for mortgage customers who received forbearance. 
   
·
Default and arrears rates remain sensitive to economic developments and are currently supported by the low interest rate environment and strong book growth, with recent business yet to fully mature.
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Residential mortgages (continued)
 
Citizens
Key points
 
·
Citizens' residential mortgage portfolio totalled £23.8 billion at 31 December 2011, a reduction of 3% from 2010 (£24.6 billion).
   
·
The mortgage portfolio comprises £6.4 billion of residential mortgages (99% in first lien position: Core - £5.8 billion; Non-Core - £0.6 billion) and £17.4 billion of home equity loans and lines (41% in first lien position: Core - £14.9 billion; Non-Core - £2.5 billion). Home equity Core consists of 47% in first lien position.
   
·
Citizens continues to focus on the 'footprint' states of New England, Mid Atlantic and Mid West, targeting low risk products and maintaining conservative risk policies. At 31 December 2011, the portfolio consisted of £19.5 billion (82% of the total portfolio) within footprint.
   
·
Loan acceptance criteria were tightened during 2009 to address deteriorating economic and market conditions.
   
·
Non-Core comprises 13% of the residential mortgage portfolio. Its largest component (74%) is the serviced by others (SBO) home equity portfolio. The SBO portfolio consists of purchased pools of home equity loans and lines, which resulted in an annualised charge-off rate of 8.7% in 2011. It is characterised by out-of-footprint geographies, high second lien concentration (95%) and high average LTV (113% at 31 December 2011). The SBO book has been closed to new purchases since the third quarter of 2007 and is in run-off, with exposure down from £2.8 billion at 31 December 2010, to £2.3 billion at 31 December 2011. The arrears rate of the SBO portfolio decreased from 3.0% at 31 December 2010, to 2.3% at 31 December 2011, as the legacy of poorer assets receded, and account servicing and collections became more effective following a servicer conversion in 2009.
 
Personal lending
The Group's personal lending portfolio includes credit cards, unsecured loans, auto finance and overdrafts. The majority of personal lending exposures exist in the UK and the US. Impairments as a proportion of average loans and receivables are shown in the following table.
 
 
 
31 December 2011
  
31 December 2010
 
Average 
loans and 
receivables 
Impairment 
charge as a % 
of average 
loans and 
receivables 
  
Average 
loans and 
receivables 
Impairment 
charge as a % 
of average 
loans and 
receivables 
Personal lending
£m 
% 
  
£m 
% 
           
UK Retail cards (1)
5,675 
3.0 
  
6,025 
5.0 
UK Retail loans (1)
7,755 
2.8 
  
9,863 
4.8 
           
Citizens cards (2)
936 
5.1 
  
1,005 
9.9 
Citizens auto loans (2)
4,856 
0.2 
  
5,256 
0.6 
 
Notes:
 
(1)
The ratio for UK Retail assets refers to the impairment charges for the year. This is the Core UK loans book and excludes the Non-Core direct loans book that was sold in late 2011.
(2)
The ratio for Citizens refers to the impairment charges in the year, net of recoveries realised in the year.
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Personal lending (continued)
 
UK Retail
Key points
 
·
The UK personal lending portfolio, of which 99.4% is in Core businesses, comprises credit cards, unsecured loans and overdrafts, and totalled £16.0 billion at 31 December 2011 (31 December 2010 - £18.1 billion).
   
·
The decrease in portfolio size of 11.4% was driven by continued subdued loan recruitment activity and a continuing general market trend of customers repaying unsecured debt.
   
·
The Non-Core portfolio consists of the direct finance loan portfolios (Direct Line, Lombard, Mint and Churchill) and totalled £0.1 billion at 31 December 2011 (2010 - £0.4 billion). In the last quarter of 2011, a portfolio of £170 million of balances was disposed of.
   
·
Risk appetite continues to be actively managed across all products with investment in collection and recovery processes continuing, addressing both continued support for the Group's customers and the management of impairments.
   
·
Support continues for customers experiencing financial difficulties through 'breathing space initiatives'. Refer to the disclosures on forbearance on page 156 for more information.
   
·
The impairment charge on unsecured lending was £579 million for the year, down 42% on 2010, reflecting the effect of risk appetite tightening. The sale of the direct finance loan book gave rise to a one-off benefit of approximately £30 million.
   
·
Impairments remain sensitive to the external environment, including unemployment levels and interest rates.
   
·
Industry benchmarks for cards arrears remain stable, with the Group continuing to perform favourably.
 
Citizens
Key points
 
·
Citizens' average credit card portfolio totalled £936 million during 2011, with Core assets comprising 90.2% of the portfolio. Citizens' cards business has traditionally adopted conservative risk strategies compared with the US market and given the economic climate, has introduced tighter lending criteria and lower credit limits. These actions have led to improving new business quality and a business performing better than industry benchmarks (provided by VISA). The latest available metrics show the 60+ days delinquency as a percentage of total outstandings at 2.15% at November 2011 (compared to an industry figure of 2.45%) and net contractual charge-offs as a percentage of total outstandings at 2.89% at November 2011 (compared to an industry figure of 3.69%).
   
·
Citizens' average auto loan portfolio totalled £4.9 billion during 2011, of which 98% is considered Core. £101 million (2%) is Non-Core and anticipated to run off by 2013. Citizens' vehicle financing business lends to US consumers through a network of 4,200 auto dealers in 25 US states. Citizens' credit policy is considered conservative, targeting prime customers and has historically experienced credit losses below those of industry peers. 
   
·
The net write-off rate on the total auto portfolio fell to 0.18% at 31 December 2011, from 0.34% in 2010. The 30+ days past due delinquency rate fell to 1.04% at 31 December 2011, from 1.57% in 2010.
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Ulster Bank Group (Core and Non-Core)
 
Overview
At 31 December 2011, Ulster Bank Group accounted for 10% of the Group's total gross customer loans (31 December 2010 - 10%) and 9% of the Group's Core gross customer loans (31 December 2010 - 9%). Ulster Bank's financial performance continues to be overshadowed by the challenging economic climate in Ireland, with impairments remaining elevated as high unemployment, coupled with higher taxation and limited liquidity in the economy, continues to depress the property market and domestic spending.   
 
The impairment charge of £3,717 million for the year (31 December 2010 - £3,843 million) was driven by a combination of new defaulting customers and deteriorating security values. Provisions as a percentage of risk elements in lending increased from 44% at 31 December 2010 to 53% at 31 December 2011, predominantly as a result of the deterioration in the value of the Non-Core commercial real estate development portfolio.
 
Core
The impairment charge for the year of £1,384 million (31 December 2010 - £1,161 million) reflects the difficult economic climate in Ireland, with elevated default levels across both mortgage and other corporate portfolios. The mortgage sector accounted for £570 million (41%) of the total 2011 impairment charge.
 
Non-Core
The impairment charge for the year was £2,333 million (31 December 2010 - £2,682 million), with the commercial real estate sector accounting for £2,160 million (93%) of the total 2011 charge.
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Ulster Bank Group (Core and Non-Core) (continued)
 
Loans, risk elements in lending (REIL) and impairments by sector
 
 
 
Gross 
 loans 
REIL 
Provisions 
REIL 
as a % of 
gross 
 loans 
Provisions 
 as a % of 
 REIL 
Provisions 
 as a % of 
 gross loans 
 
 
Impairment 
charge 
 
Amounts 
 written-off 
31 December 2011
£m 
£m 
£m 
% 
% 
% 
£m 
£m 
                 
Core
                
Mortgages
20,020 
2,184 
945 
10.9 
43 
4.7 
570 
11 
Personal unsecured
1,533 
201 
184 
13.1 
92 
12.0 
56 
25 
Commercial real estate
                
  - investment
3,882 
1,014 
413 
26.1 
41 
10.6 
225 
-   
  - development
881 
290 
145 
32.9 
50 
16.5 
99 
16 
Other corporate
7,736 
1,834 
1,062 
23.7 
58 
13.7 
434 
72 
                 
 
34,052 
5,523 
2,749 
16.2 
50 
8.1 
1,384 
124 
                 
Non-Core
                
Commercial real estate
                
  - investment
3,860 
2,916 
1,364 
75.5 
47 
35.3 
609 
1 
  - development
8,490 
7,536 
4,295 
88.8 
57 
50.6 
1,551 
32 
Other corporate
1,630 
1,159 
642 
71.1 
55 
39.4 
173 
16 
                 
 
13,980 
11,611 
6,301 
83.1 
54 
45.1 
2,333 
49 
                 
Ulster Bank Group
                
Mortgages
20,020 
2,184 
945 
10.9 
43 
4.7 
570 
11 
Personal unsecured
1,533 
201 
184 
13.1 
92 
12.0 
56 
25 
Commercial real estate
                
  - investment
7,742 
3,930 
1,777 
50.8 
45 
23.0 
834 
1 
  - development
9,371 
7,826 
4,440 
83.5 
57 
47.4 
1,650 
48 
Other corporate
9,366 
2,993 
1,704 
32.0 
57 
18.2 
607 
88 
                 
 
48,032 
17,134 
9,050 
35.7 
53 
18.8 
3,717 
173 
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Ulster Bank Group (Core and Non-Core) (continued)
 
Loans, REIL and impairments by sector (continued)
 
 
 
Gross 
 loans 
REIL 
Provisions 
REIL 
as a % of 
gross 
 loans 
Provisions 
 as a % of 
 REIL 
Provisions 
 as a % of 
 gross loans 
 
Impairment 
charge 
 
Amounts 
 written-off 
31 December 2010
£m 
£m 
£m 
% 
% 
% 
£m 
£m 
                 
Core
                
Mortgages
21,162 
1,566 
439 
7.4 
28 
2.1 
294 
7 
Personal unsecured
1,282 
185 
158 
14.4 
85 
12.3 
48 
30 
Commercial real estate
                
  - investment
4,284 
598 
332 
14.0 
56 
7.7 
259 
- 
  - development
1,090 
65 
37 
6.0 
57 
3.4 
116 
- 
Other corporate
9,039 
1,205 
667 
13.3 
55 
7.4 
444 
11 
                 
 
36,857 
3,619 
 1,633 
9.8 
45 
4.4 
1,161 
48 
                 
Non-Core
                
Mortgages
- 
- 
- 
- 
- 
- 
42 
- 
Commercial real estate
                
  - investment
3,854 
2,391 
1,000 
62.0 
42 
25.9 
630 
- 
  - development
8,760 
6,341 
2,783 
72.4 
44 
31.8 
1,759 
- 
Other corporate
1,970 
 1,310 
561 
66.5 
43 
28.5 
251 
- 
                 
 
14,584 
 10,042 
 4,344 
68.9 
43 
29.8 
2,682 
- 
                 
Ulster Bank Group
                
Mortgages
21,162 
1,566 
439 
7.4 
28 
2.1 
336 
7 
Personal unsecured
1,282 
185 
158 
14.4 
85 
12.3 
48 
30 
Commercial real estate
                
  - investment
8,138 
2,989 
1,332 
36.7 
45 
16.4 
889 
- 
  - development
9,850 
6,406 
2,820 
65.0 
44 
28.6 
1,875 
- 
Other corporate
11,009 
2,515 
1,228 
22.8 
49 
11.2 
695 
11 
                 
 
51,441 
13,661 
5,977 
26.6 
44 
11.6 
3,843 
48 
 
Key points
 
·
REIL increased by £3.5 billion during the year, which reflects continuing difficult conditions in both the commercial and residential sectors in Ireland. Growth moderated in the last two quarters of 2011 as default trends for corporate portfolios declined.
   
