UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR | |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended | |
OR | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR | |
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission file number:
(Exact name of Registrant as specified in its charter)
(Jurisdiction of incorporation)
(Address of principal executive offices)
Tel:
(Name, Telephone, E-mail and/or Facsimile number and Address of Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading |
| Name of each exchange |
* Not for trading, but only in connection with the registration of American Depositary Shares representing such ordinary shares pursuant to the requirements of the Securities and Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Perpetual Subordinated Contingent Convertible Additional Tier 1 Capital Notes callable 2025 | Irish Stock Exchange |
Perpetual Subordinated Contingent Convertible Additional Tier 1 Capital Notes callable 2025 | London Stock Exchange |
Perpetual Subordinated Contingent Convertible Additional Tier 1 Capital Notes callable 2027 | London Stock Exchange |
Reset Perpetual Subordinated Contingent Convertible Additional Tier 1 Capital Notes callable 2028 | London Stock Exchange |
Perpetual Subordinated Contingent Convertible Additional Tier 1 Capital Notes callable 2031 | London Stock Exchange |
Reset Perpetual Subordinated Contingent Convertible Additional Tier 1 Capital Notes callable 2028 | London Stock Exchange |
Perpetual Subordinated Contingent Convertible Additional Tier 1 Capital Notes callable 2031 | London Stock Exchange |
American Depositary Shares, Series U, each representing 1 Non-cumulative Dollar Preference Share, Series U | Not listed |
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2021, the close of the period covered by the annual report:
(Title of each class) |
| (Number of outstanding shares) |
Ordinary shares of £1 each | ||
11% cumulative preference shares | ||
5½% cumulative preference shares | ||
Non-cumulative dollar preference shares, Series U |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
☐ Yes ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer , accelerated filer and emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Accelerated filer ☐ | Non-Accelerated filer ☐ | Emerging growth company |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new ore revised financial accounting standards † provided pursuant to Section 13(a) of the Exchange Act. ☐
†The term “new or revised financial accounting standard” refers to any update issues by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
☐ U.S. GAAP
☒
☐ Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐ Item 17 ☐ Item 18
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
SEC Form 20-F cross reference guide
Item | Item Caption | Pages | |
PART I | Annual Report on Form 20-F | Exhibit 15.2: Annual Report and Form 20-F Information | |
1 | Identity of Directors, Senior Management and Advisers | Not applicable | 82-85 |
2 | Offer Statistics and Expected Timetable | Not applicable | Not applicable |
3 | Key Information [Reserved] Capitalisation and indebtedness Reasons for the offer and use of proceeds Risk factors | Not applicable Not applicable 5-6, 136-157 | Not applicable Not applicable 72-75 |
4 | Information on the Company History and development of the Company Business overview Organisational structure Property, plant and equipment | 2, 9, 36-42, 48-52,167-171, 173-174 11-14, 120, 158-160 9-10, Exhibit 8.1 37-38, 63-64, 95-96 | 4-11, 13, 18-27, 51, 168 1-75, 78-79, 168-171, 34-37, 234 12-13, 18-19, 32-33, 64-71 |
4a | Unresolved Staff Comments | Not applicable | Not applicable |
5 | Operating and Financial Review and Prospects Operating results Liquidity and capital resources Research and development, patents, licences etc Trend information Critical Accounting Estimates | 1-22 9-10, 36, 46-59, 100-108 11-13, 29-35, 77-78, 80-87, 90-91 Not applicable Not applicable Not applicable | 1-79, 188-207 2-3, 18-19, 28-29, 32-33, 51, 233-252 Not applicable 1-63, 72-75 Not applicable |
6 | Directors, Senior Management and Employees Directors and senior management Compensation Board practices Employees Share ownership | Not applicable 53-57, 108 Not applicable 45 37, 45-47 | 78, 82-85, 170 120-164 78-79, 82-119, 170 58-61, 76, 138-140 120-164 |
7 | Major Shareholders and Related Party Transactions Major shareholders Related party transactions Interests of experts and counsel | 158, 160-161 109 Not applicable | 170 Not applicable Not applicable |
8 | Financial Information Consolidated statements and other financial information Significant changes | 7-22, 29-35 2 | Not applicable 3-5 |
9 | The Offer and Listing Offer and listing details Plan of distribution Markets Selling shareholders Dilution Expenses of the issue | 92-94, 165 Not applicable 164 Not applicable Not applicable Not applicable | 168-170 Not applicable 165-167 Not applicable Not applicable Not applicable |
10 | Additional information Share capital Memorandum and articles of association Material contracts Exchange controls Taxation Dividends and paying agents Statement of experts Documents on display Subsidiary information | Not applicable 167-172 160-161 167 165-166 Not applicable Not applicable 172 Not applicable | Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable |
11 | Quantitative Qualitative Disclosure about Market Risk | 80-87, 120-133 | 179-180, 181-261 |
12 | Description of Securities other than Equity Securities | 135 | Not applicable |
SEC Form 20-F cross reference guide continued
Item | Item Caption | Pages | |
PART II | Annual Report on Form 20-F | Exhibit 15.2: Annual Report and Form 20-F Information | |
13 | Defaults, Dividend Arrearages and Delinquencies | Not applicable | Not applicable |
14 | Material Modifications to the Rights of Security Holders and Use of Proceeds | Not applicable | Not applicable |
15 | Controls and Procedures | 24-28, Exhibits 12.1 and 12.2 | 72-75, 100-107, 165-167 |
16 | [Reserved] | ||
16a | Audit Committee financial expert | Not applicable | 100 |
16b | Code of ethics | 158 | 6-10, 13-17, 173-174 |
16c | Principal Accountant Fees and services | 58 | 106-107 |
16d | Exemptions from the Listing Standards | Not applicable | Not applicable |
16e | Purchases of Equity Securities by the Issuer and Affiliated Purchasers | Not applicable | Not applicable |
16f | Change in Registrant’s Certifying Accountant | Not applicable | Not applicable |
16g | Corporate Governance | Not applicable | 78-79, 82-85, 168-171 |
16h | Mine Safety Disclosure | Not applicable | Not applicable |
16I | Disclosure Regarding Foreign Jurisdictions that Prevent Inspection | Not applicable | Not applicable |
PART III | |||
17 | Financial Statements | Not applicable | Not applicable |
18 | Financial Statements | 23-118 | Not applicable |
19 | Exhibits | 175-176 | Not applicable |
Forward looking statements
Cautionary statement regarding forward-looking statements
Certain sections in this document contain ‘forward-looking statements’ as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words ‘expect’, ‘estimate’, ‘project’, ‘anticipate’, ‘commit’, ‘believe’, ‘should’, ‘intend’, ‘will’, ‘plan’, ‘could’, ‘probability’, ‘risk’, ‘Value-at-Risk (VaR)’, ‘target’, ‘goal’, ‘objective’, ‘may’, ‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and similar expressions or variations on these expressions. In particular, this document includes forward-looking targets and guidance relating to financial performance measures, such as income growth, operating expense, cost reductions, RoTE, ROE, discretionary capital distribution targets, impairment loss rates, balance sheet reduction, including the reduction of RWAs, CET1 ratio (and key drivers of the CET1 ratio including timing, impact and details), Pillar 2 and other regulatory buffer requirements and MREL and non-financial performance measures, such as climate and ESG-related performance ambitions, targets and metrics, including in relation to initiatives to transition to a net zero economy, Climate and Sustainable Funding and Financing (CSFF) and financed emissions. In addition, this document includes forward-looking statements relating, but not limited to: the Covid-19 pandemic and its impact on NatWest Group; planned cost reductions, disposal losses and strategic costs; implementation of NatWest Group’s Purpose-led strategy and other strategic priorities (including in relation to: its phased withdrawal from ROI, the NWM Refocusing and investment programmes relating to digital transformation of its operations and services and inorganic opportunities); the timing and outcome of litigation and government and regulatory investigations; direct and on-market buy-backs; funding plans and credit risk profile; managing its capital position; liquidity ratio; portfolios; net interest margin and drivers related thereto; lending and income growth, product share and growth in target segments; impairments and write-downs, including with respect to goodwill; restructuring and remediation costs and charges; NatWest Group’s exposure to political risk, economic assumptions and risk, climate, environmental and sustainability risk, operational risk, conduct risk, financial crime risk, cyber, data and IT risk and credit rating risk and to various types of market risk, including interest rate risk, foreign exchange rate risk and commodity and equity price risk; customer experience, including our Net Promotor Score (NPS); employee engagement and gender balance in leadership positions.
Limitations inherent to forward-looking statements
These statements are based on current plans, expectations, estimates, targets and projections, and are subject to significant inherent risks, uncertainties and other factors, both external and relating to NatWest Group’s strategy or operations, which may result in NatWest Group being unable to achieve the current plans, expectations, estimates, targets, projections and other anticipated outcomes expressed or implied by such forward-looking statements. In addition, certain of these disclosures are dependent on choices relying on key model characteristics and assumptions and are subject to various limitations, including assumptions and estimates made by management. By their nature, certain of these disclosures are only estimates and, as a result, actual future results, gains or losses could differ materially from those that have been estimated. Accordingly, undue reliance should not be placed on these statements. The forward-looking statements contained in this document speak only as of the date we make them and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statements contained herein, whether to reflect any change in our expectations with regard thereto, any change in events, conditions or circumstances on which any such statement is based, or otherwise, except to the extent legally required.
Important factors that could affect the actual outcome of the forward-looking statements
We caution you that a large number of important factors could adversely affect our results or our ability to implement our strategy, cause us to fail to meet our targets, predictions, expectations and other anticipated outcomes or affect the accuracy of forward-looking statements described in this document. These factors include, but are not limited to, those set forth in the risk factors and the other uncertainties described in NatWest Group plc’s Annual Report on Form 20-F and its other filings with the US Securities and Exchange Commission. The principal risks and uncertainties that could adversely NatWest Group’s future results, its financial condition and prospects and cause them to be materially different from what is forecast or expected, include, but are not limited to: economic and political risk (including in respect of: the impact of the COVID-19 pandemic on NatWest Group and its customers; political and economic risks and uncertainty in the UK and global markets; uncertainty regarding the effects of Brexit; changes in interest rates and foreign currency exchange rates; and HM Treasury’s ownership of NatWest Group plc); strategic risk (including in respect of the implementation of NatWest Group’s Purpose-led Strategy; refocusing of its NWM franchise; and the effect of the COVID-19 pandemic on NatWest Group’s strategic objectives and targets); financial resilience risk (including in respect of: NatWest Group’s ability to meet targets and to make discretionary capital distributions; the competitive environment; impact of the COVID-19 pandemic on the credit quality of NatWest Group’s counterparties; counterparty and borrower risk; prudential regulatory requirements for capital and MREL; the adequacy of NatWest Group’s resolution plans; liquidity and funding risks; changes in the credit ratings; the requirements of regulatory stress tests; goodwill impairment; model risk; sensitivity to accounting policies, judgments, assumptions and estimates; changes in applicable accounting standards; the value or effectiveness of credit protection; and the application of UK statutory stabilisation or resolution powers); climate and sustainability risk (including in respect of: risks relating to climate change and the transitioning to a net zero economy; the implementation of NatWest Group’s climate change strategy and climate change resilient systems, controls and procedures; climate-related data and model risk; the failure to adapt to emerging climate, environmental and sustainability risks and opportunities; changes in ESG ratings; increasing levels of climate, environmental and sustainability related regulation and oversight; and climate, environmental and sustainability-related litigation, enforcement proceedings and investigations); operational and IT resilience risk (including in respect of: operational risks (including reliance on third party suppliers); cyberattacks; the accuracy and effective use of data; complex IT systems (including those that enable remote working); attracting, retaining and developing senior management and skilled personnel; NatWest Group’s risk management framework; and reputational risk); and legal, regulatory and conduct risk (including in respect of: the impact of substantial regulation and oversight; compliance with regulatory requirements; the outcome of legal, regulatory and governmental actions and investigations; the transition of LIBOR other IBOR rates to alternative risk-free rates; and changes in tax legislation or failure to generate future taxable profits).
Climate and ESG disclosures
Climate and ESG disclosures in this report use a greater number and level of judgements, assumptions and estimates, including with respect to the classification of climate and sustainable funding and financing activities, than our reporting of historical financial information. These judgements, assumptions and estimates are highly likely to change over time, and, when coupled with the longer time frames used in these disclosures, make any assessment of materiality inherently uncertain. In addition, our climate risk analysis and net zero strategy remain under development, and the data underlying our analysis and strategy remain subject to evolution over time. As a result, we expect that certain climate and ESG disclosures made in this report are likely to be amended, updated, recalculated or restated in the future. This forward-looking statement should be read together with the ‘Climate-related and other forward-looking statements and metrics’ of the NatWest Group 2021 Climate-related Disclosures Report.
The information, statements and opinions contained in this document do not constitute a public offer under any applicable legislation or an offer to sell or a solicitation of an offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments.
Presentation of information
In the Annual Report on Form 20-F, unless specified otherwise, ‘parent company’ or ‘company’ refers to NatWest Group plc, and ‘NatWest Group’, ‘Group’ or ‘we’ refers to NatWest Group plc and its subsidiaries. The term ‘NWH Group’ refers to NatWest Holdings Limited (‘NWH’) and its subsidiary and associated undertakings. The term ‘NWM Group’ refers to NatWest Markets Plc (‘NWM Plc’) and its subsidiary and associated undertakings. The term ‘NWM N.V.’ refers to NatWest Markets N.V. The term ‘NWMSI’ refers to NatWest Markets Securities, Inc. The term ‘RBS plc’ refers to The Royal Bank of Scotland plc. The term ‘NWB Plc’ refers to National Westminster Bank Plc. The term ‘UBIDAC’ refers to Ulster Bank Ireland DAC. The term ‘RBSI Limited’ refers to The Royal Bank of Scotland International Limited. ‘Go-forward group’ excludes Ulster Bank RoI and discontinued operations.
NatWest Group publishes its financial statements in pounds sterling (‘£’ or ‘sterling’). The abbreviations ‘£m’ and ‘£bn’ represent millions and thousands of millions of pounds sterling (‘GBP’), respectively, and references to ‘pence’ represent pence where amounts are denominated in pounds sterling. Reference to ‘dollars’ or ‘$’ are to United States of America (‘US’) dollars. The abbreviations ‘$m’ and ‘$bn’ represent millions and thousands of millions of dollars, respectively. The abbreviation ‘€’ represents the ‘euro’, and the abbreviations ‘€m’ and ‘€bn’ represent millions and thousands of millions of euros, respectively.
To aid readability, this document retains references to EU legislative and regulatory provisions in effect in the UK before 1 January 2021 that have now been implemented in UK domestic law. These references should be read and construed as including references to the applicable UK implementation measures with effect from 1 January 2021.
Website references
Any information contained on websites linked in this Annual Report on Form 20-F is for information only and will not be deemed to be incorporated by reference herein.
References to the Pillar 3 Report, Climate related Disclosures Report and ESG Supplement
This document contains references throughout to the NatWest Group Pillar 3 Report, Climate-related Disclosures Report and ESG Supplement. References to these reports are made for information purposes only and will not be deemed to be incorporated by reference herein.
Continuing operations
Two legally binding agreements for the sale of the UBIDAC business were announced in 2021 as part of the phased withdrawal from the Republic of Ireland: the sale of commercial lending to Allied Irish Banks p.l.c. (AIB) and the performing non-tracker mortgages, performing micro-SME
loans, UBIDAC’s asset finance business and 25 of its branch locations to Permanent TSB p.l.c (PTSB).
The business activities relating to these sales that meet the requirements of IFRS 5 are presented as a discontinued operation and as a disposal group on 31 December 2021.
The Financial review presents the results of the Group’s continuing operations. For further details refer to Note 8 Discontinued operations and assets and liabilities of disposal groups in the Notes to the consolidated financial statements.
Recent developments
NWM Plc is a defendant in a class action pending in the United States District Court for the Southern District of New York on behalf of lender plaintiffs who allege that NWM Plc and other defendants engaged in fraud by artificially suppressing USD LIBOR. On 25 February 2022, the United States Court of Appeals for the Second Circuit reversed the lower court’s prior dismissal of the case, finding that the plaintiffs have adequately alleged the court’s jurisdiction over the defendants.
NatWest Group plc – Annual Report on Form 20-F | 2 |
Non-IFRS financial information
NatWest Group prepares its financial statements in accordance with generally accepted accounting principles (GAAP). This document contains a number of adjusted or alternative performance measures, also known as non-GAAP or non-IFRS performance measures. These measures are adjusted for notable and other defined items which management believe are not representative of the underlying performance of the business and which distort period-on-period comparison. The non-IFRS measures provide users of the financial statements with a consistent basis for comparing business performance between financial periods and information on elements of performance that are one-off in nature. The non-IFRS measures also include the calculation of metrics that are used throughout the banking industry. These non-IFRS measures are not measures within the scope of IFRS and are not a substitute for IFRS measures. The list below specifies how each non-IFRS performance measure is used by management to manage and maintain the performance of the business. For further details of non-IFRS performance measures please refer to page 111 to 118.
| 1. | Adjustment for notable items |
Go-forward group income excluding notable items is calculated as total income excluding Ulster Bank RoI total income and excluding notable items. UK and RBSI retail and commercial businesses total income excluding notable items comprises income in the Retail Banking, Commercial Banking, Private Banking and RBS International operating segments excluding notable items.
The exclusion of notable items aims to remove the impact of one-offs which may distort period-on-period comparisons
| 2. | Adjustment for asset disposals/strategic risk reductions and own credit adjustments |
NWM total income excluding asset disposals/strategic risk reductions and own credit adjustments (OCA) is calculated as total income of the NWM business less asset disposals/strategic risk reductions and OCA.
This aims to show underlying income generation in NWM excluding the impact of disposal losses and OCA.
| 3. | Operating expenses- management view |
The management analysis of operating expenses shows strategic costs and litigation and conduct costs in separate lines. Depreciation and amortisation, and other administrative expenses attributable to these costs are included in strategic costs and litigation and conduct costs lines for management analysis. These amounts are included in staff, premises and equipment and other administrative expenses in the statutory analysis.
Other expenses excludes strategic costs and litigation and conduct costs, which are more volatile and may distort comparisons with prior periods.
| 4. | Other expenses excluding operating lease depreciation (OLD) and Ulster Bank direct costs |
Our cost target for 2021 is based on this measure and we track progress against this.
| 5. | Cost:income ratio |
The cost:income ratio is calculated as total operating expenses less OLD divided by total income less OLD.
This is a common metric used to compare profitability across the banking industry, although different banks may calculate the rate differently.
| 6. | NatWest Group return on tangible equity |
Return on tangible equity comprises profit or loss for the period attributable to ordinary shareholders divided by average tangible equity. Average tangible equity is average total equity excluding non-controlling interests (NCI) less average intangible assets and average other owners’ equity.
Go-forward group return on tangible equity is calculated as profit or loss for the period less Ulster Bank RoI loss from continuing operations and less profit from discontinued operations divided by go-forward group total tangible equity.
This measure shows the return NatWest Group generates on tangible equity deployed. It is used to determine relative performance of banks and used widely across the sector, although different banks may calculate the rate differently.
| 7. | Segmental return on equity |
Segmental return on equity comprises segmental operating profit or loss, adjusted for preference share dividends and tax, divided by average notional tangible equity, allocated at an operating segment specific rate of the period average segmental risk- weighted assets, incorporating the effect of capital deductions (RWAes).
This measure shows the return generated by operating segments on equity deployed.
| 8. | Tangible equity |
Tangible equity is ordinary shareholders’ interest less intangible assets. TNAV per ordinary share is calculated as tangible equity divided by the number of ordinary shares in issue.
This is a measure used by external analysts in valuing the bank and the starting point for calculating regulatory capital.
| 9. | Net interest margin |
Bank net interest margin is defined as net interest income of the banking business of the Go-forward group less NatWest Markets (NWM) element and excluding liquid asset buffer, as a percentage of bank average interest-earning assets. Bank average interest earning assets are the average interest earning assets of the banking business of the Go-forward group less NWM element and excluding liquid asset buffer.
NatWest Group plc – Annual Report on Form 20-F | 3 |
Non-IFRS financial information continued
The exclusion of the NWM element aims to eliminate the impact of distorting volatility in NWM. The exclusion of the Ulster Bank RoI from the aims to align the basis of calculation with prior periods.
Liquid asset buffer consists of assets held by NatWest Group, such as cash and balances at central banks and debt securities in issue, that can be used to ensure repayment of financial obligations as they fall due.
The exclusion of liquid asset buffer has been introduced as a way to present net interest margin on a basis more comparable with UK peers and exclude the impact of regulatory driven factors.
| 10. | Net lending |
NatWest Group net lending is calculated as total loans to customers less loan impairment provisions. Go-forward group net lending is calculated as net loans to customers less Ulster Bank RoI net loans to customers. UK and RBSI retail and commercial businesses net lending excluding UK Government support schemes comprises customer loans in the Retail Banking, Commercial Banking, Private Banking and RBS International operating segments, excluding UK Government support schemes.
This is the basis of our lending target for our key retail and commercial businesses.
| 11. | Customer deposits |
Go-forward group customer deposits is calculated as total customer deposits less Ulster Bank RoI customer deposits. UK and RBSI retail and commercial businesses customer deposits comprises customer deposits in the Retail Banking, Commercial Banking, Private Banking and RBS International operating segments.
This metric is used to show underlying deposit movements across our key retail and commercial businesses.
| 12. | Total operating profit before tax including discontinued operations |
Given the current progress of the phased withdrawal from the Republic of Ireland, Ulster Bank RoI results are currently presented in both continuing and discontinued operations. Including operating profit before tax from discontinued operations provides a complete view of the NatWest Group operating profit in 2021.
Performance metrics not defined under IFRS
Metrics based on GAAP measures, included as not defined under IFRS and reported for compliance with European Securities and Markets Authority (ESMA) adjusted performance measure rules.
| 1. | Loan:deposit ratio |
Loan:deposit ratio is calculated as net customer loans held at amortised cost divided by total customer deposits.
This is a common metric used among peers to assess liquidity.
| 2. | Loan impairment rate |
Loan impairment rate is the loan impairment charge divided by gross customer loans.
| 3. | Funded assets |
Funded assets is calculated as total assets less derivative assets.
This measure allows review of balance sheet trends exclusive of the volatility associated with derivative fair values.
| 4. | AUMAs |
AUMA comprises both assets under management (AUMs) and assets under administration (AUAs) serviced through the Private Banking franchise. AUMs comprise assets where the investment management is undertaken by Private Banking on behalf of Private Banking, Retail Banking and RBSI customers. AUAs comprise third party assets held on an execution-only basis in custody by Private Banking, Retail Banking and RBSI for their customers accordingly, for which the execution services are supported by Private Banking. Private Banking receives a fee for providing investment management and execution services to Retail Banking and RBSI franchises.
Private Banking is the Centre of Expertise for asset management across NatWest Group, servicing all client segments across Retail, Premier and Private Banking.
| 5. | Depositary assets |
Assets held by RBSI as an independent trustee and in a depositary service capacity.
Depositary assets are a closely monitored KPI for the RBS International business and its inclusion in commentary highlights the services that RBS International provides.
| 6. | Wholesale funding |
Wholesale funding comprises deposits by banks, debt securities in issue and subordinated liabilities.
This is a closely monitored metric used across the banking industry to ensure capital requirements are being met.
NatWest Group plc – Annual Report on Form 20-F | 4 |
Summary risk factors
Principal risks and uncertainties
Set out below is a summary of the principal risks and uncertainties that could adversely affect NatWest Group’s future results, its financial condition and prospects and cause them to be materially different from what is forecast or expected, and directly or indirectly impact the value of its securities in issue. This summary should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties; a fuller description of these and other risk factors is included on pages 136 to 157 of this report on Form 20-F and should be read together with NatWest Group’s other public disclosures. Any of the risks identified may have a material adverse effect on NatWest Group’s business, operations, financial condition or prospects. The current COVID-19 pandemic may exacerbate any of the risks described below.
Risks relating to the COVID-19 pandemic
- | The effects of the COVID-19 pandemic on the UK, global economies and financial markets, and NatWest Group’s customers, as well as its competitive environment may continue to have a material adverse effect on NatWest Group’s business, results of operations and outlook. |
- | The adverse impact of the COVID-19 pandemic on the credit quality of NatWest Group’s counterparties and the implementation of support schemes in response of the COVID-19 pandemic has increased NatWest Group’s exposure to counterparty risk, which may adversely affect its business, results of operations and outlook. |
- | The COVID-19 pandemic may adversely affect NatWest Group’s strategy and impair its ability to meet its targets and to achieve its strategic objectives. |
- | The COVID-19 pandemic has heightened NatWest Group’s operational risks as many of its employees are working remotely which may also adversely affect NatWest Group’s ability to maintain effective internal controls. |
- | The effects of the COVID-19 pandemic could affect NatWest Group’s ability to access sources of liquidity and funding, which may result in higher funding costs and failure to comply with regulatory capital, funding and leverage requirements. |
- | NatWest Group’s results could be adversely affected if the effects of the COVID-19 pandemic or other events trigger the recognition of a goodwill impairment. |
Economic and political risk
- | Continuing uncertainty regarding the effects of the UK’s withdrawal from the European Union may continue to adversely affect NatWest Group and its operating environment. |
- | NatWest Group faces increased political and economic risks and uncertainty in the UK and global markets. |
- | Changes in interest rates have significantly affected and will continue to affect NatWest Group’s business and results. |
- | HM Treasury (or UKGI on its behalf) could exercise a significant degree of influence over NatWest Group and further offers or sales of NatWest Group’s shares held by HM Treasury may affect the price of securities issued by NatWest Group. |
- | Changes in foreign currency exchange rates may affect NatWest Group’s results and financial position. |
Strategic risk
- | NatWest Group is currently implementing its Purpose-led Strategy, which carries significant execution and operational risks and may not achieve its stated aims and targeted outcomes. |
- | NatWest Group is in the process of refocusing its NWM franchise, which entails significant commercial, operational and execution risks and the intended benefits for NatWest Group may not be realised within the timeline and in the manner currently contemplated. |
Financial resilience risk
- | NatWest Group may not meet targets and be in a position to continue to make discretionary capital distributions (including dividends to shareholders). |
- | NatWest Group operates in markets that are highly competitive, with increasing competitive pressures and technology disruption. |
- | NatWest Group has significant exposure to counterparty and borrower risk. |
- | NatWest Group may not meet the prudential regulatory requirements for capital and MREL, or manage its capital effectively, which could trigger the execution of certain management actions or recovery options. |
- | NatWest Group is subject to Bank of England oversight in respect of resolution, and NatWest Group could be adversely affected should the Bank of England deem NatWest Group’s preparations to be inadequate. |
- | NatWest Group may not be able to adequately access sources of liquidity and funding. |
- | Any reduction in the credit rating and/or outlooks assigned to NatWest Group plc, any of its subsidiaries or any of their respective debt securities could adversely affect the availability of funding for NatWest Group, reduce NatWest Group’s liquidity position and increase the cost of funding. |
- | NatWest Group may be adversely affected if it fails to meet the requirements of regulatory stress tests. |
- | NatWest Group could incur losses or be required to maintain higher levels of capital as a result of limitations or failure of various models. |
- | NatWest Group’s financial statements are sensitive to the underlying accounting policies, judgments, estimates and assumptions. |
- | Changes in accounting standards may materially impact NatWest Group’s financial results. |
- | The value or effectiveness of any credit protection that NatWest Group has purchased depends on the value of the underlying assets and the financial condition of the insurers and counterparties. |
- | NatWest Group may become subject to the application of UK statutory stabilisation or resolution powers which may result in, among other actions, the cancellation, transfer or dilution of ordinary shares, or the write-down or conversion of certain other of NatWest Group’s securities. |
NatWest Group plc – Annual Report on Form 20-F | 5 |
Summary risk factors continued
Climate and sustainability-related risks
- | NatWest Group and its customers may face significant climate-related risks, including in transitioning to a low-carbon economy, which may adversely impact NatWest Group. |
- | NatWest Group’s Purpose-led Strategy includes one area of focus on climate change that is likely to require material changes to the business of NatWest Group which entails significant execution risk. |
- | Any failure by NatWest Group to implement effective and compliant climate change resilient systems, controls and procedures could adversely affect NatWest Group’s ability to manage climate-related risks. |
- | There are significant uncertainties inherent in accurately modelling the impact of climate-related risks. |
- | A failure to adapt NatWest Group’s business strategy, governance, procedures, systems and controls to manage emerging sustainability-related risks and opportunities may have a material adverse effect on NatWest Group’s reputation, business, results of operations and outlook. |
- | Any reduction in the ESG ratings of NatWest Group could have a negative impact on NatWest Group’s reputation and on investors’ risk appetite. |
- | Increasing levels of climate, environmental and sustainability-related laws, regulation and oversight may adversely affect NatWest Group’s business and expose NatWest Group to increased costs of compliance, regulatory sanction and reputational damage. |
- | NatWest Group may be subject to potential climate, environmental and other sustainability-related litigation, enforcement proceedings, investigations and conduct risk. |
Operational and IT resilience risk
- | Operational risks (including reliance on third party suppliers and outsourcing of certain activities) are inherent in NatWest Group’s businesses. |
- | NatWest Group is subject to increasingly sophisticated and frequent cyberattacks. |
- | NatWest Group operations and strategy are highly dependent on the accuracy and effective use of data. |
- | NatWest Group’s operations are highly dependent on its complex IT systems (including those that enable remote working) and any IT failure could adversely affect NatWest Group. |
- | NatWest Group relies on attracting, retaining and developing senior management and skilled personnel, and is required to maintain good employee relations. |
- | A failure in NatWest Group’s risk management framework could adversely affect NatWest Group, including its ability to achieve its strategic objectives. |
- | NatWest Group’s operations are subject to inherent reputational risk. |
Legal, regulatory and conduct risk
- | NatWest Group’s businesses are subject to substantial regulation and oversight, which are constantly evolving and may adversely affect NatWest Group. |
- | NatWest Group is subject to various litigation matters, regulatory and governmental actions and investigations as well as remedial undertakings, including conduct-related reviews, anti-money laundering and redress projects, the outcomes of which are inherently difficult to predict, and which could have an adverse effect on NatWest Group. |
- | NatWest Group may not effectively manage the transition of LIBOR and other IBOR rates to alternative risk free rates. |
- | NatWest Group operates in jurisdictions that are subject to intense scrutiny by the competition authorities. |
- | The cost of implementing the Alternative Remedies Package (‘ARP’) could be more onerous than anticipated. |
Changes in tax legislation or failure to generate future taxable profits may impact the recoverability of certain deferred tax assets recognised by NatWest Group.
NatWest Group plc – Annual Report on Form 20-F | 6 |
Chief Financial Officer’s review
We have delivered a strong operating performance in 2021.
Group RoTE was 9.4%, benefiting from a £1.3 billion net impairment release. Total operating expenses of £7,758 million were £100 million, or 1.3%, lower compared with 2020. We achieved our Group cost reduction target(excluding litigation and conduct costs, operating lease depreciation and Ulster Bank RoI direct costs) of 4.0% Net loans to customers were £1.5 billion, or 0.4%, lower compared with 2020. Lending growth across our UK and RBSI retail and commercial businesses was 2.6%, excluding UK Government financial support schemes.
Our capital and liquidity position remains strong after returning £3.8 billion to shareholders, and default levels have remained low across all our portfolios. The CET1 ratio was 18.2%, reducing to 15.9% on 1 January 2022 following regulatory RWA and capital changes. We have made good progress on our phased withdrawal from the Republic of Ireland and will focus the financial commentary below on the Group excluding Ulster Bank RoI (Go-forward group).
Total income was £4 million higher compared with 2020. Total income, excluding notable items, in the Go-forward group was 5.6% lower than prior year. Across the UK and RBSI retail and commercial businesses income increased by 1.4% reflecting strong balance sheet growth, principally in our mortgage book. NWM income was below expectations, down by 61.5%, compared with 2020, reflecting continued weakness in Fixed Income, impacted by subdued levels of customer activity and ongoing reshaping of the business, and exceptional levels of market activity in the prior year.
Net interest margin of 1.45% was 10 basis points lower compared with 2020. Bank NIM(1) of 2.39% was 7 basis points lower than 2020 impacted by reduced structural hedge income, yield curve movements and lower unsecured balances.
Total operating expenses of £7,758 million were £100 million, or 1.3%, lower compared with 2020. We delivered a cost reduction (excluding litigation and conduct costs, operating lease depreciation and Ulster Bank RoI direct costs) of £256 million, or 4.0%, in 2021, in line with our target for the year. This has been achieved by transformation across our customer journeys and NWM business, in line with the strategic announcement made in February 2020 and a £68 million reduction in the bank levy charge.
A net impairment release of £1,278 million reflects the low levels of realised losses we have seen across the year. Total impairment provisions reduced by £2.4 billion to £3.8 billion during 2021 and as a result ECL coverage ratio decreased from 1.66% to 1.03%.
We are pleased to report a 2021 attributable profit of £2,950 million, with earnings per share of 25.4 pence and a RoTE of 9.4%.
A final dividend of 7.5 pence per share is proposed, bringing our total 2021 paid and proposed capital distributions to £3.8 billion through a combination of ordinary dividends, directed buybacks of the UK Government stake and our on-market buyback programme.
Net loans to customers were £1.5 billion, or 0.4%, lower compared with 2020. Across the UK and RBSI retail and commercial businesses, and excluding UK Government support schemes, net lending increased by 2.6%. Mortgage growth exceeded the market, however commercial lending was behind market as we have sought to reduce certain exposures, through targeted sector reductions and capital actions, whilst continuing to focus on supporting customers through sustainable lending.
Customer deposits were £48.1 billion, or 11.1%, higher compared with 2020. Customer deposits in the Go-forward group increased by £49.3 billion, or 12.0%, in 2021 including £9.4 billion related to Treasury repo activity. Across the UK and RBSI retail and commercial businesses customer deposits increased by 10.0%, as customers continued to build and retain liquidity.
TNAV per share increased by 3 pence in the quarter to 272 pence largely reflecting the attributable profit partially offset by movements in the cash flow hedging reserve.
Capital, funding and liquidity
The CET1 ratio remains strong at 18.2%, or 17.8% excluding IFRS 9 transitional relief. The 30 basis points reduction in the year includes capital distributions of c.240 basis points, partially offset by the reduction in RWAs, c.170 basis points, and the attributable profit net of IFRS 9 transitional relief and other capital movements. RWAs of £157.0 billion reduced by £13.3 billion in 2021 mainly reflecting business movements in Commercial Banking, including targeted sector reductions, improvement in risk parameters and active capital management
On 1 January 2022, the proforma CET1 ratio was 15.9% including the impact of regulatory RWA inflation, 200 basis points, the removal of the software development costs capital benefit, 20 basis points, and the tapering of IFRS 9 transitional relief, 10 basis points. RWAs increased by £18.8 billion, including £14.8 billion associated with mortgage risk weight changes.
The liquidity coverage ratio (LCR) of 172%, representing £89.9 billion headroom above 100% minimum requirement, increased by 7 percentage points compared with 2020. Total wholesale funding increased by £6.0 billion in the year to £76.7 billion.
| (1) | Excludes NatWest Markets, liquid asset buffer and Ulster Bank RoI |
NatWest Group plc – Annual Report on Form 20-F | 7 |
Chief Financial Officer’s review continued
| 2021 |
| 2020 (1) |
| Variance |
| |
£m | £m | £m |
| ||||
Continuing operations |
|
|
|
|
|
| |
Go-forward group income(2,3) |
| 10,284 |
| 10,286 |
| (2) | |
Total income |
| 10,512 |
| 10,508 |
| 4 | |
Operating expenses |
| (7,758) |
| (7,858) |
| (100) | |
Profit before impairment releases/(losses) |
| 2,754 |
| 2,650 |
| 104 | |
Operating profit/(loss) before tax |
| 4,032 |
| (481) |
| 4,513 | |
Profit/(loss) attributable to ordinary shareholders |
| 2,950 |
| (753) |
| 3,703 | |
Excluding notable items within total income(4) |
|
|
|
|
|
| |
Go-forward group income excluding notable items (2,3) |
| 10,074 |
| 10,670 |
| (596) | |
Total income excluding notable items(3) |
| 10,267 |
| 10,892 |
| (625) | |
Operating expenses |
| (7,758) |
| (7,858) |
| 100 | |
Profit before impairment releases/(losses) excluding notable items |
| 2,509 |
| 3,034 |
| (525) | |
Operating profit/(loss) before tax excluding notable items |
| 3,787 |
| (97) |
| 3,884 | |
UK and RBSI retail and commercial businesses income excluding notable items(3) |
| 9,620 |
| 9,486 |
| 134 | |
Performance key metrics and ratios |
|
|
|
|
|
| |
Bank net interest margin(3,5) |
| 2.39 | % | 2.46 | % | (0.07) | % |
Bank average interest earning assets(3,5) |
| £314bn | £301bn | £13bn | |||
Cost:income ratio(3) |
| 73.4 | % | 74.4 | % | (1.1) | % |
Loan impairment rate(3) |
| (35bps) | 85bps |
| (120bps) | ||
Total earnings per share attributable to ordinary shareholders – basic |
| 25.4p | (6.2p) |
| 31.6p | ||
Go-forward group return on tangible equity(2) |
| 10.0 | % | (1.3) | % | 11.3 | % |
Return on tangible equity(3) |
| 9.4 | % | (2.4) | % | 11.8 | % |
Balance sheet |
|
|
|
|
|
| |
Go-forward group customer deposits(2,3) |
| £461.4bn |
| £412.1bn |
| £49.3bn | |
UK and RBSI retail and commercial net lending excluding UK Government support schemes(3) |
| £305.7bn |
| £297.9bn |
| £7.8bn | |
Capital, liquidity and funding |
|
|
|
|
|
| |
Common Equity Tier (CET1) ratio(6) |
| 18.2 | % | 18.5% | (0.3) | % | |
Risk-weighted assets (RWAs) |
| £157.0bn | £170.3bn | (£13.3bn) | |||
Liquidity coverage ratio (LCR) |
| 172 | % | 165 | % | 7 | % |
Total wholesale funding(3) |
| £77bn | £71bn |
| £6bn | ||
Tangible net asset value (TNAV) per ordinary share(3) |
| 272p |
| 261p |
| 11p |
| (1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. |
| (2) | Go-forward group excludes Ulster Bank RoI and discontinued operations. |
| (3) | Refer to the Non-IFRS financial measures section for details of the basis of preparation and reconciliation of non-IFRS financial measures. |
| (4) | Refer to page 11 for details of notable items within total income. |
| (5) | NatWest Group excluding NatWest Markets, Ulster Bank RoI and liquid asset buffer. |
| (6) | Based on CRR end-point including the IFRS 9 transitional adjustment of £0.6 billion (31 December 2020 – £1.7 billion). Excluding this adjustment, the CET1 ratio would be 17.8% (31 December 2020 – 17.5%.) |
Continuing operations
Two legally binding agreements for the sale of the UBIDAC business were announced in 2021 as part of the phased withdrawal from the Republic of Ireland: the sale of commercial lending to Allied Irish Banks p.l.c. (AIB) and the performing non-tracker mortgages, performing micro-SME loans, UBIDAC’s asset finance business and 25 of its branch locations to Permanent TSB p.l.c (PTSB).
The business activities relating to these sales that meet the requirements of IFRS 5 are presented as a discontinued operation and as a disposal group on 31 December 2021.
The Financial review presents the results of the Group’s continuing operations. For further details refer to Note 8 Discontinued operations and assets and liabilities of disposal groups in the Notes to the consolidated financial statements.
NatWest Group plc – Annual Report on Form 20-F | 8 |
Financial review
This section includes a discussion on our operating results for the year ended 31 December 2021, including a comparative discussion on our operating results for the year ended 31 December 2020. For a discussion on our operating results for the year ended 31 December 2020, including a comparative discussion on our operating results for the year ended 31 December 2019, refer to “Business Review” on pages 86 to 100 in our 2020 Annual Report on Form 20-F (File No. 001-10306) filed with the Securities and Exchange Commission on March 5, 2021.
Segmental performance
Reportable operating segments:
The reportable operating segments are as follows:
Retail Banking serves individuals and mass affluent customers in the UK and includes Ulster Bank customers in Northern Ireland.
Commercial Banking serves start-up, SME, commercial, corporate and institutional customers in the UK.
Private Banking serves UK-connected high net worth individuals and their business interests.
RBS International (RBSI) serves retail, commercial, and corporate customers in the Channel Islands, Isle of Man and Gibraltar, and financial institution clients in those same locations in addition to the UK and Luxembourg.
NatWest Markets (NWM) helps NatWest Group’s corporate and institutional customers manage their financial risks safely and achieve their short-term and long-term sustainable financial goals.
Central items other includes corporate functions, such as NatWest Group Treasury, finance, risk management, compliance, legal, communications and human resources. Central functions manages NatWest Group capital resources and NatWest Group-wide regulatory projects and provides services to the reportable segments. Balances in relation to legacy litigation issues and the international private banking business are included in Central items in the relevant periods.
Ulster Bank RoI serves individuals and businesses in the Republic of Ireland (RoI).
Competition
Introduction
In an environment in which central banks have maintained very low interest rates for an unusually long period or introduced negative rates, competitive dynamics have changed in some of the principal markets in which we operate. In this environment an ability to attract and manage funding remains a critical competitive advantage. Other key competitive factors include cost management, growing digital sales focus, branch network re-shaping, and product simplification. Cost management remains a key focus, as banks seek to simplify their organisational and IT architectures while at the same time investing to ensure that they can meet customers’ evolving channel preferences. Customers have increasingly focused on the use of internet and mobile as sales and service channels for certain types of products. Therefore, competitive position and performance increasingly depends on the possession of user-friendly, diverse and efficient online solutions.
Retail Banking
In the retail banking business, NatWest Group competes with a range of providers including UK banks and building societies, major retailers and life assurance companies, as well as the UK subsidiaries of major international banks. In the mortgage market, NatWest Group competes with UK banks, building societies and specialist lenders. Increasingly, the ambitions of non-traditional players in the UK market are gaining credibility, with new entrants active and seeking to build their platforms either through organic growth or in some cases by acquiring businesses made available through the restructuring of incumbents.
Entrants with new business models such as peer-to-peer lending platforms, while currently small, continue to grow rapidly and are emerging as significant competitors. Such competitors often target specific elements of the value chain, providing specialised services to particular customer segments.
In the UK credit card market, large retailers and specialist card issuers are active in addition to the UK banks. In addition to physical distribution channels, providers compete through direct marketing activity and digital channels.
NatWest Group distributes life assurance products to banking customers in competition with independent advisors and life assurance companies.
Ulster Bank RoI
Since the end of July 2021, apart from the UBIDAC asset finance business which remains fully open, commercial banking has been closed to new customers, remaining open for existing customers only. Since the end of October 2021, Ulster Bank RoI has stopped accepting applications from new personal customers, but continues to consider applications on a reduced number of products from existing personal customers, mainly mortgages. Support continues for existing customers pending further decisions on the phased withdrawal.
NatWest Group plc – Annual Report on Form 20-F | 9 |
Financial review continued
Commercial Banking
Competition for corporate, institutional and business customers in the UK is from UK banks, from specialised global and regional investment banks and from large foreign universal banks that offer combined investment and commercial banking capabilities as well as from new entrants and non-bank challengers. In asset finance and invoice finance, the bank competes with banks and specialist finance providers, both captive and non-captive. In the small business banking market, the bank competes with other UK banks, specialist finance providers and building societies. In all of these areas, entrants with new technology-based business model are also showing rapid growth.
RBS International
RBS International competes with other UK and international banks to offer offshore and domestic banking services in the Channel Islands, Gibraltar and the Isle of Man as well as depositary services in the UK and Luxembourg.
Private Banking
Competition with UK clearing and private banks, asset managers and with international private banks. Competition in wealth management remains strong as banks maintain their focus on competing for affluent and high net worth customers.
NatWest Markets
NatWest Markets focuses on the needs of large corporates operating in the UK and Western Europe as well as global financial institution customers. NatWest Markets provides financing and risk management for these customers, and trades with financial institutions and counterparties for distribution and market making. There are sales and trading operations in Amsterdam, London, the US and Singapore and offices in a select number of countries. NatWest Markets, therefore, competes with large domestic banks, major international banks and a number of investment banks that offer risk management, trading solutions and debt financing to financial institutions and UK and European corporate customers.
NatWest Group’s product proposition is built around its core strength of supporting customers across currencies, rates and financing. Key competitive factors in this market include the ability to develop digital innovation, such as automation across flow products, the expertise and markets insight of employees and delivering value-adding bespoke solutions for customers.
With an evolving regulatory landscape and continued pressure on margins, competition in this market remains strong. Many market participants are also revising their strategy in order to ensure they deliver sustainable returns
NatWest Group plc – Annual Report on Form 20-F | 10 |
Financial review continued
Financial summary
2021 | 2020 (1) | Variance |
| ||||||
Income - Continuing operations |
| £m |
| £m |
| £m |
| % | |
Interest receivable (2) |
| 9,313 |
| 9,798 |
| (485) |
| (4.9) | |
Interest payable (2) |
| (1,699) |
| (2,322) |
| 623 |
| (26.8) | |
Net interest income |
| 7,614 |
| 7,476 |
| 138 |
| 1.8 | |
Net fees and commissions |
| 2,124 |
| 2,000 |
| 124 |
| 6.2 | |
Income from trading activities |
| 323 |
| 1,125 |
| (802) |
| (71.3) | |
Other non-interest income |
| 451 |
| (93) |
| 544 |
| nm | |
Non-interest income |
| 2,898 |
| 3,032 |
| (134) |
| (4.4) | |
Total income |
| 10,512 |
| 10,508 |
| 4 |
| nm | |
Go-forward group income excluding notable items (3) |
| 10,074 |
| 10,670 |
| (596) |
| (5.6) | |
Total income excluding notable items (3) |
| 10,267 |
| 10,892 |
| (625) |
| (5.7) | |
Notable items within total income (3) |
|
|
|
|
|
|
|
| |
Retail Banking |
|
|
|
|
|
|
|
| |
Retail Banking debt sale gain |
| — |
| 8 |
|
|
|
| |
Metro Bank mortgage portfolio acquisition loss |
| — |
| (58) |
|
|
|
| |
Private Banking |
|
|
|
|
|
|
|
| |
Consideration on the sale of the Adam Company investment management business |
| 54 |
| — |
|
|
|
| |
Commercial Banking |
|
|
|
|
|
|
|
| |
Commercial Banking fair value and disposal loss |
| (22) |
| (37) |
|
|
|
| |
Commercial Banking tax variable lease repricing |
| 32 |
| — |
|
|
|
| |
NatWest Markets |
|
|
|
|
|
|
|
| |
NatWest Markets asset disposals/strategic risk reduction (4) |
| (64) |
| (83) |
|
|
|
| |
Own credit adjustments (OCA) |
| 6 |
| (24) |
|
|
|
| |
Central items other |
|
|
|
|
|
|
|
| |
Share of associate profit/(loss) for Business Growth Fund |
| 219 |
| (22) |
|
|
|
| |
Liquidity Asset Bond sale gains |
| 120 |
| 113 |
|
|
|
| |
Loss on redemption of own debt |
| (138) |
| (324) |
|
|
|
| |
IFRS volatility in Central items other (5) |
| 47 |
| 83 |
|
|
|
| |
Property strategy update |
| (44) |
| — |
|
|
|
| |
FX recycling loss in Central items other |
| — |
| (40) |
|
|
|
| |
Ulster Bank RoI |
|
|
|
|
|
|
|
| |
Ulster Bank RoI gain arising from the restructuring of structural hedges |
| 35 |
| — |
|
|
|
| |
Total |
| 245 |
| (384) |
|
|
|
| |
| (1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. |
| (2) | Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities. |
| (3) | Refer to the Non-IFRS financial measures section for details of the basis of preparation and reconciliation of Non-IFRS financial and performance measures |
| (4) | Asset disposals/strategic risk reduction in 2020 relates to the cost of exiting positions and the impact of risk reduction transactions entered into, in respect of the strategic announcement on 14 February 2020. |
| (5) | IFRS volatility relates to loans which are economically hedged but for which hedge accounting is not permitted under IFRS. |
2021 compared with 2020
- | Total income was £4 million higher compared with 2020. Total income, excluding notable items, in the Go-forward group(1) was £596 million, or 5.6% lower than prior year. Across the UK and RBSI retail and commercial businesses income increased by 1.4% reflecting strong balance sheet growth, principally in our mortgage book. NWM income was below expectations, down £757 million, or 61.5% compared with 2020, reflecting continued weakness in Fixed Income, impacted by subdued levels of customer activity and ongoing reshaping of the business, and exceptional levels of market activity in the prior year. |
- | Net interest margin of 1.45% was 10 basis points lower compared with 2020 Bank NIM(2) of 2.39% was 7 basis points lower than 2020 impacted by reduced structural hedge income, yield curve movements and lower unsecured balances. |
- | Structural hedges of £190 billion generated £1.3 billion of incremental net interest income for the year, compared with £1.1 billion of incremental net interest income on a balance of £159 billion in 2020. |
| (1) | Go-forward group excludes Ulster Bank RoI. |
| (2) | NatWest Group excluding NatWest Markets, liquid asset buffer and Ulster Bank RoI. |
NatWest Group plc – Annual Report on Form 20-F | 11 |
Financial review continued
Financial summary continued
2021 | 2020 (1) | Variance | ||||||
Operating expenses - Continuing operations |
| £m |
| £m |
| £m |
| % |
Staff expenses |
| 3,265 |
| 3,416 |
| (151) |
| (4.4) |
Premises and equipment |
| 1,030 |
| 989 |
| 41 |
| 4.1 |
Other administrative expenses |
| 1,427 |
| 1,535 |
| (108) |
| (7.0) |
Strategic costs |
| 787 |
| 1,013 |
| (226) |
| (22.3) |
Litigation and conduct costs |
| 466 |
| 113 |
| 353 |
| nm |
Depreciation and amortisation |
| 783 |
| 792 |
| (9) |
| (1.1) |
Operating expenses |
| 7,758 |
| 7,858 |
| (100) |
| (1.3) |
Excluding: |
|
|
|
|
|
|
|
|
Litigation and conduct costs |
| 466 |
| 113 |
| 353 |
| nm |
Strategic costs |
| 787 |
| 1,013 |
| (226) |
| (22.3) |
Operating lease depreciation |
| 140 |
| 145 |
| (5) |
| (3.4) |
Ulster Bank RoI direct costs |
| 273 |
| 239 |
| 34 |
| 14.2 |
| 6,092 |
| 6,348 |
| (256) |
| (4.0) | |
| (1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. |
2021 compared with 2020
- | Total operating expenses were £100 million, or 1.3%, lower compared with 2020. Operating expenses excluding litigation and conduct costs, strategic costs, operating lease depreciation and Ulster Bank RoI direct costs decreased by £256 million, or 4.0%, in line with our target for the year. This has been achieved by transformation across our customer journeys and NWM business, in line with the strategic announcement made in February 2020 and a £68 million reduction in the UK bank levy charge. |
- | Strategic costs of £787 million included £237 million in NWM related to transformation, £124 million of redundancy charges, £88 million of technology spend and an £85 million goodwill impairment. |
- | Litigation and conduct costs of £466 million represent the net impact of a number of remediation and litigation matters concluding. This amount includes penalties associated with the resolution of FCA’s investigation into potential breaches of the UK Money Laundering Regulations 2007. Refer to Note 27 for additional information on other litigation and regulatory matters. |
2021 | 2020 | Variance | |||||||
Impairments - Continuing operations (1) |
| £m |
| £m |
| £m | |||
Loans - amortised cost and FVOCI |
| 369,827 |
| 372,399 |
| (2,572) |
| (0.7) | % |
ECL provisions |
| 3,806 |
| 6,186 |
| (2,380) |
| (38.5) | % |
ECL provisions coverage ratio (%) |
| 1.03 |
| 1.66 |
| (0.6) |
| (38.0) | % |
Impairment (releases)/losses |
|
|
|
|
|
|
|
| |
ECL (release)/charge (2) |
| (1,278) |
| 3,131 |
| (4,409) |
| (140.8) | % |
Amounts written off |
| 876 |
| 937 |
| (61) |
| (6.5) | % |
| (1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. |
| (2) | The table above summarises loans and related credit impairment measured on an IFRS 9 basis. Refer to Credit Risk – Banking activities in the Risk and capital management section for further details. |
2021 compared with 2020
- | A net impairment release of £1,278 million reflects the low levels of realised losses we have seen across the year. Total impairment provisions reduced by £2.4 billion to £3.8 billion during 2021 and as a result ECL coverage ratio decreased from 1.66% to 1.03%. Whilst we are comfortable with the strong credit performance of our book, we continue to hold economic uncertainty post model adjustments (PMA) of £0.6 billion, or 15.3% of total impairment provisions. We will continue to assess this position throughout the year. |
| 2021 |
| 2020 (1) |
| |
Tax - Continuing operations |
| £m |
| £m | |
Tax charge |
| (996) |
| (74) | |
UK corporation tax rate |
| 19.0 | % | 19.0 | % |
Effective tax rate |
| 24.7 | % | (23.7) | % |
| (1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. |
2021 compared with 2020
- | A tax charge of £996 million for the year ended 31 December 2021 arises rather than the expected tax charge of £766 million based on the UK corporation tax rate of 19%. The higher tax charge reflects the UK banking surcharge, and other non-deductible items such as UK bank levy. These factors have been partially offset by the impact on the group’s UK net deferred tax asset of the increased tax rate from 1 April 2023, enacted on 10 June 2021. Further details can be found in Note 7 to the consolidated financial statements. |
NatWest Group plc – Annual Report on Form 20-F | 12 |
Financial review continued
Summary consolidated balance sheet as at 31 December 2021
2021 | 2020 | Variance |
| ||||||
| £m |
| £m |
| £m | ||||
Assets |
|
|
|
|
|
|
|
| |
Cash and balances at central banks |
| 177,757 |
| 124,489 |
| 53,268 |
| 43 | % |
Trading assets |
| 59,158 |
| 68,990 |
| (9,832) |
| (14) | % |
Derivatives |
| 106,139 |
| 166,523 |
| (60,384) |
| (36) | % |
Settlement balances |
| 2,141 |
| 2,297 |
| (156) |
| (7) | % |
Loans to banks - amortised cost |
| 7,682 |
| 6,955 |
| 727 |
| 10 | % |
Loans to customers - amortised cost |
| 358,990 |
| 360,544 |
| (1,554) |
| (0) | % |
Other financial assets |
| 46,145 |
| 55,148 |
| (9,003) |
| (16) | % |
Other assets (including intangible assets) |
| 14,965 |
| 14,545 |
| 420 |
| 3 | % |
Assets of disposal groups |
| 9,015 |
| — |
| 9,015 |
| nm | |
Total assets |
| 781,992 |
| 799,491 |
| (17,499) |
| (2) | % |
Liabilities |
|
|
|
|
|
|
|
| |
Bank deposits |
| 26,279 |
| 20,606 |
| 5,673 |
| 28 | % |
Customer deposits |
| 479,810 |
| 431,739 |
| 48,071 |
| 11 | % |
Settlement balances |
| 2,068 |
| 5,545 |
| (3,477) |
| (63) | % |
Trading liabilities |
| 64,598 |
| 72,256 |
| (7,658) |
| (11) | % |
Derivatives |
| 100,835 |
| 160,705 |
| (59,870) |
| (37) | % |
Other financial liabilities |
| 49,326 |
| 45,811 |
| 3,515 |
| 8 | % |
Subordinated liabilities |
| 8,429 |
| 9,962 |
| (1,533) |
| (15) | % |
Notes in circulation |
| 3,047 |
| 2,655 |
| 392 |
| 15 | % |
Other liabilities |
| 5,797 |
| 6,388 |
| (591) |
| (9) | % |
Total liabilities |
| 740,189 |
| 755,667 |
| (15,478) |
| (2) | % |
Total equity |
| 41,803 |
| 43,824 |
| (2,021) |
| (5) | % |
Total liabilities and equity |
| 781,992 |
| 799,491 |
| (17,499) |
| (2) | % |
Tangible net asset value per ordinary share (pence) (1) |
| 272p |
| 261p |
| 11p |
| 4 | % |
| (1) | Tangible net asset value per ordinary share represents tangible equity divided by the number of ordinary shares. |
- | Total assets of £782.0 billion as at 31 December 2021 decreased by £17.5 billion, 2%, compared with 31 December 2020. This was primarily driven by decreases in derivatives, trading assets and other financial assets partially offset by cash and balances at central banks. |
- | Cash and balances at central banks increased by £53.3 billion, 43%, to £177.8 billion mainly as a result of a net customer funding surplus driven by significant deposit inflows flow in addition to £15.6 billion liquidity and debt portfolio optimisation activity. |
- | Trading assets decreased by £9.8 billion, 14%, to £59.2 billion mainly driven by reductions in cash collateral and debt securities. Trading liabilities decreased by £7.7 billion, 11%, to £64.6 billion due to reduction in cash collateral. |
- | Derivative assets decreased £60.4 billion, 36%, to £106.1 billion, and liabilities, decreased by £59.9 billion, 37%, to £100.8 billion. These movements were driven by a decrease in underlying volumes due to matured trades and buyouts exceeding new trades and lower mark-to-market valuations due to higher interest rates for major currencies in the year. |
- | Loans to customers - amortised cost, decreased by £1.6 billion, to £359.0 billion including £11.3 billion decrease in Ulster Bank ROI predominantly due to a reclassification of banking portfolio loans to assets of disposal groups, partially offset by an £9.9 billion increase in Retail Banking driven by strong gross mortgage lending. |
- | Other financial assets, which includes debt securities, equity shares and other loans, decreased by £9.0 billion, 16%, to £46.1 billion, primarily due to reductions in debt securities. |
- | Customer deposits increased by £48 billion, 11%, to £479.8 billion including increases of £17.1 billion in Retail Banking, £10 billion in Commercial Banking and £7.0 billion in Private Banking as customers retained liquidity in light of the COVID-19 economic uncertainty. Treasury reflected a £9.4 billion increase in customer facing repos due to prevailing market conditions. |
- | Other financial liabilities, which includes customer deposits at fair value through profit and loss and debt securities in issue, increased by £3.5 billion, 8%, to £49.3 billion. |
- | Subordinated liabilities have decreased by £1.5 billion, 15%, to £8.4 billion due to redemptions partially offset by new issuances. |
- | Other liabilities decreased by £0.6 billion, 9%, to £5.8 billion mainly due to lower lease liabilities in the year. |
- | Owners’ equity decreased by £2.0 billion, 5%, to £41.8 billion, driven by share repurchase, ordinary and paid-in-equity dividends paid, partially offset by the attributable profit for the year. |
NatWest Group plc – Annual Report on Form 20-F | 13 |
Financial review continued
Segmental summary income statements
Continuing operations | Go-forward group |
| |||||||||||||||||
Total |
| ||||||||||||||||||
Central | excluding | Total |
| ||||||||||||||||
Retail | Private | Commercial | RBS | NatWest | items | Ulster | Ulster | NatWest |
| ||||||||||
Banking | Banking | Banking | International | Markets | other | Bank RoI | Bank RoI | Group |
| ||||||||||
2021 |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
|
Net interest income |
| 4,074 |
| 480 |
| 2,582 |
| 383 |
| 9 |
| (14) |
| 7,514 |
| 100 |
| 7,614 | |
Non-interest income |
| 371 |
| 336 |
| 1,293 |
| 165 |
| 406 |
| 199 |
| 2,770 |
| 128 |
| 2,898 | |
Total income |
| 4,445 |
| 816 |
| 3,875 |
| 548 |
| 415 |
| 185 |
| 10,284 |
| 228 |
| 10,512 | |
Other expenses |
| (2,250) |
| (504) |
| (2,153) |
| (228) |
| (907) |
| (42) |
| (6,084) |
| (421) |
| (6,505) | |
Strategic costs |
| (187) |
| (19) |
| (93) |
| (11) |
| (254) |
| (201) |
| (765) |
| (22) |
| (787) | |
Litigation and conduct costs |
| (76) |
| 3 |
| (108) |
| (3) |
| — |
| (243) |
| (427) |
| (39) |
| (466) | |
Operating expenses |
| (2,513) |
| (520) |
| (2,354) |
| (242) |
| (1,161) |
| (486) |
| (7,276) |
| (482) |
| (7,758) | |
Impairment releases |
| 36 |
| 54 |
| 1,073 |
| 52 |
| 35 |
| — |
| 1,250 |
| 28 |
| 1,278 | |
Operating profit/(loss) |
| 1,968 |
| 350 |
| 2,594 |
| 358 |
| (711) |
| (301) |
| 4,258 |
| (226) |
| 4,032 | |
Total income excluding notable items |
| 4,445 |
| 762 |
| 3,865 |
| 548 |
| 473 |
| (19) |
| 10,074 |
| 193 |
| 10,267 | |
Return on tangible equity (1) |
| na |
| na |
| na |
| na |
| na |
| na |
| 10.0 | % | na |
| 9.4 | % |
Return on equity (2) |
| 26.1 | % | 17.0 | % | 22.0 | % | 22.5 | % | (13.1) | % | nm |
| nm |
| nm |
| na | |
Cost:income ratio (1) |
| 56.5 | % | 63.7 | % | 59.3 | % | 44.2 | % | 279.8 | % | nm |
| 70.3 | % | nm |
| 73.4 | % |
Customer deposits (£bn) |
| 188.9 |
| 39.3 |
| 177.7 |
| 37.5 |
| 2.3 |
| 15.7 |
| 461.4 |
| 18.4 |
| 479.8 | |
Average interest earning assets (£bn) |
| 196.0 |
| 27.2 |
| 168.1 |
| 37.8 |
| 32.7 |
| nm |
| nm |
| 15.9 |
| 524.9 | |
Net interest margin (1) |
| 2.08 | % | 1.76 | % | 1.54 | % | 1.01 | % | nm |
| nm |
| nm |
| nm |
| nm | |
Third party customer asset rate (3) |
| 2.66 | % | 2.36 | % | 2.71 | % | 2.26 | % | nm |
| nm |
| nm |
| nm |
| nm | |
Third party customer funding rate (3) |
| (0.06) | % | — |
| (0.01) | % | 0.08 | % | nm |
| nm |
| nm |
| 0.02 | % | nm | |
2020 (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net interest income |
| 3,868 |
| 489 |
| 2,740 |
| 371 |
| (57) |
| (57) |
| 7,354 |
| 122 |
| 7,476 | |
Non-interest income |
| 313 |
| 274 |
| 1,218 |
| 126 |
| 1,180 |
| (179) |
| 2,932 |
| 100 |
| 3,032 | |
Total income |
| 4,181 |
| 763 |
| 3,958 |
| 497 |
| 1,123 |
| (236) |
| 10,286 |
| 222 |
| 10,508 | |
Other expenses |
| (2,295) |
| (466) |
| (2,261) |
| (244) |
| (1,038) |
| (19) |
| (6,323) |
| (409) |
| (6,732) | |
Strategic costs |
| (226) |
| (15) |
| (179) |
| (49) |
| (267) |
| (252) |
| (988) |
| (25) |
| (1,013) | |
Litigation and conduct costs |
| (19) |
| 26 |
| 10 |
| 2 |
| (5) |
| (120) |
| (106) |
| (7) |
| (113) | |
Operating expenses |
| (2,540) |
| (455) |
| (2,430) |
| (291) |
| (1,310) |
| (391) |
| (7,417) |
| (441) |
| (7,858) | |
Impairment losses |
| (792) |
| (100) |
| (1,927) |
| (107) |
| (40) |
| (26) |
| (2,992) |
| (139) |
| (3,131) | |
Operating profit/(loss) |
| 849 |
| 208 |
| (399) |
| 99 |
| (227) |
| (653) |
| (123) |
| (358) |
| (481) | |
Total income excluding notable items |
| 4,231 |
| 763 |
| 3,995 |
| 497 |
| 1,230 |
| (46) |
| 10,670 |
| 222 |
| 10,892 | |
Return on tangible equity (1) |
| na |
| na |
| na |
| na |
| na |
| na |
| (1.3) | % | na |
| (2.4) | % |
Return on equity (2) |
| 10.2 | % | 10.3 | % | (4.5) | % | 6.1 | % | (3.8) | % | nm |
| nm |
| nm |
| na | |
Cost:income ratio (1) |
| 60.8 | % | 59.6 | % | 59.9 | % | 58.6 | % | 116.7 | % | nm |
| 71.7 | % | nm |
| 74.4 | % |
Customer deposits (£bn) |
| 171.8 |
| 32.4 |
| 167.7 |
| 31.3 |
| 2.6 |
| 6.3 |
| 412.1 |
| 19.6 |
| 431.7 | |
Average interest earning assets (£bn) |
| 181.4 |
| 23.8 |
| 163.1 |
| 31.7 |
| 37.9 |
| nm |
| nm |
| 16.6 |
| 483.7 | |
Net interest margin (1) |
| 2.13 | % | 2.05 | % | 1.68 | % | 1.17 | % | nm |
| nm |
| nm |
| nm |
| nm | |
Third party customer asset rate (3) |
| 2.89 | % | 2.53 | % | 2.86 | % | 2.51 | % | nm |
| nm |
| nm |
| nm |
| nm | |
Third party customer funding rate (3) |
| (0.19) | % | (0.11) | % | (0.08) | % | (0.01) | % | nm |
| nm |
| nm |
| (0.04) | % | nm | |
nm = not meaningful
| (1) | Refer to the Non-IFRS financial measures section for details of the basis of preparation. |
| (2) | NatWest Group’s CET1 target is approximately 14% but for the purposes of computing segmental return on equity (ROE), to better reflect the differential drivers of capital usage, segmental operating profit adjusted for preference share dividends and tax is divided by average notional equity allocated at different rates of 14.5% (Retail Banking), 15.5% (Ulster Bank RoI), 11.5% (Commercial Banking), 12.5% (Private Banking), 16% (RBS International) and 15% for all other segments, of the period average of segmental risk-weighted assets equivalents (RWAe) incorporating the effect of capital deductions. NatWest Group return on equity is calculated using profit attributable to ordinary shareholders. Refer to the Non-IFRS financial measures section for details of the basis of preparation. |
| (3) | Third party customer asset rate is calculated as annualised interest receivable on third-party loans to customers as a percentage of third-party loans to customers. This excludes assets of disposal groups, intragroup items, loans to banks and liquid asset portfolios. Third party customer funding rate reflects interest payable or receivable on third-party customer deposits, including interest bearing and non-interest bearing customer deposits. Intragroup items, bank deposits, debt securities in issue and subordinated liabilities are excluded from the customer funding rate calculation. Net interest margin is calculated as net interest income as a percentage of the average interest-earning assets, excluding assets of disposal groups and without these remaining exclusions. |
| (4) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. |
NatWest Group plc – Annual Report on Form 20-F | 14 |
Financial review continued
Segment performance
Retail Banking
2021 | 2020 | Variance | ||||||
Income statement |
| £m |
| £m |
| £m |
| % |
Net interest income |
| 4,074 |
| 3,868 |
| 206 |
| 5 |
Non-interest income |
| 371 |
| 313 |
| 58 |
| 19 |
Total income |
| 4,445 |
| 4,181 |
| 264 |
| 6 |
Other expenses |
| (2,250) |
| (2,295) |
| 45 |
| (2) |
Strategic costs |
| (187) |
| (226) |
| 39 |
| (17) |
Litigation and conduct costs |
| (76) |
| (19) |
| (57) |
| 300 |
Operating expenses |
| (2,513) |
| (2,540) |
| 27 |
| (1) |
Impairment releases/(losses) |
| 36 |
| (792) |
| 828 |
| (105) |
Operating profit |
| 1,968 |
| 849 |
| 1,119 |
| 132 |
Performance ratios |
|
|
|
|
|
|
|
|
Return on equity (1) |
| 26.1 | % | 10.2 | % | 15.9 | % |
|
Net interest margin |
| 2.08 | % | 2.13 | % | (0.05) | % |
|
Cost:income ratio |
| 56.5 | % | 60.8 | % | (4.3) | % |
|
Loan impairment rate |
| (2bps) |
| 45bps |
| (47bps) |
|
|
| (1) | Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 14.5% of the period average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes), assuming a 28% tax rate. |
2021 | 2020 | Variance | ||||||
Capital and balance sheet |
| £bn |
| £bn |
| £m |
| % |
Loans to customers (amortised cost) |
|
|
|
|
|
|
|
|
- personal advances |
| 7.1 |
| 7.3 |
| (0.2) |
| (3) |
- mortgages |
| 172.8 |
| 163.0 |
| 9.8 |
| 6 |
- cards |
| 3.8 |
| 3.8 |
| — |
| — |
Total loans to customers (amortised cost) |
| 183.7 |
| 174.1 |
| 9.6 |
| 6 |
Loan impairment provisions |
| (1.5) |
| (1.8) |
| 0.3 |
| (17) |
Net loans to customers (amortised cost) |
| 182.2 |
| 172.3 |
| 9.9 |
| 6 |
Total assets |
| 210.0 |
| 197.6 |
| 12.4 |
| 6 |
Customer deposits |
| 188.9 |
| 171.8 |
| 17.1 |
| 10 |
Risk-weighted assets |
| 36.7 |
| 36.7 |
| — |
| — |
2021 compared with 2020
- | In 2021, Retail Banking continued to grow net lending with an measured approach to risk, delivering a return on equity of 26.1% and operating profit of £1,968 million. Lending growth was supported by a strong performance in mortgages and a return to unsecured lending growth in the second half of 2021. |
- | Retail Banking completed £1.1 billion of Climate and Sustainable Funding and Financing in 2021, which will contribute towards the new NatWest Group target of £100 billion of Climate and Sustainable Funding and Financing between 1 July 2021 and the end of 2025. |
- | Total income was £264 million, or 6.3%, higher than 2020 reflecting mortgage balance and margin improvement, higher transactional-related fee income and non-repeat of loss on acquisition, partially offset by the impact of the lower interest rate environment on deposit returns, lower average unsecured balances and the annualised impact of regulatory changes on fee income. |
- | Net interest margin was 5 basis points lower than 2020 reflecting lower deposit returns and lower average unsecured balances, partly offset by higher mortgage margins. |
- | Operating expenses decreased by £27 million, or 1.1%, compared with 2020. Other expenses decreased by £45 million, or 2.0%, compared with 2020 primarily reflecting an 8.8% reduction in headcount as a result of continued customer digital adoption, automation and improvement of end-to-end customer journeys, including digitalising the customer account opening processes, leading to an increase in straight through processing within journeys from 45% in December 2020 to 70% in December 2021. |
- | Strategic costs of £117 million in Q4 2021 include an £85 million impairment of goodwill, reflecting a legacy business in accelerated run down within Retail Banking. |
- | An impairment release of £36 million primarily reflects ECL provision releases in the non-defaulted portfolio. |
- | Net loans to customers increased by £9.9 billion, or 5.7%, compared with 2020 as a result of strong gross new mortgage lending and improved retention. Gross new mortgage lending was £36.0 billion with flow share of 11.5%, supporting mortgage balance growth of £9.8 billion or 6.0%, representing a stock share of 11.0%. Cards were stable however, we have seen improved customer spend and demand in the second half of 2021. Personal advances reduced by £0.2 billion as customers made higher overdraft repayments in H1 2021, reflecting the impact of UK Government restrictions partly offset by growth in H2 2021 as customer demand for personal loans increased as the UK economy recovered. |
- | Customer deposits increased by £17.1 billion, or 10.0%, compared with 2020 as UK Government schemes combined with Covid related restrictions resulted in lower customer spend and increased savings in H1 2021. |
- | RWAs were broadly stable compared with 2020 primarily reflecting lending growth, offset by continued quality improvements. |
NatWest Group plc – Annual Report on Form 20-F | 15 |
Financial review continued
Segment performance continued
Private Banking
2021 | 2020 | Variance | ||||||
Income statement |
| £m |
| £m |
| £m |
| % |
Net interest income |
| 480 |
| 489 |
| (9) |
| (2) |
Non-interest income |
| 336 |
| 274 |
| 62 |
| 23 |
Total income |
| 816 |
| 763 |
| 53 |
| 7 |
Other expenses |
| (504) |
| (466) |
| (38) |
| 8 |
Strategic costs |
| (19) |
| (15) |
| (4) |
| 27 |
Litigation and conduct costs |
| 3 |
| 26 |
| (23) |
| (88) |
Operating expenses |
| (520) |
| (455) |
| (65) |
| 14 |
Impairment releases/(losses) |
| 54 |
| (100) |
| 154 |
| (154) |
Operating profit |
| 350 |
| 208 |
| 142 |
| 68 |
Performance ratios |
|
|
|
|
|
|
|
|
Return on equity (1) |
| 17.0 | % | 10.3 | % | 6.7 | % |
|
Net interest margin |
| 1.76 | % | 2.05 | % | (0.29) | % |
|
Cost:income ratio |
| 63.7 | % | 59.6 | % | 4.1 | % |
|
Loan impairment rate |
| (29bps) |
| 58bps |
| (87bps) |
|
|
| (1) | Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 12.5% of the period average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes), assuming a 28% tax rate. |
2021 | 2020 | Variance | ||||||
Capital and balance sheet |
| £bn |
| £bn |
| £m |
| % |
Loans to customers (amortised cost) |
|
|
|
|
|
|
|
|
- personal |
| 2.3 |
| 2.2 |
| 0.1 |
| 5 |
- mortgages |
| 11.8 |
| 10.7 |
| 1.1 |
| 10 |
- other |
| 4.4 |
| 4.2 |
| 0.2 |
| 5 |
Total loans to customers (amortised cost) |
| 18.5 |
| 17.1 |
| 1.4 |
| 8 |
Loan impairment provisions |
| (0.1) |
| (0.1) |
| — |
| — |
Net loans to customers (amortised cost) |
| 18.4 |
| 17.0 |
| 1.4 |
| 8 |
Total assets |
| 29.9 |
| 26.2 |
| 3.7 |
| 14 |
Assets under management (AUMs) (2) |
| 30.2 |
| 27.0 |
| 3.2 |
| 12 |
Assets under administration (AUAs) (2) |
| 5.4 |
| 5.1 |
| 0.3 |
| 6 |
Assets under management and administration (AUMA) (2) |
| 35.6 |
| 32.1 |
| 3.5 |
| 11 |
Customer deposits |
| 39.3 |
| 32.4 |
| 6.9 |
| 21 |
Loan:deposit ratio |
| 47 | % | 52 | % | (5) | % | (10) |
Risk-weighted assets |
| 11.3 |
| 10.9 |
| 0.4 |
| 4 |
| (2) | The definition of AUMs/AUAs has been updated to provide clarity on assets where the investment management is undertaken by Private Banking. AUMs now comprises assets where the investment management is undertaken by Private Banking irrespective of the franchise the customer belongs to. AUAs now comprises third party assets held on an execution-only basis in custody. Total AUMA remain as before. |
2021 compared with 2020
- | In 2021, Private Banking delivered strong growth across AUMA, lending and deposits which has supported a 2021 return on equity of 17.0% and operating profit of £350 million. Digital net new money across NatWest Invest, Royal Bank Invest and Coutts Invest of £0.8 billion in 2021 is more than double 2020. Approximately 2,114 new customers were onboarded into Private Banking, an increase of around 29% compared to 2020. |
- | NatWest Group completed the sale of Adam Company’s investment management business on 1 October 2021 for a total consideration of £54 million, which has been recorded as a notable item in the Q4 2021 results. |
- | Total income was £53 million, or 6.9%, higher than 2020 reflecting a £54 million consideration from the sale of the Adam Company investment management business in Q4 2021 and strong balance growth partially offset by lower deposit returns in a lower interest rate environment. |
- | Net interest margin decreased by 29 basis points reflecting lower deposit returns and higher liquidity portfolio costs. |
- | Operating expenses were £65 million, or 14.3%, higher compared with 2020. Other expenses were £38 million, or 7.9%, higher than 2020 principally due to investment in digital infrastructure and an increase in headcount related to the enhancement of AUMA growth propositions. |
- | A net impairment release of £54 million in 2021 mainly reflects ECL provision releases in non-default portfolios. |
- | Net loans to customers increased by £1.4 billion, or 8.2%, compared with 2020 driven by continued strong mortgage lending growth of £1.1 billion or 10.3%, including gross new lending of £3.3 billion. RWAs increased by £0.4 billion, or 3.7%. |
- | Customer deposits increased by £6.9 billion, or 21.3%, compared with 2020 reflecting strong personal and commercial inflows as UK Government restrictions resulted in clients continuing to build and retain liquidity. |
- | AUMAs increased by £3.5 billion, or 10.9%, driven by an increase in AUM net new money (NNM) of £3.0 billion and AUM positive investment performance of £2.1 billion, partially offset by the £1.8 billion impact of the sale of Adam Company’s investment management business and £0.2 billion EEA resident client outflows following the UK’s exit from the EU. AUM NNM of £3.0 billion represents 9.3% of opening AUMAs, which is double NNM in 2020. |
NatWest Group plc – Annual Report on Form 20-F | 16 |
Financial review continued
Segment performance continued
Commercial Banking
2021 | 2020 | Variance | ||||||
Income statement |
| £m |
| £m |
| £m |
| % |
Net interest income |
| 2,582 |
| 2,740 |
| (158) |
| (6) |
Non-interest income |
| 1,293 |
| 1,218 |
| 75 |
| 6 |
Total income |
| 3,875 |
| 3,958 |
| (83) |
| (2) |
Other expenses (excluding operating lease depreciation) |
| (2,013) |
| (2,116) |
| 103 |
| (5) |
Strategic costs |
| (93) |
| (179) |
| 86 |
| (48) |
Litigation and conduct costs |
| (108) |
| 10 |
| (118) |
| (1,180) |
Operating expenses |
| (2,354) |
| (2,430) |
| 76 |
| (3) |
Impairment releases/(losses) |
| 1,073 |
| (1,927) |
| 3,000 |
| (156) |
Operating profit/(loss) |
| 2,594 |
| (399) |
| 2,993 |
| (750) |
Performance ratios |
|
|
|
|
|
|
|
|
Return on equity (1) |
| 22.0 | % | (4.5) | % | 26.5 | % |
|
Net interest margin |
| 1.54 | % | 1.68 | % | (0.14) | % |
|
Cost:income ratio |
| 59.3 | % | 59.9 | % | (0.6) | % |
|
Loan impairment rate |
| (104bps) |
| 173bps |
| (277bps) |
|
|
| (1) | Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 11.5% of the period average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes), assuming a 28% tax rate. |
2021 | 2020 | Variance | ||||||
Capital and balance sheet |
| £bn |
| £bn |
| £m |
| % |
Loans to customers (amortised cost) |
|
|
|
|
|
|
|
|
- business banking |
| 14.3 |
| 13.5 |
| 0.8 |
| 6 |
- SME mid corporates |
| 34.6 |
| 32.4 |
| 2.2 |
| 7 |
- specialised business |
| 15.5 |
| 14.8 |
| 0.7 |
| 5 |
- large corporates institutions (1) |
| 18.8 |
| 21.4 |
| (2.6) |
| (12) |
- real estate (2) |
| 18.6 |
| 21.5 |
| (2.9) |
| (13) |
- commercial - EU divestment (3) |
| — |
| 5.9 |
| (5.9) |
| (100) |
- other (4) |
| 0.9 |
| 1.6 |
| (0.7) |
| (44) |
Total loans to customers (amortised cost) |
| 102.7 |
| 111.1 |
| (8.4) |
| (8) |
Loan impairment provisions |
| (1.5) |
| (2.9) |
| 1.4 |
| (48) |
Net loans to customers (amortised cost) |
| 101.2 |
| 108.2 |
| (7.0) |
| (6) |
Total assets |
| 184.6 |
| 187.4 |
| (2.8) |
| (1) |
Customer deposits |
| 177.7 |
| 167.7 |
| 10.0 |
| 6 |
Loan:deposit ratio |
| 57 | % | 65 | % | (8) | % | (12) |
Risk-weighted assets |
| 66.4 |
| 75.1 |
| (8.7) |
| (12) |
| (1) | Segment reporting for income, impairments and loans to customers for large corporates institutions (LCI) includes the Western European business segment. |
| (2) | Real estate includes commercial real estate and housing associations. |
| (3) | EU Divestment balances from Q2 2021 integrated within business banking (Q3 2020 - £0.9 billion, Q4 2020 - £1.1 billion) and SME mid corporates (Q3 2020 - £5.0 billion, Q4 2020 - £4.8 billion), as the Incentivised Switching Scheme (ISS) closed at the end of June 2021. |
| (4) | Other includes shipping and project finance. |
2021 compared with 2020
- | Commercial Banking delivered a resilient performance with a return on equity of 22.0% and operating profit of £2,594 million including a £1,073 million impairment release as the UK economy continued to recover. Returns have improved through active capital management, pricing discipline, and a targeted sector strategy linked to our purpose. |
- | Growth in Tyl, our innovative merchant acquiring platform saw over £1.5 billion of transactions in 2021, three times 2020 levels, as transaction activity recovered and customers favoured digital payment solutions and reduced their reliance on cash and branch. |
- | Commercial Banking completed £5.2 billion of Climate and Sustainable Funding and Financing in 2021, including £2.7 billion in H2 2021 which will contribute towards the new NatWest Group target of £100 billion between 1 July 2021 and the end of 2025. |
- | Total income was £83 million, or 2.1%, lower than 2020 due to reduced deposit returns in a low interest rate environment and lower lending volumes, partially offset by a recovery in transactional banking fee income in H2 2021 driven by the UK economy. |
- | Net interest margin decreased by 14 basis points in 2021 reflecting lower deposit returns. |
- | Operating expenses were £76 million, or 3.1%, lower compared with 2020. Other expenses, excluding OLD, decreased by £103 million, or 4.8%, compared with 2020 reflecting cost efficiencies and simplifying our operating model enabling better service to our customers including building momentum in our digital service, whilst reducing our headcount by 9.8%. |
- | Impairment release of £1,073 million primarily reflects ECL provision releases related to the improved economic outlook with Stage 3 defaults remaining at low levels. |
- | Net loans to customers decreased by £7.0 billion, or 6.4%, compared with 2020 primarily reflecting and targeted sector reductions including real estate, retail and leisure and active capital management of £1.0 billion. Customer liquidity resulted in net revolving credit facility (RCF) repayments of £1.7 billion driven by large corporates institutions and real estate as well as UK Government financial support scheme repayments of £1.3 billion. RCF utilisation was approximately 19% of committed facilities in 2021, significantly below pre-COVID-19 levels of approximately 27%. These items were partially offset by £1.4 billion lower loan provisions and growth in specialist businesses of £0.7 billion. |
- | Customer deposits increased by £10.0 billion, or 6.0%, compared with 2020 reflecting customer behaviour to build and retain liquidity. |
- | RWAs decreased by £8.7 billion, or 11.6%, compared with 2020 mainly reflecting business movements including targeted sector reductions in real estate and retail, improvement in risk parameters and active capital management of £1.5 billion. |
NatWest Group plc – Annual Report on Form 20-F | 17 |
Financial review continued
Segment performance continued
RBS International
2021 |
| 2020 |
| Variance |
| ||||
Income statement |
| £m |
| £m |
| £m |
| % | |
Net interest income |
| 383 |
| 371 |
| 12 |
| 3 | |
Non-interest income |
| 165 |
| 126 |
| 39 |
| 31 | |
Total income |
| 548 |
| 497 |
| 51 |
| 10 | |
Other expenses |
| (228) |
| (244) |
| 16 |
| (7) | |
Strategic costs |
| (11) |
| (49) |
| 38 |
| (78) | |
Litigation and conduct costs |
| (3) |
| 2 |
| (5) |
| (250) | |
Operating expenses |
| (242) |
| (291) |
| 49 |
| (17) | |
Impairment releases/(losses) |
| 52 |
| (107) |
| 159 |
| (149) | |
Operating profit |
| 358 |
| 99 |
| 259 |
| 262 | |
Performance ratios |
|
|
|
|
|
|
|
| |
Return on equity (1) |
| 22.5 | % | 6.1 | % | 16.4 | % |
| |
Net interest margin |
| 1.01 | % | 1.17 | % | (0.16) | % |
| |
Cost:income ratio |
| 44.2 | % | 58.6 | % | (14.4) | % |
| |
Loan impairment rate |
| (33bps) |
| 80bps |
| (113bps) |
|
| |
| (1) | Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 16% of the period average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes), assuming a 17.5% (14% prior to Q1 2021) tax rate. |
2021 |
| 2020 |
| Variance |
| ||||
Capital and balance sheet |
| £bn |
| £bn |
| £m |
| % | |
Loans to customers (amortised cost) |
|
|
|
|
|
|
|
| |
- corporate |
| 12.7 |
| 10.4 |
| 2.3 |
| 22 | |
- mortgages |
| 2.4 |
| 2.5 |
| (0.1) |
| (4) | |
- other |
| 0.5 |
| 0.5 |
| — |
| — | |
Total loans to customers (amortised cost) |
| 15.6 |
| 13.4 |
| 2.2 |
| 16 | |
Loan impairment provisions |
| (0.1) |
| (0.1) |
| — |
| — | |
Net loans to customers (amortised cost) |
| 15.5 |
| 13.3 |
| 2.2 |
| 17 | |
Total assets |
| 40.6 |
| 34.0 |
| 6.6 |
| 19 | |
Customer deposits |
| 37.5 |
| 31.3 |
| 6.2 |
| 20 | |
Risk-weighted assets |
| 7.5 |
| 7.5 |
| — |
| — | |
Depositary assets (1) |
| 479.4 |
| 427.5 |
| 51.9 |
| 12 | |
| (1) | Assets held by RBSI as an independent trustee and in a depositary service capacity. |
2021 compared with 2020
- | During 2021 RBS International (RBSI) delivered £358 million of operating profit with return on equity of 22.5% through strong lending and deposit volumes, an impairment release and continued growth in our depositary offering. This was achieved while continuing investment in our digital offering to customers including new payment features on the mobile app for both personal and business customers and the extension of our video banking proposition delivered in 2021. |
- | RBSI completed £1.5 billion of Climate and Sustainable Funding and Financing in 2021, including £0.9 billion in H2 2021 which will contribute towards the new NatWest Group target of £100 billion between 1 July 2021 and the end of 2025. |
- | Total income increased by £51 million, or 10.3%, compared with 2020 as a result of higher average lending balances in Institutional Banking, including higher non-utilisation fees, and higher depositary fee income. |
- | Net interest margin decreased by 16 basis points in 2021 reflecting a higher proportion of lower yielding assets with central banks due to the higher volume of short term customer deposits in the year. |
- | Operating expenses were £49 million, or 16.8% lower compared with 2020. Other expenses decreased by £16 million, or 6.6%, compared with 2020 primarily reflecting the reduction in the bank levy charge for 2021. |
- | An impairment release of £52 million in 2021 largely reflects releases across Stage 1 and 2 within the wholesale sector. |
- | Net loans to customers increased by £2.2 billion, or 16.5%, compared with 2020 as a result of higher Institutional Banking sector volumes. |
- | Customer deposits increased by £6.2 billion, or 19.8%, compared with 2020 as a result of higher call balances in the Institutional Banking sector throughout the year. |
- | Depositary assets were £51.9 billion, or 12.1%, higher than 2020 reflecting strong performance in the funds sector primarily in the UK. |
- | RWAs of £7.5 billion are broadly stable compared with 2020 as a result of lending volume growth primarily in the Institutional Banking sector, offset by model updates in the period. |
NatWest Group plc – Annual Report on Form 20-F | 18 |
Financial review continued
Segment performance continued
NatWest Markets(1)
2021 |
| 2020 |
| Variance |
| ||||
Income statement |
| £m |
| £m |
| £m |
| % | |
Net interest income |
| 9 |
| (57) |
| 66 |
| (116) | |
Non-interest income |
| 406 |
| 1,180 |
| (774) |
| (66) | |
Total income |
| 415 |
| 1,123 |
| (708) |
| (63) | |
Other expenses |
| (907) |
| (1,038) |
| 131 |
| (13) | |
Strategic costs |
| (254) |
| (267) |
| 13 |
| (5) | |
Litigation and conduct costs |
| — |
| (5) |
| 5 |
| (100) | |
Operating expenses |
| (1,161) |
| (1,310) |
| 149 |
| (11) | |
Impairment releases/(losses) |
| 35 |
| (40) |
| 75 |
| (188) | |
Operating loss |
| (711) |
| (227) |
| (484) |
| 213 | |
Analysis of income by product (2) |
|
|
|
|
|
|
|
| |
Fixed income |
| (64) |
| 518 |
| (582) |
| (112) | |
Currencies |
| 427 |
| 583 |
| (156) |
| (27) | |
Capital Markets |
| 336 |
| 384 |
| (48) |
| (13) | |
Capital Management Unit other |
| (29) |
| (62) |
| 33 |
| (53) | |
Income before revenue share paid, asset disposals and OCA |
| 670 |
| 1,423 |
| (753) |
| (53) | |
Revenue share with other NatWest Group segments |
| (197) |
| (193) |
| (4) |
| 2 | |
Income excluding asset disposals and OCA |
| 473 |
| 1,230 |
| (757) |
| (62) | |
Asset disposals/strategic risk reduction (3) |
| (64) |
| (83) |
| 19 |
| (23) | |
Own credit adjustments (OCA) |
| 6 |
| (24) |
| 30 |
| (125) | |
Total income |
| 415 |
| 1,123 |
| (708) |
| (63) | |
Performance ratios |
|
|
|
|
|
|
|
| |
Return on equity (4) |
| (13.1) | % | (3.8) | % | (9.3) | % |
| |
Cost:income ratio |
| 279.8 | % | 116.7 | % | 163.1 | % |
| |
2021 |
| 2020 |
| Variance |
| ||||
Capital and balance sheet |
| £bn |
| £bn |
| £bn |
| % | |
Loans to customers (amortised cost) |
| 7.5 |
| 8.4 |
| (0.9) |
| (11) | |
Total assets |
| 200.7 |
| 270.1 |
| (69.4) |
| (26) | |
Funded assets |
| 96.1 |
| 105.9 |
| (9.8) |
| (9) | |
Risk-weighted assets |
| 24.2 |
| 26.9 |
| (2.7) |
| (10) | |
| (1) | The NatWest Markets operating segment is not the same as the NatWest Markets Plc legal entity (NWM Plc) or group (NWM or NWM Group) because the NatWest Markets segment excludes the Central items other segment. |
| (2) | Product performance includes gross income earned on a group-wide basis, including amounts contributed to other segments. |
| (3) | Asset disposals/strategic risk reduction relates to the cost of exiting positions, which includes changes in carrying value to align to the expected exit valuation, and the impact of risk reduction transactions entered into, in respect of the strategic announcement on 14 February 2020. |
| (4) | Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 15% of the period average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAe), assuming a 28% tax rate. |
2021 compared with 2020
- | NatWest Markets has supported its customers’ evolving needs with innovative solutions and continued to deliver a more integrated customer proposition across NatWest Group. NatWest Markets has made good progress on building a refocused, sustainable business from which it can grow. NatWest Markets incurred an operating loss in 2021 but has largely completed its RWA reduction and continued to reduce operating expenses, and in Q4 2021, introduced changes to Rates which will improve the strategic alignment with the rest of the business and drive income growth. NatWest Markets performance at the beginning of 2022 has been in line with expectations. |
- | NatWest Markets completed £9.7 billion of Climate and Sustainable Funding and Financing in 2021, including £3.3 billion in H2 2021 which will contribute towards the new NatWest Group target of £100 billion between 1 July 2021 and the end of 2025. |
- | Total income was £708 million, or 63.0% lower compared with 2020. Income excluding asset disposals/strategic risk reduction and OCA was £757 million, or 61.5% lower than 2020. The performance of Fixed Income was weak in 2021 impacted by subdued levels of customer activity and the reshaping of the business, in contrast to the prior year which benefitted from exceptional levels of market activity generated by the initial spread of the COVID-19 virus. Both Currencies and Capital Markets income were lower than in 2020 but performed broadly in line with expectations. |
- | Operating expenses were £149 million, or 11.4%, lower compared with 2020. Other expenses decreased by £131 million, or 12.6%, compared with 2020 reflecting continued reductions in line with the strategic announcement in February 2020. |
- | A net impairment release of £35 million in 2021 reflects releases against a number of cases throughout the year. |
- | RWAs decreased by £2.7 billion, or 10.0%, compared with 2020 reflecting lower levels of market risk and counterparty credit risk, including the impact of capital optimisation actions taken throughout the year. |
NatWest Group plc – Annual Report on Form 20-F | 19 |
Financial review continued
Segment performance continued
Ulster Bank RoI
Continuing operations
2021 | 2020 (1) | Variance |
| ||||||
Income statement |
| £m |
| £m |
| £m |
| % | |
Net interest income |
| 100 |
| 122 |
| (22) |
| (18) | |
Non-interest income |
| 128 |
| 100 |
| 28 |
| 28 | |
Total income |
| 228 |
| 222 |
| 6 |
| 3 | |
Other expenses |
| (421) |
| (409) |
| (12) |
| 3 | |
Strategic costs |
| (22) |
| (25) |
| 3 |
| (12) | |
Litigation and conduct costs |
| (39) |
| (7) |
| (32) |
| 457 | |
Operating expenses |
| (482) |
| (441) |
| (41) |
| 9 | |
Impairment releases/(losses) |
| 28 |
| (139) |
| 167 |
| (120) | |
Operating loss |
| (226) |
| (358) |
| 132 |
| (37) | |
Average exchange rate - €/£ |
| 1.163 |
| 1.125 |
|
|
|
| |
| (1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. |
2021 | 2020 | Variance |
| ||||||
Capital and balance sheet |
| £bn |
| £bn |
| £m |
| % | |
Loans to customers (amortised cost) |
|
|
|
|
|
|
|
| |
- mortgages |
| 6.2 |
| 13.7 |
| (7.5) |
| (55) | |
- other lending |
| 1.0 |
| 5.1 |
| (4.1) |
| (80) | |
Total loans to customers (amortised cost) |
| 7.2 |
| 18.8 |
| (11.6) |
| (62) | |
Loan impairment provisions |
| (0.5) |
| (0.8) |
| 0.3 |
| (38) | |
Net loans to customers (amortised cost) |
| 6.7 |
| 18.0 |
| (11.3) |
| (63) | |
Total assets |
| 22.8 |
| 26.6 |
| (3.8) |
| (14) | |
Funded assets |
| 22.8 |
| 26.6 |
| (3.8) |
| (14) | |
Customer deposits |
| 18.4 |
| 19.6 |
| (1.2) |
| (6) | |
Risk-weighted assets |
| 9.1 |
| 11.8 |
| (2.7) |
| (23) | |
Spot exchange rate - €/£ |
| 1.190 |
| 1.113 |
|
|
|
| |
2021 compared with 2020
- | Ulster Bank RoI continues to make progress on its phased withdrawal from the Republic of Ireland. On 17 December 2021 UBIDAC entered a legally binding agreement with Permanent TSB p.l.c. (PTSB) for the proposed sale of approximately €7.6 billion of gross performing loans as at 30 June 2021, comprising performing non-tracker mortgages, performing loans in the micro-SME business, the UBIDAC Asset Finance business, including its digital platform, and 25 Ulster Bank branch locations. Completion of the sale is subject to obtaining competition, regulatory and other approvals, including PTSB’s holding company shareholder approval, and other conditions being satisfied. The transaction is expected to occur in phases between Q4 2022 and Q1 2023 with the majority of loans expected to transfer by Q4 2022. |
- | Progress continues with Allied Irish Banks, p.l.c. (AIB) for the transfer of approximately €4.2 billion, plus up to €2.8 billion of undrawn exposures, of performing commercial lending. A key part of the process is to complete the regulatory approvals and the Competition and Consumer Protection Commission (CCPC) has already carried out an extended preliminary investigation and on 31 December 2021 announced its decision to carry out a Phase 2 investigation into the proposed sale. There is no firm date for the completion of this process. Discussions are ongoing with other counterparties about their potential interest in other parts of the bank. |
- | The values shown above represent the continuing operations of Ulster Bank RoI, including re-presented comparatives for the income statement. The re-presentation is in accordance with IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’. |
- | Total income was £6 million, or 2.7% (€15 million, or 6.0% in euro terms), higher than 2020 reflecting gains arising from the adjustment of the swap hedging portfolio to align the modelled maturity position of deposits and other balances to the withdrawal plan, offset by lower lending levels and fee income as a result of the decision to withdraw from the RoI market. |
- | Operating expenses were £41 million, or 9.3%, ( €59 million, or 11.8%, in euro terms) higher compared with 2020. Other expenses were £12 million, or 2.9% (€25 million, or 5.4% in euro terms), higher than 2020, due to higher VAT costs and regulatory levies, partially offset by a 15% reduction in headcount, lower advertising spend and back office operational costs. |
- | A net impairment release of £28 million (€33 million) in 2021 reflects improvements in the reducing loan portfolios and economic forecasts. |
- | Net loans to customers decreased by £11.3 billion (€12.1 billion) primarily due to the reclassification of £9.0 billion (€10.7 billion) of loans to the disposal group. |
NatWest Group plc – Annual Report on Form 20-F | 20 |
Financial review continued
Segment performance continued
Central items other
2021 | 2020 | Variance |
| ||||||
| £m |
| £m |
| £m |
| % | ||
Central items not allocated |
| (301) |
| (653) |
| 352 |
| (54) | |
Funding and operating costs have been allocated to operating segments based on direct service usage, the requirement for market funding and other appropriate drivers where services span more than one segment. Residual unallocated items relate to volatile corporate items that do not naturally reside within a segment.
