Risk Assessment Report of Royal Bank of Scotland

Read this comprehensive risk assessment report of Royal Bank of Scotland (RBS) to understand the risk portfolio of the bank. The report covers strategic risk, interest rate risk, market risk, liquidity risk, credit risk and risk associated with foreign exchange of the bank.

Running head: FINANCIAL MARKET AND INSTITUTES
Financial Market and Institutes
Name of the Student:
Name of the University:
Authors Note:

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FINANCIAL MARKET AND INSTITUTES
Executive summary:
Royal Bank of Scotland is one of the subsidiaries of Royal Bank of Scotland Plc. with
more than 700 branches in all across Scotland and England. Also known as RBS, it mainly
operates in Scotland, England and Wales with most of its branches situated in the Scotland. Over
the years the performance of RBS have taken sharp nose dive as far as the amount of revenue
and profit are concerned. A brief look at the financial reports of the bank will be enough to
understand the steady and significant decline in the amount of gross interest revenue and profits
over the last 10 years. However, the topic of discussion of this document is not about the
financial performance of the bank but to assess risk associated with the operations of the bank. A
risk assessment report of the bank is produced below to help the readers to understand the risk
portfolio of the bank. The report below covers strategic risk, interest rate risk, market risk,
liquidity risk,, credit risk and risk associated with foreign exchange of the bank.

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FINANCIAL MARKET AND INSTITUTES
Contents
Executive summary:........................................................................................................................1
Introduction:....................................................................................................................................3
Comprehensive risk assessment report:...........................................................................................3
Interest rate risk:........................................................................................................................11
Liquidity risk:............................................................................................................................16
Market risk:................................................................................................................................16
Credit and credit portfolio risk:.................................................................................................17
Foreign exchange risk:...............................................................................................................17
Conclusion and recommendations:................................................................................................18
References:....................................................................................................................................19

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FINANCIAL MARKET AND INSTITUTES
Introduction:
RBS and its parent Royal Bank of Scotland Plc. are completely separate entity when it comes to
banking operations. Established in 1724 in the Scotland, RBS has grown into one of the largest
banks in the world by the time 21st Century ushered in. However, the performance of the bank
has deteriorated significantly in recent years with ever decreasing gross interest income and net
income from interest in last 10 years. The risk associated with the banking operations is often a
key element in the overall performance of an organization. Especially in case of banks the
importance of risk assessment is crucial to the performance of the banks. A comprehensive risk
assessment report of RBS is provided below along with necessary analysis to assess the state of
risk associated with the banking operations.
Comprehensive risk assessment report:
A comprehensive risk assessment report of an organization is a report prepared to outline each
and every single risk associated with the operations of the organization. Along with identification
of the risks associated with the operations the report also contains appropriate recommendations
to deal with stated risks effectively. In this case the comprehensive risk assessment report of
RBS shall contain different types of risks affecting the performance of the bank (Delis, Hasan &
Tsionas, 2015).
Strategic risk:
As can be seen from the financial reports of the RBS for the last 10 years and above the gross
revenue of the bank, especially total income from interests and net interest income have both
declined significantly. Strategic risk can be defined as the risk of suffering decline in operating
income due under-performance of an organization which is not compensated by the reduction in

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FINANCIAL MARKET AND INSTITUTES
operating costs. To assess the strategic risk of RBS the table below shows the amount of gross
and net income from interests of the bank over the last decade.
31-12-18 31-12-17 31-12-16 31-12-15
Increase / (decrease) in gross interest
income
(881,342.4
5)
1,059,003.
91
(3,822,066.3
8)
(2,742,048.5
2)
Net interest income % of gross interest
income
78.
34
81
.45
77
.35
73
.52
31-12-14 31-12-13 31-12-12 31-12-11
Increase / (decrease) in gross interest
income
(3,445,131.5
2)
(5,381,501.7
9)
(3,283,420.9
7)
(2,455,895.5
5)
Net interest income % of gross
interest income
70
.79
62
.24
61
.53
58
.49
31-12-10 31-12-09 31-12-08 31-12-07
Increase / (decrease) in gross interest
income
(7,630,975.5
0)
(18,893,962.2
8)
(5,449,093.3
4)
18,450,739.
20