·
At 31 December 2011, 68% of REIL was in Non-Core (2010 - 74%). The majority of the Non-Core commercial real estate development portfolio (89%) is REIL with a 57% provision coverage.
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Ulster Bank Group (Core and Non-Core) (continued)
 
Residential mortgages
The tables below show how the continued decrease in property values has affected the distribution of residential mortgages by indexed LTV. LTV is based upon gross loan amounts and whilst including defaulted loans, does not take account of provisions made.
 
 
 
LTV distribution calculated on a volume basis
2011 
% 
2010 
% 
     
<= 70%
45.0 
50.3 
> 70% and <= 90%
11.4 
13.0 
> 90% and <= 110%
12.0 
14.5 
> 110% and <= 130%
10.9 
13.5 
> 130%
20.7 
8.7 
     
Total portfolio average LTV at 31 December
81.0 
71.2 
     
Average LTV on new originations during the year
67.0 
75.9 
 
 
LTV distribution calculated on a value basis
 
£m 
 
£m 
     
<= 70%
4,526 
5,928 
> 70% and <= 90%
2,501 
3,291 
> 90% and <= 110%
3,086 
4,256 
> 110% and <= 130%
3,072 
4,391 
> 130%
6,517 
2,958 
     
Total portfolio average LTV at 31 December
106.1 
91.7 
     
Average LTV on new originations during the year
73.9 
78.9 
 
Key points
 
·
The residential mortgage portfolio across Ulster Bank Group totalled £20 billion at 31 December 2011, with 89% in the Republic of Ireland and 11% in Northern Ireland. At constant exchange rates the portfolio decreased by 4% from 2010, as a result of natural amortisation and limited growth due to low market demand.
   
·
The mortgage REIL continued to increase as a result of the continued challenging economic environment. At 31 December 2011, REIL as a percentage of gross mortgages was 10.9% (by value) compared with 7.4% in 2010. The impairment charge for 2011 was £570 million compared with £336 million for 2010. Repossession levels were higher than in 2010, with a total of 161 properties repossessed during 2011 (compared with 76 during 2010). 76% of repossessions during 2011 were through voluntary surrender or abandonment of the property.
   
·
Ulster Bank Group is assisting customers in this difficult environment. Mortgage forbearance policies which are deployed through the 'Flex' initiative are aimed at assisting customers in financial difficulty. At 31 December 2011, 9.1% (by value) of the mortgage book (£1.8 billion) was on a forbearance arrangement compared with 5.8% (£1.2 billion) at 31 December 2010. The majority of these forbearance arrangements are in the performing book (77%) and not 90 days past due, refer to page 156 for further details.
 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Ulster Bank Group (Core and Non-Core) (continued)
 
Commercial real estate
The commercial real estate lending portfolio for Ulster Bank Group totalled £17.1 billion at 31 December, of which £12.3 billion or 72% is Non-Core. The geographic split of the total Ulster Bank Group commercial real estate portfolio remained similar to 2010, with 26% in Northern Ireland, 63% in the Republic of Ireland and 11% in the UK.
 
 
 
Development
  
Investment
    
 
Commercial  
Residential 
  
Commercial 
Residential 
  
Total 
Exposure by geography
£m 
£m 
  
£m 
£m 
  
£m 
               
31 December 2011
              
Ireland (ROI & NI)
2,591 
6,317 
  
5,097 
1,132 
  
15,137 
UK (excluding NI)
95 
336 
  
1,371 
111 
  
1,913 
RoW
- 
32 
  
27 
4 
  
63 
               
 
2,686 
6,685 
  
6,495 
1,247 
  
17,113 
               
31 December 2010
              
Ireland (ROI & NI)
2,785 
6,578 
  
5,032 
1,098 
  
15,493 
UK (excluding NI)
110 
359 
  
1,869 
115 
  
2,453 
RoW
- 
18 
  
23 
1 
  
42 
               
 
2,895 
6,955 
  
6,924 
1,214 
  
17,988 
 
 
Key points
 
·
Commercial real estate remains the primary driver of the increase in the defaulted loan book for Ulster Bank Group. The outlook remains challenging, with limited liquidity in the marketplace to support sales or refinancing. The decrease in asset valuations has placed pressure on the portfolio.
   
·
Within its early problem management framework, Ulster Bank may agree various remedial measures with customers whose loans are performing but who are experiencing temporary financial difficulties. During 2011, commercial real estate loans amounting to £0.8 billion (exposures greater than £10 million) benefited from such measures.
   
·
During 2011, impaired commercial real estate loans amounting to £1 billion (exposures greater than £10 million) were restructured and remain in the non-performing book.
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk
Country risk is the risk of material losses arising from significant country-specific events such as sovereign events (default or restructuring); economic events (contagion of sovereign default to other parts of the economy, cyclical economic shock); political events (transfer or convertibility restrictions and expropriation or nationalisation); and natural disaster or conflict. Such events have the potential to affect elements of the Group's credit portfolio that are directly or indirectly linked to the country in question and can also give rise to market, liquidity, operational and franchise risk related losses.
 
For a discussion of the Group's approach to country risk management and the external risk environment, refer to the 2011 Annual Report and Accounts: Business review: Risk and balance sheet management: Country risk.
 
The following tables show the Group's exposure by country of incorporation of the counterparty at 31 December 2011. Countries shown are those where the Group's balance sheet exposure to counterparties incorporated in the country exceeded £1 billion and the country had an external rating of A+ or below from S&P, Moody's or Fitch at 31 December 2011, as well as selected eurozone countries. The numbers are stated before taking into account the impact of mitigating actions, such as collateral, insurance or guarantees, that may have been taken to reduce or eliminate exposure to country risk events. Exposures relating to ocean-going vessels are not included due to their multinational nature.
 
For definitions of headings in the following tables, refer to page 204.
 
'Other eurozone' comprises Austria, Cyprus, Estonia, Finland, Malta, Slovakia and Slovenia.
 
References to Non-Core in the following pages relate to Non-Core lending disclosures in the summary tables on pages 182-183.
 
 

 
 
 

 

 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Summary
 
 
 
31 December 2011
 
Lending
                            
 
Central 
and local 
 government 
Central 
 banks 
Other 
 banks 
 
Other 
financial 
institutions 
Corporate 
Personal 
Total 
lending 
  
Of which 
Non-Core 
  
Debt 
securities 
  
Derivatives 
(gross of 
collateral)
 and repos 
  
 
Balance 
sheet 
exposures 
  
Contingent 
liabilities and 
commitments 
  
Total 
  
CDS 
notional 
less fair 
value 
 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
  
£m 
  
£m 
  
£m 
  
£m 
  
£m 
  
£m 
  
£m 
                                           
Eurozone
                                          
Ireland
45 
1,467 
136 
336 
18,994 
18,858 
39,836 
  
10,156 
  
886 
  
2,824 
  
43,546 
  
2,928 
  
46,474 
  
53 
Spain
9 
3 
206 
154 
5,775 
362 
6,509 
  
3,735 
  
6,155 
  
2,393 
  
15,057 
  
2,630 
  
17,687 
  
(1,013)
Italy
- 
73 
233 
299 
2,444 
23 
3,072 
  
1,155 
  
1,258 
  
2,314 
  
6,644 
  
3,150 
  
9,794 
  
(452)
Greece
7 
6 
- 
31 
427 
14 
485 
  
94 
  
409 
  
355 
  
1,249 
  
52 
  
1,301 
  
1 
Portugal
- 
- 
10 
- 
495 
5 
510 
  
341 
  
113 
  
519 
  
1,142 
  
268 
  
1,410 
  
55 
Germany
- 
18,068 
653 
305 
6,608 
155 
25,789 
  
5,402 
  
15,767 
  
16,037 
  
57,593 
  
7,527 
  
65,120 
  
(2,401)
Netherlands
2,567 
7,654 
623 
1,575 
4,827 
20 
17,266 
  
2,498 
  
9,893 
  
10,285 
  
37,444 
  
10,216 
  
47,660 
  
(1,295)
France
481 
3 
1,273 
437 
3,761 
79 
6,034 
  
2,317 
  
7,794 
  
9,058 
  
22,886 
  
10,217 
  
33,103 
  
(2,846)
Luxembourg
- 
- 
101 
1,779 
2,228 
2 
4,110 
  
1,497 
  
130 
  
3,689 
  
7,929 
  
2,007 
  
9,936 
  
(404)
Belgium
213 
8 
287 
354 
588 
20 
1,470 
  
480 
  
652 
  
3,010 
  
5,132 
  
1,359 
  
6,491 
  
(99)
Other eurozone
121 
- 
28 
115 
1,375 
26 
1,665 
  
324 
  
710 
  
1,971 
  
4,346 
  
1,365 
  
5,711 
  
(25)
                                           
Total eurozone
3,443 
27,282 
3,550 
5,385 
47,522 
19,564 
106,746 
  
27,999 
  
43,767 
  
52,455 
  
202,968 
  
41,719 
  
244,687 
  
(8,426)
                                           