2021 compared with 2020
- | Central items not allocated represented a £301 million operating loss in 2021 principally reflecting litigation and conduct charges of £243 million, strategic costs of £201 million and losses on redemption of own debt of £138 million related to the repurchase of legacy instruments, partially offset by a £219 million share of gains under equity accounting for Business Growth Fund, and other Treasury income. 2020 included the day one loss on redemption of own debt of £324 million related to the repurchase of legacy instruments, property-related strategic costs and litigation and conduct charges. |
NatWest Group plc – Annual Report on Form 20-F | 21 |
Financial review continued
Summary financial statements
NatWest Group’s financial statements are prepared in accordance with IFRS. Selected data under IFRS for each of the last three years is presented below.
| 2021 |
| 2020 (1) |
| 2019 (1) | |
Summary consolidated income statement | £m | £m | £m | |||
Net interest income |
| 7,614 |
| 7,476 |
| 7,799 |
Non-interest income |
| 2,898 |
| 3,032 |
| 6,188 |
Total income |
| 10,512 |
| 10,508 |
| 13,987 |
Operating expenses |
| (7,758) |
| (7,858) |
| (9,280) |
Profit before impairment losses |
| 2,754 |
| 2,650 |
| 4,707 |
Impairment releases/(losses) |
| 1,278 |
| (3,131) |
| (724) |
Operating profit/(loss) before tax |
| 4,032 |
| (481) |
| 3,983 |
Tax charge |
| (996) |
| (74) |
| (439) |
Profit/(loss) from continuing operations |
| 3,036 |
| (555) |
| 3,544 |
Profit from discontinued operations, net of tax |
| 276 |
| 121 |
| 256 |
Profit/(loss) for the year |
| 3,312 |
| (434) |
| 3,800 |
Attributable to: |
|
|
|
|
|
|
Ordinary shareholders |
| 2,950 |
| (753) |
| 3,133 |
Preference shareholders |
| 19 |
| 26 |
| 39 |
Paid-in equity holders |
| 299 |
| 355 |
| 367 |
Non-controlling interests |
| 44 |
| (62) |
| 261 |
| 3,312 |
| (434) |
| 3,800 |
| (1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. |
| 2021 |
| 2020 |
| 2019 | |
Summary consolidated balance sheet | £m | £m | £m | |||
Cash and balances at central banks |
| 177,757 |
| 124,489 |
| 80,993 |
Trading assets |
| 59,158 |
| 68,990 |
| 76,745 |
Derivatives |
| 106,139 |
| 166,523 |
| 150,029 |
Settlement balances |
| 2,141 |
| 2,297 |
| 4,387 |
Loans to banks and customers - amortised cost |
| 366,672 |
| 367,499 |
| 334,501 |
Other financial assets |
| 46,145 |
| 55,148 |
| 61,452 |
Other and intangible assets |
| 14,965 |
| 14,545 |
| 14,932 |
Assets of disposal groups |
| 9,015 |
| — |
| — |
Total assets |
| 781,992 |
| 799,491 |
| 723,039 |
Deposits |
| 506,089 |
| 452,345 |
| 389,740 |
Trading liabilities |
| 64,598 |
| 72,256 |
| 73,949 |
Settlement balances, derivatives, other financial liabilities and subordinated liabilities |
| 160,658 |
| 222,023 |
| 206,147 |
Other liabilities |
| 8,844 |
| 9,043 |
| 9,647 |
Owners' equity |
| 41,796 |
| 43,860 |
| 43,547 |
Non-controlling interests |
| 7 |
| (36) |
| 9 |
Total liabilities and equity |
| 781,992 |
| 799,491 |
| 723,039 |
NatWest Group plc – Annual Report on Form 20-F | 22 |
Financial statements
Page | ||
Independent auditor’s report (PCAOB number: | 28 | |
29 | ||
30 | ||
31 | ||
32 | ||
34 | ||
36 | ||
43 | ||
43 | ||
44 | ||
45 | ||
48 | ||
53 | ||
58 | ||
58 | ||
Discontinued operations and assets and liabilities of disposal groups | 62 | |
63 | ||
63 | ||
68 | ||
77 | ||
79 | ||
79 | ||
84 | ||
87 | ||
88 | ||
89 | ||
89 | ||
90 | ||
91 | ||
92 | ||
95 | ||
97 | ||
98 | ||
99 | ||
100 | ||
Analysis of the net investment in business interests and intangible assets | 107 | |
107 | ||
108 | ||
108 | ||
109 | ||
109 | ||
110 | ||
NatWest Group plc – Annual Report on Form 20-F | 23 |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of NatWest Group plc
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of NatWest Group plc (the “Group”) as of 31 December 2021 and 2020, the related consolidated income statements, statements of comprehensive income, and changes in equity and cash flow statements for each of the three years in the period ended 31 December 2021, the related Accounting policies and Notes 1 to 34, and the information identified as audited in the Annual remuneration report in the Directors’ remuneration report and in the Risk and capital management section (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group at 31 December 2021 and 2020 and the results of its operations and its cash flows for each of the three years in the period ended 31 December 2021, in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Group’s internal control over financial reporting as of 31 December 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated 3 March 2022 expressed an unqualified opinion thereon.
Basis for opinion
These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on the Group’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
NatWest Group plc – Annual Report on Form 20-F | 24 |
Report of Independent Registered Public Accounting Firm continued
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the Group Audit Committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate..
Estimate of expected credit loss provisions | |
Description of the matter | At 31 December 2021, the Group reported total gross loans of £369.8 billion and associated £3.8 billion of expected credit losses (‘ECL’). As explained more fully in the Accounting policies, the credit risk section of the Risk and capital management section and Note 14 to the consolidated financial statements, ECL is recognised for financial instruments classified as amortised cost or fair value through other comprehensive income. Performing assets are measured at either (i) 12-month ECL (stage 1) or (ii) for those assets that are considered to have a significant increase in credit risk (‘SICR’), lifetime ECL (stage 2). Defaulted assets (stage 3) are also measured at lifetime ECL. Auditing the ECL estimate was complex due to the judgmental methods used to to estimate the ECL, including: accounting interpretations, modelling assumptions and the selection and use of the data used to build and run modelled estimates of Probability of Default (‘PD’), Loss Given Default (‘LGD’) and Exposure at Default (‘EAD’); how to allocate assets between the stages; multiple probability weighted economic scenarios incorporated in the models; post-model adjustments applied; and the recovery and timing assumptions for individually provided stage 3 ECLs. The ongoing impact of COVID-19 led to increased judgments applied in these areas |
How we addressed the matter in our audit | We evaluated the design and tested the operating effectiveness of controls over the processes relevant to ECL, including the judgements and estimates noted above. The controls we tested included, amongst others, controls over the monitoring of the criteria used to allocate assets into stages, model governance, economic forecasting, credit monitoring, individual provisions and the governance over the review of the overall ECL, including the application of model adjustments. To test the ECL provision, amongst other procedures, we performed an overall assessment of the ECL provision levels by stage to assess if they were reasonable by considering the overall credit quality of the Group’s portfolios, risk profile, the ongoing impact of COVID-19, and the macroeconomic environment, by considering trends in the economy and industries to which the Group is exposed as well as performing peer benchmarking, where available, to assess overall staging and provision coverage levels. We evaluated the criteria used to allocate a financial asset to stage 1, 2 or 3 in accordance with IFRS 9; this included peer benchmarking to assess staging levels. We recalculated the assets in stage 1, 2 and 3 to assess if they were allocated to the appropriate stage and performed sensitivity analysis to assess the impact of different criteria on the ECL and also considered the impact of performing collective staging downgrades to higher risk industries and geographic regions. We involved modelling specialists to assist us to test a sample of ECL models, by testing the assumptions, inputs and formulae used. This included a combination of assessing the model design and formulae, alternative modelling techniques, recalculating the PD, LGD and EAD, and model implementation. We also considered the results of the Group’s internal model validation results. To evaluate data quality used in the ECL estimate, we agreed a sample of ECL calculation data points to source systems, including balance sheet date data used to run the models and historic loss data to monitor the models. We also tested the ECL data points input into the IT systems where the ECL calculations are performed through to the general ledger and disclosures. We involved our economic specialists to assist us to evaluate the base case and alternative economic scenarios used in the calculation of the probability weighted forward looking ECL, including evaluating probability weights and comparing these to other scenarios from a variety of external sources. We tested a sample of post-model adjustments including those which continued to be applied as a result of COVID-19 uncertainty. With our modelling specialists, we assessed the risk of bias and the completeness of these adjustments by considering the data, judgments, methodology, sensitivities, and governance of these adjustments. We recalculated and performed procedures to assess the recovery and timing scenarios, assumptions and cash flows for a sample of individually provided stage 3 ECLs, including the alternative scenarios and the probability weights assigned, involving valuation specialists where appropriate. |
NatWest Group plc – Annual Report on Form 20-F | 25 |
Report of Independent Registered Public Accounting Firm continued
Impairment of goodwill | |
Description of the matter | At 31 December 2021, the Group had reported goodwill of £5.5 billion as explained in Notes 16 and 17 to the consolidated financial statements. The recognition and carrying value of goodwill is based on value-in-use (VIU) models, which involve estimates of future profitability, which require significant management judgement and include the risk of management bias due to the forward-looking nature and inherent uncertainties associated with the key assumptions |
How we addressed the matter in our audit | We evaluated the design and tested the operating effectiveness of controls over the preparation and review of the forecasts, and the significant assumptions (such as the discount rate and long-term growth rate), inputs, calculations, methodologies and judgements used in the value-in-use models. This included testing controls over the selection of macroeconomic assumptions. To test the valuation of goodwill, amongst other procedures, we involved internal economic specialists to evaluate the macroeconomic assumptions that were used in the Group’s forecasts. We assessed the reasonableness of revenue and cost forecasts by evaluating the underlying business strategies, comparing to expected market trends and historical performance and considering anticipated balance sheet growth. With the assistance of our valuation specialists, we tested the reasonableness of key performance indicators used in the forecasts by comparing against peers. We evaluated the method of calculating the recoverable amount and how the discount rates and long-term growth rates used by management compared to our ranges which were developed using peer practice, external market data and calculations performed by our valuation specialists. We also assessed changes to the valuation methodology and benchmarked against industry practice. We evaluated how management considered alternative assumptions and performed our own sensitivity and scenario analyses on certain assumptions, such as revenue and cost forecasts, discount rate and long-term growth rates and other key performance indicators on both the detailed forecasts and on an overall basis. |
Provisions for customer redress, litigation and other regulatory matters | |
Description of the matter | At 31 December 2021, the Group has reported £1.3 billion of provisions for liabilities and charges, including £0.8 billion for customer redress, litigation and other regulatory matters as detailed in Note 20 to the consolidated financial statements. Regulatory scrutiny and the continued litigious environment give rise to a high level of management judgement in determining appropriate provisions and disclosures for specific customer redress, litigation and other regulatory matters. Management judgement is needed to determine whether a present obligation exists, a provision should be recorded and how to measure any required provision in accordance with the accounting criteria set out under IAS 37. Auditing the adequacy of these provisions was complex due to management’s judgement in the selection and use of assumptions to determine if a present obligation exists, if an outflow is probable and can be estimated, and adequately disclosed. |
How we addressed the matter in our audit | We evaluated the design and tested the operating effectiveness of controls over the identification, estimation, monitoring and disclosure of provisions related to customer redress, litigation and other regulatory matters. We received confirmations from the Group’s external legal counsel for matters to evaluate the existence of the obligation and management’s estimate of the outflow at year-end. Amongst other procedures, we also conducted inquiries with internal legal counsel over the existence of the legal obligations and related provisions. Where appropriate, we involved our conduct risk and forensics specialists to assist us in evaluating the provisions for specific customer redress, litigation and other regulatory matters. We evaluated the disclosures provided on customer redress, litigation and other regulatory matters to assess whether they complied with accounting standards. |
NatWest Group plc – Annual Report on Form 20-F | 26 |
Report of Independent Registered Public Accounting Firm continued
Valuation of financial instruments with higher risk characteristics including related income from trading activities | |
Description of the matter | As reported in Note 12 to the financial statements, as at 31 December 2021, the Group held financial instruments with higher risk characteristics. This included (but is not limited to) reported level 3 assets of £2.0 billion and level 3 liabilities of £0.6 billion whose value is dependent on unobservable inputs. The valuation of those financial instruments with higher risk characteristics involved both significant judgement and the risk of inappropriate revenue recognition through incorrect pricing as outlined below. Auditing management’s judgements and assumptions used in the estimation of the fair value of these instruments was complex due to the judgemental nature of valuation techniques, modelling assumptions, significant illiquid inputs and certain valuation adjustments. Complex models were used to value exotic features in certain interest rate swaps and options and foreign exchange options. Judgmental unobservable inputs included discount rates associated with derivatives with complex collateral arrangements and illiquid securities and loans. Judgmental fair value adjustments included Funding Valuation Adjustments (FVA), Credit Valuation Adjustments (CVA), and material product and deal specific adjustments on long-dated derivative portfolios |
How we addressed the matter in our audit | We evaluated the design and tested the operating effectiveness of controls relating to financial instrument valuation and related income statement measurement, which included controls over the bank’s independent price verification process, valuation models governance, collateral management and income statement analysis. Amongst other procedures, we involved our financial instrument valuation and modelling specialists to assist us in testing complex model-dependent valuations by performing independent revaluation to assess the appropriateness of models and the adequacy of both assumptions and inputs. We also independently re-priced instruments that had been valued using illiquid pricing inputs, using alternative pricing sources, where available, to evaluate management’s valuation. In addition, we compared fair value adjustment methodologies against current market practice. With the assistance of our specialists we revalued a sample of counterparty level FVAs and CVAs, comparing funding spreads to third party data and independently assessed illiquid CVA inputs. We also tested material product and deal specific adjustments on long-dated derivative portfolios and assessed other information, including trading activity, asset disposals and collateral discrepancies, to evaluate modelling assumptions and inputs |
/s/
We have served as the Group’s auditors since 2016
3 March 2022
NatWest Group plc – Annual Report on Form 20-F | 27 |
Independent auditors’ report to the members of NatWest Group plc
To the Shareholders and the Board of Directors of NatWest Group plc
Opinion on Internal Control over Financial Reporting
We have audited NatWest Group plc’s (the “Group”) internal control over financial reporting as of 31 December 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of 31 December 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Group as of 31 December 2021 and 2020, the related consolidated income statements, statements of comprehensive income and changes in equity and cash flow statements for each of the three years in the period ended 31 December 2021, the related Accounting policies and Notes 1 to 34, and the information identified as audited in the Annual remuneration report in the Directors’ Remuneration Report and in the Risk and capital management section and our report dated 3 March 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst Young LLP
We have served as the Group’s auditors since 2016
London, United Kingdom
3 March 2022
Consolidated income statement for the year ended 31 December 2021
|
| 2021 |
| 2020 (1) |
| 2019 (1) | |||
| Note |
| £m |
| £m |
| £m | ||
Interest receivable |
| |
| |
| | |||
Interest payable |
| ( |
| ( |
| ( | |||
Net interest income |
| 1 |
| |
| |
| | |
Fees and commissions receivable | | | | ||||||
Fees and commissions payable |
| ( |
| ( |
| ( | |||
Income from trading activities |
| |
| |
| | |||
Other operating income |
| |
| ( |
| | |||
Non-interest income |
| 2 |
| |
| |
| | |
Total income |
| |
| |
| | |||
Staff costs | ( | ( | ( | ||||||
Premises and equipment |
| ( |
| ( |
| ( | |||
Other administrative expenses |
| ( |
| ( |
| ( | |||
Depreciation and amortisation |
| ( |
| ( |
| ( | |||
Operating expenses | 3 |
| ( |
| ( |
| ( | ||
Profit before impairment releases/(losses) |
| |
| |
| | |||
Impairment releases/(losses) |
| 15 |
| |
| ( |
| ( | |
Operating profit/(loss) before tax |
| | ( |
| | ||||
Tax charge |
| 7 |
| ( | ( |
| ( | ||
Profit/(loss) from continuing operations |
| | ( |
| | ||||
Profit from discontinued operations, net of tax (2) |
| 8 |
| |
| |
| | |
Profit/(loss) for the year | | ( | | ||||||
| |||||||||
Attributable to: |
|
| |||||||
Ordinary shareholders | | ( | | ||||||
Preference shareholders | | | | ||||||
Paid-in equity holders |
| | |
| | ||||
Non-controlling interests |
| | ( |
| | ||||
| | ( | | ||||||
| |||||||||
Earnings per ordinary share - continuing operations | 9 |
| (p) |
| |||||
Earnings per ordinary share - discontinued operations | 9 | ||||||||
Total earnings per share attributable to ordinary shareholders - basic | 9 | (p) | |||||||
Earnings per ordinary share - fully diluted continuing operations | 9 | (p) | |||||||
Earnings per ordinary share - fully diluted discontinued operations | 9 | ||||||||
Total earnings per share attributable to ordinary shareholders - fully diluted | 9 | (p) |
| (1) |
| (2) |
The accompanying notes on pages 43 to 110, the Accounting policies on pages 36 to 42, the audited sections of the Financial review on pages 9 to 22 and the audited sections of the Risk and capital management sections on pages 172 to 269 of the NatWest Group 2021 Annual Report and Form 20-F Information included as Exhibit 15.2 to this Form 20-F, form an integral part of these financial statements.
NatWest Group plc – Annual Report on Form 20-F | 29 |
Consolidated statement of comprehensive income for the year ended 31 December 2021
|
| 2021 |
| 2020 |
| 2019 |
£m |
| £m |
| £m | ||
Profit/(loss) for the year | |
| ( |
| | |
Items that do not qualify for reclassification |
|
|
| |||
Remeasurement of retirement benefit schemes | ||||||
- other movements (1) | ( | | ( | |||
Loss on fair value of credit in financial liabilities designated at FVTPL due to own credit risk | ( | ( | ( | |||
FVOCI financial assets | | ( | ( | |||
Tax | |
| |
| | |
| ( |
| ( |
| ( | |
| ||||||
Items that do qualify for reclassification | ||||||
FVOCI financial assets | ( |
| |
| ( | |
Cash flow hedges | ( |
| |
| | |
Currency translation | ( |
| |
| ( | |
Tax | |
| ( |
| ( | |
| ( |
| |
| ( | |
Other comprehensive (loss)/income after tax | ( |
| |
| ( | |
Total comprehensive income/(loss) for the year | |
| ( |
| | |
Attributable to: | ||||||
Ordinary shareholders | |
| ( |
| | |
Preference shareholders | |
| |
| | |
Paid-in equity holders | |
| |
| | |
Non-controlling interests | |
| ( |
| | |
| |
| ( |
| |
| (1) |
The accompanying notes on pages 43 to 110, the Accounting policies on pages 36 to 42, the audited sections of the Financial review on pages 9 to 22 and the audited sections of the Risk and capital management sections on pages 172 to 269 of the NatWest Group 2021 Annual Report and Form 20-F Information included as Exhibit 15.2 to this Form 20-F, form an integral part of these financial statements.
NatWest Group plc – Annual Report on Form 20-F | 30 |
Consolidated balance sheet as at 31 December 2021
|
| 2021 |
| 2020 | ||
| Note |
| £m |
| £m | |
Assets | ||||||
Cash and balances at central banks |
| 10 |
| |
| |
Trading assets | 13 | | | |||
Derivatives | 14 | | | |||
Settlement balances |
|
| |
| | |
Loans to banks - amortised cost |
| 10 |
| |
| |
Loans to customers - amortised cost | 10 |
| |
| | |
Securities subject to repurchase agreements |
|
| | | ||
Other financial assets excluding securities subject to repurchase agreements |
|
| |
| | |
Other financial assets |
| 16 |
| |
| |
Intangible assets |
| 17 |
| |
| |
Other assets |
| 18 |
| |
| |
Assets of disposal groups | 8 | | — | |||
Total assets |
| |
| | ||
Liabilities | ||||||
Bank deposits | 10 | | | |||
Customer deposits | 10 | | | |||
Settlement balances |
|
| |
| | |
Trading liabilities |
| 13 |
| |
| |
Derivatives | 14 | | | |||
Other financial liabilities | 19 | | | |||
Subordinated liabilities |
| 20 |
| |
| |
Notes in circulation | | | ||||
Other liabilities | 21 |
| |
| | |
Total liabilities |
| |
| | ||
Ordinary shareholders' interests | | | ||||
Other owners’ interests |
|
| | | ||
Owners’ equity | 22 | | | |||
Non-controlling interests |
|
| | ( | ||
Total equity |
| | | |||
Total liabilities and equity |
| | |
The accompanying notes on pages 43 to 110, the Accounting policies on pages 36 to 42, the audited sections of the Financial review on pages 9 to 22 and the audited sections of the Risk and capital management sections on pages 172 to 269 of the NatWest Group 2021 Annual Report and Form 20-F Information included as Exhibit 15.2 to this Form 20-F, form an integral part of these financial statements.
The accounts were approved by the Board of directors on 17 February 2022 and signed on its behalf by:
Howard Davies |
| Alison Rose-Slade |
| Katie Murray | NatWest Group plc | |
Chairman | Group Chief Executive Officer | Group Chief Financial Officer | Registered No. SC45551 |
NatWest Group plc – Annual Report on Form 20-F | 31 |
Consolidated statement of changes in equity for the year ended 31 December 2021
| 2021 |
| 2020 |
| 2019 | |
£m | £m | £m | ||||
Called-up share capital - at 1 January | | | | |||
Ordinary shares issued | | | | |||
Share cancellation (1,5) | ( | — | — | |||
At 31 December |
| | |
| | |
Paid-in equity - at 1 January | | | | |||
Redeemed |
| — | ( |
| — | |
Reclassified (2) |
| ( |
| — |
| — |
Securities issued during the period | | | — | |||
At 31 December |
| |
| |
| |
Share premium - at 1 January | | | | |||
Ordinary shares issued |
| | |
| | |
At 31 December |
| |
| |
| |
Merger reserve - at 1 January and 31 December | | | | |||
FVOCI reserve - at 1 January | | | | |||
Unrealised gains/(losses) |
| |
| |
| ( |
Realised (gains)/losses (3) | ( | | ( | |||
Tax |
| ( |
| ( |
| ( |
At 31 December |
| | |
| | |
Cash flow hedging reserve - at 1 January | | | ( | |||
Amount recognised in equity |
| ( |
| |
| |
Amount transferred from equity to earnings |
| ( |
| ( |
| ( |
Tax |
| |
| ( |
| ( |
At 31 December |
| ( |
| |
| |
Foreign exchange reserve - at 1 January | | | | |||
Retranslation of net assets |
| ( |
| |
| ( |
Foreign currency gains/(losses) on hedges of net assets |
| |
| ( |
| |
Tax |
| ( |
| |
| ( |
Recycled to profit or loss on disposal of businesses |
| |
| |
| ( |
At 31 December |
| |
| |
| |
Capital redemption reserve - at 1 January | | | | |||
Share cancellation (1) |
| | |
| | |
Redemption of preference shares |
| | — |
| — | |
At 31 December | | | | |||
Retained earnings - at 1 January | | | | |||
Implementation of IFRS 16 on 1 January 2019 | — | — | ( | |||
Profit/(loss) attributable to ordinary shareholders and other equity owners | ||||||
- continuing operations | | ( | | |||
- discontinued operations | | | | |||
Equity preference dividends paid | ( | ( | ( | |||
Paid-in equity dividends paid | ( | ( | ( | |||
Ordinary dividends paid | ( | — | ( | |||
Shares repurchased during the year (1,5) | ( | — | — | |||
Unclaimed dividend | — | | — | |||
Redemption of preference shares | ( | — | — | |||
Redemption/reclassification of paid-in equity (2,6) | | ( | — | |||
Realised gains/(losses) in period on FVOCI equity shares | ||||||
- gross | | ( | | |||
- tax | — | — | — | |||
Remeasurement of the retirement benefit schemes | ||||||
- other movements (4) | ( | | ( | |||
- tax (4) | | | | |||
Changes in fair value of credit in financial liabilities designated at FVTPL |
| |||||
- gross | ( | ( | ( | |||
- tax | | | | |||
Shares issued under employee share schemes | | ( | ( | |||
Share-based payments (7) | ( | | ( | |||
At 31 December | | | |
For the notes to this table refer to the following page.
NatWest Group plc – Annual Report on Form 20-F | 32 |
Consolidated statement of changes in equity for the year ended 31 December 2021 continued
| 2021 |
| 2020 |
| 2019 | |
£m | £m | £m | ||||
Own shares held - at 1 January | ( | ( | ( | |||
Shares issued under employee share schemes | | | | |||
Own shares acquired (1) | ( | ( | ( | |||
At 31 December | ( | ( | ( | |||
Owners' equity at 31 December | | | | |||
Non-controlling interests - at 1 January | ( | | | |||
Currency translation adjustments and other movements |
| | |
| ( | |
Profit/(loss) attributable to non-controlling interests |
| |
| ( |
| |
Dividends paid |
| ( | — |
| ( | |
Equity raised | — | — | | |||
Equity withdrawn and disposals |
| — | — |
| ( | |
At 31 December |
| |
| ( |
| |
Total equity at 31 December |
| |
| |
| |
Attributable to: | ||||||
Ordinary shareholders |
| |
| |
| |
Preference shareholders |
| |
| |
| |
Paid-in equity holders |
| |
| |
| |
Non-controlling interests |
| |
| ( |
| |
| |
| |
| |
| (1) |
| (2) |
| (3) |
| (4) |
| (5) |
| (6) |
| (7) |
The accompanying notes on pages 43 to 110, the Accounting policies on pages 36 to 42, the audited sections of the Financial review on pages 9 to 22 and the audited sections of the Risk and capital management sections on pages 172 to 269 of the NatWest Group 2021 Annual Report and Form 20-F Information included as Exhibit 15.2 to this Form 20-F, form an integral part of these financial statements.
NatWest Group plc – Annual Report on Form 20-F | 33 |
Consolidated cash flow statement for the year ended 31 December 2021
|
| 2021 |
| 2020 |
| 2019 | ||
| Note |
| £m |
| £m |
| £m | |
Cash flows from operating activities | ||||||||
Operating profit/(loss) before tax from continuing operations (1) |
| |
| ( |
| | ||
Operating profit before tax from discontinued operations | | | | |||||
Adjustments for: |
|
| ||||||
Impairment (releases)/losses | ( | | | |||||
Amortisation of discounts and premiums of other financial assets |
| |
| |
| | ||
Depreciation and amortisation |
| | |
| | |||
Change in fair value taken to profit or loss of other financial assets |
| | ( |
| ( | |||
Change in fair value taken to profit or loss on other financial liabilities and subordinated liabilities |
| ( | |
| | |||
Elimination of foreign exchange differences | | ( | | |||||
Other non-cash items | ( | ( | ( | |||||
Income receivable on other financial assets | ( | ( | ( | |||||
(Profit)/loss on sale of other financial assets | ( | ( | | |||||
(Profit)/loss on sale of subsidiaries and associates | ( | | ( | |||||
Share of (profit)/loss of associates | ( | | | |||||
Loss/(profit) on sale of other assets and net assets/liabiltiies | | ( | ( | |||||
Interest payable on MRELs and subordinated liabilities | | | | |||||
Loss on sale of MRELs and subordinated liabilities | | | — | |||||
Charges and releases on provisions | | | | |||||
Defined benefit pension schemes | | | | |||||
Net cash flows from trading activities |
|
| |
| |
| | |
Decrease/(increase) in trading assets | | | ( | |||||
Decrease/(increase) in derivative assets | | ( | ( | |||||
Decrease/(increase) in settlement balance assets | | | ( | |||||
(Increase)/decrease in loans to banks | ( | ( | | |||||
Decrease/(increase) in loans to customers | | ( | ( | |||||
(Increase)/decrease in other financial assets | ( | | | |||||
(Increase)/decrease in other assets | ( | | | |||||
Increase in assets of disposal groups | ( | — | — | |||||
Increase/(decrease) in banks deposits | | | ( | |||||
Increase in customer deposits |
| | |
| | |||
(Decrease)/increase in settlement balance liabilities | ( | ( | | |||||
(Decrease)/increase in trading liabilities |
| ( |
| ( |
| | ||
(Decrease)/increase in derivative liabilities | ( | | | |||||
Increase/(decrease) in other financial liabilities |
| | ( |
| | |||
Increase/(decrease) in notes in circulation | | | ( | |||||
Decrease in other liabilities | ( | ( | ( | |||||
Changes in operating assets and liabilities |
| | |
| ( | |||
Income taxes paid | ( | ( | ( | |||||
Net cash flows from operating activities (2) |
| |
| |
| ( |
NatWest Group plc – Annual Report on Form 20-F | 34 |
Consolidated cash flow statement for the year ended 31 December 2021 continued
|
| 2021 |
| 2020 |
| 2019 | ||
| Note |
| £m |
| £m |
| £m | |
Cash flows from investing activities | ||||||||
Sale and maturity of other financial assets | | | | |||||
Purchase of other financial assets | ( | ( | ( | |||||
Income received on other financial assets | | | | |||||
Net movement in business interests and intangible assets | 28 | ( | ( | ( | ||||
Sale of property, plant and equipment | | | | |||||
Purchase of property, plant and equipment | ( | ( | ( | |||||
Net cash flows from investing activities | | | ( | |||||
Cash flows from financing activities | ||||||||
Movement in MRELs |
| | |
| | |||
Movement in subordinated liabilities |
| ( | ( |
| ( | |||
Ordinary shares issued |
| — | — |
| | |||
Share cancellation |
| ( | ( |
| ( | |||
Dividends paid |
| ( | ( |
| ( | |||
Issue of paid-in equity | | | — | |||||
Net cash flows from financing activities |
| ( |
| |
| ( | ||
Effects of exchange rate changes on cash and cash equivalents |
| ( |
| |
| ( | ||
Net increase/(decrease) in cash and cash equivalents |
| |
| |
| ( | ||
Cash and cash equivalents at 1 January |
| |
| |
| | ||
Cash and cash equivalents at 31 December |
| 30 |
| |
| |
| |
| (1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. |
| (2) |
The accompanying notes on pages 43 to 110, the Accounting policies on pages 36 to 42, the audited sections of the Financial review on pages 9 to 22 and the audited sections of the Risk and capital management sections on pages 172 to 269 of the NatWest Group 2021 Annual Report and Form 20-F Information included as Exhibit 15.2 to this Form 20-F, form an integral part of these financial statements.
NatWest Group plc – Annual Report on Form 20-F | 35 |
Accounting policies
This section includes the basis of preparation of the financial statements and the significant accounting policies used to prepare the financial statements.
Our accounting policies are the specific principles, bases, conventions, rules, and practices we apply in preparing and presenting the financial statements. Further information is provided where judgment and estimation is applied to critical accounting policies and key sources of estimation uncertainty.
Future accounting developments details new or amendments to existing accounting standards, when they are effective from and where the NatWest Group is assessing their impact on future financial statements.
1. Presentation of financial statements
NatWest Group plc is incorporated in the UK and registered in Scotland. The financial statements are presented in the functional currency, pounds sterling.
NatWest Group plc’s consolidated financial statements incorporate the results of NatWest Group plc and the entities it controls. Control arises when NatWest Group plc has the power to direct the activities of an entity so as to affect the return from the entity. Control is assessed by reference to our ability to enforce our will on the other entity, typically through voting rights. The consolidated financial statements are prepared under consistent accounting policies.
Transactions and balances between Group companies are eliminated in the consolidated financial statements to show only those transactions and balances external to the NatWest Group.
The audited financial statements are set out on pages 29 to 110 and the audited sections of Risk and capital management on pages 172 to 269 of the NatWest Group 2021 Annual Report and Form 20-F Information included as Exhibit 15.2 to this Form 20-F, form an integral part of these financial statements. The directors have prepared the financial statements on a going concern basis after assessing the principal risks, forecasts, projections and other relevant evidence over the twelve months from the date the financial statements are approved (see the Report of the directors, page 168 of the NatWest Group 2021 Annual Report and Form 20-F Information included as Exhibit 15.2 to this Form 20-F) and in accordance with UK adopted International Accounting Standards (IAS), International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and IFRS as adopted by the European Union. The significant accounting policies and related judgments are set out below.
Except for certain financial instruments as described in Accounting policies 10 and 15 and investment property, the financial statements are presented on a historical cost basis.
Accounting policy changes effective 1 January 2021.
The IASB amended IFRS 16 Leases with “COVID-19 amendments on lease modifications – Amendments to IFRS 16 – Leases (IFRS 16)”. The effect of the amendment on NatWest Group’s financial statements is immaterial.
2. Revenue recognition
Interest income and expense are recognised in the income statement using the effective interest rate method for: all financial instruments measured at amortised cost, debt instruments measured as fair value through other comprehensive income and the effective part of any related accounting hedging instruments. Finance lease income is recognised at a constant periodic rate of return before tax on the net investment on the lease. Negative interest on financial assets is presented in interest payable and negative interest on financial liabilities is presented in interest receivable.
Other interest relating to financial instruments measured at fair value is recognised as part of the movement in fair value and is reported in income from trading activities or other operating income as relevant. Fees in respect of services are recognised as the right to consideration accrues through the performance of each distinct service obligation to the customer. The arrangements are generally contractual and the cost of providing the service is incurred as the service is rendered. The price is usually fixed and always determinable.
3. Discontinued operations, Held for sale and Disposal group
The results of discontinued operations (comprising the post-tax profit or loss of discontinued operations and the post-tax results of either the ongoing measurement at fair value less costs to sell or disposal of the discontinued operation) are excluded from the results of continuing operations and are presented as a single amount as profit/(loss) from discontinued operations, net of tax in the income statement. Comparatives are represented for the income statement, cash flow statement, statement of changes in equity and related notes.
An asset or disposal group (assets and liabilities) is classified as held for sale if NatWest Group will recover its carrying amount principally through a sale transaction rather than through continuing use. These are measured at the lower of its carrying amount or fair value less cost to sell unless scoped out of IFRS 5 in which case the existing measurement provisions of IFRS apply. These are presented as single amounts, comparatives are not represented.
NatWest Group plc – Annual Report on Form 20-F | 36 |
Accounting policies continued
4. Staff costs
Employee costs, such as salaries, paid absences, and other benefits are recognised over the period in which the employees provide the related services to NatWest Group. Employees may receive variable compensation in cash, in deferred cash or debt instruments of NatWest Group or in ordinary shares of NatWest Group plc. NatWest Group operates a number of share-based compensation schemes under which it grants awards of NatWest Group plc shares and share options to its employees. Such awards are subject to vesting conditions.
Variable compensation that is settled in cash or debt instruments is charged to the income statement on a straight-line basis over the period during which services are provided, taking account of forfeiture and clawback criteria. The value of employee services received in exchange for NatWest Group plc shares and share options is recognised as an expense over the vesting period, subject to deferral. clawback and forfeiture criteria with a corresponding increase in equity. The fair value of the instruments granted is based on market prices at the grant date.
Defined contribution pension scheme
A scheme where NatWest Group pays fixed contributions and there is no legal or constructive obligation to pay further contributions or benefits. Contributions are recognised in the income statement as employee service costs accrue.
Defined benefit pension scheme
A scheme that defines the benefit an employee will receive on retirement and is dependent on one or more factors such as age, salary, and years of service. The net of the recognisable scheme assets and obligations is reported on the balance sheet in other assets or other liabilities. The defined benefit obligation is measured on an actuarial basis. The charge to the income statement for pension costs (mainly the service cost and the net interest on the net defined benefit asset or liability) is recognised in operating expenses.
Actuarial gains and losses (i.e. gains and/or losses on re-measuring the net defined benefit asset or liability due to changes in actuarial measurement assumptions) are recognised in other comprehensive income in full in the period in which they arise, and not subject to recycling to the income statement.
The difference between scheme assets and scheme liabilities, the net defined benefit asset or liability, is recognised on the balance sheet if the criteria of the asset ceiling test are met. This requires the net defined benefit surplus to be limited to the present value of any economic benefits available to NatWest Group in the form of refunds from the plan or reduced contributions to it.
NatWest Group will recognise a liability where a minimum funding requirement exists for any of its defined benefit pension schemes. This reflects agreed minimum funding and the availability of a net surplus as determined as described above. When estimating the liability for minimum funding requirements NatWest Group plc only include contributions that are substantively or contractually agreed and do not include discretionary features, including dividend-linked contributions
5. Intangible assets and goodwill
Intangible assets are identifiable non-monetary assets without physical substance acquired by NatWest Group are stated at cost less accumulated amortisation and impairment losses. Amortisation is a method to spread the cost of such assets over time to the income statement. This is charged to the income statement over the assets' estimated useful economic lives using methods that best reflect the pattern of economic benefits. The estimated useful economic lives are:
Computer software | |
Other acquired intangibles |
Expenditure on internally generated goodwill and brands is charged to the income statement as incurred.
Direct costs relating to the development of internal-use computer software are reported on the balance sheet after technical feasibility and economic viability have been established. These direct costs include payroll, the costs of materials and services, and directly attributable overheads. Capitalisation of costs ceases when the software can operate as intended.
During and after development, accumulated costs are reviewed for impairment against the benefits that the software is expected to generate.
Costs incurred prior to the establishment of technical feasibility and economic viability are expensed to the income statement as incurred, as are all training costs and general overheads. The costs of licences to use computer software that are expected to generate economic benefits beyond one year are also reported on the balance sheet
Goodwill on the acquisition of a subsidiary is the excess of the fair value of the consideration paid, the fair value of any existing interest in the subsidiary and the amount of any non-controlling interest measured either at fair value or at its share of the subsidiary’s net assets over the net fair value of the subsidiary’s identifiable assets, liabilities, and contingent liabilities.
Goodwill is measured at initial cost less any subsequent impairment losses. The gain or loss on the disposal of a subsidiary includes the carrying value of any related goodwill when such transactions occur.
NatWest Group plc – Annual Report on Form 20-F | 37 |
Accounting policies continued
6. Impairment of non-financial assets
At each balance sheet date, NatWest Group assesses whether there is any indication that its intangible assets or property, plant and equipment are impaired. If any such indication exists, NatWest Group estimates the recoverable amount of the asset and compares it to its balance sheet value to calculate if an impairment loss should be charged to the income statement. The balance sheet value of the asset is reduced by the amount of the impairment loss. A reversal of an impairment loss on intangible assets or property, plant and equipment is recognised in the income statement provided the increased carrying value is not greater than it would have been had no impairment loss been recognised.
Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. Impairment losses on goodwill are not reversed
The recoverable amount of an asset that does not generate cash flows that are independent from those of other assets or groups of assets, is determined as part of the cash-generating unit to which the asset belongs. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. For the purposes of impairment testing, goodwill acquired in a business combination is allocated to NatWest Group’s cash-generating units or groups of cash-generating units expected to benefit from the combination. The recoverable amount of an asset or cash-generating unit is the higher of its fair value less cost to sell or its value in use. Value in use is the present value of future cash flows from the asset or cash-generating unit discounted at a rate that reflects market interest rates adjusted for risks specific to the asset or cash-generating unit that have not been considered in estimating future cash flows.
7. Foreign currencies
Foreign exchange differences arising on the settlement of foreign currency transactions and from the translation of monetary assets and liabilities are reported in income from trading activities except for differences arising on cash flow hedges and hedges of net investments in foreign operations.
Non-monetary items denominated in foreign currencies that are stated at fair value are translated into the functional currency at the foreign exchange rates ruling at the dates the values are determined. Translation differences are recognised in the income statement except for differences arising on non-monetary financial assets classified as fair value through other comprehensive income.
Income and expenses of foreign subsidiaries and branches are translated into sterling at average exchange rates unless these do not approximate the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on the translation of a foreign operation are recognised in other comprehensive income. The amount accumulated in equity is reclassified from equity to the income statement on disposal of a foreign operation.
8. Provisions and contingent liabilities
NatWest Group recognises a provision for a present obligation resulting from a past event when it is more likely than not that it will be required to pay to settle the obligation and the amount of the obligation can be estimated reliably.
Provision is made for restructuring costs, including the costs of redundancy, when NatWest Group has a constructive obligation. An obligation exists when NatWest Group has a detailed formal plan for the restructuring and has raised a valid expectation in those affected either by starting to implement the plan or by announcing its main features.
NatWest Group recognises any onerous cost of the present obligation under a contract as a provision. An onerous cost is the unavoidable cost of meeting its contractual obligations that exceed the expected economic benefits. When NatWest Group intends to vacate a leasehold property or right of use asset, the asset would be tested for impairment and a provision may be recognised for the ancillary contractual occupancy costs, such as rates.
Contingent liabilities are possible obligations arising from past events, whose existence will be confirmed only by uncertain future events, or present obligations arising from past events that are not recognised because either an outflow of economic benefits is not probable, or the amount of the obligation cannot be reliably measured. Contingent liabilities are not recognised but information about them is disclosed unless the possibility of any outflow of economic benefits in settlement is remote.
9. Tax
Tax encompassing current tax and deferred tax is recognised in the income statement except when taxable items are recognised in other comprehensive income or equity. Tax consequences arising from servicing financial instruments classified as equity are recognised in the income statement in line with IAS 12.
Current tax is tax payable or recoverable in respect of the taxable profit or loss for the year arising in the income statement, other comprehensive income or equity. Provision is made for current tax at rates enacted, or substantively enacted, at the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable in respect of temporary differences between the carrying amount of an asset or liability for accounting purposes and the carrying amount for tax purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent their recovery is probable.
Deferred tax is not recognised on temporary differences that arise from initial recognition of an asset or a liability in a transaction (other than a business combination) that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is calculated using tax rates expected to apply in the periods when the assets will be realised or the liabilities settled, based on tax rates and laws enacted, or substantively enacted, at the balance sheet date.
Deferred tax assets and liabilities are offset where NatWest Group has a legally enforceable right to offset and where they relate to income taxes levied by the same taxation authority either on an individual NatWest Group company or on NatWest Group companies in the same tax group that intend, in future periods, to settle current tax liabilities and assets on a net basis or on a gross basis simultaneously.
NatWest Group plc – Annual Report on Form 20-F | 38 |
Accounting policies continued
Accounting for taxes is judgmental and carries a degree of uncertainty because tax law is subject to interpretation, which might be questioned by the relevant tax authority. NatWest Group recognises the most likely current and deferred tax liability or asset, assessed for uncertainty using consistent judgments and estimates. Current and deferred tax assets are only recognised where their recovery is deemed probable, and current and deferred tax liabilities are recognised at the amount that represents the best estimate of the probable outcome having regard to their acceptance by the tax authorities.
10. Financial instruments
Financial instruments are measured at fair value on initial recognition on the balance sheet.
Monetary financial assets are classified into one of the following subsequent measurement categories (subject to business model assessment and review of contractual cash flow for the purposes of sole payments of principal and interest where applicable):
| - | amortised cost measured at cost using the effective interest rate method, less any impairment allowance; |
| - | fair value through other comprehensive income (FVOCI) measured at fair value, using the effective interest rate method and changes in fair value through other comprehensive income; |
| - | mandatory fair value through profit or loss (MFVTPL) measured at fair value and changes in fair value reported in the income statement; or |
| - | designated at fair value through profit or loss (DFV) measured at fair value and changes in fair value reported in the income statement. |
Classification by business model reflects how NatWest Group manages its financial assets to generate cash flows. A business model assessment helps to ascertain the measurement approach depending on whether cash flows result from holding financial assets to collect the contractual cash flows, from selling those financial assets, or both.
Business model assessment of assets is made at portfolio level, being the level at which they are managed to achieve a predefined business objective. This is expected to result in the most consistent classification of assets because it aligns with the stated objectives for the portfolio, its risk management, manager’s remuneration and the ability to monitor sales of assets from a portfolio.
The contractual terms of a financial asset; any leverage features; prepayment and extension terms; and triggers that might reset the effective rate of interest; are considered in determining whether cash flows are solely payments of principal and interest.
Certain financial assets may be designated at fair value through profit or loss (DFV) upon initial recognition if such designation eliminates, or significantly reduces, accounting mismatch.
Equity shares are measured at fair value through profit or loss unless specifically elected as at fair value through other comprehensive income (FVOCI).
Upon disposal, the cumulative gains or losses in fair value through other comprehensive income reserve are recycled to the income statement for monetary assets and non-monetary assets (equity shares) the cumulative gains or losses are transferred directly to retained earnings.
Regular way purchases of financial assets classified as amortised cost are recognised on the settlement date; all other regular way transactions in financial assets are recognised on the trade date.
Financial liabilities are classified into one of following measurement categories:
| - | amortised cost measured at cost using the effective interest rate method; |
| - | held for trading measured at fair value and changes in fair value reported in income statement; or |
| - | designated at fair value through profit or loss measured at fair value and changes in fair value reported in the income statement except changes in fair value attributable to the credit risk component recognised in other comprehensive income when no accounting mismatch occurs. |
11. Impairment: expected credit losses (ECL)
At each balance sheet date each financial asset or portfolio of financial assets measured at amortised cost or at fair value through other comprehensive income, issued financial guarantee and loan commitment (other than those classified as held for trading) is assessed for impairment. Any change in impairment is reported in the income statement. Loss allowances are forward-looking, based on 12-month ECL where there has not been a significant increase in credit risk rating, otherwise allowances are based on lifetime expected losses.
ECL are a probability-weighted estimate of credit losses. The probability is determined by the risk of default which is applied to the cash flow estimates. In the absence of a change in credit rating, allowances are recognised when there is a reduction in the net present value of expected cash flows. Following a significant increase in credit risk, ECL are adjusted from 12 months to lifetime. This will lead to a higher impairment charge.
Judgment is exercised as follows:
| - | Models – in certain low default portfolios, Basel parameter estimates are also applied for IFRS 9. |
| - | Non-modelled portfolios, mainly in Private Banking, RBSI and Lombard, use a standardised capital requirement under Basel II. Under IFRS 9, they have bespoke treatments for the identification of significant increase in credit risk. Benchmark PDs, EADs and LGDs are reviewed annually for appropriateness. The ECL calculation is based on expected future cash flows, which is typically applied at a portfolio level. |
| - | Multiple economic scenarios (MES) – the central, or base, scenario is most critical to the ECL calculation, independent of the method used to generate a range of alternative outcomes and their probabilities. |
| - | Significant increase in credit risk – IFRS 9 requires that at each reporting date, an entity shall assess whether the credit risk on an account has increased significantly since initial recognition. Part of this assessment requires a comparison to be made between the current lifetime PD (i.e. the current probability of default over the remaining lifetime) with the equivalent lifetime PD as determined at the date of initial recognition. |
NatWest Group plc – Annual Report on Form 20-F | 39 |
Accounting policies continued
On restructuring where a financial asset is not derecognised, the revised cash flows are used in re-estimating the credit loss. Where restructuring causes derecognition of the original financial asset, the fair value of the replacement asset is used as the closing cash flow of the original asset.
Where in the course of the orderly realisation of a loan, it is exchanged for equity shares or property, the exchange is accounted for as the sale of the loan and the acquisition of equity securities or investment property. Where NatWest Group’s acquired interest is in equity shares, relevant policies for control, associates and joint ventures apply.
Impaired financial assets are written off and therefore derecognised from the balance sheet when NatWest Group concludes that there is no longer any realistic prospect of recovery of part, or all, of the loan. For financial assets that are individually assessed for impairment, the timing of the write-off is determined on a case-by-case basis. Such financial assets are reviewed regularly and write-off will be prompted by bankruptcy, insolvency, re-negotiation, and similar events.
The typical time frames from initial impairment to write-off for NatWest Group’s collectively assessed portfolios are:
| - | Retail mortgages: write-off usually occurs within |
| - | Credit cards: the irrecoverable amount is typically written off after |
| - | Overdrafts and other unsecured loans: write-off occurs within |
| - | Commercial loans: write-offs are determined in the light of individual circumstances; and Business loans are generally written off within |
12. Derecognition
A financial asset is derecognised (removed from the balance sheet) when the contractual right to receive cash flows from the asset has expired or when it has been transferred and the transfer qualifies for derecognition. Conversely, an asset is not derecognised in a contract under which NatWest Group retains substantially all the risks and rewards of ownership.
A financial liability is removed from the balance sheet when the obligation is paid, or is cancelled, or expires. Cancellation includes the issuance of a substitute instrument on substantially different terms.
13. Netting
Financial assets and financial liabilities are offset, and the net amount presented on the balance sheet when, and only when, NatWest Group currently has a legally enforceable right to set off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. NatWest Group is party to a number of arrangements, including master netting agreements, that give it the right to offset financial assets and financial liabilities, but where it does not intend to settle the amounts net or simultaneously, the assets and liabilities concerned are presented separately on the balance sheet.
14. Capital instruments
NatWest Group classifies a financial instrument that it issues as a liability if it is a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or financial liabilities on potentially unfavourable terms and as equity if it evidences a residual interest in the assets of NatWest Group after the deduction of liabilities. Incremental costs and related tax that are directly attributable to an equity transaction are deducted from equity.
The consideration for any ordinary shares of NatWest Group plc purchased by NatWest Group (known as treasury shares or own shares held) is deducted from equity. On the cancellation of treasury shares their nominal value is removed from equity and any excess of consideration over nominal value is treated in accordance with the capital maintenance provisions of the Companies Act 2006.
On the sale or re-issue of treasury shares the consideration received and related tax are credited to equity, net of any directly attributable incremental costs.
15. Derivatives and hedging
Derivatives are reported on the balance sheet at fair value.
NatWest Group uses derivatives as part of its trading activities, to manage its own risk such as interest rate, foreign exchange, or credit risk or in certain customer transactions. Not all derivatives used to manage risk are in hedge accounting relationships (an IFRS method to reduce accounting mismatch from changes in the fair value of the derivatives reported in the income statement).
Gains and losses arising from changes in the fair value of derivatives that are not in hedge relationships are recognised in the income statement in Income from trading activities except for gains and losses on those derivatives that are managed together with financial instruments designated at fair value; these gains and losses are included in Other operating income.
Hedge accounting
NatWest Group enters into three types of hedge accounting relationships (see later)). Hedge accounting relationships are designated and documented at inception in line with the requirements of IAS 39 Financial instruments – Recognition and Measurement. The documentation identifies the hedged item, the hedging instrument and details of the risk that is being hedged and the way in which effectiveness will be assessed at inception and during the period of the hedge.
Fair value hedge - the gain or loss on the hedging instrument and the hedged item attributable to the hedged risk is recognised in the income statement. Where the hedged item is measured at amortised cost, the balance sheet amount of the hedged item is also adjusted.
NatWest Group plc – Annual Report on Form 20-F | 40 |
Accounting policies continued
Cash flow hedge - the effective portion of the designated hedge relationship is recognised in other comprehensive income and the ineffective portion in the income statement. When the hedged item (forecasted cash flows) results in the recognition of a financial asset or financial liability, the cumulative gain or loss is reclassified from equity to the income statement in the same periods in which the hedged forecasted cash flows affect the income statement.
Hedge of net investment in a foreign operation - In the hedge of a net investment in a foreign operation, the effective portion of the designated hedge relationship is recognised in other comprehensive income. Any ineffective portion is recognised in profit or loss. Non-derivative financial liabilities as well as derivatives may be designated as a hedging instrument in a net investment hedge.
Discontinuation of hedge accounting
Hedge accounting is discontinued if the hedge no longer meets the criteria for hedge accounting i.e. the hedge is not highly effective in offsetting changes in fair value or cash flows attributable to the hedged risk, consistent with the documented risk management strategy; the hedging instrument expires or is sold, terminated or exercised; or if hedge designation is revoked.
For fair value hedging any cumulative adjustment is amortised to the income statement over the life of the hedged item. Where the hedge item is no longer on the balance sheet the adjustment to the hedged item is reported in the income statement.
For cash flow hedging the cumulative unrealised gain or loss is reclassified from equity to the income statement when the hedged cash flows occur or, if the forecast transaction results in the recognition of a financial asset or financial liability, when the hedged forecast cash flows affect the income statement. Where a forecast transaction is no longer expected to occur, the cumulative unrealised gain or loss is reclassified from equity to the income statement immediately.
For net investment hedging on disposal or partial disposal of a foreign operation, the amount accumulated in equity is reclassified from equity to the income statement.
16. Investment in Group undertakings
NatWest Group plc’s investments in its Group undertakings (subsidiaries) are stated at cost less any impairment.
Critical accounting policies and key sources of estimation uncertainty
The reported results of NatWest Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of the financial statements. The accounting standards used in the preparation of the financial statements (see presentation of financial statements above) require the directors, in preparing NatWest Group's financial statements, to select suitable accounting policies, apply them consistently and make judgments and estimates that are reasonable and prudent. In the absence of accounting guidance, standards used in the preparation of the financial statements require the directors to develop and apply an accounting policy that results in relevant and reliable information in the light of the requirements and guidance in IFRS dealing with similar and related issues and the IASB's ’Conceptual Framework for Financial Reporting’.
The judgments and assumptions involved in NatWest Group's accounting policies that are considered by the Board to be the most important to the portrayal of its financial condition are noted below. The use of estimates, assumptions or models that differ from those adopted by NatWest Group would affect its reported results. Estimation uncertainty continues to be affected by the COVID-19 pandemic. The COVID-19 pandemic continued to cause significant economic and social disruption during 2021. Key financial estimates are based on management's latest five-year revenue and cost forecasts. Measurement of goodwill, deferred tax and expected credit losses are highly sensitive to reasonably possible changes in those anticipated conditions. Other reasonably possible assumptions about the future include a prolonged financial effect of the COVID-19 pandemic on the economy of the UK and other countries or greater economic effect as countries and companies implement plans to counter climate risks.
