Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
29 July 2022
Commission file number: 001-10306
Form 6-K
NatWest Group plc
Gogarburn
PO Box 1000
Edinburgh EH12 1HQ
Scotland
United Kingdom
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F X Form 40-F
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):__
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):__
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
If "Yes" is marked, indicate below the file number assigned to
the registrant in connection with Rule 12g3-2(b): 82-
This report on Form 6-K, except for any information contained on any websites linked or documents referred to in this report, shall be deemed incorporated by reference into the company’s Registration Statement on Form F-3 (File No. 333-261837) and to be a part thereof from the date on which this report is filed, to the extent not superseded by documents or reports subsequently filed or furnished.
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 NatWest Group’s initial area of focus, 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: political and economic risks and uncertainty in the UK and global markets, including due to high inflation, supply chain disruption and the Russian invasion of Ukraine; the impact of the COVID-19 pandemic on NatWest Group and its customers; uncertainty regarding the effects of Brexit; changes in interest rates and foreign currency exchange rates; and HM Treasury’s ownership as the largest shareholder 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 future assessments by the Prudential Regulation Authority and the Bank of England ; 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, including publication of an initial climate transition plan in 2023 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 are not measures within the scope of IFRS and 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 in accordance with IFRS. 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. The process we have adopted to define, gather and report data on our performance on Climate and ESG measures is not subject to the formal processes adopted for financial reporting in accordance with IFRS. 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. Please also refer to the cautionary statement in the section entitled ‘Climate-related and other forward-looking statements and metrics’ of the NatWest Group 2021 Climate-related Disclosures Report.
No securities offering
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
Introduction
Presentation of information
‘Parent company’ refers to NatWest Group plc and ‘NatWest Group’ refers to NatWest Group plc and its subsidiary and associated undertakings. 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.
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, respectively, and references to ‘pence’ represent pence in the United Kingdom (‘UK’). References 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, and references to ‘cents’ represent cents in the US. The abbreviation ‘€’ represents the ‘euro’, and the abbreviations ‘€m’ and ‘€bn’ represent millions and thousands of millions of euros, respectively, and references to ‘cents’ represent cents in the European Union (‘EU’).
On 27 January 2022, NatWest Group announced that a new franchise, Commercial & Institutional, would be created, bringing together the Commercial, NatWest Markets and RBSI businesses to form a single franchise, with common management and objectives, to best support our customers across the full non-personal customer lifecycle. Comparatives have been re-presented in this document. Refer to the re-segmentation document published on 22 April 2022 for further details. The re-presentation of operating segments does not change the consolidated financial results of NatWest Group.
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.
NatWest Group – Form 6-K Interim Results 2022 | 2 |
Non-IFRS financial measures
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 certain 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. For details of the basis of preparation and reconciliations where appropriate refer to the Appendix, ‘Non-IFRS financial measures’, in this announcement. These measures include:
| 1. | Go forward group income excluding notable items |
Go-forward group income excluding notable items is calculated as total income excluding Ulster Bank RoI total income and excluding notable items. The exclusion of notable items aims to remove the impact of one-offs which may distort period-on-period comparisons.
| 2. | Go-forward group other operating expenses |
Other operating expenses is calculated as total operating expenses less litigation and conduct costs. Other operating expenses of the Go-forward group excludes Ulster Bank RoI. Our cost target for 2022 is based on this measure and we track progress against it.
| 3. | Go-forward group profit before impairment releases/(losses) |
Go-forward group profit before impairment releases/(losses) is calculated as total profit before impairment releases/(losses) less Ulster Bank RoI loss before impairment (lossess)/releases.
| 4. | Operating expenses - management view |
The management analysis of operating expenses shows litigation and conduct costs on a separate line. These amounts are included within staff costs and other administrative expenses in the statutory analysis. Other operating expenses excludes litigation and conduct costs, which are more volatile and may distort comparisons with prior periods.
| 5. | Cost:income ratio |
The cost:income ratio is calculated as total operating expenses less operating lease depreciation divided by total income less operating lease depreciation. This is a common metric used to compare profitability across the banking industry.
| 6. | NatWest Group return on tangible equity |
Return on tangible equity comprises annualised profit or loss for the period attributable to ordinary shareholders divided by average tangible equity. Average tangible equity is average total equity excluding average non-controlling interests, average other owners’ equity and average intangible assets. Go-forward group return on tangible equity is calculated as annualised profit for the period less Ulster Bank RoI divided by Go-forward group total tangible equity. Go forward RWAe applying factor is the Go- forward group average RWAe as a percentage of total Natwest Group average RWAe. 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 equity. Average RWAe is defined as average segmental RWAs incorporating the effect of capital deductions. This is multiplied by an allocated equity factor for each segment to calculate the average notional tangible equity. This measure shows the return generated by operating segments on equity deployed.
