THE LENDING QUALITY IN LARGEST UK BANKS

This subdivision, establishing on the quantitative method as explained in Chapter IV, will analyze whether there are any important differences in imparting quality of largest UK Bankss in the last five old ages or non. As can be seen in the Table 5.1, establishing on the end product of SPSS, the void hypothesis of the undermentioned ratios LSRIL, NCOGL, TCR and Tier1 can non be rejected as the consequence of p- value are greater than 0.05 ; hence, agencies of these four ratios did non vary in the period from 2005 to 2009. As the consequence, the quality of loaning activities of these 15 largest UK Bankss is rather equal in footings of these four ratios.

In contrast, since p- value of LSRGL and NPLGL are lower than 0.05, the void hypothesis is rejected. In other words, there are important differences of the agencies of these two ratios of the listed Bankss in the last five old ages from 2005 to 2009. Therefore, in footings of the direction of non- acting loan and loan loss militias, these largest United kingdom Bankss have different public presentations. ( see Appendix 2 for the full consequence of One-way ANOVA )

Table 5.1: P- value of the six ratios from One-way ANOVA

LSRGL

LSRIL

NPLGL

NCOGL

TCR

Tier1

sig

0.008

0.461

0.00

0.119

0.097

0.188

In order to acquire clearer understanding about the public presentation of these largest UK Bankss in some specific countries of recognition direction, it is better to compare the agencies of each ratio in this period. First, sing loan loss militias to gross loans and impaired loan severally, there were two opposite tendencies of these ratio: LSRGL witnessed an increasing tendency while a dramatic autumn tendency dominated at largest Bankss in LSRIL ( see Figure 5.1 ) . In theory, they are groundss for the hapless quality of recognition direction of these largest UK Bankss in this period ; however, it may be harder to pull a decision like that because in pattern, perchance these Bankss raised LSRGL to better the ability to get by with loan losingss. However, since LSRGL varies significantly between these largest Bankss as the analysis above, the tendency of this ratio is unreasonable and unsuitable for the generalization of the whole Bankss.

Second, sing the two ratios demoing the quality of loan portfolios such as NPLGL and NCOGL, this paper can reason that this quality of the 15 largest Bankss has been fallen for the last five old ages ( see the Figure 5.2 ) . Initially, NPLGL decreased from 1.5 % in 2005 to 1.33 % in 2006, after that this ratio increased continuously to 4.63 % in 2009 ; while NCOGL rose from 0.43 % to 0.88 % in the last five old ages. Hence, the additions of these two ratios are possibly indexs for the hapless direction of loan portfolios of largest UK Bankss. However, like LSRGL, NPLGL in this analysis can non be representative of the whole tendency because this ratio besides shows the important difference between these listed Bankss.

Figure 5.1: Meanss of LSRGL and LSRIL from 2005-2009

Figure 5.2: Meanss of NPLGL and NCOGL from 2005-2009

Third, on the other manus, in footings of the capital adequateness, the 15 largest UK Bankss have been demoing consistence for the last five old ages. In fact, both of the two ratios TCR and Tier1 satisfy the demand of the Basel Committee. From 12.51 % in 2005 TCR rose to 15.82 % in 2009 ; likewise, this period witnessed a considerable addition of Tier1 ratio from 8.35 % to 11.44 % ( see the Figure 5.3 ) . Because of this, the 15 largest UK Bankss have expressed assurance at the ability to get by with future losingss.

Figure 5.3: Meanss of TCR and Tier1 from 2005-2009

In drumhead, from the consequence of One-way ANOVA method, it can be conclude that there is no important difference between the largest UK Bankss in the loaning quality sing some fiscal ratios including LSRIL, NCOGL, TCR and Tier1. Hence, the analysis of agencies of these ratios can be generalised for the whole 15 Bankss, demoing a hapless public presentation in LSRIL and NCOGL which means that the undertaking of reserve for loan losingss and gross loan charged off has deteriorated in the last five old ages ; nevertheless, the loaning quality for the issue of capital adequateness ( TCR and Tier1 ) has been continuously improved at the largest UK Bankss. On the other manus, it may be unable to generalize the loaning quality of these listed Bankss in footings of LSRGL and NPLGL.