How Climate risk affects our accounting judgments and estimates
NatWest Group makes use of reasonable and supportable information to make accounting judgments and estimates. This includes information about the observable effects of the physical and transition risks of climate change on the current creditworthiness of borrowers, asset values and market indicators. It also includes the effect on NatWest Group’s competitiveness and profitability. Many of the effects arising from climate change will be longer term in nature, with an inherent level of uncertainty, and have limited effect on accounting judgments and estimates for the current period. Some physical and transition risks can manifest in the shorter term. The following items represent the most significant effects:
| - | The classification of financial instruments linked to climate, or other sustainability indicators: consideration is given to whether the effect of climate related terms prevent the instrument cashflows being solely payments of principal and interest. |
| - | The measurement of expected credit loss considers the ability of borrowers to make payments as they fall due. Future cashflows are discounted, so long dated cashflows are less likely to affect current expectations on credit loss. NatWest Group’s assessment of sector specific risks, and whether additional adjustments are required, include expectations on the ability of those sectors to meet their financing needs in the market. Changes in credit stewardship and credit risk appetite that stem from climate considerations, such as oil and gas, will directly affect our positions. |
| - | The assessment of asset impairment and deferred tax are based upon value in use. This represents the value of future cashflows and uses the Group’s five-year forecast and the expectation of long term economic growth beyond this period. The five-year forecast takes account of management’s current expectations on competitiveness and profitability, including near term effects of climate transition risk. The long term growth rate reflects external indicators which will include market expectations on climate risk. NatWest Group did not consider any additional adjustments to this indicator. |
| - | The use of market indicators as inputs to fair value is assumed to include current information and knowledge regarding the effect of climate risk. |
NatWest Group plc – Annual Report on Form 20-F | 41 |
Accounting policies continued
Changes in judgments and assumptions could result in a material adjustment to those estimates in the next reporting periods. Consideration of this source of estimation uncertainty has been set out in the notes below (as applicable).
Critical accounting policy |
| Note |
Deferred tax | 7 | |
Fair value - financial instruments | 11 | |
Loan impairment provisions | 15 | |
Goodwill | 17 | |
Provisions for liabilities and charges | 21 |
Future accounting developments
International Financial Reporting Standards
Effective 1 January 2022
| - | Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37); |
| - | Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16); |
| - | Reference to Conceptual Framework (Amendments to IFRS 3); and |
| - | Fees in the “10 per cent” test for Derecognition of Financial Liabilities (Amendments to IFRS 9). |
Other new standards and amendments that are effective for annual periods beginning after 1 January 2023, with earlier application permitted, are set out below.
Effective 1 January 2023
| - | IFRS 17 Insurance Contracts (Amendments to IFRS 17 Insurance Contracts); |
| - | Classification of Liabilities as Current or Non-current (Amendments to IAS 1); |
| - | Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12); |
| - | Definition of Accounting Estimates (Amendments to IAS 8); and |
| - | Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2). |
NatWest Group is assessing the effect of adopting these standards and amendments on its financial statements but does not expect the effect to be material.
NatWest Group plc – Annual Report on Form 20-F | 42 |
Notes to the consolidated financial statements
1 Net interest income
Net interest income is the difference between the interest NatWest Group earns from its interest-bearing assets, such as loans, balances with central banks and other financial assets, and the interest paid on its interest-bearing liabilities, such as deposits and subordinated liabilities.
Interest receivable on financial instruments classified as amortised cost, debt instruments classified as FVOCI and the interest element of the effective portion of any designated hedging relationships are measured using the effective interest rate, which allocates the interest receivable or interest payable over the expected life of the financial instrument at the rate that exactly discounts all estimated future cash flows to equal the financial instrument's initial carrying amount. Calculation of the effective interest rate takes into account fees payable or receivable that are an integral part of the financial instrument’s yield, premiums or discounts on acquisition or issue, early redemption fees and transaction costs. All contractual terms of a financial instrument are considered when estimating future cash flows. Negative interest on financial assets is presented in interest payable and negative interest on financial liabilities is presented in interest receivable.
Included in interest receivable is finance lease income which is recognised at a constant periodic rate of return before tax on the net investment.
For accounting policy information see Accounting policies note 2.
| 2021 |
| 2020 (1) |
| 2019 (1) | |
Continuing operations |
| £m |
| £m |
| £m |
Balances at central banks |
| |
| |
| |
Loans to banks - amortised cost |
| |
| |
| |
Loans to customers - amortised cost |
| |
| |
| |
Other financial assets |
| |
| |
| |
Interest receivable | | | ||||
|
|
| ||||
Balances with banks |
| |
| |
| |
Customer deposits |
| |
| |
| |
Other financial liabilities |
| |
| |
| |
Subordinated liabilities |
| |
| |
| |
Internal funding of trading businesses |
| |
| |
| |
Interest payable | | | ||||
Net interest income |
| |
| |
| |
| (1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. |
NatWest Group plc – Annual Report on Form 20-F | 43 |
Notes to the consolidated financial statements continued
2 Non-interest income
There are three main categories of non-interest income: net fees and commissions, income from trading activities, and other operating income.
Net fees and commissions is the difference between fees received from customers for services provided by Natwest Group, such as credit card annual fees, mortgage arrangement fees, underwriting fees, payment services, brokerage fees, trade finance, investment management fees, trustee and fiduciary services, and fees incurred in the provision of those services, such as credit card interchange fees, customer incentives, loan administration, foreign currency transaction charges, brokerage fees, and mortgage valuation reports.
Income from trading activities is earned from short-term financial assets and financial liabilities to either make a spread between purchase and sale price or held to take advantage of movements in prices and yields.
Other operating income includes revenue from other operating activities which are not related to the principal activities of the company, such as share of profit or loss from associate, operating lease income, the profit or loss on the sale of a subsidiary or property, plant and equipment, profit or loss on own debt, and changes in the fair value of financial assets and liabilities designated at fair value through profit or loss.
For accounting policy information see Accounting policies note 2.
| 2021 |
| 2020 (1) |
| 2019 (1) | |
Continuing operations | £m | £m | £m | |||
Net fees and commissions (2) |
| |
| |
| |
Income from trading activities | ||||||
Foreign exchange |
| | |
| | |
Interest rate |
| ( | |
| | |
Credit |
| | |
| | |
Changes in fair value of own debt and derivative liabilities attributable to own credit risk | ||||||
- debt securities in issue |
| | ( |
| ( | |
- derivative liabilities |
| — | — |
| ( | |
Equities, commodities and other |
| — | |
| — | |
| | |
| | ||
Other operating income | ||||||
Loss on redemption of own debt | ( | ( | — | |||
Operating lease and other rental income |
| |
| |
| |
Changes in fair value of financial assets and liabilities designated at fair value | ( | ( | ( | |||
through profit or loss (3) | ||||||
Changes in fair value of other financial assets at fair value through profit or loss (4) | | | | |||
Hedge ineffectiveness |
| |
| |
| |
(Loss)/profit on disposal of amortised cost assets |
| ( |
| ( |
| |
Profit/(loss) on disposal of fair value through other comprehensive income assets |
| |
| |
| ( |
(Loss)/profit on sale of property, plant and equipment (5) |
| ( |
| |
| |
Share of profits/ (losses)of associated entities |
| |
| ( |
| ( |
Profit/(loss) on disposal of subsidiaries and associates (6) | | ( | | |||
Other income (7,8) |
| |
| ( |
| |
| ( | | ||||
| | |
| (1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. |
| (2) | Refer to Note 4 for further analysis. |
| (3) | Including related derivatives. |
| (4) | Includes instruments that have failed Solely payments of principal and interest testing under IFRS 9. |
| (5) | Includes £ |
| (6) | 2019 includes a gain of £ |
| (7) | Includes income from activities other than banking. |
| (8) | 2020 includes £ |
NatWest Group plc – Annual Report on Form 20-F | 44 |
Notes to the consolidated financial statements continued
3 Operating expenses
Operating expenses are expenses NatWest Group incurs for operation of the business such as salaries, bonus awards, pension costs, depreciation and other administrative expenses. Operating expenses are expenses NatWest Group incurs in the running of the business such as all personnel expenditure (for example salaries, bonus awards, pension costs and social security costs), premises and equipment costs (that arise from the occupation of premises and the use of equipment), depreciation and amortisation and other administrative expenses.
For accounting policy information see Accounting policies note 4.
| 2021 |
| 2020 (1) |
| 2019 (1) |
| |
Continuing operations | £m | £m | £m |
| |||
Salaries |
| |
| |
| | |
Bonus awards |
| |
| |
| | |
Temporary and contract costs | | | | ||||
Social security costs |
| |
| |
| | |
Pension costs | | | | ||||
- defined benefit schemes (see Note 5) |
| |
| |
| | |
- defined contribution schemes |
| |
| |
| | |
Other |
| |
| |
| | |
Staff costs |
| |
| |
| | |
Premises and equipment (2) |
| |
| |
| | |
UK bank levy (3) |
| |
| |
| | |
Depreciation and amortisation (4,5) |
| |
| |
| | |
Other administrative expenses (6) |
| |
| |
| | |
Administrative expenses |
| |
| |
| | |
| | |
| (1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. |
| (2) | 2021 includes cost of £ |
| (3) | 2019 includes a rebate of £ |
| (4) | 2021 includes a £ |
| (5) | Includes impairment of goodwill of £ |
| (6) | Includes litigation and conduct costs, net of amounts recovered. Refer to Notes 21 and 27 for further details. |
The average number of persons employed, rounded to the nearest hundred, during the year, excluding temporary staff,was
The number of persons employed at 31 December, excluding temporary staff, by reportable segment, was as follows:
Continuing operations |
| 2021 |
| 2020 |
| 2019 |
Retail Banking |
| |
| |
| |
Private Banking |
| |
| |
| |
Commercial Banking |
| |
| |
| |
RBS International | | | | |||
NatWest Markets |
| |
| |
| |
Central items other |
| |
| |
| |
Ulster Bank RoI (1) | | | | |||
Total |
| |
| |
| |
UK |
| |
| |
| |
USA |
| |
| |
| |
India |
| |
| |
| |
Poland | | | | |||
Republic of Ireland | | | | |||
Rest of the World |
| |
| |
| |
Total |
| |
| |
| |
| (1) | Total number of persons employed in Ulster Bank RoI of |
NatWest Group plc – Annual Report on Form 20-F | 45 |
Notes to the consolidated financial statements continued
3 Operating expenses continued
Share-based payments
As described in the Remuneration report, NatWest Group grants share-based awards to employees principally on the following bases:
Award plan |
| Eligible employees |
| Nature of award |
| Vesting conditions (1) |
| Settlement |
Sharesave | UK, Channel Islands, Gibraltar, Isle of Man, Poland and India. | Option to buy shares under employee savings plan | Continuing employment or leavers in certain circumstances | 2022 to 2026 | ||||
Deferred performance awards | All | Awards of ordinary shares and conditional shares | Continuing employment or leavers in certain circumstances | 2022 to 2028 | ||||
Long-term incentives (2) | Senior employees | Awards of ordinary shares and conditional shares | Continuing employment or leavers in certain circumstances and/or satisfaction of the pre-vest assessment and underpins | 2022 to 2028 |
| (1) | All awards have vesting conditions which may not be met. |
| (2) | Long-term incentives include buy-out awards offered to compensate certain new hires for the loss of forfeited awards from their previous employment. All awards are granted under the Employee Share Plan. |
The fair value of Sharesave options granted in 2021 was determined using a pricing model that included: expected volatility of shares determined at the grant date based on historical volatility over a period of up to five years; expected option lives that equal the vesting period; expected dividends on equity shares; and risk-free interest rates determined from UK gilts with terms matching the expected lives of the options.
The exercise price of options and the fair value on granting awards of fully paid shares is the average market price over the five trading days (three trading days for Sharesave) preceding grant date. When estimating the fair value of the award, the number of shares granted, and the prevailing market price (as defined on pages 142 of the NatWest Group 2021 Annual Report and Form 20-F Information included as Exhibit 15.2 to this Form 20-F) are used. The fair value of the award is recognised as services are provided over the vesting period.
Sharesave | 2021 | 2020 | 2019 | |||||||||
| Average |
| Shares |
| Average |
| Shares |
| Average |
| Shares | |
exercise price | under option | exercise price | under option | exercise price | under option | |||||||
£ | (million) | £ | (million) | £ | (million) | |||||||
At 1 January |
| |
| |
| |
| |
| |
| |
Granted |
| |
| |
| |
| |
| |
| |
Exercised |
| |
| ( |
| |
| — |
| |
| ( |
Cancelled |
| |
| ( |
| |
| ( |
| |
| ( |
At 31 December |
| |
| |
| |
| |
| |
| |
Options are exercisable within
Deferred performance awards | 2021 | 2020 | 2019 | |||||||||
| Value at |
| Shares |
| Value at |
| Shares |
| Value at |
| Shares | |
grant | awarded | grant | awarded | grant | awarded | |||||||
£m | (million) | £m | (million) | £m | (million) | |||||||
At 1 January |
| |
| |
| |
| |
| |
| |
Granted |
| |
| |
| |
| |
| |
| |
Forfeited |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( |
Vested |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( |
At 31 December |
| |
| |
| |
| |
| |
| |
The awards granted in 2021 vest in equal tranches on their anniversaries, predominantly over
Long-term incentives | 2021 | 2020 | 2019 | |||||||||||||||
| Value at |
| Shares |
| Options |
| Value at |
| Shares |
| Options |
| Value at |
| Shares |
| Options | |
grant | awarded | over shares | grant | awarded | over shares | grant | awarded | over shares | ||||||||||
£m | (million) | (million) | £m | (million) | (million) | £m | (million) | (million) | ||||||||||
At 1 January |
| |
| |
| — |
| |
| |
| — |
| |
| |
| |
Granted |
| |
| |
| — |
| |
| |
| — |
| |
| |
| — |
Vested/exercised |
| ( |
| ( |
| — |
| ( |
| ( |
| — |
| ( |
| ( |
| — |
Lapsed |
| — |
| — |
| — |
| ( |
| ( |
| — |
| ( |
| ( |
| ( |
At 31 December |
| |
| |
| — |
| |
| |
| — |
| |
| |
| — |
The market value of awards vested/exercised in 2021 was £
NatWest Group plc – Annual Report on Form 20-F | 46 |
Notes to the consolidated financial statements continued
3 Operating expenses continued
Bonus awards
The following tables analyse NatWest Group’s bonus awards for 2021.
| 2021 | 2020 | Change |
| |||
|
| £m |
| £m |
| % |
|
Non-deferred cash awards (1) | | | | % | |||
Deferred cash awards |
| |
| |
| | % |
Deferred share awards |
| |
| |
| ( | % |
Total deferred bonus awards |
| |
| |
| | % |
Total bonus awards (2) |
| |
| |
| | % |
| |||||||
Bonus awards as a % of operating profit before tax (3) |
| | % | ( | % | ||
Proportion of bonus awards that are deferred |
| | % | | % | ||
of which | |||||||
- deferred cash awards |
| | % | | % | ||
- deferred share awards |
| | % | | % |
| 2021 |
| 2020 |
| 2019 | |
Reconciliation of bonus awards to income statement charge | £m | £m | £m | |||
Bonus awarded |
| |
| |
| |
Less: deferral of charge for amounts awarded for current year |
| ( |
| ( |
| ( |
Income statement charge for amounts awarded in current year |
| |
| |
| |
| ||||||
Add: current year charge for amounts deferred from prior years |
| |
| |
| |
Less: forfeiture of amounts deferred from prior years |
| ( |
| ( |
| ( |
Income statement charge for amounts deferred from prior years |
| |
| |
| |
| ||||||
Income statement charge for bonus awards (2) |
| |
| |
| |
| (1) | Non-deferred cash awards are limited to £ |
| (2) | Excludes other performance related compensation. |
| (3) | Operating profit before tax and bonus expense. |
| Actual | Expected | ||||||||
|
|
|
|
| 2023 | |||||
2019 | 2020 | 2021 | 2022 | and beyond | ||||||
Year in which income statement charge is expected to be taken for deferred bonus awards | £m | £m | £m | £m | £m | |||||
Bonus awards deferred from 2019 and earlier |
| |
| |
| | | | ||
Bonus awards deferred from 2020 | — | — | | | ||||||
Less: forfeiture of amounts deferred from prior years |
| ( |
| ( |
| ( | — | — | ||
Bonus awards for 2021 deferred |
| — |
| — |
| — | | | ||
| |
| |
| | | | |||
NatWest Group plc – Annual Report on Form 20-F | 47 |
Notes to the consolidated financial statements continued
4 Segmental analysis
NatWest Group analyses its performance between the different operating segments of the Group. Ulster Bank RoI is presented separately from the Go-forward group (refer to the split below) to reflect the strategic decision on the phased withdrawal from the Republic of Ireland announced in February 2021. This is consistent with internal financial reporting and how senior management assesses the performance of each operating segment.
The directors manage NatWest Group primarily by class of business and present the segmental analysis on that basis. This includes the review of net interest income for each class of business. Interest receivable and payable for all reportable segments is therefore presented net. Segments charge market prices for services rendered between each other; funding charges between segments are determined by NatWest Group Treasury, having regard to commercial demands. The segment performance measure is operating profit/(loss).
Reportable operating segments:
The reportable operating segments are as follows:
Retail Banking serves personal customers in the UK and includes Ulster Bank customers.
Private Banking serves UK-connected high net worth individuals and their business interests.
Commercial Banking serves start-up, SME, commercial, corporate and institutional customers in the UK.
RBS International (RBSI) serves retail, commercial, and corporate customers in the Channel Islands, Isle of Man and Gibraltar, and financial institution clients in those same locations in addition to the UK and Luxembourg.
NatWest Markets (NWM) helps NatWest Group's corporate and institutional customers manage their financial risks safely and achieve their short -term and long-term sustainable financial goals.
Central items other includes corporate functions, such as NatWest Group Treasury, finance, risk management, compliance, legal, communications and human resources. Central functions manages NatWest Group capital resources and NatWest Group-wide regulatory projects and provides services to the reportable segments. Balances in relation to litigation issues and the international private banking business are included in Central items in the relevant periods.
Ulster Bank RoI serves individuals and businesses in the Republic of Ireland (RoI).
Allocation of central balance sheet items
NatWest Group allocates all central costs relating to Services and Functions to the business using appropriate drivers; these are reported as indirect costs in the segmental income statements. Assets and risk-weighted assets held centrally, mainly relating to NatWest Group Treasury, are allocated to the business using appropriate drivers.
Go-forward group | ||||||||||||||||||
Total | ||||||||||||||||||
Central | excluding | |||||||||||||||||
Retail | Private | Commercial | RBS | NatWest | items | Ulster | Ulster | |||||||||||
| Banking |
| Banking |
| Banking |
| International |
| Markets |
| other |
| Bank RoI | Bank RoI |
| Total | ||
2021 |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m | £m |
| £m | |
Continuing operations | ||||||||||||||||||
Net interest income |
| |
| |
| |
| |
| |
| ( |
| | |
| | |
Net fees and commissions |
| |
| |
| |
| |
| |
| ( |
| | |
| | |
Other non-interest income |
| ( |
| |
| |
| |
| |
| |
| | |
| | |
Total income |
| |
| |
| |
| |
| |
| |
| | |
| | |
Depreciation and amortisation |
| ( |
| — |
| ( |
| ( |
| ( |
| ( |
| ( | — |
| ( | |
Other operating expenses |
| ( |
| ( |
| ( |
| ( |
| ( |
| |
| ( | ( |
| ( | |
Impairment releases |
| |
| |
| |
| |
| |
| — |
| | |
| | |
Operating profit/(loss) |
| |
| |
| |
| |
| ( |
| ( |
| | ( |
| | |
NatWest Group plc – Annual Report on Form 20-F | 48 |
Notes to the consolidated financial statements continued
4 Segmental analysis continued
Go-forward group | ||||||||||||||||||
Total | ||||||||||||||||||
excluding | ||||||||||||||||||
| Retail |
| Private |
| Commercial |
| RBS |
| NatWest |
| Central items |
| Ulster | Ulster | ||||
Banking | Banking | Banking | International | Markets | other (1) | Bank RoI | Bank RoI | Total | ||||||||||
2020 (2) |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
Continuing operations | ||||||||||||||||||
Net interest income |
| |
| |
| |
| |
| ( |
| ( |
| | | | ||
Net fees and commissions |
| |
| |
| |
| |
| |
| ( |
| | | | ||
Other non-interest income |
| ( |
| |
| |
| |
| |
| ( |
| | | | ||
Total income |
| |
| |
| |
| |
| |
| ( |
| | | | ||
Depreciation and amortisation |
| — |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( | — | ( | ||
Other operating expenses |
| ( |
| ( |
| ( |
| ( |
| ( |
| |
| ( | ( | ( | ||
Impairment losses |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( | ( | ( | ||
Operating profit/(loss) |
| |
| |
| ( |
| |
| ( |
| ( |
| ( | ( | ( | ||
2019 (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Continuing operations | ||||||||||||||||||
Net interest income | |
| |
| |
| |
| ( |
| ( |
| | |
| | ||
Net fees and commissions |
| |
| |
| |
| |
| |
| ( |
| | |
| | |
Other non-interest income |
| |
| |
| |
| |
| |
| |
| | |
| | |
Total income |
| |
| |
| |
| |
| |
| |
| | |
| | |
Depreciation and amortisation |
| — |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( | — |
| ( | |
Operating expenses |
| ( |
| ( |
| ( |
| ( |
| ( |
| |
| ( | ( |
| ( | |
Impairment losses |
| ( |
| |
| ( |
| ( |
| |
| ( |
| ( | |
| ( | |
Operating profit/(loss) |
| |
| |
| |
| |
| ( |
| |
| | ( |
| |
| (1) | 2019 predominantly related to strategic disposals in Functions. |
| (2) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. |
Total revenue (2) | ||||||||||||||||||
Go-forward group | ||||||||||||||||||
Total | ||||||||||||||||||
Central | excluding | Ulster | ||||||||||||||||
Retail | Private | Commercial | RBS | NatWest | items | Ulster | Bank | |||||||||||
| Banking |
| Banking |
| Banking |
| International |
| Markets |
| Other |
| Bank RoI |
| RoI |
| Total | |
Year ended 31 December 2021 |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
Continuing operations |
|
|
|
|
|
|
|
|
| |||||||||
External |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Inter-segmental |
| |
| |
| |
| |
| |
| ( |
| ( |
| |
| — |
Total |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
|
|
|
|
|
|
|
| ||||||||||
Year ended 31 December 2020 (1) |
|
|
|
|
|
|
|
|
| |||||||||
Continuing operations | ||||||||||||||||||
External | | | | | | | | | | |||||||||
Inter-segmental |
| |
| |
| |
| |
| |
| ( |
| ( |
| |
| — |
Total |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Year ended 31 December 2019 (1) | ||||||||||||||||||
Continuing operations | ||||||||||||||||||
External | ||||||||||||||||||
Inter-segmental | ( | ( | — | |||||||||||||||
Total | ||||||||||||||||||
| (1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. |
| (2) | Total revenue comprises interest receivable, fees and commissions receivable, income from trading activities and other operating income. |
NatWest Group plc – Annual Report on Form 20-F | 49 |
Notes to the consolidated financial statements continued
4 Segmental analysis continued
Total income | ||||||||||||||||||
Go-forward group | ||||||||||||||||||
Total | ||||||||||||||||||
Central | excluding | Ulster | ||||||||||||||||
Retail | Private | Commercial | RBS | NatWest | items | Ulster | Bank | |||||||||||
| Banking |
| Banking |
| Banking |
| International |
| Markets |
| Other |
| Bank RoI |
| RoI |
| Total | |
Year ended 31 December 2021 |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
Continuing operations | ||||||||||||||||||
External |
| | |
| | | |
| — | |
| | | |||||
Inter-segmental |
| | |
| ( | — | ( |
| | |
| ( | — | |||||
Total |
| | |
| | | |
| | |
| | | |||||
Year ended 31 December 2020 (1) |
|
|
|
| ||||||||||||||
Continuing operations | ||||||||||||||||||
External |
| | |
| | | |
| ( | |
| | | |||||
Inter-segmental | ( | ( | ( | ( | — | |||||||||||||
Total | ( | |||||||||||||||||
Year ended 31 December 2019 (1) | ||||||||||||||||||
Continuing operations | ||||||||||||||||||
External | ||||||||||||||||||
Inter-segmental | ( | ( | ( | — | ||||||||||||||
Total | ||||||||||||||||||
| (1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. |
NatWest Group plc – Annual Report on Form 20-F | 50 |
Notes to the consolidated financial statements continued
4 Segmental analysis continued
Go-forward group | ||||||||||||||||||
Total | ||||||||||||||||||
Central | excluding | |||||||||||||||||
| Retail |
| Private |
| Commercial |
| RBS |
| NatWest |
| items |
| Ulster |
| Ulster |
| ||
Analysis of net fees and commissions |
| Banking | Banking | Banking | International | Markets | other | Bank RoI | Bank RoI | Total | ||||||||
2021 |
| £m | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||
Continuing operations | ||||||||||||||||||
Fees and commissions receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
- Payment services |
| |
| | |
| |
| |
| — |
| |
| |
| | |
- Credit and debit card fees |
| |
| | |
| |
| — |
| — |
| |
| |
| | |
- Lending and financing | | | | | | — | | | | |||||||||
- Brokerage |
| |
| | — |
| |
| |
| — |
| |
| — |
| | |
- Investment management, trustee and fiduciary services (1) | |
| | — |
| |
| — |
| — |
| |
| |
| | ||
- Underwriting fees |
| — |
| — | — |
| — |
| |
| — |
| |
| — |
| | |
- Other |
| — |
| | |
| |
| — |
| ( |
| |
| — |
| | |
Total |
| |
| | |
| |
| |
| ( |
| |
| |
| | |
Fees and commissions payable |
| ( |
| ( | ( |
| ( |
| ( |
| |
| ( |
| ( |
| ( | |
Net fees and commissions |
| |
| | |
| |
| |
| ( |
| |
| |
| | |
2020 (2) | ||||||||||||||||||
Continuing operations | ||||||||||||||||||
Fees and commissions receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
- Payment services |
| |
| | |
| |
| |
| — |
| |
| |
| | |
- Credit and debit card fees |
| |
| | |
| |
| — |
| — |
| |
| |
| | |
- Lending and financing |
| |
| | |
| |
| |
| — |
| |
| |
| | |
- Brokerage |
| |
| | — |
| |
| |
| — |
| |
| |
| | |
- Investment management, trustee and fiduciary services (1) |
| |
| | |
| |
| |
| — |
| |
| |
| | |
- Underwriting fees |
| — |
| — | — |
| — |
| |
| — |
| |
| — |
| | |
- Other |
| |
| | |
| |
| |
| ( |
| |
| — |
| | |
Total |
| |
| | |
| |
| |
| ( |
| |
| |
| | |
Fees and commissions payable |
| ( |
| ( | ( |
| ( |
| ( |
| |
| ( |
| ( |
| ( | |
Net fees and commissions |
| |
| | |
| |
| |
| ( |
| |
| |
| | |
2019 (2) | ||||||||||||||||||
Fees and commissions receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
- Payment services |
| |
| | |
| |
| |
| — |
| |
| |
| | |
- Credit and debit card fees |
| |
| | |
| |
| — |
| — |
| |
| |
| | |
- Lending and financing |
| |
| | |
| |
| |
| — |
| |
| |
| | |
- Brokerage |
| |
| | — |
| — |
| |
| — |
| |
| |
| | |
- Investment management, trustee and fiduciary services |
| |
| | |
| |
| |
| — |
| |
| |
| | |
- Underwriting fees |
| — |
| — | — |
| — |
| |
| — |
| |
| — |
| | |
- Other |
| |
| | |
| |
| |
| ( |
| |
| |
| | |
Total |
| |
| | |
| |
| |
| ( |
| |
| |
| | |
Fees and commissions payable |
| ( |
| ( | ( |
| ( |
| ( |
| |
| ( |
| ( |
| ( | |
Net fees and commissions |
| |
| | |
| |
| |
| ( |
| |
| |
| | |
| (1) | Comparisons with prior periods are impacted by the transfer of the Private Client Advice business to Private Banking from 1 January 2020. |
| (2) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. |
2021 | 2020 | 2019 | ||||||||||
Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | |||||||
| £m |
| £m |
| £m |
| £m |
| £m |
| £m | |
Retail Banking |
| | | |
| |
| |
| | ||
Private Banking |
| | | |
| |
| |
| | ||
Commercial Banking |
| | | |
| |
| |
| | ||
RBS International |
| | | |
| |
| |
| | ||
NatWest Markets |
| | | |
| |
| |
| | ||
Central items other |
| | | |
| |
| |
| | ||
Total excluding Ulster Bank RoI | | | | | | | ||||||
Ulster Bank RoI |
| | | |
| |
| |
| | ||
Total |
| | | |
| |
| |
| | ||
NatWest Group plc – Annual Report on Form 20-F | 51 |
Notes to the consolidated financial statements continued
4 Segmental analysis continued
Segmental analysis of goodwill
There was an £
Geographical segments
The geographical analysis in the tables below has been compiled on the basis of location of office where the transactions are recorded.
| UK |
| USA |
| Europe |
| RoW |
| Total | |
2021 |
| £m |
| £m |
| £m |
| £m |
| £m |
Continuing operations | ||||||||||
Total revenue |
| |
| |
| |
| |
| |
Interest receivable |
| |
| |
| |
| |
| |
Interest payable | ( | ( | ( | ( | ( | |||||
Net fees and commissions |
| |
| |
| |
| |
| |
Income from trading activities |
| |
| |
| ( |
| |
| |
Other operating income |
| |
| |
| |
| - |
| |
Total income |
| |
| |
| |
| |
| |
Operating profit/(loss) before tax |
| |
| |
| ( |
| |
| |
Total assets |
| |
| |
| |
| |
| |
Total liabilities |
| |
| |
| |
| |
| |
Contingent liabilities and commitments |
| |
| |
| |
| |
| |
2020 (1) | ||||||||||
Continuing operations | ||||||||||
Total revenue |
| |
| |
| |
| |
| |
Interest receivable |
| |
| — |
| |
| |
| |
Interest payable | ( | — | ( | ( | ( | |||||
Net fees and commissions |
| |
| |
| |
| |
| |
Income from trading activities |
| |
| |
| |
| |
| |
Other operating income |
| ( |
| ( |
| |
| |
| ( |
Total income |
| |
| |
| |
| |
| |
Operating profit/(loss) before tax |
| ( |
| ( |
| ( |
| |
| ( |
Total assets |
| |
| |
| |
| |
| |
Total liabilities |
| |
| |
| |
| |
| |
Contingent liabilities and commitments |
| |
| — |
| |
| |
| |
2019 (1) |
|
|
|
|
|
|
|
|
|
|
Continuing operations | ||||||||||
Total revenue |
| |
| |
| |
| |
| |
Interest receivable |
| |
| — |
| |
| |
| |
Interest payable | ( | — | ( | ( | ( | |||||
Net fees and commissions |
| |
| |
| |
| |
| |
Income from trading activities |
| |
| |
| |
| |
| |
Other operating income |
| |
| |
| |
| |
| |
Total income |
| |
| |
| |
| |
| |
Operating profit/(loss) before tax |
| |
| |
| |
| |
| |
Total assets |
| |
| |
| |
| |
| |
Total liabilities |
| |
| |
| |
| |
| |
Contingent liabilities and commitments |
| |
| — |
| |
| |
| |
| (1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. |
NatWest Group plc – Annual Report on Form 20-F | 52 |
Notes to the consolidated financial statements continued
5 Pensions
NatWest Group operates two types of pension scheme: defined benefit and defined contribution. The defined contribution schemes invest contributions in a choice of funds and the accumulated contributions and investment returns are used by the employee to provide benefits on retirement, there is no legal or constructive obligation for NatWest Group to pay any further contributions or benefits. The defined benefit schemes provide pensions in retirement based on employees’ pensionable salary and service.
NatWest Group’s balance sheet includes any defined benefit pension scheme surplus or deficit as a retirement benefit asset or liability reported in other assets and other liabilities. The surplus or deficit is the difference between the liabilities to be paid from the defined benefit scheme, and the assets held by the scheme to meet these liabilities. The liabilities are calculated by external actuaries using a number of financial and demographic assumptions.
For some NatWest Group defined benefit schemes where there is a net defined benefit surplus which means any surplus in excess of present value of any economic benefits, the application of accounting standards means we don’t recognise that surplus on the balance sheet as the trustees may have control over the use of the surplus.
For accounting policy information see Accounting policies note 4.
Defined contribution schemes
NatWest Group sponsors several defined contribution schemes in different territories, which new employees are entitled to join. NatWest Group pays specific contributions into individual investment funds on employees’ behalf. Once those contributions are paid, there is no further liability on the NatWest Group balance sheet relating to the defined contribution scheme.
Defined benefit schemes
NatWest Group sponsors a number of pension schemes in the UK and overseas, including the Main section of the NatWest Group Pension Fund (the “Main section”) which operates under UK trust law and is managed and administered on behalf of its members in accordance with the terms of the trust deed, the scheme rules and UK legislation.
Pension fund trustees are appointed to operate each fund and ensure benefits are paid in accordance with the scheme rules and national law. The trustees are the legal owner of a scheme’s assets, and have a duty to act in the best interests of all scheme members.
The schemes generally provide a pension of -sixtieth of final pensionable salary for each year of service prior to retirement up to a maximum of
The Main section corporate trustee is NatWest Pension Trustee Limited (the Trustee), a wholly owned subsidiary of NWB Plc, Principal Employer of the Main section. The Board of the Trustee comprises
Similar governance principles apply to NatWest Group’s other defined benefit pension schemes.
Investment strategy
The assets of the Main section, which is typical of other group schemes, represent
The Main section employs both physical and derivative instruments to achieve a desired asset class exposure and to reduce the section’s interest rate, inflation, and currency risk. This means that the net funding position is considerably less sensitive to changes in market conditions than the value of the assets or liabilities in isolation. In particular, movements in interest rate and inflation are substantially hedged by the Trustee.
Major classes of plan assets as a percentage of | 2021 | 2020 | ||||||||||
total plan assets of the Main section |
| Quoted |
| Unquoted |
| Total |
| Quoted |
| Unquoted |
| Total |
% | % | % | % | % | % | |||||||
Equities | | | | | | | ||||||
Index linked bonds |
| | — | | | — | | |||||
Government bonds |
| | — | | | — | | |||||
Corporate and other bonds |
| | | | | | | |||||
Real estate |
| — |
| | | — | | | ||||
Derivatives |
| — |
| | | — | | | ||||
Cash and other assets |
| — |
| | | — | | | ||||
| | | | | | | ||||||
NatWest Group plc – Annual Report on Form 20-F | 53 |
Notes to the consolidated financial statements continued
5 Pensions continued
The Main section’s holdings of derivative instruments are summarised in the table below:
2021 | 2020 | |||||||||||
Notional | Fair value | Notional | Fair value | |||||||||
| amounts |
| Assets |
| Liabilities |
| amounts |
| Assets |
| Liabilities | |
£bn | £m | £m | £bn | £m | £m | |||||||
Inflation rate swaps |
| |
| |
| |
| |
| |
| |
Interest rate swaps |
| |
| |
| |
| |
| |
| |
Currency forwards |
| |
| |
| |
| |
| |
| |
Equity and bond call options |
| — |
| |
| — |
| |
| |
| |
Equity and bond put options |
| — |
| |
| |
| |
| |
| |
Other |
| |
| |
| |
| |
| |
| |
Swaps have been executed at prevailing market rates and within standard market bid/offer spreads with a number of counterparties, including NWB Plc.
At 31 December 2021, the gross notional value of the swaps was £
The schemes do not invest directly in NatWest Group but can have exposure to NatWest Group. The trustees of the respective UK schemes are responsible for ensuring that indirect investments in NatWest Group do not exceed the regulatory limit of
Main section | All schemes | |||||||||||||||
|
|
| Present value |
| Asset |
| Net |
|
|
| Present value |
| Asset |
| Net | |
Fair | of defined | ceiling/ | pension | Fair | of defined | ceiling/ | pension | |||||||||
value of | benefit | minimum | (assets)/ | value of | benefit | minimum | (assets)/ | |||||||||
plan assets | obligation | funding | liability | plan assets | obligation | funding | liability | |||||||||
Changes in value of net pension (assets)/liability | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||
At 1 January 2020 |
| |
| |
| |
| — |
| |
| |
| |
| ( |
Currency translation and other adjustments | — | | — | | | | — | ( | ||||||||
Income statement | | | | | | | | | ||||||||
Statement of comprehensive income | | | | | | | | ( | ||||||||
Contributions by employer | | — | — | ( | | — | — | ( | ||||||||
Contributions by plan participants and other scheme members | | | — | — | | | — | — | ||||||||
Assets/liabilities extinguished upon settlement | — | — | — | — | ( | ( | — | ( | ||||||||
Benefits paid | ( | ( | — | — | ( | ( | — | — | ||||||||
At 1 January 2021 | | | | — | | | | ( | ||||||||
Currency translation and other adjustments | — | — | — | — | ( | ( | ( | | ||||||||
Income statement | ||||||||||||||||
Net interest expense | | | | ( | | | | ( | ||||||||
Current service cost | — | | — | | — | | — | | ||||||||
Past service cost | — | | — | | — | | — | | ||||||||
| | | | | | | | |||||||||
Statement of comprehensive income | ||||||||||||||||
Return on plan assets excluding recognised interest income | | — | — | ( | | — | — | ( | ||||||||
Experience gains and losses | — | ( | — | ( | — | ( | — | ( | ||||||||
Effect of changes in actuarial financial assumptions | — | ( | — | ( | — | ( | — | ( | ||||||||
Effect of changes in actuarial demographic assumptions | — | | — | | — | | — | | ||||||||
Asset ceiling adjustments | — | — | | | — | — | | | ||||||||
| ( | | | | ( | | | |||||||||
Contributions by employer | | — | — | ( | | — | — | ( | ||||||||
Contributions by plan participants and other scheme members | | | — | — | | | — | — | ||||||||
Assets/liabilities extinguished upon settlement | — | — | — | — | — | — | — | — | ||||||||
Benefits paid | ( | ( | — | — | ( | ( | — | — | ||||||||
At 31 December 2021 | | | | — | | | | ( | ||||||||
| (1) | Defined benefit obligations are subject to annual valuation by independent actuaries. |
| (2) | NatWest Group recognises the net pension scheme surplus or deficit as a net asset or liability. In doing so, the funded status is adjusted to reflect any schemes with a surplus that NatWest Group may not be able to access, as well as any minimum funding requirement to pay in additional contributions. This is most relevant to the Main section, where the surplus is not recognised as the trustees may have control over the use of the surplus. Other NatWest Group schemes that this applies to include the Ulster Bank Pension Scheme (NI) and the NatWest Markets section. |
| (3) | NatWest Group expects to make contributions to the Main section of £ |
NatWest Group plc – Annual Report on Form 20-F | 54 |
Notes to the consolidated financial statements continued
5 Pensions continued
All schemes | ||||
| 2021 |
| 2020 | |
Amounts recognised on the balance sheet | £m | £m | ||
Fund asset at fair value |
| |
| |
Present value of fund liabilities |
| |
| |
Funded status |
| |
| |
Assets ceiling/minimun funding |
| |
| |
| |
| | |
| 2021 |
| 2020 | |
Net pension assets/(liability) comprises | £m | £m | ||
Net assets of schemes in surplus (included in Other assets, Note 18) |
| |
| |
Net liabilities of schemes in deflicit (included in Other liabilities, Note 21) |
| ( |
| ( |
| |
| |
The income statement charge comprises(1):
| 2021 |
| 2020 | |
£m | £m | |||
Continuing operations | | | ||
Discontinued operations |
| |
| |
| (1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. |
Funding and contributions by NatWest Group
In the UK, the trustees of defined benefit pension schemes are required to perform funding valuations every
A full triennial funding valuation of the Main section, effective 31 December 2020, was completed during the year.
This triennial funding valuation determined the funding level to be
The key assumptions used to determine the funding liabilities were the discount rate, which is determined based on fixed interest swap and gilt yields plus
The 2020 triennial valuation of the Group Pension Fund included an allowance for the estimated impact of guaranteed minimum pension equalisation, which is reflected in the IAS 19 valuation at 31 December 2021. As such,
Accounting Assumptions
Placing a value on NatWest Group’s defined benefit pension schemes’ liabilities requires NatWest Group’s management to make a number of assumptions, with the support of independent actuaries. The ultimate cost of the defined benefit obligations depends upon actual future events and the assumptions made are unlikely to be exactly borne out in practice, meaning the final cost may be higher or lower than expected.
NatWest Group plc – Annual Report on Form 20-F | 55 |
Notes to the consolidated financial statements continued
5 Pensions continued
The most significant assumptions used for the Main section are shown below:
Principal IAS 19 actuarial assumptions | |||||
| 2021 |
| 2020 |
| |
% | % | ||||
Discount rate |
| |
| |
|
Inflation assumption (RPI) |
| |
| |
|
Rate of increase in salaries |
| |
| |
|
Rate of increase in deferred pensions |
| |
| |
|
Rate of increase in pensions in payment |
| |
| |
|
Lump sum conversion rate at retirement |
| |
| |
|
Longevity at age 60: |
| years |
| years |
|
Current pensioners | |||||
Males |
|
|
| ||
Females |
|
|
| ||
Future pensioners, currently aged 40 |
|
|
| ||
Males |
|
|
| ||
Females |
|
|
| ||
Discount rate
The IAS 19 valuation uses a single discount rate set by reference to the yield on a basket of ‘high quality’ sterling corporate bonds.
Significant judgment is required when setting the criteria for bonds to be included in the basket of bonds that is used to determine the discount rate used in the IAS 19 valuations. The criteria include issue size, quality of pricing and the exclusion of outliers. Judgment is also required in determining the shape of the yield curve at long durations; a constant credit spread relative to gilts is assumed. Sensitivity to the main assumptions is presented below.
The weighted average duration of the Main section's defined benefit obligation at 31 December 2021 is
The larger outflow in the first three years represents the expected level of transfers out to 31 December 2023.
NatWest Group plc – Annual Report on Form 20-F | 56 |
Notes to the consolidated financial statements continued
5 Pensions continued
The table below shows how the net pension asset of the Main section would change if the key assumptions used were changed independently. In practice the variables have a degree of correlation and do not move completely in isolation.
(Decrease)/ | (Decrease)/ | Increase in | ||||
increase in | increase in | net pension | ||||
value of | value of | (obligations)/ | ||||
| assets |
| liabilities |
| assets | |
2021 | £m | £m | £m | |||
( | ( | ( | ||||
| | | ||||
( | ( | | ||||
Longevity increase of | — | | ( | |||
— | | ( | ||||
Increase in equity values of | | — | | |||
2020 | ||||||
| ( | ( |
| ( | ||
| | |
| | ||
| ( | ( |
| | ||
Longevity increase of | — | | ( | |||
— | | ( | ||||
Increase in equity values of |
| | — |
| |
| (1) | Includes both quoted and private equity. |
The funded status is most sensitive to movements in credit spreads and longevity. The table below shows the combined change in the funded status of the Main section as a result of larger movements in these assumptions, assuming no changes in other assumptions.
| Change in life expectancies | |||||||||||
| -2 years |
| -1 years |
| No change |
| + |
| + | |||
2021 |
|
|
| £bn |
| £bn |
| £bn |
| £bn |
| £bn |
Change in credit spreads |
| + |
| |
| |
| |
| |
| |
| No change |
| |
| |
| — |
| ( |
| ( | |
| - |
| ( |
| ( |
| ( |
| ( |
| ( | |
2020 |
|
|
|
|
| |||||||
Change in credit spreads |
| + |
| |
| |
| |
| |
| |
| No change |
| |
| |
| — |
| ( |
| ( | |
| - |
| ( |
| ( |
| ( |
| ( |
| ( | |
The defined benefit obligation of the Main section is attributable to the different classes of scheme members in the following proportions:
| 2021 |
| 2020 | |
Membership category | % | % | ||
Active members |
| |
| |
Deferred members |
| |
| |
Pensioners and dependants |
| |
| |
| |
| |
The experience history of NatWest Group schemes is shown below:
Main section | All schemes |
| |||||||||||||||||||
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| |
History of defined benefit schemes | £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| |
Fair value of plan assets | |
| |
| |
| |
| |
| |
| |
| |
| |
| | ||
Present value of plan obligations | |
| |
| |
| |
| |
| |
| |
| |
| |
| | ||
Net surplus/(deficit) | |
| |
| |
| |
| |
| |
| |
| |
| |
| | ||
Experience gains/(losses) on plan liabilities | |
| |
| |
| ( |
| ( |
| |
| |
| |
| ( |
| ( | ||
Experience gains/(losses) on plan assets | |
| |
| |
| ( |
| |
| |
| |
| |
| ( |
| | ||
Actual return on plan assets | |
| |
| |
| ( |
| |
| |
| |
| |
| ( |
| | ||
Actual return on plan assets % | | % | | % | ( | % | | % | | % | | % | | % | ( | % | | % | |||
NatWest Group plc – Annual Report on Form 20-F | 57 |
Notes to the consolidated financial statements continued
6 Auditor’s remuneration
Amounts payable to NatWest Group's auditors for statutory audit and other services are set out below. All audit-related and other services are approved by the Group Audit Committee and are subject to strict controls to ensure the external auditor’s independence is unaffected by the provision of other services. The Group Audit Committee recognises that for certain assignments, the auditors are best placed to perform the work economically; for other work, NatWest Group selects the supplier best placed to meet its requirements. NatWest Group’s auditors are permitted to tender for such work in competition with other firms where the work is permissible under audit independence rules.
| 2021 |
| 2020 |
| 2019 | |
£m | £m |
| £m | |||
Fees payable for : | ||||||
- the audit of NatWest Group’s annual accounts (1) |
| |
| | | |
- the audit of NatWest Group plc’s subsidiaries (1) |
| |
| | | |
- audit-related assurance services (1,2) |
| |
| | | |
Total audit and audit-related assurance services fees |
| |
| | | |
Other assurance services |
| |
| | | |
Corporate finance services (3) |
| |
| | | |
Total other services |
| |
| | |
| (1) | The 2021 audit fee was approved by the Group Audit Committee. At 31 December 2021, £ |
| (2) | Comprises fees of £ |
| (3) | Comprises fees of £ |
7 Tax
NatWest Group’s corporate income tax charge for the period is set out below, together with a reconciliation to the expected tax charge calculated using the UK standard corporation tax rate and details of the NatWest Group’s deferred tax balances.
For accounting policy information see Accounting policies note 9.
Analysis of the tax charge for the year
The tax charge comprises current and deferred tax in respect of profits and losses recognised or originating in the income statement. Tax on items originating outside the income statement is charged to other comprehensive income or direct to equity (as appropriate) and is therefore not reflected in the table below.
Current tax is tax payable or recoverable in respect of the taxable profit or loss for the year and any adjustments to tax payable in prior years. Deferred tax is explained on page 60.
2021 | 2020 (1) | 2019 (1) | ||||
Continuing operations |
| £m |
| £m |
| £m |
Current tax |
|
|
|
| ||
Charge for the year |
| ( | ( |
| ( | |
Over provision in respect of prior years |
| | |
| | |
| ( | ( |
| ( | ||
Deferred tax |
|
|
| |||
(Charge)/credit for the year |
| ( | |
| | |
UK tax rate change impact (2) |
| | |
| — | |
Net increase/(decrease) in the carrying value of deferred tax assets in respect of UK, Ireland and Netherlands losses | | ( | | |||
Over/(under) provision in respect of prior years (3) |
| | ( |
| | |
Tax charge for the year |
| ( | ( |
| ( |
| (1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. |
| (2) | It was announced in the UK Government’s budget on 3 March 2021 that the main UK corporation tax rate will increase from |
| (3) | Prior year tax adjustments incorporate refinements to tax computations made on submission and agreement with the tax authorities and adjustments to provisions in respect of uncertain tax positions. |
NatWest Group plc – Annual Report on Form 20-F | 58 |
Notes to the consolidated financial statements continued
7 Tax continued
Factors affecting the tax charge for the year
Taxable profits differ from profits reported in the income statement as certain amounts of income and expense may not be taxable or deductible. In addition, taxable profits may reflect items that have been included outside the income statement (for instance, in other comprehensive income) or adjustments that are made for tax purposes only.
The expected tax charge for the year is calculated by applying the standard UK corporation tax rate of
The actual tax charge differs from the expected tax charge as follows:
| 2021 |
| 2020 (1) |
| 2019 (1) | |
Continuing operations | £m | £m | £m | |||
Expected tax (charge)/credit |
| ( | |
| ( | |
Losses and temporary differences in year where no deferred tax asset recognised |
| ( | ( |
| ( | |
Foreign profits taxed at other rates |
| ( | ( |
| | |
Non deductible goodwill impairment |
| ( | — |
| — | |
Items not allowed for tax: | ||||||
- losses on disposals and write-downs |
| ( | ( |
| ( | |
- UK bank levy |
| ( | ( |
| ( | |
- regulatory and legal actions |
| ( | |
| ( | |
- other disallowable items |
| ( | ( |
| ( | |
Non-taxable items: |
| |||||
- Alawwal bank merger gain disposal | — | — | | |||
- FX recycling on the liquidation of RFS Holdings | — | — | | |||
- other non-taxable items | | | | |||
Taxable foreign exchange movements |
| | ( |
| ( | |
Unrecognised losses brought forward and utilised |
| | |
| | |
(Decrease)/increase in the carrying value of deferred tax assets in respect of: |
|
| ||||
- UK losses | ( | | | |||
- Ireland losses | ( | ( | ( | |||
- Netherlands losses | | — | — | |||
Banking surcharge |
| ( | ( |
| ( | |
Tax on paid-in equity | | | | |||
UK tax rate change impact |
| | |
| — | |
Adjustments in respect of prior years | | ( | | |||
Actual tax charge |
| ( | ( |
| ( |
| (1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. |
Judgment: tax contingencies
NatWest Group’s corporate income tax charge and its provisions for corporate income taxes necessarily involve a degree of estimation and judgment. The tax treatment of some transactions is uncertain and tax computations are yet to be agreed with the tax authorities in a number of jurisdictions. NatWest Group recognises anticipated tax liabilities based on all available evidence and, where appropriate, in the light of external advice. Any difference between the final outcome and the amounts provided will affect current and deferred income tax charges in the period when the matter is resolved.
Deferred tax
Deferred tax is the tax expected to be payable or recoverable in respect of temporary differences where the carrying amount of an asset or liability differs for accounting and tax purposes. Deferred tax liabilities reflect the expected amount of tax payable in the future on these temporary differences. Deferred tax assets reflect the expected amount of tax recoverable in the future on these differences.
The net deferred tax asset recognised by the NatWest Group is shown below, together with details of the accounting judgments and tax rates that have been used to calculate the deferred tax. Details are also provided of any deferred tax assets or liabilities that have not been recognised on the balance sheet.
Analysis of deferred tax
| £m |
| £m | |
Deferred tax asset |
| ( |
| ( |
Deferred tax liability |
| |
| |
Net deferred tax asset |
| ( |
| ( |
NatWest Group plc – Annual Report on Form 20-F | 59 |
Notes to the consolidated financial statements continued
7 Tax continued
| Tax |
| ||||||||||||
| Accelerated | losses | ||||||||||||
| capital | Expense | Financial | carried | ||||||||||
| Pension | allowances | provisions | instruments | forward | Other | Total | |||||||
|
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
At 1 January 2020 |
| ( |
| |
| ( |
| |
| ( |
| ( |
| ( |
Charge/(credit) to income statement: (1) |
| |||||||||||||
- continuing operations | |
| ( |
| |
| |
| |
| ( |
| ( | |
- discontinued operations | — | — | — | — | | — | | |||||||
Charge/(credit) to other comprehensive income |
| |
| — |
| — |
| |
| — |
| ( |
| |
Currency translation and other adjustments |
| |
| ( |
| — |
| — |
| ( |
| |
| ( |
At 1 January 2021 |
| ( |
| ( |
| ( |
| |
| ( |
| ( |
| ( |
Charge/(credit) to income statement: |
|
|
|
|
|
|
| |||||||
- continuing operations | | | ( | ( | ( | ( | ( | |||||||
- discontinued operations | — | — | — | — | | — | | |||||||
Charge/(credit) to other comprehensive income |
| |
| — |
| ( |
| ( |
| — |
| ( |
| ( |
Currency translation and other adjustments |
| ( |
| |
| — |
| — |
| |
| — |
| |
At 31 December 2021 |
| |
| ( |
| ( |
| |
| ( |
| ( |
| ( |
| (1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. |
Deferred tax assets in respect of carried forward tax losses are recognised if the losses can be used to offset probable future taxable profits after taking into account the expected reversal of other temporary differences. Recognised deferred tax assets in respect of tax losses are analysed further below.
| 2021 |
| 2020 | |
£m | £m | |||
UK tax losses carried forward | ||||
- NWM Plc |
| |
| |
- NWB Plc |
| |
| |
- RBS plc |
| |
| |
- Ulster Bank Limited | — | | ||
Total |
| |
| |
Overseas tax losses carried forward | ||||
- UBIDAC | | |||
- NWM N.V. |
| |
| — |
| |
| |
Critical accounting policy: Deferred tax
NatWest Group has recognised a deferred tax asset of £
Judgment – NatWest Group has considered the carrying value of deferred tax assets and concluded that, based on management’s estimates, sufficient taxable profits will be generated in future years to recover recognised deferred tax assets.
Estimate – These estimates are partly based on forecast performance beyond the horizon for management’s detailed plans. They have regard to inherent uncertainties, such as climate change and the impact of COVID. The deferred tax assets in NWM Plc and UBIDAC are supported by way of future reversing taxable temporary differences on which deferred tax liabilities are recognised at 31 December 2021.
UK tax losses
Under UK tax rules, tax losses can be carried forward indefinitely. As the recognised tax losses in NatWest Group arose prior to 1 April 2015, credit in future periods is given against
It was announced in the UK Government's budget on 3 March 2021 that the main UK corporation tax rate will increase from
It was subsequently announced in the UK Government's budget on 27 October 2021 that the UK banking surcharge will decrease from
NatWest Group plc – Annual Report on Form 20-F | 60 |
Notes to the consolidated financial statements continued
7 Tax continued
NWM Plc - NWM Plc expects that the balance of recognised deferred tax asset at 31 December 2021 of £
NWB Plc – A deferred tax asset of £
RBS plc – A deferred tax asset of £
Overseas tax losses
UBIDAC – A deferred tax asset of £
NatWest Market N.V. (NWM N.V.) - A deferred tax asset of £
Unrecognised deferred tax
Deferred tax assets of £
Deferred tax liabilities of £
NatWest Group plc – Annual Report on Form 20-F | 61 |
Notes to the consolidated financial statements continued
8 Discontinued operations and assets and liabilities of disposal groups
Discontinued operations are reported separately on the income statement to allow users to distinguish the profits and cash flows from continuing operations from those activities that are subject to disposal.
Assets and liabilities which we intend to dispose of in a single transaction are also presented separately on the balance sheet.
For accounting policy information see Accounting policies note 3.
This note sets out the profit/(loss) from the discontinued operations (represented for comparative periods), the assets and liabilities of the disposal group and the operating cash flows attributable to the discontinued operations.
On 28 June 2021 we announced it had agreed a binding sale agreement with Allied Irish Banks, p.l.c. for the transfer of c.€
On the 17 December 2021 we signed a legally binding agreement with Permanent TSB p.l.c. The proposed sale will include performing non-tracker mortgages, the performing loans in the micro-SME business; the UBIDAC Asset Finance business, including its Lombard digital platform, and a subset of Ulster Bank branch locations in the Republic of Ireland. The majority of loans are expected to transfer by Q4 2022. As part of the transaction it is anticipated that c.
The business activities relating to these sales that meet the requirements of IFRS 5 are presented as a discontinued operation and as a disposal group at 31 December 2021. The Ulster Bank RoI operating segment continues to be reported separately and reflects the results and balance sheet position of its continuing operations.
(a) Profit from discontinued operations, net of tax
| 2021 |
| 2020 |
| 2019 | |
£m | £m | £m | ||||
| ||||||
Interest receivable | | | | |||
Net interest income | | | | |||
Non-interest income | | | | |||
Total income | | | | |||
Operating expenses | ( | ( | ( | |||
Profit before impairment losses | | | | |||
Impairment releases/(losses) | | ( | | |||
Operating profit before tax | | | | |||
Tax (charge)/credit | ( | ( | | |||
Profit from discontinued operations, net of tax | | | |
(b) Assets and liabilities of disposal groups
| 2021 | |
£m | ||
Assets of disposal groups |
| |
Loans to customers - amortised cost |
| |
Derivatives |
| |
Other assets |
| |
| ||
Liabilities of disposal groups |
| |
Other liabilities |
| |
| | |
Net assets of disposal groups |
| |
(c) Operating cash flows attributable to discontinued operations
| 2021 |
| 2020 |
| 2019 | |
| £m |
| £m |
| £m | |
Net cash flows from operating activities |
| |
| ( |
| ( |
Net increase/(decrease) in cash and cash equivalents |
| |
| ( |
| ( |
NatWest Group plc – Annual Report on Form 20-F | 62 |
Notes to the consolidated financial statements continued
9 Earnings per share
Earnings per share is a metric to measure how much profit NatWest Group makes for each share that is in issue during the year. Basic earnings per ordinary share is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding. Diluted earnings per ordinary share is calculated by dividing the basic earnings by the weighted average number of ordinary shares outstanding plus the weighted average number of ordinary shares that would be issued on conversion of dilutive share options and convertible securities.
| 2021 |
| 2020 |
| 2019 | |
£m | £m | £m | ||||
Earnings |
|
|
|
|
|
|
Profit/(loss) from continuing operations attributable to ordinary shareholders |
| |
| ( |
| |
Profit from discontinued operations attributable to ordinary shareholders |
| |
| |
| |
Profit/(loss) attributable to ordinary shareholders |
| |
| ( |
| |
|
|
|
|
|
|
|
Weighted average number of shares (millions) |
|
|
|
|
|
|
Weighted average number of ordinary shares outstanding during the year |
| |
| |
| |
Effect of dilutive share options and convertible securities(1) |
| |
| — |
| |
Diluted weighted average number of ordinary shares outstanding during the year |
| |
| |
| |
| (1) | As there was a loss from continuing operations attributable to the parent company for the period to 31 December 2020, the effect of share options and convertible securities was not dilutive. |
10 Financial instruments – classification
Financial instruments are contracts that give rise to a financial asset of one entity and a corresponding financial liability or equity instrument of a counterparty entity, such as: cash; derivatives; loans; deposits; and settlement balances. This note presents financial instruments classified in accordance with IFRS 9 – Financial Instruments.
Judgment: classification of financial assets
Classification of financial assets between amortised cost and fair value through other comprehensive income requires a degree of judgment in respect of business models and contractual cashflows.
| - | The business model criteria is assessed at a portfolio level to determine whether assets are classified as held to collect or held to collect and sell. Information that is considered in determining the applicable business model includes the portfolio’s policies and objectives, how the performance and risks of the portfolio are managed, evaluated and reported to management; and the frequency, volume and timing of sales in prior periods, sales expectation for future periods, and the reasons for sales. |
| - | The contractual cash flow characteristics of financial assets are assessed with reference to whether the cash flows represent solely payments of principal and interest. A level of judgment is made in assessing terms that could change the contractual cash flows so that it would not meet the condition for solely payments of principal and interest, including contingent and leverage features, non-recourse arrangements and features that could modify the time value of money. |
For accounting policy information see Accounting policies 10, 12, 13 and 15.
NatWest Group plc – Annual Report on Form 20-F | 63 |
Notes to the consolidated financial statements continued
10 Financial instruments – classification continued
Judgment: classification of financial assets
The following tables analyse financial assets and liabilities in accordance with the categories of financial instruments on an IFRS 9 basis.
Amortised | Other |
| ||||||||
MFVTPL | FVOCI | cost | assets |
| Total | |||||
Assets |
| £m |
| £m |
| £m |
| £m |
| £m |
Cash and balances at central banks |
| — |
| — |
| |
| — | | |
Trading assets | | — | — | — | | |||||
Derivatives (1) | | — | — | — | | |||||
Settlement balances |
| — | — | | — | | ||||
Loans to bank - amortised cost (2) |
| — |
| — |
| |
| — | | |
Loans to customers - amortised cost (3) |
| — |
| — |
| |
| — | | |
Other financial assets |
| | |
| |
| — | | ||
Intangible assets | — | — | — | | | |||||
Other assets |
| — | — | — |
| | | |||
Assets of disposal groups | — | — | — | | | |||||
31 December 2021 |
| |
| |
| |
| |
| |
Cash and balances at central banks |
| |
| | ||||||
Trading assets | |
|
| | ||||||
Derivatives (1) | |
|
| | ||||||
Settlement balances |
| |
| | ||||||
Loans to bank - amortised cost (2) |
| |
| | ||||||
Loans to customers - amortised cost (3) |
|
| |
| | |||||
Other financial assets |
| |
| | |
| | |||
Intangible assets | | | ||||||||
Other assets |
| | | |||||||
31 December 2020 |
| |
| | |
| | |
Held-for- | Amortised | Other | ||||||||
| trading |
| DFV |
| cost |
| liabilities |
| Total | |
Liabilities |
| £m | £m | £m | £m | £m | ||||
Bank deposits (4) |
| — |
| — | |
| — |
| | |
Customer deposits |
| — |
| — | |
| — |
| | |
Settlement balances |
| — |
| — | |
| — |
| | |
Trading liabilities | | — | — | — | | |||||
Derivatives (1) |
| |
| — | — |
| — |
| | |
Other financial liabilities (5) |
| — |
| | |
| — |
| | |
Subordinated liabilities |
| — |
| | |
| — |
| | |
Notes in circulation | — | — | | — | | |||||
Other liabilities (6) |
| — |
| — | |
| |
| | |
31 December 2021 |
| |
| | |
| |
| | |
Bank deposits (4) |
|
| |
|
| | ||||
Customer deposits |
|
| |
|
| | ||||
Settlement balances |
|
| |
|
| | ||||
Trading liabilities |
| |
|
|
| | ||||
Derivatives (1) |
| |
|
|
| | ||||
Other financial liabilities (5) |
|
| | |
|
| | |||
Subordinated liabilities |
|
| | |
|
| | |||
Notes in circulation | | | ||||||||
Other liabilities (6) |
|
| |
| |
| | |||
31 December 2020 |
| |
| | |
| |
| |
(1) | Includes net hedging derivatives assets of £ |
(2) | Includes items in the course of collection from other banks of £ |
(3) | Includes finance lease receivables of £ |
(4) | Includes items in the course of transmission to other banks of £ |
(5) | The carrying amount of other customer accounts designated at fair value through profit or loss is the same as the principal amount for both periods. |
(6) | Includes lease liabilities of £ |
NatWest Group plc – Annual Report on Form 20-F | 64 |
Notes to the consolidated financial statements continued
10 Financial instruments – classification continued
Judgment: classification of financial assets
|
| 2021 |
| 2020 |
£m | £m | |||
Reverse repos |
|
|
|
|
Trading assets | | | ||
Loans to banks - amortised cost |
| |
| |
Loans to customers - amortised cost |
| |
| |
|
|
|
|
|
Repos |
|
|
|
|
Bank deposits |
| |
| |
Customer deposits |
| |
| |
Trading liabilities |
| | |
The tables below present information on financial assets and financial liabilities that are offset on the balance sheet under IFRS or subject to enforceable master netting agreements together with financial collateral received or given.
Instruments which can be offset | Potential for offset not recognised by IFRS |
|
| |||||||||||||||
Effect of | Net amount after | Instruments | ||||||||||||||||
master netting | the effect of netting | outside | ||||||||||||||||
IFRS | Balance | and similar | Cash | Securities | agreements and | netting | Balance | |||||||||||
Gross | offset | sheet | agreements | collateral | collateral | related collateral | agreements | sheet total | ||||||||||
2021 |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
Derivative assets |
| | ( | | ( | ( | ( | | | | ||||||||
Derivative liabilities |
| | ( | | ( | ( | ( | | | | ||||||||
Net position (1) |
| | | | — | ( | | | | | ||||||||
|
|
|
|
|
|
| ||||||||||||
Trading reverse repos |
| | ( | | ( | — | ( | | | | ||||||||
Trading repos |
| | ( | | ( | — | ( | | | | ||||||||
Net position |
| | — | | — | — | ( | | ( | | ||||||||
|
| |||||||||||||||||
Non trading reverse repos |
| | ( | | — | — | ( | — | | | ||||||||
Non trading repos |
| | ( | | — | — | ( | — | — | | ||||||||
Net position |
| | — | | — | — | ( | — | | | ||||||||
2020 |
|
|
|
|
|
| ||||||||||||
Derivative assets |
| |
| ( |
| |
| ( |
| ( |
| ( |
| |
| |
| |
Derivative liabilities |
| |
| ( |
| |
| ( |
| ( |
| ( |
| |
| |
| |
Net position (1) |
| |
| |
| |
| — |
| ( |
| ( |
| |
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Trading reverse repos |
| |
| ( |
| |
| ( |
| — |
| ( |
| |
| |
| |
Trading repos |
| |
| ( |
| |
| ( |
| — |
| ( |
| — |
| |
| |
Net position |
| |
| — |
| |
| — |
| — |
| ( |
| |
| ( |
| |
Non trading reverse repos |
| |
| ( |
| |
| — |
| — |
| ( |
| — |
| — |
| |
Non trading repos |
| |
| ( |
| |
| — |
| — |
| ( |
| — |
| — |
| |
Net position |
| |
| — |
| |
| — |
| — |
| ( |
| — |
| — |
| |
(1) | The net IFRS offset balance of £ |
NatWest Group plc – Annual Report on Form 20-F | 65 |
Notes to the consolidated financial statements continued
10 Financial instruments – classification continued
Interest rate benchmark reform
The NatWest Group IBOR program successfully delivered the conversion of the vast majority of the IBOR exposures to risk free rates (RFR) in advance of the cessation date. This encompasses loans, deposits, capital instruments and derivatives, which, have been converted using fallback provisions, switch provisions or as part of market-wide conversion events in the case of derivatives subject to clearing. These instruments will convert at the first repricing date post cessation.
The total amount of exposure for NatWest Group at 31 December 2021 subject to the above conversion provisions are £
Despite the significant conversion levels achieved, certain instruments remain in discussion with customers and counterparties to achieve consensual conversion. If consensual conversion is not achieved these instruments will default to synthetic LIBOR in line with relevant legislation.
The level of exposures without explicit or agreed conversion provisions as of 31 December 2021 is as follows:
| Rates subject to IBOR reform |
|
| |||||
GBP LIBOR | USD IBOR (1) | Other IBOR (2) | Total | |||||
2021 |
| £m |
| £m |
| £m |
| £m |
Trading assets |
| |
| |
| — |
| |
Loans to banks - amortised cost |
| — |
| |
| — |
| |
Loans to customers - amortised cost |
| |
| |
| |
| |
Other financial assets |
| |
| |
| — |
| |
Bank deposits |
| — |
| |
| — |
| |
Customer deposits |
| — |
| — |
| — |
| — |
Trading liabilities |
| |
| |
| — |
| |
Other financial liabilities |
| |
| |
| |
| |
Subordinated liabilities |
| — |
| |
| — |
| |
Loan commitments (3) | | | | | ||||
Derivatives notional (£bn) |
| |
| |
| — |
| |
At December 2021 NatWest Group held certain currency swaps with both legs subject to IBOR reform, for which only the GBP LIBOR leg has an explicit or agreed conversion provisions as of 31 December 2021, but not the entire contract. These include currency swaps of GBP LIBOR of £
NatWest Group plc – Annual Report on Form 20-F | 66 |
Notes to the consolidated financial statements continued
10 Financial instruments – classification continued
Interest rate benchmark reform
Rates subject to IBOR reform | ||||||||||
GBP LIBOR | USD IBOR (1) | EURIBOR (2) | Other IBOR | Total | ||||||
2020 |
| £m |
| £m |
| £m |
| £m |
| £m |
Trading assets |
| |
| |
| |
| |
| |
Loans to banks - amortised cost |
| |
| |
| |
| — |
| |
Loans to customers - amortised cost |
| |
| |
| |
| |
| |
Other financial assets |
| |
| |
| |
| — |
| |
Bank deposits |
| — |
| |
| — |
| |
| |
Customer deposits |
| — |
| — |
| — |
| |
| |
Trading liabilities |
| |
| |
| |
| |
| |
Other financial liabilities |
| |
| |
| |
| |
| |
Subordinated liabilities |
| |
| |
| |
| — |
| |
Loan commitments (3) |
| |
| | |
| |
| | |
Derivatives notional (£bn) |
| |
| |
| |
| |
| |
| (1) | In 2021 the FCA declared that USD IBOR will be non-representative post 30 June 2023; at the time of preparing the 31 December 2020 Annual Report on Form 20-F this date was expected to be 31 December 2021. |
| (2) | In 2021 management concluded that EURIBOR is not expected to be significantly reformed further and therefore any uncertainty due to interest benchmark rate reform for EURIBOR has ended. 31 December 2020 data includes EURIBOR exposure as subject to reform. |
| (3) | Certain loan commitments are multi-currency facilities. Where these are fully undrawn, they are allocated to the principal currency of the facility. Where the facilities are partly drawn, the remaining loan commitment is allocated to the currency with the largest drawn amount. |
Included within the 31 December 2020 table above for derivatives were currency swaps with corresponding legs also subject to IBOR reform of GBP LIBOR of £
Additionally, included above are basis swaps for GBP LIBOR of £
AT1 issuances
NatWest Group has issued certain capital instruments, AT1, under which reset clauses are linked to IBOR rates subject to reform. Where under the contractual terms of the instrument the coupon resets to a rate which has IBOR as a specified component of its pricing structure, these are subject to IBOR reform and listed below:
31 December | 31 December | |||
2021 | 2020 | |||
| £m |
| £m | |
US$ | |
| | |
US$ | — |
| |
NatWest Group‘s non-cumulative preference shares of USD$
NatWest Group plc – Annual Report on Form 20-F | 67 |
Notes to the consolidated financial statements continued
11 Financial instruments – valuation
Financial instruments recognised at fair value are revalued using techniques that can include observable inputs (pricing information that is readily available in the market, for example UK Government securities), and unobservable inputs (pricing information that is not readily available, for example unlisted securities). Gains and losses are recognised in the income statement and statement of comprehensive income as appropriate. This note presents information on the valuation of financial instruments.
The table below provides an overview of the various sections contained within the note.
Critical accounting policy: Fair value - financial instruments
Financial instruments classified as mandatory fair value through profit or loss; held-for-trading; designated fair value through profit or loss and fair value through other comprehensive income are recognised in the financial statements at fair value. All derivatives are measured at fair value.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement considers the characteristics of the asset or liability and the assumptions that a market participant would consider when pricing the asset or liability.
NatWest Group manages some portfolios of financial assets and financial liabilities based on its net exposure to either market or credit risk. In these cases, the fair value is derived from the net risk exposure of that portfolio with portfolio level adjustments applied to incorporate bid-offer spreads, counterparty credit risk, and funding costs (see ’Valuation Adjustments’).
Where the market for a financial instrument is not active, fair value is established using a valuation technique. These valuation techniques involve a degree of estimation, the extent of which depends on the instrument’s complexity and the availability of market-based data. The complexity and uncertainty in the financial instrument’s fair value is categorised using the fair value hierarchy.
For accounting policy information see Accounting policies notes 10 and 15.
Page | |
Financial instruments | |
Critical accounting policy: Fair value | 68 |
Valuation | |
Fair value hierarchy (D) | 69 |
Valuation techniques (D) | 69 |
Inputs to valuation models (D) | 69 |
Valuation control (D) | 70 |
Key areas of judgment (D) | 70 |
Table of assets and liabilities split by fair value hierarchy level (T) | 71 |
Valuation adjustments | |
Table of fair value adjustments made (T) | 71 |
Funding valuation adjustments (FVA) (D) | 72 |
Credit valuation adjustments (CVA) (D) | 72 |
Bid-offer (D) | 72 |
Product and deal specific (D) | 72 |
Own credit (D) | 72 |
Level 3 additional information | |
Level 3 ranges of unobservable inputs (D) | 73 |
Table of level 3 instruments, valuation techniques and inputs (T) | 73 |
Level 3 sensitivities (D) | 74 |
Alternative assumptions (D) | 74 |
Other considerations (D) | 74 |
Table of high and low range of fair value of | |
level 3 assets and liabilities (T) | 74 |
Movement in level 3 assets and liabilities over the reporting period (D) | 75 |
Table of the movement in level 3 assets and liabilities (T) | 75 |
Fair value of financial instruments measured | |
at amortised cost | |
Table showing the fair value of financial instruments measured at amortised cost on the balance sheet (T) | 76 |
(D) = Descriptive; (T) = Table |
NatWest Group plc – Annual Report on Form 20-F | 68 |
Notes to the consolidated financial statements continued
11 Financial instruments – valuation continued
Valuation
Fair value hierarchy
Financial instruments carried at fair value have been classified under the fair value hierarchy. The classification ranges from level 1 to level 3, with more expert judgment and price uncertainly for those classified at level 3.
The determination of an instrument’s level cannot be made at a global product level as a single product type can be in more than one level. For example, a single name corporate credit default swap could be in level 2 or level 3 depending on the level of market activity for the referenced entity.
Level 1 – instruments valued using unadjusted quoted prices in active and liquid markets, for identical financial instruments. Examples include government bonds, listed equity shares and certain exchange-traded derivatives.
Level 2 - instruments valued using valuation techniques that have observable inputs. Observable inputs are those that are readily available with limited adjustments required. Examples include most government agency securities, investment-grade corporate bonds, certain mortgage products - including CLOs, most bank loans, repos and reverse repos, state and municipal obligations, most notes issued, certain money market securities, loan commitments and most OTC derivatives.
Level 3 - instruments valued using a valuation technique where at least one input which could have a significant effect on the instruments valuation, is not based on observable market data. Examples include non-derivative instruments which trade infrequently, certain syndicated and commercial mortgage loans, private equity, and derivatives with unobservable model inputs.
Valuation techniques
NatWest Group derives the fair value of its instruments differently depending on whether the instrument is a non-modelled or a modelled product.
Non-modelled products are valued directly from a price input, typically on a position-by-position basis. Examples include equities and most debt securities.
Non-modelled products can fall into any fair value levelling hierarchy depending on the observable market activity, liquidity, and assessment of valuation uncertainty of the instruments. The assessment of fair value and the classification of the instrument to a fair value level is subject to the valuation controls discussed in the Valuation control section.
Modelled products valued using a pricing model range in complexity from comparatively vanilla products such as interest rate swaps and options (e.g., interest rate caps and floors) through to more complex derivatives (e.g., balance guarantee swaps).
For modelled products the fair value is derived using the model and the appropriate model inputs or parameters, as opposed to a cash price equivalent. Model inputs are taken either directly or indirectly from available data, where some inputs are also modelled.
Fair value classification of modelled instruments is either level 2 or level 3, depending on the product/model combination, the observability and quality of input parameters and other factors. All these must be assessed to classify a position. The modelled product is assigned to the lowest fair value hierarchy level of any significant input used in that valuation.
Most derivative instruments, for example vanilla interest rate swaps, foreign exchange swaps and liquid single name credit derivatives, are classified as level 2. This is because they are vanilla products valued using standard market models and with observable inputs. Level 2 products range from vanilla to more complex products, where more complex products remain classified as Level 2 due to the materiality of any unobservable inputs.
Inputs to valuation models
When using valuation techniques, the fair value can be significantly affected by the choice of valuation model and underlying assumptions. Factors considered include the cashflow amounts and timing of those cash flows, and application of appropriate discount rates, incorporating both funding and credit risk. Values between and beyond available data points are obtained by interpolation and extrapolation. The principal inputs to these valuation techniques are as follows:
Bond prices - quoted prices are generally available for government bonds, certain corporate securities, and some mortgage-related products.
Credit spreads - these express the return required over a benchmark rate or index to compensate for the referenced credit risk. Where available, these are derived from the price of credit default swaps or other credit-based instruments, such as debt securities. When direct prices are not available; credit spreads are determined with reference to available prices of entities with similar characteristics.
