Credit risk assets
Credit risk assets are an internal risk measure of the Group's exposure to customers. These consist of loans and advances (including overdraft facilities), instalment credit, finance lease receivables, debt securities and other traded instruments across all customer types.
| Credit risk assets | 2007 £bn |
2006 £bn |
2005 £bn |
|---|---|---|---|
| Corporate Markets | |||
| – Global Banking & Markets | 330.2 | 233.4 | 206.5 |
| – UK Corporate Banking | 86.8 | 76.0 | 66.5 |
| Retail Markets | |||
| – Retail | 112.8 | 108.1 | 103.2 |
| – Wealth Management | 11.7 | 10.0 | 8.9 |
| Ulster Bank | 46.5 | 37.0 | 31.9 |
| Citizens | 71.8 | 67.5 | 74.5 |
| RBS Insurance | 9.0 | 7.2 | 6.7 |
| 668.8 | 539.2 | 498.2 | |
| ABN AMRO excluding minority interest | 131.8 | – | – |
| 800.6 | 539.2 | 498.2 | |
| ABN AMRO minority interest | 206.0 | – | – |
| 1,006.6 | 539.2 | 498.2 |
Excluding reverse repurchase agreements, credit risk assets as at 31 December 2007 were £1,006.6 billion (2006 – £539.2 billion), an increase of £467.4 billion during the year of which £337.8 billion arose from the acquisition of ABN AMRO.
An analysis of reverse repurchase agreements is shown below.
| Reverse repurchase agreements | 2007 £bn |
2006 £bn |
2005 £bn |
|---|---|---|---|
| Banks | 67.6 | 54.2 | 41.8 |
| Customers | 79.1 | 62.9 | 48.9 |
| RBS excluding ABN AMRO | 146.7 | 117.1 | 90.7 |
| ABN AMRO excluding minority interest | 169.9 | – | – |
| 316.6 | 117.1 | 90.7 | |
| ABN AMRO minority interest | 1.7 | – | – |
| 318.3 | 117.1 | 90.7 |
Reverse repurchase agreements as at 31 December 2007 were £318.3 billion (2006 – £117.1 billion), an increase of £201.2 billion of which £171.6 billion arose from the acquisition of ABN AMRO.
Credit risk asset quality
Internal reporting and oversight of risk assets is principally differentiated by credit ratings. Internal ratings are used to assess the credit quality of borrowers. Customers are assigned an internal credit grade based on various grading models that reflect the probability of default. All credit ratings across the Group map to a Group level asset quality scale.
Expressed as an annual probability of default, the upper and lower boundaries and the midpoint for each of these Group level asset quality grades are as follows:
| Annual probability of default | ||||
|---|---|---|---|---|
| Asset quality grade | Minimum % |
Midpoint % |
Maximum % |
S&P equivalent |
| AQ1 | 0.00 | 0.10 | 0.20 | AAA to BBB- |
| AQ2 | 0.21 | 0.40 | 0.60 | BB+ to BB |
| AQ3 | 0.61 | 1.05 | 1.50 | BB- to B+ |
| AQ4 | 1.51 | 3.25 | 5.00 | B+ to B |
| AQ5 | 5.01 | 52.50 | 100.00 | B and below |
Distribution of credit risk assets by asset quality
As at 31 December 2007, including ABN AMRO net of minority interest, exposure to investment grade counterparties (AQ1) accounted for 48% (2006 – 46%) of credit risk assets and 97% (2006 – 97%) of exposures were to counterparties rated AQ4 or higher. The exposure to the lowest asset quality (AQ5) remained at 3%.
Note: Graph data are shown net of provisions and reverse repurchase agreements.
Distribution of credit risk assets by industry sector
Industry analysis plays an important part in assessing potential concentration risk from within the loan portfolio. Particular attention is given to industry sectors where the Group believes there is a high degree of risk or potential for volatility in the future.
The Group also uses scenario analysis and stress testing in order to monitor the risk to clusters of correlated industry sectors.
Note: Graph data are shown net of provisions and reverse repurchase agreements.
As at 31 December 2007, including ABN AMRO net of minority interest, 21% of credit risk assets (2006 – 28%) related to individuals and includes mortgage lending and other smaller loans that are intrinsically well-diversified. Corporate industry exposure comprised 40% of credit risk assets (2006 – 36%), which are well diversified across a range of sectors. Banks and financial services account for 24% of credit risk assets (2006 – 20%) and public sector and quasi government credit risk assets make up the remaining 15% (2006 – 16%).
Distribution of credit risk assets by geography
The acquisition of ABN AMRO in October 2007 has also changed the risk profile of the Group, with benefits arising from increased diversification available from the Group's wider global reach.
The Group operates in over 50 countries, but with the majority of assets in the UK, North America and Europe.
Distribution of credit risk assets by product and customer type
The Group also monitors its credit portfolio by customer type and product type. Including ABN AMRO net of minority interest, the largest category is lending to banks, corporates, sovereigns and quasi governments which represented 48% of credit risk assets as at 31 December 2007 (2006 – 41%). Lending to individuals accounted for 20% (2006 – 26%).
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