5.2 CREDTI RISK MANAGEMENT IN PRACTICE AT THE ROYAL BANK OF SCOTLAND GROUP ( RBS )

5.2.1 An Overview of the Royal Bank of Scotland

RBS is one of the largest fiscal services groups in the universe and a taking retail bank in the UK. The constituents of the group include more than 40 well-know consumer trade names such as: RBS, NatWest, Direct Line, Churchill, Coutts, Ulster Bank and Citizens. Its operating webs appear in Europe, North America and Asia Pacific with Centres in 13 European states, 16 North American States and 8 major Asia Pacific metropoliss. RBS serves more than 40 million clients global, over half of which ( 25 million ) are in the UK. With the entire assets of about $ 3,501 billion as IFSL ( 2010 ) mentioned, RBS is the largest Bankss in the UK and one of the largest Bankss in the top 25 largest universe Bankss.

5.2.2 Credit Risk Management in Practise at the Royal Bank of Scotland Group

a. Recognition Risk Management Environment

The group sets up cardinal rules for recognition hazard direction, qualifying processs, procedures and criterions in appraisal, blessing, proctor, extenuation of recognition exposure. It can be summarised as follows. Before O.K.ing recognition exposure, RBS applies quantitative and qualitative methods to measure recognition hazard of borrower or counterparties ; this procedure includes strict trials and appraisals such as: the purpose of the recognition, beginnings of refund, affordability trials, repayment history, etc. Once approved, recognition exposures will be monitored and managed on a regular basis with the purpose of avoiding being below approved bounds. Divisions of recognition hazard direction and concern maps have to collaborate closely to look into recognition jobs and to extenuate losingss of recognition hazard.

In footings of recognition hazard administration and construction, Executive Credit Group ( ECG ) , set by the Group ‘s Board of Directors, is one of sections or commissions in the model of hazard direction. On behalf of the Group ‘s Board of Directors, ECG is responsible for make up one’s minding on extension of bing or new recognition bounds which exceed delegated persons ‘ governments. In this system, the Group Risk Committee ( GRC ) controls recognition hazard public presentation, analyzing information of tendencies of monthly hazard portfolio. Beside, the Group Credit Risk Policy Committee, a subcommittee of the GRC authorises new criterions for recognition hazard policy.

Additionally, RBS divides the administration of recognition hazard direction into two countries: sweeping concerns and retail concerns. For sweeping recognition portfolios, the group introduced a new authorization model in 2009 replacing old recognition commissions, which include the Global Restructuring Group ( GRC ) . The GRC have to studies to the Head of Restructuring and hazard about its map of pull offing imparting job of corporate clients. Similarly, for recognition hazard direction of retail concerns, the Retail aggregations and recoveries squad has the map of back uping problem- faced clients to get the better of troubles in the hope of being back to a satisfactory degree.

Harmonizing to the model of RBS, each division has rights to set up its ain recognition hazard direction mechanism consistent with that of the group and has no duty for the public presentation of concern. However, these divisional recognition hazard sections are duties for describing to both the divisional Chief Executive Officer and to the Group Chief Credit Officer.

B. Credit Approval Process

As explained in the above subdivision, before allowing recognition for borrowers or counterparties, loan appliers have to be undertaken common quantitative and qualitative appraisals such as: the purpose of the recognition, beginnings of refund, affordability trials, repayment history, sensitiveness to economic and market developments, etc. However, recognition blessing processes varies well between sweeping portfolios and retail portfolios as the categorization of the administration of recognition hazard direction at RBS.