Interest rates - these are principally based on interest rate swap prices referencing benchmark interest rates. Benchmark rates include Interbank Offered Rates (IBOR) and the Overnight Index Swap (OIS) rate, including SONIA (Sterling Overnight Interbank Average Rate). Other quoted interest rates may also be used from both the bond, and futures markets.
Foreign currency exchange rates - there are observable prices both for spot and forward contracts and futures in the world's major currencies.
NatWest Group plc – Annual Report on Form 20-F | 69 |
Notes to the consolidated financial statements continued
11 Financial instruments – valuation continued
Equity and equity index prices - quoted prices are generally readily available for equity shares listed on the world's major stock exchanges and for major indices on such shares.
Price volatilities and correlations - volatility is a measure of the tendency of a price to change with time. Correlation measures the degree which two or more prices or variables are observed to move together. Variables that move in the same direction show positive correlation; those that move in opposite directions are negatively correlated.
Prepayment rates - rates used to reflect how fast a pool of assets prepay. The fair value of a financial instrument that can be prepaid by the issuer or borrower differs from that of an instrument that cannot be prepaid. When valuing prepayable instruments, the value of this prepayment option is considered.
Recovery rates/loss given default - these are used as an input to valuation models and reserves for asset-backed securities and other credit products as an indicator of severity of losses on default. Recovery rates are primarily sourced from market data providers, the value of the underlying collateral, or inferred from observable credit spreads.
Valuation control
NatWest Group's control environment for the determination of the fair value of financial instruments includes formalised procedures for the review and validation of fair values. This review is performed by an independent price verification (IPV) team.
IPV is a key element of the control environment. Valuations are first performed by the business which entered into the transaction. These valuations are then reviewed by the IPV team, independent of those trading the financial instruments, in light of available pricing evidence.
Independent pricing data is collated from a range of sources. Each source is reviewed for quality and the independent data applied in the IPV processes using a formalised input quality hierarchy. Consensus services are one source of independent data and encompass interest rate, currency, credit, and bond markets, providing comprehensive coverage of vanilla products and a wide selection of exotic products.
Where measurement differences are identified through the IPV process these are grouped by the quality hierarchy of the independent data. If the size of the difference exceeds defined thresholds, an adjustment is made to bring the valuation to within the independently calculated fair value range.
IPV takes place at least monthly, for all fair value financial instruments. The IPV control includes formalised reporting and escalation of any valuation differences in breach of established thresholds.
The quality and completeness of the information gathered in the IPV process gives an indication as to the liquidity and valuation uncertainty of an instrument and forms part of the information considered when determining fair value hierarchy classifications.
Initial fair value level classification of a financial instrument is carried out by the IPV team. These initial classifications are subject to senior management review. Particular attention is paid to instruments transferring from one level to another, new instrument
classes or products, instruments where the transaction price is significantly different from the fair value and instruments where valuation uncertainty is high.
Valuation Committees are made up of valuation specialists and senior business representatives from various functions and oversees pricing, reserving and valuations issues. These committees meet monthly to review and ratify any methodology changes. The Executive Valuation Committee meets quarterly to address key material and subjective valuation issues, to review items escalated by Valuation Committees and to discuss other relevant industry matters.
The Group model risk policy sets the policy for model documentation, testing and review. Governance of the model risk policy is carried out by the Group model risk oversight committee, which comprises model risk owners and independent model experts. All models are required to be independently validated in accordance with the Model Risk Policy.
Key areas of judgment
Over the years the business has simplified, with most products classified as level 1 or 2 of the fair value hierarchy. However, the diverse range of products historically traded by NatWest Group means some products remain classified as level 3. Level 3 indicates a significant level of pricing uncertainty, where expert judgment is used. As such, extra disclosures are required in respect of level 3 instruments.
Over the years the business has simplified, with most products classified as level 1 or 2 of the fair value hierarchy. However, the diverse range of products historically traded by NatWest Group means some products remain classified as level 3. Level 3 indicates a significant level of pricing uncertainty, where expert judgment is used. As such, extra disclosures are required in respect of level 3 instruments.
In general, the degree of expert judgment used and hence valuation uncertainty depends on the degree of liquidity of an instrument or input.
Where markets are liquid, little judgment is required. However, when the information regarding the liquidity in a particular market is not clear, a judgment may need to be made. For example, for an equity traded on an exchange, daily volumes of trading can be seen, but for an over the counter (OTC) derivative, assessing the liquidity of the market with no central exchange is more challenging.
NatWest Group plc – Annual Report on Form 20-F | 70 |
Notes to the consolidated financial statements continued
11 Financial instruments – valuation continued
A key related matter is where a market moves from liquid to illiquid or vice versa. Where this movement is considered temporary, the fair value level is not changed. For example, if there is little market trading in a product on a reporting date but at the previous reporting date and during the intervening period the market has been liquid. In this case, the instrument will continue to be classified at the same level in the hierarchy. This is to provide consistency so that transfers between levels are driven by genuine changes in market liquidity and do not reflect short term or seasonal effects. Material movements between levels are reviewed quarterly by the Business and IPV.
The breadth and depth of the IPV data allows for a rules-based quality assessment to be made of market activity, liquidity, and pricing uncertainty, which assists with the process of allocation to an appropriate level. Where suitable independent pricing information is not readily available, the quality assessment will result in the instrument being assessed as level 3.
The table below shows the assets and liabilities held by NatWest Group split by fair value hierarchy level. Level 1 are considered the most liquid instruments, and level 3 the most illiquid, valued using expert judgment and hence carry the most significant price uncertainty.
2021 | 2020 | |||||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Total | Level 1 |
| Level 2 |
| Level 3 | Total | |||
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m | |
Assets |
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| ||||
Trading assets |
|
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| ||||
Loans |
| — |
|
|
| — |
| |
| | | |||||
Securities |
| |
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|
| |
| |
| | | |||||
Derivatives |
| — |
|
|
| — |
| |
| | | |||||
Other financial assets |
| — |
|
| — |
|
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| ||||||||
Loans |
| — |
|
|
| — |
| |
| | | |||||
Securities |
| |
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|
| |
| |
| | | |||||
Total financial assets held at fair value |
| |
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| | | |||||
As % of total fair value assets | | % | % | % | | % | | % | | % | ||||||
Liabilities |
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| |||||||
Trading liabilities |
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Deposits |
| — |
| |
| |
| | — |
| |
| | | ||
Debt securities in issue |
| — |
| |
| — |
| | — |
| |
| — | | ||
Short positions |
| |
| |
| |
| | |
| |
| — | | ||
Derivatives |
| — |
| |
| |
| | — |
| |
| | | ||
Other financial liabilities |
| — |
|
| — |
|
|
| ||||||||
Debt securities in issue |
| — |
| |
| — |
| | — |
| |
| — | | ||
Other deposits |
| — |
| |
| — |
| | — |
| |
| — | | ||
Subordinated liabilities |
| — |
| |
| — |
| | — |
| |
| — | | ||
Total financial liabilities held at fair value |
| |
| |
| |
| | |
| |
| | | ||
As % of total fair value liabilities | % | % | | % | | % | | % | | % | ||||||
(1) | Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instrument was transferred. |
(2) | For an analysis of debt securities held at mandatory fair value through profit or loss by issuer as well as ratings and derivatives, by type and contract, refer to Risk and capital management – Credit risk. |
Valuation adjustments
When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, funding and credit risk. These adjustments are presented in the table below:
| 2021 |
| 2020 | |
Adjustment | £m | £m | ||
Funding – FVA |
| |
| |
Credit – CVA |
| |
| |
Bid – Offer |
| |
| |
Product and deal specific |
| |
| |
| |
| |
NatWest Group plc – Annual Report on Form 20-F | 71 |
Notes to the consolidated financial statements continued
11 Financial instruments – valuation continued
There was a reallocation of FVA to CVA during the period following an update to the risk management of certain exposures. The net decrease across CVA and FVA was driven by reduced exposures, due to increases in interest rates and trade exit activity. The reduction in bid-offer and product and deal specific reserves followed reduced risk due to trade exit activity and LIBOR cessation.
Funding valuation adjustments (FVA)
FVA represents an estimate of the adjustment that a market participant would make to incorporate funding costs and benefits that arise in relation to derivative exposures. FVA is calculated as a portfolio level adjustment and can result in either a funding charge (positive) or funding benefit (negative).
Funding levels are applied to estimated potential future exposures. For uncollateralised derivatives, the exposure reflects the future valuation of the derivative. For collateralised derivatives, the exposure reflects the difference between the future valuation of the derivative and the level of collateral posted.
Credit valuation adjustments (CVA)
CVA represents an estimate of the adjustment to fair value that is made to incorporate the counterparty credit risk inherent in derivative exposures. CVA is actively managed by a credit and market risk hedging process, and therefore movements in CVA are partially offset by trading revenue on the hedges.
The CVA is calculated on a portfolio basis reflecting an estimate of the amount a third party would charge to assume the credit risk.
Collateral held under a credit support agreement is factored into the CVA calculation. In such cases where NatWest Group holds collateral against counterparty exposures, CVA is held to the extent that residual risk remains.
Bid-offer
Fair value positions are required to be marked to exit, represented by bid (long positions) or offer (short positions) levels. Non-derivative positions are typically marked directly to bid or offer prices. However derivative exposures are adjusted to exit levels by taking bid-offer reserves calculated on a portfolio basis. The bid-offer approach is based on current market spreads and standard market bucketing of risk.
Bid-offer spreads vary by maturity and risk type to reflect different spreads in the market. For positions where there is no observable quote, the bid-offer spreads are widened in comparison to proxies to reflect reduced liquidity or observability.
Netting is applied on a portfolio basis to reflect the value at which NatWest Group believes it could exit the net risk of the portfolio, rather than the sum of exit costs for each of the portfolio’s individual trades. This is applied where the asset and liability positions are managed as a portfolio for risk and reporting purposes.
Product and deal specific
On initial recognition of financial assets and liabilities valued using valuation techniques which have a significant dependence on information other than observable market data, any difference between the transaction price and that derived from the valuation technique is deferred. Such amounts are recognised in the income statement over the life of the transaction; when market data becomes observable; or when the transaction matures or is closed out as appropriate. On 31 December 2021, net gains of £
Where system generated valuations do not accurately recover market prices, manual valuation adjustments are applied either at a position or portfolio level. Manual adjustments are subject to the scrutiny of independent control teams and are subject to monthly review by senior management.
Own Credit
NatWest Group considers the effect of its own credit standing when valuing financial liabilities recorded at fair value. Own credit spread adjustments are made when valuing issued debt held at fair value, including issued structured notes. An own credit adjustment is applied to positions where it is believed that counterparties would consider NatWest Group's creditworthiness when pricing trades.
NatWest Group plc – Annual Report on Form 20-F | 72 |
Notes to the consolidated financial statements continued
11 Financial instruments – valuation continued
Level 3 additional information
For illiquid assets and liabilities, classified as level 3, additional information is provided on the valuation techniques used and price sensitivity of the products to those inputs. This is to enable the reader to gauge the level of uncertainty that arises from positions with significant unobservable inputs or modelling parameters.
Level 3 ranges of unobservable inputs
The table below provides additional information on level 3 instruments and inputs. This shows the valuation technique used for the fair value calculation, the unobservable input or inputs and input range.
| 2021 |
| 2020 | |||||||||||
Financial instrument |
| Valuation technique |
| Unobservable inputs |
| Units |
| Low |
| High |
| Low |
| High |
Trading assets and Other financial assets | ||||||||||||||
Loans |
| Price-based | Price | % | — | | — | | ||||||
Discount cash flow | Credit spreads | bps | | | | | ||||||||
Discount cash flow | Discount margin | bps | | | | | ||||||||
Debt securities |
| Price-based | Price |
| % | — | | — | | |||||
Equity Shares | Price-based | Price | GBP | — | | — | | |||||||
Price-based | Price | % | — | | — | | ||||||||
| Discount cash flow | Discount margin | % | | | | | |||||||
Net asset valuation | Net asset value | % | | | | | ||||||||
Derivative assets and liabilities | ||||||||||||||
Credit derivatives | Credit derivative pricing | Credit spreads | bps | | | | | |||||||
| Correlation |
| % | ( | | ( | | |||||||
|
| Volatility | % | | | | | |||||||
|
| Upfront points |
| % | — | | — | | ||||||
|
| Recovery rate |
| % | — | | | | ||||||
Interest rate FX |
| Option pricing | Correlation |
| % | ( | | ( | | |||||
derivatives |
| Volatility | % | | | | | |||||||
Constant Prepayment Rate | % | | | | | |||||||||
Mean Reversion | % | — | | — | | |||||||||
Basis volatility | bps | | | | | |||||||||
Inflation volatility | % | | | | | |||||||||
Inflation rate | % | | | | | |||||||||
|
| |||||||||||||
Equity derivatives | Option pricing | Correlation | % | ( | | ( | | |||||||
| (1) | Valuation for private equity investments may be estimated by looking at past prices of similar stocks and from valuation statements where valuations are usually derived from earnings measures such as EBITDA or net asset value (NAV). Similarly, for equity or bond fund investments, prices may be estimated from valuation or credit statements using NAV or similar measures. |
| (2) | NatWest Group does not have any material liabilities measured at fair value that are issued with an inseparable third-party credit enhancement. |
NatWest Group plc – Annual Report on Form 20-F | 73 |
Notes to the consolidated financial statements continued
11 Financial instruments – valuation continued
Level 3 sensitivities
The level 3 sensitivities presented below are calculated at a trade or low-level portfolio basis rather than an overall portfolio basis. As individual sensitivities are aggregated with no reflection of the correlated nature between instruments, the overall portfolio sensitivity may not be accurately reflected. For example, some portfolios may be negatively correlated to others, where a downwards movement in one asset would produce an upwards movement in another. However, due to the additive presentation of the above figures this correlation impact cannot be displayed. As such, the actual potential downside sensitivity of the total portfolio may be less than the non-correlated sum of the additive figures as shown in the below table.
Alternative assumptions
Reasonably plausible alternative assumptions of unobservable inputs are determined based on a specified target level of certainty of 90%. Alternative assumptions are determined with reference to all available evidence including consideration of the following: quality of independent pricing information considering consistency between different sources, variation over time, perceived tradability or otherwise of available quotes; consensus service dispersion ranges; volume of trading activity and market bias (e.g. one-way inventory); day 1 profit or loss arising on new trades; number and nature of market participants; market conditions; modelling consistency in the market; size and nature of risk; length of holding of position; and market intelligence.
Other considerations
Whilst certain inputs used to calculate CVA, FVA and own credit adjustments are not based on observable market data, the uncertainty of these inputs is not considered to have a significant effect on the net valuation of the related derivative portfolios and issued debt.
As such, the fair value levelling of the derivative portfolios and issued debt is not determined by CVA, FVA or own credit inputs. In addition, any fair value sensitivity driven by these inputs is not included in the level 3 sensitivities presented.
The table below shows the high and low range of fair value of the level 3 assets and liabilities. This range incorporates the range of fair value inputs as described in the previous table.
2021 | 2020 | |||||||||||
Level 3 | Favourable | Unfavourable | Level 3 | Favourable | Unfavourable | |||||||
| £m |
| £m |
| £m |
| £m |
| £m |
| £m | |
Assets | ||||||||||||
Trading assets | ||||||||||||
Loans |
| |
| |
| ( |
| |
| |
| — |
Securities |
| |
| — |
| — |
| |
| — |
| — |
Derivatives |
| |
| |
| ( |
| |
| |
| ( |
Other financial assets |
|
|
|
|
|
|
| |||||
Loans |
| |
| |
| ( |
| |
| |
| ( |
Securities |
| |
| |
| ( |
| |
| |
| ( |
| |
| |
| ( |
| |
| |
| ( | |
|
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|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
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Trading liabilities |
|
|
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|
|
|
|
|
|
|
|
|
Deposits |
| |
| — |
| — |
| |
| — |
| — |
Debt securities in issue |
| — |
| — |
| — |
| — |
| — |
| — |
Short positions |
| |
| — |
| — |
| — |
| — |
| — |
Derivatives |
| |
| |
| ( |
| |
| |
| ( |
Other financial liabilities |
| — |
| — |
| — |
| — |
| — |
| — |
| |
| |
| ( |
| |
| |
| ( | |
NatWest Group plc – Annual Report on Form 20-F | 74 |
Notes to the consolidated financial statements continued
11 Financial instruments – valuation continued
Movement in level 3 assets and liabilities
The following table shows the movement in level 3 assets and liabilities in the year.
2021 | 2020 | |||||||||||||||
Trading | Other | Trading | Other | |||||||||||||
assets | financial | Total | Total | assets | financial | Total | Total | |||||||||
(2) | assets (3) | assets | liabilities | (2) | assets (3) | assets | liabilities | |||||||||
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m | |
At 1 January |
| |
| |
| |
| |
| |
| |
| |
| |
Amounts recorded in the income statement (1) |
| ( |
| ( |
| ( |
| ( |
| |
| ( |
| |
| ( |
Amounts recorded in the statement of comprehensive income |
| — |
| |
| |
| — |
| — |
| |
| |
| — |
Level 3 transfers in |
| |
| |
| |
| |
| |
| |
| |
| |
Level 3 transfers out |
| ( |
| ( |
| ( |
| ( |
| ( |
| — |
| ( |
| ( |
Purchases/originations (4) |
| |
| |
| |
| |
| |
| |
| |
| |
Settlements/other decreases |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( |
Sales |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( |
Foreign exchange and other |
| ( |
| ( |
| ( |
| ( |
| |
| |
| |
| |
At 31 December |
| |
| |
| |
| |
| |
| |
| |
| |
Amounts recorded in the income statement in respect of balances held at year end - unrealised |
| ( |
| ( |
| ( |
| ( |
| |
| ( |
| |
| ( |
| (1) | There were £ |
| (2) | Trading assets comprise assets held at fair value in trading portfolios. |
| (3) | Other financial assets comprise fair value through other comprehensive income, designated as at fair value through profit or loss and other fair value through profit or loss. |
| (4) | Movement in the period includes new loan originations classified as HTCS under IFRS 9 and fair valued through other comprehensive income. 2021 purchases include a new leveraged finance loan of £ |
NatWest Group plc – Annual Report on Form 20-F | 75 |
Notes to the consolidated financial statements continued
11 Financial instruments – valuation continued
Fair value of financial instruments measured at amortised cost on the balance sheet
The following table shows the carrying value and fair value of financial instruments measured at amortised cost on the balance sheet.
| Items where |
|
|
|
|
| ||||||
fair value | ||||||||||||
approximates | Carrying | Fair value hierarchy level | ||||||||||
carrying value | value | Fair value | Level 1 | Level 2 | Level 3 | |||||||
2021 | £bn | £bn | £bn | £bn | £bn | £bn | ||||||
Financial assets |
|
|
|
|
|
| ||||||
Cash and balances at central banks |
| | — | — | — | — | — | |||||
Settlement balances | | — | — | — | — | — | ||||||
Loans to banks |
| | | | — | | | |||||
Loans to customers | — | | | — | | | ||||||
Other financial assets - securities |
| — | | | | | | |||||
2020 | ||||||||||||
Financial assets |
| |||||||||||
Cash and balances at central banks |
| | — | — | — | — | — | |||||
Settlement balances |
| | — | — | — | — | — | |||||
Loans to banks | | | | — | | | ||||||
Loans to customers |
| — | | | — | | | |||||
Other financial assets - securities |
| — | | | | | | |||||
2021 |
| |||||||||||
Financial liabilities |
| |||||||||||
Bank deposits |
| |
| |
| |
| — |
| |
| |
Customer deposits |
| |
| |
| |
| — |
| |
| |
Settlement balances |
| |
| — |
| — |
| — |
|
| ||
Other financial liabilities - debt securities in issue | — | | | — | | | ||||||
Subordinated liabilities |
| — |
| |
| |
| — |
| |
| |
Notes in circulation | | — | — | — | — | — | ||||||
2020 | ||||||||||||
Financial liabilities |
|
|
|
|
|
| ||||||
Bank deposits | | | | — | | | ||||||
Customer deposits |
| |
| |
| |
| — |
| |
| |
Settlement balances |
| |
| — |
| — |
| — |
| — |
| — |
Other financial liabilities - debt securities in issue |
| — |
| |
| |
| — |
| |
| |
Subordinated liabilities |
| — |
| |
| |
| — |
| |
| |
Notes in circulation |
| | — | — | — | — | — | |||||
The assumptions and methodologies underlying the calculation of fair values of financial instruments at the balance sheet date are as follows:
Short-term financial instruments
For certain short-term financial instruments: cash and balances at central banks, items in the course of collection from other banks, settlement balances, items in the course of transmission to other banks, customer demand deposits and notes in circulation, carrying value is deemed a reasonable approximation of fair value.
Loans to banks and customers
In estimating the fair value of net loans to customers and banks measured at amortised cost, NatWest Group's loans are segregated into appropriate portfolios reflecting the characteristics of the constituent loans. Two principal methods are used to estimate fair value:
| (a) | Contractual cash flows are discounted using a market discount rate that incorporates the current spread for the borrower or where this is not observable, the spread for borrowers of a similar credit standing. This method is used for portfolios where counterparties have external ratings: institutional and corporate lending. |
| (b) | Expected cash flows (unadjusted for credit losses) are discounted at the current offer rate for the same or similar products. The current methodology caps all loan values at par rather than modelling clients' option to repay loans early. This approach is adopted for lending portfolios in Retail Banking, Ulster Bank RoI, Commercial Banking (SME loans) and Private Banking in order to reflect the homogeneous nature of these portfolios. |
Debt securities and subordinated liabilities
Most debt securities are valued using quoted prices in active markets or from quoted prices of similar financial instruments in active markets. Fair values of the remaining population are determined using market standard valuation techniques, such as discounted cash flows, adjusting for own credit spreads where appropriate.
Bank and customer deposits
Fair values of deposits are estimated using discounted cash flow valuation techniques. Where required, methodologies can be revised as additional information and valuation inputs become available.
NatWest Group plc – Annual Report on Form 20-F | 76 |
Notes to the consolidated financial statements continued
12 Financial instruments - maturity analysis
Remaining maturity
This note shows the maturity profile of NatWest Group’s financial assets and liabilities by contractual date of maturity and contractual cash flows.
The following table shows the residual maturity of financial instruments, based on contractual date of maturity.
2021 | 2020 | |||||||||||
Less than | More than | Less than | More than | |||||||||
12 months | 12 months | Total | 12 months | 12 months | Total | |||||||
|
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
Assets | ||||||||||||
Cash and balances at central banks |
| |
| — |
| |
| |
| — |
| |
Trading assets |
| |
| |
| |
| |
| |
| |
Derivatives |
| |
| |
| |
| |
| |
| |
Settlement balances |
| |
| — |
| |
| |
| — |
| |
Loans to banks - amortised cost | | | | | | | ||||||
Loans to customers - amortised cost | | | | | | | ||||||
Other financial assets |
| |
| |
| |
| |
| |
| |
Liabilities |
| |||||||||||
Bank deposits |
| | | | | | | |||||
Customer deposits |
| |
| |
| |
| |
| |
| |
Settlement balances |
| |
| — |
| |
| |
| — |
| |
Trading liabilities |
| |
| |
| |
| |
| |
| |
Derivatives | | | | | | | ||||||
Other financial liabilities |
| |
| |
| |
| |
| |
| |
Subordinated liabilities |
| |
| |
| |
| |
| |
| |
Notes in circulation | | — | | | — | | ||||||
Lease liabilities |
| |
| |
| |
| |
| |
| |
Assets and liabilities by contractual cash flows up to 20 years
The tables on the following page, show the contractual undiscounted cash flows receivable and payable, up to a period of
Financial assets have been reflected in the time band of the latest date on which they could be repaid, unless earlier repayment can be demanded by NatWest Group. Financial liabilities are included at the earliest date on which the counterparty can require repayment, regardless of whether or not such early repayment results in a penalty. If the repayment of a financial instrument is triggered by, or is subject to, specific criteria such as market price hurdles being reached, the asset is included in the time band that contains the latest date on which it can be repaid, regardless of early repayment.
The liability is included in the time band that contains the earliest possible date on which the conditions could be fulfilled, without considering the probability of the conditions being met.
For example, if a structured note is automatically prepaid when an equity index exceeds a certain level, the cash outflow will be included in the less than three months period, whatever the level of the index at the year end. The settlement date of debt securities in issue, issued by certain securitisation vehicles consolidated by NatWest Group, depends on when cash flows are received from the securitised assets. Where these assets are prepayable, the timing of the cash outflow relating to securities assumes that each asset will be prepaid at the earliest possible date. As the repayments of assets and liabilities are linked, the repayment of assets in securitisations is shown on the earliest date that the asset can be prepaid, as this is the basis used for liabilities.
The principal amounts of financial assets and liabilities that are repayable after
The maturity of guarantees and commitments is based on the earliest possible date they would be drawn in order to evaluate NatWest Group's liquidity position.
MFVTPL assets of £
NatWest Group plc – Annual Report on Form 20-F | 77 |
Notes to the consolidated financial statements continued
12 Financial instruments - maturity analysis continued
| 0-3 months |
| 3-12 months |
| 1-3 years |
| 3-5 years |
| 5-10 years |
| 10-20 years | |
2021 | £m | £m | £m | £m | £m | £m | ||||||
Assets by contractual maturity up to 20 years |
|
|
|
|
|
| ||||||
Cash and balances at central banks |
| |
| — |
| — |
| — |
| — |
| — |
Derivatives held for hedging | ( | ( | | | | | ||||||
Settlement balances |
| | — | — | — | — | — | |||||
Loans to banks - amortised cost |
| |
| |
| |
| — |
| — |
| — |
Loans to customers - amortised cost |
| |
| |
| |
| |
| |
| |
Other financial assets (1) | | | | | | | ||||||
Finance lease |
| |
| |
| |
| |
| |
| |
| | |
| |
| |
| |
| | ||
Liabilities by contractual maturity up to 20 years |
|
| ||||||||||
Bank deposits |
| |
| |
| |
| |
| — |
| — |
Customer deposits |
| |
| |
| |
| |
| |
| |
Settlement balances |
| |
| — |
| — |
| — |
| — |
| — |
Derivatives held for hedging |
| ( |
| ( |
| |
| |
| ( |
| ( |
Other financial liabilities |
| |
| |
| |
| |
| |
| |
Subordinated liabilities | | | | | | | ||||||
Other liabilities - Notes in circulation | | — | — | — | — | — | ||||||
Lease liabilities |
| | |
| |
| |
| |
| | |
| |
| |
| |
| |
| |
| | |
Guarantees and commitments - notional amount |
| |||||||||||
Guarantees (2) |
| |
| — | — | — | — | — | ||||
Commitments (3) |
| |
| — |
| — |
| — |
| — |
| — |
| |
| — |
| — |
| — |
| — |
| — |
| ||||||||||||
2020 | ||||||||||||
Assets by contractual maturity up to 20 years |
|
|
|
|
|
| ||||||
Cash and balances at central banks |
| |
| — |
| — |
| — |
| — |
| — |
Derivatives held for hedging |
| |
| |
| |
| — |
| |
| |
Settlement balances | | — | — | — | — | — | ||||||
Loans to banks - amortised cost |
| | | — | — | | | |||||
Loans to customers - amortised cost |
| |
| |
| |
| |
| |
| |
Other financial assets (1) |
| |
| |
| |
| |
| |
| |
Finance lease | | | | | | | ||||||
| |
| |
| |
| |
| | |||
Liabilities by contractual maturity up to 20 years |
|
| ||||||||||
Bank deposits |
| |
| |
| | |
| — |
| — | |
Customer deposits |
| |
| |
| |
| |
| |
| |
Settlement balances |
| |
| — |
| — |
| — |
| — |
| — |
Derivatives held for hedging |
| | ( |
| |
| |
| |
| ( | |
Other financial liabilities |
| |
| |
| |
| |
| |
| |
Subordinated liabilities |
| |
| |
| |
| |
| |
| |
Other liabilities - Notes in circulation | | — | — | — | — | — | ||||||
Lease liabilities | | | | | | | ||||||
| |
| |
| |
| |
| |
| | |
Guarantees and commitments - notional amount |
| |||||||||||
Guarantees (2) |
| |
| — | — | — | — | — | ||||
Commitments (3) |
| |
| — |
| — |
| — |
| — |
| — |
| |
| — |
| — |
| — |
| — |
| — |
| (1) | Other financial assets excludes equity shares. |
| (2) | NatWest Group is only called upon to satisfy a guarantee when the guaranteed party fails to meet its obligations. NatWest Group expects most guarantees it provides to expire unused. |
| (3) | NatWest Group has given commitments to provide funds to customers under undrawn formal facilities, credit lines and other commitments to lend subject to certain conditions being met by the counterparty. NatWest Group does not expect all facilities to be drawn, and some may lapse before drawdown. |
NatWest Group plc – Annual Report on Form 20-F | 78 |
Notes to the consolidated financial statements continued
13 Trading assets and liabilities
Trading assets and liabilities comprise assets and liabilities held at fair value and classified as held-for- trading. Financial instruments are classified as held for trading if they are held for the purpose of selling or repurchasing them in the short term, to make a spread between purchase and sale price or held to take advantage of movements in prices and yields.
For accounting policy information see Accounting policies note 10.
2021 | 2020 | |||
Assets |
| £m |
| £m |
Loans |
|
|
|
|
Reverse repos |
| |
| |
Collateral given |
| |
| |
Other loans |
| |
| |
Total loans |
| |
| |
Securities |
|
| ||
Central and local government |
|
| ||
- UK |
| |
| |
- US |
| |
| |
- other |
| |
| |
Financial institutions and corporate |
| |
| |
Total securities |
| |
| |
Total |
| |
| |
Liabilities |
|
| ||
Deposits |
|
| ||
Repos |
| |
| |
Collateral received |
| |
| |
Other deposits |
| |
| |
Total deposits |
| |
| |
Debt securities in issue |
| |
| |
Short positions |
| |
| |
Total |
| |
| |
14 Derivatives
Derivative is a term covering a wide range of financial instruments that derive their fair value from an underlying rate or price, for example interest rates or exchange rates (the underlying). NatWest Group uses derivatives as a part of its trading activities, to manage its own risks such as interest rate, foreign exchange, or credit risk and in certain customer transactions. This note shows contracted volumes of derivatives, how they are used for hedging purposes and more specifically the effects of the application of hedge accounting.
For accounting policy information see Accounting policies note 10 and 15.
2021 | 2020 | |||||||||||
Notional | Assets | Liabilities | Notional | Assets | Liabilities | |||||||
| £bn |
| £m |
| £m |
| £bn |
| £m |
| £m | |
Exchange rate contracts | | | | | | | ||||||
Interest rate contracts |
| |
| |
| |
| |
| |
| |
Credit derivatives |
| |
| |
| |
| |
| |
| |
Equity and commodity contracts |
| — |
| |
| — |
| |
| |
| |
|
| |
| |
|
|
| |
| | ||
NatWest Group applies hedge accounting to reduce the accounting mismatch caused in the income statement by using derivatives to hedge the following risks: interest rate, foreign exchange and net investment in foreign operations.
NatWest Group’s interest rate hedging relates to the management of NatWest Group’s non-trading structural interest rate risk, caused by the mismatch between fixed interest rates and floating interest rates on its financial instruments. NatWest Group manages this risk within approved limits. Residual risk positions are hedged with derivatives, principally interest rate swaps.
Suitable larger fixed rate financial instruments are subject to fair value hedging; the remaining exposure, where possible, is hedged by derivatives designated as cash flow hedges.
Cash flow hedges of interest rate risk relate to exposures to the variability in future interest payments and receipts due to the movement of benchmark interest rates on forecast transactions and on financial assets and financial liabilities. This variability in cash flows is hedged by interest rate swaps, which convert variable cash flows into fixed. For these cash flow hedge relationships, the hedged items are actual and forecast variable interest rate cash flows arising from financial assets and financial liabilities with interest rates linked to the relevant benchmark rates, most notably LIBOR, EURIBOR, SONIA and the Bank of England Official Bank Rate. The variability in cash flows due to movements in the relevant benchmark rate is hedged; this risk component is identified using the risk management systems of NatWest Group and encompasses the majority of cash flow variability risk.
Fair value hedges of interest rate risk involve interest rate swaps transforming the fixed interest rate risk in financial assets and financial liabilities to floating. The hedged risk is the risk of changes in the hedged item’s fair value attributable to changes in the benchmark interest rate risk component of
NatWest Group plc – Annual Report on Form 20-F | 79 |
Notes to the consolidated financial statements continued
the hedged item. The significant benchmarks identified as risk components are LIBOR, EURIBOR and SONIA. These risk components are identified using the risk management systems of NatWest Group and encompass the majority of the hedged item’s fair value risk.
NatWest Group hedges the exchange rate risk of its net investment in foreign currency denominated operations with currency borrowings and forward foreign exchange contracts. NatWest Group reviews the value of the investments’ net assets, executing hedges where appropriate to reduce the sensitivity of capital ratios to foreign exchange rate movement. Hedge accounting relationships will be designated where required.
Exchange rate risk also arises in NatWest Group where payments are denominated in currencies other than the functional currency. Residual risk positions are hedged with forward foreign exchange contracts, fixing the exchange rate the payments will be settled in. The derivatives are documented as cash flow hedges.
For all cash flow hedging and fair value hedge relationships, and net investment hedging, NatWest Group determines that there is an adequate level of offsetting between the hedged item and hedging instrument at inception and on an ongoing basis. This is achieved by comparing movements in the fair value of the expected highly probable forecast interest cash flows/fair value of the hedged item attributable to the hedged risk with movements in the fair value of the expected changes in cash flows from the hedging interest rate swap. Hedge effectiveness is assessed on a cumulative basis over a time period management determines to be appropriate. NatWest Group uses either the actual ratio between the hedged item and hedging instrument(s) or one that minimises hedge ineffectiveness to establish the hedge ratio for hedge accounting. Hedge ineffectiveness is measured and recognised in the income statement as it arises.
IBOR reform - NatWest Group in the year continued to apply, for relationships directly affected by interest rate benchmark reform, Interest Rate Benchmark Reform Amendments to IAS 39 and IFRS 7 issued September 2019 (“Phase 1 relief”) and Interest Rate Benchmark Reform – Phase 2 Amendments to IAS 39 and IFRS 7 issued August 2020 (“Phase 2 relief”).
Significant transitions in the year were the GBP, JPY and CHF derivatives subject to cash flow and fair value hedging transitioned as part of the LCH ‘big bang’ conversion in December 2021. The swaps were restructured to reprice off the appropriate risk free rate from the next repricing date post 31 December 2021 plus a spread adjustment. All impacted hedge accounting relationships had their designations updated to reflect this transition.
USD cash flow and fair value hedges of interest rate risk that mature post 30 June 2023 continue to be directly affected by interest rate benchmark reform.
14 Derivatives continued
Included in the table below are derivatives held for hedging purposes as follows:
2021 | 2020 | |||||||||||||||
Changes in fair | Changes in fair | |||||||||||||||
value used for | value used for | |||||||||||||||
Notional | Assets | Liabilities | hedge ineffectiveness (1) | Notional | Assets | Liabilities | hedge ineffectiveness (1) | |||||||||
| £bn |
| £m |
| £m |
| £m |
| £bn |
| £m |
| £m |
| £m | |
Fair value hedging |
|
|
|
|
|
|
|
|
|
| ||||||
Interest rate contracts |
| |
| |
| | |
| | |
| | ( | |||
|
|
|
| |||||||||||||
Cash flow hedging |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest rate contracts |
| |
| |
| | ( |
| | |
| | | |||
Exchange rate contracts |
| |
| |
| | |
| | |
| | ( | |||
|
|
|
|
|
| |||||||||||
Net investment hedging |
|
|
|
|
|
|
| |||||||||
Exchange rate contracts |
| |
| |
| | |
| | — |
| | | |||
| | | — | | | | ( | |||||||||
IFRS netting/Clearing house settlements | ( | ( | ( | ( | ||||||||||||
|
| |
| |
| |
| | ||||||||
| (1) | The change in fair value used for hedge ineffectiveness includes instruments that were decrecognised in the year. |
The notional of hedging instruments affected by interest rate benchmark reform is as follows:
| 2021 | 2020 | ||
| £bn |
| £bn | |
Fair value hedging |
|
| ||
EURIBOR (1) |
| — | | |
GBP LIBOR |
| — | | |
USD LIBOR (2) | | | ||
Other currency LIBOR |
| — | | |
Cash flow hedging |
| |||
EURIBOR (1) |
| — | | |
GBP LIBOR |
| — | | |
SOFR (3) | | — | ||
USD LIBOR (2) |
| | |
| (1) | In 2021 management concluded that EURIBOR is not expected to be significantly reformed further and therefore any uncertainty due to interest benchmark rate reform for EURIBOR has ended. |
| (2) | In 2021 the FCA declared that USD LIBOR will be non-representative post 30 June 2023; at the time of preparing the 2020 disclosures this date was expected to be 31 December 2021. |
| (3) | Hedge relationships subject to reform are those where either the hedged item or the hedging instrument is subject to the IBOR reform. |
| (4) | Notional of £ |
NatWest Group plc – Annual Report on Form 20-F | 80 |
Notes to the consolidated financial statements continued
14 Derivatives continued
The following table shows the period in which the notional of hedging contract ends:
| 0-3 months |
| 3-12 months |
| 1-3 years |
| 3-5 years |
| 5-10 years |
| 10-20 years |
| 20+ years |
| Total | |
2021 | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | ||||||||
Fair value hedging | ||||||||||||||||
Hedging assets - interest rate risk | | | | | | | | | ||||||||
Hedging liabilities - interest rate risk | | | | | | | | | ||||||||
Cash flow hedging | ||||||||||||||||
Hedging assets | ||||||||||||||||
Interest rate risk | | | | | | — | — | | ||||||||
Average fixed interest rate (%) | | | | | | — | — | | ||||||||
Hedging liabilities | ||||||||||||||||
Interest rate risk | | | | | | | — | | ||||||||
Average fixed interest rate (%) | | | | | | | — | | ||||||||
Hedging assets | ||||||||||||||||
Exchange rate risk | — | — | — | — | — | — | — | — | ||||||||
Hedging liabilities | ||||||||||||||||
Exchange rate risk | | | | | — | — | — | | ||||||||
Net investment hedging | ||||||||||||||||
Exchange rate risk | | — | — | — | — | — | — | | ||||||||
2020 | ||||||||||||||||
Fair value hedging | ||||||||||||||||
Hedging assets - interest rate risk | | | | | | | | | ||||||||
Hedging liabilities - interest rate risk | — | | | | | | | | ||||||||
Cash flow hedging | ||||||||||||||||
Hedging assets | ||||||||||||||||
Interest rate risk | | | | | | | — | | ||||||||
Average fixed interest rate (%) | | | | | | | — | | ||||||||
Hedging liabilities | ||||||||||||||||
Interest rate risk | | | | | | | — | | ||||||||
Average fixed interest rate (%) | | | | | | | — | | ||||||||
Hedging assets | ||||||||||||||||
Exchange rate risk | — | — | | — | — | — | — | | ||||||||
Hedging liabilities | ||||||||||||||||
Exchange rate risk | — | | | | | — | — | | ||||||||
Net investment hedging | ||||||||||||||||
Exchange rate risk | | | — | — | — | — | — | |
For cash flow hedging of exchange rate risk, the average foreign exchange rates applicable across the relationships were as below for the main currencies hedged.
| 2021 |
| 2020 | |
INR/GBP |
| |
| |
USD/GBP |
| |
| |
CHF/GBP |
| |
| n/a |
JPY/GBP |
| |
| |
JPY/EUR |
| n/a |
| |
CNH/GBP |
| |
| n/a |
For net investment hedging of exchange rate risk, the average foreign exchange rates applicable were as below for the main currencies hedged.
| 2021 |
| 2020 | |
SEK/GBP |
| |
| |
DKK/GBP |
| |
| |
NOK/GBP |
| |
| |
AED/USD |
| |
| n/a |
USD/GBP |
| |
| n/a |
NatWest Group plc – Annual Report on Form 20-F | 81 |
Notes to the consolidated financial statements continued
14 Derivatives continued
The table below analyses assets and liabilities subject to hedging derivatives.
Impact on | ||||||||
|
|
| Changes in fair |
| hedged items | |||
Carrying value | Impact on | value used as | ceased to be | |||||
of hedged | hedged items | a basis to | adjusted for | |||||
assets and | included in | determine | hedging | |||||
liabilities | carrying value | ineffectiveness (1) | gains or losses | |||||
2021 | £m | £m | £m | £m | ||||
Fair value hedging - interest rate | ||||||||
Loans to banks and customers - amortised cost | | | ( | | ||||
Other financial assets - securities | | | ( | — | ||||
Total | | | ( | | ||||
Other financial liabilities - debt securities in issue | | | | — | ||||
Subordinated liabilities | | ( | | — | ||||
Total | | | | — | ||||
Cash flow hedging - interest rate | ||||||||
Loans to banks and customers - amortised cost | | | ||||||
Other financial assets - securities | | | ||||||
Total | | | ||||||
Cash flow hedging - interest rate | ||||||||
Bank and customer deposits | | ( | ||||||
Other financial liabilities - debt securities in issue | | ( | ||||||
Total | | ( | ||||||
Cash flow hedging - exchange rate | ||||||||
Loans to banks and customer - amortised cost | | — | ||||||
Other financial assets - securities | | — | ||||||
Total | | — | ||||||
Other financial liabilities - debt securities in issue | | ( | ||||||
Subordinated liabilities | | ( | ||||||
Other | | ( | ||||||
Total | | ( | ||||||
2020 | ||||||||
Fair value hedging - interest rate |
|
|
|
|
|
| ||
Loans to banks and customers - amortised cost |
| |
| |
| | | |
Other financial assets - securities |
| |
| |
| | — | |
Total |
| |
| |
| | | |
Other financial liabilities - debt securities in issue |
| |
| |
| ( | — | |
Subordinated liabilities |
| |
| |
| ( | | |
Total |
| |
| |
| ( | | |
Cash flow hedging - interest rate |
|
|
|
| ||||
Loans to banks and customers - amortised cost |
| |
|
| ( | |||
Other financial assets - securities |
| |
|
| ( | |||
Total |
| |
|
| ( | |||
Cash flow hedging - interest rate | ||||||||
Bank and customer deposits | | | ||||||
Other financial liabilities - debt securities in issue | | | ||||||
Total | | |||||||
Cash flow hedging - exchange rate | ||||||||
Loans to banks and customer - amortised cost | | | ||||||
Other financial assets - securities | | — | ||||||
Total | | | ||||||
Cash flow hedging - exchange rate | ||||||||
Other financial liabilities - debt securities in issue |
| |
|
| | |||
Subordinated liabilities |
| |
|
| | |||
Other | | ( | ||||||
Total |
| |
|
| |
| (1) | The change in fair value used for hedge ineffectiveness includes instruments that were derecognised in the year. |
NatWest Group plc – Annual Report on Form 20-F | 82 |
Notes to the consolidated financial statements continued
14 Derivatives continued
The following risk exposures will be affected by interest rate benchmark reform (notional, hedged adjustment):
2021 | 2020 | |||||||
Hedged | Hedged | |||||||
| Notional | adjustment | Notional |
| adjustment | |||
| £bn |
| £m |
| £bn |
| £m | |
Fair value hedging |
|
|
|
| ||||
EURIBOR (1) |
| — | — | |
| | ||
GBP LIBOR |
| — | — | |
| | ||
USD LIBOR (2) | | | | ( | ||||
Other currency LIBOR |
| — | — | |
| | ||
Cash flow hedging |
| |||||||
EURIBOR (1) |
| — | — | |
| ( | ||
GBP LIBOR |
| — | — | |
| ( | ||
USD LIBOR (2) | | | | ( | ||||
BOE Base rate (3) |
| — | — | |
| ( | ||
ECB REFI rate (3) |
| — | — | |
| — | ||
SONIA (3) |
| — | — | |
| | ||
| (1) | In 2021 management concluded that EURIBOR is not expected to be significantly reformed further and therefore any uncertainty due to interest benchmark rate reform for EURIBOR has ended. |
| (2) | In 2021 the FCA declared that USD LIBOR will be non-representative post 30 June 2023; at the time of preparing the 2020 disclosures this date was expected to be 31 December 2021. |
| (3) | Hedge relationships subject to reform are those where either the hedged item or the hedging instrument is subject to the IBOR reform. |
| (4) | Notional of £ |
NatWest Group plc – Annual Report on Form 20-F | 83 |
Notes to the consolidated financial statements continued
14 Derivatives continued
The following table shows an analysis of the pre-tax cash flow hedge reserve and foreign exchange hedge reserve.
2021 | 2020 | |||||||
Foreign | Foreign | |||||||
Cash flow | exchange | Cash flow | exchange | |||||
hedge reserve | hedge reserve | hedge reserve | hedge reserve | |||||
| £m |
| £m |
| £m |
| £m | |
Continuing |
|
|
|
| ||||
Interest rate risk |
| ( |
| — |
| |
| — |
Foreign exchange risk |
| | | | ( | |||
De-designated |
|
|
| |||||
Interest rate risk |
| ( |
| — |
| ( |
| — |
Foreign exchange risk |
| |
| ( |
| ( |
| ( |
Total |
| ( |
| ( |
| |
| ( |
2021 | 2020 | |||||||
Foreign | Foreign | |||||||
Cash flow | exchange hedge | Cash flow | exchange hedge | |||||
| hedge reserve |
| reserve |
| hedge reserve |
| reserve | |
| £m |
| £m |
| £m |
| £m | |
Amount recognised in equity | ||||||||
Interest rate risk |
| ( | — |
| |
| — | |
Foreign exchange risk |
| |
| |
| |
| ( |
Total |
| ( |
| |
| |
| ( |
Amount transferred from equity to earnings | ||||||||
Interest rate risk to net interest income |
| ( |
| — |
| ( |
| — |
Interest rate risk to non-interest income (1) | | — | — | — | ||||
Foreign exchange risk to net interest income |
| ( |
| |
| ( |
| — |
Foreign exchange risk to non-interest income |
| |
| ( |
| — |
| |
Foreign exchange risk to operating expenses | | — | | — | ||||
Total |
| ( |
| — |
| ( |
| |
(1) | There was £ |
Hedge ineffectiveness recognised in other operating income comprises:
| 2021 |
| 2020 |
| 2019 | |
£m | £m | £m | ||||
Fair value hedging |
|
|
|
|
| |
(Losses)/gains on hedged items attributable to the hedged risk |
| ( |
| |
| |
Gains/(losses) on the hedging instruments |
| |
| ( |
| ( |
Fair value hedging ineffectiveness |
| |
| |
| |
Cash flow hedging | ||||||
Interest rate risk | ( | | | |||
Cash flow hedging ineffectiveness |
| ( |
| |
| |
Total |
| |
| |
| |
The main sources of ineffectiveness for interest rate risk hedge accounting relationships are:
| - | The effect of the counterparty credit risk on the fair value of the interest rate swap which is not reflected in the fair value of the hedged item attributable to the change in interest rate (fair value hedge). |
| - | Differences in the repricing basis between the hedging instrument and hedged cash flows (cash flow hedge); and |
Upfront present values on the hedging derivatives where hedge accounting relationships have been designated after the trade date (cash flow hedge and fair value hedge).
15 Loan impairment provisions
Loan exposure and impairment metrics
There is a risk that customers and counterparties fail to meet their contractual obligation to settle outstanding amounts, known as expected credit losses (ECL). The calculation of ECL considers historic, current and forward-looking information to determine the amount we do not expect to recover. ECL is recognised on current and potential exposures, and contingent liabilities.
For accounting policy information see Accounting policies note 11. Further disclosures on credit risk and information on ECL methodology are shown from page 181 of the NatWest Group 2021 Annual Report and Form 20-F Information included as Exhibit 15.2 to this Form 20-F.
NatWest Group plc – Annual Report on Form 20-F | 84 |
Notes to the consolidated financial statements continued
The table below summarises loans and credit impairment measures within the scope of IFRS 9 Expected credit losses framework.
| 2021 | 2020 | ||
|
| £m |
| £m |
Loans - amortised cost |
|
|
|
|
Stage 1 |
| |
| |
Stage 2 |
| |
| |
Stage 3 |
| |
| |
Of which: individual | | | ||
Of which: collective |
| |
| |
| | |||
ECL provisions (1) |
|
| ||
- Stage 1 |
| |
| |
- Stage 2 |
| |
| |
- Stage 3 |
| |
| |
Of which: individual | | | ||
Of which: collective | | | ||
| |
| | |
ECL provision coverage (2,3) |
|
| ||
- Stage 1 (%) |
| | ||
- Stage 2 (%) | |
| | |
- Stage 3 (%) | |
| | |
|
| | ||
Continuing operations | ||||
Impairment (releases)/losses |
|
| ||
ECL (release)/charge (3,4) | ( | | ||
Stage 1 | ( | ( | ||
Stage 2 | ( | | ||
Stage 3 | | | ||
Of which: individual | | | ||
Of which: collective | | | ||
Amounts written off |
| |
| |
Of which: individual | | | ||
Of which: collective |
| |
| |
| (1) | Includes £ |
| (2) | ECL provisions coverage is calculated as total ECL provisions divided by third party loans – amortised cost and FVOCI. |
| (3) | Includes a £ |
| (4) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. |
| (5) | The table shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to Financial instruments within the scope of the IFRS 9 ECL framework for further details. Other financial assets within the scope of the IFRS 9 ECL framework were cash and balances at central banks totalling £ |
NatWest Group plc – Annual Report on Form 20-F | 85 |
Notes to the consolidated financial statements continued
15 Loan impairment provisions continued
Credit risk enhancement and mitigation
For information on Credit risk enhancement and mitigation held as security, refer to Risk and capital management – Credit risk enhancement and mitigation section.
Critical accounting policy: Loan impairment provisions
Accounting policies note 11 sets out how the expected loss approach is applied. At 31 December 2021, customer loan impairment provisions amounted to £
The impairment loss is the difference between the carrying value of the loan and the present value of estimated future cash flows at the loan's original effective interest rate.
The measurement of credit impairment under the IFRS expected loss model depends on management's assessment of any potential deterioration in the creditworthiness of the borrower, its modelling of expected performance and the application of economic forecasts. All three elements require judgments that are potentially significant to the estimate of impairment losses. For further information and sensitivity analysis, refer to Risk and capital management - Measurement uncertainty and ECL sensitivity analysis section.
IFRS 9 ECL model design principles
Refer to Credit risk – IFRS 9 ECL model design principles section for further details.
Approach for multiple economic scenarios (MES)
The base scenario plays a greater part in the calculation of ECL than the approach to MES. Refer to Credit risk - Economic loss drivers - Probability weightings of scenarios section for further details.
NatWest Group plc – Annual Report on Form 20-F | 86 |
Notes to the consolidated financial statements continued
16 Other financial assets
Other financial assets consist of debt securities, equity shares and loans that are not held for trading. Balances consist of local and central government securities, a component part of NatWest Group’s liquidity portfolio.
For accounting policy information see Accounting policy 10.
Debt securities | ||||||||||||||||
Central and local government | Other | Equity | Other | |||||||||||||
UK | US | Other | debt | Total | shares | loans | Total | |||||||||
2021 |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
Mandatory fair value through profit or loss |
| — |
| — |
| — |
| |
| |
| | |
| | |
Fair value through other comprehensive income (1) |
| |
| |
| |
| |
| |
| | |
| | |
Amortised cost |
| |
| |
| |
| |
| |
| — | — |
| | |
Total |
| |
| |
| |
| |
| |
| | |
| | |
2020 | ||||||||||||||||
Mandatory fair value through profit or loss | — | — | — | | | | | | ||||||||
Fair value through other comprehensive income (1) |
| |
| |
| |
| |
| |
| | | | ||
Amortised cost |
| |
| |
| |
| |
| |
| — | — |
| | |
Total |
| |
| |
| |
| |
| |
| | | | ||
(1) | Upon initial recognition, the Group occasionally irrevocably designates some of its equity investments as equity instruments at FVOCI when they meet the definition of equity under IAS 32 Financial instruments: presentation, are not held for trading or they are held for strategic purposes. Such classification is determined on an instrument by instrument basis. Gains and losses on these equity instruments are not recycled to the income statement and dividends are recognised in profit or loss except when they represent a recovery of part of the cost of the instrument, in which case such gains are recorded in OCI. Equity instruments at FVOCI are not subject to an impairment assessment. |
Equity shares disposed during 2020 included SABB (£
Dividends on FVOCI equity shares include £
NatWest Group plc – Annual Report on Form 20-F | 87 |
Notes to the consolidated financial statements continued
17 Intangible assets
Intangible assets, such as internally generated software and goodwill generated on business combinations are not physical in nature. This note presents the cost of the assets, which is the amount NatWest Group initially paid or incurred, additions and disposals during the year, and any amortisation or impairment. Amortisation is a charge that reflects the usage of the asset and impairment is a reduction in value arising from specific events identified during the year.
For accounting policy information see Accounting policies notes 5 and 6.
2021 | 2020 | |||||||||||
| Goodwill |
| Other (1) |
| Total |
| Goodwill |
| Other (1) |
| Total | |
Cost | £m | £m | £m | £m | £m | £m | ||||||
At 1 January |
| | | |
| |
| |
| | ||
Currency translation and other adjustments |
| — |
| |
| |
| — |
| ( |
| ( |
Additions |
| — |
| |
| |
| — |
| |
| |
Disposals and write-off of fully amortised assets |
| — |
| ( |
| ( |
| ( |
| ( |
| ( |
At 31 December |
| | | |
| |
| |
| | ||
|
|
|
| |||||||||
Accumulated amortisation and impairment |
|
|
|
| ||||||||
At 1 January |
| | | |
| |
| |
| | ||
Currency translation and other adjustments |
| — |
| |
| |
| — |
| |
| |
Disposals and write-off of fully amortised assets |
| — |
| ( |
| ( |
| ( |
| ( |
| ( |
Impairment of intangible assets |
| |
| |
| |
| — |
| |
| |
Amortisation charge for the year | — | | | — | | | ||||||
At 31 December |
| |
| |
| |
| |
| |
| |
|
|
|
| |||||||||
Net book value at 31 December |
| |
| |
| |
| |
| |
| |
| (1) | Principally internally generated software. |
Intangible assets and goodwill are reviewed for indicators of impairment. In 2021 £
NatWest Group’s goodwill acquired in business combinations analysed by reportable segment is in Note 4 Segmental analysis. It is reviewed annually at 31 December for impairment. In 2021 goodwill in the Retail segment was impaired by £
Impairment testing involves the comparison of the carrying value of each cash-generating unit (CGU) with its recoverable amount. The carrying values of the segments reflect the equity allocations made by management, which are consistent with NatWest Group’s capital targets. Recoverable amount is the higher of fair value less costs of disposal and value in use. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants. Value in use is the present value of expected future cash flows from the CGU. The recoverable amounts for all CGUs at 31 December 2021 were based on value in use, using management's latest five-year revenue and cost forecasts. These are discounted cash flow projections over five years. The forecast is then extrapolated in perpetuity using a long-term growth rate to compute a terminal value, which comprises the majority of the value in use. The long-term growth rates have been based on expected growth of the CGUs. The pre-tax risk discount rates are based on those observed to be applied to businesses regarded as peers of the CGUs.
Critical accounting policy: Goodwill
Critical estimates
Impairment testing involves a number of judgments. The key judgments are the five-year cash flow forecast, the long-term growth rate used to derive the terminal value, and the discount rate. Future value in use is primarily affected by changes in profitability and changes in discount rate. Adverse changes could lead to value in use falling below carrying value. The most likely cause for this would be a failure to meet budgets, including cost targets, or external downgrades in the UK economy.
NatWest Group plc – Annual Report on Form 20-F | 88 |
Notes to the consolidated financial statements continued
17 Intangible assets continued
The impact of reasonably possible changes to the more significant variables in the value in use calculations is presented below. This reflects the sensitivity of the VIU to each key assumption on its own. It is possible that more than one change may occur at the same time.
Consequential impact of 1% | Consequential impact of 5% | |||||||||||||||||
Assumptions | Recoverable | adverse movement | adverse movement | |||||||||||||||
Terminal | Pre-tax | Cost: | amount exceeded | Discount | Terminal | Forecast | Forecast | |||||||||||
Goodwill | growth rate | discount rate | income ratio (1) | carrying value | rate | growth rate | Income | cost | ||||||||||
31 December 2021 |
| £bn |
| % |
| % | % |
| £bn |
| £bn |
| £bn |
| £bn |
| £bn | |
Retail Banking |
| |
| |
| | |
| |
| ( | ( |
| ( | ( | |||
Commercial Banking |
| |
| |
| | |
| |
| ( |
| ( |
| ( | ( | ||
RBS International |
| |
| |
| | |
| |
| ( |
| ( |
| ( | ( | ||
|
|
|
|
|
|
| ||||||||||||
31 December 2020 |
|
|
|
|
|
|
| |||||||||||
Retail Banking |
| |
| |
| | |
| |
| ( | ( |
| ( | ( | |||
Commercial Banking |
| |
| |
| | |
| |
| ( |
| ( |
| ( | ( | ||
RBS International |
| |
| |
| | |
| |
| ( |
| ( |
| ( | ( | ||
| (1) | Average Cost:income ratio % over the |
The following table gives the percentage change in key assumptions that would reduce the headroom of CGUs to nil.
2021 | 2020 | |||||||||||||||
Terminal | Pre-tax | Forecast | Forecast | Terminal | Pre-tax | Forecast | Forecast | |||||||||
growth rate | discount rate | income | cost | growth rate | discount rate | income | cost | |||||||||
Change in key assumptions to reduce headroom to nil (%) |
| % |
| % |
| % |
| % |
| % |
| % |
| % |
| % |
Retail Banking |
| ( |
| | ( |
| |
| ( |
| | ( |
| | ||
Commercial Banking |
| ( |
| | ( |
| |
| ( |
| | ( |
| | ||
RBS International |
| ( |
| | ( |
| |
| ( |
| | ( |
| | ||
18 Other assets
Other assets are not financial assets and reflect a grouping of assets that are not large enough to present separately on the balance sheet.
| 2021 |
| 2020 | |
£m | £m | |||
Interests in associates (1) | | | ||
Property, plant and equipment (2) | | | ||
Pension schemes in net surplus (Note 5) | | | ||
Prepayments |
| |
| |
Accrued income |
| |
| |
Tax recoverable |
| |
| |
Deferred tax (Note 7) | | | ||
Acceptances | | | ||
Other |
| |
| |
Other assets |
| |
| |
| (1) | Includes interest in Business Growth Fund £ |
| (2) | The estimated useful lives of NatWest Group's property, plant and equipment are: freehold buildings and long leasehold |
19 Other financial liabilities
Other financial liabilities consist of customer deposits designated at fair value and debt securities in issue classified as designated at fair value and amortised cost.
For accounting policy information see Accounting policies notes 10 and 14.
| 2021 |
| 2020 | |
| £m | £m | ||
Customer deposits - designated as at fair value through profit or loss |
| |
| |
Debt securities in issue |
|
|
|
|
- designated as at fair value through profit or loss |
| |
| |
- amortised cost |
| |
| |
Total |
| |
| |
NatWest Group plc – Annual Report on Form 20-F | 89 |
Notes to the consolidated financial statements continued
20 Subordinated liabilities
Subordinated liabilities are debt securities that, in the event of winding up or bankruptcy, rank below other liabilities for interest payments and repayment. The subordinated liabilities presented in the note are classified as designated at fair value and amortised cost.
For accounting policy information see Accounting policies notes 10 and 14.
| 2021 |
| 2020 | |
£m | £m | |||
Dated loan capital |
| |
| |
Undated loan capital |
| |
| |
Preference shares |
| |
| |
|
| |
| |
Certain preference shares issued by the company are classified as liabilities; these securities remain subject to the capital maintenance rules of the Companies Act 2006.
Capital | 2021 | 2020 | ||||
New issue |
| treatment |
| £m |
| £m |
NatWest Group plc |
|
|
|
|
|
|
£ | Tier 2 | — | | |||
US$ | Tier 2 | — | | |||
£ | Tier 2 | | — | |||
€ | Tier 2 | | — | |||
|
|
|
| |
| |
Redemptions | ||||||
NatWest Group plc |
|
|
|
|
|
|
US$ | Tier 2 | | | |||
US$ | Tier 2 | | | |||
US$ | Tier 2 | — | | |||
US$ | Ineligible | | | |||
US$ | Ineligible | | — | |||
US$ | Tier 2 | | — | |||
US$ | Tier 2 | | — | |||
US$ |
| Tier 2 |
| |
| — |
| |
| | |||
NatWest Markets Plc |
| |||||
US$ | Tier 2 | — | | |||
€ | Tier 2 | | — | |||
£ | Tier 2 | | — | |||
£ | Tier 2 | | — | |||
|
| | | |||
|
| |||||
National Westminister Bank Plc | ||||||
£ | Tier 2 | | — | |||
€ | Upper Tier 2 | | — | |||
€ | Upper Tier 2 | | — | |||
US$ | Upper Tier 2 | | — | |||
US$ | Upper Tier 2 | | — | |||
US$ | Upper Tier 2 | | — | |||
£ | Upper Tier 2 | | — | |||
£ | Tier 1 | | — | |||
| — | |||||
NWM N.V. and subsidiaries |
| |||||
US$ | Ineligible | | | |||
€ | Tier 2 | — | | |||
| |
(1) | In July 2021, paid in equity reclassified to liabilities as the result of a call in August 2021 of US$ |
NatWest Group plc – Annual Report on Form 20-F | 90 |
Notes to the consolidated financial statements continued
21 Other liabilities
Other liabilities are amounts due to third parties that are not financial liabilities including lease liabilities, amounts due for goods and services that have been received but not invoiced, tax due to HMRC, and retirement benefit liabilities. Liabilities which have a level of uncertainty regarding their timing or the future cost to settle them are included in other liabilities as provisions for liabilities and charges.
| 2021 |
| 2020 | |
Other liabilities | £m | £m | ||
Lease liabilities (Note 23) | | | ||
Provisions for liabilities and charges | | | ||
Retirement benefit liabilities (Note 5) |
| |
| |
Accruals |
| |
| |
Deferred income |
| |
| |
Current tax |
| |
| |
Deferred tax (Note 7) | | | ||
Acceptances |
| |
| |
Other liabilities (1) | | | ||
| |
| |
(1) | Other liabilities include liabilities of disposal groups of £ |
Litigation and | Financial | |||||||||||
Customer | other | commitments | ||||||||||
redress (1) | regulatory (4) | Property (3) | and guarantees | Other (2) | Total | |||||||
Provisions for liabilities and charges |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
At 1 January 2021 |
| |
| |
| |
| |
| |
| |
Expected credit loss impairment release | — | — | — | ( | — | ( | ||||||
Currency translation and other movements | ( | | | ( | ( | ( | ||||||
Charge to income statements | | | | — | | | ||||||
Release to income statement |
| ( |
| ( |
| ( |
| — |
| ( |
| ( |
Provisions utilised |
| ( |
| ( |
| ( |
| — |
| ( |
| ( |
At 31 December 2021 |
| |
| |
| |
| |
| |
| |
| (1) | Includes payment protection insurance provision which reflects the estimated cost of PPI redress attributable to claims prior to the Financial Conduct Authority (FCA) complaint deadline of 29 August 2019. All pre-deadline complaints have been processed which removes complaint volume estimation uncertainty from the provision estimate. NatWest Group continues to conclude remaining bank-identified closure work and conclude cases with the Financial Ombudsmen Service. |
| (2) | Other materially comprises provisions relating to restructuring costs. |
| (3) | Property provision materially includes dilapidation provisions. Release in property provision includes the effect of purchase of freeholds for properties where the group was the primary leaseholder. |
| (4) | Majority of charge in the year and utilisation of litigation provisions relates to FCA investigation into money laundering. |
Provisions are liabilities of uncertain timing or amount and are recognised when there is a present obligation as a result of a past event, the outflow of economic benefit is probable and the outflow can be estimated reliably. Any difference between the final outcome and the amounts provided will affect the reported results in the period when the matter is resolved.
For accounting policy information see Accounting policies note 8.
Critical accounting policy: Provisions for liabilities
The key judgment is involved in determining whether a present obligation exists. There is often a high degree of uncertainty and judgment is based on the specific facts and circumstances relating to individual events in determining whether there is a present obligation. Judgment is also involved in estimation of the probability, timing and amount of any outflows. Where NatWest Group can look to another party such as an insurer to pay some or all of the expenditure required to settle a provision, any reimbursement is recognised when, and only when, it is virtually certain that it will be received.
Estimates - Provisions are liabilities of uncertain timing or amount and are recognised when there is a present obligation as a result of a past event, the outflow of economic benefit is probable and the outflow can be estimated reliably. Any difference between the final outcome and the amounts provided will affect the reported results in the period when the matter is resolved.
| - | Customer redress: Provisions reflect the estimated cost of redress attributable to claims where it is determined that a present obligation exists. |
| - | Litigation and other regulatory: NatWest Group is engaged in various legal proceedings, both in the UK and in overseas jurisdictions, including the US. For further information in relation to legal proceedings and discussion of the associated uncertainties, refer to Note 27. |
| - | Property: This includes provision for contractual costs such as rates associated with vacant properties. |
| - | Other provisions: These materially comprise provisions for onerous contracts and restructuring costs. Onerous contract provisions comprise an estimate of the costs involved in fulfilling the terms and conditions of contracts net of any expected benefits to be received. This includes provision for contractual costs such as rates associated with vacant properties. Redundancy and restructuring provisions comprise the estimated cost of restructuring, including redundancy costs where an obligation exists. |
Background information for all material provisions is given in Note 27.
NatWest Group plc – Annual Report on Form 20-F | 91 |
Notes to the consolidated financial statements continued
22 Share capital and other equity
Share capital consists of ordinary shares and preference shares and is measured as the number of shares allotted and fully paid multiplied by the nominal value of a share. Other equity includes paid-in equity, merger reserves, capital redemption reserve and own shares held.
For accounting policy information see Accounting policies note 14.
Number of shares | ||||||||
2021 | 2020 | 2021 | 2020 | |||||
Allotted, called up and fully paid |
| £m |
| £m |
| 000s |
| 000s |
Ordinary shares of £ |
| |
| |
| |
| |
Cumulative preference shares of £ |
| |
| |
| |
| |
Non-cumulative preference shares of US$ |
| — |
| — |
| |
| |
| (1) |
Number of | ||||
Movement in allotted, called up and fully paid ordinary shares |
| £m |
| shares 000s |
At 1 January 2020 |
| |
| |
Shares issued |
| |
| |
At 1 January 2021 |
| |
| |
Shares issued | | | ||
Shares redeemed |
| ( |
| ( |
At 31 December 2021 |
| |
| |
Ordinary shares
There is
On 6 February 2019 the company held a General Meeting and shareholders approved a special resolution to give the company authority to make off-market purchases of its ordinary shares from HM Treasury (or its nominee) at such times as the directors may determine is appropriate. Full details of the proposal are set out in the Circular and Notice of General Meeting. This authority was renewed at the Annual General Meeting in 2021 and shareholders will be asked to renew the authority at the Annual General Meeting in 2022.
The company utilised the authority it obtained at the 2020 AGM to make an off-market purchase of
At the Annual General Meeting in 2021 shareholders authorised the company to make market purchases of up to
A further
In 2021, the company issued
In 2021 NatWest Group paid an interim dividend of £
The company has announced that the directors have recommended a final dividend of £
If approved, payment will be made on 4 May 2022 to shareholders on the register at the close of business on 18 March 2022. The ex-dividend date will be 17 March 2022.
Cumulative preference shares
At the 2021 Annual General Meeting, shareholders authorised the company to make an off-market purchase of preference shares in the company. The company announced on 15 December 2021 that it had utilised this authority to purchase
NatWest Group plc – Annual Report on Form 20-F | 92 |
Notes to the consolidated financial statements continued
22 Share capital and other equity continued
Non-cumulative preference shares
Non-cumulative preference shares entitle their holders to periodic non-cumulative cash dividends at specified fixed rates for each series payable out of distributable profits of the company.
The company may redeem some or all of the non-cumulative preference shares from time to time at the rates detailed in the table below plus dividends otherwise payable for the then current dividend period to the date of redemption.
| Number of shares |
|
| Redemption |
| Redemption | ||
Non-cumulative preference shares classified as equity | in issue | Interest rate | date on or after | price per share | ||||
Shares of US$ |
| |
| Floating | 29 September 2017 |
| US$ |
| (1) | Preference shares where distributions are discretionary are classified as equity. |
On a winding-up or liquidation of the company, the holders of the non-cumulative preference shares are entitled to receive, out of any surplus assets available for distribution to the company’s shareholders (after payment of arrears of dividends on the cumulative preference shares up to the date of repayment) pari passu with the cumulative preference shares and all other shares of the company ranking pari passu with the non-cumulative preference shares as regards participation in the surplus assets of the company, a liquidation distribution per share equal to the applicable redemption price detailed in the table above, together with an amount equal to dividends for the then current dividend period accrued to the date of payment, before any distribution or payment may be made to holders of the ordinary shares as regards participation in the surplus assets of the company.
Except as described above, the holders of the non-cumulative preference shares have no right to participate in the surplus assets of the company.
Holders of the non-cumulative preference shares are not entitled to receive notice of or attend general meetings of the company except if any resolution is proposed for adoption by the shareholders of the company to vary or abrogate any of the rights attaching to the non-cumulative preference shares or proposing the winding-up or liquidation of the company. In any such case, they are entitled to receive notice of and to attend the general meeting of shareholders at which such resolution is to be proposed and are entitled to speak and vote on such resolution (but not on any other resolution). In addition, in the event that, prior to any general meeting of shareholders, the company has failed to pay in full the most recent dividend payment due on the series U non-cumulative dollar preference shares, the holders shall be entitled to receive notice of, attend, speak and vote at such meeting on all matters together with the holders of the ordinary shares. In these circumstances only, the rights of the holders of the non-cumulative preference shares so to vote shall continue until the company shall have resumed the payment in full of the dividends in arrears.
Paid-in equity - comprises equity instruments issued by the company other than those legally constituted as shares.
Additional Tier 1 instruments issued by NatWest Group plc having the legal form of debt are classified as equity under IFRS. The coupons on these instruments are non-cumulative and payable at the company’s discretion. In the event NatWest Group’s CET1 ratio falls below
Capital recognised for regulatory purposes cannot be redeemed without Prudential Regulation Authority consent. This includes ordinary shares, preference shares and additional Tier 1 instruments.
|
| 2021 |
| 2020 |
| 2019 |
|
| £m |
| £m |
| £m |
Additional Tier 1 notes |
|
|
|
| ||
US$ |
| — | — |
| | |
US$ | | | | |||
US$ | — | | | |||
US$ |
| | |
| — | |
GBP£ | | | — | |||
GBP£ | | — | — | |||
US$ |
| | — |
| — | |
| | |
| (1) | Issued in August 2015. In the event of conversion, converted into ordinary shares at a price of $ |
| (2) | Issued in August 2016. In the event of conversion, converted into ordinary shares at a price of $ |
| (3) | Issued in June 2020. In the event of conversion, converted into ordinary shares at a price of £ |
| (4) | Issued in November 2020. In the event of conversion, converted into ordinary shares at a price of £ |
| (5) | Issued in March 2021. In the event of conversion, converted into ordinary shares at a price of £ |
| (6) | Issued in June 2021. In the event of conversion, converted into ordinary shares at a price of £ |
NatWest Group plc – Annual Report on Form 20-F | 93 |
Notes to the consolidated financial statements continued
22 Share capital and other equity continued
Merger reserve - the merger reserve comprises the premium on shares issued to acquire NatWest Bank Plc less goodwill amortisation charged under previous GAAP.
Capital redemption reserve - under UK companies legislation, when shares are redeemed or purchased wholly or partly out of the company’s profits, the amount by which the company’s issued share capital is diminished must be transferred to the capital redemption reserve. The capital maintenance provisions of UK companies legislation apply to the capital redemption reserve as if it were part of the company’s paid up share capital. On 15 June 2017, the Court of Session approved a reduction of NatWest plc capital so that the amounts which stood to the credit of the capital redemption reserve were transferred to retained earnings. The nominal value of the shares bought back from HM Treasury in March 2021 and via the Programme during 2021 have been transferred to the Capital redemption reserve.
Own shares held - at 31 December 2021,
As part of the shares bought back from HM Treasury in March 2021, the company transferred
NatWest Group plc optimises capital efficiency by maintaining reserves in subsidiaries, including regulated entities. Certain preference shares and subordinated debt are also included within regulatory capital. The remittance of reserves to the company or the redemption of shares or subordinated capital by regulated entities may be subject to maintaining the capital resources required by the relevant regulator.
UK law prescribes that only the reserves of the company are taken into account for the purpose of making distributions and in determining permissible applications of the share premium account.
NatWest Group plc – Annual Report on Form 20-F | 94 |
Notes to the consolidated financial statements continued
23 Leases
A lease is a contract or part of a contract whereby the lessor (the legal owner of an asset) conveys to the lessee (the user of the asset) the right to use an asset for an agreed period of time in exchange for a payment or series of payments.
This note presents the income, expenses, assets, liabilities and cash flows of NatWest Group in the capacity of both lessee and lessor.
Lessee
NatWest Group is party to lease contracts as lessee to support its operations. The following table provides information in respect of those lease contracts as lessee.
| 2021 |
| 2020 | |
| £m | £m | ||
Amount recognised in consolidated income statement | ||||
Interest payable |
| ( | ( | |
Depreciation (1) |
| ( | ( | |
Rental expenses on short term leases |
| — | ( | |
Income from subleasing right to use assets |
| | | |
2021 | 2020 | |||
£m | £m | |||
Amount recognised on balance sheet | ||||
Right of use assets include property, plant and equipment (2),(3) |
| | | |
Additions to right of use assets |
| | | |
Lease liabilities (3),(4) |
| ( | ( |
The total cash outflow for leases is £
| (1) | Includes impairment of right of use assets of £ |
| (2) | Includes right of use asset for plant and equipment of £ |
| (3) | Includes the effect of the purchase of freeholds for properties where the Group was the primary leaseholder. |
| (4) | Contractual cashflows of lease liabilities are shown in Note 12. |
Lessor
Acting as a lessor, NatWest Group provides asset finance to its customers. It purchases plant, equipment and intellectual property, renting them to customers under lease arrangements that, depending on their terms, qualify as either operating or finance leases.
| 2021 |
| 2020 | |
| £m | £m | ||
Amount included in consolidated income statement |
|
| ||
Finance leases | ||||
Finance income on the net investment in leases |
| | | |
Operating leases | ||||
Lease income |
| | |
The following table shows the reconciliation of undiscounted finance lease receivables to net investment in finance leases:
| 2021 | 2020 | ||
| £m |
| £m | |
Amount receivable under finance leases | ||||
Within 1 year |
| | | |
1 to 2 years |
| | | |
2 to 3 years |
| | | |
3 to 4 years |
| | | |
4 to 5 years |
| | | |
After 5 years |
| | | |
Lease payments total |
| | | |
Unguaranteed residual values |
| | | |
Future drawdowns |
| ( | ( | |
Unearned income |
| ( | ( | |
Present value of lease payments |
| | | |
Impairments |
| ( | ( | |
Net investment in finance leases |
| | |
NatWest Group plc – Annual Report on Form 20-F | 95 |
Notes to the consolidated financial statements continued
23 Leases continued
The following tables show undiscounted lease receivables from operating leases:
| 2021 | 2020 | ||
| £m |
| £m | |
Amount receivable under operating leases | ||||
Within 1 year |
| | | |
1 to 2 years |
| | | |
2 to 3 years |
| | | |
3 to 4 years |
| | | |
4 to 5 years |
| | | |
After 5 years |
| | | |
Total |
| | |
| 2021 |
| 2020 | |
Nature of operating lease assets on the balance sheet | £m | £m | ||
Transportation |
| |
| |
Car and light commercial vehicles |
| |
| |
Other |
| |
| |
|
| |
| |
Fair value of investment properties under operating lease are £
| 2021 |
| 2020 | |
£m | £m | |||
Amount receivable under investment properties |
|
|
|
|
Within 1 year |
| |
| |
1 to 2 years |
| |
| |
2 to 3 years |
| |
| |
3 to 4 years |
| |
| |
4 to 5 years |
| |
| |
After 5 years |
| |
| |
Total |
| |
| |
NatWest Group plc – Annual Report on Form 20-F | 96 |
Notes to the consolidated financial statements continued
24 Structured entities
A structured entity (SE) is an entity that has been designed such that voting or similar rights are not the dominant factor in deciding who controls the entity, for example when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. SEs are usually established for a specific, limited purpose. They do not carry out a business or trade and typically have no employees. They take a variety of legal forms - trusts, partnerships and companies - and fulfil many different functions where these can be a medium for a single transaction or portfolio of similar transactions. SEs are established as investment or funding vehicles, within the NatWest Group and for client transactions.
