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The Royal Bank of Scotland is one of the leading banks in United Kingdom servicing its customers since the year 1727. This global bank has marked its presence in all countries across the globe offering a host of financial services that includes corporate and small and medium enterprises banking, retail markets, wealth management, and general and life insurance. RBS Insurance is the second leading insurer in UK, selling and underwriting retail and general insurance over the phone or through Internet, service brokers and agencies. Operational profit is one of the prominent contributors to cash inflow.

The premiums earned from insurance policies in addition to total fees and commissions earned from the sale of policies and deductions in the form of expenses towards staff, and operating costs add to the operating profit figure. Any increase or decrease in the revenue or costs figures will be reflected in the cash inflow. Cash flows from investing activities reflect the gross gains from net revenue, sales of property, and mergers or acquisitions within the financial year after deducting the amount invested in property, plant and equipment.

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Net cash flows from financing activities take into account the cash inflows from issue of shares and equities and cash outflows in the form of dividend payouts, and payment of liabilities. Group Performance The financial results of RBS for the year 2007 present a period of growth in opportunities and revenue generation for the group. The bank employs nearly 226,400 people serving 40 million people across six continents. The global banking group has reported an increase of 9 percent in the operating profit figures increasing to ? 10.

3 billion from ? 9. 4 billion in the year 2006. A significant area of growth seen by the group is the emerging markets of Asia that is witnessing increasing number of high net worth individuals. This is attributed to increasing foreign direct investment in these countries. The bank has increased its presence in these countries to serve the growing client base. Another prominent factor that has increased the bank’s earning potential over the previous year was the acquisition of ABN AMRO that has helped RBS to expand its services outside UK markets.

UK Economy Inflation rate: 3. 1 percent Unemployment rate: 6. 1 percent Balance of payments: – (? 7. 7 billion) Gross Domestic Product annual growth rate: – 1. 5 percent (Source: National Statistics, UK) The recession in the US markets has made a strong impact on the economy of UK and market experts are predicting a weak economic growth in the next couple of years. The credit crunch in the financial markets has led to the closure of many financial firms and loss of jobs.

Financial and market experts believe that the financial institutions face a critical period owing to the recession that has hit the economy badly and it might take a few years for the country to recover from the credit crunch. The interest rates have been slashed by the government and the consumer confidence is very low. Market Risks and Threats The global economic recession has weakened the economy of UK considerably over the past few months.

Financial institutions are floundering and there are speculations of the market collapsing under the impact of the severe credit crunch. The priority risks identified by the Financial Risk Outlook edition of the year 2008 includes the existing business models of the financial institutions and their survival strategy that shifts the management focus on reducing the size of loans and mortgages. The increase in cost of funding is forcing most of the financial institutions to reduce the size of loans and mortgages and this is reflected in the economic growth rate.

Financial institutions in the face of credit and liquidity crunch are shifting their locus of attention from fulfilling the needs of the consumer and providing satisfactory service in an effort to survive in the tough market conditions. The financial service institutions can only survive by understanding and meeting the consumer demands and expectations. The financial markets in the past few months have become very risky and the credit crunch has created a sense of uncertainty and confusion in most investors.

This has led to decline in consumer confidence on the financial institutions and lack of consumer confidence will result in financial market instability. Unless the financial institutions take steps to reinstate consumer confidence and encourage active participation in banking and other related products and services the financial markets will not stabilize. Another prominent risk element faced by the financial institutions in current market conditions is the high level of borrowing by some consumers who are unable to pay their debts.

Escalating property prices in the recent past induced many people to invest in real estate and the sudden fall in property rates have caused a panic among investors. The segments of population who have invested in real estate in hopes of higher rates are facing severe financial losses and that is one of the prime causes of concern facing the financial institutions. Favorable economic conditions in the recent past also led to many people taking personal debts but the current economic crisis that has led to company layoffs and rising inflation has created an increased number of consumer groups who are unable to pay back their debts.

Deteriorating financial market conditions also increase the possibility of incidents of financial crimes and frauds. The financial institutions in such cases will be forced to allocate resources towards dealing with such incidents of frauds rather than spending these resources on meeting market challenges. Money laundering and financial fraud cases are quite rampant in such stressful market conditions and keeping this in mind the financial institutions should be prepared to meet such challenges and adopt practices to curb such instances.

The International Monetary Fund observes that such risks and threats require “new policy initiatives are needed to produce credible loan loss recognition; sort financial companies according to their medium run viability; and provide public support to viable institutions by injecting capital, and carving out bad assets, including possibly through a ‘bad bank’ approach. ” Government policies and market intervention can also resolve the financial crisis and sublime its effect in the near future.

Working in market conditions that restrict the avenues of growth and opportunities and limited resources can be most challenging for any business. However, for a global organization like RBS the management needs to focus more on emerging markets of developing countries in Asia that promises expanded consumer base and increased scope to adopt new practices. Among other measures adopting more fair practices towards the consumers and having stronger control over lending and underwriting practices. References: 1. Royal Bank of Scotland official website. Financial information accessed on 28th January 2009 from www. rbs. com

2. Financial Risk Outlook 2008. Accessed on 28th Jan 2009 from http://www. fsa. gov. uk/pubs/plan/financial_risk_outlook_2008. pdf 3. BBC News. 2008. UK economy ‘at risk of recession’. Accessed on 28th Jan 2009 from http://news. bbc. co. uk/1/hi/business/7212545. stm 4. National Statistics. Government of UK. Accessed on 28th Jan 2009 from http://www. statistics. gov. uk/instantfigures. asp 5. Beattle, Alan. 2008. IMF slashes 2009 growth forecasts. Accessed on 28th Jan 2009 from http://www. ft. com/cms/s/0/cb6ced8c-ed49-11dd-88f3-0000779fd2ac. html? nclick_check=1

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