The group uses the term of sweeping portfolios to connote to corporate clients, fiscal establishments and authorities entities. For sweeping portfolios, the recognition blessing procedure includes two stairss: appraisal and determination. Assessment activities employ recognition theoretical accounts through analyzing hazard parametric quantities such as chance of default, loss given default and exposure at default in order to give results served for the determination measure. Once approved, recognition is monitor on a regular basis to analyze negative tendencies in order to set recognition bounds and hazard parametric quantity estimations. Beside, for retail portfolios such as loans and related merchandises to persons and little companies, determinations on allowing recognition are based on behaviors hiting techniques related to a smattering of factors classified by merchandise, trade name, information on clients, etc.

c. Credit Risk Measurement

At RBS, recognition hazard measuring is undertaken by recognition theoretical accounts, which are divided into three classs: Probability of default ( PD ) , Exposure at default ( EAD ) , Loss given default are ( LGD ) , used for the recognition blessing procedure, measuring and monitoring portfolios.

Probability of default ( PD )

These theoretical accounts calculate the chance of a client neglecting to carry through their duties for the period of one twelvemonth. Depending on types of clients, the chance of default theoretical account uses quantitative inputs such as recent fiscal public presentation and qualitative inputs like direction public presentation to rate each counterparty or borrower into a specific default chance scope. In other words, this is the internal evaluation procedure.

Exposure at default ( EAD ) :

There are two types of these theoretical accounts: Facility use theoretical accounts and Counterparty recognition hazard exposure measuring theoretical accounts. First, the Facility use theoretical account is designed to gauge the expected degree of use of granted recognition at the clip of a client ‘s default. It is assumed by the methodological analysiss adopted in EAD that bing recognition installations may be used more when clients are in the danger of default.

Second, Counterparty recognition hazard exposure measuring theoretical accounts evaluate the effects of the market to recognition exposure. Not merely establishing on chief and involvement due but besides more implicit in market variables, these theoretical accounts are normally used for traded instruments ; at RBS, these theoretical accounts are tools act uponing internal recognition hazard direction.

Loss given default ( LGD )

Unrecovered recognition installations or economic losingss in the circumstance of default are calculated by these theoretical accounts by taking into consideration both features of borrowers and recognition installations, the quality of hazard extenuation, the cost of aggregation, etc.

d. Credit Exposure Management

At RBS, recognition exposure direction is carried out through analysing, commanding recognition assets categorised by types of concerns, merchandises, geographics, industry sectors. Credit hazard assets are demonstrated by the concern lines in the tabular array, including loans and progresss, instalment recognition, finance rental receivables and trade instruments across all client types. Harmonizing to published consequences, entire recognition hazard assets of the Group in 2009 was about ?708 billion, cut downing ?146 billion or 17 % compared to that in 2008. Decreases occurred across industry sectors and in most parts while the largest decreases were in loaning balances and derived functions.

Table 5.2: Recognition hazard assets by concern lines at RBS in 2009 and 2008

beginning: RBS Annual Report, 2009.

Particular attending is besides paid to industry sectors or geographic countries by RBS when these sectors have high concentration of recognition hazard assets. The Group gave the industry and geographic analyses in 2008 and 2009 in the tabular array below.

Table 5.3: Recognition hazard assets by industry sectors and geographics of RBS in 2008 and 2009

beginning: RBS Annual Report 2009

As can be seen, recognition hazard assets decreased dramatically in the last two old ages across industry sectors and geographic countries, with the exclusion of the UK where recognition exposure fell merely approximately 2 % . Furthermore, Personal and Banks & A ; fiscal establishments are the two industries with the largest recognition exposure assets ; in contrast, the industry of Agriculture and piscaries is the 1 with smallest recognition hazard assets. Besides, in footings of geographics, recognition hazard assets concentrated in the UK largely the last two old ages.