Other countries
                                        
India
- 
275 
610 
35 
2,949 
127 
3,996 
  
350 
  
1,530 
  
218 
  
5,744 
  
1,280 
  
7,024 
  
(105)
China
74 
178 
1,237 
17 
654 
30 
2,190 
  
50 
  
597 
  
413 
  
3,200 
  
1,559 
  
4,759 
  
(62)
South Korea
- 
5 
812 
3 
576 
1 
1,397 
  
3 
  
845 
  
404 
  
2,646 
  
627 
  
3,273 
  
(22)
Turkey
215 
193 
253 
66 
1,072 
16 
1,815 
  
423 
  
361 
  
94 
  
2,270 
  
437 
  
2,707 
  
10 
Russia
- 
36 
970 
8 
659 
62 
1,735 
  
76 
  
186 
  
66 
  
1,987 
  
356 
  
2,343 
  
(343)
Brazil
- 
- 
936 
- 
227 
4 
1,167 
  
70 
  
790 
  
24 
  
1,981 
  
319 
  
2,300 
  
(377)
Romania
66 
145 
30 
8 
413 
392 
1,054 
  
1,054 
  
220 
  
6 
  
1,280 
  
160 
  
1,440 
  
8 
Mexico
- 
7 
233 
- 
683 
1 
924 
  
39 
  
83 
  
131 
  
1,138 
  
353 
  
1,491 
  
10 
Poland
35 
208 
3 
9 
624 
6 
885 
  
45 
  
116 
  
56 
  
1,057 
  
701 
  
1,758 
  
(99)
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Summary (continued)
 
 
 
31 December 2010
 
Lending
                            
 
Central 
and local 
 government 
Central 
 banks 
Other 
 banks 
 
Other 
financial 
institutions 
Corporate 
Personal 
Total 
lending 
  
Of which 
Non-Core 
  
Debt 
securities 
  
Derivatives 
(gross of 
collateral)
 and repos 
  
 
Balance 
sheet 
exposures 
  
Contingent 
liabilities and 
commitments 
  
Total 
  
CDS 
notional 
less fair 
value 
 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
  
£m 
  
£m 
  
£m 
  
£m 
  
£m 
  
£m 
  
£m 
                                           
Eurozone
                                          
Ireland
61 
2,119 
87 
813 
19,886 
20,228 
43,194 
  
10,758 
  
1,323 
  
2,940 
  
47,457 
  
4,316 
  
51,773 
  
(32)
Spain
19 
5 
166 
92 
6,991 
407 
7,680 
  
4,538 
  
7,107 
  
2,047 
  
16,834 
  
3,061 
  
19,895 
  
(964)
Italy
45 
78 
668 
418 
2,483 
27 
3,719 
  
1,901 
  
3,836 
  
2,032 
  
9,587 
  
3,853 
  
13,440 
  
(838)
Greece
14 
36 
18 
31 
191 
16 
306 
  
130 
  
974 
  
227 
  
1,507 
  
164 
  
1,671 
  
182 
Portugal
86 
- 
63 
- 
611 
6 
766 
  
316 
  
242 
  
394 
  
1,402 
  
734 
  
2,136 
  
41 
Germany
- 
10,894 
1,060 
422 
7,519 
162 
20,057 
  
6,471 
  
14,747 
  
15,266 
  
50,070 
  
8,917 
  
58,987 
  
(1,551)
Netherlands
914 
6,484 
554 
1,801 
6,170 
81 
16,004 
  
3,205 
  
12,523 
  
9,058 
  
37,585 
  
18,141 
  
55,726 
  
(1,530)
France
511 
3 
1,095 
470 
4,376 
102 
6,557 
  
2,787 
  
14,041 
  
8,607 
  
29,205 
  
11,640 
  
40,845 
  
(1,925)
Luxembourg
- 
25 
26 
734 
2,503 
3 
3,291 
  
1,517 
  
378 
  
2,545 
  
6,214 
  
2,383 
  
8,597 
  
(532)
Belgium
102 
14 
441 
32 
893 
327 
1,809 
  
501 
  
803 
  
2,238 
  
4,850 
  
1,492 
  
6,342 
  
57 
Other eurozone
124 
1 
142 
119 
1,505 
24 
1,915 
  
332 
  
535 
  
1,370 
  
3,820 
  
2,037 
  
5,857 
  
(82)
                                           
Total eurozone
1,876 
19,659 
4,320 
4,932 
53,128 
21,383 
105,298 
  
32,456 
  
56,509 
  
46,724 
  
208,531 
  
56,738 
  
265,269 
  
(7,174)
                                           
Other countries
                                        
India
- 
- 
1,307 
307 
2,665 
273 
4,552 
  
653 
  
1,686 
  
178 
  
6,416 
  
1,281 
  
7,697 
  
(195)
China
17 
298 
1,223 
16 
753 
64 
2,371 
  
236 
  
573 
  
252 
  
3,196 
  
1,589 
  
4,785 
  
(117)
South Korea
- 
276 
1,033 
5 
558 
2 
1,874 
  
53 
  
1,353 
  
493 
  
3,720 
  
1,143 
  
4,863 
  
(159)
Turkey
282 
68 
448 
37 
1,386 
12 
2,233 
  
692 
  
550 
  
111 
  
2,894 
  
686 
  
3,580 
  
(91)
Russia
- 
110 
244 
7 
1,181 
58 
1,600 
  
125 
  
124 
  
51 
  
1,775 
  
596 
  
2,371 
  
(134)
Brazil
- 
- 
825 
- 
315 
5 
1,145 
  
120 
  
687 
  
15 
  
1,847 
  
190 
  
2,037 
  
(369)
Romania
36 
178 
21 
21 
426 
446 
1,128 
  
1,123 
  
310 
  
8 
  
1,446 
  
319 
  
1,765 
  
23 
Mexico
- 
8 
149 
- 
999 
1 
1,157 
  
303 
  
144 
  
122 
  
1,423 
  
840 
  
2,263 
  
84 
Poland
- 
168 
7 
7 
655 
6 
843 
  
108 
  
271 
  
69 
  
1,183 
  
1,020 
  
2,203 
  
(94)
 
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk (continued)
 
Key points
Reported exposures are affected by currency movements. Over the year, sterling fell 0.3% against the US dollar and rose 3.1% against the euro. In the fourth quarter, sterling fell 0.9% against the US dollar and rose 2.9% against the euro.
 
 
·
Exposure to most countries shown in the table declined over 2011 as the Group maintained a cautious stance and many bank clients reduced debt levels. Decreases were seen in balance sheet and off-balance sheet exposures in many countries. Increases in derivatives and repos were in line with the Group's strategy, driven partly by customer demand for hedging solutions and partly by market movements; risks are generally mitigated by active collateralisation.
   
·
India - strong economic growth in 2011 resulted in increased exposure across most product types until the fourth quarter, when a decline took place, driven by a Global Transaction Services (GTS) exercise in the region to manage down risk-weighted assets, natural run-offs/maturities and a sharp rupee depreciation. Year-on-year increases in lending to corporate clients (£0.3 billion) and the central bank (£0.3 billion) were offset by reductions in lending to banks (£0.7 billion) and other financial institutions (£0.3 billion).
   
·
China - lending to Chinese banks increased in the first three quarters of the year, supporting trade finance activities and on-shore regulatory needs, but by the end of 2011 exposure had decreased close to December 2010 levels. The Group reduced lending in the interbank money markets over the final quarter. This reduction in lending was offset by significant growth in repo trading with Chinese financial institutions helping to support the Group's funding requirements, with highly liquid US Treasuries being the main underlying security. A reduction in off-balance sheet exposures, including guarantees and undrawn commitments, was in part due to the run-off of performance bonds in respect of shipping deliveries and also due to reduced appetite for trade finance assets.
   
·
South Korea - exposure decreased by £1.6 billion during 2011. This was largely due to a reduction in debt securities as the Group managed its wrong-way risk exposure. The Group maintained a cautious stance given the current global economic downturn.
   
·
Turkey - exposures were managed down in most categories, with the non-strategic (mid-market) portfolio significantly reduced in 2011. Nonetheless, Turkey continues to be one of the Group's key emerging markets. The strategy remains client-centric, with the product offering tailored to selected client segments across large Turkish international corporate clients and financial institutions as well as Turkish subsidiaries of global clients.
 
Risk and balance sheet management (continued)
 
Risk management: Country risk (continued)
 
Key points (continued)
 
·
Mexico - asset sales and a number of early repayments in the corporate portfolio led to exposure falling £0.8 billion in the year. This decline also reflects the Group's cautious approach to new business during the fourth quarter following its decision to close its onshore operation in Mexico.
   
·
Eurozone periphery (Ireland, Spain, Italy, Greece and Portugal) - exposure decreased across most of the periphery, with derivatives (gross of collateral) and repos being the only component that still saw some increases year on year (partly an effect of market movements on existing positions). Most of the Group's country risk exposure to the eurozone periphery countries arises from the activities of GBM and Ulster Bank (with respect to Ireland). The Group has some large holdings of Spanish bank and financial institution MBS bonds and smaller quantities of Italian bonds and Greek sovereign debt. GTS provides trade finance facilities to clients across Europe including the eurozone periphery.
   
 
The Group primarily transacts CDS contracts with investment-grade global financial institutions that are active participants in the CDS market. These transactions are subject to regular margining. For European peripheral sovereigns, credit protection has been purchased from a number of major European banks, predominantly outside the country of the reference entity. In a few cases where protection was bought from banks in the country of the reference entity, giving rise to wrong-way risk, this risk is mitigated through specific collateralisation. Due to their bespoke nature, exposures relating to CDPCs and related hedges have not been included, as they cannot be meaningfully attributed to a particular country or a reference entity. Exposures to CDPCs are disclosed on page 164.
 
The Group used CDS contracts throughout 2011 to manage both eurozone country and counterparty exposures. As shown in the individual country tables, this resulted in increases in both gross notional bought and sold eurozone CDS contracts, mainly on Italy, France and the Netherlands. The magnitude of the fair value of bought and sold CDS contracts increased over 2011 in line with the widening of eurozone CDS spreads.
 