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FINANCIAL MARKET AND INSTITUTES
Net interest income % of gross
interest income
61
.66
50
.88
36
.70
3
7.91
It is clear from the above that the gross interest income of the bank has reduced significantly
over the last decade and the decline has not been compensated by the reduction in cost of
operations as is clear from the net interest income.
Capital ratios:
Capital to risk weighted asset ratio known as capital adequacy ratio indicates the capital structure
of a bank. In terms of Tier 1 ratio RBS has the highest tier 1 ratio out of the 4 bans, namely
HSBC, Barclays, Standard Chartered and RBS itself as at the end of 2018. The tier 1 ratio of
RBS in 2018 was 18.40 as compared to 15.8 of Barclays, 16.1 of standard chartered and 16.6 of
HSBC Holding. Total capital adequacy ratio of RBS in 2018 was also highest with 21.8 in 2018
as compared to the 19.8 of Barclays, 20.8 of Standard Chartered and 19.4 of HSB Holdings Plc.
The capital ratios of these banks have been calculated from the financial reports of the bank are
presented in the tabular format below to understand the capital adequacy of these banks ("Home
Page | Barclays", 2019).
Royal Bank of Scotland (RBS) 2018 2017 2016 2015 2014 2013
Tier 1 ratio (as reported)% 18.4 17.9 15.2 16.3 11.2 9.5
Total capital adequacy ratio (as
reported)%
21.8 21.3 19.2 19.6 13.7 11.8

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FINANCIAL MARKET AND INSTITUTES
Total equity / Total assets% 6.697 6.652 6.186 6.64 5.586 5.761
Total equity / Risk-weighted assets
(RWAs)%
15.239 15.949 15.294 17.676 17.564 15.151
Barclays
Tier 1 ratio (as reported)% 15.8 16.1 14.2 12.9 11.5 9.8
Total capital adequacy ratio (as
reported)%
19.8 20.7 18.5 17.3 15.4 14.1
Total equity / Total assets% 4.778 5.036 5.351 5.407 4.539 4.606
Total equity / Risk-weighted assets
(RWAs)%
17.144 18.211 16.527 15.169 14.409 14.252
Standard chartered
Tier 1 ratio (as reported)% 16.1 15.4 15.1 13.3 10.7 11.2
Total capital adequacy ratio (as
reported)%
20.8 20.1 20.4 17.9 15.3 15.1
Total equity / Total assets% 6.373 6.835 6.679 7.031 6.439 6.946
Total equity / Risk-weighted assets
(RWAs)%
16.995 16.212 16.031 14.865 13.68 14.404

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FINANCIAL MARKET AND INSTITUTES
HSBC Holdings Plc
Tier 1 ratio (as reported)% 16.6 16.4 14.9 12.7 11.6 10.9
Total capital adequacy ratio (as
reported)%
19.4 18.3 16.8 14.1 12.8 12
Total equity / Total assets% 7.593 6.964 7.688 8.197 7.592 7.13
Total equity / Risk-weighted assets
(RWAs)%
19.787 18.238 21.193 21.366 20.518 19.198
Royal Bank of Scotland (RBS) 2012 2011 2010 2009 2008 2007 2006
Tier 1 ratio (as reported)% 12.4 13 12.9 14.1 10 7.3 7.5
Total capital adequacy ratio (as
reported)%
14.5 13.8 14 16.1 14.1 11.2 11.7
Total equity / Total assets% 5.368 5.047 5.287 5.578 3.352 4.967 5.22
Total equity / Risk-weighted
assets (RWAs)%
16.38 16.74
8
15.28
6
13.76
7
9.636 13.32
4
11.26
Barclays
Tier 1 ratio (as reported)% 13.2 12.9 13.5 13 8.6 7.6 7.7