For the direction of recognition concentration hazard, RBS identifies four key countries including individual name, industry/sector, state and product/assets category, which are monitored, reported and managed at both Group and divisional degrees. Under the direction at RBS, the size of exposure influences blessing degrees ; in particular fortunes, high exposures need to be approved by a little figure of executives. Major consequences of the direction model for sector concentrations are review on a regular basis by the Executive Risk Forum ( ERF ) . These reappraisals are an analysis of the Group ‘s franchise in a peculiar sector, an appraisal of the mentality including stressed fortunes, etc.

e. Credit Risk Mitigation Techniques

In order to extenuate recognition hazard, RBS applies a figure of methods and techniques: gauze of debitor and creditor balances, the exchange of fiscal collateral, structuring a security involvement in a physical or fiscal plus, recognition derived functions, warrants, etc. These techniques will be employed depending on types of merchandises, clients and concern schemes ; nevertheless, all of these recognition hazard extenuation techniques have to fulfill minimal criterions stipulated at RBS.

f. Credit Quality Management

Internal evaluation system

As mentioned above, internal evaluation system uses the PD theoretical accounts to delegate borrowers into specific classs or tonss which serve the internal direction including a degree plus quality, shown in the tabular array below.

Table 5.4: The degree assets choice graduated table of RBS in 2008 and 2009

beginning: RBS Annual Report 2009

As can be seen, recognition hazard assets at RBS are divided into 10 degrees of quality with AQ1 being the most choice plus group ( minimal PD scope ) and AQ10 being the least choice plus group ( maximal PD scope ) . The tabular array above shows the addition of low quality sets ( AQ7 and below ) ; hence, it can be concluded that the quality of assets at RBS deteriorated in the last two old ages.

Hazard elements and damages

The Group divides impaired assets into hazard elements in loaning ( REIL ) or possible job loans ( PPL ) ; while REIL comprises non-accrual loans, past due loans and restructured loans, PPL consists impaired assets which are excluded in REIL, but forecasted to be related to recognition jobs in the hereafter.

Table 5.5: Impaired assets at RBS in 2008 and 2009

beginning: RBS Annual Report 2009

It can be seen that there are additions of impaired assets from 2008 to 2009 because of these indexs of this assets rocketed: REIL, PPL increased about 80 % and 346 % , severally in the last two old ages. Additionally, hazard elements in gross loaning to clients besides went up when REIL and PPL accounted for 2.5 % of this loan in 2008, up to 5.5 % in 2009.

Provision:

RBS creates commissariats for both consumer portfolios and corporate portfolios following the rule of instance by instance, relied on specializers such as professional valuers and comptrollers. For consumer portfolios, these portfolios consisting high volume, little value credits are identified job credits by extremely efficient automated procedures. Due to being high value, lower volume credits, corporate portfolios are structured to run into single client demands. At RBS, commissariats are classified under three types. Table displays the sum of commissariats in RBS during the last two old ages.

Individual assessed commissariats: these commissariats are set up for single impaired assets on the footing of the fiscal status of the counterparty, collateralised assets and the discounted value of security or collateralised assets.

Jointly assessed commissariats: these commissariats on impaired credits below approved bounds are determined in conformity with a quantitative method sing the degree of unpaid debts, security and mean loss history.

Latent loss commissariats: these commissariats on damages in executing portfolios which incurs before the balance sheet day of the month but non given at the balance sheet day of the month.

Table 5.6: Impairment commissariats on loans of RBS in 2008 and 2009

beginning: RBS Annual Report 2009

One singular tendency of commissariats is that there has been a uninterrupted diminution of the rate of commissariats for impaired assets for the last five old ages from 2005 to 2009 as can be seen in the below tabular array.

Table 5.7: Provision coverage ratios for the period of five old ages at RBS

Entire proviso as % of REIL

Entire proviso as % of REIL and PPL

2009

45

44

2008

52

51

2007

60

57

2006

62

62

2005

65

65

beginning: RBS Annual Report 2009 and 2006