For more specific commentary on the Group's exposure to each of the eurozone periphery countries, refer to pages 188 to 196. For commentary on the Group's exposure to other eurozone countries, see page 203.
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Eurozone
 
                             
CDS by reference entity
 
Lending 
REIL 
Provisions 
  
AFS and 
 LAR debt 
 securities 
AFS 
 reserves 
  
HFT
debt securities
Total debt 
 securities 
  
Derivatives 
 (gross of 
 collateral) and repos 
  
 
Balance 
sheet 
exposures 
  
Notional
  
Fair value
Long 
Short 
Bought 
Sold  
Bought 
Sold 
31 December 2011
£m 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
£m 
  
£m 
  
£m 
  
£m 
£m 
  
£m 
£m 
                                         
Central and local
  government
3,443 
- 
- 
  
18,406 
81 
  
19,597 
15,049 
22,954 
  
1,925 
  
28,322 
  
37,080 
36,759 
  
6,488 
(6,376)
Central banks
27,282 
- 
- 
  
20 
- 
  
6 
- 
26 
  
5,770 
  
33,078 
  
- 
- 
  
- 
- 
Other banks
3,550 
- 
- 
  
8,423 
(752)
  
1,272 
1,502 
8,193 
  
29,685 
  
41,428 
  
19,736 
19,232 
  
2,303 
(2,225)
Other financial
  institutions
5,385 
- 
- 
  
10,494 
(1,129)
  
1,138 
471 
11,161 
  
10,956 
  
27,502 
  
17,949 
16,608 
  
693 
(620)
Corporate
47,522 
14,152 
7,267 
  
964 
23 
  
528 
59 
1,433 
  
4,118 
  
53,073 
  
76,966 
70,119 
  
2,241 
(1,917)
Personal
19,564 
2,280 
1,069 
  
- 
- 
  
- 
- 
- 
  
1 
  
19,565 
  
- 
- 
  
- 
- 
                                         
 
106,746 
16,432 
8,336 
  
38,307 
(1,777)
  
22,541 
17,081 
43,767 
  
52,455 
  
202,968 
  
151,731 
142,718 
  
11,725 
(11,138)
                                         
31 December 2010
                                        
Central and local
  government
1,876 
- 
- 
  
23,201 
(893)
  
25,041 
14,256 
33,986 
  
1,537 
  
37,399 
  
28,825 
29,075 
  
2,899 
(2,843)
Central banks
19,659 
- 
- 
  
- 
- 
  
7 
- 
7 
  
6,382 
  
26,048 
  
- 
- 
  
- 
- 
Other banks
4,320 
- 
- 
  
9,192 
(916)
  
1,719 
1,187 
9,724 
  
25,639 
  
39,683 
  
16,616 
16,256 
  
1,042 
(1,032)
Other financial
  institutions
4,932 
- 
- 
  
10,583 
(737)
  
908 
83 
11,408 
  
9,025 
  
25,365 
  
12,921 
12,170 
  
173 
(182)
Corporate
53,128 
12,404 
5,393 
  
813 
45 
  
831 
260 
1,384 
  
4,141 
  
58,653 
  
70,354 
63,790 
  
(267)
461 
Personal
21,383 
1,642 
537 
  
- 
- 
  
- 
- 
- 
  
- 
  
21,383 
  
- 
- 
  
- 
- 
                                         
 
105,298 
14,046 
5,930 
  
43,789 
(2,501)
  
28,506 
15,786 
56,509 
  
46,724 
  
208,531 
  
128,716 
121,291 
  
3,847 
(3,596)
 
CDS bought protection: counterparty analysis by internal asset quality band
 
 
 
AQ1
  
AQ2-AQ3
  
AQ4-AQ9
  
AQ10
  
Total
 
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
31 December 2011 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
                             
Banks
67,624 
5,585 
  
1,085 
131 
  
198 
23 
  
- 
- 
  
68,907 
5,739 
Other financial Institutions
79,824 
5,605 
  
759 
89 
  
2,094 
278 
  
147 
14 
  
82,824 
5,986 
                             
Total
147,448 
11,190 
  
1,844 
220 
  
2,292 
301 
  
147 
14 
  
151,731 
11,725 
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Ireland
 
                             
CDS by reference entity
 
Lending 
REIL 
Provisions 
  
AFS and 
 LAR debt 
 securities 
AFS 
 reserves 
  
HFT
debt securities
Total debt 
 securities 
  
Derivatives 
 (gross of 
 collateral) and repos 
  
Balance 
sheet 
exposures 
  
Notional
  
Fair value
Long 
Short 
Bought 
Sold  
Bought 
Sold 
31 December 2011
£m 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
£m 
  
£m 
  
£m 
  
£m 
£m 
  
£m 
£m 
                                         
Central and local
  government
45 
- 
- 
  
102 
(46)
  
20 
19 
103 
  
92 
  
240 
  
2,145 
2,223 
  
466 
(481)
Central banks
1,467 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
1,467 
  
- 
- 
  
- 
- 
Other banks
136 
- 
- 
  
177 
(39)
  
195 
14 
358 
  
1,459 
  
1,953 
  
110 
107 
  
21 
(21)
Other financial
  institutions
336 
- 
- 
  
61 
- 
  
116 
35 
142 
  
855 
  
1,333 
  
523 
630 
  
64 
(74)
Corporate
18,994 
10,269 
5,689 
  
148 
3 
  
135 
- 
283 
  
417 
  
19,694 
  
425 
322 
  
(11)
10
Personal
18,858 
2,258 
1,048 
  
- 
- 
  
- 
- 
- 
  
1 
  
18,859 
  
- 
- 
  
- 
- 
                                         
 
39,836 
12,527 
6,737 
  
488 
(82)
  
466 
68 
886 
  
2,824 
  
43,546 
  
3,203 
3,282 
  
540 
(566)
                                         
31 December 2010
                                        
Central and local
  government
61 
- 
- 
  
104 
(45)
  
93 
88 
109 
  
20 
  
190 
  
1,872 
2,014 
  
360 
(387)
Central banks
2,119 
- 
- 
  
- 
- 
  
7 
- 
7 
  
126 
  
2,252 
  
- 
- 
  
- 
- 
Other banks
87 
- 
- 
  
435 
(51)
  
96 
45 
486 
  
1,523 
  
2,096 
  
317 
312 
  
103 
(95)
Other financial
  institutions
813 
- 
- 
  
291 
(1)
  
205 
- 
496 
  
837 
  
2,146 
  
566 
597 
  
45 
(84)
Corporate
19,886 
8,291 
4,072 
  
91 
(2)
  
140 
6 
225 
  
434 
  
20,545 
  
483 
344 
  
(20)
17 
Personal
20,228 
1,638 
534 
  
- 
- 
  
- 
- 
- 
  
- 
  
20,228 
  
- 
- 
  
- 
- 
                                         
 
43,194 
9,929 
4,606 
  
921 
(99)
  
541 
139 
1,323 
  
2,940 
  
47,457 
  
3,238 
3,267 
  
488 
(549)
 
CDS bought protection: counterparty analysis by internal asset quality band
 
 
 
AQ1
  
AQ2-AQ3
  
AQ4-AQ9
  
AQ10
  
Total
 
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
31 December 2011 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
                             
Banks
1,586 
300 
  
2 
- 
  
- 
- 
  
- 
- 
  
1,588 
300 
Other financial Institutions
1,325 
232 
  
161 
1 
  
129 
7 
  
- 
- 
  
1,615 
240 
                             
Total
2,911 
532 
  
163 
1 
  
129 
7 
  
- 
- 
  
3,203 
540 
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Ireland (continued)
 
Key points
 
●
The Group's exposure to Ireland is driven by Ulster Bank Group (87% of the Group's Irish exposure at 31 December 2011). The portfolio is predominantly personal lending of £18.9 billion (largely mortgages) and corporate lending of £19.0 billion (largely loans to the property sector). In addition, the Group has lending and derivatives exposure to the Central Bank of Ireland, financial institutions and large international clients with funding units based in Ireland.
   
●
Group exposure declined in all categories, with notable reductions in lending of £3.4 billion and in off-balance sheet items of £1.4 billion over the year, as a result of currency movements and de-risking in the portfolio.
 
Central and local government and central bank
 
●
Exposure to the central bank fluctuates, driven by regulatory requirements and by deposits of excess liquidity as part of the Group's assets and liabilities management. Exposures fell by £0.7 billion over the year, with most of the decline occurring in the fourth quarter.
 
Financial institutions
 
●
GBM and Ulster Bank account for the majority of the Group's exposure to financial institutions. Exposure to the financial sector fell by £1.1 billion during the year, caused by a £0.4 billion reduction in lending, a £0.5 billion reduction in debt securities and smaller reductions in derivatives and repos and in off-balance sheet exposure. The largest category is derivatives and repos where exposure is affected predominantly by market movements and transactions are typically collateralised.
 
Corporate
 
●
Corporate lending exposure fell approximately £0.9 billion over the year, driven by a combination of exchange rate movements and write-offs. At the end of 2011, lending exposure was highest in the property sector (£11.6 billion), which is also the sector that experienced the largest year-on-year reduction (£0.4 billion). REIL and impairment provisions rose by £2.0 billion and £1.6 billion respectively over the year.
 
Personal
 
●
The Ulster Bank retail portfolio mainly consists of mortgages (approximately 95% of Ulster Bank personal lending at 31 December 2011), with the remainder comprising credit card and other personal lending. Overall personal lending exposure fell approximately £1.4 billion over the year as a result of exchange rate fluctuations, amortisation, a small amount of write-offs and a lack of demand in the market.
 
Non-Core (included above)
Refer to table on pages 182 and 183 for details.
 
●
Ireland Non-Core lending exposure was £10.2 billion at 31 December 2011, down by £0.6 billion or 6% since December 2010. The remaining lending portfolio largely consists of exposures to real estate (79%), retail (7%) and leisure (4%).
 