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FINANCIAL MARKET AND INSTITUTES
Total capital adequacy ratio (as
reported)%
17 16.4 16.9 16.6 13.6 11.2 11.7
Total equity / Total assets% 4.03 4.17 4.18 4.241 2.309 2.646 2.748
Total equity / Risk-weighted
assets (RWAs)%
14.15
1
15.09
4
14.54
9
13.91
6
10.26
6
9.402 9.702
Standard chartered
Tier 1 ratio (as reported)% 13.4 13.7 14 11.5 9.9 8.8 8.3
Total capital adequacy ratio (as
reported)%
17.4 17.6 18.4 16.5 15.6 15.2 14.2
Total equity / Total assets% 7.296 6.981 7.524 6.394 5.216 6.503 6.537
Total equity / Risk-weighted
assets (RWAs)%
n.a. n.a. n.a. n.a. n.a. n.a. n.a.
HSBC Holdings Plc
Tier 1 ratio (as reported)% 10.27
2
11.5 12.1 10.8 8.3 9.3 9.4
Total capital adequacy ratio (as
reported)%
10.27
2
14.1 15.2 13.7 11.4 13.6 13.5
Total equity / Total assets% 6.801 6.499 6.311 5.738 3.972 5.752 6.176

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FINANCIAL MARKET AND INSTITUTES
Total equity / Risk-weighted
assets (RWAs)%
18.35
7
17.66
1
16.16
4
15.13
7
10.76 13.79
6
13.23
9
From the above ratios it is clear that the comparatively capital ratios of RBS are quite better than
all the other banks which have been considered in this document, i.e. HSBC, Standard Chartered
and Barclays. Charts of individual bank’s capital ratios have been prepared with the help of the
above data to further understand movement in these ratios since 2006 (Hong, 2011).
2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
0
10
20
30
40
50
60
70
RBS
Tier 1 ratio (as reported)%
Total capital adequacy ratio (as reported)%
Total equity / Total assets%
Total equity / Risk-weighted assets (RWAs)%
It is quite clear from the above chart that each and every single ratio under capital structure of
RBS have improved since 2006. This is a clear indication of increase amount of capital to the
proportion of total funds of the bank. This shows the improved solvency position of the bank
over the last 12 years. In fact the capital ratios of all RBS are all quite better compared to the
other three banks i.e. HSBS, Barclays Standard Chartered. The charts below will further help to
understand the matter.

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FINANCIAL MARKET AND INSTITUTES
2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
0
10
20
30
40
50
60
70
Barclays
Tier 1 ratio (as reported)%
Total capital adequacy ratio (as reported)%
Total equity / Total assets%
Total equity / Risk-weighted assets (RWAs)%
The capital ratios of Barclays have also improved over the last 12 years however, in 2018 the
capital ratios have deteriorated a bit since 2017 as can be seen from the above chart.
2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
0
10
20
30
40
50
60
70
Standard Chartered
Tier 1 ratio (as reported)%
Total capital adequacy ratio (as reported)%
Total equity / Total assets%
Total equity / Risk-weighted assets (RWAs)%
Standard Chartered have recorded the most improved ratios over the last 12 years since, 2006 as
can be seen in the above chart. However, the capital ratios of RBS in pure term is still better than
all the other banks (Moloi, 2016).

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FINANCIAL MARKET AND INSTITUTES
2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
0
10
20
30
40
50
60
70
HSBC Holdings
Tier 1 ratio (as reported)%
Total capital adequacy ratio (as reported)%
Total equity / Total assets%
Total equity / Risk-weighted assets (RWAs)%
The capital ratios of HSBC have also improved since 2006 as visible in the above chart. The
improved capital ratios of all the four banks are quite clear from the capital ratios of these banks
clearly suggests that the solvency positions of these banks have improved since 2006.
Interest rate risk:
In order to assess the interest rate risk of a bank the operational ratios such as net interest margin
ratio, return on equity etc. are calculated and analyzed. The table below contains all net interest
margin ratios and return on equity ratios of all the four banks for comparative analysis since
2006 (ning & Qing-yi, 2012).
The table below contains from 2013 to 2018.
RBS 2018 2017 2016 2015 2014 2013
Net interest margin% 1.426 1.347 1.22 1.101 1.034 0.858