Consolidated structured entities
Securitisations
In a securitisation, assets, or interests in a pool of assets, are transferred generally to an SE which then issues liabilities to third party investors. The majority of securitisations are supported through liquidity facilities or other credit enhancements. NatWest Group arranges securitisations to facilitate client transactions and undertakes own-asset securitisations to sell or to fund portfolios of financial assets. NatWest Group also acts as an underwriter and depositor in securitisation transactions in both client and proprietary transactions.
NatWest Group involvement in client securitisations takes a number of forms. It may: sponsor or administer a securitisation programme; provide liquidity facilities or programme-wide credit enhancement; and purchase securities issued by the vehicle.
Other credit risk transfer securitisations
NatWest Group also transfers credit risk on originated loans and mortgages without the transfer of assets to a SE. As part of this, NatWest Group enters into credit derivative and financial guarantee contracts with consolidated SEs. At 31 December 2021, debt securities in issue by such SEs (and held by third parties) were £
Covered debt programme
Group companies have assigned loans to customers and debt investments to bankruptcy remote limited liability partnerships to provide security for issues of debt securities. NatWest Group retains all of the risks and rewards of these assets and continues to recognise them. The partnerships are consolidated by NatWest Group and the related covered bonds included within other financial liabilities. At 31 December 2021, £
Lending of own issued securities
NatWest Group has issued, retained, and lent debt securities under securities lending arrangements. Under standard terms in the UK and US markets, the recipient has an unrestricted right to sell or repledge collateral, subject to returning equivalent securities on maturity of the transaction. NatWest Group retains all of the risks and rewards of own issued liabilities lent under such arrangements and does not recognise them. At 31 December 2021, £
Unconsolidated structured entities
NatWest Group's interest in unconsolidated structured entities is analysed below.
2021 | 2020 | |||||||||||
Asset | Asset | |||||||||||
backed | Investment | backed | Investment | |||||||||
securitisation | funds and | securitisation | funds and | |||||||||
vehicles | others | Total | vehicles | others | Total | |||||||
| £m |
| £m |
| £m |
| £m |
| £m |
| £m | |
Trading assets and derivatives |
| |||||||||||
Trading assets |
| |
| |
| |
| |
| |
| |
Derivative assets |
| |
| |
| |
| |
| |
| |
Derivative liabilities |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( |
Total |
| |
| |
| |
| |
| |
| |
|
|
|
|
|
|
|
|
|
| |||
Non trading assets |
|
|
|
|
|
|
|
| ||||
Loans to customers |
| |
| |
| |
| |
| |
| |
Other financial assets |
| |
| |
| |
| |
| |
| |
Total |
| |
| |
| |
| |
| |
| |
|
|
|
|
|
|
|
|
|
| |||
Liquidity facilities/loan commitments |
| |
| |
| |
| |
| |
| |
Maximum exposure |
| |
| |
| |
| |
| |
| |
NatWest Group plc – Annual Report on Form 20-F | 97 |
Notes to the consolidated financial statements continued
25 Asset transfers
This note provides an overview of asset transfers which do not qualify for derecognition and therefore continue to be recognised in NatWest Group’s balance sheet.
For accounting policy information see Accounting policies note 4.
Transfers that do not qualify for derecognition
NatWest Group enters into securities repurchase, lending and total return transactions in accordance with normal market practice which includes the provision of additional collateral if necessary. Under standard terms in the UK and US markets, the recipient has an unrestricted right to sell or repledge collateral, subject to returning equivalent securities on settlement of the transaction.
Securities sold under repurchase transactions and transactions with the substance of securities repurchase agreements are not derecognised if NatWest Group retains substantially all the risks and rewards of ownership. The fair value (and carrying value) of securities transferred under such transactions included on the balance sheet, are set out below. All of these securities could be sold or repledged by the holder.
| 2021 |
| 2020 | |
The following assets have failed derecognition (1) | £m | £m | ||
Trading assets | | | ||
Loans to bank - amortised cost | | | ||
Loans to customers - amortised cost | | | ||
Other financial assets | | | ||
Total |
| |
| |
| (1) | Associated liabilities were £ |
Assets pledged as collateral
NatWest Group pledges collateral with its counterparties in respect of derivative liabilities and bank and stock borrowings.
2021 | 2020 | |||
Assets pledged against liabilities |
| £m |
| £m |
Trading assets | | | ||
Loans to banks - amortised cost |
| |
| |
Loans to customers - amortised cost |
| |
| |
Other financial assets (1) |
| |
| |
Total |
| |
| |
| (1) | Includes assets pledged for pension derivatives and stock borrowings. |
As part of the covered debt programme £
Own asset securitisations
In own-asset securitisations, the pool of assets held by the SE is either originated by NatWest Group or, in the case of whole loan programmes, purchased from third parties.
The table below analyses the asset categories for those own-asset securitisations where the transferred assets continue to be recorded on NatWest Group's balance sheet.
| 2021 |
| 2020 | |||||||||||||
Debt Securities in issue | Debt Securities in issue | |||||||||||||||
Held by | Held by |
| Held by | Held by |
| |||||||||||
third | NatWest | third | NatWest | |||||||||||||
Assets | parties | Group (1) | Total | Assets | parties | Group (1) | Total | |||||||||
Asset Type |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
Mortgages - Rol | | — | | | | | | | ||||||||
Cash deposits | | | ||||||||||||||
| |
| | |||||||||||||
| (1) | Debt securities retained by NatWest Group may be pledged with central banks. |
NatWest Group plc – Annual Report on Form 20-F | 98 |
Notes to the consolidated financial statements continued
26 Capital resources
NatWest Group’s regulatory capital is assessed against minimum requirements that are set out under the Capital Requirements Regulation to determine the strength of its capital base.
This note shows a reconciliation of shareholders’ equity to regulatory capital.
PRA transitional basis | ||||
|
| 2021 |
| 2020 |
£m | £m | |||
Shareholders’ equity (excluding non-controlling interests) |
|
|
|
|
Shareholders’ equity |
| |
| |
Preference shares - equity |
| ( |
| ( |
Other equity instruments |
| ( |
| ( |
| |
| | |
Regulatory adjustments and deductions |
|
| ||
Own credit |
| |
| ( |
Defined benefit pension fund adjustment |
| ( |
| ( |
Cash flow hedging reserve |
| |
| ( |
Deferred tax assets |
| ( |
| ( |
Prudential valuation adjustments |
| ( |
| ( |
Goodwill and other intangible assets |
| ( |
| ( |
Foreseeable ordinary dividends | ( | ( | ||
Foreseeable charges | ( | — | ||
Foreseeable pension contributions | ( | ( | ||
Adjustment under IFRS 9 transitional arrangements |
| |
| |
Other regulatory adjustments | ( | — | ||
| ( |
| ( | |
|
| |||
CET1 capital |
| |
| |
Additional Tier 1 (AT1) capital |
|
| ||
Qualifying instruments and related share premium |
| |
| |
Qualifying instruments and related share premium subject to phase out |
| |
| |
Qualifying instruments issued by subsidiaries and held by third parties subject to phase out |
| — |
| |
AT1 capital |
| |
| |
Tier 1 capital |
| |
| |
Qualifying Tier 2 capital |
|
| ||
Qualifying instruments and related share premium |
| |
| |
Qualifying instruments issued by subsidiaries and held by third parties |
| |
| |
Other regulatory adjustments | | | ||
Tier 2 capital |
| |
| |
Total regulatory capital |
| |
| |
It is NatWest Group policy to maintain a strong capital base, to expand it as appropriate and to utilise it efficiently throughout its activities to optimise the return to shareholders while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, NatWest Group has regard to the supervisory requirements of the PRA. The PRA uses capital ratios as a measure of capital adequacy in the UK banking sector, comparing a bank’s capital resources with its risk-weighted assets (the assets and off-balance sheet exposures are weighted to reflect the inherent credit and other risks); by international agreement, the Pillar 1 capital ratios should be not less than
A number of subsidiaries and sub-groups within NatWest Group, principally banking entities, are subject to various individual regulatory capital requirements in the UK and overseas. Furthermore, the payment of dividends by subsidiaries and the ability of members of NatWest Group to lend money to other members of NatWest Group may be subject to restrictions such as local regulatory or legal requirements, the availability of reserves and financial and operating performance.
NatWest Group plc – Annual Report on Form 20-F | 99 |
Notes to the consolidated financial statements continued
27 Memorandum items
Contingent liabilities and commitments
NatWest Group provides its customers with a variety of services to support their businesses, such as guarantees. These are reported as commitments. Contingent liabilities are possible obligations dependent on a future event or present obligations which are either not probable or cannot be measured reliably.
For accounting policy information see Accounting policies note 8.
The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31 December 2021. Although NatWest Group is exposed to credit risk in the event of a customer’s failure to meet its obligations, the amounts shown do not, and are not intended to, provide any indication of NatWest Group’s expectation of future losses.
| More than | More than | ||||||||||
| 1 year but | 3 years but | ||||||||||
| Less than | less than | less than | Over | ||||||||
| 1 year | 3 years | 5 years | 5 years | 2021 | 2020 | ||||||
|
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
Guarantees |
| | | | | |
| | ||||
Other contingent liabilities |
| | | | | |
| | ||||
Standby facilities, credit lines and other commitments |
| | | | | |
| | ||||
Contingent liabilities and commitments |
| | | | | |
| |
| (1) | The maturity of contingent liabilities and commitment is based on the expiry of the agreement between NatWest Group and the customer. |
Banking commitments and contingent obligations, which have been entered into on behalf of customers and for which there are corresponding obligations from customers, are not included in assets and liabilities. NatWest Group’s maximum exposure to credit loss, in the event of its obligation crystallising and all counterclaims, collateral or security proving valueless, is represented by the contractual nominal amount of these instruments included in the table above. These commitments and contingent obligations are subject to NatWest Group’s normal credit approval processes.
Guarantees – NatWest Group gives guarantees on behalf of customers. A financial guarantee represents an irrevocable undertaking that NatWest Group will meet a customer’s specified obligations to third party if the customer fails to do so. The maximum amount that NatWest Group could be required to pay under a guarantee is its principal amount as disclosed in the table above. NatWest Group expects most guarantees it provides to expire unused.
Other contingent liabilities - these include standby letters of credit, supporting customer debt issues and contingent liabilities relating to customer trading activities such as those arising from performance and customs bonds, warranties and indemnities.
Standby facilities and credit lines - under a loan commitment, NatWest Group agrees to make funds available to a customer in the future. Loan commitments, which are usually for a specified term, may be unconditionally cancellable or may persist, provided all conditions in the loan facility are satisfied or waived. Commitments to lend include commercial standby facilities and credit lines, liquidity facilities to commercial paper conduits and unutilised overdraft facilities.
Other commitments - these include documentary credits, which are commercial letters of credit providing for payment by NatWest Group to a named beneficiary against presentation of specified documents, forward asset purchases, forward deposits placed and undrawn note issuance and revolving underwriting facilities, and other short-term trade related transactions.
Contractual obligations for future expenditure not provided for in the accounts
The following table shows contractual obligations for future expenditure not provided for in the accounts at the year end.
2021 | 2020 | |||
| £m |
| £m | |
Capital expenditure on property, plant and equipment |
| | | |
Contracts to purchase goods or services (1) |
| | | |
| | |
| (1) |
NatWest Group plc – Annual Report on Form 20-F | 100 |
Notes to the consolidated financial statements continued
27 Memorandum items continued
Trustee and other fiduciary activities
In its capacity as trustee or other fiduciary role, NatWest Group may hold or place assets on behalf of individuals, trusts, companies, pension schemes and others. The assets and their income are not included in NatWest Group’s financial statements. NatWest Group earned fee income of £
The Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS), the UK’s statutory fund of last resort for customers of authorised financial services firms, pays compensation if a firm is unable to meet its obligations. The FSCS funds compensation for customers by raising management expenses levies and compensation levies on the industry. In relation to protected deposits, each deposit-taking institution contributes towards these levies in proportion to their share of total protected deposits on 31 December of the year preceding the scheme year (which runs from 1 April to 31 March), subject to annual maxima set by the Prudential Regulation Authority. In addition, the FSCS has the power to raise levies on a firm that has ceased to participate in the scheme and is in the process of ceasing to be authorised for the costs that it would have been liable to pay had the FSCS made a levy in the financial year it ceased to be a participant in the scheme.
Litigation and regulatory matters
NatWest Group plc and certain members of NatWest Group are party to legal proceedings and involved in regulatory matters, including as the subject of investigations and other regulatory and governmental action (Matters) in the United Kingdom (UK), the United States (US), the European Union (EU) and other jurisdictions.
NatWest Group recognises a provision for a liability in relation to these Matters when it is probable that an outflow of economic benefits will be required to settle an obligation resulting from past events, and a reliable estimate can be made of the amount of the obligation.
In many of these Matters, it is not possible to determine whether any loss is probable, or to estimate reliably the amount of any loss, either as a direct consequence of the relevant proceedings and regulatory matters or as a result of adverse impacts or restrictions on NatWest Group's reputation, businesses and operations. Numerous legal and factual issues may need to be resolved, including through potentially lengthy discovery and document production exercises and determination of important factual matters, and by addressing novel or unsettled legal questions relevant to the proceedings in question, before a liability can reasonably be estimated for any claim. NatWest Group cannot predict if, how, or when such claims will be resolved or what the eventual settlement, damages, fine, penalty or other relief, if any, may be, particularly for claims that are at an early stage in their development or where claimants seek substantial or indeterminate damages.
There are situations where NatWest Group may pursue an approach that in some instances leads to a settlement agreement. This may occur in order to avoid the expense, management distraction or reputational implications of continuing to contest liability, or in order to take account of the risks inherent in defending claims or regulatory matters, even for those Matters for which NatWest Group believes it has credible defences and should prevail on the merits. The uncertainties inherent in all such Matters affect the amount and timing of any potential outflows for both Matters with respect to which provisions have been established and other contingent liabilities.
It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities.
The future outflow of resources in respect of any Matter may ultimately prove to be substantially greater than or less than the aggregate provision that NatWest Group has recognised. Where (and as far as) liability cannot be reasonably estimated, no provision has been recognised. NatWest Group expects that in future periods, additional provisions, settlement amounts and customer redress payments will be necessary, in amounts that are expected to be substantial in some instances. Please refer to Note 21 for information on material provisions.
Material Matters in which NatWest Group is currently involved are set out below. We have provided information on the procedural history of certain Matters, where we believe appropriate, to aid the understanding of the Matter.
For a discussion of certain risks associated with NatWest Group’s litigation and regulatory matters, see the Risk factor relating to legal, regulatory and governmental actions and investigations set out on page 156.
Litigation
Residential mortgage-backed securities (RMBS) litigation in the US
NatWest Group companies continue to defend RMBS-related claims in the US in which the plaintiff, the Federal Deposit Insurance Corporation (FDIC), alleges that certain disclosures made in connection with the relevant offerings of RMBS contained materially false or misleading statements and/or omissions regarding the underwriting standards pursuant to which the mortgage loans underlying the RMBS were issued. In Q4 2021, NWMSI settled RMBS claims by the State of New Mexico for an amount that was covered by an existing provision. In addition, NWMSI previously agreed to settle a purported RMBS class action entitled New Jersey Carpenters Health Fund v. Novastar Mortgage Inc. et al. for US$
NatWest Group plc – Annual Report on Form 20-F | 101 |
Notes to the consolidated financial statements continued
27 Memorandum items continued
London Interbank Offered Rate (LIBOR) and other rates litigation
NWM Plc and certain other members of NatWest Group, including NatWest Group plc, are defendants in a number of class actions and individual claims pending in the United States District Court for the Southern District of New York (SDNY) with respect to the setting of LIBOR and certain other benchmark interest rates. The complaints allege that certain members of NatWest Group and other panel banks violated various federal laws, including the US commodities and antitrust laws, and state statutory and common law, as well as contracts, by manipulating LIBOR and prices of LIBOR-based derivatives in various markets through various means.
Several class actions relating to USD LIBOR, as well as more than dozen non-class actions concerning USD LIBOR, are part of a co-ordinated proceeding in the SDNY. In December 2021, the United States Court of Appeals for the Second Circuit (US Court of Appeals), reversing a December 2016 decision of the SDNY, held that plaintiffs in these cases have adequately asserted the court’s personal jurisdiction over NWM Plc and other non-US banks, including with respect to antitrust class action claims on behalf of over-the-counter plaintiffs and exchange-based purchaser plaintiffs.
Litigation and regulatory matters
In the same decision, the appellate court affirmed the SDNY’s prior decision that plaintiffs who purchased LIBOR-based instruments from third parties (as opposed to the defendants) lack antitrust standing to pursue such claims. The appellate court remanded these matters to the SDNY for further proceedings in light of its rulings. A separate appeal concerning the SDNY’s dismissal of a fraud class action on behalf of lender plaintiffs remains pending in the US Court of Appeals. In March 2020, NatWest Group companies finalised a settlement resolving the class action on behalf of bondholder plaintiffs (those who held bonds issued by non-defendants on which interest was paid from 2007 to 2010 at a rate expressly tied to USD LIBOR). The amount of the settlement (which was covered by an existing provision) has been paid into escrow pending court approval of the settlement.
The non-class claims filed in the SDNY include claims that the FDIC is asserting on behalf of certain failed US banks. In July 2017, the FDIC, on behalf of
In addition, there are
In addition to the above,
NWM Plc is also named as a defendant in a motion to certify a class action relating to LIBOR in the Tel Aviv District Court in Israel. NWM Plc filed a motion for cancellation of service outside the jurisdiction, which was granted in July 2020.
The claimants appealed that decision and in November 2020 the appeal was refused and the claim dismissed by the Appellate Court. The claim could in future be recommenced depending on the outcome of an appeal to Israel's Supreme Court in respect of dismissal of the substantive case against banks that had a presence in Israel.
In January 2019, a class action antitrust complaint was filed in the SDNY alleging that the defendants (USD ICE LIBOR panel banks and affiliates) have conspired to suppress USD ICE LIBOR from 2014 to the present by submitting incorrect information to ICE about their borrowing costs. The NatWest Group defendants are NatWest Group plc, NWM Plc, NWMSI and NWB Plc. The defendants made a motion to dismiss this case, which was granted by the court in March 2020. One plaintiff sought to appeal the dismissal, but on 14 February 2022, the US Court of Appeals dismissed the appeal because that plaintiff lacks standing to maintain the appeal.
In August 2020, a complaint was filed in the United States District Court for the Northern District of California by several United States consumer borrowers against the USD ICE LIBOR panel banks and their affiliates, alleging that the normal process of setting USD ICE LIBOR amounts to illegal price-fixing, and also that banks in the United States have illegally agreed to use LIBOR as a component of price in variable consumer loans. The NatWest Group defendants are NatWest Group plc, NWM Plc, NWMSI and NWB Plc. The plaintiffs seek damages and to prevent the enforcement of LIBOR-based instruments through injunction. Defendants have filed a motion to dismiss, which remains pending.
NatWest Group plc – Annual Report on Form 20-F | 102 |
Notes to the consolidated financial statements continued
27 Memorandum items continued
FX litigation
NWM Plc, NWMSI and/or NatWest Group plc are defendants in several cases relating to NWM Plc's foreign exchange (FX) business. In 2015, NWM Plc paid US$
In April 2019, some of the same claimants in the opt-out case described above, as well as others, served proceedings (which are ongoing) in the High Court of Justice of England and Wales, asserting competition claims against NWM Plc and several other banks. The claim was transferred from the High Court of Justice of England and Wales in December 2021 and registered in the Competition Appeal Tribunal in January 2022.
An FX-related class action, on behalf of ‘consumers and end-user businesses’, is proceeding in the SDNY against NWM Plc and others. Plaintiffs have filed a motion for class certification, which defendants are opposing.
In May 2019, a cartel class action was filed in the Federal Court of Australia against NWM Plc and
Litigation and regulatory matters
pleading disputes, NWM Plc is preparing its defence.
In July and December 2019,
In November 2020, proceedings were issued in the High Court of Justice of England and Wales against NWM Plc by a claimant who sought an account of profits and/or damages in respect of alleged historical FX trading misconduct. The claim was served on NWM Plc in March 2021 and discontinued in December 2021.
In December 2021, a claim was issued in the Netherlands against NatWest Group plc, NWM Plc and NWM N.V. by Stichting FX Claims, seeking a declaration from the court that anti-competitive FX market conduct described in decisions of the European Commission of 16 May 2019 is unlawful, along with unspecified damages. The claimant has indicated that it may seek to amend its claim to also refer to the December 2021 decision by the EC (described below under “Foreign exchange related investigations”). A hearing is scheduled for June 2022.
Certain other foreign exchange transaction related claims have been or may be threatened. NatWest Group cannot predict whether all or any of these claims will be pursued.
Government securities antitrust litigation
NWMSI and certain other US broker-dealers are defendants in a consolidated antitrust class action pending in the SDNY on behalf of persons who transacted in US Treasury securities or derivatives based on such instruments, including futures and options. The plaintiffs allege that defendants rigged the US Treasury securities auction bidding process to deflate prices at which they bought such securities and colluded to increase the prices at which they sold such securities to plaintiffs. The complaint was dismissed in March 2021. Plaintiffs have filed an amended complaint, which defendants are again seeking to have dismissed.
Class action antitrust claims commenced in March 2019 are pending in the SDNY against NWM Plc, NWMSI and other banks in respect of Euro-denominated bonds issued by European central banks (EGBs). The complaint alleges a conspiracy among dealers of EGBs to widen the bid-ask spreads they quoted to customers, thereby increasing the prices customers paid for the EGBs or decreasing the prices at which customers sold the bonds. The class consists of those who purchased or sold EGBs in the US between 2007 and 2012. The defendants filed a motion to dismiss this matter, which was granted by the court in respect of NWM Plc and NWMSI in July 2020. Plaintiffs have filed an amended complaint which defendants are seeking to have dismissed.
NatWest Group plc – Annual Report on Form 20-F | 103 |
Notes to the consolidated financial statements continued
27 Memorandum items continued
Swaps antitrust litigation
NWM Plc and other members of NatWest Group, including NatWest Group plc, as well as a number of other interest rate swap dealers, are defendants in several cases pending in the SDNY alleging violations of the US antitrust laws in the market for interest rate swaps. There is a consolidated class action complaint on behalf of persons who entered into interest rate swaps with the defendants, as well as non-class action claims by
In June 2021, a class action antitrust complaint was filed against a number of credit default swap dealers in New Mexico federal court on behalf of persons who, from 2005 onwards, settled credit default swaps in the United States by reference to the ISDA credit default swap auction protocol. The complaint alleges that the defendants conspired to manipulate that benchmark through various means in violation of the antitrust laws and the Commodity Exchange Act. The defendants include several NatWest Group companies, including NatWest Group plc. Defendants are seeking dismissal.
Odd lot corporate bond trading antitrust litigation
In October 2021, the SDNY granted defendants’ motion to dismiss the class action antitrust complaint alleging that from August 2006 onwards various securities dealers, including NWMSI, conspired artificially to widen spreads for odd lots of corporate bonds bought or sold in the United States secondary market and to boycott electronic trading platforms that would have allegedly promoted pricing competition in the market for such bonds. Plaintiffs have commenced an appeal of the dismissal.
Spoofing litigation
In December 2021,
Madoff
NWM N.V. is a defendant in
Litigation and regulatory matters
EUA trading litigation
NWM Plc was a named defendant in civil proceedings before the High Court of Justice of England and Wales brought in 2015 by
In October 2020, the High Court quantified total damages against NWM Plc and Mercuria at £
Offshoring VAT assessments
HMRC issued protective tax assessments in 2018 against NatWest Group plc totalling £
US Anti-Terrorism Act litigation
NWB Plc is a defendant in lawsuits filed in the United States District Court for the Eastern District of New York by a number of US nationals (or their estates, survivors, or heirs) who were victims of terrorist attacks in Israel. The plaintiffs allege that NWB Plc is liable for damages arising from those attacks pursuant to the US Anti-Terrorism Act because NWB Plc previously maintained bank accounts and transferred funds for the Palestine Relief Development Fund, an organisation which plaintiffs allege solicited funds for Hamas, the alleged perpetrator of the attacks.
In March 2019, the trial court granted summary judgment in favour of NWB Plc. In April 2021, the US Court of Appeals affirmed the trial court’s judgment in favour of NWB Plc. In September 2021, the plaintiffs filed a petition seeking discretionary review by the United States Supreme Court, and that petition remains pending.
NatWest Group plc – Annual Report on Form 20-F | 104 |
Notes to the consolidated financial statements continued
27 Memorandum items continued
NWM N.V. and certain other financial institutions are defendants in several actions filed by a number of US nationals (or their estates, survivors, or heirs), most of whom are or were US military personnel, who were killed or injured in attacks in Iraq between 2003 and 2011. NWM Plc is also a defendant in some of these cases.
According to the plaintiffs’ allegations, the defendants are liable for damages arising from the attacks because they allegedly conspired with Iran and certain Iranian banks to assist Iran in transferring money to Hezbollah and the Iraqi terror cells that committed the attacks, in violation of the US Anti-Terrorism Act, by agreeing to engage in ‘stripping’ of transactions initiated by the Iranian banks so that the Iranian nexus to the transactions would not be detected.
The first of these actions was filed in the United States District Court for the Eastern District of New York in November 2014. In September 2019, the district court dismissed the case, finding that the claims were deficient for several reasons, including lack of sufficient allegations as to the alleged conspiracy and causation. The plaintiffs are appealing the decision to the US Court of Appeals. Another action, filed in the SDNY in 2017, was dismissed in March 2019 on similar grounds, but remains subject to appeal to the US Court of Appeals. Other follow-on actions that are substantially similar to the two that have now been dismissed are pending in the same courts.
Securities underwriting litigation
NWMSI is an underwriter defendant in securities class actions in the US in which plaintiffs generally allege that an issuer of public securities, as well as the underwriters of the securities (including NWMSI), are liable to purchasers for misrepresentations and omissions made in connection with the offering of such securities.
1MDB litigation
A claim for a material sum has been issued, but not served, recently in Malaysia by 1MDB against Coutts Co Ltd for alleged losses in connection with the 1MDB fund. Coutts Co Ltd is a company registered in Switzerland and is in wind-down following the announced sale of its business assets in 2015.
Regulatory matters (including investigations and customer redress programmes)
NatWest Group's businesses and financial condition can be affected by the actions of various governmental and regulatory authorities in the UK, the US, the EU and elsewhere. NatWest Group has engaged, and will continue to engage, in discussions with relevant governmental and regulatory authorities, including in the UK, the US, the EU and elsewhere, on an ongoing and regular basis, and in response to informal and formal inquiries or investigations, regarding operational, systems and control evaluations and issues including those related to compliance with applicable laws and regulations, including consumer protection, investment advice, business conduct, competition/anti-trust, VAT recovery, anti-bribery, anti-money laundering and sanctions regimes.
NWM Group in particular has been providing information regarding a variety of matters, including, for example, offering of securities, the setting of benchmark rates and related derivatives trading, conduct in the foreign exchange market, product mis-selling and various issues relating to the issuance, underwriting, and sales and trading of fixed-income securities, including structured products and government securities, some of which have resulted, and others of which may result, in investigations or proceedings.
Litigation and regulatory matters
Any matters discussed or identified during such discussions and inquiries may result in, among other things, further inquiry or investigation, other action being taken by governmental and regulatory authorities, increased costs being incurred by NatWest Group, remediation of systems and controls, public or private censure, restriction of NatWest Group's business activities and/or fines. Any of the events or circumstances mentioned in this paragraph or below could have a material adverse effect on NatWest Group, its business, authorisations and licences, reputation, results of operations or the price of securities issued by it, or lead to material additional provisions being taken.
NatWest Group is co-operating fully with the matters described below.
Investigations
US investigations relating to fixed-income securities
In December 2021, NWM Plc pled guilty in the United States District Court for the District of Connecticut to
The 2018 trading occurred during the term of a non-prosecution agreement (NPA) between NWMSI and the United States Attorney’s Office for the District of Connecticut (USAO CT), under which non-prosecution was conditioned on NWMSI and affiliated companies not engaging in criminal conduct during the term of the NPA. The relevant trading in 2018 was conducted by two NWM traders in Singapore and breached that NPA.
The plea agreement reached with the US Department of Justice and the USAO CT resolves both the spoofing conduct and the breach of the NPA.
As required by the resolution and sentence imposed by the court, NWM Plc is subject to a
Other material adverse collateral consequences may occur as a result of this matter, as further described in the Risk factor relating to legal, regulatory and governmental actions and investigations set out on page 156.
NatWest Group plc – Annual Report on Form 20-F | 105 |
Notes to the consolidated financial statements continued
27 Memorandum items continued
Foreign exchange related investigations
In recent years, NWM Plc paid significant penalties to resolve investigations into its FX business by the FCA, the Commodity Futures Trading Commission, the US Department of Justice, the Board of Governors of the Federal Reserve System, the European Commission (EC) and others. In December 2021, the EC announced that a settlement had been reached with NatWest Group plc, NWM Plc and other banks in relation to its investigation into past breaches of competition law regarding spot foreign exchange trading. NatWest Group plc and NWM Plc were fined EUR
FCA investigation into NatWest Group’s compliance with the Money Laundering Regulations 2007
Following an FCA investigation, commenced in 2017, into potential breaches of the UK Money Laundering Regulations 2007 (‘MLR 2007’), NWB Plc pled guilty in October 2021 to three offences under regulation 45(1) of the MLR 2007 for failure to comply with regulation 8(1) between 7 November 2013 and 23 June 2016, and regulations 8(3) and 14(1) between 8 November 2012 and 23 June 2016. These regulations required the firm to determine, conduct and demonstrate risk sensitive due diligence and ongoing monitoring of its relationships with its customers for the purposes of preventing money laundering. The offences relate to operational weaknesses between 2012 and 2016, during which period NWB Plc did not adequately monitor the accounts of a UK incorporated customer. In December 2021, NWB Plc was fined £
Other material adverse collateral consequences may occur as a result of this matter, as further described in the Risk factor relating to legal, regulatory and governmental actions and investigations set out on page 156.
Systematic Anti-Money Laundering Programme assessment
In December 2018, the FCA commenced a Systematic Anti-Money Laundering Programme assessment of NatWest Group. In August 2019, the FCA instructed NatWest Group to appoint a Skilled Person under section 166 of the Financial Services and Markets Act 2000 to provide assurance on financial crime governance arrangements in relation to two financial crime change programmes. The Skilled Person’s final report was received in January 2022.
Customer redress programmes
FCA review of NatWest Group’s treatment of SMEs
In 2014, the FCA appointed an independent Skilled Person under section 166 of the Financial Services and Markets Act 2000 to review NatWest Group’s treatment of SME customers whose relationship was managed by NatWest Group’s Global Restructuring Group (GRG) in the period 1 January 2008 to 31 December 2013. In response to the Skilled Person’s final report and update in 2016, NatWest Group announced redress steps for SME customers in the UK and the Republic of Ireland that were in GRG between 2008 and 2013. These steps were (i) an automatic refund of certain complex fees; and (ii) a new complaints process, overseen by an independent third party. Both processes have now been completed. Accordingly, NatWest Group retains only a small residual provision at December 2021.
Investment advice review
In October 2019, the FCA notified NatWest Group of its intention to appoint a Skilled Person under section 166 of the Financial Services and Markets Act 2000 to conduct a review of whether NatWest Group’s past business review of investment advice provided during 2010 to 2015 was subject to appropriate governance and accountability and led to appropriate customer outcomes. The Skilled Person’s review has concluded and, after discussion with the FCA, NatWest Group is now conducting additional review / remediation work.
Litigation and regulatory matters
Review and investigation of treatment of tracker mortgage customers in Ulster Bank Ireland DAC
In December 2015, correspondence was received from the CBI setting out an industry examination framework in respect of the sale of tracker mortgages from approximately 2001 until the end of 2015. The redress and compensation phase has concluded, although an appeals process is currently anticipated to run until the end of 2022. NatWest Group has made provisions totalling €
UBIDAC customers have lodged tracker mortgage complaints with the Financial Services and Pensions Ombudsman (FSPO). UBIDAC is challenging three FSPO adjudications in the Irish High Court. The outcome and impact of that challenge on those and related complaints is uncertain but may be material.
UBIDAC has identified further legacy business issues and these remediation programmes are ongoing. NatWest Group has made provisions of €
NatWest Group plc – Annual Report on Form 20-F | 106 |
Notes to the consolidated financial statements continued
28 Analysis of the net investment in business interests and intangible assets
This note shows cash flows relating to obtaining or losing control of associates or subsidiaries and net assets and liabilities purchased and sold. These cash flows are presented as investing activities on the cash flow statement.
| 2021 |
| 2020 |
| 2019 | |
| £m |
| £m |
| £m | |
Fair value given for businesses acquired(1) |
| — |
| — |
| ( |
Additional investment in associates | ( | ( | — | |||
Net assets/liabilities purchased | ( | — | — | |||
Net outflow of cash in respect of acquisitions |
| ( |
| ( |
| ( |
Sale of interests in associates |
| — |
| |
| — |
Net assets/liabilities disposed |
| |
| |
| |
Profit on disposal |
| |
| |
| — |
Net inflow of cash in respect of disposals |
| |
| |
| |
Cash expenditure on intangible assets |
| ( |
| ( |
| ( |
Net outflow of cash |
| ( |
| ( |
| ( |
| (1) | 2019 includes the purchase of Free agent. |
29 Analysis of changes in financing during the year
This note shows cash flows and non-cash movements relating to the financing activities of the Group. These activities reflect movements in share capital, share premium, paid-in equity, subordinated liabilities and MRELs.
Share capital, share premium, | ||||||||||||||||||
and paid-in equity | Subordinated liabilities | MRELs | ||||||||||||||||
| 2021 |
| 2020 |
| 2019 |
| 2021 |
| 2020 |
| 2019 |
| 2021 |
| 2020 |
| 2019 | |
£m | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||
At 1 January |
| |
| |
| |
| |
| |
| | | | | |||
Ordinary shares issued |
| — |
| — |
| |
| — |
| — |
| — | — | — | — | |||
Issue of paid-in equity |
| |
| |
| — |
| — |
| — |
| — | — | — | — | |||
Issue of subordinated liabilities | — | — | — | | | | — | — | — | |||||||||
Redemption of subordinated liabilities |
| — |
| — |
| — |
| ( |
| ( |
| ( | — | — | — | |||
Interest on subordinated liabilities | — | — | — | ( | ( | ( | — | — | — | |||||||||
Issue of MRELs | — | — | — | — | — | — | | | | |||||||||
Maturity/redemption of MRELs | — | — | — | — | — | — | — | ( | ( | |||||||||
Interest on MRELs | — | — | — | — | — | — | ( | ( | ( | |||||||||
Net cash inflow/(outflow) from financing |
| |
| |
| |
| ( |
| ( |
| ( | | | | |||
Ordinary shares issued | | | | — | — | — | — | — | — | |||||||||
Share cancellation | ( | — | — | — | — | — | — | — | — | |||||||||
Effects of foreign exchange |
| — |
| — |
| — |
| ( |
| ( |
| ( | ( | ( | ( | |||
Changes in fair value of subordinated liabilities and MRELs | ( | | | ( | | | ||||||||||||
Paid in equity reclassified to subordinated liabilities | ( | ( | — | | | — | ||||||||||||
Loss on sale of subordinated liabilities and MRELs | | | — | — | — | — | ||||||||||||
Interest on subordinated liabilities and MRELs | | | | | | | ||||||||||||
At 31 December |
| |
| |
| |
| |
| |
| | | | | |||
NatWest Group plc – Annual Report on Form 20-F | 107 |
Notes to the consolidated financial statements continued
30 Analysis of cash and cash equivalents
In the cash flow statement, cash and cash equivalents comprises cash, loans to banks and treasury bills with an original maturity of less than three months that are readily convertible to known amounts of cash and subject to insignificant risk of change in value.
| 2021 |
| 2020 |
| 2019 | |
£m | £m | £m | ||||
At 1 January |
|
|
|
|
|
|
- cash |
| |
| |
| |
- cash equivalents |
| |
| |
| |
|
| |
| |
| |
Net increase/(decrease) in cash and cash equivalents |
| |
| |
| ( |
At 31 December |
| |
| |
| |
|
|
|
| |||
Comprising: |
|
|
| |||
Cash and balances at central banks |
| |
| |
| |
Trading assets | | | | |||
Other financial assets |
| |
| |
| |
Loans to banks - amortised cost (1) |
| |
| |
| |
Cash and cash equivalents |
| |
| |
| |
| (1) | Includes cash collateral posted with bank counterparties in respect of derivative liabilities of £ |
Certain members of NatWest Group are required by law or regulation to maintain balances with the central banks in the jurisdictions in which they operate. Natwest Markets N.V. had mandatory reserve deposits with De Nederlandsche Bank N.V. of €
31 Directors' and key management remuneration
Directors and key management are remunerated for services rendered in the period. The executive directors may participate in the company's long-term incentive plans, executive share option and sharesave schemes and details of their interests in the company's shares arising from their participation are given in the directors' remuneration report. Details of the remuneration received by each director are also given in the directors' remuneration report.
Key management comprises members of the NatWest Group plc and NWH Ltd Boards, members of the NatWest Group plc and NWH Ltd Executive Committees, and the Chief Executives of NatWest Markets Plc and RBS International (Holdings) Limited. This is on the basis that these individuals have been identified as Persons Discharging Managerial Responsibilities of NatWest Group plc under the new governance structure.
| 2021 |
| 2020 | |
Directors' remuneration | £000 | £000 | ||
Non-executive directors emoluments |
| |
| |
Chairman and executive directors emoluments |
| |
| |
| |
| | |
Amounts receivable under long-term incentive plans and share option plans |
| |
| |
Total |
| |
| |
Compensation of key management
The aggregate remuneration of directors and other members of key management during the year was as follows:
| 2021 |
| 2020 | |
£000 | £000 | |||
Short-term benefits |
| |
| |
Post-employment benefits |
| |
| |
Share-based payments |
| |
| |
| |
| |
NatWest Group plc – Annual Report on Form 20-F | 108 |
Notes to the consolidated financial statements continued
32 Transactions with directors and key management
This note presents information relating to any transactions with directors and key management. Key management comprises directors of the company and Persons Discharging Managerial Responsibilities (PDMRs) of NatWest Group plc.
For the purposes of IAS 24 Related party disclosures, key management comprise directors of the company and PDMRs of NatWest Group plc. Key management have banking relationships with NatWest Group entities which are entered into in the normal course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with other persons of a similar standing or, where applicable, with other employees. These transactions did not involve more than the normal risk of repayment or present other unfavourable features.
Amounts in the table below are attributed to each person at their highest level of NatWest Group key management.
| 2021 |
| 2020 | |
£000 | £000 | |||
Loans to customers - amortised cost |
| |
| |
Customer deposits |
| |
| |
At 31 December 2021, amounts outstanding in relation to transactions, arrangements and agreements entered into by authorised institutions in NatWest Group, as defined in UK legislation, were £
33 Related parties
A related party is a person or entity that is related to the entity that is preparing its financial statements. Transactions between an entity and any related party are disclosed in the financial statements to ensure readers are aware of how financial statements may be affected by these transactions.
UK Government
The UK Government through HM Treasury is the ultimate controlling party of The NatWest Group plc. The UK Government's shareholding is managed by UK Government Investments Limited, a company wholly owned by the UK Government. As a result the UK Government and UK Government controlled bodies are related parties of the Group.
At 31 December 2021, HM Treasury’s holding in the company’s ordinary shares was
NatWest Group enters into transactions with many of these bodies. Transactions include the payment of: taxes – principally UK corporation tax (Note 7) and value added tax; national insurance contributions; local authority rates; and regulatory fees and levies (including the bank levy (Note 3) and FSCS levy (Note 27) - together with banking transactions such as loans and deposits undertaken in the normal course of banker-customer relationships.
Bank of England facilities
NatWest Group may participate in a number of schemes operated by the Bank of England in the normal course of business.
Members of NatWest Group that are UK authorised institutions are required to maintain non-interest bearing (cash ratio) deposits with the Bank of England amounting to
NatWest Group provides guarantees for certain subsidiaries liabilities to the Bank of England.
Other related parties
| - | In their roles as providers of finance, NatWest Group companies provide development and other types of capital support to businesses. These investments are made in the normal course of business. In some instances, the investment may extend to ownership or control over |
| - | NatWest Group recharges NatWest Group Pension Fund with the cost of administration services incurred by it. The amounts involved are not material to NatWest Group. |
| - | In accordance with IAS 24, transactions or balances between NatWest Group entities that have been eliminated on consolidation are not reported. |
| - | The captions in the primary financial statements of the parent company include amounts attributable to subsidiaries. These amounts have been disclosed in aggregate in the relevant notes to the financial statements. Other net income/(expenses) represents the share of post-tax results of associates and joint ventures, profit (or loss) on disposal of subsidiaries, associates and joint ventures, and gains on acquisitions. |
NatWest Group plc – Annual Report on Form 20-F | 109 |
Notes to the consolidated financial statements continued
34 Post balance sheet events
A post balance sheet event is an event that takes place between 31 December 2021 (reporting date) and 17 February 2022 (date of approval of these financial statements). Significant events are included in the financial statements either to provide new information about conditions that existed at 31 December 2021, including estimates used to prepare the financial statements (known as an adjusting event) or to provide new information about conditions that did not exist at 31 December 2021 (non-adjusting events). This note provides information relating to material non-adjusting events.
On 27 January 2022, NatWest Group announced that we will create a new franchise, Commercial and Institutional, bringing together our Commercial, NatWest Markets and RBS International businesses to form a single franchise, with common objectives, to best support our customers across the full non-personal customer lifecycle. Our reporting will follow this new structure from Q1 2022.
Regulatory calls were announced as a result of the PRA determination that certain instruments can no longer be included as part of Tier 1 capital on a solo and/or consolidated basis after 31 December 2021:
– | On 1 February 2022, NatWest Group plc gave notice of redemption to holders of the USD Series U Non-Cumulative Dollar Preference Shares (ISIN US39057AA62). The notional outstanding of $ |
– | On 1 February 2022, NatWest Group plc gave notice of redemption to holders of the $ |
On 11 February 2022, NatWest Group plc gave notice to noteholders of the redemption of its €
Other than as disclosed in the accounts, there have been no other significant events between 31 December 2021 and the date of approval of these accounts which would require a change or additional disclosure.
NatWest Group plc – Annual Report on Form 20-F | 110 |
Non-IFRS financial measures
Non-IFRS financial measures
1. Adjustment for notable items
NatWest Group prepares its financial statements in accordance with generally accepted accounting principles (GAAP). This document contains a number of adjusted or alternative performance measures, also known as non-GAAP or non-IFRS performance measures. These measures are adjusted for notable and other defined items which management believe are not representative of the underlying performance of the business and which distort period-on-period comparison. The non-IFRS measures provide users of the financial statements with a consistent basis for comparing business performance between financial periods and information on elements of performance that are one-off in nature. The non-IFRS measures also include the calculation of metrics that are used throughout the banking industry. These non-IFRS measures are not measures within the scope of IFRS and are not a substitute for IFRS measures.
Go-forward group income excluding notable items is calculated as total income excluding Ulster Bank RoI total income and excluding notable items. UK and RBSI retail and commercial businesses total income excluding notable items comprises income in the Retail Banking, Commercial Banking, Private Banking and RBS International operating segments excluding notable items.
The exclusion of notable items aims to remove the impact of one-offs which may distort period-on-period comparisons.
Refer to page 8 for further details.
| 2021 |
| 2020 |
| 2019 | |
Continuing operations |
|
|
|
|
|
|
Total income (1) |
| 10,512 |
| 10,508 |
| 13,987 |
Less Ulster Bank RoI total income |
| (228) |
| (222) |
| (301) |
Go-forward group income |
| 10,284 |
| 10,286 |
| 13,686 |
Less notable items |
| (210) |
| 384 |
| (2,115) |
Go-forward group total income excluding notable items |
| 10,074 |
| 10,670 |
| 11,571 |
Total income |
|
|
|
|
|
|
Retail Banking |
| 4,445 |
| 4,181 |
| 4,866 |
Private Banking |
| 816 |
| 763 |
| 777 |
Commercial Banking |
| 3,875 |
| 3,958 |
| 4,318 |
RBS International |
| 548 |
| 497 |
| 610 |
UK and RBSI retail and commercial businesses income |
| 9,684 |
| 9,399 |
| 10,571 |
Less notable items (2) |
| (64) |
| 87 |
| (33) |
UK and RBSI retail and commercial businesses income excluding notable items |
| 9,620 |
| 9,486 |
| 10,538 |
(1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. |
(2) | For details of UK and RBSI retail and commercial businesses notable items refer to page 11. |
2. Adjustment for asset disposals/strategic risk reductions and own credit adjustments
NWM total income excluding asset disposals/strategic risk reductions and own credit adjustments (OCA) is calculated as total income of the NWM business less asset disposals/strategic risk reductions and OCA.
This aims to show underlying income generation in NWM excluding the impact of disposal losses and OCA.
Refer to page 19 for further details.
| 2021 |
| 2020 |
| 2019 | |
NWM total income |
| 415 |
| 1,123 |
| 1,342 |
Less asset disposals/strategic risk reduction |
| 64 |
| 83 |
| — |
Less OCA |
| (6) |
| 24 |
| 80 |
NWM total income excluding asset disposals/ strategic risk reductions and OCA |
| 473 |
| 1,230 |
| 1,422 |
NatWest Group plc – Annual Report on Form 20-F | 111 |
Non-IFRS financial measures continued
3. Operating expenses - management view
The management analysis of operating expenses shows strategic costs and litigation and conduct costs in separate lines. Depreciation and amortisation, and other administrative expenses attributable to these costs are included in strategic costs and litigation and conduct costs lines for management analysis. These amounts are included in staff, premises and equipment and other administrative expenses in the statutory analysis.
Other expenses excludes strategic costs and litigation and conduct costs, which are more volatile and may distort comparisons with prior periods.
Refer to page 12 for further details.
Statutory analysis
Year ended | ||||||
| 31 December |
| 31 December |
| 31 December | |
2021 | 2020 (1) | 2019 (1) | ||||
Operating expenses | £m | £m | £m | |||
Continuing operations |
|
|
|
|
|
|
Staff expenses |
| 3,676 |
| 3,878 |
| 3,976 |
Premises and equipment |
| 1,133 |
| 1,222 |
| 1,258 |
Other administrative expenses |
| 2,026 |
| 1,845 |
| 2,828 |
Depreciation and amortisation |
| 923 |
| 913 |
| 1,218 |
Total |
| 7,758 |
| 7,858 |
| 9,280 |
Non-statutory analysis
Year ended | ||||||||
31 December 2021 | ||||||||
Litigation | Statutory | |||||||
Strategic | and conduct | Other | operating | |||||
Operating expenses |
| costs |
| costs |
| expenses |
| expenses |
Continuing operations |
|
|
|
|
|
|
| |
Staff expenses |
| 411 |
| — |
| 3,265 |
| 3,676 |
Premises and equipment |
| 103 |
| — |
| 1,030 |
| 1,133 |
Other administrative expenses |
| 133 |
| 466 |
| 1,427 |
| 2,026 |
Depreciation and amortisation |
| 140 |
| — |
| 783 |
| 923 |
Total |
| 787 |
| 466 |
| 6,505 |
| 7,758 |
31 December 2020 (1) | ||||||||
Litigation | Statutory | |||||||
Strategic | and conduct | Other | operating | |||||
Operating expenses |
| costs |
| costs |
| expenses |
| expenses |
Continuing operations |
|
|
|
|
|
|
|
|
Staff expenses |
| 462 |
| — |
| 3,416 |
| 3,878 |
Premises and equipment |
| 233 |
| — |
| 989 |
| 1,222 |
Other administrative expenses |
| 197 |
| 113 |
| 1,535 |
| 1,845 |
Depreciation and amortisation |
| 121 |
| — |
| 792 |
| 913 |
Total |
| 1,013 |
| 113 |
| 6,732 |
| 7,858 |
31 December 2019 (1) | ||||||||
Litigation | Statutory | |||||||
Strategic | and conduct | Other | operating | |||||
Operating expenses |
| costs |
| costs |
| expenses |
| expenses |
Continuing operations |
|
|
|
|
|
|
|
|
Staff expenses |
| 451 |
| — |
| 3,525 |
| 3,976 |
Premises and equipment |
| 239 |
| — |
| 1,019 |
| 1,258 |
Other administrative expenses |
| 295 |
| 895 |
| 1,638 |
| 2,828 |
Depreciation and amortisation |
| 396 |
| — |
| 822 |
| 1,218 |
Total |
| 1,381 |
| 895 |
| 7,004 |
| 9,280 |
(1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8. |
NatWest Group plc – Annual Report on Form 20-F | 112 |
Non-IFRS financial measures continued
4. Other expenses excluding operating lease depreciation (OLD) and Ulster Bank RoI direct costs
Our cost target for 2021 is based on this measure and we track progress against this.
Refer to page 12 for further details.
| 2021 |
| 2020 (1) |
| 2019 (1) | |
Continuing operations |
|
|
|
|
|
|
Total operating expenses |
| 7,758 |
| 7,858 |
| 9,280 |
Less strategic costs |
| (787) |
| (1,013) |
| (1,381) |
Less litigation and conduct costs |
| (466) |
| (113) |
| (895) |
Other expenses |
| 6,505 |
| 6,732 |
| 7,004 |
Less OLD |
| (140) |
| (145) |
| (138) |
Other expenses excluding OLD |
| 6,365 |
| 6,587 |
| 6,866 |
Less Ulster Bank RoI direct costs |
| (273) |
| (239) |
| (247) |
Other expenses excluding OLD and Ulster Bank RoI direct costs |
| 6,092 |
| 6,348 |
| 6,619 |
(1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. |
5. Cost:income ratio
The cost:income ratio is calculated as total operating expenses less OLD divided by total income less OLD.
This is a common metric used to compare profitability across the banking industry, although different banks may calculate the rate differently.
Refer to pages 8 and 15 to 19 for further details.
Go-forward group |
| ||||||||||||||||||
Total |
| ||||||||||||||||||
Central | excluding |
| |||||||||||||||||
Retail | Private | Commercial | RBS | NatWest | items | Ulster | Ulster | NatWest |
| ||||||||||
Banking | Banking | Banking | International | Markets | other | Bank RoI | Bank RoI | Group |
| ||||||||||
Year ended 31 December 2021 |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
|
Continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Operating expenses |
| (2,513) |
| (520) |
| (2,354) |
| (242) |
| (1,161) |
| (486) |
| (7,276) |
| (482) |
| (7,758) | |
Operating lease depreciation |
| — |
| — |
| 140 |
| — |
| — |
| — |
| 140 |
| — |
| 140 | |
Adjusted operating expenses |
| (2,513) |
| (520) |
| (2,214) |
| (242) |
| (1,161) |
| (486) |
| (7,136) |
| (482) |
| (7,618) | |
Total income |
| 4,445 |
| 816 |
| 3,875 |
| 548 |
| 415 |
| 185 |
| 10,284 |
| 228 |
| 10,512 | |
Operating lease depreciation |
| — |
| — |
| (140) |
| — |
| — |
| — |
| (140) |
| — |
| (140) | |
Adjusted total income |
| 4,445 |
| 816 |
| 3,735 |
| 548 |
| 415 |
| 185 |
| 10,144 |
| 228 |
| 10,372 | |
Cost:income ratio |
| 56.5 | % | 63.7 | % | 59.3 | % | 44.2 | % | 279.8 | % | nm |
| 70.3 | % | nm |
| 73.4 | % |
Year ended 31 December 2020 (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Operating expenses |
| (2,540) |
| (455) |
| (2,430) |
| (291) |
| (1,310) |
| (391) |
| (7,417) |
| (441) |
| (7,858) | |
Operating lease depreciation |
| — |
| — |
| 145 |
| — |
| — |
| — |
| 145 |
| — |
| 145 | |
Adjusted operating expenses |
| (2,540) |
| (455) |
| (2,285) |
| (291) |
| (1,310) |
| (391) |
| (7,272) |
| (441) |
| (7,713) | |
Total income |
| 4,181 |
| 763 |
| 3,958 |
| 497 |
| 1,123 |
| (236) |
| 10,286 |
| 222 |
| 10,508 | |
Operating lease depreciation |
| — |
| — |
| (145) |
| — |
| — |
| — |
| (145) |
| — |
| (145) | |
Adjusted total income |
| 4,181 |
| 763 |
| 3,813 |
| 497 |
| 1,123 |
| (236) |
| 10,141 |
| 222 |
| 10,363 | |
Cost:income ratio |
| 60.8 | % | 59.6 | % | 59.9 | % | 58.6 | % | 116.7 | % | nm |
| 71.7 | % | nm |
| 74.4 | % |
Year ended 31 December 2019 (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Operating expenses |
| (3,618) |
| (486) |
| (2,600) |
| (264) |
| (1,418) |
| (384) |
| (8,770) |
| (510) |
| (9,280) | |
Operating lease depreciation |
| — |
| — |
| 138 |
| — |
| — |
| — |
| 138 |
| — |
| 138 | |
Adjusted operating expenses |
| (3,618) |
| (486) |
| (2,462) |
| (264) |
| (1,418) |
| (384) |
| (8,632) |
| (510) |
| (9,142) | |
Total income |
| 4,866 |
| 777 |
| 4,318 |
| 610 |
| 1,342 |
| 1,773 |
| 13,686 |
| 301 |
| 13,987 | |
Operating lease depreciation |
| — |
| — |
| (138) |
| — |
| — |
| — |
| (138) |
| — |
| (138) | |
Adjusted total income |
| 4,866 |
| 777 |
| 4,180 |
| 610 |
| 1,342 |
| 1,773 |
| 13,548 |
| 301 |
| 13,849 | |
Cost:income ratio |
| 74.4 | % | 62.5 | % | 58.9 | % | 43.3 | % | 105.7 | % | nm |
| 63.7 | % | nm |
| 66.0 | % |
(1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. |
NatWest Group plc – Annual Report on Form 20-F | 113 |
Non-IFRS financial measures continued
6. NatWest Group return on tangible equity
Return on tangible equity comprises profit or loss for the period attributable to ordinary shareholders divided by average tangible equity. Average tangible equity is average total equity excluding non-controlling interests (NCI) less average intangible assets and average other owners’ equity.
Go-forward group return on tangible equity is calculated as profit or loss for the period less Ulster Bank RoI loss from continuing operations and less profit from discontinued operations divided by go-forward group total tangible equity.
This measure shows the return NatWest Group generates on tangible equity deployed. It is used to determine relative performance of banks and used widely across the sector, although different banks may calculate the rate differently.
Refer to pages 8 and 14 for further details.
Year ended or as at |
| ||||
31 December | 31 December |
| |||
NatWest Group return on tangible equity |
| 2021 |
| 2020 |
|
Profit/(loss) attributable to ordinary shareholders (£m) |
| 2,950 |
| (753) | |
Average total equity (£m) |
| 42,727 |
| 43,774 | |
Adjustment for other owners equity and intangibles (£m) |
| (11,395) |
| (11,872) | |
Adjusted total tangible equity (£m) |
| 31,332 |
| 31,902 | |
Return on tangible equity (%) |
| 9.4 | % | (2.4) | % |
Go-forward group return on tangible equity |
|
|
|
| |
Profit/(loss) attributable to ordinary shareholders (£m) |
| 2,950 |
| (753) | |
Less Ulster Bank RoI loss from continuing operations (£m) |
| 255 |
| 495 | |
Less profit from discontinued operations (£m) |
| (276) |
| (121) | |
Go-forward group profit/(loss) attributable to ordinary shareholders (£m) |
| 2,929 |
| (379) | |
Average total equity (£m) |
| 42,727 |
| 43,774 | |
Adjustment for other owners equity and intangibles (£m) |
| (11,395) |
| (11,872) | |
Adjusted total tangible equity (£m) |
| 31,332 |
| 31,902 | |
Go-forward group RWAe applying factor (%) |
| 93 | % | 93 | % |
Go-forward group total tangible equity (£m) |
| 29,139 |
| 29,669 | |
Return on tangible equity (%) |
| 10.0 | % | (1.3) | % |
NatWest Group plc – Annual Report on Form 20-F | 114 |
Non-IFRS financial measures continued
7. Segmental return on equity
Segmental return on equity comprises segmental operating profit or loss, adjusted for preference share dividends and tax, divided by average notional tangible equity, allocated at an operating segment specific rate of the period average segmental risk- weighted assets, incorporating the effect of capital deductions (RWAes).
This measure shows the return generated by operating segments on equity deployed.
Refer to pages 15 to 19 for further details.
| Retail |
| Private |
| Commercial |
| RBS |
| NatWest |
| |
Year ended 31 December 2021 | Banking | Banking | Banking | International | Markets |
| |||||
Operating profit/(loss) (£m) |
| 1,968 |
| 350 |
| 2,594 |
| 358 |
| (711) | |
Preference share cost allocation (£m) |
| (79) |
| (21) |
| (154) |
| (20) |
| (63) | |
Adjustment for tax (£m) |
| (529) |
| (92) |
| (683) |
| (59) |
| 217 | |
Adjusted attributable profit/(loss) (£m) |
| 1,360 |
| 237 |
| 1,757 |
| 279 |
| (557) | |
Average RWAe (£bn) |
| 36.0 |
| 11.2 |
| 69.5 |
| 7.8 |
| 28.4 | |
Equity factor |
| 14.5 | % | 12.5 | % | 11.5 | % | 16.0 | % | 15.0 | % |
RWAe applying equity factor (£bn) |
| 5.2 |
| 1.4 |
| 8.0 |
| 1.2 |
| 4.3 | |
Return on equity |
| 26.1 | % | 17.0 | % | 22.0 | % | 22.5 | % | (13.1) | % |
Year ended 31 December 2020 |
|
|
|
|
|
|
|
|
|
| |
Operating profit/(loss) (£m) |
| 849 |
| 208 |
| (399) |
| 99 |
| (227) | |
Preference share cost allocation (£m) |
| (88) |
| (22) |
| (153) |
| (20) |
| (68) | |
Adjustment for tax (£m) |
| (213) |
| (52) |
| 155 |
| (11) |
| 83 | |
Adjusted attributable profit/(loss) (£m) |
| 548 |
| 134 |
| (397) |
| 68 |
| (212) | |
Average RWAe (£bn) |
| 37.2 |
| 10.4 |
| 76.4 |
| 7.0 |
| 37.3 | |
Equity factor |
| 14.5 | % | 12.5 | % | 11.5 | % | 16.0 | % | 15.0 | % |
RWAe applying equity factor (£bn) |
| 5.4 |
| 1.3 |
| 8.8 |
| 1.1 |
| 5.6 | |
Return on equity |
| 10.2 | % | 10.3 | % | (4.5) | % | 6.1 | % | (3.8) | % |
Year ended 31 December 2019 |
|
|
|
|
|
|
|
|
|
| |
Operating profit/(loss) (£m) |
| 855 |
| 297 |
| 1,327 |
| 344 |
| (25) | |
Adjustment for tax (£m) |
| (236) |
| (83) |
| (372) |
| (48) |
| 7 | |
Preference share cost allocation (£m) |
| (74) |
| (18) |
| (163) |
| (11) |
| (64) | |
Adjustment for Alawaal bank merger gain (£m) |
| — |
| — |
| — |
| — |
| (150) | |
Adjusted attributable profit/(loss) (£m) |
| 545 |
| 196 |
| 792 |
| 285 |
| (232) | |
Average RWAe (£bn) |
| 37.7 |
| 9.8 |
| 78.2 |
| 6.9 |
| 48.0 | |
Equity factor |
| 15.0 | % | 13.0 | % | 12.0 | % | 16.0 | % | 15.0 | % |
RWAe applying equity factor (£bn) |
| 5.7 |
| 1.3 |
| 9.4 |
| 1.1 |
| 7.2 | |
Return on equity |
| 9.6 | % | 15.4 | % | 8.4 | % | 25.7 | % | (3.2) | % |
8. Tangible equity
Tangible equity is ordinary shareholders’ interest less intangible assets. TNAV per ordinary share is calculated as tangible equity divided by the number of ordinary shares in issue.
This is a measure used by external analysts in valuing the bank and the starting point for calculating regulatory capital.
Refer to page 8 for further details.
Year ended | ||||
31 December | 31 December | |||
| 2021 |
| 2020 | |
Ordinary shareholders’ interests (£m) |
| 37,412 |
| 38,367 |
Less intangible assets (£m) |
| (6,723) |
| (6,655) |
Tangible equity (£m) |
| 30,689 |
| 31,712 |
Ordinary shares in issue (millions) |
| 11,272 |
| 12,129 |
TNAV per ordinary share (pence) |
| 272p |
| 261p |
NatWest Group plc – Annual Report on Form 20-F | 115 |
Non-IFRS financial measures continued
9. Net interest margin
Bank net interest margin is defined as net interest income of the banking business of the Go-forward group less NatWest Markets (NWM) element and excluding liquid asset buffer, as a percentage of bank average interest-earning assets. Bank average interest earning assets are the average interest earning assets of the banking business of the Go-forward group less NWM element and excluding liquid asset buffer.
The exclusion of the NWM element aims to eliminate the impact of distorting volatility in NWM. The exclusion of the Ulster Bank RoI from the aims to align the basis of calculation with prior periods.
Liquid asset buffer consists of assets held by NatWest Group, such as cash and balances at central banks and debt securities in issue, that can be used to ensure repayment of financial obligations as they fall due.
The exclusion of liquid asset buffer has been introduced as a way to present net interest margin on a basis more comparable with UK peers and exclude the impact of regulatory driven factors.
Refer to pages 8 and 14 to 18 for further details.
Year ended |
| ||||||
31 December | 31 December | 31 December |
| ||||
2021 | 2020 | 2019 |
| ||||
| £m |
| £m |
| £m |
| |
Continuing operations | |||||||
NatWest Group net interest income (1) |
| 7,614 |
| 7,476 |
| 7,799 | |
Less NWM net interest income | (9) | 57 | 188 | ||||
Less Ulster Bank RoI net interest income |
| (100) |
| (122) |
| (152) | |
Bank net interest income |
| 7,505 |
| 7,411 |
| 7,835 | |
Average interest earning assets (IEA) |
| 524,886 |
| 483,719 |
| 439,994 | |
Less NWM average IEA |
| (32,730) |
| (37,929) |
| (35,444) | |
Less Ulster Bank RoI average IEA |
| (15,854) |
| (16,600) |
| (16,538) | |
Less liquid asset buffer average IEA (1) |
| (162,195) |
| (127,945) |
| (106,925) | |
Bank average IEA |
| 314,107 |
| 301,245 |
| 281,087 | |
|
|
|
|
|
| ||
Bank net interest margin |
| 2.39 | % | 2.46 | % | 2.79 | % |
(1) | Comparative results have been re-presented from those previously published to reclassify certain operations as discontinued operations as described in Note 8 to the consolidated financial statements. |
NatWest Group plc – Annual Report on Form 20-F | 116 |
Non-IFRS financial measures continued
10. Net lending
NatWest Group net lending is calculated as total loans to customers less loan impairment provisions.
Go-forward group net lending is calculated as net loans to customers less Ulster Bank RoI net loans to customers.
UK and RBSI retail and commercial businesses net lending excluding UK Government support schemes comprises customer loans in the Retail Banking, Commercial Banking, Private Banking and RBS International operating segments, excluding UK Government support schemes.
This is the basis of our lending target for our key retail and commercial businesses.
Refer to pages 8 for further details.
As at | ||||
31 December | 31 December | |||
2021 | 2020 | |||
| £bn |
| £bn | |
Total loans to customers (amortised cost) | 362.8 | 366.5 | ||
Less loan impairment provisions |
| (3.8) |
| (6.0) |
Net loans to customers (amortised cost) |
| 359.0 |
| 360.5 |
Less Ulster Bank RoI net loans to customers (amortised cost) |
| (6.7) |
| (18.0) |
Go-forward group net lending |
| 352.3 |
| 342.5 |
Net loans to customers (amortised cost) |
|
|
|
|
Retail Banking |
| 182.2 |
| 172.3 |
Private Banking |
| 18.4 |
| 17.0 |
Commercial Banking |
| 101.2 |
| 108.2 |
RBS International |
| 15.5 |
| 13.3 |
UK and RBSI retail and commercial businesses net loans to customers (amortised cost) |
| 317.3 |
| 310.8 |
Less UK Government support schemes |
| (11.6) |
| (12.9) |
Total UK and RBSI retail and commercial businesses net lending excluding UK Government support schemes |
| 305.7 |
| 297.9 |
11. Customer deposits
Go-forward group customer deposits is calculated as total customer deposits less Ulster Bank RoI customer deposits.
UK and RBSI retail and commercial businesses customer deposits comprises customer deposits in the Retail Banking, Commercial Banking, Private Banking and RBS International operating segments.
This metric is used to show underlying deposit movements across our key retail and commercial businesses.
Refer to pages 8 for further details.
As at | ||||
31 December | 31 December | |||
2021 | 2020 | |||
| £bn |
| £bn | |
Total customer deposits | 479.8 | 431.7 | ||
Less Ulster Bank RoI customer deposits |
| (18.4) |
| (19.6) |
Go-forward group customer deposits |
| 461.4 |
| 412.1 |
Retail Banking |
| 188.9 |
| 171.8 |
Private Banking |
| 39.3 |
| 32.4 |
Commercial Banking |
| 177.7 |
| 167.7 |
RBS International |
| 37.5 |
| 31.3 |
Total UK and RBSI retail and commercial businesses customer deposits |
| 443.4 |
| 403.2 |
12. Total operating profit before tax including discontinued operations
Given the current progress of the phased withdrawal from the Republic of Ireland, Ulster Bank RoI results are currently presented in both continuing and discontinued operations. Including operating profit before tax from discontinued operations provides a complete view of the NatWest Group operating profit in 2021.
| 2021 |
| 2020 |
| 2019 | |
Operating profit/(loss) before tax |
| 4,032 |
| (481) |
| 3,983 |
Operating profit before tax from discontinued operations |
| 279 |
| 130 |
| 249 |
Total operating profit including discontinued operations |
| 4,311 |
| (351) |
| 4,232 |
NatWest Group plc – Annual Report on Form 20-F | 117 |
Non-IFRS financial measures continued
Performance metrics not defined under IFRS
Metrics based on GAAP measures, included as not defined under IFRS and reported for compliance with European Securities and Markets Authority (ESMA) adjusted performance measure rules.
1. Loan:deposit ratio
Loan:deposit ratio is calculated as net customer loans held at amortised cost divided by total customer deposits.
This is a common metric used among peers to assess liquidity.
Refer to page 13 for further details.
As at |
| ||||||
31 December | 31 December | 31 December |
| ||||
2021 | 2020 | 2019 |
| ||||
| £m |
| £m |
| £m |
| |
Loans to customers - amortised cost | 358,990 | 360,544 | 326,947 | ||||
Customer deposits |
| 479,810 |
| 431,739 |
| 369,247 | |
Loan:deposit ratio (%) |
| 75 | % | 84 | % | 89 | % |
2. Loan impairment rate
Loan impairment rate is the loan impairment charge divided by gross customer loans.
Refer to pages 8 and 14 to 18 for further details.
3. Funded assets
Funded assets is calculated as total assets less derivative assets.
This measure allows review of balance sheet trends exclusive of the volatility associated with derivative fair values.
Refer to pages 19 and 20 for further details.
4. AUMAs
AUMA comprises both assets under management (AUMs) and assets under administration (AUAs) serviced through the Private Banking franchise. AUMs comprise assets where the investment management is undertaken by Private Banking on behalf of Private Banking, Retail Banking and RBSI customers. AUAs comprise third party assets held on an execution-only basis in custody by Private Banking, Retail Banking and RBSI for their customers accordingly, for which the execution services are supported by Private Banking. Private Banking receives a fee for providing investment management and execution services to Retail Banking and RBSI franchises.
Private Banking is the Centre of Expertise for asset management across NatWest Group, servicing all client segments across Retail, Premier and Private Banking.
Refer to page 16 for further details.
5. Depositary assets
Assets held by RBSI as an independent trustee and in a depositary service capacity.
Depositary assets are a closely monitored KPI for the RBS International business and its inclusion in commentary highlights the services that RBS International provides.
Refer to page 18 for further details.
6. Wholesale funding
Wholesale funding comprises deposits by banks, debt securities in issue and subordinated liabilities.
This is a closely monitored metric used across the banking industry to ensure capital requirements are being met.
Refer to page 8 for further details..
NatWest Group plc – Annual Report on Form 20-F | 118 |
Additional information
NatWest Group plc – Annual Report on Form 20-F | 119 |
Additional information
Adoption of IFRS 9
Following the adoption of IFRS 9, certain disclosures in this section cover comparative periods only. Comparatives are presented on an IAS 39 basis. For current year disclosures in relation to loans and credit metrics refer to the Capital and risk management – Credit risk section.
Financial summary
The geographic analysis, including the average balance sheet and interest rates, changes in net interest income and average interest rates, yields, spreads and margins in this report have generally been compiled on the basis of location of office - UK and overseas - unless indicated otherwise. ‘UK’ in this context includes transactions conducted through the offices in the UK which service international banking transactions.
Analysis of loans and advances to customers
The following table analyses gross loans to customers by remaining maturity, geographical area (location of office) and type of customer.
| 2017 | |
£m | ||
UK |
|
|
Central and local government |
| 4,609 |
Finance |
| 30,191 |
Residential mortgages |
| 147,399 |
Personal lending |
| 14,145 |
Property |
| 32,327 |
Construction |
| 3,658 |
Manufacturing |
| 8,333 |
Service industries and business activities |
| 49,132 |
Agriculture, forestry and fishing |
| 3,428 |
Finance leases and instalment credit |
| 11,670 |
Accrued interest |
| 291 |
Total UK |
| 305,183 |
Overseas |
|
|
US |
| 497 |
Rest of the World |
| 21,318 |
Total overseas |
| 21,815 |
Reverse repos |
|
|
UK |
| 20,906 |
US |
| 5,797 |
Rest of the World |
| 32 |
Total reverse repos |
| 26,735 |
Loans to customers - gross |
| 353,733 |
Loan impairment provisions |
| (3,814) |
Loans to customers - net |
| 349,919 |
Fixed rate |
| 132,174 |
Variable rate |
| 194,824 |
Reverse repos |
| 26,735 |
Loans to customers - gross |
| 353,733 |
NatWest Group provides credit facilities at variable rates to its corporate and retail customers. Variable rate credit extended to NatWest Group’s corporate and commercial customers includes bullet and instalment loans, finance lease agreements and overdrafts; interest is generally charged at a margin over a benchmark rate such as LIBOR or base rate. Interest on variable rate retail loans may also be based on LIBOR or base rate; other variable rate retail lending is charged at variable interest rates set by NatWest Group such as its mortgage standard variable rate in the UK.