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Spain
 
                             
CDS by reference entity
 
Lending 
REIL 
Provisions 
  
AFS and 
 LAR debt 
 securities 
AFS 
 reserves 
  
HFT
debt securities
Total debt 
 securities 
  
Derivatives 
 (gross of 
 collateral) and repos 
  
Balance 
sheet 
exposures 
  
Notional
  
Fair value
Long 
Short 
Bought 
Sold  
Bought 
Sold 
31 December 2011
£m 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
£m 
  
£m 
  
£m 
  
£m 
£m 
  
£m 
£m 
                                         
Central and local
  government
9 
- 
- 
  
33 
(15)
  
360 
751 
(358)
  
35 
  
(314)
  
5,151 
5,155 
  
538 
(522)
Central banks
3 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
3 
  
- 
- 
  
- 
- 
Other banks
206 
- 
- 
  
4,892 
(867)
  
162 
214 
4,840 
  
1,622 
  
6,668 
  
1,965 
1,937 
  
154 
(152)
Other financial
  institutions
154 
- 
- 
  
1,580 
(639)
  
65 
8 
1,637 
  
282 
  
2,073 
  
2,417 
2,204 
  
157 
(128)
Corporate
5,775 
1,190 
442 
  
9 
- 
  
27 
- 
36 
  
454 
  
6,265 
  
4,831 
3,959 
  
448 
(399)
Personal
362 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
362 
  
- 
- 
  
- 
- 
                                         
 
6,509 
1,190 
442 
  
6,514  
(1,521)
  
614  
973 
6,155 
  
2,393 
  
15,057 
  
14,364 
13,225 
  
1,297 
(1,201)
                                         
31 December 2010
                                        
Central and local
  government
19 
- 
- 
  
88 
(7)
  
1,172 
1,248 
12 
  
53 
  
84 
  
3,820 
3,923 
  
436 
(435)
Central banks
5 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
5 
  
- 
- 
  
- 
- 
Other banks
166 
- 
- 
  
5,264 
(834)
  
147 
118 
5,293 
  
1,482 
  
6,941 
  
2,087 
2,159 
  
133 
(135)
Other financial
  institutions
92 
- 
- 
  
1,724 
(474)
  
34 
7 
1,751 
  
22 
  
1,865 
  
1,648 
1,388 
  
72 
(45)
Corporate
6,991 
1,871 
572 
  
9 
38 
  
50 
8 
51 
  
490 
  
7,532 
  
5,192 
4,224 
  
231 
(168)
Personal
407 
1 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
407 
  
- 
- 
  
- 
- 
                                         
 
7,680 
1,872 
572 
  
7,085 
(1,277)
  
1,403 
1,381 
7,107 
  
2,047 
  
16,834 
  
12,747 
11,694 
  
872 
(783)
 
CDS bought protection: counterparty analysis by internal asset quality band
 
 
 
AQ1
  
AQ2-AQ3
  
AQ4-AQ9
  
AQ10
  
Total
 
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
31 December 2011 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
                             
Banks
6,595 
499 
  
68 
5 
  
32 
4 
  
- 
- 
  
6.695 
508 
Other financial Institutions
7,238 
736 
  
162 
3 
  
269 
50 
  
- 
- 
  
7,669 
789 
                             
Total
13,833 
1,235 
  
230 
8 
  
301 
54 
  
- 
- 
  
14,364 
1,297 
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Spain (continued)
 
Key points
 
●
The Group maintains strong relationships with Spanish government entities, banks, other financial institutions and large corporate clients. The exposure to Spain is driven by corporate lending and a large MBS covered bond portfolio.
   
●
Exposure fell in most categories in 2011, particularly in corporate lending, as a result of steps to de-risk the portfolio.
 
Central and local government and central bank
 
●
The Group's exposure to the government was negative at 31 December 2011, reflecting net short held-for-trading debt securities.
 
Financial institutions
 
●
A sizeable covered bond portfolio of £6.5 billion is the Group's largest exposure to the Spanish financial sector. The portfolio continued to perform satisfactorily in 2011. Stress analysis conducted to date on these available-for-sale debt securities indicated that this exposure is unlikely to suffer material credit losses. However, the Group continues to monitor the situation closely.
   
●
A further £1.9 billion of the Group's exposure to financial institutions consists of derivatives exposure to Spanish international banks and a few of the large regional banks, the majority of which is collateralised. This increased £0.4 billion in 2011, due partly to market movements.
   
●
Lending to banks consists mainly of short-term uncommitted credit lines with the top two international Spanish banks.
 
Corporate
 
●
Exposure to corporate clients declined during 2011, with reductions in lending of £1.2 billion and in off-balance sheet items of £0.4 billion, driven by reductions in exposure to property, transport and technology, media and telecommunications sectors. The majority of REIL relates to commercial real estate lending and decreased over the year, reflecting disposals and restructurings.
 
Non-Core (included above)
Refer to table on pages 182 and 183 for details.
 
●
At 31 December 2011, Non-Core had lending exposure of £3.7 billion to Spain, a reduction of £0.8 billion or 18% since December 2010. The real estate (66%), construction (11%), electricity (7%) and land transport (3%) sectors account for the majority of this lending exposure.
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Italy
 
                             
CDS by reference entity
 
Lending 
REIL 
Provisions 
  
AFS and 
 LAR debt 
 securities 
AFS 
 reserves 
  
HFT
debt securities
Total debt 
 securities 
  
Derivatives 
 (gross of 
 collateral) and repos 
  
Balance 
sheet 
exposures 
  
Notional
  
Fair value
Long 
Short 
Bought 
Sold  
Bought 
Sold 
31 December 2011
£m 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
£m 
  
£m 
  
£m 
  
£m 
£m 
  
£m 
£m 
                                         
Central and local
  government
- 
- 
- 
  
704 
(220)
  
4,336 
4,725 
315 
  
90 
  
405 
  
12,125 
12,218 
  
1,750 
(1,708)
Central banks
73 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
73 
  
- 
- 
  
- 
- 
Other banks
233 
- 
- 
  
119 
(14)
  
67 
88 
98 
  
1,064 
  
1,395 
  
6,078 
5,938 
  
1,215 
(1,187)
Other financial
  institutions
299 
- 
- 
  
685 
(15)
  
40 
13 
712 
  
686 
  
1,697 
  
872 
762 
  
60 
(51)
Corporate
2,444 
361 
113 
  
75 
- 
  
58 
- 
133 
  
474 
  
3,051 
  
4,742 
4,299 
  
350 
(281)
Personal
23 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
23 
  
- 
- 
  
- 
- 
                                         
 
3,072 
361 
113 
  
1,583 
(249)
  
4,501 
4,826 
1,258 
  
2,314 
  
6,644 
  
23,817 
23,217 
  
3,375 
(3,227)
                                         
31 December 2010
                                        
Central and local
  government
45 
- 
- 
  
906 
(99)
  
5,113 
3,175 
2,844 
  
71 
  
2,960 
  
8,998 
8,519 
  
641 
(552)
Central banks
78 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
78 
  
- 
- 
  
- 
- 
Other banks
668 
- 
- 
  
198 
(11)
  
67 
16 
249 
  
782 
  
1,699 
  
4,417 
4,458 
  
421 
(414)
Other financial
  institutions
418 
- 
- 
  
646 
(5)
  
49 
- 
695 
  
759 
  
1,872 
  
723 
697 
  
21 
(13)
Corporate
2,483 
314 
141 
  
20 
- 
  
36 
8 
48 
  
420 
  
2,951 
  
4,506 
3,966 
  
150 
(88)
Personal
27 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
27 
  
- 
- 
  
- 
- 
                                         
 
3,719 
314 
141 
  
1,770 
(115)
  
5,265 
3,199 
3,836 
  
2,032 
  
9,587 
  
18,644 
 17,640 
  
1,233 
(1,067)
 
CDS bought protection: counterparty analysis by internal asset quality band
 
 
 
AQ1
  
AQ2-AQ3
  
AQ4-AQ9
  
AQ10
  
Total
 
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
31 December 2011 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
                             
Banks
12,904 
1,676 
  
487 
94 
  
61 
10 
  
- 
- 
  
13,452 
1,780 
Other financial Institutions
10,138 
1,550 
  
8 
2 
  
219 
43 
  
- 
- 
  
10,365 
1,595 
                             
Total
23,042 
3,226 
  
495 
96 
  
280 
53 
  
- 
- 
  
23,817 
3,375 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Italy (continued)
 
Key points
 
●
The Group maintains strong relationships with Italian government entities, banks, other financial institutions and large corporate clients. Since the start of 2011, the Group has taken steps to reduce its risks through strategic exits where appropriate, or to mitigate these risks through increased collateral requirements, in line with its evolving appetite for Italian risk. As a result, the Group reduced lending exposure to Italian counterparties by £0.6 billion over 2011 to £3.1 billion.
 
Central and local government and central bank
 
●
The Group is an active market-maker in Italian government bonds, resulting in large gross long and short positions in held-for-trading securities. Given this role, the Group left itself in a relatively modest long position at 31 December 2011 to avoid being temporarily over exposed as a result of its expected participation in the purchase of new government bonds being issued in January 2012.
   
●
Over 2011, the total government debt securities position declined by £2.5 billion to £0.3 billion, reflecting a rebalancing of the trading portfolio.
 
Financial institutions
 
●
The majority of the Group's exposure to Italian financial institutions relates to the top five banks. The Group's product offering consists largely of collateralised trading products and, to a lesser extent, short-term uncommitted lending lines for liquidity purposes. During the fourth quarter of the year, gross mtm derivatives exposure increased due to market movements but the risk was mitigated since most facilities are fully collateralised.
 
Corporate
 
●
Lending exposure fell slightly during 2011, with reductions in lending to the property industry offset by increased lending to manufacturing companies, particularly in the fourth quarter.
 
Non-Core (included above)
Refer to table on pages 182 and 183 for details.
 
●
Non-Core lending exposure was £1.2 billion at 31 December 2011, a £0.7 billion (39%) reduction since December 2010. The remaining lending exposure comprises mainly commercial real estate finance (22%), leisure (20%), unleveraged funds (16%), electricity (15%) and industrials (10%).
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Greece
 
                             
CDS by reference entity
 
Lending 
REIL 
Provisions 
  
AFS and 
 LAR debt 
 securities 
AFS 
 reserves 
  
HFT
debt securities
Total debt 
 securities 
  
Derivatives 
 (gross of 
 collateral) and repos 
  
Balance 
sheet 
exposures 
  
Notional
  
Fair value
Long 
Short 
Bought 
Sold  
Bought 
Sold 
31 December 2011
£m 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
£m 
  
£m 
  
£m 
  
£m 
£m 
  
£m 
£m 
                                         
Central and local
  government
7 
- 
- 
  
312 
- 
  
102 
5 
409 
  
- 
  
416 
  
3,158 
3,165 
  
2,228 
(2,230)
Central banks
6 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
6 
  
- 
- 
  
- 
- 
Other banks
- 
- 
- 
  
- 
- 
  
- 
- 
- 
  
290 
  
290 
  
22 
22 
  
3 
(3)
Other financial
  institutions
31 
- 
- 
  
- 
- 
  
- 
- 
- 
  
2 
  
33 
  
34 
34 
  
8 
(8)
Corporate
427 
256 
256 
  
- 
- 
  
- 
- 
- 
  
63 
  
490 
  
434 
428 
  
144 
(142)
Personal
14 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
14 
  
- 
- 
  
- 
- 
                                         
 
485 
256 
256 
  
312 
- 
  
102 
5 
409 
  
355 
  
1,249 
  
3,648 
3,649 
  
2,383 
(2,383)
                                         
31 December 2010
                                        
Central and local
  government
14 
- 
- 
  
895 
(694)
  