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FINANCIAL MARKET AND INSTITUTES
Return On Avg Equity
(ROAE)%
4.361 2.873 -10.136 -2.1 -4.598 -13.075
Barclays
Net interest margin% 1.052 1.045 1.021 0.912 0.944 0.873
Return On Avg Equity
(ROAE)%
4.265 -1.466 4.508 1.02 1.368 2.128
Standard Chartered
Net interest margin% 1.525 1.482 1.499 1.798 1.926 1.963
Return On Avg Equity
(ROAE)%
2.405 2.771 -0.419 -4.709 5.781 9.042
HSBC
Net interest margin% 1.354 1.28 1.374 1.422 1.451 1.477
Return On Avg Equity
(ROAE)%
8.124 6.633 1.813 7.596 7.533 9.529
The table below contains from 2006 to 2012.
RBS 2012 2011 2010 2009 2008 2007 2006

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FINANCIAL MARKET AND INSTITUTES
Net interest margin% 0.893 0.91 0.949 0.689 0.771 1.006 1.285
Return On Avg Equity
(ROAE)%
-7.926 -2.575 -1.943 -2.653 -
40.183
11.265 14.282
Barclays
Net interest margin% 0.827 0.87 0.947 0.728 0.716 0.883 0.94
Return On Avg Equity
(ROAE)%
0.289 6.2 7.535 19.432 13.236 17.021 18.967
Standard Chartered
Net interest margin% 2.06 2.025 1.912 1.977 1.969 2.13 2.244
Return On Avg Equity
(ROAE)%
11.403 12.296 13.219 13.739 15.149 15.389 13.533
HSBC
Net interest margin% 1.603 1.778 1.758 1.784 1.857 1.908 1.973
Return On Avg Equity
(ROAE)%
8.782 11.18 9.767 5.672 5.512 16.342 14.68
From the above table it is quite clear that RBS neither has the highest net interest margin nor
higher return on average equity. In the most recent year ending on 31st December 2018, HSBC

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FINANCIAL MARKET AND INSTITUTES
has the highest average return on equity ratio with 8.124% followed by RBS of 4.361%. As far
as the net interest margin ratio is concerned Standard Chartered bank with 1.525% net interest
margin scores over RBS (1.426%) for the year 2018 ("rbs.com", 2019). In order to understand
the fluctuations in these ratios charts have been prepared below.
2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
-50
-40
-30
-20
-10
0
10
20
RBS
Net interest margin% Return On Avg Equity (ROAE)%
The RBS chart of net interest margin and return on average equity shows that both have
fluctuated significantly since 2006 however, compared to earlier both have improved
significantly over the years. Barclays, HSBC and Standard Chartered on the other have
experienced steady slide in these ratios as is clear in the chart below.

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FINANCIAL MARKET AND INSTITUTES
2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
-5
0
5
10
15
20
25
Barclays
Net interest margin% Return On Avg Equity (ROAE)%
2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
-10
-5
0
5
10
15
20
Standard Chartered
Net interest margin% Return On Avg Equity (ROAE)%

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FINANCIAL MARKET AND INSTITUTES
2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
0
2
4
6
8
10
12
14
16
18
HSBC
Net interest margin% Return On Avg Equity (ROAE)%
Thus, though the net interest margin and return on average equity are not greatest for RBS but
the positive thing is that both these ratios have improved over the years whereas the other banks
have all experienced deterioration in these ratios suggesting decline in performance ("Standard
Chartered: Personal, Business & Private Banking | Standard Chartered", 2019).
Liquidity risk:
Liquidity risk is the risk that an organization will not be able to meet its current liabilities from
current assets. Proportion of current assets to current liabilities is calculated to assess the
liquidity risk of an organization. Liquidity risk can further be segregated into equity risk, net
loans risk etc.
Market risk:
The risk of losing market value of shares due to fluctuations in the equity market is considered in
market risk assessment. The losses though not directly recorded in the books of accounts but has
significant influence on investors.
Liquidity ratios:

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FINANCIAL MARKET AND INSTITUTES
The liquidity ratios include interbank ratio, net loan to total assets ratio, etc. In case of Royal
Bank of Scotland, all these ratios have fluctuated significantly throughout the last 12 years. The
interbank ratio of RBS for 2018 is 71.54% which was almost 90% in 2016. The net loans to total
assets of the bank ratio of 2018 is 43.95% has increased significantly over the last 10 years or so
as once the net loan to total asset ratio was as low as 30.14% in 2010. Compared to HSBC and
Barclays the liquidity position of RBS is quite better however, Standard Chartered has the best
liquidity position out of the four banks as its net loans to total assets as well as other liquidity
ratios are better than all the other banks (Tkachuk, 2017).
Credit and credit portfolio risk:
Credit risk is an important consideration for a bank as it denotes the risk of losing money due to
the failure of borrowers to repay the loan taken from the bank. The less the credit risk the better
it is for an organization. From the operational ratios to the liquidity ratios the fact that the bank,
i.e. RBS has improved its financial position is more than clear. The net loan to total deposit and
borrowing ratio of RBS for 2018 is 48.56% is quite stable like other three banks. Hence there is
no alarming red flag for credit risk and credit risk portfolio of the bank.
Foreign exchange risk:
The foreign exchange risk is dependent on the ability of a bank to manage its foreign exchange
transactions. RBS mainly operates in Scotland, England and Wales. However, in recent years the
bank has spread its operations in different parts of Asia and other continents. Thus, ensuring that
foreign exchange transactions are correctly recorded and the risk of foreign exchange is
minimum is the responsibility of the management. There is no particular ratio to calculate the
foreign exchange risk except probably one which is calculating the proportion of foreign
exchange transactions to the total transactions of the bank. Due to lack of information it is not

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FINANCIAL MARKET AND INSTITUTES
possible to calculate such ratio however, all the banks primarily operate in the domestic market
thus, none of them have significantly huge proportion of total transactions denominated in
foreign exchange ("Welcome to Barclays US", 2019).
Conclusion and recommendations:
Analysis in the above document shows that in definite terms the amount of gross revenue
from interest and net interest revenue of RBS have declined since 2006 but the strategic risk,
liquidity risks, market risk, credit risks and foreign exchange risks of the bank have not adversely
affected. This is extremely positive news from the point of view of business operations of RBS.
However, the management must take immediate steps to arrest the trend of declining gross and
net interest revenue. Comparatively also in terms of strategic risk and market risk RBS is quite
better compared to the all the other three banks. However, in terms of liquidity and profitability
ratios RBS can still do better to catch up with the leader out of these four banks.

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FINANCIAL MARKET AND INSTITUTES
References:
Delis, M., Hasan, I., & Tsionas, E. (2015). Banks’ Risk Endogenous to Strategic Management
Choices. British Journal Of Management, 26(4), 637-656. doi: 10.1111/1467-8551.12111
Home Page | Barclays. (2019). Retrieved from https://www.banking.barclaysus.com/index.html
Hong, J. (2011). Liquidation Risks, Investment and Bank Takeovers. SSRN Electronic
Journal, 2(6), 10-27. doi: 10.2139/ssrn.1786779
Moloi, T. (2016). The nature of credit risk information disclosed in the risk and capital reports of
the top-5 South African banks. Banks And Bank Systems, 11(3), 87-93. doi:
10.21511/bbs.11(3).2016.09
ning, z., & Qing-yi, C. (2012). Liquidity Risk, Liquidity Creation and Financial Supervision: An
Empirical Analysis from Chinese Commercial Banks. SSRN Electronic Journal, 2(3), 1237. doi:
10.2139/ssrn.2137105
rbs.com. (2019). Retrieved from http://www.rbs.com/
Standard Chartered: Personal, Business & Private Banking | Standard Chartered. (2019).
Retrieved from https://www.sc.com/en/
Tkachuk, I. (2017). Asset operations of Ukrainian banks on the current stage of banking system
development. Banks And Bank Systems, 12(1), 119-127. doi: 10.21511/bbs.12(1-1).2017.04
Welcome to Barclays US. (2019). Retrieved from https://cards.barclaycardus.com/