NatWest Group plc – Annual Report on Form 20-F | 120 |
Additional information continued
Yields, spreads and margins of the banking business
| 2021 |
| 2020 |
| 2019 | |
% | % | % | ||||
Gross yield on interest-earning assets of the banking business (1) |
| 1.74 |
| 2.01 |
| 2.51 |
Cost of interest-bearing liabilities of the banking business |
| (0.43) |
| (0.69) |
| (1.10) |
Interest spread of the banking business (2) |
| 1.31 |
| 1.32 |
| 1.41 |
Benefit from interest-free funds |
| 0.14 |
| 0.23 |
| 0.36 |
Net interest margin of the banking business (3) |
| 1.45 |
| 1.55 |
| 1.77 |
Gross yield (1,4) |
|
|
|
|
|
|
- Group |
| 1.74 |
| 2.01 |
| 2.51 |
- UK |
| 1.86 |
| 2.14 |
| 2.71 |
- Overseas |
| 0.38 |
| 0.53 |
| 0.39 |
Interest spread (2,4) |
|
|
|
|
|
|
- Group |
| 1.31 |
| 1.32 |
| 1.41 |
- UK |
| 1.42 |
| 1.42 |
| 1.56 |
- Overseas |
| 0.07 |
| 0.45 |
| 0.14 |
Net interest margin (3,4) |
|
|
|
|
|
|
- Sterling |
| 1.45 |
| 1.55 |
| 1.77 |
- UK |
| 1.56 |
| 1.63 |
| 1.91 |
- Overseas |
| 0.27 |
| 0.50 |
| 0.27 |
NatWest Group plc base rate (average) |
| 0.50 |
| 0.10 |
| 0.75 |
(1) | Gross yield is the interest earned on average interest-earning assets of the banking book. |
(2) | Interest spread is the difference between the gross yield and the interest rate paid on average interest-bearing liabilities of the banking business. |
(3) | Net interest margin is net interest income of the banking business as a percentage of interest-earning assets (IEA) of the banking business. Bank net interest margin as reported elsewhere in the document is net interest income of the banking business less the NatWest Markets (NWM) element as a percentage of interest-earning assets of the banking business less the NWM element. Refer to the Non-IFRS financial measures section for details of the basis of preparation. |
(4) | The analysis into UK and overseas has been compiled on the basis of location of office. |
NatWest Group plc – Annual Report on Form 20-F | 121 |
Additional information continued
Average balance sheet and related interest
2021 | 2020 | |||||||||||||
Average | Average | |||||||||||||
|
| balance |
| Interest |
| Rate |
| balance |
| Interest |
| Rate | ||
£m | £m |
| % | £m | £m |
| % | |||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans to banks |
| -UK |
| 124,092 |
| 307 |
| 0.25 |
| 92,811 |
| 342 |
| 0.37 |
| -Overseas |
| 31,389 |
| (39) |
| (0.12) |
| 20,036 |
| (60) |
| (0.30) | |
Loans to customers |
| -UK |
| 311,876 |
| 8,388 |
| 2.69 |
| 301,810 |
| 8,729 |
| 2.89 |
| -Overseas |
| 8,987 |
| 198 |
| 2.21 |
| 12,106 |
| 255 |
| 2.11 | |
Other financial assets |
| -UK |
| 44,301 |
| 241 |
| 0.54 |
| 52,006 |
| 470 |
| 0.90 |
| -Overseas |
| 4,242 |
| 11 |
| 0.27 |
| 4,950 |
| 2 |
| 0.04 | |
Interest-earning assets |
| -UK |
| 480,268 |
| 8,936 |
| 1.86 |
| 446,627 |
| 9,541 |
| 2.14 |
| -Overseas |
| 44,618 |
| 171 |
| 0.38 |
| 37,092 |
| 197 |
| 0.53 | |
Total interest-earning assets |
| -banking business (1,2,4) |
| 524,886 |
| 9,107 |
| 1.74 |
| 483,719 |
| 9,738 |
| 2.01 |
| -trading business (3) |
| 71,625 |
| 88,757 | |||||||||
Interest-earning assets |
| 596,511 |
|
|
|
|
| 572,476 |
|
|
|
| ||
Non-interest-earning assets |
| 152,841 |
|
|
|
|
| 226,747 |
|
|
|
| ||
Total assets |
| 749,352 |
|
|
|
|
| 799,223 |
|
|
|
| ||
Percentage of assets applicable to overseas operations | 11.91 | % |
|
|
|
| 11.01 | % |
|
|
| |||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits |
| -UK |
| 4,862 |
| 40 |
| 0.82 |
| 13,800 |
| 134 |
| 0.97 |
| -Overseas |
| 2,909 |
| (13) |
| (0.45) |
| 2,501 |
| (46) |
| (1.84) | |
Customer deposits: demand |
| -UK |
| 98,011 |
| 16 |
| 0.02 |
| 83,507 |
| 61 |
| 0.07 |
| -Overseas |
| 10,139 |
| 0 |
| — |
| 1,113 |
| (9) |
| (0.81) | |
Customer deposits: savings |
| -UK |
| 154,236 |
| 348 |
| 0.23 |
| 139,181 |
| 665 |
| 0.48 |
| -Overseas |
| (2,630) |
| 27 |
| (1.03) |
| 7,014 |
| 10 |
| 0.14 | |
Customer deposits: other time |
| -UK |
| 9,256 |
| 134 |
| 1.45 |
| 14,085 |
| 166 |
| 1.18 |
| -Overseas |
| 5,670 |
| 2 |
| 0.04 |
| 4,969 |
| 23 |
| 0.46 | |
Other financial liabilities |
| -UK |
| 42,833 |
| 654 |
| 1.53 |
| 44,477 |
| 836 |
| 1.88 |
| -Overseas |
| 1,131 |
| 15 |
| 1.36 |
| 1,794 |
| (0) |
| (0.01) | |
Subordinated liabilities |
| -UK |
| 7,973 |
| 249 |
| 3.12 |
| 10,003 |
| 370 |
| 3.70 |
| -Overseas |
| 378 |
| 18 |
| 4.72 |
| (36) |
| 32 |
| (88.89) | |
Internal funding of trading business |
| -UK |
| 10,098 |
| 1 |
| 0.01 |
| 8,046 |
| 19 |
| 0.24 |
| -Overseas |
| (1,047) |
| 1 |
| (0.08) |
| (4,878) |
| — |
| — | |
Interest-bearing liabilities |
| -UK |
| 327,270 |
| 1,442 |
| 0.44 |
| 313,099 |
| 2,251 |
| 0.72 |
| -Overseas |
| 16,550 |
| 50 |
| 0.31 |
| 12,477 |
| 10 |
| 0.08 | |
Total interest-bearing liabilities |
| -banking business (1) |
| 343,820 |
| 1,492 |
| 0.43 |
| 325,576 |
| 2,261 |
| 0.69 |
| -trading business (3) |
| 59,096 |
| 98,562 | |||||||||
Interest-bearing liabilities |
| 402,916 |
|
|
| 424,138 |
|
|
|
| ||||
Non-interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||
Demand deposits |
| -UK |
| 169,717 |
|
|
| 138,751 |
|
|
|
| ||
| -Overseas |
| 6,859 |
| 8,315 | |||||||||
Other liabilities |
| 127,144 |
|
|
| 184,273 |
|
|
|
| ||||
Total equity |
| 42,716 |
|
|
| 43,746 |
|
|
|
| ||||
Total liabilities and equity |
| 749,351 |
|
|
| 799,223 |
|
|
|
| ||||
Percentage of liabilities applicable to overseas operations |
| 8.46 | % |
|
|
| 8.79 | % |
|
|
| |||
For the notes to the table refer to the following page.
NatWest Group plc – Annual Report on Form 20-F | 122 |
Additional information continued
Average balance sheet and related interest continued
2019 | ||||||||
Average | ||||||||
balance | Interest | Rate | ||||||
|
| £m |
| £m |
| % | ||
Assets |
|
|
|
|
|
|
|
|
Loans to banks |
| -UK |
| 67,441 |
| 784 |
| 1.16 |
| -Overseas |
| 21,297 |
| (122) |
| (0.57) | |
Loans to customers |
| -UK |
| 278,497 |
| 9,284 |
| 3.33 |
| -Overseas |
| 12,318 |
| 230 |
| 1.87 | |
Other financial assets |
| -UK |
| 56,321 |
| 814 |
| 1.45 |
| -Overseas |
| 4,122 |
| 40 |
| 0.97 | |
Interest-earning assets |
| -UK |
| 402,259 |
| 10,882 |
| 2.71 |
| -Overseas |
| 37,737 |
| 148 |
| 0.39 | |
Total interest-earning assets |
| -banking business (1,2,4) |
| 439,996 |
| 11,030 |
| 2.51 |
| -trading business (3) |
| 97,143 | |||||
Interest-earning assets |
| 537,139 |
|
|
|
| ||
Non-interest-earning assets |
| 183,925 |
|
|
|
| ||
Total assets |
| 721,064 |
|
|
|
| ||
Percentage of assets applicable to overseas operations |
| 11.73 | % |
|
|
| ||
Liabilities |
|
|
|
|
|
|
|
|
Bank deposits |
| -UK |
| 15,479 |
| 290 |
| 1.87 |
| -Overseas |
| 1,681 |
| (35) |
| (2.08) | |
Customer deposits: demand |
| -UK |
| 75,937 |
| 165 |
| 0.22 |
| -Overseas |
| 1,080 |
| (5) |
| (0.46) | |
Customer deposits: savings |
| -UK |
| 126,187 |
| 801 |
| 0.63 |
| -Overseas |
| 6,450 |
| 11 |
| 0.17 | |
Customer deposits: other time |
| -UK |
| 17,178 |
| 240 |
| 1.40 |
| -Overseas |
| 4,071 |
| 10 |
| 0.25 | |
Other financial liabilities |
| -UK |
| 41,762 |
| 1,092 |
| 2.62 |
| -Overseas |
| 1,225 |
| 11 |
| 0.88 | |
Subordinated liabilities |
| -UK |
| 9,076 |
| 442 |
| 4.87 |
| -Overseas |
| 190 |
| 41 |
| 21.58 | |
Internal funding of trading business |
| -UK |
| (9,307) |
| 156 |
| (1.68) |
| -Overseas |
| 2,963 |
| 12 |
| 0.40 | |
Interest-bearing liabilities |
| -UK |
| 276,312 |
| 3,186 |
| 1.15 |
| -Overseas |
| 17,660 |
| 45 |
| 0.25 | |
Total interest-bearing liabilities |
| -banking business (1) |
| 293,972 |
| 3,231 |
| 1.10 |
| -trading business (3) |
| 112,900 | |||||
Interest-bearing liabilities |
|
| 406,872 |
|
|
|
| |
Non-interest-bearing liabilities: |
|
|
|
|
|
|
|
|
Demand deposits |
| -UK |
| 128,288 |
|
|
|
|
| -Overseas |
| 7,337 | |||||
Other liabilities |
| 133,052 |
|
|
|
| ||
Total equity |
| 45,515 |
|
|
|
| ||
Total liabilities and equity |
| 721,064 |
|
|
|
| ||
Percentage of liabilities applicable to overseas operations | 13.00 | % |
|
|
| |||
(1) | Interest receivable and interest payable have both been decreased by £206 million (2020 - £60 million decrease; 2019 - £97 million decrease) in respect of negative interest relating to financial assets that attracted negative interest. |
(2) | Interest receivable includes £494 million (2020 - £350million; 2019 - £184 million) in respect of loan fees forming part of the effective interest rate of loans and receivables. |
(3) | Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities. |
(4) | Interest receivable includes amounts (unwind of discount) recognised on impaired loans and receivables. The average balances of such loans are included in average loans to banks and loans to customers. |
(5) | The analysis into UK and overseas has been compiled on the basis of location of office. |
(6) | 2021, 2020 and 2019 Loans and advances to customers average balances have been reclassified to exclude assets held for sale (2021 - £9.45 billion, 2020 – £9.75 billion, 2019 - £8.56 billion |
(7) | 2021 Customer deposit average balance has been reclassified between demand (£34,255 million decrease), savings (£27,839 million increase) and other time (£6,416 million increase) |
NatWest Group plc – Annual Report on Form 20-F | 123 |
Additional information continued
Average loans
The following table shows net charge-offs during the period to average loans outstanding.
Personal | Wholesale | Total |
| ||||||||||||||||||
Credit | Other |
| |||||||||||||||||||
2021 |
| Mortgages |
| cards |
| personal |
| Total |
| Property |
| Corporate |
| FI |
| Sovereign |
| Total |
|
| |
Average loans (£m) |
| 194,935 |
| 3,651 |
| 8,866 |
| 207,453 |
| 33,491 |
| 76,743 |
| 95,927 |
| 3,907 |
| 210,067 |
| 417,520 | |
Provision charges/(releases) |
| (58) |
| (14) |
| 30 |
| (42) |
| (477) |
| (724) |
| (38) |
| 3 |
| (1,236) |
| (1,278) | |
As a % of average loans during the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total provisions charged/(released) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
to income statement |
| (0.03) | % | (0.38) | % | 0.34 | % | (0.02) | % | (1.42) | % | (0.94) | % | (0.04) | % | 0.08 | % | (0.59) | % | (0.31) | % |
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Average loans (£m) |
| 182,151 |
| 3,836 |
| 9,325 |
| 195,312 |
| 35,925 |
| 81,698 |
| 107,769 |
| 3,058 |
| 228,450 |
| 423,763 | |
Provision charges/(releases) |
| 276 |
| 191 |
| 422 |
| 889 |
| 733 |
| 1,407 |
| 95 |
| 7 |
| 2,242 |
| 3,131 | |
As a % of average loans during the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total provisions charged/(released) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
to income statement |
| 0.15 | % | 4.98 | % | 4.53 | % | 0.46 | % | 2.04 | % | 1.72 | % | 0.09 | % | 0.23 | % | 0.98 | % | 0.74 | % |
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Average loans (£m) |
| 168,426 |
| 4,274 |
| 9,969 |
| 182,668 |
| 34,929 |
| 75,429 |
| 102,466 |
| 3,193 |
| 216,017 |
| 398,685 | |
Provision charges/(releases) |
| 27 |
| 104 |
| 253 |
| 384 |
| 35 |
| 307 |
| (4) |
| 2 |
| 340 |
| 724 | |
As a % of average loans during the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total provisions charged/(released) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
to income statement |
| 0.02 | % | 2.43 | % | 2.54 | % | 0.21 | % | 0.10 | % | 0.41 | % | (0.00) | % | 0.06 | % | 0.16 | % | 0.18 | % |
Net average loans have decreased by £6.2 billion compared with 2020 primarily due to a £12 billion decrease in loans to financial institutions driven by a decline in cash collateral placed against derivative liabilities reflecting reduced market volatility during 2021, along with a sharp decline in derivative liabilities during the year. In addition, corporate and property loans decreased by £5 billion and £2.4 billion respectively, mainly reflecting UK Government financial support scheme repayments and targeted sector reductions in Real Estate. This was partially offset by a £12.8 billion increase in mortgages reflecting continued strong mortgage demand.
2020 included large increases in impairments in response to the COVID-19 pandemic. 2021 has been more favourable and many of the provisions created have now released in part, or in full, back to the income statement therefore providing an improved ECL.
NatWest Group plc – Annual Report on Form 20-F | 124 |
Additional information continued
Loans by contractual maturity
The following table analyses loans by category, contractual maturity and interest type.
| Less than |
|
|
| More than |
| ||||
1 year | 1-5 Years | 5-15 years | 15 years | Total | ||||||
2021 | £m | £m | £m | £m | £m | |||||
Personal | ||||||||||
Mortgages |
| 10,446 |
| 39,913 |
| 80,633 |
| 61,541 |
| 192,533 |
Credit cards |
| 347 |
| 1,146 |
| 1,356 |
| 881 |
| 3,730 |
Other personal |
| 4,112 |
| 3,840 |
| 794 |
| 316 |
| 9,062 |
Wholesale |
|
|
|
|
|
|
|
|
|
|
Property |
| 12,729 |
| 11,053 |
| 5,138 |
| 2,028 |
| 30,948 |
Financial institutions |
| 77,262 |
| 7,826 |
| 658 |
| 327 |
| 86,073 |
Sovereign |
| 2,877 |
| 494 |
| 493 |
| 134 |
| 3,998 |
Corporate |
| 37,116 |
| 26,591 |
| 7,647 |
| 3,743 |
| 75,097 |
Total |
| 148,889 |
| 90,863 |
| 96,719 |
| 68,970 |
| 401,441 |
of which: |
|
|
|
|
|
|
|
|
|
|
Amortised cost |
|
|
|
|
|
|
|
|
|
|
Fixed interest rates |
| 45,212 |
| 48,298 |
| 75,689 |
| 58,983 |
| 228,182 |
Variable interest rates |
| 65,902 |
| 41,970 |
| 20,728 |
| 9,890 |
| 139,881 |
Trading assets |
|
|
|
|
|
|
|
|
|
|
Fixed interest rates |
| 18,707 |
| 121 |
| — |
| — |
| 18,828 |
Variable interest rates |
| 14,965 |
| 187 |
| 223 |
| — |
| 15,375 |
Other financial assets |
|
|
|
|
|
|
|
|
|
|
Fixed interest rates |
| 41 |
| 16 |
| 72 |
| 80 |
| 209 |
Variable interest rates |
| 62 |
| 271 |
| 7 |
| 17 |
| 357 |
NatWest Group plc – Annual Report on Form 20-F | 125 |
Additional information continued
Analysis of change in net interest income - volume and rate analysis
Volume and rate variances have been calculated based on movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. Changes due to a combination of volume and rate are allocated pro rata to volume and rate movements.
| 2021 over 2020 - statutory | 2020 over 2019 - statutory | ||||||||||
(Decrease)/increase due to changes in: | (Decrease)/increase due to changes in: | |||||||||||
Average | Average | Net | Average | Average | Net | |||||||
volume | rate | change | volume | rate | change | |||||||
| £m |
| £m |
| £m |
| £m |
| £m |
| £m | |
Interest-earning assets | ||||||||||||
Loans to banks | ||||||||||||
UK |
| 96 |
| (131) |
| (35) |
| 222 |
| (664) |
| (442) |
Overseas |
| (25) |
| 46 |
| 21 |
| 7 |
| 55 |
| 62 |
Loans to customers |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
| 282 |
| (623) |
| (341) |
| 735 |
| (1,290) |
| (555) |
Overseas |
| (68) |
| 12 |
| (57) |
| (4) |
| 29 |
| 25 |
Other financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
| (62) |
| (167) |
| (229) |
| (58) |
| (286) |
| (344) |
Overseas |
| — |
| 10 |
| 9 |
| 7 |
| (45) |
| (38) |
Total interest receivable of the banking business |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
| 316 |
| (921) |
| (605) |
| 899 |
| (2,240) |
| (1,341) |
Overseas |
| (93) |
| 68 |
| (26) |
| 10 |
| 39 |
| 49 |
| 223 |
| (853) |
| (631) |
| 909 |
| (2,201) |
| (1,292) | |
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
| 76 |
| 18 |
| 94 |
| 29 |
| 127 |
| 156 |
Overseas |
| 7 |
| (39) |
| (33) |
| 15 |
| (4) |
| 11 |
Customer deposits: demand |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
| (8) |
| 53 |
| 45 |
| (16) |
| 120 |
| 104 |
Overseas |
| 8 |
| (17) |
| (9) |
| — |
| 4 |
| 4 |
Customer deposits: savings |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
| (65) |
| 382 |
| 317 |
| (73) |
| 209 |
| 136 |
Overseas |
| (2) |
| (15) |
| (17) |
| (1) |
| 2 |
| 1 |
Customer deposits: other time |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
| 65 |
| (33) |
| 32 |
| 40 |
| 34 |
| 74 |
Overseas |
| (3) |
| 24 |
| 21 |
| (3) |
| (10) |
| (13) |
Other financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
| 30 |
| 152 |
| 182 |
| (68) |
| 324 |
| 256 |
Overseas |
| — |
| (16) |
| (16) |
| (3) |
| 14 |
| 11 |
Subordinated liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
| 68 |
| 53 |
| 121 |
| (42) |
| 114 |
| 72 |
Overseas |
| 13 |
| 1 |
| 14 |
| 2 |
| 7 |
| 9 |
Internal funding of trading business |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
| (4) |
| 22 |
| 18 |
| 85 |
| 52 |
| 137 |
Overseas |
| — |
| (1) |
| (1) |
| 9 |
| 3 |
| 12 |
Total interest payable of the banking business |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
| 162 |
| 647 |
| 809 |
| (45) |
| 980 |
| 935 |
Overseas |
| 23 |
| (63) |
| (41) |
| 19 |
| 16 |
| 35 |
| 185 |
| 584 |
| 769 |
| (26) |
| 996 |
| 970 | |
Movement in net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
| 478 |
| (274) |
| 204 |
| 854 |
| (1,260) |
| (406) |
Overseas |
| (70) |
| 5 |
| (67) |
| 29 |
| 55 |
| 84 |
| 408 |
| (269) |
| 138 |
| 883 |
| (1,205) |
| (322) | |
NatWest Group plc – Annual Report on Form 20-F | 126 |
Additional information continued
Loan impairment provisions
For details of the factors considered in determining the amount of provisions, refer to the accounting policy on page 38 and ‘Critical accounting policies and key sources of estimation uncertainty’ on page 41. The following table shows the movements in loan impairment provisions.
| 2017 | |
£m | ||
Provisions at the beginning of the year | ||
UK |
| 3,150 |
Overseas |
| 1,305 |
| 4,455 | |
Transfer to disposal groups |
|
|
Overseas |
| — |
| — | |
Currency translation and other adjustments |
|
|
UK |
| (28) |
Overseas |
| 2 |
| (26) | |
Disposals |
|
|
Overseas |
| (5) |
Amounts written-off |
|
|
UK |
| (1,070) |
Overseas |
| (140) |
| (1,210) | |
Recoveries of amounts previously written-off |
|
|
UK |
| 142 |
Overseas |
| 14 |
| 156 | |
Losses/(releases) to income statement - continuing operations (1) |
|
|
UK |
| 473 |
Overseas |
| 57 |
| 530 | |
Losses to income statement - discontinued operations |
|
|
Overseas |
| — |
Unwind of discount (recognised in interest income) |
|
|
UK |
| (61) |
Overseas |
| (25) |
| (86) | |
Provisions at the end of the year |
|
|
UK |
| 2,606 |
Overseas |
| 1,208 |
| 3,814 | |
Provisions at the end of the year comprise |
|
|
Customers |
| 3,814 |
Banks |
| — |
| 3,814 | |
Gross loans to customers (2) |
|
|
UK |
| 305,183 |
Overseas |
| 21,815 |
| 326,998 |
For the notes to this table refer to the following page.
NatWest Group plc – Annual Report on Form 20-F | 127 |
Additional information continued
Loan impairment provisions continued
| 2017 |
| |
Closing customer provisions as a % of gross loans to customers (2) | |||
UK | 0.90 | % | |
Overseas | 5.50 | % | |
Total | 1.20 | % | |
Customer losses/(releases) to income statement as a % of gross loans to customers (2) | |||
UK | 0.20 | % | |
Overseas | 0.30 | % | |
Total | 0.20 | % | |
Average loans to customers - gross | 366,959 | ||
As a % of average loans to customers during the year | |||
Total customer provisions charged/(released) to income statement | 0.10 | % | |
Amounts written-off (net of recoveries) - customers | 0.30 | % |
(1) | Includes nil relating to loans to banks (2016 - nil). |
(2) | Excludes reverse repos. |
Analysis of closing customer loan impairment provisions
The following table analyses customer loan impairment provisions by geographical area and type of UK customer
2017 | ||||
Closing | Total | |||
provision | loans | |||
| £m |
| % | |
UK | ||||
Central and local government | — | 1.4 | ||
Manufacturing | 37 | 2.5 | ||
Construction | 317 | 1.1 | ||
Finance | 8 | 9.2 | ||
Service industries and business activities | 769 | 15.0 | ||
Agriculture, forestry and fishing | 15 | 1.0 | ||
Property | 211 | 9.9 | ||
Residential mortgages | 137 | 45.1 | ||
Personal lending | 721 | 4.3 | ||
Finance leases and instalment credit | 80 | 3.6 | ||
Accrued interest | — | 0.1 | ||
Total UK | 2,295 | 93.2 | ||
Overseas | 1,129 | 6.8 | ||
Impaired book provisions | 3,424 | 100.0 | ||
Latent book provisions | 390 | |||
Total provisions | 3,814 | |||
NatWest Group plc – Annual Report on Form 20-F | 128 |
Additional information continued
Analysis of write-offs
The following table analyses amounts written-off by geographical area and type of UK customer
| 2017 | |
£m | ||
UK |
|
|
Manufacturing |
| 16 |
Construction |
| 51 |
Finance |
| 7 |
Service industries and business activities |
| 460 |
Agriculture, forestry and fishing |
| 2 |
Property |
| 93 |
Residential mortgages |
| 20 |
Personal lending |
| 411 |
Finance leases and instalment credit |
| 10 |
Total UK |
| 1,070 |
Overseas |
| 140 |
| 1,210 |
(1) | Includes nil written-off in respect of loans to banks (2016 – nil). |
Analysis of recoveries
The following table analyses recoveries of amounts written-off by geographical area and type of UK customer.
| 2017 | |
£m | ||
UK | ||
Manufacturing |
| 1 |
Construction |
| 2 |
Finance |
| — |
Service industries and business activities |
| 16 |
Property |
| 7 |
Residential mortgages |
| 43 |
Personal lending |
| 72 |
Finance leases and instalment credit |
| 1 |
Total UK |
| 142 |
Overseas |
| 14 |
Total recoveries |
| 156 |
NatWest Group plc – Annual Report on Form 20-F | 129 |
Additional information continued
Risk elements in lending
Risk elements in lending (REIL) comprises of impaired loans and accruing loans past due 90 days or more as to principal or interest. Impaired loans are all loans (including loans subject to forbearance) for which an impairment provision has been established; for collectively assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in impaired loans. Accruing loans past due 90 days or more comprises loans past due 90 days where no impairment loss is expected
| 2017 |
| |
£m |
| ||
Impaired loans (1) |
|
| |
UK |
| 4,450 | |
Overseas |
| 2,973 | |
Total |
| 7,423 | |
Accruing loans which are contractually overdue 90 days or more as to principal or interest |
|
| |
UK |
| 1,087 | |
Overseas |
| 394 | |
Total |
| 1,481 | |
Total REIL |
| 8,904 | |
Closing provisions for impairment as a % of total REIL |
| 43 | % |
REIL as a % of gross lending to customers excluding reverse repos |
| 2.7 | % |
(1) | The write-off of impaired loans affects closing provisions for impairment as a % of total REIL (the coverage ratio). The coverage ratio reduces if the loan written-off carries a higher than average provision and increases if the loan written-off carries a lower than average provision. |
(2) | Impaired loans at 31 December 2017 include £1,324 million (2016 - £2,496 million) of loans subject to forbearance granted during the year. |
| 2017 | |
£m | ||
Gross income not recognised but which would have been recognised under |
|
|
the original terms of impaired loans |
|
|
UK |
| 227 |
Overseas |
| 80 |
| 307 | |
Interest on impaired loans included in net interest income |
|
|
UK |
| 61 |
Overseas |
| 25 |
| 86 |
Potential problem loans
Potential problem loans (PPL) are loans for which an impairment event has taken place but no impairment loss is expected. This category is used for advances which are not past due 90 days or revolving credit facilities where identification as 90 days overdue is not feasible.
| 2017 | |
£m | ||
Potential problem loans |
| 745 |
Both REIL and PPL are reported gross and take no account of the value of any security held which could reduce the eventual loss should it occur, nor of any provision marked. Therefore, impaired assets which are highly collateralised, such as mortgages, will have a low coverage ratio of provisions held against the reported impaired balance.
NatWest Group plc – Annual Report on Form 20-F | 130 |
Additional information continued
Forbearance
The table below shows loans granted forbearance during the year. These loans are unimpaired: either the loan was performing before and after the granting of forbearance or the loan was non-performing before but subsequently transferred to the performing book. Loans with impairment provisions subject to forbearance continue to be reported as impaired loans.
| 2017 | |
£m | ||
Loans granted forbearance |
| 1,480 |
(1) | Wholesale loans subject to forbearance include only those arrangements above thresholds set individually by the segments, ranging from nil to £3 million. |
(2) | For 2017, wholesale loans subject to forbearance were £1,206 million (2016 - £1,807 million) and secured retail loans subject to forbearance were £274 million (2016 - £450 million). Unsecured retail loans subject to forbearance amounting to £31 million (2016 - £37 million) are not included. |
Analysis of debt securities - fair value through other comprehensive income
The following table analyses debt securities at fair value through other comprehensive income and the related yield (based on weighted averages) by remaining maturity and issuer.
Within 1 year | After 1 but within 5 years | After 5 but within 10 years | After 10 years | Total | ||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||
2021 |
| £m |
| % |
| £m |
| % |
| £m |
| % |
| £m |
| % |
| £m |
| % |
Central and local governments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- UK |
| 1,299 |
| 2.2 |
| 1,981 |
| 1.1 |
| 2,048 |
| 0.7 |
| 6,610 |
| 1.2 |
| 11,938 |
| 1.2 |
- US |
| 2,732 |
| 1.3 |
| 4,666 |
| 1.8 |
| 1,173 |
| 2.6 |
| 1,515 |
| 2.5 |
| 10,086 |
| 1.9 |
- Other | 1,763 |
| 0.5 |
| 2,667 |
| 0.7 |
| 390 |
| 1.0 |
| 784 |
| 1.6 |
| 5,604 |
| 0.8 | |
Other debt |
| 1,840 |
| 0.8 |
| 5,030 |
| 0.8 |
| 1,987 |
| 0.6 |
| 201 |
| 0.6 |
| 9,058 |
| 0.7 |
| 7,634 |
| 1.1 |
| 14,344 |
| 1.1 |
| 5,598 |
| 1.1 |
| 9,110 |
| 1.4 |
| 36,686 |
| 1.2 | |
Of which ABS (1) |
| 460 |
| 1.3 |
| 2,176 |
| 0.6 |
| 986 |
| 0.4 |
| 116 |
| 0.6 |
| 3,738 |
| 0.6 |
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central and local governments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- UK |
| 974 |
| 4.5 |
| 4,401 |
| 3.2 |
| 4,613 |
| 1.9 |
| 7,470 |
| 2.3 |
| 17,458 |
| 2.6 |
- US |
| 2,170 |
| 1.3 |
| 5,186 |
| 1.7 |
| 2,575 |
| 2.2 |
| 1,811 |
| 2.3 |
| 11,742 |
| 1.8 |
- Other |
| 2,421 |
| 1.0 |
| 2,681 |
| 0.6 |
| 725 |
| 0.6 |
| 975 |
| 1.5 |
| 6,802 |
| 0.9 |
Other debt |
| 1,380 |
| 1.2 |
| 5,085 |
| 0.8 |
| 1,999 |
| 0.6 |
| 127 |
| 0.5 |
| 8,591 |
| 0.8 |
| 6,945 |
| 1.6 |
| 17,353 |
| 1.7 |
| 9,912 |
| 1.6 |
| 10,383 |
| 2.2 |
| 44,593 |
| 1.8 | |
Of which ABS (1) |
| 229 |
| 1.6 |
| 1,879 |
| 0.8 |
| 806 |
| 1.6 |
| 127 |
| 0.5 |
| 3,041 |
| 0.7 |
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central and local governments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- UK |
| 1,414 |
| 3.7 |
| 3,864 |
| 3.5 |
| 6,866 |
| 2.2 |
| 6,293 |
| 2.7 |
| 18,437 |
| 2.7 |
- US |
| 2,727 |
| 0.9 |
| 6,130 |
| 2.5 |
| 3,219 |
| 2.4 |
| 1,905 |
| 2.7 |
| 13,981 |
| 2.2 |
- Other |
| 3,804 |
| 6.0 |
| 3,114 |
| 1.5 |
| 1,290 |
| 0.6 |
| 578 |
| 2.1 |
| 8,786 |
| 3.3 |
Other debt |
| 1,022 |
| 1.0 |
| 4,648 |
| 1.2 |
| 1,351 |
| 0.9 |
| 109 |
| 1.6 |
| 7,130 |
| 1.1 |
| 8,967 |
| 3.5 |
| 17,756 |
| 2.2 |
| 12,726 |
| 1.9 |
| 8,885 |
| 2.6 |
| 48,334 |
| 2.4 | |
Of which ABS (1) |
| 134 |
| 0.9 |
| 1,440 |
| 1.1 |
| 240 |
| 0.4 |
| 109 |
| 1.1 |
| 1,923 |
| 1.0 |
(1) | Includes covered bonds. |
Analysis of debt securities – amortised cost
The following table analyses debt securities at amortised cost and the related yield (based on weighted averages) by remaining maturity and issuer.
Within 1 year | After 1 but within 5 years | After 5 but within 10 years | After 10 years | Total | ||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||
2021 |
| £m |
| % |
| £m |
| % |
| £m |
| % |
| £m |
| % |
| £m |
| % |
Central and local governments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- UK |
| 1,442 |
| 1.9 |
| 1,946 |
| 1.1 |
| 433 |
| 0.1 |
| — |
| — |
| 3,821 |
| 1.3 |
- US |
| 70 |
| 1.0 |
| 86 |
| 1.0 |
| — |
| — |
| — |
| — |
| 156 |
| 1.0 |
- Other |
| 29 |
| 1.0 |
| 52 |
| 1.0 |
| — |
| — |
| — |
| — |
| 81 |
| 1.0 |
Other debt |
| 1,580 |
| 2.3 |
| 501 |
| 4.2 |
| 655 |
| 2.7 |
| 1,768 |
| 0.7 |
| 4,504 |
| 2.0 |
Total |
| 3,121 |
| 2.1 |
| 2,585 |
| 1.7 |
| 1,088 |
| 1.7 |
| 1,768 |
| 0.7 |
| 8,562 |
| 1.6 |
NatWest Group plc – Annual Report on Form 20-F | 131 |
Additional information continued
Analysis of deposits - product analysis
The following table analyses deposits excluding repos by geographical area (location of office) and type of deposit.
2021 | 2020 | 2019 | ||||
| £m |
| £m |
| £m | |
UK | ||||||
Deposits |
|
|
|
|
|
|
- interest-free |
| 180,077 |
| 161,153 |
| 122,014 |
- interest-bearing |
| 293,903 |
| 274,420 |
| 258,740 |
Total UK |
| 473,981 |
| 435,573 |
| 380,754 |
Overseas |
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
- interest-free |
| 4,949 |
| 10,227 |
| 8,514 |
- interest-bearing |
| 24,546 |
| 20,737 |
| 19,225 |
Total overseas |
| 29,494 |
| 30,964 |
| 27,739 |
Total deposits |
| 503,475 |
| 466,537 |
| 408,493 |
Overseas |
|
|
|
|
|
|
US |
| 264 |
| 20 |
| 220 |
Rest of the World |
| 29,230 |
| 30,944 |
| 27,519 |
Total overseas |
| 29,494 |
| 30,964 |
| 27,739 |
Repos |
|
|
|
|
|
|
UK |
| 27,135 |
| 17,565 |
| 14,369 |
US |
| 13,956 |
| 12,833 |
| 17,598 |
Rest of the World |
| 750 |
| 275 |
| 280 |
Total repos |
| 41,842 |
| 30,673 |
| 32,247 |
Certificates of deposit and other time deposits
The following table shows certificates of deposit and other time deposits over $100,000 or equivalent by remaining maturity.
Over | ||||||||||
0-3 months | 3-6 months | 6-12 months | 12 months | Total | ||||||
2021 |
| £m |
| £m |
| £m |
| £m |
| £m |
UK based companies and branches |
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
| 2,397 |
| 1,498 |
| 666 |
| 115 |
| 4,676 |
Other time deposits |
| 3,809 |
| 1,820 |
| 1,416 |
| 13,843 |
| 20,888 |
Overseas based companies and branches |
|
|
|
|
|
|
|
|
|
|
Other time deposits |
| 937 |
| 992 |
| 524 |
| 103 |
| 2,556 |
| 7,143 |
| 4,310 |
| 2,606 |
| 14,016 |
| 28,120 |
Uninsured time deposits
The following table shows total uninsured time deposits in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit by remaining maturity.
2021 | 2020 | 2019 | ||||
| £m |
| £m |
| £m | |
Time deposits in excess of the Federal Deposit Insurance |
|
|
|
|
|
|
Corporation (FDIC) insurance limit |
| (25,623) |
| (34,958) |
| (31,985) |
Uninsured time deposits by maturity |
|
|
|
|
|
|
0-3 months |
| (5,411) |
| (14,578) |
| (11,020) |
3-6 months |
| (3,094) |
| (6,015) |
| (4,787) |
6-12 months |
| (2,877) |
| (5,025) |
| (3,525) |
Over 12 months |
| (14,241) |
| (9,340) |
| (12,653) |
NatWest Group plc – Annual Report on Form 20-F | 132 |
Additional information continued
Short-term borrowings
Short-term borrowings comprise repurchase agreements, borrowings from financial institutions, commercial paper and certificates of deposit. Derivative collateral received from financial institutions is excluded from the table, as are certain long-term borrowings.
At year end | During the year | |||||||||
Weighted | Weighted | |||||||||
average | Maximum | Average | average | |||||||
Balance | interest rate | balance | balance | interest rate | ||||||
2021 |
| £bn |
| % |
| £bn |
| £bn |
| % |
Repos |
| 42 |
| (0.2) |
| 51 |
| 42 |
| (0.3) |
Financial institutions (1) |
| 65 |
| 0.1 |
| 70 |
| 64 |
| 0.1 |
Commercial paper |
| 4 |
| (0.1) |
| 5 |
| 4 |
| — |
Certificates of deposits |
| 5 |
| 0.1 |
| 5 |
| 4 |
| 0.1 |
Total |
| 116 |
| — |
| 131 |
| 114 |
| (0.1) |
2020 |
|
|
|
|
|
|
|
|
|
|
Repos |
| 31 |
| (0.3) |
| 47 |
| 32 |
| 0.3 |
Financial institutions (1) |
| 60 |
| 0.1 |
| 66 |
| 59 |
| 0.1 |
Commercial paper |
| 4 |
| 0.1 |
| 4 |
| 3 |
| 0.4 |
Certificates of deposits |
| 3 |
| 0.2 |
| 4 |
| 3 |
| 0.5 |
Total |
| 98 |
| 0.0 |
| 121 |
| 97 |
| 0.2 |
2019 |
|
|
|
|
|
|
|
|
|
|
Repos |
| 32 |
| 1.7 |
| 56 |
| 42 |
| 2.5 |
Financial institutions (1) |
| 54 |
| 0.2 |
| 70 |
| 53 |
| 0.3 |
Commercial paper |
| 2 |
| 0.4 |
| 3 |
| 2 |
| 0.3 |
Certificates of deposits |
| 2 |
| 0.4 |
| 2 |
| 2 |
| 0.5 |
Total |
| 90 |
| 0.8 |
| 131 |
| 99 |
| 1.3 |
(1) | Excludes derivative cash collateral of £23 billion at 31 December 2020 (2019 - £22 billion; 2018 - £20 billion); and 2020 average of £26 billion (2019 - £22 billion; 2018 - £21 billion). |
Balances are generally based on monthly data. Average interest rates during the year are computed by dividing total interest expense by the average amount borrowed. Weighted average interest rates at year end are for a single day and as such may reflect one-day market distortions, which may not be indicative of generally prevailing rates.
Other contractual cash obligations
The table below summarises other contractual cash obligations by payment date.
0-3 months | 3-12 months | 1-3 years | 3-5 years | 5-10 years | 10-20 years | |||||||
2021 |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
Contractual obligations to purchase goods or services |
| 75 |
| 226 |
| 318 |
| 63 |
| — |
| — |
| 75 |
| 226 |
| 318 |
| 63 |
| — |
| — | |
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations to purchase goods or services |
| 75 |
| 192 |
| 362 |
| 92 |
| 8 |
| — |
| 75 |
| 192 |
| 362 |
| 92 |
| 8 |
| — | |
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations to purchase goods or services |
| 80 |
| 205 |
| 226 |
| 92 |
| 11 |
| — |
| 80 |
| 205 |
| 226 |
| 92 |
| 11 |
| — |
Undrawn formal facilities, credit lines and other commitments to lend were £121,922 million (2019 - £117,228 million; 2018 - £116,843 million). While NatWest Group has given commitments to provide these funds, some facilities may be subject to certain conditions being met by the counterparty. NatWest Group does not expect all facilities to be drawn, and some may lapse before drawdown.
NatWest Group plc – Annual Report on Form 20-F | 133 |
Additional information continued
Exchange rates
The following tables show the Noon Buying Rate in New York for cable transfers in sterling as certified for customs purposes by the Federal Reserve Bank of New York.
January | December | November | October | September | August | |||||||
US dollars per £1 |
| 2022 |
| 2021 |
| 2021 |
| 2021 |
| 2021 |
| 2021 |
Noon Buying Rate |
|
|
|
|
|
|
|
|
|
|
|
|
High |
| 1.3724 |
| 1.3500 |
| 1.3679 |
| 1.3821 |
| 1.3862 |
| 1.3929 |
Low |
| 1.3385 |
| 1.3188 |
| 1.3252 |
| 1.3569 |
| 1.3439 |
| 1.3625 |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 | |||
Noon Buying Rate |
|
|
|
|
|
|
|
|
|
| ||
Period end rate |
| 1.3500 |
| 1.3662 |
| 1.3269 |
| 1.2763 |
| 1.3529 | ||
Average rate for the year (1) |
| 1.3739 |
| 1.2923 |
| 1.2803 |
| 1.3309 |
| 1.3016 | ||
Consolidation rate (2) |
|
|
|
|
|
|
|
|
|
| ||
Period end rate |
| 1.3486 |
| 1.3655 |
| 1.3200 |
| 1.2790 |
| 1.3513 | ||
Average rate for the year |
| 1.3755 |
| 1.2836 |
| 1.2771 |
| 1.3350 |
| 1.2887 |
(1) | The average of the Noon Buying Rates on the last US business day of each month during the year. |
(2) | The rates used for translating US dollars into sterling in the preparation of the financial statements. |
(3) | On 25 February 2022, the Noon Buying Rate was £1.3407. |
NatWest Group plc – Annual Report on Form 20-F | 134 |
Additional information continued
ADR payment information
Fees paid by ADR holders
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees.
The depository may collect its annual fee for depository services by deductions from cash distributions or by directly billing investors or by changing the book-entry system accounts of participants acting for them. The depository may generally refuse to provide fee-attracting services until its fees for those services are paid.
Persons depositing or withdrawing shares must pay: |
| For: |
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) |
| Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property. |
|
|
|
|
| Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates. |
|
|
|
$0.02 (or less) per ADS |
| Any cash distribution to ADS registered holders. |
|
|
|
A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs |
| Distribution of securities distributed to holders of securities of deposited securities to ADS registered holders. |
|
|
|
Registration or transfer fees |
| Transfer and registration of shares on our share register to or from the name of the depository or its agent when you deposit or withdraw shares. |
|
|
|
Expenses of the depository |
| Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement). |
|
|
|
|
| Converting foreign currency to U.S. dollars. |
|
|
|
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes |
| As necessary. |
|
|
|
Any charges incurred by the depository or its agents for servicing the deposited securities |
| As necessary. |
Fees payable by the depository to the issuer
Fees incurred in past annual Period
From 1 January 2021 to 31 December 2021, the company received from the depository $174,710 for continuing annual stock exchange listing fees, standard out-of-pocket maintenance costs for the ADRs (consisting of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend cheques, electronic filling of U.S. Federal tax information, mailing required tax forms, stationary, postage, facsimile, and telephone calls), any applicable performance indicators relating to the ADR facility, underwriting fees and legal fees.
Fees to be paid in the future
The Bank of New York Mellon, as depository, has agreed to reimburse the company for expenses they incur that are related to establishment and maintenance expenses of the ADS program. The depository has agreed to reimburse the Company for its continuing annual stock exchange listing fees. The depository has also agreed to pay the standard out-of-pocket maintenance costs for the ADRs, which consist of the expenses of postage and envelopes for mailing annual and interim reports, printing and distributing dividend cheques, electronic filing of U.S. federal tax information, mailing required tax forms, stationary, postage, facsimile, and telephone calls. It has also agreed to reimburse the company annually for certain investor relationship programs of special investor relations promotional activities. In certain instances, the depository has agreed to provide additional payments to the company based on any applicable performance indicators relating to the ADR facility. There are limits on the amount of expenses for which the depository will reimburse the company, but the amount of reimbursement available to the company is not necessarily tied to the amount of fees the depository collects from investors.
NatWest Group plc – Annual Report on Form 20-F | 135 |
Risk factors
Principal Risks and Uncertainties
Set out below are certain risk factors that could adversely affect NatWest Group’s future results, its financial condition and prospects and cause them to be materially different from what is forecast or expected, and directly or indirectly impact the value of its securities in issue. These risk factors are broadly categorised and should be read in conjunction with other sections of this annual report, including the forward-looking statements section, the strategic report and the risk and capital management section. They should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties facing NatWest Group. The COVID-19 pandemic may exacerbate any of the risks described below.
Economic and political risk
The impact of the COVID-19 pandemic and related uncertainties continue to affect the UK, global economies and financial markets and NatWest Group’s customers, as well as its competitive environment, which may continue to have an adverse effect on NatWest Group.
In many countries, including the UK (NatWest Group’s most significant market), the COVID-19 pandemic has, at times, resulted in the imposition of strict social distancing measures, restrictions on non-essential activities and travel quarantines, in an attempt to slow the spread and reduce the impact of the COVID-19 pandemic. The COVID-19 pandemic has also, at times, caused significant reductions in levels of consumer and commercial activity, reductions in consumer spending, increased levels of corporate debt and, for some customers, personal debt, increased unemployment and significant market volatility in asset prices, interest rates and foreign exchange rates. It has also, at times, caused physical disruption to global supply chains and working practices, all of which have affected NatWest Group’s customers. NatWest Group has significant exposures to many of the commercial sectors economically impacted by the COVID-19 pandemic, including property, retail, leisure and travel.
Despite widespread COVID-19 vaccination within the geographical regions in which NatWest Group operates, the proliferation of COVID-19 variants continues to affect the UK and global economies. Further waves of infection or the spread of new strains may result in renewed restrictions in affected countries and regions. As a result, significant uncertainties remain as to how long the impact of the COVID-19 pandemic will last, and how it will continue to affect the global economy.
In response to the COVID-19 pandemic, central banks, governments, regulators and legislatures in the UK and elsewhere have offered unprecedented levels of support and various schemes to assist impacted businesses and individuals. This has included forms of financial assistance and legal and regulatory initiatives. Many of these support schemes have now been curtailed. However, uncertainty remains as to the impact of the ending or tapering of these schemes and the repayment of the loans involved on customers, the economic environment and NatWest Group. Moreover, it is unclear as to how any further measures, such as rising interest rates and inflation, also have a material adverse effect on NatWest Group’s business and performance.
The COVID-19 pandemic has prompted many changes that may prove to be permanent shifts in customer behaviour and economic activity, such as changes in spending patterns and significantly more people working from home. These changes may have long lasting impacts on asset prices, the economic environment and its customer’s financial needs.
Uncertainties relating to the COVID-19 pandemic has made reliance on analytical models and planning and forecasting for NatWest Group more complex, and may result in uncertainty impacting the risk profile of NatWest Group and/or that of the wider banking industry. The medium and long-term implications of the COVID-19 pandemic for NatWest Group customers, the UK housing market, and the UK and global economies and financial markets remain uncertain.
Any of the above may have a material adverse effect on NatWest Group’s business, results of operations and outlook.
NatWest Group faces continued economic and political risks and uncertainty in the UK and global markets.
The outlook for the global economy over the medium-term remains uncertain due to a number of factors including: the COVID-19 pandemic, societal inequalities and changes, trade barriers and the increased possibility of and/or continuation of trade wars, geopolitical tensions, widespread political instability (including as a result of populism and nationalism, which may lead to protectionist policies, state and privately sponsored cyber and terrorist acts or threats, efforts to destabilise regimes or armed conflict), energy prices, changes in inflation and interest rates (including negative interest rates), supply chain disruption, climate, environmental, social and other sustainability-related risks and global regional variations in the impact and responses to these factors.
These conditions could be worsened by a number of factors including macro-economic deterioration, increased instability in the global financial system and concerns relating to further financial shocks or contagion (for example, due to economic concerns in emerging markets), market volatility or fluctuations in the value of the pound sterling, new or extended economic sanctions, volatility in commodity prices or concerns regarding sovereign debt. This may be compounded by the changing demographics of the populations in the markets that NatWest Group serves, increasing social and other inequalities, or rapid change to the economic environment due to the adoption of technology and artificial intelligence. Any of the above developments could adversely impact NatWest Group directly (for example, as a result of credit losses) or indirectly (for example, by impacting global economic growth and financial markets and NatWest Group’s customers and their banking needs).
In addition, NatWest Group is exposed to risks arising out of geopolitical events or political developments, such as exchange controls and other measures taken by sovereign governments that may hinder economic or financial activity levels. Furthermore, unfavourable political, military or diplomatic events, including secession movements or the exit of other member states from the EU, armed conflict (including the Russia/Ukraine conflict and related consequences for geopolitical stability, energy supply and prices, and cross-border financial transactions, including as a result of economic sanctions), pandemics and widespread public health crises (including the current COVID-19 pandemic and any future epidemics or pandemics), state and privately sponsored cyber and terrorist acts or threats, and the responses to them by governments and markets, could negatively affect the business and performance of NatWest Group, including as a result of the indirect effect on regional or global trade and/or NatWest Group’s customers.
NatWest Group plc – Annual Report on Form 20-F | 136 |
Risk factors continued
NatWest Group faces political uncertainty in Scotland, as a result of a possible second Scottish independence referendum. Independence may adversely impact NatWest Group since NatWest Group plc and other NatWest Group entities (including NWM Plc) are incorporated in Scotland. Any changes to Scotland’s relationship with the UK or the EU would impact the environment in which NatWest Group and its subsidiaries operate, and may require further changes to NatWest Group’s structure, independently or in conjunction with other mandatory or strategic structural and organisational changes which, any of which could adversely impact NatWest Group. The value of NatWest Group’s financial instruments may be materially affected by market risk, including as a result of market fluctuations. Market volatility, illiquid market conditions and disruptions in the credit markets may make it extremely difficult to value certain of NatWest Group’s financial instruments, particularly during periods of market displacement. This could cause a decline in the value of NatWest Group’s financial instruments, which may have a material adverse effect on NatWest Group’s results of operations in future periods, or inaccurate carrying values for certain financial instruments.
In addition, financial markets are susceptible to severe events evidenced by rapid depreciation in asset values, which may be accompanied by a reduction in asset liquidity. Under these conditions, hedging and other risk management strategies may not be as effective at mitigating trading losses as they would be under more normal market conditions. Moreover, under these conditions, market participants are particularly exposed to trading strategies employed by many market participants simultaneously and on a large scale, increasing NatWest Group’s counterparty risk. NatWest Group’s risk management and monitoring processes seek to quantify and mitigate NatWest Group’s exposure to more extreme market moves. However, severe market events have historically been difficult to predict and NatWest Group could realise significant losses if extreme market events were to occur.
Any of the above may have a material adverse effect on NatWest Group’s business, results of operations and outlook.
Continuing uncertainty regarding the effects and extent of the UK’s post Brexit divergence from EU laws and regulation, and NatWest Group’s post Brexit EU operating model may continue to adversely affect NatWest Group and its operating environment.
The UK ceased to be a member of the EU and the European Economic Area (‘EEA’) on 31 January 2020 (‘Brexit’) and the 2020 EU-UK Trade and Cooperation Agreement (‘TCA’) ended the transition period on 31 December 2020. The TCA provides for free trade between the UK and EU with zero tariffs and quotas on all goods that comply with the appropriate rules of origin, with minimal coverage. However, for financial services, UK-incorporated financial services providers no longer have EU passporting rights and there is no mutual recognition regime. Financial services may largely be subject to individual equivalence decisions by relevant regulators. A number of temporary equivalence decisions have been made that cover certain services offered by NatWest Group. The EU’s equivalence regime does not cover most lending and deposit taking, and determinations in respect of third countries have not, to date, covered the provision of most investment services. In addition, equivalence determinations do not guarantee permanent access rights and can be withdrawn with short notice. The TCA is accompanied by a Joint Declaration on financial services which sets out an intention for the EU and UK to cooperate on matters of financial regulation and to agree a Memorandum of Understanding, which has yet to be signed. In late 2021 the European Commission proposed legislation that would require non-EU firms to establish a branch or subsidiary in the EU before providing “banking services” in the EU. If these proposals become law all “banking services” will be licensable activities in each EU member state and member states will not be permitted to offer bilateral permissions to financial institutions outside the EU allowing them to provide “banking services” in the EU. Uncertainty remains as to whether “banking services” will also include investment products.
NatWest Group continues to evaluate its post Brexit EU operating model, making adaptations as necessary. NatWest Group also continues to assess where NatWest Group companies can obtain bilateral regulatory permissions to facilitate intragroup transactions and/or to permit business to continue from its UK entities, transferring what cannot be continued to be rendered from the UK to an EEA subsidiary or branch where permitted. Where these regulatory permissions are temporary or are withdrawn, a different approach may need to be taken or may result in a change in operating model or some business being ceased. Not all NatWest Group entities have applied for bilateral regulatory permissions and instead intend to move EEA business to an EEA licensed subsidiary or branch. There is a risk that these EEA licenses may not be granted, or may be withdrawn, and where these permissions are not obtained, further changes to NatWest Group’s operating model may be required or some business may need to be ceased. In addition, failure to obtain required regulatory permissions or licences in one part of NatWest Group may impact other parts of NatWest Group adversely. Certain permissions are required in order to maintain the ability to clear euro payments. Other permissions, including the ability to have two intermediate EU parent undertakings, would allow NatWest Group to continue to serve EEA customers from both the ring-fenced and non-ring-fenced banking entities. Furthermore, transferring business to an EEA based subsidiary is a complex exercise and involves legal, regulatory and execution risks, and could result in a loss of business and/or customers or greater than expected costs. The changes to NatWest Group’s operating model have been costly and further changes to its business operations, product offering and customer engagement could result in further costs.
The long-term effects of Brexit and the uncertainty regarding NatWest Group’s EU operating model may have a negative impact on NatWest Group’s business. These may be exacerbated by wider global macro-economic trends and events, particularly COVID-19 pandemic related uncertainties, which may significantly impact NatWest Group and its customers and counterparties who are themselves dependent on trading with the EU or personnel from the EU. They may exacerbate the economic impacts of the COVID-19 pandemic on the UK, the Republic of Ireland (‘ROI’) and the rest of the EU/EEA.
Significant uncertainties remain as to the extent to which EU/EEA laws will diverge from UK law (including bank regulation), whether and what equivalence determinations will be made by the various regulators, whether the proposed EEA licensed subsidiary is granted a banking licence, whether banking services will be harmonised across the EEA and, therefore, what the respective legal and regulatory arrangements will be, under which NatWest Group and its subsidiaries will operate. This divergence could lead to further market fragmentation. These risks and uncertainties may require costly changes to NatWest Group’s EU operating model. The legal and political uncertainty, and any actions taken as a result of this uncertainty, as well as the approach taken by regulators and new or amended rules, could have a significant adverse impact on NatWest Group’s businesses, non-UK operations and/or legal entity structure, including attendant operating, compliance and restructuring costs, level of impairments, capital requirements, changes to intragroup arrangements, increased complexity, regulatory environment and tax implications and as a result may have a material adverse effect on NatWest Group’s profitability, competitive position, business model and product offering.
NatWest Group plc – Annual Report on Form 20-F | 137 |
Risk factors continued
Changes in interest rates have significantly affected and will continue to affect NatWest Group’s business and results.
Interest rate risk is significant for NatWest Group. Monetary policy has been accommodative in recent years including initiatives implemented by the Bank of England and HM Treasury, such as the Term Funding Scheme with additional incentives for SMEs (‘TFSME’), which have helped to support demand at a time of pronounced fiscal tightening and balance sheet repair. However, market expectations are currently that benchmark interest rates such as UK base rate, could begin to rise further and faster than had been anticipated previously and that this could be accompanied by other measures to reverse accommodative policy, such as quantitative tightening.
While increases in interest rates may support NatWest Group’s interest income, sharp rises could have macroeconomic effects that lead to adverse outcomes for the business. For example, they could lead to generally weaker than expected growth, or even contracting GDP, reduced business confidence, higher default rates on customer loans, higher levels of unemployment or underemployment, and falling property prices in the markets in which NatWest Group operates, each of which could have a material adverse effect on NatWest Group’s business, results of operations and outlook. Conversely, decreases in interest rates and/or continued sustained low or negative interest rates would be expected to continue to put further pressure on NatWest Group’s interest income and profitability.
Unexpected moves in interest rates will also affect valuations of assets and liabilities that are recognised at fair value on the balance sheet. Changes in these valuations may be adverse. Unexpected movements in spreads between key benchmark rates could have adverse impacts and also have a material adverse effect on NatWest Group’s financial position.
Changes in foreign currency exchange rates may affect NatWest Group’s results and financial position.
Decisions of major central banks (including the Bank of England, the European Central Bank and the US Federal Reserve) and political or market events, which are outside NatWest Group’s control, may lead to sharp and sudden variations in foreign exchange rates.
Although NatWest Group is principally a UK focused banking group, it is subject to foreign exchange risk from capital deployed in NatWest Group’s foreign subsidiaries, branches and joint arrangements and customer transactions denominated in a currency other than the functional currency of NatWest Group. NatWest Group also relies on issuing securities in foreign currencies that assist in meeting NatWest Group’s minimum requirements for own funds and eligible liabilities (‘MREL’) and NWM Plc deals foreign exchange instruments. NatWest Group maintains policies and procedures designed to manage the impact of exposures to fluctuations in currency rates. Nevertheless, changes in currency rates, particularly in the sterling-US dollar and euro-sterling rates, can adversely affect the value of assets, liabilities (including the total amount MREL-eligible instruments), foreign exchange dealing activity, income and expenses, RWAs and hence the reported earnings and financial condition of NatWest Group and may have a material adverse effect on NatWest Group’s income from foreign exchange dealing, business, results of operations and outlook.
HM Treasury (or UKGI on its behalf) could exercise a significant degree of influence over NatWest Group and further offers or sales of NatWest Group’s shares held by HM Treasury may affect the price of NatWest Group securities.
In its March 2021 Budget, the UK Government announced its intention to continue the process of privatisation of NatWest Group plc and to carry out a programme of sales of NatWest Group plc ordinary shares with the objective of selling all of its remaining shares in NatWest Group plc by 2025-2026. As a result of a directed buyback of NatWest Group plc shares by NatWest Group plc from UK Government Investments Limited (‘UKGI’) in March 2021, sales of NatWest Group plc shares by UKGI by accelerated bookbuild in May 2021 and purchases made under NatWest Group plc’s on-market buyback programme announced in July 2021, as at 11 February 2022, the UK Government held 50.94% of the issued share capital with voting rights of NatWest Group plc. In addition to the £750 million on-market buyback announced on 18 February 2022, NatWest Group may participate in further directed or on-market buybacks in the future. The timing, extent and continuation of UKGI’s sell-downs is uncertain, which could result in a prolonged period of increased price volatility on NatWest Group plc’s ordinary shares.
Any offers or sales of a substantial number of ordinary shares by UKGI, market expectations about these sales and any associated directed, on or off market buyback activity by NatWest Group, could affect the prevailing market price for the outstanding ordinary shares of NatWest Group plc.
HM Treasury has indicated that it intends to respect the commercial decisions of NatWest Group and that NatWest Group will continue to have its own independent board of directors and management team determining its own strategy. However, for as long as HM Treasury remains the NatWest Group plc’s largest single shareholder, HM Treasury and UKGI (as manager of HM Treasury’s shareholding) could exercise a significant degree of influence over the election of directors and appointment of senior management, NatWest Group’s capital strategy, dividend policy, remuneration policy or the conduct of NatWest Group’s operations, amongst others. HM Treasury or UKGI’s approach depends on government policy, which could change. The manner in which HM Treasury or UKGI exercises HM Treasury’s rights as the largest single shareholder could give rise to conflicts between the interests of HM Treasury and the interests of other shareholders, including as a result of a change in government policy.
Any of the above could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
Strategic risk
NatWest Group continues to implement its purpose-led strategy, which carries significant execution and operational risks and may not achieve its stated aims and targeted outcomes.
In February 2020, NatWest Group announced a new strategy, focused on becoming a purpose-led business, designed to champion potential and to help individuals, families and businesses to thrive. This strategy is intended to reflect the rapidly shifting environment and backdrop of unprecedented disruption in society driven by technology and changing customer expectations, as accelerated by the COVID-19 pandemic. The purpose-led strategy has required an internal cultural shift across NatWest Group as to how performance is perceived and how NatWest Group conducts its business. These changes are substantial and will take many years to fully embed. These changes may not result in the expected outcome within the timeline and in the manner currently contemplated.
NatWest Group plc – Annual Report on Form 20-F | 138 |
Risk factors continued
As part of its purpose-led strategy, NatWest Group has set a number of financial, capital and operational targets and expectations, both for the short term and throughout the implementation period. Meeting these targets and expectations requires further significant reductions to NatWest Group’s cost base. Realising these cost reductions may result in material strategic costs, which may be more than currently expected. The continued focus on meeting cost reduction targets may also mean limited investment in other areas, which could affect NatWest Group’s long-term prospects, product offering or competitive position, its ability to meet its other targets and commitments (including those related to customer satisfaction) and its capacity to respond to climate-related risks.
NatWest Group’s ability to meet its planned reductions in its annual underlying costs may vary considerably from year to year. Any of the factors above could jeopardise NatWest Group’s ability to achieve its associated financial targets and generate sustainable returns.
The financial services industry is currently experiencing a trend towards consolidation and technological advancement and disruption. In pursuing its purpose-led strategy, NatWest Group may decide to undertake divestments, restructurings or reorganisations of certain of its customer segments. Conversely, it may decide to grow its business through acquisitions, joint ventures, investments and/or strategic partnerships as well as other transactions and initiatives, in certain customer segments and including to: (i) enhance capabilities that may lead to better productivity or cost efficiencies; (ii) acquire talent; (iii) pursue new products or expand existing products; or (iv) enter new markets or enhance its presence in existing markets. There are risks that NatWest Group may not fully realise the expected benefits and value from these transactions and initiatives. In particular, NatWest Group may: (i) fail to realise the business rationale for the transaction or initiative, or assumptions underlying the business plans supporting the valuation of a target business may prove inaccurate, for example, synergies and expected commercial demand; (ii) fail to successfully integrate any acquired businesses (including in respect of technologies, existing strategies, products and human capital); (iii) fail to retain key employees, customers and suppliers of any acquired business; (iv) be required or wish to terminate pre-existing contractual relationships, which could prove costly and/or be executed at unfavourable terms and conditions; (v) fail to discover certain contingent or undisclosed liabilities in businesses that it acquires, or its due diligence to discover any such liabilities may be inadequate; and (vi) not obtain necessary regulatory and other approvals or onerous conditions may be attached to such approvals. Accordingly, NatWest Group may not be successful in growing its business through these types of transactions and initiatives and any particular transaction may not succeed, may be limited in scope or scale (including due to NatWest Group’s current ownership structure) and may not conclude on the terms contemplated, or at all. Any of the above may materially and adversely affect NatWest Group’s results of operations, financial condition or prospects.
NatWest Group’s phased withdrawal from ROI continues to present significant commercial, operational, legal and execution risks. In particular, the phased withdrawal from ROI involves transfers of business, assets and liabilities to third parties, and entails many risks, the most significant of which include: (i) anticipated reductions in net income, total lending and RWAs; (ii) potential trapped or stranded capital; (iii) the diversion of management resources and attention away from day-to-day management; (iv) the recognition of disposal losses as part of the orderly run-down of certain loan portfolios which may be higher than anticipated; (v) execution risks arising from the significant uncertainties of a phased withdrawal, including the additional IT and operational expense and resource required to mitigate manual and limited customer switching and handling processes of Ulster Bank Ireland DAC, potential counterparties and other banks; (vi) customer action or inaction, or the inability to obtain necessary approvals and/or support from governmental authorities, regulators, trade unions and/or other stakeholders resulting in additional cost, resource and delays; (vii) potential loss of customers, resulting in retail and commercial deposit outflows (or a failure to attract deposit inflows) and reduced revenues and liquidity; (viii) increased people risk through the potential loss of key colleagues and institutional knowledge and increased challenges of attracting and retaining colleagues; (ix) regulatory risk, including in relation to prudential, conduct and other regulatory requirements; (x) no or limited access to Euro system funding arrangements; and (xi) brand and reputational risks due to press speculation and stakeholder scrutiny about the phased withdrawal from ROI. Any of these risks and uncertainties may cost more, be more complex or harder to mitigate than currently estimated and may adversely affect NatWest Group’s ability to execute a phased withdrawal from ROI, or may affect the financial performance of NatWest Group.
On 27 January 2022, NatWest Group announced that, in order to further support its customers’ growth ambitions and deliver on the next phase of its strategy, it is evolving its Commercial, NatWest Markets and RBS International businesses to form a single franchise to best support its customers across the full non-personal customer lifecycle. The transition is expected to begin over the coming months and be effective from July 2022.
In pursuing its strategy, NatWest Group may not be able to successfully: (i) implement all aspects of its strategy; (ii) reach any or all of the related targets or expectations of its strategy; or (iii) realise the intended strategic objectives of any other future strategic or growth initiative. The scale and scope of its strategy and the intended changes continue to present material business, operational (including compliance with the UK ring-fencing regime), legal, execution, IT system, internal culture, conduct and people risks to NatWest Group. Implementing many changes and strategic actions concurrently, including in respect of any growth initiatives, will require application of robust governance and controls frameworks and robust IT systems; there is a risk that NatWest Group may not be successful in these respects. The implementation of the purpose-led strategy and any other strategic initiatives could result in materially higher costs than initially contemplated (including due to material uncertainties and factors outside of NatWest Group’s control) and may not be completed as planned, or at all, or could be phased or could progress in a manner other than currently expected. This could lead to additional management actions by NatWest Group.
Changes in the economic, political and regulatory environment in which NatWest Group operates, or regulatory uncertainty and changes, strong market competition and industry disruption or economic volatility may require NatWest Group to adjust aspects of its strategy or the timeframe for its implementation including in relation to its financial, capital and operational targets and expectations. As certain initiatives depend on achieving growth in new ventures and opportunities for NatWest Group, its strategy is vulnerable to an economic downturn. NatWest Group’s strategy also requires ongoing confidence from customers and the wider market, without which customer activity and related income levels may fall or NatWest Group’s reputation may be adversely affected.
NatWest Group plc – Annual Report on Form 20-F | 139 |
Risk factors continued
Each of these risks, and others identified in these Risk Factors, individually or collectively could jeopardise the implementation and delivery of the purpose-led strategy and other strategic initiatives, result in higher than expected costs, impact NatWest Group’s products and services offering, its reputation with customers or business model and adversely impact NatWest Group’s ability to deliver its strategy and meet its targets and guidance, each of which could have a material adverse impact on NatWest Group’s business, results of operations and outlook.
NatWest Group continues to refocus its NWM franchise, which entails material execution, commercial and operational risks and the intended benefits for NatWest Group may not be realised within the timeline and in the manner currently contemplated.
Over the past few years, as part of its purpose-led strategy, NatWest Group has sought to implement a more strategically congruent and economically sustainable model for its NWM franchise. As part of this, NatWest Group has been refocusing the NWM franchise to principally serve NatWest Group’s corporate and institutional customer base. This requires NWM Group to simplify its operating model and technology platform, as well as reduce its cost base and capital requirements. NWM Group has also directed resources to emphasising and growing product capability in the areas of importance to NatWest Group’s corporate and institutional customers, including the Fixed Income and Capital Markets businesses, and has refocused its Rates business to best serve its core customers.
In addition, to improve efficiencies and best serve customers following Brexit, NatWest Group expects that certain assets, liabilities, transactions and activities of its Western European corporate portfolio (principally including term funding and revolving credit facilities), will be transferred from the ring-fenced subgroup of NatWest Group to NWM Group on a rolling basis, subject to certain regulatory and customer requirements. The timing and quantum of these transfers remain uncertain as is the impact of these transactions on its go-forward results of operations. As a result, NatWest Group’s business, results of operations, financial position and prospects could be materially adversely affected.
NatWest Group’s ability to serve its customers may be diminished by the changed business strategy, as a result of the NWM Refocusing. In addition, customer reactions to the changed nature of NWM Group’s business model may be more adverse than expected and previously anticipated revenue and profitability levels may not be achieved in the timescale envisaged or at all. An adverse macroeconomic environment (including due to the COVID-19 pandemic, heightened inflation and rising interest rates), continued political and regulatory uncertainty, market volatility and/or strong market competition may also pose significant challenges to the achievement of the anticipated targets and goals of the NWM Refocusing.
The implementation of the NWM Refocusing has been a complex process and although substantial progress has been made, the risk remains that this strategy may not result in the contemplated business outcome and there continue to be material execution, commercial and operational risks in connection with the NWM Refocusing. There may continue to be material execution, commercial and operational risks for NWM Group and NWM Group may continue to be subject to significant structural and other change. There can be no certainty that the NWM Refocusing will be successful or that NWM Group will be a viable, competitive or profitable business. The intended benefits for NatWest Group may not be realised within the timeline and in the manner currently contemplated, which may have a material adverse effect on NatWest Group’s business, results of operations and outlook.
Trends relating to the COVID-19 pandemic may adversely affect NatWest Group’s strategy and impair its ability to meet its targets and strategic objectives.
The trajectory of the COVID-19 pandemic’s impact on the UK and global economy and NatWest Group remains uncertain. If trends relating to the COVID-19 pandemic negatively impact the UK and global economy, NatWest Group’s may be unable to meet its financial, capital and operational targets and expectations. In addition, the COVID-19 pandemic has, at times, caused significant market volatility, which could cause RWA inflation for NatWest Group. This could impair NatWest Group’s ability to timely deliver on certain aspects of its purpose-led strategy, which may have a material adverse effect on NatWest Group’s business, results of operations and outlook. See also, ‘NatWest Group continues to implement its purpose-led strategy, which carries significant execution and operational risks and may not achieve its stated aims and targeted outcomes’.
It is uncertain as to how the broader macroeconomic business environment and societal norms may be impacted by the COVID-19 pandemic, causing significant wider societal changes. For example, one of the most notable effects of the COVID-19 pandemic has been its disproportionate impact on the most vulnerable groups of society and concerns about systemic racial biases and social inequalities.
In addition, the COVID-19 pandemic has accelerated existing economic trends that may radically change the way businesses are run and people live their lives. These trends include digitalisation, decarbonisation, automation, e-commerce and agile working, each of which has resulted in significant market volatility in asset prices. There is also increased investor, regulatory and customer scrutiny regarding how businesses address these changes and related climate, environmental, social, governance and other sustainability issues, including tackling inequality, working conditions, workplace health, safety and wellbeing, diversity and inclusion, data protection and management, workforce management, human rights and supply chain management. Any failure or delay by NatWest Group to successfully adapt its business strategy and to establish and maintain effective governance, procedures, systems and controls in response to these changes, and to manage emerging climate, environmental, social, governance and other sustainability-related risks and opportunities, may have a material adverse impact on NatWest Group’s reputation, business, results of operations, outlook and the value of NatWest Group’s securities. See also, ‘Any failure by NatWest Group to implement effective and compliant climate change resilient systems, controls and procedures could adversely affect NatWest Group’s ability to manage climate-related risks’ and ‘A failure to adapt NatWest Group’s business strategy, governance, procedures, systems and controls to manage emerging sustainability-related risks and opportunities may have a material adverse effect on NatWest Group, its reputation, business, results of operations and outlook’.
The COVID-19 pandemic may also result in unexpected developments or changes in financial markets, the fiscal, tax and regulatory frameworks and consumer customer and corporate client behaviour, which could intensify competition in the financial services industry. This could have a material adverse impact on NatWest Group’s business, results of operations and outlook, if it is not able to adapt or compete effectively.
Financial resilience risk
NatWest Group may not meet the targets it communicates or be in a position to continue to make discretionary capital distributions (including dividends to shareholders).
As part of NatWest Group’s strategy, NatWest Group has set a number of financial, capital and operational targets for NatWest Group including in respect of: CET1 ratio targets, MREL targets, return on tangible equity (‘ROTE’), funding plans and requirements, employee engagement, diversity and inclusion as well as ESG (including climate and sustainable funding and financing targets) and customer satisfaction targets and discretionary capital distributions (including dividends to shareholders).
NatWest Group plc – Annual Report on Form 20-F | 140 |
Risk factors continued
See also, ‘NatWest Group continues to implement its purpose-led strategy, which carries significant execution and operational risks and may not achieve its stated aims and targeted outcomes’.
NatWest Group’s ability to meet its targets and to successfully meet its strategy is subject to various internal and external factors and risks. These include but are not limited to: the impact of the COVID-19 pandemic, market, regulatory, macroeconomic and political uncertainties, operational risks and risks relating to NatWest Group’s business model and strategy (including risks associated with climate, environmental, social, governance and other sustainability-related issues) and litigation, governmental actions, investigations and regulatory matters.
A number of factors, including the economic and other effects of the COVID-19 pandemic, may impact NatWest Group’s ability to maintain its CET1 ratio target and make discretionary capital distributions. See also, ‘NatWest Group may not meet the prudential regulatory requirements for capital and MREL, or manage its capital effectively, which could trigger the execution of certain management actions or recovery options’.
There is a risk that NatWest Group may not meet its targets and expectations or be in a position to continue to distribute capital, or that NatWest Group will be a viable, competitive or profitable banking business. Any failure of NatWest Group to meet its targets, successfully meet its strategy or make discretionary capital distributions could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
NatWest Group operates in markets that are highly competitive, with increasing competitive pressures and technology disruption.
The markets within which NatWest Group operates are highly competitive. NatWest Group expects such competition to continue and intensify in response to various changes. These include: evolving customer behaviour, technological changes (including digital currencies, stablecoins and the growth of digital banking, such as from fintech entrants), competitor behaviour, new entrants to the market (including non-traditional financial services providers such as large retail or technology conglomerates, who may have competitive advantages in scale, technology and customer engagement), competitive foreign-exchange offerings, industry trends resulting in increased disaggregation or unbundling of financial services or conversely the re-intermediation of traditional banking services, and the impact of regulatory actions and other factors. In particular, developments in the financial sector resulting from new banking, lending and payment solutions offered by rapidly evolving incumbents, challengers and new entrants, notably with respect to payment services and products, and the introduction of disruptive technology may impede NatWest Group’s ability to grow or retain its share and impact its revenues and profitability, particularly in its key UK retail and commercial banking segments. Moreover, innovations such as biometrics, artificial intelligence, the cloud, blockchain, cryptocurrencies and quantum computing may rapidly facilitate industry transformation.
These trends have accelerated during the COVID-19 pandemic and may be catalysed by various regulatory and competition policy interventions, including the UK initiative on Open Banking (PSD2), Open Finance and other remedies imposed by the Competition and Markets Authority (CMA) which are designed to further promote competition within retail banking. The competition enhancing measures under NatWest Group’s independently administered Alternative Remedies Package (‘ARP’) benefits grant recipients and eligible competitors. The ARP may be more costly than anticipated and may adversely impact customer service for NatWest Group’s own customers, its competitive position and reputation. Failure to comply with the terms of the scheme could result in the imposition of additional measures or limitations on NatWest Group’s operations, additional supervision by NatWest Group’s regulators, and loss of investor confidence, each of which could have a material adverse effect on NatWest Group’s business, results of operations and outlook..
Increasingly many of the products and services offered by NatWest Group are, and will become, more technology intensive. For example, NatWest Group recently invested in a number of fintech ventures, including Mettle, FreeAgent, Tyl, Rapid Cash and Rooster Money. See also, ‘NatWest Group continues to implement its purpose-led strategy, which carries significant execution and operational risks and may not achieve its stated aims and targeted outcomes’. NatWest Group’s ability to develop such digital solutions (which also need to comply with applicable and evolving regulations) has become increasingly important to retaining and growing NatWest Group’s customer business in the UK. There can be no certainty that NatWest Group’s innovation strategy (which includes investment in its IT capability intended to address the material increase in customer use of online and mobile technology for banking as well as selective acquisitions, which carry associated risks) will be successful or that it will allow NatWest Group to continue to grow such services in the future. Certain of NatWest Group’s current or future competitors may be more successful in implementing innovative technologies for delivering products or services to their customers. NatWest Group may also fail to identify future opportunities or derive benefits from disruptive technologies in the context of rapid technological innovation, changing customer behaviour and growing regulatory demands, resulting in increased competition from traditional banking businesses as well as new providers of financial services, including technology companies with strong brand recognition, that may be able to develop financial services at a lower cost base.
NatWest Group’s competitors may also be better able to attract and retain customers and key employees, may have better IT systems, and may have access to lower cost funding and/or be able to attract deposits on more favourable terms than NatWest Group. Although NatWest Group invests in new technologies and participates in industry and research led initiatives aimed at developing new technologies, such investments may be insufficient or ineffective, especially given NatWest Group’s focus on its cost savings targets. This may limit additional investment in areas such as financial innovation and could therefore affect NatWest Group’s offering of innovative products or technologies for delivering products or services to customers and its competitive position. Furthermore, the development of innovative products depends on NatWest Group’s ability to produce underlying high-quality data, failing which its ability to offer innovative products may be compromised.
If NatWest Group is unable to offer competitive, attractive and innovative products that are also profitable and timely, it will lose share, incur losses on some or all of its activities and lose opportunities for growth. In this context, NatWest Group is investing in the automation of certain solutions and interactions within its customer-facing businesses, including through artificial intelligence. Such initiatives may result in operational, reputational and conduct risks if the technology used is defective, inadequate or is not fully integrated into NatWest Group’s current solutions. There can be no certainty that such initiatives will deliver the expected cost savings and investment in automated processes will likely also result in increased short-term costs for NatWest Group.
NatWest Group plc – Annual Report on Form 20-F | 141 |
Risk factors continued
In addition, the implementation of its purpose-led strategy (including in relation to acquisitions, reorganisations and/or partnerships), delivery on its climate ambition, cost-reduction measures, as well as employee remuneration constraints, may also have an impact on its ability to compete effectively and intensified competition from incumbents, challengers and new entrants could affect NatWest Group’s ability to maintain satisfactory returns. Moreover, activist investors have increasingly become engaged and interventionist in recent years, which may pose a threat to NatWest Group’s strategic initiatives. Furthermore, continued consolidation or technological or other developments in certain sectors of the financial services industry could result in NatWest Group’s remaining competitors gaining greater capital and other resources, including the ability to offer a broader range of products and services and geographic diversity, or the emergence of new competitors, each of which may adversely affect NatWest Group’s business, results of operations and outlook. These and other changes in NatWest Group’s competitive environment could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
The impact of the COVID-19 pandemic on the credit quality of NatWest Group’s counterparties may negatively impact NatWest Group.