118 
39 
974 
  
7 
  
995 
  
2,960 
3,061 
  
854 
(871)
Central banks
36 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
36 
  
- 
- 
  
- 
- 
Other banks
18 
- 
- 
  
- 
- 
  
- 
- 
- 
  
167 
  
185 
  
21 
19 
  
3 
(3)
Other financial
  institutions
31 
- 
- 
  
- 
- 
  
- 
- 
- 
  
3 
  
34 
  
35 
35 
  
11 
(11)
Corporate
191 
48 
48 
  
- 
- 
  
- 
- 
- 
  
50 
  
241 
  
511 
616 
  
44 
(49)
Personal
16 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
16 
  
- 
- 
  
- 
- 
                                         
 
306 
48 
48 
  
895 
(694)
  
118 
39 
974 
  
227 
  
1,507 
  
3,527 
3,731 
  
912 
(934)
 
CDS bought protection: counterparty analysis by internal asset quality band
 
 
 
AQ1
  
AQ2-AQ3
  
AQ4-AQ9
  
AQ10
  
Total
 
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
31 December 2011 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
Banks
2,001 
1,345 
  
1 
1 
  
- 
- 
  
- 
- 
  
2,002 
1,346 
Other financial Institutions
1,507 
945 
  
63 
45 
  
76 
47 
  
- 
- 
  
1,646 
1,037 
                             
Total
3,508 
2,290 
  
64 
46 
  
76 
47 
  
- 
- 
  
3,648 
2,383 
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Greece (continued)
 
Key points
 
●
The Group has reduced its effective exposure to Greece and continues to actively manage its exposure to the country, in line with the de-risking strategy that has been in place since early 2010. Much of the remaining exposure is collateralised or guaranteed.
 
Central and local government and central bank
 
●
As a result of the continued deterioration in Greece's fiscal position, coupled with the potential for the restructuring of Greek sovereign debt, the Group recognised an impairment charge in respect of available-for-sale Greek government bonds.
 
Financial institutions
 
●
Activity with Greek financial companies is under close scrutiny; exposure is minimal.
   
●
Due to market movements, the gross derivatives exposure to banks increased by £0.1 billion during the year. The portfolio is largely collateralised.
 
Corporate
 
●
At the start of 2011, the Group reclassified the domicile of exposures to a number of defaulted clients, resulting in an increase in reported exposure to Greek corporate clients as well as increases in REIL and impairment provisions.
   
●
The Group's focus is now on short-term trade facilities to the domestic subsidiaries of international clients, increasingly supported by parental guarantees.
 
Non-Core (included above)
Refer to table on pages 182 and 183 for details.
 
●
The Non-Core division's lending exposure to Greece was £0.1 billion at 31 December 2011, a reduction of 28% since December 2010. The remaining lending portfolio primarily consists of the following sectors: financial intermediaries (33%), construction (20%), other services (16%) and electricity (14%).
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Portugal
 
                             
CDS by reference entity
 
Lending 
REIL 
Provisions 
  
AFS and 
 LAR debt 
 securities 
AFS 
 reserves 
  
HFT
debt securities
Total debt 
 securities 
  
Derivatives 
 (gross of 
 collateral) and repos 
  
Balance 
sheet 
exposures 
  
Notional
  
Fair value
Long 
Short 
Bought 
Sold  
Bought 
Sold 
31 December 2011
£m 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
£m 
  
£m 
  
£m 
  
£m 
£m 
  
£m 
£m 
                                         
Central and local
  government
- 
- 
- 
  
56 
(58)
  
36 
152 
(60)
  
19 
  
(41)
  
3,304 
3,413 
  
997 
(985)
Other banks
10 
- 
- 
  
91 
(36)
  
12 
2 
101 
  
389 
  
500 
  
1,197 
1,155 
  
264 
(260)
Other financial
  institutions
- 
- 
- 
  
5 
- 
  
7 
- 
12 
  
30 
  
42 
  
8 
5 
  
1 
(1)
Corporate
495 
27 
27 
  
42 
- 
  
18 
- 
60 
  
81 
  
636 
  
366 
321 
  
68 
(48)
Personal
5 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
5 
  
- 
- 
  
- 
- 
                                         
 
510 
27 
27 
  
194 
(94)
  
73 
154 
113 
  
519 
  
1,142 
  
4,875 
4,894 
  
1,330 
(1,294)
                                         
31 December 2010
                                        
Central and local
  government
86 
- 
- 
  
92 
(26)
  
68 
122 
38 
  
29 
  
153 
  
2,844 
2,923 
  
471 
(460)
Other banks
63 
- 
- 
  
106 
(24)
  
46 
2 
150 
  
307 
  
520 
  
1,085 
1,107 
  
231 
(243)
Other financial
  institutions
- 
- 
- 
  
47 
- 
  
7 
- 
54 
  
7 
  
61 
  
9 
6 
  
(1)
- 
Corporate
611 
27 
21 
  
- 
1 
  
- 
- 
- 
  
51 
  
662 
  
581 
507 
  
48 
(29)
Personal
6 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
6 
  
- 
- 
  
- 
- 
                                         
 
766 
27 
21 
  
245 
(49)
  
121 
124 
242 
  
394 
  
1,402 
  
4,519 
4,543 
  
749 
(732)
 
CDS bought protection: counterparty analysis by internal asset quality band
 
 
 
AQ1
  
AQ2-AQ3
  
AQ4-AQ9
  
AQ10
  
Total
 
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
31 December 2011 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
Banks
2,922 
786 
  
46 
12 
  
- 
- 
  
- 
- 
  
2,968 
798 
Other financial Institutions
1,874 
517 
  
- 
- 
  
33 
15 
  
- 
- 
  
1,907 
532 
                             
Total
4,796 
1,303 
  
46 
12 
  
33 
15 
  
- 
- 
  
4,875 
1,330 
 
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Portugal (continued)
 
Key points
 
●
In early 2011, RBS closed its local operations in Portugal, leaving the Group with modest overall exposure of £1.4 billion by year-end. The portfolio, now managed out of Spain, is focused on corporate lending and derivatives trading with the largest local banks. Medium-term activity has ceased with the exception of that carried out under a Credit Support Annex.
 
Central and local government and central bank
 
●
During 2011, the Group's exposure to the Portuguese government was reduced to a very small derivatives position, the result of decreases in contingent and lending exposures to public sector entities by way of facility maturities. The Group's exposure to the government was negative at 31 December 2011, reflecting net short held-for-trading debt securities.
 
Financial institutions
 
●
A major proportion of the remaining exposures is focused on the top four systemically important financial groups. Exposures generally consist of collateralised trading products.
 
Corporate
 
●
The largest non-financial corporate exposure is to the energy and transport sectors. The Group's exposure is concentrated on a few large, highly creditworthy clients.
 
Non-Core (included above)
Refer to table on pages 182 and 183 for details.
 
●
The Non-Core division's lending exposure to Portugal was £0.3 billion at 31 December 2011, an increase of 8% in the portfolio since December 2010, due to an infrastructure project drawing committed facilities. The portfolio comprises lending exposure to the land transport and logistics (52%), electricity (30%) and commercial real estate (14%) sectors. There is no exposure to central or local government.
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Germany
 
                             
CDS by reference entity
 
Lending 
REIL 
Provisions 
  
AFS and 
 LAR debt 
 securities 
AFS 
 reserves 
  
HFT
debt securities
Total debt 
 securities 
  
Derivatives 
 (gross of 
 collateral) and repos 
  
Balance 
sheet 
exposures 
  
Notional
  
Fair value
Long 
Short 
Bought 
Sold  
Bought 
Sold 
31 December 2011
£m 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
£m 
  
£m 
  
£m 
  
£m 
£m 
  
£m 
£m 
                                         
Central and local
  government
- 
- 
- 
  
12,035 
523 
  
4,136 
2,084 
14,087 
  
423 
  
14,510 
  
2,631 
2,640 
  
76 
(67)
Central banks
18,068 
- 
- 
  
- 
- 
  
- 
- 
- 
  
5,704 
  
23,772 
  
- 
- 
  
- 
- 
Other banks
653 
- 
- 
  
1,376 
5 
  
294 
761 
909 
  
6,003 
  
7,565 
  
4,765 
4,694 
  
307 
(310)
Other financial
  institutions
305 
- 
- 
  
563 
(33)
  
187 
95 
655 
  
3,321 
  
4,281 
  
3,653 
3,403 
  
7 
(2)
Corporate
6,608 
191 
80 
  
109 
9 
  
14 
7 
116 
  
586 
  
7,310 
  
20,433 
18,311 
  
148 
(126)
Personal
155 
19 
19 
  
- 
- 
  
- 
- 
- 
  
- 
  
155 
  
- 
- 
  
- 
- 
                                         
 
25,789 
210 
99 
  
14,083 
504 
  
4,631 
2,947 
15,767 
  
16,037 
  
57,593 
  
31,482 
29,048 
  
538 
(505)
                                         
31 December 2010
                                        
Central and local
  government
- 
- 
- 
  
10,648 
1 
  
5,964 
4,124 
12,488 
  
160 
  
12,648 
  
2,056 
2,173 
  
25 
(19)
Central banks
10,894 
- 
- 
  
- 
- 
  
- 
- 
- 
  
6,233 
  
17,127 
  
- 
- 
  
- 
- 
Other banks
1,060 
- 
- 
  
1,291 
3 
  
567 
481 
1,377 
  
6,289 
  
8,726 
  
3,848 
3,933 
  
73 
(88)
Other financial
  institutions
422 
- 
- 
  
494 
(47)
  
195 
17 
672 
  
1,951 
  
3,045 
  
2,712 
2,633 
  
(18)
18 
Corporate
7,519 
163 
44 
  
219 
4 
  
44 
53 
210 
  
633 
  
8,362 
  
20,731 
19,076 
  
(382)
372 
Personal
162 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
162 
  
- 
- 
  
- 
- 
                                         
 
20,057 
163 
44 
  
12,652 
(39)
  
6,770 
4,675 
14,747 
  
15,266 
  
50,070 
  
29,347 
27,815 
  
(302)
283 
 
CDS bought protection: counterparty analysis by internal asset quality band
 
 
 
AQ1
  
AQ2-AQ3
  
AQ4-AQ9
  
AQ10
  
Total
 
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
31 December 2011 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
Banks
14,644 
171 
  