| 8. | Bank net interest margin |
Bank net interest margin is defined as annualised net interest income of the Go-forward group, 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 excluding liquid asset buffer. 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 presents net interest margin on a basis more comparable with UK peers and excludes the impact of regulatory driven factors.
| 9. | Tangible net asset value (TNAV) per ordinary share |
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 allows for comparison with other per ordinary share metrics including the share price.
NatWest Group – Form 6-K Interim Results 2022 | 3 |
| 10. | Go-forward group 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.
| 11. | Go-forward group customer deposits |
Go-forward group customer deposits is calculated as total customer deposits less Ulster Bank RoI customer deposits.
Performance metrics based on but not defined under IFRS
| 1. | Loan:deposit ratio |
Loan:deposit ratio is calculated as net customer loans held at amortised cost excluding reverse repos divided by total customer deposits excluding repos. Prior periods have been re-presented. This is a common metric used to assess liquidity. This removal of repos and reverse repos reduces volatility and presents the ratio on a basis that is more comparable to UK peers.
| 2. | Loan impairment rate |
Loan impairment rate is the annualised 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 Commercial & Institutional customers. AUAs comprise third party assets held on an execution-only basis in custody by Private Banking, Retail Banking and Commercial & Institutional for their customers, 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 Commercial & Institutional franchises.
Private Banking is the centre of expertise for asset management across NatWest Group servicing all client segments across Retail Banking, Private Banking and Commercial & Institutional Banking.
| 5. | Net new money |
Net new money refers to client cash inflows and outflows relating to investment products (this can include transfers from saving accounts). Net new money excludes the impact of EEA resident client outflows following the UK’s exit from the EU.
Net new money is reported and tracked to monitor the business performance of new business inflows and management of existing client withdrawals across Retail Banking, Private Banking and Commercial & Institutional Banking.
| 6. | Wholesale funding |
Wholesale funding comprises deposits by banks (excluding repos), debt securities in issue and subordinated liabilities.
Funding risk is the risk of not maintaining a diversified, stable and cost-effective funding base. The disclosure of wholesale funding highlights the extent of our diversification and how we mitigate funding risk.
NatWest Group – Form 6-K Interim Results 2022 | 4 |
NatWest Group plc
Interim results for the period ended 30 June 2022
Chief Executive, Alison Rose, commented
“NatWest Group delivered a strong performance in the first half of 2022, building on two years of progress against our strategic priorities. We are growing our lending to customers and continuing our £3 billion investment programme to create a simpler and better banking experience whilst delivering sustainable dividends and returns for our shareholders.
We know that continued increases in the cost of living are impacting people, families and businesses across the UK and we have put in place a range of targeted measures to support those who are likely to need it most. Our strong levels of profitability and capital generation mean we are well positioned to provide this support.
By building deeper relationships with our customers at every stage of their lives, we will deliver sustainable growth and help them to thrive in a challenging environment.”