The effects of the COVID-19 pandemic have adversely affected the credit quality of some of NatWest Group’s borrowers and other counterparties, and government support schemes may delay the effects of defaults by such counterparties. As government support schemes reduce, defaults are expected to rise with more customers moving from IFRS 9 Stage 2 to Stage 3. As a result, NatWest Group continues to experience elevated exposure to credit risk and demands on its funding, and the long-term effects remain uncertain. If borrowers or other counterparties face increasing levels of debt and default or suffer deterioration in credit, this would increase impairment charges, write-downs, regulatory expected loss and impact credit reserves. See also, ‘NatWest Group has significant exposure to counterparty and borrower risk’ and ‘NatWest Group’s financial statements are sensitive to the underlying accounting policies, judgments, estimates and assumptions’.
In line with certain mandated COVID-19 pandemic support schemes, NatWest Group has sought to assist affected customers with a number of initiatives including NatWest Group’s participation in BBLS, CBILS and CLBILS products. NatWest Group has sought to manage the risks of fraud and money laundering against the need for the fast and efficient release of funds to customers and businesses. NatWest Group may be exposed to fraud, conduct and litigation risks arising from inappropriate approval (or denial) of BBLS or CBILS or the enforcing or pursuing repayment of BBLS and CBILS (or a failure to exercise forbearance), which may have a material adverse effect on NatWest Group’s reputation and results of operations. The implementation of the initiatives and efforts mentioned above may result in litigation, regulatory and government actions and proceedings. These actions may result in judgments, settlements, penalties or fines.
Any of the above may have a material adverse effect on NatWest Group’s business, results of operations and outlook.
NatWest Group has significant exposure to counterparty and borrower risk.
NatWest Group has exposure to many different industries, customers and counterparties, and risks arising from actual or perceived changes in credit quality and the recoverability of monies due from borrowers and other counterparties are inherent in a wide range of NatWest Group’s businesses. NatWest Group’s lending strategy and associated processes may fail to identify or anticipate weaknesses or risks in a particular sector, market or borrower, or fail to adequately value physical or financial collateral. This may result in increased default rates or a higher loss given default for loans, which may, in turn, impact NatWest Group’s profitability. See also, ‘Risk and capital management — Credit Risk’.
The credit quality of NatWest Group’s borrowers and other counterparties may be affected by a deterioration in prevailing economic and market conditions (including those caused by the COVID-19 pandemic) and by the legal and regulatory landscape in the UK and countries where NatWest Group is exposed to credit risk and any deterioration in such conditions or changes to legal or regulatory landscapes (including the extent of the UK’s post-Brexit divergence from EU laws and regulation). These could worsen borrower and counterparty credit quality or impact the enforcement of contractual rights over security, increasing credit risk.
An increase in drawings upon committed credit facilities may also increase NatWest Group’s RWAs. In addition, the level of household indebtedness in the UK remains high. The ability of households to service their debts could be worsened by a period of high unemployment (including as a result of the COVID-19 pandemic), increasing interest rates and higher inflation, particularly if prolonged. NatWest Group may be affected by volatility in property prices (including as a result of the general UK political or economic climate or the COVID-19 pandemic) given that NatWest Group’s mortgage loan and wholesale property loan portfolios as at 31 December 2021, amounted to £226.5 billion, representing 61% of NatWest Group’s total customer loan exposure. If property prices were to weaken this could lead to higher impairment charges, particularly if default rates also increase. In addition, NatWest Group’s credit risk may be exacerbated if the collateral that it holds cannot be realised as a result of market conditions or regulatory intervention or if it is liquidated at prices not sufficient to recover the net amount after accounting for any IFRS 9 provisions already made. This is most likely to occur during periods of illiquidity or depressed asset valuations.
Concerns about, or a default by, a financial institution could lead to significant liquidity problems and losses or defaults by other financial institutions, since the commercial and financial soundness of many financial institutions is closely related and interdependent as a result of credit, trading, clearing and other relationships. Any perceived lack of creditworthiness of a counterparty may lead to market-wide liquidity problems and losses for NatWest Group. This systemic risk may also adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with which NatWest Group interacts on a daily basis. See also, ‘NatWest Group may not be able to adequately access sources of liquidity and funding’.
NatWest Group plc – Annual Report on Form 20-F | 142 |
Risk factors continued
As a result, adverse changes in borrower and counterparty credit risk may cause accelerated impairment charges under IFRS 9, increased repurchase demands, higher costs, additional write-downs and losses for NatWest Group and an inability to engage in routine funding transactions, which could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
NatWest Group has applied an internal analysis of multiple economic scenarios (MES) together with the determination of specific overlay adjustments to inform its IFRS 9 ECL (Expected Credit Loss). The recognition and measurement of ECL is complex and involves the use of significant judgment and estimation. This includes the formulation and incorporation of multiple forward-looking economic scenarios into ECL to meet the measurement objective of IFRS 9. The ECL provision is sensitive to the model inputs and economic assumptions underlying the estimate. Going forward, NatWest Group anticipates observable credit deterioration of a proportion of assets resulting in a systematic uplift in defaults, which is mitigated by those economic assumption scenarios being reflected in the Stage 2 ECL across portfolios, along with a combination of post model overlays in both wholesale and retail portfolios reflecting the uncertainty of credit outcomes. See also, ‘Risk and capital management’. A credit deterioration would also lead to RWA increases. Furthermore, the assumptions and judgments used in the MES and ECL assessment at 31 December 2021 may not prove to be adequate resulting in incremental ECL provisions for NatWest Group. As government support schemes reduce, defaults are expected to rise with more ECLs cases moving from Stage 2 to Stage 3. Each of these risks may have a material adverse effect on NatWest Group’s business, results of operations and outlook.
NatWest Group is exposed to the financial industry, including sovereign debt securities, banks, financial intermediation providers (including providing facilities to financial sponsors and funds, backed by assets or investor commitments) and securitised products (typically senior lending to special purpose vehicles backed by pools of financial assets). Due to NatWest Group’s exposure to the financial industry, it also has exposure to shadow banking entities (i.e., entities which carry out banking activities outside a regulated framework). NatWest Group is required to identify and monitor its exposure to shadow banking entities, implement and maintain an internal framework for the identification, management, control and mitigation of the risks associated with exposure to shadow banking entities, and ensure effective reporting and governance in respect of such exposure. If NatWest Group is unable to properly identify and monitor its shadow banking exposure, maintain an adequate framework, or ensure effective reporting and governance in respect of shadow banking exposure, this may have a material adverse effect on the business, results of operations and outlook of NatWest Group.
If NatWest Group experiences losses and a reduction in future profitability, this is likely to affect the recoverable value of fixed assets, including goodwill and deferred taxes, which may lead to further write-downs and may have a material adverse effect on NatWest Group’s business, results of operations and outlook.
NatWest Group may not meet the prudential regulatory requirements for capital and MREL, or manage its capital effectively, which could trigger the execution of certain management actions or recovery options.
NatWest Group is required by regulators in the UK, the EU and other jurisdictions in which it undertakes regulated activities to maintain adequate financial resources. Adequate capital provides NatWest Group with financial flexibility in the face of turbulence and uncertainty in the global economy and specifically in its core UK operations. It also permits NatWest Group plc to make discretionary capital distributions (including dividends to shareholders).
As at 31 December 2021, NatWest Group plc’s CET1 ratio was 18.2% and NatWest Group plc currently targets a CET1 ratio of 13-14% by the end of 2023. NatWest Group plc’s target capital ratio is based on a combination of its expected regulatory requirements and internal modelling, including stress scenarios and management’s and/or the Prudential Regulatory Authority’s (‘PRA’) views on appropriate buffers above minimum operating levels.
NatWest Group plc’s current capital strategy is based on the expected accumulation of additional capital through the accrual of profits over time, planned capital actions (including issuances, redemptions, and discretionary capital distributions), RWA growth in the form of regulatory uplifts and lending growth and other capital management initiatives which focus on improving capital efficiency and ensuring NatWest Group meets its medium to long term targets.
A number of factors may impact NatWest Group plc’s ability to maintain its current CET1 ratio target and achieve its capital strategy. These include, amongst other things:
- | a depletion of its capital resources through increased costs or liabilities or reduced profits; |
- | an increase in the quantum of RWAs in excess of that expected, including due to regulatory changes, or a failure in internal controls or procedures to accurately measure and report RWAs; |
- | changes in prudential regulatory requirements including NatWest Group plc’s Total Capital Requirement set by the PRA, including Pillar 2 requirements and regulatory buffers as well as any applicable scalars; |
- | reduced dividends from NatWest Group’s subsidiaries because of changes in their financial performance and/or the extent to which local capital requirements exceed NatWest Group plc’s target ratio; and limitations on the use of double leverage, i.e. NatWest Group plc’s use of debt to invest in the equity of its subsidiaries, as a result of the Bank of England’s and/or NatWest Group’s evolving views on distribution of capital within groups. |
A shortage of capital could in turn affect NatWest Group plc’s capital ratio, and/or its ability to make capital distributions.
A minimum level of capital adequacy is required to be met by NatWest Group plc for it to be entitled to make certain discretionary payments, and institutions which fail to meet the combined buffer requirement are subject to restricted discretionary payments. The resulting restrictions are scaled according to the extent of the breach of the combined buffer requirement and calculated as a percentage of the profits of the institution since the last distribution of profits or discretionary payment which gives rise to a maximum distributable amount (MDA) (if any) that the financial institution can distribute through discretionary payments. Any breach of the combined buffer requirement, may necessitate for NatWest Group plc reducing or ceasing discretionary payments (including payments of dividends to shareholders) to the extent of the breach.
NatWest Group plc – Annual Report on Form 20-F | 143 |
Risk factors continued
NatWest Group is required to maintain a set quantum of MREL set as the higher of its RWAs or leverage requirement. The Bank of England has identified single point-of-entry as the preferred resolution strategy for NatWest Group. As a result, NatWest Group plc is the only entity that can externally issue securities that count towards its MREL requirements, the proceeds of which can then be downstreamed to meet the internal MREL issuance requirements of its operating entities and intermediate holding companies.
If NatWest Group plc is unable to raise the requisite amount of regulatory capital or MREL, downstream the proceeds of MREL to subsidiaries as required, or to otherwise meet its regulatory capital, MREL and leverage requirements, it may be exposed to increased regulatory supervision or sanctions, loss of investor confidence, constrained or more expensive funding and be unable to make dividend payments on its ordinary shares or maintain discretionary payments on capital instruments.
If, under a stress scenario, the level of capital or MREL falls outside of risk appetite, there are a range of recovery management actions (focused on risk reduction and mitigation) that NatWest Group could take to manage its capital levels, but any such actions may not be sufficient to restore adequate capital levels. Under the EU Bank Recovery and Resolution Directives I and II (‘BRRD’), as implemented in the UK, NatWest Group must maintain a recovery plan acceptable to its regulator, such that a breach of NatWest Group’s applicable capital or leverage requirements may trigger the application of NatWest Group’s recovery plan to remediate a deficient capital position. NatWest Group’s regulator may request that NatWest Group carry out certain capital management actions or, if NatWest Group plc’s CET1 ratio falls below 7%, certain regulatory capital instruments issued by NatWest Group will be written-down or converted into equity and there may be an issue of additional equity by NatWest Group plc, which could result in the dilution of the holdings of NatWest Group plc’s existing shareholders. The success of such issuances will also be dependent on favourable market conditions and NatWest Group may not be able to raise the amount of capital required on acceptable terms or at all. Separately, NatWest Group may address a shortage of capital by taking action to reduce leverage exposure and/or RWAs via asset or business disposals. These actions may, in turn, affect, among other things, NatWest Group’s product offering, credit ratings, ability to operate its businesses, pursue its current strategies and pursue strategic opportunities, any of which may have a material adverse effect on the business, results of operations, outlook, the underlying profitability of NatWest Group and future growth potential. See also, ‘NatWest Group may become subject to the application of UK statutory stabilisation or resolution powers which may result in, among other actions, the cancellation, transfer or dilution of ordinary shares, or the write-down or conversion of certain other of NatWest Group’s securities’.
NatWest Group is subject to Bank of England and PRA oversight in respect of resolution, and NatWest Group could be adversely affected should the Bank of England deem NatWest Group’s preparations to be inadequate.
NatWest Group is subject to regulatory oversight by the Bank of England and the PRA, and is required (under the PRA rulebook) to carry out an assessment of its preparations for resolution, submit a report of the assessment to the PRA, and disclose a summary of this report. The initial report was submitted to the PRA on 30 September 2021 and the Bank of England’s assessment of NatWest Group’s preparations is scheduled to be released on 10 June 2022 although the Bank of England may provide feedback before then.
NatWest Group has dedicated significant resources towards the preparation of NatWest Group for a potential resolution scenario. However, if the Bank of England assessment identifies a significant gap in NatWest Group’s ability to achieve the resolvability outcomes, or reveals that NatWest Group is not adequately prepared to be resolved, or did not have adequate plans in place to meet resolvability requirements which came into effect on 1 January 2022, NatWest Group may be required to take action to enhance its preparations to be resolvable, resulting in additional costs and the dedication of additional resources. Such a scenario may have an impact on NatWest Group as, depending on the Bank of England’s assessment, potential action may include, but is not limited to, restrictions on NatWest Group’s maximum individual and aggregate exposures, a requirement to dispose of specified assets, a requirement to change legal or operational structure, a requirement to cease carrying out certain activities and/or maintaining a specified amount of MREL, consequently impacting NatWest Group’s strategic plans and having a material adverse effect on NatWest Group’s business, results of operations and outlook. This may also result in reputational damage and loss of investor confidence.
NatWest Group may not be able to adequately access sources of liquidity and funding.
NatWest Group is required to access sources of liquidity and funding through retail and wholesale deposits, as well as through the debt capital markets. As at 31 December 2021, NatWest Group plc held £506.1 billion in deposits. The level of deposits may fluctuate due to factors outside NatWest Group’s control, such as a loss of investor confidence (including in individual NatWest Group entities), sustained low or negative interest rates, government support, increasing competitive pressures for retail and corporate customer deposits or the reduction or cessation of deposits by wholesale depositors, which could result in a significant outflow of deposits within a short period of time. An inability to grow or any material decrease in NatWest Group’s deposits could, particularly if accompanied by one of the other factors described above, materially affect NatWest Group’s ability to satisfy its liquidity or funding needs. In turn, this could require NatWest Group to adapt its funding plans.
The effects of the COVID-19 pandemic, current economic uncertainties and any significant market volatility could affect NatWest Group’s ability to access sources of liquidity and funding, which may result in higher funding costs and failure to comply with regulatory capital, funding and leverage requirements. As a result, NatWest Group and its subsidiaries could be required to adapt their funding plans. This could exacerbate funding and liquidity risk, which could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
As at 31 December 2021, NatWest Group plc’s liquidity coverage ratio was 172%. If its liquidity position were to come under stress, and if NatWest Group plc were unable to raise funds through deposits or in the debt capital markets on acceptable terms or at all, its liquidity position could be adversely affected and it might be unable to meet deposit withdrawals on demand or at their contractual maturity, to repay borrowings as they mature, to meet its obligations under committed financing facilities, to comply with regulatory funding requirements, to undertake certain capital and/or debt management activities, or to fund new loans, investments and businesses. NatWest Group may need to liquidate unencumbered assets to meet its liabilities, including disposals of assets not previously identified for disposal to reduce its funding commitments or trigger the execution of certain management actions or recovery options. In a time of reduced liquidity, NatWest Group may be unable to sell some of its assets, or may need to sell assets at depressed prices, which in either case could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
NatWest Group plc – Annual Report on Form 20-F | 144 |
Risk factors continued
Any reduction in the credit rating and/or outlooks assigned to NatWest Group plc, any of its subsidiaries or any of their respective debt securities could adversely affect the availability of funding for NatWest Group, reduce NatWest Group’s liquidity position and increase the cost of funding.
Rating agencies regularly review NatWest Group plc and other NatWest Group entity credit ratings and outlooks, which could be negatively affected by a number of factors that can change over time, including: the credit rating agency’s assessment of NatWest Group’s strategy and management’s capability; its financial condition including in respect of profitability, asset quality, capital, funding and liquidity; the level of political support for the industries in which NatWest Group operates; the implementation of structural reform; the legal and regulatory frameworks applicable to NatWest Group’s legal structure; business activities and the rights of its creditors; changes in rating methodologies; changes in the relative size of the loss-absorbing buffers protecting bondholders and depositors; the competitive environment, political and economic conditions in NatWest Group’s key markets (including the impact of the COVID-19 pandemic and any further Scottish independence referendum); any reduction of the UK’s sovereign credit rating and market uncertainty.
In addition, credit ratings agencies are increasingly taking into account sustainability-related factors, including climate, environmental, social and governance related risk, as part of the credit ratings analysis, as are investors in their investment decisions.
Any reductions in the credit ratings of NatWest Group plc or of certain other NatWest Group entities, including, in particular, downgrades below investment grade, or a deterioration in the capital markets’ perception of NatWest Group’s financial resilience could significantly affect NatWest Group’s access to money markets, reduce the size of its deposit base and trigger additional collateral or other requirements in derivatives contracts and other secured funding arrangements or the need to amend such arrangements, which could adversely affect NatWest Group’s (and, in particular, NatWest Group plc’s) cost of funding and its access to capital markets and could limit the range of counterparties willing to enter into transactions with NatWest Group (and, in particular, with NatWest Group plc). This could in turn adversely impact NatWest Group’s competitive position and have a material adverse effect on NatWest Group’s business, results of operations and outlook.
NatWest Group may be adversely affected if it fails to meet the requirements of regulatory stress tests.
NatWest Group is subject to annual stress tests by its regulator in the UK and is also subject to stress tests by European regulators with respect to NWM N.V. and Ulster Bank Ireland DAC. Stress tests are designed to assess the resilience of banks to potential adverse economic or financial developments and ensure that they have robust, forward-looking capital planning processes that account for the risks associated with their business profile. If the stress tests reveal that a bank’s existing regulatory capital buffers are not sufficient to absorb the impact of the stress, then it is possible that the bank will need to take action to strengthen its capital position.
Failure by NatWest Group to meet the quantitative and qualitative requirements of the stress tests as set forth by its UK regulator or those elsewhere may result in: NatWest Group’s regulators requiring NatWest Group to generate additional capital, reputational damage, increased supervision and/or regulatory sanctions, restrictions on capital distributions and loss of investor confidence, each of which may have a material adverse effect on NatWest Group’s business, results of operations and outlook..
NatWest Group’s results could be adversely affected if an event triggers the recognition of a goodwill impairment. NatWest Group capitalises goodwill, which is calculated as the excess of the cost of an acquisition over the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Acquired goodwill is recognised at cost less any accumulated impairment losses. As required by IFRS, NatWest Group tests goodwill for impairment at least annually, or more frequently when events or circumstances indicate that it might be impaired.
An impairment test compares the recoverable amount (the higher of the value in use and fair value less cost to sell) of an individual cash generating unit with its carrying value. At 31 December 2021, NatWest Group plc carried goodwill of £5.5 billion on its balance sheet. The value in use and fair value of NatWest Group’s cash-generating units are affected by market conditions, the economies in which NatWest Group operates and may also be affected by the COVID-19 pandemic.
The goodwill held by NatWest Group plc relies on management’s assumptions on future profitability. Goodwill is particularly sensitive to changes in assumed future profitability. If actual performance were to fall below management’s forecasts, then there is a risk that an impairment of goodwill would become necessary.
Where NatWest Group is required to recognise a goodwill impairment, it is recorded in NatWest Group’s income statement, but it has no effect on NatWest Group’s regulatory capital position. Changes in such assumptions may result in the carrying balance being impaired, which could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
NatWest Group could incur losses or be required to maintain higher levels of capital as a result of limitations or failure of various models.
Given the complexity of NatWest Group’s business, strategy and capital requirements, NatWest Group relies on analytical and other models for a wide range of purposes, including to manage its business, assess the value of its assets and its risk exposure, as well as to anticipate capital and funding requirements (including to facilitate NatWest Group’s mandated stress testing). In addition, NatWest Group utilises models for valuations, credit approvals, calculation of loan impairment charges on an IFRS 9 basis, financial reporting and for financial crime (criminal activities in the form of money laundering, terrorist financing, bribery and corruption, tax evasion and sanctions as well as fraud risk management (collectively, ‘financial crime’)). NatWest Group’s models, and the parameters and assumptions on which they are based, are periodically reviewed and updated to maximise their accuracy.
NatWest Group plc – Annual Report on Form 20-F | 145 |
Risk factors continued
As models analyse scenarios based on assumed inputs and a conceptual approach, model outputs therefore remain uncertain. Failure of models (including due to errors in model design) or new data inputs (including non-representative data sets), for example, to accurately reflect changes in the micro and macroeconomic environment in which NatWest Group operates (for example to account for the impact of the COVID-19 pandemic), to capture risks and exposures at the subsidiary level and to update for changes to NatWest Group’s current business model or operations, or for findings of deficiencies by NatWest Group’s regulators (including as part of NatWest Group’s mandated stress testing), may render some business lines uneconomic, result in increased capital requirements, may require management action or may subject NatWest Group to regulatory sanction. NatWest Group may also face adverse consequences as a result of actions based on models that are poorly developed, implemented or used, models that are based on inaccurate or compromised data or as a result of the modelled outcome being misunderstood, or by such information being used for purposes for which it was not designed. Risks arising from the use of models could have a material adverse effect on NatWest Group’s business, results of operations and outlook, minimum capital requirements and reputation.
NatWest Group’s financial statements are sensitive to the underlying accounting policies, judgments, estimates and assumptions.
The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income, expenses, exposures and RWAs. While estimates, judgments and assumptions take into account historical experience and other factors, (including market practice and expectations of future events that are believed to be reasonable under the circumstances), actual results may differ due to the inherent uncertainty in making estimates, judgments and assumptions (particularly those involving the use of complex models).
The accounting policies deemed critical to NatWest Group’s results and financial position, based upon materiality and significant judgments and estimates, which include loan impairment provisions, are set out in ‘Critical accounting policies and key sources of estimation uncertainty’. New accounting standards and interpretations that have been issued by the International
Accounting Standards Board but which have not yet been adopted by NatWest Group are discussed in ‘Future accounting developments’. Changes resulting from such new accounting standards and interpretations could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
Changes in accounting standards may materially impact NatWest Group’s financial results.
Changes in accounting standards or guidance by accounting bodies or in the timing of their implementation, whether immediate or foreseeable, could result in NatWest Group having to recognise additional liabilities on its balance sheet, or in further write-downs or impairments to its assets and could also have a material adverse effect on the business, results of operations and outlook of NatWest Group.
The valuation of financial instruments, including derivatives, measured at fair value can be subjective, in particular where models are used which include unobservable inputs. Generally, to establish the fair value of these instruments, NatWest Group relies on quoted market prices or, where the market for a financial instrument is not sufficiently credible, internal valuation models that utilise observable market data. In certain circumstances, the data for individual financial instruments or classes of financial instruments utilised by such valuation models may not be available or may become unavailable due to prevailing market conditions. In these circumstances, NatWest Group’s internal valuation models require NatWest Group to make assumptions, judgments and estimates to establish fair value, which are complex and often relate to matters that are inherently uncertain.
The value or effectiveness of any credit protection that NatWest Group has purchased depends on the value of the underlying assets and the financial condition of the insurers and counterparties.
NatWest Group has some remaining credit exposure arising from over-the-counter derivative contracts, mainly credit default swaps (CDSs), and other credit derivatives, each of which are carried at fair value. The fair value of these CDSs, as well as NatWest Group’s exposure to the risk of default by the underlying counterparties, depends on the valuation and the perceived credit risk of the instrument against which protection has been bought. Many market counterparties have been adversely affected by their exposure to residential mortgage-linked and corporate credit products, whether synthetic or otherwise, and their actual and perceived creditworthiness may deteriorate rapidly. If the financial condition of these counterparties or their actual or perceived creditworthiness deteriorates, NatWest Group may record further credit valuation adjustments on the credit protection bought from these counterparties under the CDSs. NatWest Group also recognises any fluctuations in the fair value of other credit derivatives. Any such adjustments or fair value changes may have a material adverse effect on NatWest Group’s business, results of operations and outlook..
NatWest Group may become subject to the application of UK statutory stabilisation or resolution powers which may result in, among other actions, the cancellation, transfer or dilution of ordinary shares, or the write-down or conversion of certain other of NatWest Group’s securities.
HM Treasury, the Bank of England and the PRA and FCA (together, the ‘Authorities’) are granted substantial powers to resolve and stabilise UK-incorporated financial institutions. Five stabilisation options exist: (i) transfer of all of the business of a relevant entity or the shares of the relevant entity to a private sector purchaser; (ii) transfer of all or part of the business of the relevant entity to a ‘bridge bank’ wholly-owned by the Bank of England; (iii) transfer of part of the assets, rights or liabilities of the relevant entity to one or more asset management vehicles for management of the transferor’s assets, rights or liabilities; (iv) the write-down, conversion, transfer, modification, or suspension of the relevant entity’s equity, capital instruments and liabilities; and (v) temporary public ownership of the relevant entity. These tools may be applied to NatWest Group plc as the parent company or an affiliate where certain conditions are met (such as, whether the firm is failing or likely to fail, or whether it is reasonably likely that action will be taken (outside of resolution) that will result in the firm no longer failing or being likely to fail). Moreover, there are modified insolvency and administration procedures for relevant entities, and the Authorities have the power to modify or override certain contractual arrangements in certain circumstances and amend the law for the purpose of enabling their powers to be used effectively and may promulgate provisions with retrospective applicability.
Under the UK Banking Act, the Authorities are generally required to have regard to specified objectives in exercising the powers provided for by the Banking Act. One of the objectives (which is required to be balanced as appropriate with the other specified objectives) refers to the protection and enhancement of the stability of the financial system of the UK. Moreover, the ‘no creditor worse off’ safeguard contained in the Banking Act may not apply in relation to an application of the separate write-down and conversion power relating to capital instruments under the Banking Act, in circumstances where a stabilisation power is not also used. Holders of debt instruments which are subject to the power may, however, have ordinary shares transferred to or issued to them by way of compensation.
NatWest Group plc – Annual Report on Form 20-F | 146 |
Risk factors continued
Uncertainty exists as to how the Authorities may exercise their powers including the determination of actions undertaken in relation to the ordinary shares and other securities of NatWest Group, which may depend on factors outside of NatWest Group’s control. Moreover, the Banking Act provisions remain untested in practice.
If NatWest Group is at or is approaching the point of non-viability such that regulatory intervention is required, any exercise of the resolution regime powers by the Authorities may materially adversely affect holders of NatWest Group plc’s ordinary shares or other NatWest Group securities. This may result in various actions being undertaken in relation to NatWest Group and any securities of NatWest Group, including cancellation, transfer, dilution, write-down or conversion (as applicable). There may also be a corresponding material adverse effect on the market price of such securities.
Climate and sustainability-related risks
NatWest Group and its customers face significant climate-related risks, including in transitioning to a net zero economy, which may adversely impact NatWest Group.
Climate-related risks and uncertainties are continuing to receive increasing regulatory, judicial, political and societal scrutiny.
Financial and non-financial risks from climate change arise through physical and transition risks. Furthermore, NatWest Group may also face a variety of climate-related legal risks, both physical and transition, from potential litigation and conduct liability. See also, ‘NatWest Group may be subject to potential climate, environmental and other sustainability-related litigation, enforcement proceedings, investigations and conduct risk’.
There are significant uncertainties as to the extent and timing of the manifestation of the physical risks of climate change, such as more severe and frequent extreme weather events (flooding, subsidence, heat waves and long-lasting wildfires), rising sea levels, biodiversity loss and resource scarcity. Damage to NatWest Group customers’ properties and operations could disrupt business, impair asset values and negatively impact the creditworthiness of customers leading to increased default rates, delinquencies, write-offs and impairment charges in NatWest Group’s portfolios. In addition, NatWest Group premises and operations, or those of its critical outsourced functions may experience damage or disruption leading to increased costs and negatively affecting NatWest Group’s business continuity and reputation.
In October 2021, the UK Government published its Net Zero Strategy which sets out how the UK will deliver on its commitment to reach net zero emissions by 2050. The timing, content and implementation of the specific policies and proposals remain uncertain. Widespread transition to a net zero economy across all sectors of the economy and markets in which NatWest Group operates will be required to meet the goals of the 2015 Paris Agreement, the UK’s Net Zero Strategy and the Glasgow Climate Pact of 2021. The impact of the extensive commercial, technological, policy and regulatory changes required to achieve transition remains uncertain, but it is expected to be significant and may be disruptive across the global economy and markets, especially if these changes do not occur in an orderly or timely manner or are not effective in reducing emissions sufficiently. Some sectors such as property, energy (including oil and gas), mining, infrastructure, transport (including automotive and aviation) and agriculture are expected to be particularly impacted. The timing and pace of the transition to a net zero economy is also uncertain and may be near term, gradual and orderly or delayed, rapid and disorderly, or the combination of these.
Climate-related risks may be drivers of several different risk categories simultaneously and may exacerbate existing risks, including credit risk, operational risk (business continuity), market risk (both traded and non-traded), liquidity and funding risk (for example, net cash outflows or depletion of liquidity buffers).
If NatWest Group fails to adapt its business and operating model in a timely manner to the climate-related risks and opportunities and changing regulatory and market expectations, or to appropriately identify, measure, manage and mitigate climate change related physical, transition and legal risks and opportunities that NatWest Group, its customers and value chain face, it may have a material adverse effect on NatWest Group’s reputation, business, operations or value chain and results of operations and outlook.
NatWest Group’s purpose-led strategy includes climate change as one of its three areas of focus. This is likely to require material changes to the business and operating model of NatWest Group which entails significant execution risk.
In February 2020, NatWest Group announced its ambition to become a leading bank on climate in the UK, helping to address the climate challenge by setting itself the challenge to at least halve the climate impact of its financing activity by 2030 and intending to do what is necessary to achieve alignment with the 2015 Paris Agreement. In addition, in April 2021, NatWest Group by joining the Net Zero Banking Alliance 'Business Ambition to 1.5C', stated its ambition to reach net zero by 2050. Furthermore, as part of its efforts to support the transition to a net zero economy, NatWest Group has also announced its ambitions to phase out of coal for UK and non UK customers who have UK coal production, coal fired generation and coal related infrastructure by 1 October 2024, with a full global phase out by 1 January 2030; to plan to stop financing new customer relationships with corporate customers who explore for, extract or produce coal or operate unabated coal powered plants; and that it would not provide services to existing customers who are increasing coal mining activity by exploring for new coal, developing new coal mines or increasing thermal coal production.
To achieve its 2030 and 2050 ambitions, NatWest Group has also announced other climate ambitions, targets and commitments, and going-forward it may also announce other climate ambitions, targets and commitments, including science-based targets to be validated by the Science Based Target Initiative.
Making the changes necessary to achieving these ambitions may materially affect NatWest Group’s business and operations and will require significant reductions to its financed emissions and to its exposure to customers that do not align with a transition to a net zero economy or do not have a credible transition plan. Increases in lending and financing activities may wholly or partially offset some or all of these reductions, which may increase the extent of changes and reductions necessary. It is anticipated that achieving these reductions, together with the active management of climate-related risks and other regulatory, policy and market changes, are likely to necessitate material and accelerated changes to NatWest Group’s business, operating model and existing exposures (potentially on accelerated timescales and outside of risk appetite) which may have a material adverse effect on NatWest Group’s ability to achieve its financial targets and generate sustainable returns.
NatWest Group plc – Annual Report on Form 20-F | 147 |
Risk factors continued
NatWest Group’s ability to achieve theses ambitions, targets and commitments will depend to a large extent on many factors and uncertainties beyond NatWest Group’s control. These include the macroeconomic environment, the extent and pace of climate change, including the timing and manifestation of physical and transition risks, the effectiveness of actions of governments, legislators, regulators, businesses, investors, customers and other stakeholders to adapt and/or mitigate the impact of climate-related risks, changes in customer behaviour and demand, the challenges related with the implementation and integration of adoption policy tools, changes in the available technology for mitigation and adaptation, the availability of accurate, verifiable, reliable, consistent and comparable data. See also, ‘NatWest Group continues to implement its purpose-led strategy, which carries significant execution and operational risks and may not achieve its stated aims and targeted outcomes’ and ‘There are significant challenges in relation to climate-related data due to quality and other limitations, lack of standardisation, consistency and incompleteness which amongst other factors contribute to the significant uncertainties inherent in accurately modelling the impact of climate-related risks’.
These internal and external factors and uncertainties will make it challenging for NatWest Group to meet its climate ambitions, targets and commitments and there is a significant risk that all or some of them will not be achieved.
Any delay or failure in setting, making progress against or meeting NatWest Group’s climate-related ambitions, targets and commitments may have a material adverse effect on NatWest Group, its reputation, business, results of operations, outlook, market and competitive position and may increase the climate-related risks NatWest Group faces.
Any failure by NatWest Group to implement effective and compliant climate change resilient systems, controls and procedures could adversely affect NatWest Group’s ability to manage climate-related risks.
The prudential regulation of climate-related risks is an important driver in how NatWest Group develops its risk appetite for financing activities or engaging with counterparties that do not align with a transition to a net zero economy or do not have a credible transition plan.
Legislative and regulatory authorities are publishing expectations as to how banks should prudently manage and transparently disclose climate-related and environmental risks under prudential rules.
In April 2019, the PRA published a supervisory statement (the ‘SS 3/19’) with particular focus on the management of financial risks from climate change with respect to governance, risk management, scenario analysis and disclosures.
Following the submission of initial plans by UK banks in October 2019, in July 2020 the PRA issued a ‘Dear CEO’ letter requiring firms to embed fully their approaches to managing climate-related financial risks by the end of 2021. In response, on 8 October 2020, NatWest Group provided the PRA with an update to its original plan noting that the COVID-19 pandemic had disrupted some elements of NatWest Group’s original plan and, as a result, the updated plan would require additional operating cycles reaching into 2022 and beyond to prove embedding. Subsequently the PRA issued its ‘Climate Change Adaptation Report’ in October 2021 advising firms of the need to continue to refine and innovate ways to further integrate the financial risks from climate change within risk management practices and it restated that by the end of 2021, firms should be able to demonstrate that the expectations set out in SS3/19 have been implemented and embedded throughout the firms’ organisation as fully as possible. In January 2022, NatWest Group provided the PRA with an update on how it has addressed the commitments made in its October 2020 plan, noting the delivery of a 1st generation, largely qualitative in nature, approach to supervisory requirements.
In June 2021, the Bank of England launched its 2021 Biennial Exploratory Scenario (‘CBES’) to stress test the resilience of the current business models of the largest banks, insurers and the financial system to the physical and transition risks from climate change under three climate scenarios. NatWest Group delivered its CBES submission to the PRA in October 2021. The Bank of England has since announced that the CBES is likely to include a second round over February and March 2022, which is likely to be largely qualitative in nature.
The Bank of England guidance for the CBES confirmed that it is exploratory in nature and not intended to be used to set capital requirements. In the aforementioned ‘Climate Change Adaptation Report 2021’, the Bank of England confirmed that over the coming year it will undertake further analysis to explore enhancements to the regulatory capital frameworks as they relate to climate related financial risk. To support this work, the Bank of England will put out a ‘Call for Papers’ and host a Research Conference on the interaction between climate change and capital in Q4 2022. Informed by these steps and internal analysis, the Bank of England is expected to publish a follow-up report on the use of capital including on the role of any future scenario exercises by the end of 2022. It is therefore likely that in the coming years financial institutions, including NatWest Group, may be required to hold additional capital to enhance their resilience against systemic and/or institution specific vulnerabilities to climate-related financial risks, which could, in turn, have a material adverse effect on NatWest Group’s business, results of operations and outlook..
Any failure of NatWest Group to fully and timely embed climate-related risks into its risk management practices and framework to appropriately identify, measure, manage and mitigate the various climate-related physical and transition risks and apply the appropriate product governance in line with applicable legal and regulatory requirements and expectations, may have a material and adverse effect on NatWest Group’s regulatory compliance, prudential capital requirements, liquidity position, reputation, business, results of operations and outlook.
NatWest Group plc – Annual Report on Form 20-F | 148 |
Risk factors continued
There are significant challenges in relation to climate-related data due to quality and other limitations, lack of standardisation, consistency and incompleteness which amongst other factors contribute to the significant uncertainties inherent in accurately modelling the impact of climate-related risks.
Meaningful reporting of climate-related risks and opportunities and their potential impacts and related metrics depend on access to accurate, reliable, consistent and comparable climate-related data from counterparties or customers. These may not be generally available or, if available, may not be accurate, verifiable, reliable, consistent, or comparable. Any failure of NatWest Group to incorporate climate-related factors into its counterparty and customer data sourcing and accompanying analytics, or to develop accurate, reliable, consistent and comparable counterparty and customer data, may have a material adverse effect on NatWest Group’s ability to prepare meaningful reporting of climate-related risks and opportunities, its regulatory compliance, reputation, business and its competitive position.
In the absence of other sources, reporting of financed emissions by financial institutions, including NatWest Group, is necessarily based therefore on aggregated information developed by third parties that may be prepared in an inconsistent way using different methodologies, interpretations, or assumptions. Accordingly, our climate-related disclosures use a greater number and level of assumptions and estimates than many of our financial disclosures. These assumptions and estimates are highly likely to change over time, and, when coupled with the longer time frames used in these climate related disclosures, make any assessment of materiality inherently uncertain. In particular, in the absence of actual emissions monitoring and measurement, emissions estimates are based on industry and other assumptions that may not be accurate for a given counterparty or customer. There may also be data gaps, particularly for private companies, that are filled using proxy data, such as sectoral averages, again developed in different ways. As a result, our climate related disclosures may be amended, updated or restated in the future as the quality and completeness of our data and methodologies continue to improve. These data quality challenges, gaps and limitations could have a material impact on NatWest Group’s ability to make effective business decisions about climate risks and opportunities, including risk management decisions, comply with disclosure requirements and our ability to monitor and report our progress in meeting our ambitions, targets and commitments, which could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
Significant risks, uncertainties and variables are inherent in the assessment, measurement and mitigation of climate-related risks. These include data quality gaps and limitations mentioned above, the pace at which climate science, greenhouse gas accounting standards and various emissions reduction solutions develop. In addition, there is a significant uncertainty about how climate change and the transition to a net zero economy will unfold over the coming decades and affect how and when climate-related risks will manifest. These timeframes are considerably longer than NatWest Group’s historical strategic, financial, resilience and investment planning horizons.
As a result, it is very difficult to predict and model the impact of climate-related risks into precise financial and economic outcomes and impacts. Climate-related risks present significant methodological challenges due to their forward-looking nature, the lack and/or quality of historical testing capabilities, lack of standardisation and incompleteness of emissions and other climate and sub-sector related data and the immature nature of risk measurement and modelling methodologies. The evaluation of climate-related risk exposure and the development of associated potential risk mitigation techniques largely depend on the choice of climate scenario modelling methodology and the assumptions made which involves a number of risks and uncertainties, for example
- | climate scenarios are not predictions of what is likely to happen or what NatWest Group would like to happen, they rather explore the possible implications of different judgments and assumptions by considering a series of scenarios; |
- | climate scenarios do not provide a comprehensive description of all possible future outcomes; |
- | it requires a special skill set that banks traditionally do not have and therefore NatWest Group needs to rely on third party advice, modelling, and data which is also subject to many limitations and uncertainties; |
- | modelling approaches and data on climate-related risks on financial assets is immature in nature and it is expected that techniques and understanding will evolve rapidly in the coming years; |
- | it is challenging to benchmark or back test the climate scenarios given their forward-looking nature and the multiple possible outcomes; |
- | there is a significant uncertainty as to how the climate will evolve over time, how and when governments, regulators, businesses, investors and customers respond and how those responses impact the economy, asset valuations, land systems, energy systems, technology, policy and wider society; |
- | the assumptions will be continually evolving with more data/information which may affect the baselines for comparability across reporting periods and impact internal and external verification processes; and |
- | the pace of the development of the methodologies across different sectors may be different and therefore it may be challenging to report on the whole balance sheet with regard to emissions. |
Accordingly, these risks and uncertainties coupled with significantly longer timeframes make the outputs of climate-related risk modelling, including emissions reductions targets and pathways, inherently more uncertain than outputs modelled for traditional financial planning cycles based on historical financial information.
Capabilities within NatWest Group to appropriately assess, model and manage climate-related risks and the suitability of the assumptions required to model and manage climate-related risks appropriately are developing. Even when those capabilities are developed, the high level of uncertainty regarding any assumptions modelled, the highly subjective nature of risk measurement and mitigation techniques, incorrect or inadequate assumptions and judgments and data quality gaps and limitations may lead to inadequate risk management information and frameworks, or ineffective business adaptation or mitigation strategies, which may have a material adverse impact on NatWest Group’s regulatory compliance, reputation, business, results of operations and outlook.
NatWest Group plc – Annual Report on Form 20-F | 149 |
Risk factors continued
A failure to adapt NatWest Group’s business strategy, governance, procedures, systems and controls to manage emerging sustainability-related risks and opportunities may have a material adverse effect on NatWest Group, its reputation, business, results of operations and outlook.
Investors, customers, international organisations, regulators and other stakeholders are increasingly focusing on identification, measurement, management and mitigation of ‘sustainability-related’ risks and opportunities such as environmental (including biodiversity and loss of natural capital); social (including diversity and inclusion, the living wage, fair taxation and value chains); and governance (including board diversity, ethics, executive compensation and management structure) related risks and opportunities and on long term sustainable value creation.
Financial institutions, including NatWest Group, are directly and indirectly exposed to multiple types of environmental and biodiversity-related risk through their activities, including risk of default by clients. Additionally, there is a growing need to move from safeguards and interventions that focus on reducing negative impacts on environment and biodiversity towards those that focus on increasing positive impact on environment and biodiversity and nature-based solutions. In 2021, NatWest Group accordingly classified ‘Biodiversity and Nature Loss’ as an emerging risk for NatWest Group within its Risk Management Framework. This is an evolving and complex area which requires collaborative approaches with partners, stakeholders and peers to help measure and mitigate negative impacts of financing activities on the environment, biodiversity and nature as well as supporting the growing sector of nature-based solutions, habitat restoration and biodiversity markets. NatWest Group is in the early stages of developing its approach and NatWest Group recognises the need for more progress.
There is also increased investor, regulatory and customer scrutiny regarding how businesses address social issues, including tackling inequality, working conditions, workplace health, safety and wellbeing, diversity and inclusion, data protection and management, workforce management, human rights and supply chain management which may impact NatWest Group’s employees, customers, and their business activities or the communities in which they operate. There is also growing attention on the need for a 'just transition' and “energy justice” – in recognition that the transition to a net zero economy should not disproportionally affect the most disadvantaged members of society. The increased focus on these issues may create reputational and other risks for financial institutions, including NatWest Group.
In addition to climate-related risks, sustainability-related risks (i) may also adversely affect economic activity, asset pricing and valuations of issuers’ securities and, in turn, the wider financial system; (ii) may impact economic activities directly (for example through lower corporate profitability or the devaluation of assets) or indirectly (for example through macro-financial changes); (iii) may also affect the viability or resilience of business models over the medium to longer term, particularly those business models most vulnerable to sustainability-related risks; (iv) can trigger further losses stemming directly or indirectly from legal claims (liability risks) and reputational damage as a result of the public, customers, counterparties and/or investors associating NatWest Group or its customers with adverse sustainability-related issues; and (v) intersect with and further complexity and challenge to achieving our purpose-led strategy including climate ambitions, targets and commitments.
Together with climate-related risks, these risks may combine to generate even greater adverse effects on our business.
Furthermore, sustainability-related risks may be drivers of several different risk categories simultaneously and may exacerbate the risks described herein, including credit risk, operational risk (business continuity), market risk (both traded and non-traded), liquidity and funding risk (for example, net cash outflows or depletion of liquidity buffers).
Accordingly, any failure or delay by NatWest Group to successfully adapt its business strategy and to establish and maintain effective governance, procedures, systems and controls in response to these issues, and to manage these emerging sustainability-related risks and opportunities may have a material adverse impact NatWest Group’s reputation, liquidity position, business, results of operations, outlook and the value of NatWest Group’s securities.
Any reduction in the ESG ratings of NatWest Group could have a negative impact on NatWest Group’s reputation and on investors’ risk appetite and customers’ willingness to deal with NatWest Group.
ESG ratings from agencies and data providers which rate how NatWest Group manages environmental, social and governance risks are increasingly influencing investment decisions or being used as a basis to label financial products and services as green or sustainable. ESG ratings are (i) unsolicited; (ii) subject to the assessment and interpretation by the ESG rating agencies; (iii) provided without warranty; (iv) not a sponsorship, endorsement, or promotion of NatWest Group by the relevant rating agency; and (v) may depend on many factors some of which are beyond NatWest Group’s control (e.g. any change in rating methodology). Any reduction in the ESG ratings of NatWest Group could have a negative impact on NatWest Group’s reputation and could influence investors’ risk appetite for NatWest Group’s and/or its subsidiaries’ securities, particularly ESG securities and could affect a customer’s willingness to deal with NatWest Group. Any of the above could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
Increasing levels of climate, environmental and sustainability-related laws, regulation and oversight may adversely affect NatWest Group’s business and expose NatWest Group to increased costs of compliance, regulatory sanction and reputational damage.
There are an increasing number of EU, UK and other regulatory and legislative initiatives to address issues around climate, environmental and sustainability risks and opportunities and to promote the transition to a net zero economy. As a result, an increasing number of laws, regulations, legislative actions are likely to affect the financial sector and the real economy, including proposals, guidance, policy and regulatory initiatives many of which have been introduced or amended recently and are subject to further changes.
Many of these initiatives are focused on developing standardized definitions for green and sustainable criteria of assets and liabilities, integrating climate change and sustainability into decision-making and customers access to green and sustainable financial products and services which may have a significant impact on the services provided by NatWest Group and its subsidiaries, especially mortgage lending, and its associated credit, market and financial risk profile. They could also impact NatWest Group’s recognition of its climate and sustainable funding and financing activity and may adversely affect NatWest Group’s ability to achieve its climate strategy and climate and sustainable funding and financing ambitions.
NatWest Group plc – Annual Report on Form 20-F | 150 |
Risk factors continued
In addition, NatWest Group and its subsidiaries are and will be subject to increasing entity wide climate-related and other non-financial disclosure requirements pursuant to the recommendations of the Task Force on Climate-related Financial Disclosure (‘TCFD’) and under other regimes. From February 2022, NatWest Group will be required to provide enhanced climate-related disclosures consistent with the TCFD recommendations to comply with the FCA Policy Statement on the new Listing Rules (PS 20/17) that require commercial companies with a UK premium listing – such as NatWest Group - to make climate related disclosures, consistent with TCFD, on a ‘comply or explain’ basis. The FCA is proposing to expand this requirement to a wider scope of listed issuers which would include NatWest Group’ subsidiaries as it moves towards mandatory TCFD reporting across the UK economy by 2025. See also, ‘There are significant challenges in relation to climate-related data due to quality and other limitations, lack of standardisation, consistency and incompleteness which amongst other factors contribute to the significant uncertainties inherent in accurately modelling the impact of climate-related risks’.
In addition, NatWest Group’s EU subsidiaries and branches are and will continue to be subject to an increasing array of the EU/EEA climate and sustainability-related legal and regulatory requirements. These requirements may be used as the basis for UK laws and regulations (such as the UK Green Taxonomy) or regarded by investors and regulators as best practice standards whether or not they apply to UK businesses. Any divergence between UK, EU/EEA and US climate and sustainability-related legal and regulatory requirements may result in NatWest Group not meeting investors’ expectations, may increase the cost of doing business and may restrict access of NatWest Group’s UK business to the EU/EEA market.
NatWest Group is also participating in various voluntary carbon reporting and other standard setting initiatives for disclosing climate and sustainability-related information, many of which have differing objectives and methodologies and are at different stages of development in terms of how they apply to financial institutions.
Compliance with these developing and evolving climate and sustainability-related requirements is likely to require NatWest Group to implement significant changes to its business models, product and other governance, internal controls over financial reporting, disclosure controls and procedures, modelling capability and risk management systems, which may increase the cost of doing business, entail additional change risk and compliance costs.
Failure to implement and comply with these legal and regulatory requirements or emerging best practice expectations may have a material adverse effect on NatWest Group’s regulatory compliance and may result in regulatory sanction, reputational damage and investor disapproval each of which could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
NatWest Group may be subject to potential climate, environmental and other sustainability-related litigation, enforcement proceedings, investigations and conduct risk.
Due to increasing new climate and sustainability-related jurisprudence, laws and regulations in the UK and other jurisdictions, growing demand from investors and customers for environmentally sustainable products and services, and regulatory scrutiny, financial institutions, including NatWest Group, may through their business activities face increasing litigation, conduct, enforcement and contract liability risks related to climate change, environmental degradation and other social, governance and sustainability-related issues.
These risks may arise, for example, from claims pertaining to : (i) failures to meet obligations, targets or commitments relating to, or to disclose accurately, or provide updates on material climate and/or sustainability related risks, or otherwise provide appropriate disclosure to investors, customers, counterparties and other stakeholders; (ii) conduct, mis-selling and other customer protection type claims; (iii) marketing that portrays products, securities, activities or policies as producing positive climate, environmental or sustainable outcomes to an extent that may not the case; (iv) damages claims under various tort theories, including common law public nuisance claims, or negligent mismanagement of physical and/or transition risks; (v) alleged violations of officers’, directors’ and other fiduciaries’ fiduciary duties, for example by financing various carbon-intensive, environmentally harmful or otherwise highly exposed assets, companies, and industries; (vi) changes in understanding of what constitutes positive climate, environmental or sustainable outcomes as a result of developing climate science, leading to discrepancy between current product offerings and investor and/or market and/or broader stakeholder expectations; (vii) any weaknesses or failures in specific systems or processes associated particularly with climate, environmental or sustainability linked products, including any failure in timely implementation, onboarding and/or updating of such systems or processes; or (viii) counterparties, collaborators and third parties in NatWest Group’s value chain action who act, or fail to act, or undertake due diligence, or apply appropriate risk management and product governance in a manner that impacts NatWest Group’s reputation or sustainability credentials.
Furthermore, there is a risk that shareholders, campaign groups, customers and special interest groups could seek to take legal action against NatWest Group for financing or contributing to climate change and environmental degradation and for not supporting the principles of “just transition” (i.e. maximising the social benefits of the transition, mitigating the social risks of the transition, empowering those affected by the change, anticipating future shifts to address issues up front and mobilising investments from the public and private sectors).
There is a risk that as climate science develops and societal understanding of climate science increases and deepens, courts, regulators and enforcement authorities may apply the then current understandings of climate related matters retrospectively when assessing claims about historic conduct or dealings of financial institutions, including NatWest Group.
These potential litigation, conduct, enforcement and contract liability risks may have a material adverse effect on NatWest Group’s ability to achieve its strategy, including its climate ambition, and they could have a material adverse effect on NatWest Group’s reputation, business, financial results, position and prospects, results of operations and outlook.
NatWest Group plc – Annual Report on Form 20-F | 151 |
Risk factors continued
Operational and IT resilience risk
Operational risks (including reliance on third party suppliers and outsourcing of certain activities) are inherent in NatWest Group’s businesses.
Operational risk is the risk of loss resulting from inadequate or failed internal processes, procedures, people or systems, or from external events, including legal risks. NatWest Group operates in a number of countries, offering a diverse range of products and services supported directly or indirectly by third party suppliers. As a result, operational risks or losses can arise from a number of internal or external factors (including financial crime and fraud), for which there may now be a risk of greater scrutiny by third parties on NatWest Group’s compliance with financial crime requirements; see ‘NatWest Group is exposed to the risks of various litigation matters, regulatory and governmental actions and investigations as well as remedial undertakings, including conduct-related reviews, anti-money laundering and redress projects, the outcomes of which are inherently difficult to predict, and which could have an adverse effect on NatWest Group’). These risks are also present when NatWest Group relies on third-party suppliers or vendors to provide services to it or its customers, as is increasingly the case as NatWest Group outsources certain activities, including with respect to the implementation of new technologies, innovation and responding to regulatory and market changes.
Operational risks continue to be heightened as a result of the implementation of NatWest Group’s purpose-led strategy, including NatWest Group’s phased withdrawal from ROI, NatWest Group’s current cost-reduction measures and conditions affecting the financial services industry generally (including the COVID-19 pandemic and other geo-political developments) as well as the legal and regulatory uncertainty resulting therefrom. It is unclear as to how the future ways of working may evolve, including in respect of how working practices may develop, or how NatWest Group will evolve to best serve its customers. Any of the above may place significant pressure on NatWest Group’s ability to maintain effective internal controls and governance frameworks.
The effective management of operational risks is critical to meeting customer service expectations and retaining and attracting customer business. Although NatWest Group has implemented risk controls and mitigation actions, with resources and planning having been devoted to mitigate operational risk, such measures may not be effective in controlling each of the operational risks faced by NatWest Group. Ineffective management of such risks could have a material adverse effect on affect NatWest Group’s business, results of operations and outlook.
NatWest Group is subject to increasingly sophisticated and frequent cyberattacks.
NatWest Group experiences a constant threat from cyberattacks across the entire NatWest Group and against NatWest Group’s supply chain, reinforcing the importance of due diligence of and close working relationship with the third parties on which NatWest Group relies. NatWest Group is reliant on technology, against which there is a constantly evolving series of attacks that are increasing in terms of frequency, sophistication, impact and severity. As cyberattacks evolve and become more sophisticated, NatWest Group is required to continue to invest in additional capability designed to defend against the emerging threats. In 2021, NatWest Group and its supply chain were subjected to a small number of Distributed Denial of Service (‘DDOS’) and ransomware attacks, which are a pervasive and significant threat to the global financial services industry. The focus is to manage the impact of the attacks and sustain availability of services for NatWest Group’s customers. NatWest Group continues to invest significant resources in the development and evolution of cyber security controls that are designed to minimise the potential effect of such attacks.
Hostile attempts are made by third parties to gain access to, introduce malware (including ransomware) into and exploit vulnerabilities of, NatWest Group’s IT systems. NatWest Group has information and cyber security controls in place to minimise the impact of any attack, which are subject to review on a continuing basis but given the nature of the threat, there can be no assurance that such measures will prevent all attacks in the future. See also, ‘NatWest Group’s operations are highly dependent on its complex IT systems (including those that enable remote working) and any IT failure could adversely affect NatWest Group’.
Any failure in NatWest Group’s cybersecurity policies, procedures or controls, may result in significant financial losses, major business disruption, inability to deliver customer services, or loss of data or other sensitive information (including as a result of an outage) and may cause associated reputational damage. Any of these factors could increase costs (including costs relating to notification of, or compensation for customers, credit monitoring or card reissuance), result in regulatory investigations or sanctions being imposed or may affect NatWest Group’s ability to retain and attract customers. Regulators in the UK, US, Europe and Asia continue to recognise cybersecurity as an important systemic risk to the financial sector and have highlighted the need for financial institutions to improve their monitoring and control of, and resilience (particularly of critical services) to cyberattacks, and to provide timely notification of them, as appropriate.
Additionally, third parties may also fraudulently attempt to induce employees, customers, third-party providers or other users who have access to NatWest Group’s systems to disclose sensitive information in order to gain access to NatWest Group’s data or that of NatWest Group’s customers or employees. Cybersecurity and information security events can derive from groups or factors such as: internal or external threat actors, human error, fraud or malice on the part of NatWest Group’s employees or third parties, including third party providers, or may result from accidental technological failure.
NatWest Group expects greater regulatory engagement, supervision and enforcement to continue at a high level in relation to its overall resilience to withstand IT and related disruption, either through a cyberattack or some other disruptive event. Such increased regulatory engagement, supervision and enforcement is uncertain in relation to the scope, cost, consequence and the pace of change, which could negatively impact NatWest Group. Due to NatWest Group’s reliance on technology and the increasing sophistication, frequency and impact of cyberattacks, such attacks may have a material adverse impact on NatWest Group, its business, results of operations and outlook.
In accordance with the Data Protection Act 2018 and the European Union Withdrawal Act 2018, the Data Protection, Privacy and Electronic Communications (Amendments Etc.) (EU Exit) Regulations 2019, as amended by the Data Protection, Privacy and Electronic Communications (Amendments Etc.) (EU Exit) Regulations 2020 (‘UK Data Protection Framework’) and European Banking Authority (‘EBA’) Guidelines on ICT and Security Risk Management, NatWest Group is required to ensure it implements timely, appropriate and effective organisational and technological safeguards against unauthorised or unlawful access to the data of NatWest Group, its customers and its employees. In order to meet this requirement, NatWest Group relies on the effectiveness of its internal policies, controls and procedures to protect the confidentiality, integrity and availability of information held on its IT systems, networks and devices as well as with third parties with whom NatWest Group interacts. A failure to monitor and manage data in accordance with the UK Data Protection Framework and EBA requirements of the applicable legislation may result in financial losses, regulatory fines and investigations and associated reputational damage.
NatWest Group plc – Annual Report on Form 20-F | 152 |
Risk factors continued
NatWest Group operations and strategy are highly dependent on the accuracy and effective use of data.
NatWest Group relies on the effective use of accurate data to support, monitor, evaluate, manage and enhance its operations and deliver its strategy. The availability of current, complete, detailed, accurate and, wherever possible, machine-readable customer segment and sub-sector data, together with appropriate governance and accountability for data, is fast becoming a critical strategic asset, which is subject to increased regulatory focus. Failure to have that data or the ineffective use or governance of that data could result in a failure to manage and report important risks and opportunities or satisfy customers’ expectations including the inability to deliver innovative products and services. This could also result in a failure to deliver NatWest Group’s strategy and could place NatWest Group at a competitive disadvantage by increasing its costs, inhibiting its efforts to reduce costs or its ability to improve its systems, controls and processes, which could result in a failure to deliver NatWest Group’s strategy. These data limitations, or the unethical or inappropriate use of data, and/or non-compliance with customer data protection laws could give rise to conduct and litigation risks and may increase the risk of operational events, losses or other adverse consequences due to inappropriate models, systems, processes, decisions or other actions, which in turn could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
NatWest Group’s operations are highly dependent on its complex IT systems (including those that enable remote working) and any IT failure could adversely affect NatWest Group.
NatWest Group’s operations are highly dependent on the ability to process a very large number of transactions efficiently and accurately while complying with applicable laws and regulations. The proper functioning of NatWest Group’s payment systems, financial crime, fraud systems and controls, risk management, credit analysis and reporting, accounting, customer service and other IT systems, as well as the communication networks between its branches and main data processing centres, is critical to NatWest Group’s operations.
Individually or collectively, any critical system failure, material loss of service availability or material breach of data security could cause serious damage to NatWest Group’s ability to provide services to its customers, which could result in reputational damage, significant compensation costs or regulatory sanctions (including fines resulting from regulatory investigations) or a breach of applicable regulations and could affect its regulatory approvals, competitive position, business and brands, which could undermine its ability to attract and retain customers. This risk is heightened as most of NatWest Group’s employees continue to work remotely, as it outsources certain functions and as it continues to innovate and offer new digital solutions to its customers as a result of the trend towards online and mobile banking.
In 2021, NatWest Group continued to make considerable investments to further simplify, upgrade and improve its IT and technology capabilities (including migration of certain services to cloud platforms). NatWest Group also continues to develop and enhance digital services for its customers and seeks to improve its competitive position through enhancing controls and procedures and strengthening the resilience of services including cyber security. Any failure of these investment and rationalisation initiatives to achieve the expected results, due to cost challenges or otherwise, could negatively affect NatWest Group’s operations, its reputation and ability to retain or grow its customer business or adversely impact its competitive position, which could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
Remote working may adversely affect NatWest Group’s ability to maintain effective internal controls.
From March 2020 to September 2021, many of NatWest Group’s employees worked exclusively on a remote basis. Following the lifting of government restrictions, NatWest Group will implement a new hybrid working policy whereby many employees may work remotely the majority of the time in the ordinary course of their roles.
Remote working arrangements for NatWest Group employees continues to place heavy reliance on the IT systems that enable remote working and increased exposure to fraud, conduct, operational and other risks and may place additional pressure on NatWest Group’s ability to maintain effective internal controls and governance frameworks. Remote working arrangements are also subject to regulatory scrutiny to ensure adequate recording, surveillance and supervision of regulated activities, and compliance with regulatory requirements and expectations, including requirements to: meet threshold conditions for regulated activities; ensure the ability to oversee functions (including any outsourced functions); ensure no detriment is caused to customers; and ensure no increased risk of financial crime. See also, ‘A failure in NatWest Group’s risk management framework could adversely affect NatWest Group, including its ability to achieve its strategic objectives.’ Moreover, the IT systems that enable remote working interface with third-party systems, and NatWest Group could experience service denials or disruptions if such systems exceed capacity or if a third-party system fails or experiences any interruptions, all of which could result in business and customer interruption and related reputational damage, significant compensation costs, regulatory sanctions and/or a breach of applicable regulations. See also, ‘NatWest Group’s operations are highly dependent on its complex IT systems (including those that enable remote working) and any IT failure could adversely affect NatWest Group’.
Sustained periods of remote working may negatively affect workforce morale. Whilst NatWest Group has taken measures seeking to maintain the health, wellbeing and safety of its employees, these measures may be ineffective. Any of the above could impair NatWest Group’s ability to hire, retain and engage well-qualified employees, especially at a senior level, which in turn may adversely impact NatWest Group’s ability to serve its customers efficiently and impact productivity across NatWest Group. This could also adversely affect NatWest Group’s reputation and competitive position and its ability to grow its business, which could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
NatWest Group relies on attracting, retaining and developing diverse senior management and skilled personnel, and is required to maintain good employee relations.
NatWest Group’s success depends on its ability to attract, retain through creating an inclusive environment, and develop highly skilled and qualified diverse personnel, including senior management, directors and key employees especially for technology and data focused roles, in a highly competitive market and under internal cost reduction pressures.
NatWest Group’s ability to do this may be more difficult due to the cost reduction pressures, heightened regulatory oversight of banks and the increasing scrutiny of, and (in some cases) restrictions placed upon, employee compensation arrangements (in particular those of banks in receipt of government support such as NatWest Group). This increases the cost of hiring, training and retaining diverse skilled personnel. In addition, certain economic, market and regulatory conditions and political developments may reduce the pool of diverse candidates for key management and non-executive roles, including non-executive directors with the right skills, knowledge and experience, or increase the number of departures of existing employees. Moreover, a failure to foster a diverse and inclusive workforce may have an adverse impact on NatWest Group’s employee engagement and the formulation and execution of its strategy, and could also have a negative effect on its reputation with customers, investors and regulators.
NatWest Group plc – Annual Report on Form 20-F | 153 |
Risk factors continued
The inability to compensate employees competitively and/or any reduction of compensation, as a result of negative economic developments or otherwise, could have an adverse effect on NatWest Group’s ability to hire, retain and engage well qualified employees, especially at a senior level, which may have a material adverse impact on the financial position and prospects of NatWest Group.
Many of NatWest Group’s employees in the UK, the ROI and continental Europe are represented by employee representative bodies, including trade unions and works councils. Engagement with its employees and such bodies is important to NatWest Group in maintaining good employee relations. Any failure to do so could impact NatWest Group’s ability to operate its business effectively.
Any of the above could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
A failure in NatWest Group’s risk management framework could adversely affect NatWest Group, including its ability to achieve its strategic objectives.
Risk management is an integral part of all of NatWest Group’s activities and includes the definition and monitoring of NatWest Group’s risk appetite and reporting on NatWest Group’s risk exposure and the potential impact thereof on NatWest Group’s financial condition. Financial risk management is highly dependent on the use and effectiveness of internal stress tests and models.
In addition, financial crime risk management is dependent on the use and effectiveness of financial crime assessment, systems and controls. Weak or ineffective financial crime processes and controls may risk NatWest Group inadvertently facilitating financial crime which may result in regulatory investigation, sanction, litigation and reputational damage. Financial crime continues to evolve, whether through fraud, scams, cyber-attacks or other criminal activity. NatWest Group has made and continues to make significant, multi-year investments to strengthen and improve its overall financial crime control framework with prevention systems and capabilities. As part of its ongoing programme of investment, there is current and future investment planned to further strengthen financial crime controls over the coming years, including investment in new technologies and capabilities to further enhance customer due diligence, transaction monitoring, sanctions and anti-bribery and corruption systems.
Ineffective risk management may arise from a wide variety of factors, including lack of transparency or incomplete risk reporting, unidentified conflicts or misaligned incentives, lack of accountability control and governance, incomplete risk monitoring and management or insufficient challenges or assurance processes. Failure to manage risks effectively could adversely impact NatWest Group’s reputation or its relationship with its regulators, customers, shareholders or other stakeholders.
NatWest Group’s operations are inherently exposed to conduct risks, which include business decisions, actions or reward mechanisms that are not responsive to or aligned with NatWest Group’s regulatory obligations, customers’ needs or do not reflect NatWest Group’s customer-focused strategy, ineffective product management, unethical or inappropriate use of data, information asymmetry, implementation and utilisation of new technologies, outsourcing of customer service and product delivery, the possibility of mis-selling of financial products and mishandling of customer complaints. Some of these risks have materialised in the past and ineffective management and oversight of conduct risks may lead to further remediation and regulatory intervention or enforcement.
NatWest Group’s businesses are also exposed to risks from employee misconduct including non-compliance with policies and regulations, negligence or fraud (including financial crimes and fraud), any of which could result in regulatory fines or sanctions and serious reputational or financial harm to NatWest Group. These risks may be exacerbated as most of NatWest Group’s employees continue to work remotely, which places additional pressure on NatWest Group’s ability to maintain effective internal controls and governance frameworks.
NatWest Group has been seeking to embed a strong risk culture across the organisation and has implemented policies and allocated new resources across all levels of the organisation to manage and mitigate conduct risk and expects to continue to invest in its risk management framework. However, such efforts may not insulate NatWest Group from future instances of misconduct and no assurance can be given that NatWest Group’s strategy and control framework will be effective. Any failure in NatWest Group’s risk management framework could have a material adverse effect on NatWest Group and its financial condition through reputational and financial harm and may result in the inability to achieve its strategic objectives for its customers, employees and wider stakeholders.
NatWest Group’s operations are subject to inherent reputational risk.
Reputational risk relates to stakeholder and public perceptions of NatWest Group arising from an actual or perceived failure to meet stakeholder expectations, including with respect to NatWest Group’s purpose-led strategy and related targets, due to any events, behaviour, action or inaction by NatWest Group, its employees or those with whom NatWest Group is associated. See also ‘NatWest Group’s businesses are subject to substantial regulation and oversight, which are constantly evolving and may adversely affect NatWest Group’. This includes brand damage, which may be detrimental to NatWest Group’s business, including its ability to build or sustain business relationships with customers, and may cause low employee morale, regulatory censure or reduced access to, or an increase in the cost of, funding. Reputational risk may arise whenever there is a material lapse in standards of integrity, compliance, customer or operating efficiency and may adversely affect NatWest Group’s ability to attract and retain customers. In particular, NatWest Group’s ability to attract and retain customers (particularly, corporate and retail depositors) may be adversely affected by, amongst others: negative public opinion resulting from the actual or perceived manner in which NatWest Group conducts or modifies its business activities and operations, media coverage (whether accurate or otherwise), employee misconduct, NatWest Group’s financial performance, IT systems failures or cyberattacks, data breaches, financial crime and fraud, the level of direct and indirect government support, or the actual or perceived practices in the banking and financial industry in general, or a wide variety of other factors, each of which could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
NatWest Group plc – Annual Report on Form 20-F | 154 |
Risk factors continued
Modern technologies, in particular online social networks and other broadcast tools that facilitate communication with large audiences in short timeframes and with minimal costs, may also significantly increase and accelerate the impact of damaging information and allegations.
Although NatWest Group has implemented a Reputational Risk Policy to improve the identification, assessment and management of customers, transactions, products and issues, which represent a reputational risk, NatWest Group cannot be certain that it will be successful in avoiding damage to its business from reputational risk.
Legal, regulatory and conduct risk
NatWest Group’s businesses are subject to substantial regulation and oversight, which are constantly evolving and may adversely affect NatWest Group.
NatWest Group is subject to extensive laws, regulations, corporate governance practice and disclosure requirements, administrative actions and policies in each jurisdiction in which it operates. Many of these have been introduced or amended recently and are subject to further material changes, which may increase compliance and conduct risks, particularly if EU/EEA and UK laws diverge as a result of Brexit. NatWest Group expects government and regulatory intervention in the financial services industry to remain high for the foreseeable future.
In recent years, regulators and governments have focused on reforming the prudential regulation of the financial services industry and the manner in which the business of financial services is conducted. Amongst others, measures have included: enhanced capital, liquidity and funding requirements, implementation of the UK ring-fencing regime, implementation and strengthening of the recovery and resolution framework applicable to financial institutions in the UK, the EU and the US, financial industry reforms (including in respect of MiFID II), corporate governance requirements, restrictions on the compensation of senior management and other employees, enhanced data protection and IT resilience requirements, financial market infrastructure reforms (including enhanced data protection and IT resilience requirements, enhanced regulations in respect of the provision of ‘investment services and activities’), and increased regulatory focus in certain areas, including conduct, consumer protection, competition, disputes regimes, payment systems, financial crime and fraud laws and regulations.
Other areas in which, and examples of where, governmental policies, regulatory and accounting changes, and increased public and regulatory scrutiny could have an adverse impact (some of which could be material) on NatWest Group include, but are not limited to, the following:
- | general changes in government, central bank, regulatory or competition policy, or changes in regulatory regimes that may influence investor decisions in the jurisdictions in which NatWest Group operates; |
- | rules relating to foreign ownership, expropriation, nationalisation and confiscation of assets; |
- | increased scrutiny from the CMA, FCA and Payment Systems Regulator (‘PSR’) for the protection and resilience of, and competition and innovation in, UK payment systems and retail banking developments relating to the UK initiative on Open Banking, Open Finance and the European directive on payment services; |
- | the ongoing compliance by NatWest Group with CMA’s Retail Banking Market Order 2017 (the ‘Order’) as well as the ongoing consultation by the UK Government to introduce penalties for breaches of the Order (in addition to the current customer remediation requirements); |
- | ongoing competition litigation in the English courts around payment card interchange fees, combined with increased regulatory scrutiny (from the PSR) of the Visa and Mastercard card schemes; |
- | new or increased regulations relating to customer data protection as well as IT controls and resilience, including the UK Data Protection Framework and the impact of the Court of Justice of the EU (CJEU) decision (known as Schrems II), in which the CJEU ruled that the Privacy Shield (an EU/US data transfer mechanism) is now invalid, leading to more onerous due diligence requirements for the Group prior to sending personal data of its EU customers and employees to non-EEA countries, including the UK and the US; |
- | the introduction of, and changes to, taxes, levies or fees applicable to NatWest Group’s operations, such as the imposition of a financial transaction tax, introduction of global minimum tax rules, changes in tax rates, changes in the scope and administration of the Bank Levy, increases in the bank corporation tax surcharge in the UK, restrictions on the tax deductibility of interest payments or further restrictions imposed on the treatment of carry-forward tax losses that reduce the value of deferred tax assets and require increased payments of tax; |
- | increased regulatory focus on customer protection (such as the FCA’s consumer duty consultation paper (CP21/13)) in retail or other financial markets; |
- | the potential introduction by the Bank of England of a Central Bank Digital Currency which could result in deposit outflows, higher funding costs, and/or other implications for UK banks including NatWest Group; and |
- | regulatory enforcement in the form of PRA imposed financial penalties for failings in banks’ regulatory reporting governance and controls, and regulatory scrutiny following the 2019 PRA “Dear CEO letter” letter regarding PRA’s ongoing focus on: the integrity of regulatory reporting, which the PRA considers has equal standing with financial reporting; the PRA’s thematic reviews of the governance, controls and processes for preparing regulatory returns of selected UK banks, including NatWest Group; the publication of the PRA’s common findings from those reviews in September 2021; and NatWest Group’s programme of improvements to meet PRA expectations. |
These and other recent regulatory changes, proposed or future developments and heightened levels of public and regulatory scrutiny in the UK, the EU and the US have resulted in increased capital, funding and liquidity requirements, changes in the competitive landscape, changes in other regulatory requirements and increased operating costs, and have impacted, and will continue to impact, competitive position, product offerings and business models. Future competition investigations, market reviews, or the regulation of mergers may lead to the imposition of financial penalties or market remedies that may adversely impact NatWest Group’s competitive or financial position. Any of these developments (including any failure to comply with new rules and regulations) could also have a significant impact on NatWest Group’s authorisations and licences, the products and services that NatWest Group may offer, its reputation and the value of its assets, NatWest Group’s operations or legal entity structure, and the manner in which NatWest Group conducts its business. Material consequences could arise should NatWest Group be found to be non-compliant with these regulatory requirements. Regulatory developments may also result in an increased number of regulatory investigations and proceedings and have increased the risks relating to NatWest Group’s ability to comply with the applicable body of rules and regulations in the manner and within the time frames required.
NatWest Group plc – Annual Report on Form 20-F | 155 |
Risk factors continued
Changes in laws, rules or regulations, or in their interpretation or enforcement, or the implementation of new laws, rules or regulations, including contradictory or conflicting laws, rules or regulations by key regulators or policymakers in different jurisdictions, or failure by NatWest Group to comply with such laws, rules and regulations, may have a material adverse effect on NatWest Group’s business, results of operations and outlook. In addition, uncertainty and insufficient international regulatory coordination as enhanced supervisory standards are developed and implemented may adversely affect NatWest Group’s ability to engage in effective business, risk and capital management planning.
NatWest Group is exposed to the risks of various litigation matters, regulatory and governmental actions and investigations as well as remedial undertakings, including conduct-related reviews, anti-money laundering and redress projects, the outcomes of which are inherently difficult to predict, and which could have an adverse effect on NatWest Group.
NatWest Group’s operations are diverse and complex and it operates in legal and regulatory environments that expose it to potentially significant legal proceedings, and civil and criminal regulatory and governmental actions. NatWest Group has resolved a number of legal and regulatory actions over the past several years but continues to be, and may in the future be, involved in such actions in the US, the UK, Europe and other jurisdictions.
NatWest Group is currently, has recently been and will likely be involved in a number of significant legal and regulatory actions, including investigations, proceedings and ongoing reviews (both formal and informal) by governmental law enforcement and other agencies and litigation proceedings, relating to, among other matters, the offering of securities, conduct in the foreign exchange market, the setting of benchmark rates such as LIBOR and related derivatives trading, the issuance, underwriting, and sales and trading of fixed-income securities (including government securities), product mis-selling, customer mistreatment, anti-money laundering, antitrust, VAT recovery and various other compliance issues. Legal and regulatory actions are subject to many uncertainties, and their outcomes, including the timing, amount of fines, damages or settlements or the form of any settlements, which may be material and in excess of any related provisions, are often difficult to predict, particularly in the early stages of a case or investigation. NatWest Group’s expectation for resolution may change and substantial additional provisions and costs may be recognised in respect of any matter.
The resolution of significant investigations include: (a) NWM Plc’s December 2021 spoofing-related guilty plea in the United States, which involves a three-year period of probation, an independent corporate monitor, and commitments to compliance programme reviews and improvements and reporting obligations, as well as approximately US$35 million in fines and restitution, and (b) National Westminster Bank Plc’s October 2021 guilty plea for breaches of the UK Money Laundering Regulations 2007, which resulted in a fine of approximately £265 million. For additional information relating to these and other legal and regulatory proceedings and matters to which NatWest Group is currently exposed, see ‘Litigation and regulatory matters’ at Note 27 to the consolidated accounts.
The recent guilty pleas, other recently resolved matters or adverse outcomes or resolution of current or future legal or regulatory actions could increase the risk of greater regulatory and third party scrutiny and could have material collateral consequences for NatWest Group’s business and result in restrictions or limitations on NatWest Group’s operations.