163 
4 
  
8 
- 
  
- 
- 
  
14,815 
175 
Other financial Institutions
16,315 
357 
  
18 
- 
  
334 
6 
  
- 
- 
  
16,667 
363 
                             
Total
30,959 
528 
  
181 
4 
  
342 
6 
  
- 
- 
  
31,482 
538 
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Netherlands
 
                             
CDS by reference entity
 
Lending 
REIL 
Provisions 
  
AFS and 
 LAR debt 
 securities 
AFS 
 reserves 
  
HFT
debt securities
Total debt 
 securities 
  
Derivatives 
 (gross of 
 collateral) and repos 
  
Balance 
sheet 
exposures 
  
Notional
  
Fair value
Long 
Short 
Bought 
Sold  
Bought 
Sold 
31 December 2011
£m 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
£m 
  
£m 
  
£m 
  
£m 
£m 
  
£m 
£m 
                                         
Central and local
  government
2,567 
- 
- 
  
1,447 
74 
  
849 
591 
1,705 
  
41 
  
4,313 
  
1,206 
1,189 
  
31 
(31)
Central banks
7,654 
- 
- 
  
- 
- 
  
6 
- 
6 
  
7 
  
7,667 
  
- 
- 
  
- 
- 
Other banks
623 
- 
- 
  
802 
217 
  
365 
278 
889 
  
7,574 
  
9,086 
  
965 
995 
  
41 
(42)
Other financial
  institutions
1,575 
- 
- 
  
6,804 
(386)
  
290 
108 
6,986 
  
1,914 
  
10,475 
  
5,772 
5,541 
  
142 
(131)
Corporate
4,827 
621 
209 
  
199 
6 
  
113 
5 
307 
  
749 
  
5,883 
  
15,416 
14,238 
  
257 
(166)
Personal
20 
3 
2 
  
- 
- 
  
- 
- 
- 
  
- 
  
20 
  
- 
- 
  
- 
- 
                                         
 
17,266 
624 
211 
  
9,252 
(89)
  
1,623 
982 
9,893 
  
10,285 
  
37,444 
  
23,359 
21,963 
  
471 
(370)
                                         
31 December 2010
                                        
Central and local
  government
914 
- 
- 
  
3,469 
16 
  
1,426 
607 
4,288 
  
46 
  
5,248 
  
1,195 
999 
  
(2)
(4)
Central banks
6,484 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
6,484 
  
- 
- 
  
- 
- 
Other banks
554 
- 
- 
  
984 
2 
  
223 
275 
932 
  
5,021 
  
6,507 
  
784 
789 
  
12 
(10)
Other financial
  institutions
1,801 
- 
- 
  
6,612 
(185)
  
344 
12 
6,944 
  
3,116 
  
11,861 
  
4,210 
3,985 
  
48 
(46)
Corporate
6,170 
388 
149 
  
264 
3 
  
152 
57 
359 
  
875 
  
7,404 
  
12,330 
11,113 
  
(72)
177 
Personal
81 
3 
3 
  
- 
- 
  
- 
- 
- 
  
- 
  
81 
  
- 
- 
  
- 
- 
                                         
 
16,004 
391 
152 
  
11,329 
(164)
  
2,145 
951 
12,523 
  
9,058 
  
37,585 
  
18,519 
16,886 
  
(14)
117
 
CDS bought protection: counterparty analysis by internal asset quality band
 
 
 
AQ1
  
AQ2-AQ3
  
AQ4-AQ9
  
AQ10
  
Total
 
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
31 December 2011 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
Banks
7,605 
107 
  
88 
1 
  
6 
- 
  
- 
- 
  
7,699 
108 
Other financial Institutions
14,529 
231 
  
308 
37 
  
676 
81 
  
147 
14 
  
15,660 
363 
                             
Total
22,134 
338 
  
396 
38 
  
682 
81 
  
147 
14 
  
23,359 
471 
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: France
 
                             
CDS by reference entity
 
Lending 
REIL 
Provisions 
  
AFS and 
 LAR debt 
 securities 
AFS 
 reserves 
  
HFT
debt securities
Total debt 
 securities 
  
Derivatives 
 (gross of 
 collateral) and repos 
  
Balance 
sheet 
exposures 
  
Notional
  
Fair value
Long 
Short 
Bought 
Sold  
Bought 
Sold 
31 December 2011
£m 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
£m 
  
£m 
  
£m 
  
£m 
£m 
  
£m 
£m 
                                         
Central and local
  government
481 
- 
- 
  
2,648 
(14)
  
8,705 
5,669 
5,684 
  
357 
  
6,522 
  
3,467 
2,901 
  
228 
(195)
Central banks
3 
- 
- 
  
20 
- 
  
- 
- 
20 
  
12 
  
35 
  
- 
- 
  
- 
- 
Other banks
1,273 
- 
- 
  
889 
(17)
  
157 
75 
971 
  
7,271 
  
9,515 
  
4,232 
3,995 
  
282 
(236)
Other financial
  institutions
437 
- 
- 
  
642 
(40)
  
325 
126 
841 
  
675 
  
1,953 
  
2,590 
2,053 
  
136 
(117)
Corporate
3,761 
128 
74 
  
240 
9 
  
72 
34 
278 
  
743 
  
4,782 
  
23,224 
21,589 
  
609 
(578)
Personal
79 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
79 
  
- 
- 
  
- 
- 
                                         
 
6,034 
128 
74 
  
4,439 
(62)
  
9,259 
5,904 
7,794 
  
9,058 
  
22,886 
  
33,513 
30,538 
  
1,255 
(1,126)
                                         
31 December 2010
                                        
Central and local
  government
511 
- 
- 
  
5,912 
40 
  
10,266 
3,968 
12,210 
  
362 
  
13,083 
  
2,225 
2,287 
  
87 
(92)
Central banks
3 
- 
- 
  
- 
- 
  
- 
- 
- 
  
15 
  
18 
  
- 
- 
  
- 
- 
Other banks
1,095 
- 
- 
  
774 
- 
  
410 
204 
980 
  
7,183 
  
9,258 
  
3,631 
3,071 
  
63 
(43)
Other financial
  institutions
470 
- 
- 
  
666 
(22)
  
42 
23 
685 
  
375 
  
1,530 
  
1,722 
1,609 
  
- 
(2)
Corporate
4,376 
230 
46 
  
71 
1 
  
185 
90 
166 
  
672 
  
5,214 
  
19,771 
18,466 
  
(181)
159 
Personal
102 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
102 
  
- 
- 
  
- 
- 
                                         
 
6,557 
230 
46 
  
7,423 
19 
  
10,903 
4,285 
14,041 
  
8,607 
  
29,205 
  
27,349 
25,433 
  
(31)
22 
 
CDS bought protection: counterparty analysis by internal asset quality band
 
 
 
AQ1
  
AQ2-AQ3
  
AQ4-AQ9
  
AQ10
  
Total
 
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
31 December 2011 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
Banks
13,353 
453 
  
162 
13 
  
79 
8 
  
- 
- 
  
13,594 
474 
Other financial Institutions
19,641 
758 
  
24 
1 
  
254 
22 
  
- 
- 
  
19,919 
781 
                             
Total
32,994 
1,211 
  
186 
14 
  
333 
30 
  
- 
- 
  
33,513 
1,255 
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Luxembourg
 
                             
CDS by reference entity
 
Lending 
REIL 
Provisions 
  
AFS and 
 LAR debt 
 securities 
AFS 
 reserves 
  
HFT
debt securities
Total debt 
 securities 
  
Derivatives 
 (gross of 
 collateral) and repos 
  
Balance 
sheet 
exposures 
  
Notional
  
Fair value
Long 
Short 
Bought 
Sold  
Bought 
Sold 
31 December 2011
£m 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
£m 
  
£m 
  
£m 
  
£m 
£m 
  
£m 
£m 
                                         
Other banks
101 
- 
- 
  
10 
- 
  
7 
- 
17 
  
546 
  
664 
  
- 
- 
  
- 
- 
Other financial
  institutions
1,779 
- 
- 
  
54 
(7)
  
82 
80 
56 
  
2,963 
  
4,798 
  
2,080 
1,976 
  
118 
(108)
Corporate
2,228 
897 
301 
  
5 
- 
  
58 
6 
57 
  
180 
  
2,465 
  
2,478 
2,138 
  
146 
(116)
Personal
2 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
2 
  
- 
- 
  
- 
- 
                                         
 
4,110 
897 
301 
  
69 
(7)
  
147 
86 
130 
  
3,689 
  
7,929 
  
4,558 
4,114 
  
264 
(224)
                                         
31 December 2010
                                        
Central and local
  government
- 
- 
- 
  
- 
- 
  
24
- 
24 
  
- 
  
24 
  
- 
- 
  
- 
- 
Central banks
25 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
25 
  
- 
- 
  
- 
- 
Other banks
26 
- 
- 
  
30 
(1)
  
45 
- 
75 
  
499 
  
600 
  
- 
- 
  
- 
- 
Other financial
  institutions
734 
- 
- 
  
99 
(3)
  
32 
19 
112 
  
1,800 
  
2,646 
  
1,296 
1,220 
  
(5)
1 
Corporate
2,503 
807 
206 
  
5 
1 
  
183 
21 
167 
  
246 
  
2,916 
  
2,367 
1,918 
  
(16)
13 
Personal
3 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
3 
  
- 
- 
  
- 
- 
                                         
 
3,291 
807 
206 
  
134 
(3)
  
284 
40 
378 
  
2,545 
  
6,214 
  
3,663 
3,138 
  
(21)
14 
 
CDS bought protection: counterparty analysis by internal asset quality band
 
 
 
AQ1
  
AQ2-AQ3
  
AQ4-AQ9
  
AQ10
  
Total
 
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
31 December 2011 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
Banks
1,535 
93 
  
16 
- 
  
- 
- 
  
- 
- 
  
1,551 
93 
Other financial Institutions
2,927 
164 
  
10 
- 
  
70 
7 
  
- 
- 
  
3,007 
171 
                             
Total
4,462 
257 
  
26 
- 
  
70 
7 
  
- 
- 
  
4,558 
264 
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Belgium
 
                             
CDS by reference entity
 
Lending 
REIL 
Provisions 
  
AFS and 
 LAR debt 
 securities 
AFS 
 reserves 
  
HFT
debt securities
Total debt 
 securities 
  
Derivatives 
 (gross of 
 collateral) and repos 
  
Balance 
sheet 
exposures 
  
Notional
  
Fair value
Long 
Short 
Bought 
Sold  
Bought 
Sold 
31 December 2011
£m 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
£m 
  
