Business and strategy FAQs

When we speak to our investors, some questions are asked more often than others. Below we provide a selection of those frequently asked questions - and answers.

Where are you in the impairment cycle?

The level of group impairments fell by 33 per cent in 2010, reflecting improvements in the economic environment. Impairments fell in all core businesses, except Ulster Bank, where asset default levels and loss rates remained high in both the retail and corporate portfolios, reflecting difficult economic conditions in Ireland.

When will the UK government sell its shareholding?

The UK government set up UK Financial Investments Ltd (UKFI) to manage its investments in financial institutions, including RBS. UKFI has been given a clear mandate by the government, to protect and create value for the taxpayer as shareholder. As such, decisions around the timing of any sale are outside the remit of RBS. We are acutely aware of our responsibility as part of this process. By successfully implementing our strategic plan, we will serve our customers well and achieve the business success needed to attract new investors.

Can you explain the treatment of the Asset Protection Scheme (APS) and fair value of own debt?

Our financial performance is affected by two items that do not reflect the day-to-day business of RBS – the Asset Protection Scheme (APS) and the fair value of own debt. Both can exhibit counter-cyclical behaviour, in that improving market conditions result in a charge, and vice versa.

The APS is a credit derivative and so must be accounted for at fair value; fluctuations in this value are reflected in the results. If market circumstances are getting better and credit spreads for the assets in the covered portfolio narrow, the value of the protection decreases and a loss is recognised. If spreads widen, the protection is more valuable, giving rise to a gain.

For accounting purposes, the group values some of its issued debt (e.g. bond issues) at the current market price. Changes in this value are recorded in profit or loss. Part of this change results from market movements in the price of the group's credit: when the group's credit spreads tighten a loss is recorded, when they widen a gain is recorded.

What has been happening to margins, and why?

We need to rebuild net interest margins (NIMs) if we are to produce adequate profits to service the capital our shareholders have invested in RBS. Encouragingly, we made further progress in 2010: the bank's NIM rose by 25 basis points to 2.01 per cent. This improvement was driven by the Retail & Commercial business, where asset margins recovered across a number of markets, primarily due to the run-off of older business written at unsustainably lower margins.

Progress on liability margins has been more difficult. This reflects strong competition for customer deposits, as the banking sector tries to narrow its funding gap, and the low interest rate environment.

What recommendations have you made to the Independent Commission on Banking (ICB)?

The Commission inquiry is a major event for our industry in the UK, and we have sought to engage thoughtfully. RBS's response was published on the ICB website.

In our view, the debate about banking size and structure can often generate more heat than light. The banks that failed during the crisis didn't fail because they were too big, or because they had an investment bank. They failed because they had some form of concentration risk: in funding, in lending to property, in geography or in proprietary trading.

We should aim for a financial system where the probability of future crises is substantially reduced and there is an effective resolution regime for those institutions that do still fail. If this can be achieved then the size and shape of banks can be driven by the choices of customers and shareholders, within the context of strong and effective regulation.

How much progress have you made towards the cost reduction target you set?

RBS's cost reduction programme continues to deliver material savings. Annualised savings are now just ahead of the £2.5 billion target for 2011 and are forecast to exceed £3 billion by 2013. This reflects better cost control in our day-to-day operations, as well as a number of business disposals.

These cost savings will help to finance the £6 billion of essential investments we have committed to make as part of our five-year recovery plan. These will strengthen our core businesses. Examples include the provision of an integrated Wealth IT platform and enhanced electronic trading facilities for Markets and International Banking (MIB).

How much exposure do you have to the sovereign debt crisis?

Our exposure to sovereign bonds in the two countries most deeply embroiled in the crisis – Greece and Ireland – is relatively low (£895 million and £104 million, respectively at 31 December 2010). But we clearly have significant exposure to the Republic of Ireland economy through our Ulster Bank subsidiary (total lending was £43.2 billion at 31 December 2010). To help manage this exposure, we placed c.£15 billion of assets in our non-core division, the vast majority of which relates to commercial property. We are managing this down over time and, where assets are currently non-performing, they are being heavily provisioned.