Annual Financial Report - 35 of 56

Our objective in the management of Group capital is to maintain appropriate levels of capital to support our business strategy and meet our regulatory and stress testing related requirements.

Capital highlights ·   Our end point common equity tier 1 ('CET1') ratio of 11.9% was up from 11.1% at the end of 2014. ·   We continue to generate capital from profit and our progress to achieve targeted RWA initiatives strengthened our CET1 ratio, creating capacity for growth. ·   Our leverage ratio remained strong at 5.0%.

 

Capital overview

Capital ratios

		At 31 December
		2015		2014
		%		%
CRD IV end point
Common equity tier 1 ratio1		11.9		11.1
CRD IV transitional
Common equity tier 1 ratio1		11.9		10.9
Tier 1 ratio		13.9		12.5
Total capital ratio		17.2		15.6

 

Total regulatory capital and risk-weighted assets

		At 31 December
		2015		2014
		$m		$m
CRD IV end point
Common equity tier 1 capital1		130,863		135,953
CRD IV transitional
Common equity tier 1 capital1		130,863		133,200
Additional tier 1 capital		22,440		19,539
Tier 2 capital		36,530		37,991
Total regulatory capital		189,833		190,730
Risk-weighted assets		1,102,995		1,219,765

For footnote, see page 243.

We manage Group capital to ensure that we exceed current regulatory requirements and that we respect the payment priority of our capital providers. Throughout 2015, we complied with the Prudential Regulation Authority's ('PRAs') regulatory capital adequacy requirements, including those relating to stress testing. We are also well placed to meet our expected future capital requirements.

We continue to manage Group capital to meet a medium-term target for return on equity of more than 10% by 2017. This is modelled on a CET1 ratio on an end point basis in the range of 12% to 13%, which takes into account known and quantifiable end-point CET1 requirements and includes a regulatory and management buffer in the range of 1% to 2%, based on our estimate of the additional CET1 we will need to hold to cover the new time-varying buffers and other factors. The CET1 regulatory and management buffer will be kept under review until the details of the regulatory framework are finalised.

Capital and RWAs are calculated and presented according to the Group's interpretation of CRD IV legislation and the PRA's rules as set out in the PRA Rulebook.

Despite the rules published to date, there remains continued uncertainty around the amount of capital that UK banks will be required to hold. In December 2015, the Financial Policy Committee ('FPC') published its view of the capital framework as applicable to UK banks, which set out expectations in relation to CET1 and tier 1 capital across the industry. However, requirements applicable to individual banks are subject to the PRA's determination. While there is emerging clarity around the interaction of the capital buffers and the PRA's Pillar 2 framework, uncertainty remains around the broader capital framework, including revisions to the RWA requirements, capital floors, and global systemically important bank ('G-SIB') developments. Furthermore, there remain a number of draft and unpublished European Banking Authority ('EBA') technical and implementation standards due in 2016.

A summary of our policies and practices regarding capital management, measurement and allocation is provided in the Appendix to Capital on page 243.

Movements by major drivers

Capital and RWA movements by major driver - CRD IV end point basis

		CET1 capital		RWAs
		$bn		$bn
CRD IV end point basis at 1 January 2015		136.0		1,219.8
Capital generation from profit		3.4
- consolidated profits attributable to shareholders of the parent company (including regulatory adjustments)		11.3
- dividends net of scrip2		(7.9)
RWA initiatives				(123.8)
Business growth including associates				48.7
Foreign currency translation differences3		(7.9)		(52.2)
Other movements		(0.6)		10.5
CRD IV end point basis at 31 December 2015		130.9		1,103.0

For footnotes, see page 243.

Our CET1 capital was reduced by foreign currency translation differences of $7.9bn. This was partly offset by capital of $3.4bn generated from profits net of dividends (including the fourth interim dividend after planned scrip).

Included in profits was a $1.4bn gain on the partial sale of our shareholding in Industrial Bank. This included fair value gains reclassified to the income statement that has already been included in CET1 capital, resulting in no further impact. An additional impact on CET1 capital from the partial sale of our shareholding in Industrial Bank was lower allowable non-controlling interest.

Substantial progress has been made in achieving the Group's 2017 RWA target. After foreign currency translation differences, RWAs reduced by $65bn in 2015, primarily driven by specific initiatives that saved $124bn of RWAs. The saving was partially offset by business growth of $49bn.

 

The following comments describe the key RWA movements excluding foreign currency translation differences.

RWA initiatives

The main drivers were:

·   $38bn from reduced exposures, the partial disposal of our investment in Industrial Bank, a decrease in trading positions subject to the Incremental Risk Charge, client facility reductions and trade compressions;

·   $30bn from refining our calculations, including the further application of the small and medium-sized enterprise ('SME') supporting factor, a more refined application of credit conversion factors ('CCFs'), increased usage of internal ratings-based ('IRB') models and the move of certain exposures from residual to cash flow weighted maturity;

·   $25bn from process improvements such as better linking of collateral and guarantees to facilities, enhanced risk parameters and the use of more granular data resulting in lower CCFs for off-balance sheet items; and

·   $30bn through the continued reduction in the GB&M legacy credit and US run-off portfolios.

Business growth

Business growth increased RWAs by $49bn, principally in:

·   CMB, from higher term lending to corporate customers, principally in Europe, North America and Asia, $23bn;

·   our associates, Bank of Communications and The Saudi British Bank, $14bn; and

·   GB&M, from higher general lending to corporates which increased RWAs by $10bn, mainly in Europe.

Risk-weighted assets

RWAs by risk type

		2015		2014
		$bn		$bn
Credit risk		875.9		955.3
- standardised approach		332.7		356.9
- IRB foundation approach		27.4		16.8
- IRB advanced approach		515.8		581.6
Counterparty credit risk		69.2		90.7
- standardised approach		19.1		25.2
- advanced approach		50.1		65.5
Market risk		42.5		56.0
- internal model based		34.9		44.6
- standardised approach		7.6		11.4
Operational risk		115.4		117.8
At 31 December 2015		1,103.0		1,219.8
Of which:
Run-off portfolios		69.3		99.2
- legacy credit in GB&M		29.8		44.1
- US CML and Other		39.5		55.1

 

RWAs by global businesses

		2015		2014
		$bn		$bn
Retail Banking and Wealth Management4		189.5		207.2
Commercial Banking4		421.0		430.3
Global Banking and Markets		440.6		516.1
Global Private Banking		19.3		20.8
Other		32.6		45.4
At 31 December 2015		1,103.0		1,219.8

 

RWAs by geographical regions⁵

		2015		2014
		$bn		$bn
Europe		337.4		375.4
Asia		459.7		499.8
Middle East and North Africa		60.4		63.0
North America		191.6		221.4
Latin America		73.4		88.8
At 31 December 2015		1,103.0		1,219.8

For footnotes, see page 243