£m 
  
£m 
  
£m 
£m 
  
£m 
£m 
                                         
Central and local
  government
213 
- 
- 
  
742 
(116)
  
608 
722 
628 
  
89 
  
930 
  
1,612 
1,505 
  
120 
(110)
Central banks
8 
- 
- 
  
- 
- 
  
- 
- 
- 
  
3 
  
11 
  
- 
- 
  
- 
- 
Other banks
287 
- 
- 
  
4 
- 
  
- 
- 
4 
  
2,450 
  
2,741 
  
312 
302 
  
14 
(13)
Other financial
  institutions
354 
- 
- 
  
- 
- 
  
1 
4 
(3)
  
191 
  
542 
  
- 
- 
  
- 
- 
Corporate
588 
31 
21 
  
3 
- 
  
20 
- 
23 
  
277 
  
888 
  
563 
570 
  
12 
(12)
Personal
20 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
20 
  
- 
- 
  
- 
- 
                                         
 
1,470 
31 
21 
  
749 
(116)
  
629 
726 
652 
  
3,010 
  
5,132 
  
2,487 
2,377 
  
146 
(135)
                                         
31 December 2010
                                        
Central and local
  government
102 
- 
- 
  
763 
(54)
  
529 
602 
690 
  
92 
  
884 
  
880 
986 
  
53 
(57)
Central banks
14 
- 
- 
  
- 
- 
  
- 
- 
- 
  
7 
  
21 
  
- 
- 
  
- 
- 
Other banks
441 
- 
- 
  
39 
1 
  
66 
2 
103 
  
1,822 
  
2,366 
  
278 
266 
  
2 
(1)
Other financial
  institutions
32 
- 
- 
  
- 
- 
  
- 
- 
- 
  
126 
  
158 
  
- 
- 
  
- 
- 
Corporate
893 
27 
27 
  
1 
- 
  
11 
2 
10 
  
191 
  
1,094 
  
628 
594 
  
(6)
6 
Personal
327 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
327 
  
- 
- 
  
- 
- 
                                         
 
1,809 
27 
27 
  
803 
(53)
  
606 
606 
803 
  
2,238 
  
4,850 
  
1,786 
1,846 
  
49 
(52)
 
CDS bought protection: counterparty analysis by internal asset quality band
 
 
 
AQ1
  
AQ2-AQ3
  
AQ4-AQ9
  
AQ10
  
Total
 
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
31 December 2011 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
Banks
1,602 
97 
  
2 
- 
  
12 
1 
  
- 
- 
  
1,616 
98 
Other financial Institutions
866 
48 
  
1 
- 
  
4 
- 
  
- 
- 
  
871 
48 
                             
Total
2,468  
145 
  
3 
- 
  
16 
1 
  
- 
- 
  
2,487 
146 
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Rest of eurozone (1)
 
 
 
Lending 
REIL 
Provisions 
  
AFS and 
 LAR debt 
 securities 
AFS 
 reserves 
  
HFT
debt securities
Total debt 
 securities 
  
Derivatives 
 (gross of 
 collateral) and repos 
  
Balance 
sheet 
exposures 
  
CDS by reference entity
Notional
  
Fair value
Long 
Short 
Bought 
Sold  
  
Bought 
Sold 
31 December 2011
£m 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
£m 
  
£m 
  
£m 
  
£m 
£m 
  
£m 
£m 
                                         
Central and local
  government
121 
- 
- 
  
327 
(47)
  
445 
331 
441 
  
779 
  
1,341 
  
2,281 
2,350 
  
54 
(47)
Central banks
- 
- 
- 
  
- 
- 
  
- 
- 
- 
  
44 
  
44 
  
- 
- 
  
- 
- 
Other banks
28 
- 
- 
  
63 
(1)
  
13 
70 
6 
  
1,017 
  
1,051 
  
90 
87 
  
2 
(1)
Other financial
  institutions
115 
- 
- 
  
100 
(9)
  
25 
2 
123 
  
37 
  
275 
  
- 
- 
  
- 
- 
Corporate
1,375 
181 
55 
  
134 
(4)
  
13 
7 
140 
  
94 
  
1,609 
  
4,054 
3,944 
  
70 
(59)
Personal
26 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
26 
  
- 
- 
  
- 
- 
                                         
 
1,665 
181 
55 
  
624 
(61)
  
496 
410 
710 
  
1,971 
  
4,346 
  
6,425 
6,381 
  
126 
(107)
                                         
31 December 2010
                                        
Central and local
  government
124 
- 
- 
  
324 
(25)
  
268 
283 
309 
  
697 
  
1,130 
  
1,975 
2,190 
  
(26)
34
Central banks
1 
- 
- 
  
- 
- 
  
- 
- 
- 
  
1 
  
2 
  
- 
- 
  
- 
- 
Other banks
142 
- 
- 
  
71 
(1)
  
52 
44 
79 
  
564 
  
785 
  
148 
142 
  
1 
- 
Other financial
  institutions
119 
- 
- 
  
4 
- 
  
- 
5 
(1)
  
29 
  
147 
  
- 
- 
  
- 
- 
Corporate
1,505 
238 
67 
  
133 
(1)
  
30 
15 
148 
  
79 
  
1,732 
  
3,254 
2,966 
  
(63)
51
Personal
24 
- 
- 
  
- 
- 
  
- 
- 
- 
  
- 
  
24 
  
- 
- 
  
- 
- 
                                         
 
1,915 
238 
67 
  
532 
(27)
  
350 
347 
535 
  
1,370 
  
3,820 
  
5,377 
5,298 
  
(88)
85
 
CDS bought protection: counterparty analysis by internal asset quality band
 
 
 
AQ1
  
AQ2-AQ3
  
AQ4-AQ9
  
AQ10
  
Total
 
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
  
Notional 
Fair value 
31 December 2011 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
£m 
Banks
2,877 
58 
  
50 
1 
  
- 
- 
  
- 
- 
  
2,927 
59 
Other financial Institutions
3,464 
67 
  
4 
- 
  
30 
- 
  
- 
- 
  
3,498 
67 
                             
Total
6,341 
125 
  
54 
1 
  
30 
- 
  
- 
- 
  
6,425 
126 
 
 
     
Note:
 (1)
Comprises Austria, Cyprus, Estonia, Finland, Malta, Slovakia and Slovenia.
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk: Eurozone non-periphery
 
Key points
 
●
Due to credit risk and capital considerations, the Group increased exposure to central banks (particularly in Germany and the Netherlands) by depositing with them higher levels of surplus liquidity on a short-term basis, given the limited alternative investment opportunities.
   
●
During 2011, in anticipation of widening credit spreads and for reasons of general risk management, the Group reduced its holdings in French and Dutch AFS sovereign bonds. The Group concurrently increased its holdings of German AFS sovereign debt in line with internal liquidity and risk management strategies.
 
Financial institutions
 
●
France - approximately half of the lending to banks is to the top three banks.
   
●
Luxembourg - lending to non-bank financial institutions increased by £1.0 billion during 2011, reflecting collateral relating to derivatives and repos.
 
Corporate
 
●
Netherlands - corporate lending fell £1.3 billion over 2011, driven by the manufacturing, natural resources and services sectors. The relatively large contingent liabilities and commitments declined £7.9 billion.
 
Non-Core (included above)
Refer to table on pages 182 and 183 for details.
 
●
Non-Core lending exposure has been generally reduced in line with the Group's strategic plan. Lending exposure in France was £2.3 billion at 31 December 2011, having declined £0.5 billion during 2011. The lending portfolio mainly comprises property (45%) and sovereign and quasi-sovereign (20%) exposures.
   
●
Non-Core lending exposure in Germany was £5.4 billion at 31 December 2011, down £1.1 billion since December 2010. The lending portfolio is mostly in the property (44%) and transport (35%) sectors.
   
●
Non-Core lending exposure in the Netherlands was £2.5 billion at 31 December 2011, down £0.7 billion year on year. The portfolio mainly comprises exposures to the property (66%) and technology, media and telecommunications (19%) sectors.
 
 
Risk and balance sheet management (continued)
 
Risk management: Country risk
Notes to tables on page 182 to 202.
 
Lending comprises gross loans and advances to: central and local governments; central banks, including cash balances; other banks and financial institutions, incorporating overdraft and other short-term facilities; corporations, in large part loans and leases; and individuals, comprising mortgages, personal loans and credit card balances. Lending includes impaired loans and loans where an impairment event has taken place but no impairment provision is recognised.
 
Debt securitiescomprise securities classified as available-for-sale (AFS), loans and receivables (LAR), held-for-trading (HFT) and designated as at fair value through profit or loss (DFV). All debt securities other than LAR securities are carried at fair value. LAR debt securities are carried at amortised cost less impairment. HFT debt securities are presented as gross long positions (including DFV securities) and short positions per country. Impairment losses and exchange differences relating to AFS debt securities, together with interest are recognised in the income statement; other changes in the fair value of AFS securities are reported within AFS reserves, which are presented gross of tax.
 
Derivativescomprise the mark-to-market (mtm) value of such contracts after the effect of enforceable netting agreements, but gross of collateral. Reverse repurchase agreements (repos) comprise the mtm value of counterparty exposure arising from repo transactions net of collateral.
 
Balance sheet exposurescomprise lending exposures, debt securities and derivatives and repo exposures.
 
Contingent liabilities and commitments comprise contingent liabilities, including guarantees, and committed undrawn facilities.
 
Asset Quality (AQ) - for the probability of default range relating to each internal asset quality band, refer to page 163.
 
Credit default swap (CDS) under CDS contract, the credit risk on the reference entity is transferred from the buyer to the seller. The fair value, or mtm, represents the balance sheet carrying value. The mtm value of CDSs is included within derivatives against the counterparty of the trade, as opposed to the reference entity. The notional is the par amount of the credit protection bought or sold and is included against the reference entity of the CDS contract.
 
The column CDS notional less fair value represents the notional less fair value amounts arising from sold positions netted against those arising from bought positions, and represents the net change in exposure for a given reference entity should the CDS contract be triggered by a credit event, assuming there is zero recovery rate. However, in most cases, the Group expects the recovery rate to be greater than zero and the change in exposure to be less than this amount.
 

 
 
 

 
Signatures


 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.







 
 
Date: 23 February 2012
 
 
THE ROYAL BANK OF SCOTLAND GROUP plc (Registrant)
 
 
 
By:
/s/ Jan Cargill
 
 
Name:
Title:
Jan Cargill
Deputy Secretary