These may include the effective or actual disqualification from carrying on certain regulated activities and consequences resulting from the need to reapply for various important licences or obtain waivers to conduct certain existing activities of NatWest Group, particularly but not solely in the US, which may take a significant period of time and the results of which are uncertain. Disqualification from carrying on any activities, whether automatically as a result of the resolution of a particular matter or as a result of the failure to obtain such licences or waivers could adversely impact NatWest Group’s business, in particular in the US. This in turn and/or any fines, settlement payments or penalties could adversely impact NatWest Group’s reported financial results and condition, capital position or reputation.
Failure to comply with undertakings made by NatWest Group to its regulators, or the conditions of probation resulting from the spoofing-related guilty plea, may result in additional measures or penalties being taken against NatWest Group. In addition, any failure to administer conduct redress processes adequately, or to handle individual complaints fairly or appropriately, could result in further claims as well as the imposition of additional measures or limitations on NatWest Group’s operations, additional supervision by NatWest Group’s regulators, and loss of investor confidence.
Any of the above could have a material adverse effect on NatWest Group’s business, results of operations, outlook, capital position or its ability to meet regulatory capital adequacy requirements.
NatWest Group may not effectively manage the transition of LIBOR and other IBOR rates to alternative risk-free rates.
UK and international regulators are driving the transition from the use of interbank offer rates (‘IBORs’), including LIBOR, to alternative rates, primarily risk free rates (‘RFRs’). As of 31 December 2021, LIBOR, as currently determined, has ceased for all tenors of GBP, JPY, CHF, EUR, and for the 1 week and 2 month tenors for USD. The remaining USD LIBOR tenors, as currently determined, are due to cease after 30 June 2023. The FCA has used its powers under the UK Benchmarks Regulation (‘UK BMR’) to require, for a limited period of time after 31 December 2021, the ongoing publication of the 1, 3, and 6 month GBP and JPY LIBOR tenors using a changed methodology (i.e., ‘Art23A LIBOR’ on a synthetic basis). The UK has passed the Critical Benchmarks (References and Administrators’ Liability) Act 2021 (‘Critical Benchmarks Act’) which establishes a framework that allows the ongoing use of Art23A LIBOR under certain circumstances where contracts have pro-actively transitioned onto alternative rates. However, the FCA has been clear that the solutions provided under UK BMR and the Critical Benchmarks Act are not permanent and cannot be guaranteed after the end of 2022 (and for JPY the FCA has confirmed that Art23A LIBOR will no longer be available after the end of 2022). This framework and its lack of permanence may expose NatWest Group, its customers and the financial services industry more widely to various risks, including: (i) the FCA further restricting use of Art23A LIBOR resulting in proactive transition of contracts; and (ii) mis-matches between positions in cleared derivatives and the exposures they are hedging where those exposures are permitted to make use of Art23A LIBOR, as the FCA has chosen not to permit the use of Art23A LIBOR for cleared derivatives. Although the formal cessation date for the remaining USD LIBOR tenors (as currently determined) is not until the end of June 2023, US and UK regulators have been clear that this is only to support the rundown of back book USD LIBOR exposures, and that no new contracts should reference these USD LIBOR tenors after 31 December 2021, other than in a very limited range of circumstances. Natwest Group will continue to have ongoing exposure to the remaining USD LIBOR tenors until they cease at the end of June 2023.
NatWest Group plc – Annual Report on Form 20-F | 156 |
Risk factors continued
Natwest Group had significant exposures to IBORs and has actively sought to transition away from these during 2021 in accordance with regulatory expectations and milestones. Transition measures have included the pro-active development of new products on using alternative rates, primarily but not exclusively RFRs rather than LIBOR, pro-actively restructuring existing LIBOR exposures so that they cease to reference LIBOR and instead reference alternative rates, and embedding language into contracts that allows for the automatic conversion to alternative rates when LIBOR ceases to be available. The main Central Counterparty Clearing houses (CCPs) conducted mass conversion exercises in December 2021 covering GBP, JPY, CHF and EUR LIBOR cleared derivatives to fully transition all outstanding LIBOR exposure to the relevant RFR. Natwest Group entities, along with many of their major counterparties, have already adhered to the ISDA IBOR fall-backs supplement and protocol which establishes a clear, industry accepted, contractual process to manage the transition from IBORs to RFRs for non-cleared derivative products.
These transition efforts have involved extensive engagement with customers, industry working groups and regulators to seek to deliver transition in a transparent and economically appropriate manner. Any economic impacts will be dependent on, amongst other things, the establishment of deep and liquid RFR markets, the establishment of clear and consistent market conventions for all replacement products, as well as counterparties’ willingness to accept, and transition to, these conventions. Furthermore, certain IBOR obligations may not be able to be pro-actively changed which could, depending on any over-arching legislative transition frameworks, potentially result in fundamentally different economic outcomes than originally intended. The uncertainties around the manner of transition to RFRs, and the ongoing broader acceptance and use of RFRs across the market, expose NatWest Group, its clients and the financial services industry more widely to risks.
Examples of these risks may include (i) legal (including litigation) risks relating to documentation for new and the majority of existing transactions (including, but not limited to, changes, lack of changes, unclear contractual provisions, and disputes in respect of these); (ii) financial risks from any changes in valuation of financial instruments linked to impacted IBORs that may impact NatWest Group’s performance, including its cost of funds, and its risk management related financial models; (iii) pricing, interest rate or settlement risks such as changes to benchmark rates that could impact pricing, interest rate or settlement mechanisms in or on certain instruments; (iv) operational risks due to the requirement to adapt IT systems, trade reporting infrastructure and operational processes, as well as ensuring compliance with restrictions on new USD LIBOR usage after December 2021; (v) conduct and litigation risks arising from communication regarding the potential impact on customers, and engagement with customers during and after the transition period, or non-acceptance by customers of replacement rates; and (vi) different legislative provisions in different jurisdictions, for example, unlike certain US states and the EU, the UK has not provided a clear and robust safe harbour to protect against litigation and potential liability arising out of the switch to ‘synthetic LIBOR’.
Notwithstanding all efforts to date, until the transition away from LIBOR onto alternative rates has been fully completed and there is greater experience of how RFRs are adopted across different products and customer groups, it remains difficult to determine to what extent the changes will affect NatWest Group, or the costs of implementing any relevant remedial action. Uncertainty as to the nature and extent of such potential changes, the take up of alternative reference rates, or other reforms may adversely affect financial instruments originally referencing LIBOR as the benchmark. The implementation of any alternative RFRs may be impossible or impracticable under the existing terms of certain financial instruments and could have a material adverse effect on the value of, return on, and trading market for, certain financial instruments and on NatWest Group’s profitability.
Changes in tax legislation or failure to generate future taxable profits may impact the recoverability of certain deferred tax assets recognised by NatWest Group.
In accordance with the accounting policies set out in ‘Critical accounting policies and key sources of estimation uncertainty’, NatWest Group has recognised deferred tax assets on losses available to relieve future profits from tax only to the extent it is probable that they will be recovered. The deferred tax assets are quantified on the basis of current tax legislation and accounting standards and are subject to change in respect of the future rates of tax or the rules for computing taxable profits and offsetting allowable losses.
Failure to generate sufficient future taxable profits or further changes in tax legislation (including with respect to rates of tax) or accounting standards may reduce the recoverable amount of the recognised tax loss deferred tax assets, amounting to £899 million as at 31 December 2021. Changes to the treatment of certain deferred tax assets may impact NatWest Group’s capital position. In addition, NatWest Group’s interpretation or application of relevant tax laws may differ from those of the relevant tax authorities and provisions are made for potential tax liabilities that may arise on the basis of the amounts expected to be paid to tax authorities. The amounts ultimately paid may differ materially from the amounts provided depending on the ultimate resolution of such matters.
Any of the above could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
NatWest Group plc – Annual Report on Form 20-F | 157 |
Additional information
Description of property and equipment
NatWest Group operates from a number of locations worldwide, principally in the UK. At 31 December 2021, RBS plc and NWB Plc had 130 and 640 retail branches respectively, in the UK. Ulster Bank has a footprint of 132 branches and a network of business banking offices across Northern Ireland and the Republic of Ireland, of which 25 are to be sold to Permanent TSB plc as part of the recently agreed sale. A majority of the UK branches are owned by NWB Plc or are held under leases with unexpired terms of over 50 years. NatWest Group’s principal properties include its headquarters at Gogarburn, Edinburgh and its principal office at 250 Bishopsgate, London.
Major shareholders
In December 2008, The Solicitor for the Affairs of Her Majesty’s Treasury (HMT) acquired 22,854 million ordinary shares of 25p and during 2009 acquired a further 16,791 million ordinary shares of 25p, representing 70.3 % of the company’s issued ordinary share capital.
In December 2009, HMT acquired 51 billion B shares in the company, representing the entire issued B share capital. In 2015, HMT sold 630 million of the company’s ordinary shares and converted its entire holding of B shares into 5.1 billion new ordinary shares of £1 each. In June 2018 HMT sold a further 925 million of the company’s ordinary shares. In March 2021, the company carried out an off-market purchase of 591 million of its ordinary shares from HMT. In May 2021, HMT sold 580 million ordinary shares through an accelerated book building process to institutional investors. In July 2021, HMT announced its intention to sell part of its shareholding over a 12 month period from August 2021 via a trading plan, for up to 15% of the aggregate total trading volume. At 31 December 2021, HMT’s holding in the company’s issued share capital with voting rights was 52.96%. At 31 December 2021, Norges Bank held 3.07% of the company’s issued share capital with voting rights. The percentages were correct at the date of notification on 5 November 2021. As far as the company is aware, there have been no other significant changes in the percentage ownership of major shareholders of the company’s ordinary shares or preference shares during the three years ended 17 February 2022.
Since 1 January 2018, the company has redeemed substantially all of the preference shares that were in issue (refer to Note 19 for further details). All shareholders within a class of the company’s shares have the same voting rights.
At the 2021 Annual General Meeting, shareholders authorised the company to make an off market purchase of preference shares. The company announced on 15 December 2021 that it had utilised this authority to purchase 157,546 5.5 per cent cumulative preference shares and 259,314 11.00 per cent cumulative preference shares. The company cancelled the purchased shares.
As at 31 December 2021, almost all of the company’s US$ denominated preference shares and American Depository Shares representing ordinary shares were held by shareholders registered in the US. All other shares were predominantly held by shareholders registered outside the US.
Our Code of conduct
NatWest Group’s Code of Conduct (Our Code) lets everyone know what to expect of each other, what to do when unsure of a decision, and where to go for advice when needed. It is available at https://www.natwestgroup.com/our-purpose/society/compliance-and-conduct.html, or without charge, and upon request, by contacting Corporate Governance at the telephone number listed on page 174. It includes our Critical People Capabilities that guide how we behave and set clear expectations of the behaviours consistently required from everyone and are aligned to our purpose, goals and risk culture. It also incorporates five standards of behaviour aligned to the Financial Conduct Authority (FCA) Conduct Rules. These are: (1) You must act with integrity; (2) You must act with due skill, care and diligence; (3) You must be open and cooperative with the Prudential Regulatory Authority (PRA) and other regulators; (4) You must pay due regard to the interests of customers and treat them fairly; and (5) You must observe proper standards of market conduct. These Conduct Rules are very much in keeping with the values and behaviours that we are already following across NatWest Group.
Iran sanctions and related disclosures
Disclosure pursuant to section 13(r) of the Securities Exchange Act
Section 13(r) of the Securities Exchange Act, added by section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, requires an issuer to disclose in its annual or quarterly reports, as applicable, whether, during the period covered by the report, it or any of its affiliates knowingly engaged in specified activities or transactions relating to Iran or with individuals or entities designated under Executive Order 13382 or 13224. Disclosure is required of certain activities conducted outside the United States by non-U.S. entities in compliance with local law, whether or not the activities are sanctionable under U.S. law.
In order to comply with this requirement, the following activities of NatWest Group’s affiliates are disclosed in response to section 13(r).
Transactions involving Iranian Government owned entities
During 2021 affiliates of NatWest Group facilitated seven payments which were remitted by, or on behalf of, Iranian Government owned entities and/or entities designated under Executive Order 13382 or 13224, and received by NatWest Group customers (non-designated and located in the United Kingdom) in relation to legal fees.
NatWest Group facilitated one payment which was paid to an Iranian Government owned entity and/or designated under Executive Order 13382 or 13224, to release NatWest Group of its obligations in relation to an expired guarantee.
All the payments described above were processed in full compliance with applicable sanctions and where relevant authorised under applicable licence.
The transactions described above resulted in £15,000 gross revenue to NatWest Group. Considering the processes in place to undertake such transactions, including enhanced due diligence processes, the profit from these transactions was negligible. NatWest Group has a restrictive risk appetite in relation to transactions involving Iran and will only continue to engage in transactions similar to those described above as long as such transactions are in compliance with applicable sanctions laws and within NatWest Group’s risk appetite.
NatWest Group plc – Annual Report on Form 20-F | 158 |
Additional information continued
NatWest Group maintain one account for an Iranian Government entity located in the United Kingdom. The purpose of the account is to facilitate UK domestic transactions only for employees’ salaries and operating costs such as UK taxes and utilities. No commercial activity is processed through the account.
Guarantees
Under applicable licenses granted by appropriate authorities, affiliates of NatWest Group hold three legacy guarantees entered into between 1984 and 1998, which support arrangements lawfully entered into by affiliates of NatWest Group customers with Iranian counterparties. This has reduced by one since the 2020 Iran sanctions and related disclosures submission. These legacy guarantees are in favour of Iranian Government owned financial institutions. The affiliates of NatWest Group have made considerable efforts to exit and formally cancel the guarantees.
Iranian Petroleum Industry
Section 13(r) of the Securities Exchange Act (as amended) requires disclosure of any knowing engagement in activity described in section 5 (a) or (b) of the Iran Sanctions Act, including significant investments in or transactions that could develop the Iranian petroleum or petrochemical sectors.
During 2021, no transactions that meet this criteria have been facilitated by NatWest Group.
Supervision
United Kingdom
The home supervisors for NatWest Group are the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). As with all significant banking institutions, the PRA is the consolidated supervisor of NatWest Group. The FCA’s overall objective is to ensure financial markets function well. This is supported by its operational objectives of: securing an appropriate degree of protection for consumers; protecting and enhancing the integrity of the UK financial system; and promoting effective competition in the interests of consumers.
As at 31 December 2021, 12 companies in NatWest Group, spanning a range of financial services sectors, including banking and investment business, were authorised to conduct financial activities in the UK. The material UK authorised banks in NatWest Group are The Royal Bank of Scotland plc (RBS plc), National Westminster Bank Plc (NWB Plc), NatWest Markets Plc (NWM Plc) and Coutts Company. Wholesale activities, other than Treasury activities, are concentrated in NatWest Markets Plc. Retail banking activities in England, Scotland and Wales are managed by the Retail Banking, Commercial Banking and Private Banking businesses of RBS plc, NWB Plc and Coutts Company. In June 2019, NatWest Group announced its intention to transfer its UBL business to NWB Plc in order to simplify the current legal entity structure of NatWest Group. This was completed in May 2021, at which point UBL became a trading name of NWB Plc.
NatWest Group’s banking service in the Republic of Ireland is provided by Ulster Bank Ireland DAC (UBI DAC), which is supervised by the Central Bank of Ireland and the European Central Bank under the Single Supervisory Mechanism. In February 2021, NatWest Group announced the phased withdrawal of UBI DAC from the Republic of Ireland which remains ongoing.
Investment management business is principally undertaken by companies in the Commercial Banking and Private Banking businesses, including Coutts Company.
NatWest Group is subject to extensive regulations that impose obligations on financial institutions to maintain appropriate policies, procedures and controls to ensure compliance with the rules and regulations to which they are subject.
United States
NatWest Group conducts business in the US through its investment bank, NWM Plc. NWM Plc’s regulated entities in the US are: its broker-dealer affiliate, NatWest Markets Securities Inc. (NWMSI); NWMSI’s Futures Commission Merchant (FCM); NWBM Plc’s non-FCM clearing member; NWM Plc’s non-US-based Swap Dealer; and NWM Plc’s Connecticut Representative Office. NWM Plc is subject to the supervision of the Board of Governors of the Federal Reserve System (Federal Reserve) due to an outstanding enforcement action brought against NatWest Group by the Federal Reserve, namely the 2015 FX Cease and Desist Consent Order.
In addition, NWMSI is a Primary Dealer of the Federal Reserve, which makes it subject to the supervision of the Federal Reserve Bank of New York (FRB-NY).
NWMSI is subject to the regulations of a number of US securities regulators, mainly the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), Options Clearing Corporation (OCC), Depository Trust Clearing Corporation (DTCC), and various state regulators. NWMSI’s FCM is mainly subject to the regulations of the Commodity Futures Trading Commission (CFTC), National Futures Association (NFA), the Chicago Mercantile Exchange Group (CME), and the Intercontinental Exchange (ICE) Futures US.
NWM Plc is a non-FCM clearing member of the CME and is subject to the regulations of the CME and the CFTC. NWM Plc is also a non-US-based provisionally-registered swap dealer and as such it is subject to oversight by the US regulators the CFTC and the NFA.
The NWM Plc Connecticut Representative Office is supervised by the FRB-NY and the Connecticut Department of Banking.
The anti-money laundering, anti-terrorism and economic sanctions regulations are a major focus of the US government for financial institutions and are rigorously enforced by most of the regulators mentioned above and the Financial Crimes Enforcement Network (FinCEN) of US Department of the Treasury.
Other jurisdictions
NatWest Group operates in a number of countries through a network of branches, local banks and non-bank subsidiaries and these activities are subject to supervision in most cases by a local regulator or central bank.
NatWest Group plc – Annual Report on Form 20-F | 159 |
Material contracts
The company and its subsidiaries are party to various contracts in the ordinary course of business. Material contracts include the following:
B Share Acquisition and Contingent Capital Agreement
On 26 November 2009, the company and HM Treasury entered into the Acquisition and Contingent Capital Agreement pursuant to which HM Treasury subscribed for the initial B shares and the Dividend Access Share (the Acquisitions) and agreed the terms of HM Treasury’s contingent subscription (the Contingent Subscription) for an additional £8 billion in aggregate in the form of further B shares (the Contingent B shares), to be issued on the same terms as the initial B shares. The Acquisitions were subject to the satisfaction of various conditions, including the company having obtained the approval of its shareholders in relation to the Acquisitions.
On 16 December 2013, the company announced that, having received approval from the PRA, it had terminated the £8 billion Contingent Subscription. The company was able to cancel the Contingent Subscription as a result of the actions announced in the second half of 2013 to further strengthen its capital position.
On 9 October 2015, the company announced that on 8 October 2015, it had received a valid conversion notice from HM Treasury in respect of all outstanding B shares held by HM Treasury. The new ordinary shares issued on conversion of the B shares were admitted to the official list of the UK Listing Authority (UKLA), and to trading on the London Stock Exchange plc, on 14 October 2015. Following such conversion, HM Treasury no longer holds any B shares.
The company gave certain representations and warranties to HM Treasury on the date of the Acquisition and Contingent Capital Agreement, on the date the circular was posted to shareholders, on the first date on which all of the conditions precedent were satisfied, or waived, and on the date of the Acquisitions. The company also agreed to a number of undertakings.
The company agreed to reimburse HM Treasury for its expenses incurred in connection with the Acquisitions.
For as long as it is a substantial shareholder of the company (within the meaning of the UKLA’s Listing Rules), HM Treasury has undertaken not to vote on related party transaction resolutions at general meetings and to direct that its affiliates do not so vote.
Directed Buyback Contract
On 7 February 2019, the company and HM Treasury entered into the Directed Buyback Contract to help facilitate the return of the company to full private ownership through the use of any excess capital to buy back the company’s ordinary shares held by HM Treasury.
Under the terms of the Directed Buyback Contract, the company may agree with HM Treasury to make off-market purchases from time to time of its ordinary shares held by HM Treasury, including by way of one or more standalone purchases, through a non-discretionary, broker-managed directed trading programme, or in conjunction with any offer or sale by HM Treasury by way of an institutional placing. Neither the company nor HM Treasury would be under an obligation to agree to make such off-market purchases and would only do so subject to regulatory approval at the time.
The aggregate number of ordinary shares which the company may purchase from HM Treasury under the Directed Buyback Contract cannot exceed 4.99%. of the company’s issued share capital and the aggregate consideration to be paid cannot exceed 4.99% of the company’s market capitalisation. The price to be paid for each ordinary share will be the market price at the time of purchase or, if the directed buyback is in conjunction with an institutional placing, the placing price.
On 19 March 2021, the company announced that it had agreed with HM Treasury to make an off-market purchase (the “Off-Market Purchase”) under the Directed Buyback Contract for the total consideration of £1,125,341,269 for 590,730,325 ordinary shares, representing 4.86% of the company’s issued share capital at that point in time.
Framework and State Aid Deed
As a result of the State Aid granted to the company, it was required to work with HM Treasury to submit a State Aid restructuring plan to the European Commission (EC), which was then approved by the EC under the State Aid rules on 14 December 2009. The company agreed a series of measures which supplemented the measures in the company’s strategic plan.
The company entered into a State Aid Commitment Deed with HM Treasury at the time of the initial EC decision and, following the EC’s approval of amendments to the restructuring plan in April 2014, the company entered into a revised State Aid Commitment Deed with HM Treasury. In September 2017, the revised State Aid Commitment Deed was amended by a Deed of Variation (as so amended, the “Revised State Aid Commitment Deed”) following the EC’s approval of an alternative remedies package (the “Alternative Remedies Package”) to replace the company’s final outstanding commitment under its State Aid obligations (to divest the business previously known as Williams Glyn).
On 25 April 2018, the Revised State Aid Commitment Deed was replaced by the Framework and State Aid Deed between the company, HM Treasury and an independent body established to facilitate and oversee the delivery of the Alternative Remedies Package (the “Independent Body”). Under the Framework and State Aid Deed, the company agrees to do all acts and things necessary to ensure that HM Treasury is able to comply with its obligations under any EC decision approving State Aid to the company, including under the Alternative Remedies Package.
NatWest Group plc – Annual Report on Form 20-F | 160 |
Material contracts continued
Pursuant to the Framework and State Aid Deed, the company has committed and paid: (i) £425 million into a fund for eligible bodies in the UK banking and financial technology sectors to develop and improve their capability to compete with the company in the provision of banking services to small and medium-sized enterprises (“SMEs”) and develop and improve the financial products and services available to SMEs (the “Capability and Innovation Fund”); and (ii) £275 million to eligible bodies to help them incentivise SME banking customers within the division of the company previously known as Williams Glyn to switch their business current accounts and loans to the eligible bodies (the “Incentivised Switching Scheme”). The Independent Body will distribute funds from the Capability and Innovation Fund and implement the Incentivised Switching Scheme.
Under the Framework and State Aid Deed, the company also agreed to indemnify the Independent Body and HM Treasury, up to an amount of £320 million collectively to cover liabilities that may be incurred in implementing the Alternative Remedies Package. The provisions of the indemnity to the Independent Body are set out in the Framework and State Aid Deed and the provisions of the indemnity to HM Treasury are set out in a separate agreement between the company and HM Treasury, described under “Deed of Indemnity” below.
The Framework and State Aid Deed also provides that if the EC adopts a decision that the UK Government must recover any State Aid (a “Repayment Decision”) and the recovery order of the Repayment Decision has not been annulled or suspended by the General Court or the European Court of Justice, then the company must repay HM Treasury any aid ordered to be recovered under the Repayment Decision.
Deed of Indemnity
In the context of the Framework and State Aid Deed, the company entered into a Deed of Indemnity with HM Treasury on 25 April 2018, pursuant to which the company agreed to indemnify HM Treasury to cover liabilities that may be incurred in implementing the Alternative Remedies Package, as described under “Framework and State Aid Deed” above.
Trust Deed
In the context of the Framework and State Aid Deed, the company entered into a Trust Deed with the Independent Body on 25 April 2018, to set up a trust to administer the funds committed by the company under the Framework and State Aid Deed for the Alternative Remedies Package.
State Aid Costs Reimbursement Deed
Under the 2009 State Aid Costs Reimbursement Deed, the company has agreed to reimburse HM Treasury for fees, costs and expenses associated with the State Aid and State Aid approval.
HMT and UKFI Relationship Deed
On 7 November 2014, in order to comply with an amendment to the UK Listing Rules, the company entered into a Relationship Deed with HM Treasury and UK Financial Investments Limited in relation to the company’s obligations under the UK Listing Rules to put in place an agreement with any controlling shareholder (as defined for these purposes in the Listing Rules). The Relationship Deed covers the three independence provisions mandated by the Listing Rules: (i) that contracts between the company and HM Treasury (or any of its subsidiaries) will be arm’s length and normal commercial arrangements, (ii) that neither HM Treasury nor any of its associates will take any action that would have the effect of preventing the company from complying with its obligations under the Listing Rules; and (iii) neither HM Treasury nor any of its associates will propose or procure the proposal of a shareholder resolution which is intended or appears to be intended to circumvent the proper application of the Listing Rules.
Memorandum of Understanding Relating to the NatWest Group Pension Fund
On 16 April 2018 the company entered into a Memorandum of Understanding (the “MoU”) with the trustee of the NatWest Group Pension Fund (the “Group Fund”), which aimed to facilitate both the necessary changes to the Main Section of the Group Fund to align the employing entity structure with the requirements of the UK ring-fencing legislation and acceleration of the settlement framework for the 31 December 2017 triennial valuation of the Main Section of the Group Fund (brought forward from 31 December 2018).
In addition, the MoU also provided clarity on the additional related funding contributions required to be made by the company to the Main Section of the Group Fund as follows: (i) a pre-tax payment of £2 billion that was made in the second half of 2018 and (ii) from 1 January 2020, further pre-tax contributions of up to £1.5 billion in aggregate linked to the making of future distributions to NatWest Group shareholders including ordinary and special dividends and/or share buy backs (subject to an annual cap on contributions of £500 million before tax).
On 28 September 2018, the implementation of the MoU was documented through a Framework Agreement entered into between the company and the trustee of the Group Fund.
NatWest Group plc – Annual Report on Form 20-F | 161 |
Shareholder information
Financial calendar
Dividends
Payment dates | |
Cumulative preference shares | 31 May and 30 December 2022 |
Non-cumulative preference shares | 31 March, 30 June, 30 September and 30 December 2022 |
Ordinary shares | 4 May 2022 |
Ex dividend date | |
Cumulative preference shares | 5 May and 1 December 2022 |
Ordinary shares | 17 March 2022 |
Record date | |
Cumulative preference shares | 6 May and 2 December 2022 |
Ordinary shares | 18 March 2022 |
Annual General Meeting | 28 April 2022 |
Interim results | 29 July 2022 |
Shareholder enquiries
You can check your shareholdings in the company by visiting the Shareholder centre section of our website, www.natwestgroup.com and click the ‘Accessing your shareholding online’ tab. You will need the shareholder reference number printed on your share certificate or dividend confirmation statement to access this information. You can also view any outstanding payments, update bank account and address details and download various forms.
NatWest Group is committed to reducing its impact on the environment. You can choose to receive your shareholder communications electronically via the ‘Sign up for e-comms’ tab and you will receive an email notification when documents become available to view on our website.
You can also check your shareholding by contacting our Registrar:
Computershare Investor Services PLC
The Pavilions
Bridgewater Road
Bristol BS99 6ZZ
Telephone: +44 (0)370 702 0135
Fax: +44 (0)370 703 6009
Website: www-uk.computershare.com/investor/contactus
Braille and audio Strategic report with additional information
Shareholders requiring a Braille or audio version of the Strategic report with additional information should contact the Registrar on +44 (0)370 702 0135.
NatWest Group plc – Annual Report on Form 20-F | 162 |
Shareholder information continued
ShareGift
The company is aware that shareholders who hold a small number of shares may be retaining these shares because dealing costs make it uneconomical to dispose of them. ShareGift, is a free charity share donation service operated by The Orr Mackintosh Foundation (registered charity 1052686) to enable shareholders to donate shares to charity.
If you are a UK taxpayer, donating your shares in this way will not give rise to either a gain or a loss for UK capital gains tax purposes. You may be able to claim UK income tax relief on gifted shares and can do so in various ways. Further information can be obtained from HM Revenue Customs.
Should you wish to donate your shares to charity please contact ShareGift for further information:
ShareGift, The Orr Mackintosh Foundation
4th Floor Rear, 67/68 Jermyn Street, London, SW1Y 6NY
Telephone: +44 (0)20 7930 3737
Website: www.sharegift.org
Share and bond scams
Share and bond scams are often run from ‘boiler rooms’ where fraudsters cold-call investors, offering them worthless, overpriced or even non-existent shares or bonds.
They use increasingly sophisticated tactics to approach investors, offering to buy or sell shares, often pressuring investors to make a quick decision or miss out on the deal. Contact can also be in the form of email, post or word of mouth. Scams are sometimes advertised in newspapers, magazines or online as genuine investment opportunities and may offer free gifts or discounts on dealing charges.
Scammers will request money upfront, as a bond or other form of security, but victims are often left out of pocket, sometimes losing their savings or even their family home. Even seasoned investors have been caught out by scams.
Clone firms
A ‘clone firm’ uses the name, firm registration number (FRN) and address of a firm or individual who is FCA authorised. The scammer may claim that the genuine firm’s contact details on the FCA Register (Register) are out of date and then use their own details, or copy the website of an authorised firm, making subtle changes such as the phone number. They may claim to be an overseas firm, which won’t always have full contact and website details listed on the Register.
How to protect yourself
Always be wary if you’re contacted out of the blue, pressured to invest quickly, or promised returns that sound too good to be true. FCA authorised firms are unlikely to contact you unexpectedly with an offer to buy or sell shares or bonds.
Please do not give any personal details to any caller unless you are certain that they are genuine. Check the Register to ensure the firm contacting you is authorised and also check the FCA’s Warning List of firms to avoid at www.fca.org.uk/scamsmart.
Ask for their (FRN) and contact details and then contact them using the telephone number on the Register. Never use a link in an email or website from the firm offering you an investment.
It is strongly advised that you seek independent professional advice before making any investment
Report a scam
If you suspect that you have been approached by fraudsters, or have any concerns about a potential scam, report this to the FCA by contacting their Consumer Helpline on 0800 111 6768 or by using their reporting form which can be found on their website.
If you have already invested in a scam, fraudsters are likely to target you again or sell your details to other criminals. The follow-up scam may be completely separate, or may be related to the previous scam in the form of an offer to get your money back or buy back the investment on payment of a fee.
Find out more at www.fca.org.uk/consumers.
NatWest Group plc – Annual Report on Form 20-F | 163 |
Shareholder information continued
Analysis of ordinary shareholders
Number | ||||||
of shares | ||||||
At 31 December 2021 |
| Shareholdings |
| - millions |
| % |
Individuals |
| 172,365 |
| 96,720,657 |
| 0.84 |
Banks and nominee companies |
| 3,749 |
| 5,347,209,748 |
| 46.63 |
Investment trusts |
| 40 |
| 335,083 |
| — |
Insurance companies |
| 3 |
| 487,631 |
| — |
Other companies |
| 433 |
| 26,797,269 |
| 0.24 |
Pension trusts |
| 20 |
| 33,956 |
| — |
Other corporate bodies |
| 68 |
| 5,996,398,291 |
| 52.29 |
| 176,678 |
| 11,467,982,635 |
| 100.00 | |
Range of shareholdings: |
|
|
|
|
|
|
1 - 1,000 |
| 152,553 |
| 36,685,708 |
| 0.32 |
1,001 - 10,000 |
| 22,253 |
| 51,255,478 |
| 0.45 |
10,001 - 100,000 |
| 993 |
| 30,052,411 |
| 0.26 |
100,001 - 1,000,000 |
| 520 |
| 185,638,204 |
| 1.62 |
1,000,001 - 10,000,000 |
| 272 |
| 923,070,585 |
| 8.05 |
10,000,001 and over |
| 87 |
| 10,241,280,249 |
| 89.30 |
| 176,678 |
| 11,467,982,635 |
| 100.00 |
Trading market
Non-cumulative dollar preference shares
The following series of American Depositary shares (ADSs) representing non-cumulative preference shares issued in the US were outstanding at 31 December 2021:
|
| Number of ADSs/non-cumulative |
| Number of | ||
Date of issue | Series of ADS | preference shares in issue | registered holders | |||
4 October 2007 |
| U |
| 10,130 |
| 1 |
The ADSs set out above represents the right to receive one corresponding preference share, and is evidenced by an American Depositary Receipt (ADR) and is listed on the Over-The-Counter market on the TRACE platform.
The ADRs evidencing the ADSs above were issued pursuant to Deposit Agreements, among the company, The Bank of New York, as depository, and all holders from time-to-time of ADRs issued thereunder. Currently, there is no non-United States trading market for any of the non-cumulative dollar preference shares. All of the non-cumulative dollar preference shares are held by the depository, as custodian, in registered form.
On February 1, 2022, NatWest Group has given notice to holders of the redemption of the Series U Non-Cumulative Dollar Preference Shares pursuant to the capital disqualification event redemption provisions. Accordingly, on March 31, 2022 (the Redemption Date), the Series U Dollar Preference Shares, and the corresponding series of American Depositary Shares (Series U ADSs), will be redeemed in full at the redemption price of US$100,000 per Series U Dollar Preference Share plus accrued dividends for the current dividend period to, but excluding, the Redemption Date.
ADSs representing ordinary shares
In October 2007, the company listed ADSs, each representing one ordinary share nominal value 25p each (or a right to receive one ordinary share), and evidenced by an ADR or uncertificated securities, on the NYSE under the symbol ‘NWG’. With effect from 7 November 2008, the ratio of one ADS representing one ordinary share changed to one ADS representing 20 ordinary shares.
Following a sub-division and one-for-ten consolidation of NatWest Group’s ordinary shares in June 2012, the ratio of one ADS representing 20 ordinary shares was adjusted to one ADS representing two ordinary shares. As at 31 December 2020, 55.7 million ordinary ADSs were outstanding.
The ordinary ADSs were issued pursuant to a Deposit Agreement, among the company, The Bank of New York Mellon, as depository, and all owners and holders from time to time of ordinary ADSs issued thereunder. The ordinary shares of the company are listed and traded on the London Stock Exchange under the symbol ‘NWG’. All ordinary shares are deposited with the principal London office of The Bank of New York Mellon, as custodian for the depository.
NatWest Group plc – Annual Report on Form 20-F | 164 |
Shareholder information continued
Dividend history
Preference dividends
| 2021 |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 | |
Amount per share | $ | £ | £ | £ | £ | £ | ||||||
Non-cumulative preference shares of US$0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
-Series F (1) |
| — |
| — |
| — |
| — |
| — |
| 1.13 |
-Series H (1) |
| — |
| — |
| — |
| — |
| — |
| 0.97 |
-Series L (1) |
| — |
| — |
| — |
| — |
| — |
| 0.77 |
-Series M (2) |
| — |
| — |
| — |
| — |
| — |
| — |
-Series N (2) |
| — |
| — |
| — |
| — |
| — |
| — |
-Series P (2) |
| — |
| — |
| — |
| — |
| — |
| — |
-Series Q (2) |
| — |
| — |
| — |
| — |
| — |
| — |
-Series R (2) |
| — |
| — |
| — |
| — |
| — |
| — |
-Series S (2) |
| — |
| — |
| — |
| — |
| 1.14 |
| 1.28 |
-Series T (2) |
| — |
| — |
| — |
| — |
| — |
| — |
-Series U (2) |
| 2,538 |
| 1,835 |
| 2,602 |
| 3,800 |
| 3,475 |
| 6,741 |
Non-cumulative convertible preference shares of US$0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
-Series 1 (1) |
| — |
| — |
| — |
| — |
| — |
| 71.99 |
Non-cumulative preference shares of €0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
-Series 1 (2) | — |
| — |
| — |
| — |
| 44.65 |
| 48.98 | |
-Series 2 (2) |
| — |
| — |
| — |
| — |
| 65.18 |
| 44.72 |
-series 3 (2) |
| — |
| — |
| — |
| — |
| 823 |
| 3,504 |
Non-cumulative convertible preference shares of £0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
-Series 1 (1) |
| — |
| — |
| — |
| — |
| — |
| 73.87 |
Non-cumulative preference shares of £1 |
|
|
|
|
|
|
|
|
|
|
|
|
-Series 1 (1) |
| — |
| — |
| — |
| — |
| 27.41 |
| 26.67 |
(1) | Classified as subordinated liabilities. |
(2) | Classified as equity. |
On 26 November 2009, NatWest Group entered into a State Aid Commitment Deed with HM Treasury containing commitments and undertakings that were designed to ensure that HM Treasury was able to comply with the commitments to be given by it to the European Commission for the purposes of obtaining approval for the State aid provided to NatWest Group. As part of these commitments and undertakings, NatWest Group agreed not to pay discretionary coupons and dividends on its existing hybrid capital instruments for a period of two years. This period commenced on 30 April 2010 for NatWest Group instruments and ended on 30 April 2012; the two year deferral period for RBS Holdings N.V. instruments commenced on 1 April 2011 and ended on 1 April 2013. On 4 May 2012, NatWest Group determined that it was in a position to recommence payments on NatWest Group instruments. In June 2013 RBS Holdings N.V. resumed payments on its hybrid capital instruments. Future coupons and dividends on hybrid capital instruments will only be paid subject to, and in accordance with, the terms of the relevant instruments.
Ordinary dividends
In 2021 NatWest Group paid an interim dividend of £347 million, or 3.0p per ordinary share (2020 – nil). In addition, the company had announced that the directors had recommended a final dividend of £844 million, or 7.5p per ordinary share (2020 - £364 million, or 3.0p per ordinary share), subject to shareholders’ approval at the Annual General Meeting on 28 April 2022.
If approved, payment will be made on 4 May 2022 to shareholders on the register at the close of business on 18 March 2022. The ex-dividend date will be 17 March 2022.
Taxation of US Holders
The following discussion summarises certain US federal and UK tax consequences of the ownership and disposition of ordinary shares, ADSs representing ordinary shares (ordinary ADSs) or ADSs representing non-cumulative dollar preference shares (preference ADSs) by a beneficial owner that is a citizen or resident of the United States or that otherwise will be subject to US federal income tax on a net income basis in respect of the ordinary shares, ordinary ADSs or preference ADSs (a “US Holder”). This summary assumes that a US Holder is holding ordinary shares, ordinary ADSs or preference ADSs, as applicable, as capital assets. This summary does not address the tax consequences to a US Holder (i) that is resident in the UK for UK tax purposes, (ii) that carries on a trade, profession or vocation through a branch, agency or permanent establishment in the UK in connection with which their ordinary shares, ordinary ADSs or preference ADSs are held, used or acquired, or (iii) generally, that is a corporation which alone or together with one or more associated companies, controls, directly or indirectly, 10% or more of the voting stock of the company, nor does this summary address all of the tax consequences that may be relevant to a US Holder in light of its particular circumstances, including alternative minimum tax and Medicare contribution tax consequences, as well as differing tax consequences that may apply to US Holders subject to special rules, such as certain financial institutions, dealers or traders in securities who use a mark-to-market method of tax accounting, persons holding ordinary shares, ordinary ADSs or preference ADSs as part of a hedging transaction, straddle, wash sale, conversion transaction or integrated transaction or persons entering into a constructive sale with respect to such securities, persons whose functional currency for US federal income tax purposes is not the US dollar, persons required for US federal income tax purposes to conform the timing of income accruals to their financial statements under Section 451 of the Internal Revenue Code of 1986, as amended (the “Code”), entities classified as partnerships for US federal income tax purposes, tax-exempt entities or persons that own or are deemed to own 10% or more of the stock of the company by vote or value.
NatWest Group plc – Annual Report on Form 20-F | 165 |
Shareholder information continued
The statements and practices set forth below regarding US and UK tax laws, including the US/UK double taxation convention relating to income and capital gains which entered into force on 31 March 2003 (the “Treaty”) and the US/UK double taxation convention relating to estate and gift taxes (the “Estate Taxation Treaty”), are based on those laws and practices as in force and as applied in practice on the date of this report. This summary is not exhaustive of all possible tax considerations and holders are advised to satisfy themselves as to the overall tax consequences, including specifically the consequences under US federal, state, local and other laws, and possible changes in taxation law, of the acquisition, ownership and disposition of ordinary shares, ordinary ADSs or preference ADSs by consulting their own tax advisers.
The following discussion assumes that the company was not a passive foreign investment company for the taxable year ended 31 December 2021 - see ‘Passive Foreign Investment Company (PFIC) considerations’ on page 168.
Ordinary shares, ordinary ADSs and preference ADSs
Taxation of dividends
For the purposes of the Treaty, the Estate Taxation Treaty and the Code, US Holders of ordinary ADSs and preference ADSs should be treated as owners of the respective ordinary shares and the non-cumulative dollar preference shares underlying such ADSs.
The company is not required to withhold UK tax at source from dividend payments it makes or from any amount (including any amounts in respect of accrued dividends) distributed by the company. US Holders who are not resident in the UK and who do not carry on a trade, profession or vocation in the UK through a branch, agency or permanent establishment in connection with which their ordinary shares, ordinary ADSs or preference ADSs are held, used or acquired will not be subject to UK tax in respect of any dividends received on the relevant shares or ADSs.
Distributions by the company (other than certain pro-rata distributions of ordinary shares or rights to receive such shares) will constitute foreign source dividend income for US federal income tax purposes to the extent paid out of the current or accumulated earnings and profits of the company, as determined under US federal income tax principles. Because the company does not maintain calculations of its earnings and profits under US federal income tax principles, it is expected that distributions will be reported to US Holders as dividends. Payments will not be eligible for the dividends-received deduction generally allowed to corporate US holders.
Subject to applicable limitations that vary depending upon a US Holder’s particular circumstances, dividends paid to certain non-corporate US Holders may be taxable at the favourable rates applicable to long-term capital gain. Non-corporate US Holders should consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to be taxed at these favourable rates.
Dividends will be included in a US Holder’s income on the date of the US Holder’s (or in the case of ADSs, the depositary’s) receipt of the dividend. The amount of any dividend paid in pounds sterling to be included in income by a US Holder will be the US dollar amount calculated by reference to the relevant exchange rate in effect on the date of such receipt regardless of whether the payment is in fact converted into US dollars. If the dividend is converted into US dollars on the date of receipt, the US Holder generally should not be required to recognise foreign currency gain or loss in respect of the dividend income. If the amount of such dividend is converted into US dollars after the date of receipt, the US Holder may have foreign currency gain or loss.
Taxation of Capital Gains
A US Holder that is not resident in the UK will not normally be liable for UK tax on capital gains realised on the disposal of an ordinary share, an ordinary ADS or a preference ADS unless at the time of the disposal, in the case of a corporate US Holder, such US Holder carries on a trade in the UK through a permanent establishment or, in the case of any other US Holder, such US Holder carries on a trade, profession or vocation in the UK through a branch or agency and, in each case, such ordinary share, ordinary ADS or preference ADS is or has been used, held or acquired by or for the purposes of such trade (or profession or vocation), or carried on through such permanent establishment, branch or agency. Special rules apply to individuals who are temporarily not resident in the UK.
A US Holder will, upon the sale or other disposition of an ordinary share, an ordinary ADS or a preference ADS, or upon the redemption of preference ADS, generally recognise capital gain or loss for US federal income tax purposes (assuming that in the case of a redemption of a preference ADS, such US Holder does not own, and is not deemed to own, any ordinary shares or ordinary ADSs of the company) in an amount equal to the difference between the amount realised (excluding, in the case of preference ADSs, any amounts attributable to declared but unpaid dividends, which will generally be treated as dividends for U.S. federal income tax purposes and the US Holder’s tax basis in such share or ADS. This capital gain or loss will be long-term capital gain or loss if the US Holder held the share or ADS so sold, disposed or redeemed for more than one year. The deductibility of capital losses is subject to limitations.
A US Holder who is liable for both UK and US tax on a gain recognised on the disposal of an ordinary share, an ordinary ADS or a preference ADS should consult their own tax adviser regarding the credibility or deductibility of such UK tax for US federal income tax purposes.
Estate and gift tax
Subject to the discussion of the Estate Tax Treaty in the following paragraph, ordinary shares, ordinary ADSs or preference ADSs beneficially owned by an individual may be subject to UK inheritance tax (subject to exemptions and reliefs) on the death of the individual or in certain circumstances, if such shares or ADSs are the subject of a gift (including a transfer at less than market value) by such individual. Inheritance tax is not generally chargeable on gifts to individuals made more than seven years before the death of the donor. Ordinary shares, ordinary ADSs or preference ADSs held by the trustees of a settlement may also be subject to UK inheritance tax. Special rules apply to such settlements.
NatWest Group plc – Annual Report on Form 20-F | 166 |
Shareholder information continued
An ordinary share, an ordinary ADS or a preference ADS beneficially owned by an individual, whose domicile is determined to be the United States for purposes of the Estate Tax Treaty and who is not a national of the UK, will not be subject to UK inheritance tax on the individual’s death or on a lifetime transfer of such share or ADS, except in certain cases where the share or ADS (i) is comprised in a settlement (unless, at the time of the settlement, the settlor was domiciled in the United States and was not a national of the UK); (ii) is part of the business property of a UK permanent establishment of an enterprise; or (iii) pertains to a UK fixed base of an individual used for the performance of independent personal services.
The Estate Tax Treaty generally provides a credit against US federal estate or gift tax liability for the amount of any tax paid in the UK in a case where the ordinary share, ordinary ADS or preference ADS is subject to both UK inheritance tax and US federal estate or gift tax.
UK stamp duty and stamp duty reserve tax (SDRT)
The following is a summary of the UK stamp duty and SDRT consequences of transferring an ADS (otherwise than to the custodian on cancellation of the ADS) or of transferring an ordinary share. A transfer of an ADS executed and retained in the United States will not give rise to a liability to pay stamp duty and an agreement to transfer an ADS through the facilities of DTC will not give rise to SDRT (provided that DTC has not made an election under section 97A of the UK Finance Act 1986). Stamp duty or SDRT will normally be payable on or in respect of transfers of ordinary shares and accordingly any holder that acquires or intends to acquire ordinary shares is advised to consult its own tax adviser in relation to stamp duty and SDRT.
Passive Foreign Investment Company (PFIC) considerations
In general, a foreign corporation will be a PFIC for any taxable year in which, after taking into account the income and assets of the corporation and certain subsidiaries pursuant to applicable ‘look-through rules’, either (i) at least 75% of its gross income is ‘passive income’ or (ii) at least 50% of the average value of its assets (generally determined on a quarterly basis) is attributable to assets that produce passive income or are held for the production of passive income. The company does not believe that it was a PFIC for its 2021 taxable year. Although interest income is generally passive income, a special rule (in proposed Treasury regulations that taxpayers may rely on pending finalization) allows banks to treat their banking business income as non-passive. To qualify for this rule, a bank must satisfy certain requirements regarding its licensing and activities. The company’s possible status as a PFIC is determined annually, however, and may be subject to change if the company fails to qualify under this special rule for any year in which a US Holder owned ordinary shares, ordinary ADSs or preference ADSs. In addition, no assurance can be given that the proposed Treasury regulations will be finalized in their current form.
If the company were to be treated as a PFIC for any taxable year during which a US Holder owns ordinary shares, ordinary ADSs or preference ADSs, US Holders would generally be subject to adverse US federal income tax consequences and certain reporting obligations. Holders should consult their own tax advisers as to the potential application of the PFIC rules to the ownership and disposition of the company’s ordinary shares, ordinary ADSs or preference ADSs.
Information reporting and backup withholding
Payments on, and proceeds from the sale or disposition of, ordinary shares, ordinary ADSs or preference ADSs that are made within the United States or through certain US-related financial intermediaries may be subject to information reporting and backup withholding unless (i) the US Holder is an exempt recipient or (ii) in the case of backup withholding, the US Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment to a US Holder will be allowed as a credit against the US Holder’s US federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the Internal Revenue Service.
Foreign financial assets reporting
Certain US Holders who are individuals (and certain specified entities) may be required to report information relating to the company’s securities, of non-US. accounts through which such securities are held. US Holders are urged to consult their tax advisers regarding the application of these rules in their particular circumstances.
Exchange controls
The company has been advised that there are currently no UK laws, decrees or regulations which would prevent the import or export of capital, including the availability of cash or cash equivalents for use by the Group, or the remittance of dividends, interest or other payments to non-UK resident holders of the company’s securities.
There are no restrictions under the Articles of Association of the company or under UK law, as currently in effect, which limit the right of non-UK resident owners to hold or, when entitled to vote, freely to vote the company’s securities.
Memorandum and Articles of Association
The company’s Memorandum and Articles of Association as in effect at the date of this Annual Report on Form 20-F are registered with the Registrar of Companies of Scotland.
The following information is a summary of certain terms of the company’s Memorandum of Association (the “Memorandum”) and Articles of Association (the “Articles”) as in effect at the date of this Annual Report on Form 20-F and certain relevant provisions of the Companies Act 2006 (the “2006 Act”) where appropriate and as relevant to the holders of any class of share. In 2020, the Articles were updated primarily to bring clearer language into the Articles to better reflect current best practice. A summary of the principal changes is outlined below:
NatWest Group plc – Annual Report on Form 20-F | 167 |
Shareholder information continued
Shares
· | Under the previous Articles, the Company had the ability to issue ‘share warrants to bearer’ (bearer shares). Changes under The Small Business, Enterprise and Employment Act 2015 abolished bearer shares, therefore any articles associated with such were removed. |
· | Since the adoption of the previous Articles, the issued share capital of the Company has been streamlined and a number of share classes referred to within the previous Articles were no longer in issue. All unnecessary references to redundant classes of shares and their respective rights were removed. |
General Meetings
· | The Articles were amended to allow the Company to hold ‘hybrid’ general meetings to enable members to attend and participate in the business of the meeting by attending a satellite physical location or by means of an electronic facility. This is not intended to permit the Company to hold general meetings wholly by electronic means and the Company will remain able to hold physical general meetings. |
The Board
· | The wording relating to the circumstances in which a Director may be required to vacate office due to mental incapacity has been updated to reflect modern market practice. |
· | To better reflect current market practice, the Articles were extended to permit that Directors may signal their agreement with a decision of the board by electronic means. |
Dividends
· | The provisions enabling the Directors to pay interim dividends have been clarified and simplified in accordance with modern market practice and these now protect the Directors from claims in respect of such dividends where they have acted in good faith. |
· | The provisions have been clarified on the payment of dividends electronically, in line with market practice and reflecting that, increasingly, cheques and warrants are no longer the Company’s primary methods for paying dividends. |
Communications by the Company
· | The wording was updated to reflect current practice in respect of the Company’s correspondence with shareholders, including permitting correspondence with untraced shareholders by email, and clarifying address requirements for overseas shareholders.] |
The following summary description is qualified in its entirety by reference to the terms and provisions of the Memorandum and Articles (and, in the case of the summary description of the non-cumulative preference shares, by reference to the terms of issue of those shares determined by the Directors pursuant to the Articles prior to allotment). The Memorandum and Articles are registered with the Registrar of Companies of Scotland. Holders of any class of share are encouraged to read the full Memorandum and Articles, which have been filed as an exhibit to this Annual Report on Form 20-F. The company’s Memorandum and Articles of Association as in effect at the date of this Annual Report are registered with the Registrar of Companies of Scotland. The current Articles were adopted on 28 April 2021 to reflect the company’s change of name in July 2020 from The Royal Bank of Scotland Group plc to NatWest Group plc.
Incorporation and registration
The company was incorporated and registered in Scotland under the Companies Act 1948 as a limited company on 25 March 1968 under the name National and Commercial Banking Group Limited. On 3 September 1979 the name was changed to The Royal Bank of Scotland Group Limited and on 10 March 1982, it changed its name to its present name and was registered under the Companies Acts 1948 to 1980 as a public company with limited liability. The company is registered under Company No. SC45551. The Royal Bank of Scotland Group plc was renamed NatWest Group plc on 22 July 2020.
Purpose and objects
The 2006 Act greatly reduces the constitutional significance of a company’s memorandum of association and provides that a memorandum of association will record only the names of the subscribers and the number of shares each subscriber has agreed to take in the company. The 2006 Act further states that, unless a company’s articles provide otherwise, a company’s objects are unrestricted and abolishes the need for companies to have objects clauses. The company removed its objects clause together with all other provisions of its memorandum of association which by virtue of the 2006 Act were treated as forming part of the company’s articles. The articles of association contain an express statement regarding the limited liability of the shareholders.
Directors
At each annual general meeting of the company, any Director appointed since the last annual general meeting and any Directors who were not appointed at one of the preceding two annual general meetings shall retire from office and may offer themselves for re-election by the members. Directors may be appointed by the company by ordinary resolution or by the Board. A director appointed by the Board holds office only until the next annual general meeting, whereupon he will be eligible for re-election.
Unless and until otherwise determined by ordinary resolution, the directors (other than alternate directors) shall be not more than twenty five. There is no stipulation in the Articles regarding a minimum number of directors; under the 2006 Act, and in the absence of express provision, the minimum number is two.
NatWest Group plc – Annual Report on Form 20-F | 168 |
Shareholder information continued
Directors’ interests
A director shall not vote at a meeting of the Board or a Committee of the Board on any resolution of the Board concerning a matter in which he has an interest (otherwise than by virtue of his interest in shares, debentures or other securities of, or otherwise in or through, the company) which (together with any interest of any person connected with him) is, to his knowledge, material unless his interests arises only because the resolution relates to one or more of the following matters:
(i) | the giving of any security or indemnity to him pursuant to the Articles or in respect of money lent, or obligations incurred, by him at the request of, or for the benefit of, the company or any of its subsidiary undertakings; |
(ii) | the giving of any security or indemnity to a third party in respect of a debt or obligation of the company or any of its subsidiary undertakings for which he has assumed responsibility (in whole or in part) under a guarantee or indemnity or by the giving of security; |
(iii) | a proposal concerning an offer of shares, debentures or other securities of the company, or any of its subsidiary undertakings, for subscription or purchase, in which offer he is, or may be, entitled to participate as a holder of securities or in the underwriting or sub-underwriting of which he is to participate; |
(iv) | any proposal concerning any other body corporate in which he is interested, directly or indirectly, whether as an officer or shareholder or otherwise, provided that he is not the holder of shares representing one per cent or more of any class of the equity share capital of such body corporate; |
(v) | any proposal concerning the adoption, modification or operation of a pension fund or retirement, death or disability benefits scheme or employees’ share scheme which relates both to directors and employees of the company or a subsidiary of the company and does not provide any privilege or advantage in respect of any director which it does not accord to the employees to which the fund or scheme relates; |
(vi) | a contract or arrangement for the benefit of the employees of the company or any of its subsidiary undertakings which does not accord him any privilege or advantage not generally accorded to the employees to whom the contract or arrangement relates; and |
(vii) | a proposal concerning any insurance which the company proposes to purchase and/or maintain for the benefit of any directors or for persons who include directors of the company. |
Under the 2006 Act, a director must avoid a situation where he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the company’s interests.
The 2006 Act allows directors of public companies, where appropriate, to authorise conflicts and potential conflicts where the articles of association contain a provision to this effect. The 2006 Act also allows the articles of association to contain other provisions for dealing with directors’ conflicts of interest to avoid a breach of duty.
Clause 91 of the Articles, gives the directors authority to authorise any matter which would or might otherwise constitute or give rise to a breach of the duty of a director under the 2006 Act to avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict with the company.
Authorisation of any matter pursuant to Clause 91 must be approved in accordance with normal board procedures by directors who have no interest in the matter being considered. In taking the decision, the directors must act in a way they consider, in good faith, will be most likely to promote the company’s success.
Any authorisation of a matter may be given on or subject to such conditions or limitations as the directors determine, whether at the time of authorisation or subsequently, including providing for the exclusion of the interested directors from the receipt of information or participation in discussion relating to the matter authorised by the directors and providing that interested directors in receipt of confidential information from a third party are not obliged to disclose such information to the company or use the information in relation to the company’s affairs. Any authorisation may be terminated by the directors at any time.
A director is not, except as otherwise agreed by him, accountable to the company for any benefit which he, or a person connected with him, derives from any matter authorised by the directors and any contract, transaction or arrangement relating to such matter is not liable to be avoided on the grounds of such benefit.
Directors’ power to allot securities
In line with market practice, the Articles provide that the authority to allot shares and the disapplication of pre-emption rights will not be set out in the Articles, but subject to resolutions passed at the company’s annual general meeting to obtain these authorities on an annual basis.
Borrowing powers
The directors may exercise all the powers of the company to borrow money and to mortgage or charge its undertaking, property and uncalled capital and to issue debentures and other securities, whether outright or as collateral security for any debt, guarantee, liability or obligation of the company, or of any third party.
Qualifying shareholding
Directors are not required to hold any shares of the company by way of qualification.
NatWest Group plc – Annual Report on Form 20-F | 169 |
Shareholder information continued
Classes of shares
The company has issued and outstanding the following two general classes of shares, namely ordinary shares, and preference shares, to which the provisions set forth below apply.
Dividends
General
Subject to the provisions of the 2006 Act and Clause 122 of the Articles, the company may, by ordinary resolution, declare dividends on ordinary shares save that no dividend shall be payable except out of profits available for distribution, or in excess of the amount recommended by the Board or in contravention of the special rights attaching to any share. Any dividend which has remained unclaimed for 12 years from the date of declaration shall be forfeited and shall revert to the company.
Dividends may be paid by such method as the Directors, in their absolute discretion may decide, and may include direct debit, bank transfer and electronic funds transfer, cheque, warrant or other financial instrument. The company may cease sending dividend warrants and cheques by post or otherwise to a member if such instruments have been returned undelivered to, or left uncashed by, that member on at least two consecutive occasions, or, following one such occasion, reasonable enquiries have failed to establish any new address or account of the registered holder. The company may resume sending warrants and cheques if the holder requests such recommencement in writing.
Preference shares
Each cumulative preference share confers the right to a fixed cumulative preferential dividend payable half-yearly. Each non-cumulative preference share confers the right to a preferential dividend (not exceeding a specified amount) payable in the currency of the relevant share. The rate of such dividend and the date of payment thereof, together with the terms and conditions of the dividend, are as may be determined by the directors prior to allotment. Cumulative preference share dividends are paid in priority to any dividend on any other class of share.
The non-cumulative preference shares rank for dividend after the cumulative preference shares but rank pari passu with each other and any shares expressed to rank, in terms of participation in the profits of the company, in some or all respects pari passu therewith and otherwise in priority to dividends payable on the ordinary shares and any other share capital in the company.
The directors may resolve prior to the issue and allotment of any series of non-cumulative preference shares that full dividends in respect of a particular dividend payment date will not be declared and paid if, (i) in its sole and absolute discretion, the directors resolve prior to the relevant dividend payment date that such dividend (or part thereof) shall not be paid and/or (ii) in the opinion of the directors, payment of a dividend would cause a breach of the UK Financial Conduct Authority’s capital adequacy requirements applicable to the company or its subsidiaries, or subject to the next following paragraph, insufficient distributable profits of the company are available to cover the payment in full of all dividends after having paid any dividends payable on any of the cumulative preference shares.
If dividends will be paid but, in the opinion of the directors, insufficient distributable profits of the company are available to cover the payment in full of dividends after having paid any dividends payable on any of the cumulative preference shares, dividends will be declared by the directors, pro rata on the non-cumulative preference shares to the extent of the available distributable profits.
The non-cumulative preference shares will carry no further rights to participate in the profits of the company and if, and to the extent, any dividend or part of any dividend is on any occasion not paid for any of the reasons described above, holders of non-cumulative preference shares will have no claim in respect of such non-payment.
If any dividend is not payable for the reasons described in clause (ii) of the third paragraph of this subsection, the directors may pay a special dividend not exceeding US$0.01, £0.01 or €0.01 (depending on the currency of the relevant preference share) per share.
If the dividend payable on any series of non-cumulative preference shares on the most recent payment date is not paid in full, or if a sum is not set aside to provide for such payment in full, in either case for the reasons set forth in clause (ii) of the third paragraph of this subsection, no dividends may be declared on any other share capital of the company and no sum may be set aside for the payment of a dividend on any other share capital (in each case other than the cumulative preference shares), unless, on the date of declaration, an amount equal to the dividend payable in respect of the then current dividend period for such series of non-cumulative preference shares is set aside for payment in full on the next dividend payment date.
If any dividend payable on the non-cumulative preference shares is not paid in full or if a sum is not set aside to provide for such payment in full (in either case for the reasons set forth in clause (ii) of the third paragraph of this subsection), the company may not redeem or purchase or otherwise acquire any other share capital of the company and may not set aside any sum nor establish any sinking fund for its redemption, purchase or other such acquisition, until such time as dividends have been declared and paid in full in respect of successive dividend periods together aggregating not less than twelve months.
The non-payment of any dividend (in full or in part) by reason of the exercise of the directors’ discretion referred to in clause (i) of the third paragraph of this subsection, shall not prevent or restrict (a) the declaration and payment of dividends on any other series of non-cumulative preference shares or on any non-cumulative preference shares expressed to rank pari passu with the non-cumulative preference shares, (b) the setting aside of sums for the payment of such dividends, (c) except as set forth in the following paragraph, the redemption, purchase or other acquisition of shares in the company by the company, or (d) except as set forth in the following paragraph, the setting aside of sums, or the establishment of sinking funds, for any such redemption, purchase or other acquisition by the company.
NatWest Group plc – Annual Report on Form 20-F | 170 |
Shareholder information continued
If dividends are not declared and paid in full on any series of non-cumulative preference shares as a result of the directors’ discretion referred to in clause (i) of the third paragraph of this subsection, then the company may not redeem, purchase or otherwise acquire for any consideration any share capital ranking after such preference shares, and may not set aside any sum nor establish any sinking fund for the redemption, purchase or other acquisition thereof, until such time as the company has declared and paid in full dividends on such series of non-cumulative preference shares in respect of successive dividend periods together aggregating no less than twelve months. In addition, no dividend may be declared or paid on any of the company’s share capital ranking after such preference shares until the dividend in respect of a particular dividend payment date payable on the preference shares to which the directors’ discretion in clause (i) of the third paragraph of this subsection applies has been declared and paid in full.
With effect from 19 April 2011, subject to existing class rights of shareholders, new preference shares can be issued with such rights and restrictions as the directors may determine.
Distribution of assets on liquidation
Cumulative preference shares
In the event of a return of capital on a winding-up or otherwise, the holders of cumulative preference shares are entitled to receive out of the surplus assets of the company available for distribution amongst the members (i) in priority to the holders of the non-cumulative preference shares and any other shares ranking pari passu therewith, the arrears of any fixed dividends including the amount of any dividend due for a payment after the date of commencement of any winding-up or liquidation but which is payable in respect of a half-year period ending on or before such date and (ii) pari passu with the holders of the non-cumulative preference shares and any other shares ranking pari passu therewith, the amount paid up or credited as paid up on such shares together with any premium.
Non-cumulative preference shares
Each non-cumulative preference share will confer on a winding up or liquidation (except (unless otherwise provided by the terms of issue) a redemption or purchase by the company of any shares in the capital of the company), the right to receive out of surplus assets of the company available for distribution amongst the members after payment of the arrears (if any) of the cumulative dividend on the cumulative preference shares and in priority to the holders of the ordinary shares, repayment of the amount paid up or credited as paid up on the non-cumulative preference shares together with any premium paid on issue pari passu with the holders of the cumulative preference shares and together with an amount equal to accrued and unpaid dividends.
General
On a winding-up of the company, the liquidator may, with the authority of any extraordinary resolution and any other sanction required by the Insolvency Act 1986 and subject to the rights attaching to any class of shares after payment of all liabilities, including the payment to holders of preference shares, divide amongst the members in specie or kind the whole or any part of the assets of the company or vest the whole or any part of the assets in trustees upon such trusts for the benefit of the members and may determine the scope and terms of those trusts. No member shall be compelled to accept any assets on which there is a liability.
Voting Rights
General
Subject to any rights or restrictions as to voting attaching to any shares or class of shares, on a show of hands every member who is present in person or by proxy at a general meeting shall have one vote (except that a proxy who is appointed by more than one member has one vote for and one vote against if the proxy has been instructed by one or more members to vote for the resolution and by one or more members to vote against the resolution) and on a poll every member present in person or by proxy shall have one vote for each 25 pence in nominal amount of shares held by him. No member shall, unless the directors otherwise determine, be entitled to vote at a general meeting or at a separate meeting of the holders of shares in the capital of the company, either in person or by proxy, in respect of any share held by him unless all monies presently payable by him in respect of that share have been paid. There is no obligation on the company to check and ensure that a proxy is voting at a general meeting in accordance with the voting directions provided by the appointing member. The chairman of a general meeting does not have a casting vote in the event of an equality of votes, as this is not permitted under the 2006 Act. The quorum required for a meeting of members is not less than five members present in person and entitled to vote.
If a meeting is adjourned because of the lack of a quorum, the members present in person or by proxy and entitled to vote will constitute a quorum at the adjourned meeting.
Meetings are convened upon written notice of not less than 21 days in respect of annual general meetings of members and not less than 14 days in respect of other meetings of members subject to certain conditions. An adjourned meeting may be called at shorter notice than applied to the original meeting, but where a meeting is adjourned for lack of quorum only if the adjourned meeting is held at least ten days after the original meeting and does not include any new business.
Cumulative preference shares
At a general meeting of the company, every holder of a cumulative preference share who is present in person or by proxy shall be entitled to one vote on a show of hands and, on a poll, every person who is present in person or by proxy shall have one vote for each 25 pence in nominal amount of shares held. No member shall be entitled to vote any share in person or by proxy unless all moneys owed in respect of that share have been paid.
Non-cumulative preference shares
Holders of non-cumulative preference shares are not entitled to attend or vote at any general meeting unless the business of the meeting includes the consideration of a resolution for the winding-up of the company or any resolution directly varying or abrogating the rights attached to any such shares and then in such case only to speak to and vote upon any such resolution. However, holders have the right to vote in respect of any matter when the dividend payable on their shares has not been declared in full for such number of dividend periods as the directors shall determine prior to the allotment thereof.
NatWest Group plc – Annual Report on Form 20-F | 171 |
Shareholder information continued
Whenever a holder is entitled to vote at a general meeting, on a show of hands every shareholder who is present in person has one vote and, on a poll, every such holder who is present in person or by proxy shall have such number of votes as may be determined by the directors prior to allotment.
Redemption
Except as set forth in the following paragraph, unless the directors determine, prior to allotment of any particular series of non-cumulative preference shares, that such series shall be non-redeemable, the preference shares will be redeemable at the option of the company on any date which (subject to certain exceptions described in the terms of such shares) falls no earlier than such date (if any) as may be fixed by the directors, prior to allotment of such shares. On redemption, there shall be paid on each non-cumulative preference share the aggregate of its nominal amount together with any premium paid on issue, where applicable a redemption premium and accruals of dividend.
If the company wishes to issue redeemable shares, the Directors are authorised to determine the terms and manner of redemption.
Purchase
General
Under the 2006 Act a company requires shareholder authority to purchase its own shares, consolidate and sub-divide its shares and reduce its share capital.
Whenever non-cumulative preference shares are issued in the future the Articles have no restriction on the maximum purchase price payable by the company unless such restriction is expressly applied by the directors in relation to an issuance of non-cumulative preference shares.
Changes in share capital and variation of rights
Subject to the provisions of the 2006 Act and without prejudice to any rights attached to any existing shares or class of shares, any share may be issued with such rights or restrictions as the company may by ordinary resolution determine or, subject to and in default of such determination, as the Board shall determine. Subject to the provisions of the 2006 Act, the company may issue shares which are, or at the option of the company or the holder are liable, to be redeemed. Subject to the provisions of the 2006 Act and the Articles, unissued shares are at the disposal of the Board.
The company may by ordinary resolution: increase its share capital; consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; subject to the provisions of the 2006 Act, subdivide its shares, or any of them, into shares of smaller amount than is fixed by the Memorandum; or cancel any shares which have not been taken or agreed to be taken by any person and diminish the amount of its share capital by the amount of the shares so cancelled.
Subject to the provisions of the 2006 Act, if at any time the capital of the company is divided into different classes of shares, the rights attached to any class of shares may (unless further conditions are provided by the terms of issue of the shares of that class) be varied or abrogated, whether or not the company is being wound up, either with the consent in writing of the holders of three-quarters in-nominal value of the issued shares of the class or with the sanction of an extraordinary resolution passed at a separate general meeting of holders of the shares of the class (but not otherwise). To any such separate general meeting the provision of the Articles relating to general meeting s will apply, save that:
(i) | if at any adjourned meeting of such holders a quorum as defined above is not present, two people who hold shares of the class, or their proxies, are a quorum; and |
(ii) | any such holder present in person or by proxy may demand a poll. |
The rights attaching to any class of shares having preferential rights are not, unless otherwise expressly provided by the terms of issue thereof, deemed to be varied by the creation or issue of further shares ranking, as regards participation in t he profits or assets of the company, pari passu therewith, but in no respect in priority thereto.
Disclosure of interests in shares
The 2006 Act gives the company the power to require persons who it believes to be, or have been within the previous three years, interested in its shares, to disclose prescribed particulars of those interests. Failure to supply the information or supplying a statement which is materially false may lead to the Board imposing restrictions upon the relevant shares. The restrictions available are the suspension of voting or other rights conferred by membership in relation to meetings of the company in respect of the relevant shares and, additionally, in the case of a shareholding representing at least 0.25 per cent of the class of shares concerned, the withholding of payment of dividends on, and the restriction of transfers of, the relevant shares.
Limitations on rights to own share
There are no limitations imposed by UK law or the Memorandum and Articles on the right of non-residents or foreign persons to hold or vote the company’s shares other than the limitations that would generally apply to all of the company’s shareholders.
Members resident abroad
Members with registered addresses outside the United Kingdom are not entitled to receive notices from the company unless they have given the company an address within the United Kingdom at which such notices may be served.
Sending notices and other documents to shareholders
The company may communicate with members by electronic and/or website communications. A member whose registered address is not within the United Kingdom shall not be entitled to receive any notice from the Company unless he gives the Company a postal address within the United Kingdom at which notices may be given to him.
Documents on display
Documents concerning the company may be inspected at 36 St Andrew Square, Edinburgh, EH2 2YB.
NatWest Group plc – Annual Report on Form 20-F | 172 |
Shareholder information continued
Executive directors’ service contracts and copies of directors’ indemnities granted by the company in terms of section 236 of the Companies Act 2006 may be inspected at the company’s office at Gogarburn, Edinburgh, EH12 1HQ (telephone +44 (0)131 556 8555).
We are subject to the informational requirements of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), and in accordance therewith, we file reports and other information with the SEC. The SEC’s website, at http://www.sec.gov, and our website, at http://www.natwestgroup.com, contain reports and other information in electronic form that we have filed. Except for SEC filings incorporated by reference in this prospectus supplement and the accompanying prospectus, none of the information on or that can be access through our website is part of this prospectus supplement or the accompanying prospectus. You may also request a copy of any filings referred to below (other than exhibits not specifically incorporated by reference) at no cost, by contacting us at NatWest Group plc, Gogarburn, P.O. Box 1000, Edinburgh EH12 1HQ, Scotland. Telephone +44 (0) 131 556 8555.
Incorporation and registration
The company was incorporated and registered in Scotland under the Companies Act 1948 as a limited company on 25 March 1968 under the name National and Commercial Banking Group Limited, and changed its name to The Royal Bank of Scotland Group Limited on 3 September 1979. On 10 March 1982 it was re-registered under the Companies Acts 1948 to 1980 as a public company with limited liability. The company is registered under Company No. SC45551. The Royal Bank of Scotland Group plc was renamed NatWest Group plc on 22 July 2020.
Important addresses
Shareholder enquiries Registrar
Computershare Investor Services PLC
The Pavilions
Bridgwater Road Bristol BS99 6ZZ
Telephone: +44 (0)370 702 0135
Facsimile: +44 (0)370 703 6009
Website: www-uk.computershare.com/investor/contactus
ADR Depositary Bank
BNY Mellon Shareowner Services
PO Box 505000
Louisville, KY 40233-5000
Direct Mailing for overnight packages:
BNY Mellon Shareowner Services
462 South 4th Street
Suite 1600
Louisville KY 40202
Telephone: 1-888-269-2377 (US callers – toll free)
Telephone: +1 201 680 6825 (International)
Email: shrrelations@cpushareownerservices.com
Website: www.mybnymdr.com
Corporate Governance
NatWest Group plc
PO Box 1000
Gogarburn Edinburgh EH12 1HQ
Telephone: +44 (0)370 702 0135
Investor Relations
250 Bishopsgate London EC2M 4AA
Telephone: +44 (0)207 672 1758
Facsimile: +44 (0)207 672 1801
Email: investor.relations@natwest.com
Registered office
36 St Andrew Square
Edinburgh EH2 2YB
Telephone: +44 (0)131 556 8555
Registered in Scotland No. SC45551
Website
natwestgroup.com
Principal offices
NatWest Group plc
PO Box 1000, Gogarburn, Edinburgh EH12 1HQ
NatWest Group plc – Annual Report on Form 20-F | 173 |
Shareholder information continued
NatWest Markets Plc
250 Bishopsgate, London, EC2M 4AA, England
National Westminster Bank Plc
250 Bishopsgate, London, EC2M 4AA, England
Ulster Bank Limited
11-16 Donegall Square East,
Belfast, Co Antrim, BT1 5UB, Northern Ireland
Ulster Bank Ireland DAC
Ulster Bank Head Office, Block B
Central Park, Leopardstown
Dublin 18, D18 N153
NatWest Markets Group Holdings Corp.
251 Little Falls Drive
Wilmington, DE, 19808
Coutts Company
440 Strand, London WC2R 0QS, England
The Royal Bank of Scotland International Limited
Royal Bank House, 71 Bath Street
St Helier, JE4 8PJ
NatWest Group plc – Annual Report on Form 20-F | 174 |
Exhibit Index
1.1 | |
2.1 | |
2.2 | |
2.3 | Neither NatWest Group plc nor NatWest Markets plc is party to any single instrument relating to long-term debt pursuant to which a total amount of securities exceeding 10% of the Group’s total assets (on a consolidated basis) is authorized to be issued. Each of NatWest Group plc and NatWest Markets plc hereby agrees to furnish to the Securities and Exchange Commission (the “Commission”), upon its request, a copy of any instrument defining the rights of holders of its long-term debt or the rights of holders of the long-term debt of any of its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed with the Commission |
2.4 | Description of Securities Registered under Section 12 of the Exchange Act |
4.1 | |
4.2 | |
4.3 | |
4.4 | |
4.5 | |
4.6 | |
4.7 | |
4.8 | |
4.9 | |
4.10 | |
4.11 | |
4.12 | |
4.13 | |
4.14 | |
4.15 | |
4.16(1) | |
4.17(1) | |
4.18(1) | |
4.19(1) | |
4.20(1) | |
4.21 | |
4.22 | |
8.1 | |
12.1 | |
12.2 | |
13.1 |
NatWest Group plc – Annual Report on Form 20-F | 175 |
15.1 | Consent of independent registered public accounting firm (Ernst Young LLP) |
15.2 | |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Scheme |
101.CAL | XBRL Taxonomy Extension Scheme Calculation Linkbase |
101.DEF | XBRL Taxonomy Extension Scheme Definition Linkbase |
101. LAB | XBRL Taxonomy Extension Scheme Label Linkbase |
101.PRE | XBRL Taxonomy Extension Scheme Presentation Linkbase |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101) |
Note:
(1) | Confidential treatment has been granted. |
NatWest Group plc – Annual Report on Form 20-F | 176 |
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
NatWest Group plc
Registrant
/s/ Katie Murray
Katie Murray
Group Chief Financial Officer
3 March 2022
NatWest Group plc – Annual Report on Form 20-F | 177 |