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2014 EU-wide Stress Test Summary for Royal Bank of Scotland Group plc

Core Content

The 2014 EU-wide Stress Test was conducted to evaluate the resilience of financial institutions, including the Royal Bank of Scotland Group plc (RBS), under different scenarios. The test includes both Baseline and Adverse scenarios, assessing the impact on financial performance and capital ratios over a three-year period from 2014 to 2016.

Key Information

Bank Overview

• Bank Name: Royal Bank of Scotland Group plc
• LEI Code: 2138005O9XJIJN4JPN90

Capital and Risk Exposure

• As of 31 December 2013:

  • Operating profit before impairments: 6,126 min EUR
  • Impairment losses on financial and non-financial assets in the banking book: 10,136 min EUR
  • Common Equity Tier 1 (CET1) capital: 44,104 min EUR
  • Total Risk Exposure: 514,739 min EUR
  • CET1 ratio: 8.6%

• As of 31 December 2016:

  • Baseline Scenario:
    • 3-year cumulative operating profit before impairments: 12,262 min EUR
    • 3-year cumulative impairment losses on financial and non-financial assets in the banking book: 10,252 min EUR
    • 3-year cumulative losses from the stress in the trading book: 2,452 min EUR
    • CET1 capital: 43,685 min EUR
    • Total Risk Exposure: 451,585 min EUR
    • CET1 ratio: 9.7%
  • Adverse Scenario:
    • 3-year cumulative operating profit before impairments: 8,179 min EUR
    • 3-year cumulative impairment losses on financial and non-financial assets in the banking book: 20,010 min EUR
    • 3-year cumulative losses from the stress in the trading book: 4,166 min EUR
    • Valuation losses due to sovereign shock after tax and prudential filters: 284 min EUR
    • CET1 capital: 26,968 min EUR
    • Total Risk Exposure: 477,214 min EUR
    • CET1 ratio: 5.7%

Capital Deductions and Adjustments

• RBS corrected an error in its initial calculation of the CET1 ratio.
• The original CET1 ratio was 6.7%, but after correction, it dropped to 5.7% due to the UK Prudential Regulation Authority's (PRA) rules, which do not allow recognition of Deferred Tax Assets in CET1.
• The adjustment was attributed to an inadequate reflection of cumulative tax credits in the capital template.

CET1 Threshold

• Common EU-wide CET1 Threshold: 5.5%
• In the adverse scenario, RBS's CET1 ratio fell below this threshold, indicating potential capital stress.

Main Points

Baseline Scenario

• RBS's CET1 ratio improved to 9.7% under the baseline scenario.
• This scenario represents a more optimistic outlook, with lower impairment losses and higher operating profits compared to the adverse scenario.

Adverse Scenario

• RBS's CET1 ratio decreased to 5.7%, well below the EU-wide threshold of 5.5%.
• This scenario reflects a more severe economic downturn, with higher impairment losses and lower capital levels.

Risk Exposure Breakdown

• Baseline Scenario:
  • Total Risk Exposure: 451,585 min EUR
• Adverse Scenario:
  • Total Risk Exposure: 477,214 min EUR

Capital and Risk Adjustments

• The test highlighted the importance of accurate capital modeling and the impact of tax considerations on capital adequacy.
• RBS made a small number of immaterial adjustments to its capital and RWA templates, which were corrected in the final results.

Summary Table

Additional Notes

• The adverse scenario showed a significant decline in RBS's capital and profitability, indicating potential vulnerabilities under severe economic conditions.
• The correction of the CET1 ratio was essential to ensure compliance with EU regulations and to provide an accurate picture of the bank's capital health.
• The test results were aligned with the UK PRA's capital definitions, which do not recognize Deferred Tax Assets in CET1.