RBS 2013 Annual Report Download - page 531
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Additional information
529
The requirement to raise additional CET1 capital, which could be
mandated by the Group’s regulators, could have a number of negative
consequences for the Group and its shareholders, including impairing the
Group’s ability to pay dividends on, or make other distributions in respect
of, ordinary shares and diluting the ownership of existing shareholders of
the Group. If the Group is unable to raise the requisite Tier 1 and Tier 2
capital, it may be required to reduce further the amount of its risk-
weighted assets or total assets and engage in the disposal of core and
other non-core businesses, which may not occur on a timely basis or
achieve prices which would otherwise be attractive to the Group.
At 31 December 2013, the Group’s Tier 1 and Core Tier 1 capital ratios
were 13.1% and 10.9%, respectively, calculated in accordance with PRA
requirements. On a fully loaded Basel III basis, the Group’s equivalent
CET1 ratio was 8.6%. The Group continues to target a fully loaded Basel
III CET1 ratio of approximately 11% by the end of 2015 and to be at 12%
or above by the end of 2016. The Group’s ability to achieve such targets
will turn on a number of factors, including the implementation of the
Group’s strategy which calls for a significant downsizing of the Group in
part through the sale of RBS Citizens in the U.S. See “Forward looking
Statements” and “The Group’s ability to implement its new strategic plan
and achieve its capital goals depends on the success of the Group’s
plans to refocus on its core strengths and the timely divestment of RBS
Citizens”.
Any change that limits the Group’s ability to manage effectively its
balance sheet and capital resources going forward (including, for
example, reductions in profits and retained earnings as a result of write-
downs or otherwise, increases in risk-weighted assets, regulatory
changes, actions by regulators, delays in the disposal of certain key
assets or the inability to syndicate loans as a result of market conditions,
a growth in unfunded pension exposures or otherwise), to implement its
capital plan or to access funding sources, could have a material adverse
effect on its financial condition and regulatory capital position.
The Group’s borrowing costs, its access to the debt capital markets and
its liquidity depend significantly on its and the UK Government’s credit
ratings
The credit ratings of RBSG, RBS and other Group members have been
subject to change and may change in the future, which could impact their
cost of, access to and sources of financing and liquidity. A number of UK
and other European financial institutions, including RBSG, the Royal
Bank and other Group members, have been downgraded multiple times
during the last three years in connection with rating methodology
changes, a review of systemic support assumptions incorporated into
bank ratings and the likelihood, in the case of UK banks, that the UK
Government is more likely in the future to make greater use of its
resolution tools to allow burden sharing with debt holders. Most recently
credit ratings of RBSG, the Royal Bank and other Group members were
downgraded in connection with the Group’s creation of RCR, coupled
with concerns about execution risk, litigation risk and the potential for
conduct related fines. Furthermore, subject to any mitigating factors,
uncertainties resulting from an affirmative vote in favour of Scottish
independence would be likely to have a negative impact on the credit
ratings of RBSG and the Royal Bank.
Rating agencies continue to evaluate the rating methodologies applicable
to UK and European financial institutions and any change in such rating
agencies’ methodologies could materially adversely affect the credit
ratings of Group companies. Any further reductions in the long-term or
short-term credit ratings of RBSG or one of its principal subsidiaries
(particularly the Royal Bank) would increase its borrowing costs, require
the Group to replace funding lost due to the downgrade, which may
include the loss of customer deposits, and may also limit the Group’s
access to capital and money markets and trigger additional collateral
requirements in derivatives contracts and other secured funding
arrangements. At 31 December 2013, a simultaneous one notch long-
term and associated short-term downgrade in the credit ratings of RBSG
and the Royal Bank by the three main ratings agencies would have
required the Group to post estimated additional collateral of £10 billion,
without taking account of mitigating action by management.
Any downgrade in the UK Government’s credit ratings could adversely
affect the credit ratings of Group companies and may have the effects
noted above. In December 2012, Standard & Poor’s placed the UK’s AAA
credit rating on credit watch, with negative outlook and, in February 2013,
Moody’s downgraded the UK’s credit rating one notch to Aa1. Credit
ratings of RBSG, the Royal Bank, The Royal Bank of Scotland N.V. (RBS
N.V.), Ulster Bank Limited and RBS Citizens are also important to the
Group when competing in certain markets, such as over-the-counter
derivatives. As a result, any further reductions in RBSG’s long-term or
short-term credit ratings or those of its principal subsidiaries could
adversely affect the Group’s access to liquidity and its competitive
position, increase its funding costs and have a material adverse impact
on the Group’s earnings, cash flow and financial condition.
The Group’s ability to meet its obligations including its funding
commitments depends on the Group’s ability to access sources of
liquidity and funding
Liquidity risk is the risk that a bank will be unable to meet its obligations,
including funding commitments, as they fall due. This risk is inherent in
banking operations and can be heightened by a number of factors,
including an over reliance on a particular source of wholesale funding
(including, for example, short-term and overnight funding), changes in
credit ratings or market-wide phenomena such as market dislocation and
major disasters. Credit markets worldwide, including interbank markets,
have experienced severe reductions in liquidity and term-funding during
prolonged periods in recent years. Although credit markets continued to
improve during 2013 (in part as a result of measures taken by central
banks around the world, including the ECB), and the Group’s overall
liquidity position remained strong, certain European banks, in particular
from the peripheral countries of Spain, Portugal, Greece, Italy and
Ireland, remained reliant on central banks as one of their principal
sources of liquidity. Although the measures taken by Central Banks have
had a positive impact, the risk of volatility returning to the global credit
markets remains.