Strong H1 2022 performance
| - | H1 2022 attributable profit of £1,891 million and a return on tangible equity of 13.1%. The cost:income ratio was 58.3% in the first half compared with 67.6% in H1 2021. |
| - | Total income of £6,219 million was £1,078 million, or 21.0%, higher compared with H1 2021. Excluding notable items, income in the Go-forward group increased by £819 million, or 16.2%, compared with H1 2021 principally reflecting the impact of base rate increases and volume growth. |
| - | Net interest margin of 1.69% was 18 basis points higher compared with Q1 2022. Bank net interest margin (NIM) of 2.72% was 26 basis points higher than Q1 2022 driven by the impact of base rate rises. |
| - | Operating expenses of £3,653 were £154 million, or 4.4%, higher compared with H1 2021. Other operating expenses in the Go-forward group were £50 million, or 1.5%, lower than H1 2021. |
| - | H1 2022 operating profit before impairments was £2,566 million, up 56.3% on H1 2021. H1 2022 operating profit before impairments in the Go-forward group was £2,787 million, up 53.5% on H1 2021. |
| - | A net impairment release of £54 million, £46 million in the Go-forward group in H1 2022 reflected the low levels of realised losses we continue to see across our portfolio, although we continue to monitor our book given the uncertain economic outlook. |
Robust balance sheet underpins sustainable growth
| - | Net lending increased by £3.6 billion during H1 2022 to £362.6 billion. Go-forward group net lending increased by £9.3 billion during H1 2022 to £361.6 billion, with growth well balanced across the business. |
| - | Customer deposits increased by £12.3 billion during H1 2022 to £492.1 billion. Customer deposits in the Go-forward group increased by £14.8 billion during H1 2022 to £476.2 billon. |
| - | The liquidity coverage ratio (LCR) of 159%, representing £76.1 billion above 100%, decreased by 13 percentage points compared with Q4 2021. |
Continued strong capital generation supports substantial distributions to shareholders
| - | We are pleased to announce an interim dividend of 3.5 pence per share, up 17% on 2021 and a special dividend with share consolidation of £1,750 million, or 16.8 pence per share, subject to shareholder approval. Taken together these will deliver 20.3p of dividends per share. |
| - | When combined with the directed buyback in the first quarter, the proposed interim and special dividends bring total distributions deducted from capital in the first half to £3.3 billion, or c.32 pence per share. |
| - | CET1 ratio of 14.3% was c.160 basis points lower than 1 January 2022 as total distributions of c.190 basis points and increased RWAs of c.30 basis points were partially offset by the attributable profit of c.110 basis points. |
| - | RWAs increased by £3.5 billion compared to 1 January 2022 to £179.8 billion. |
NatWest Group – Form 6-K Interim Results 2022 | 5 |
Outlook(1)
The economic outlook remains uncertain. The following statements are based on central economic forecasts, as detailed on pages 25 to 27, which include an anticipated increase in the central bank rate to 2.0% by the end of the year. We will monitor and react to market conditions and refine our internal forecasts as the economic position evolves.
| - | In 2022, we expect income excluding notable items to be around £12.5 billion in the Go-forward group (2). |
| - | We expect NIM to be greater than 2.70% for full year 2022 in the Go-forward group. |
| - | We are investing around £3 billion(3) over 2021 to 2023 and, with continuing simplification, we plan to reduce Go-forward group operating expenses, excluding litigation and conduct costs, by around 3% in 2022 and to keep broadly stable in 2023, with positive jaws. In 2023 we expect some of the current inflationary impacts to be more significant, however this will be offset by ongoing savings from our investment programme. |
| - | We expect our 2022 and 2023 impairment charge to be lower than our through the cycle loss rate of 20-30 basis points, with 2022 below 10 basis points in the Go-forward group. |
| - | In 2023, we expect to achieve a return on tangible equity in the range of 14-16% for the Group. |
Capital and funding
| - | We aim to end 2022 with a CET1 ratio of around 14% and target a ratio of 13-14% by 2023. |
| - | We intend to maintain ordinary dividends of around 40% of attributable profit and to distribute a minimum of £1 billion in each of 2022 and 2023. |
| - | We intend to maintain capacity to participate in directed buybacks of the UK Government stake, recognising that any exercise of this authority would be dependent upon HMT’s intentions and is limited to 4.99% of issued share capital in any 12-month period. |
| - | We will consider further on-market buybacks as part of our overall capital distribution approach as well as inorganic growth opportunities provided they are consistent with our strategy and have a strong shareholder value case. |
| - | As part of the NatWest Group capital and funding plans we intend to issue between £3 billion to £5 billion of MREL-compliant instruments in 2022, with a continued focus on issuance under our Green, Social and Sustainability Bond framework. NatWest Markets plc’s funding plan targets £4 billion to £5 billion of public benchmark issuance. |
Ulster Bank RoI
| - | We have made significant progress on our phased withdrawal from the Republic of Ireland and have binding agreements in place for c.90% of gross customer loans. We expect the majority of the commercial asset sale to Allied Irish Banks and the majority of the asset sale to Permanent TSB to be largely complete by the end of 2022 and for the tracker mortgage asset sale to Allied Irish Banks to complete in the first half of 2023. |
| - | With this progress, we continue to expect total exit costs of €900 million, with the majority incurred by the end of 2023. In Q3 2022 we expect to incur around €350 million of these exit costs as a result of the reclassification of UBIDAC mortgages to fair value. |
| - | We continue to expect the phased withdrawal to be capital accretive. |
| (1) | The guidance, targets, expectations, and trends discussed in this section represent NatWest Group plc management’s current expectations and are subject to change, including as a result of the factors described in the NatWest Group plc Risk Factors section on pages 137 to 158 of the 2021 Annual Report on Form 20-F and the Summary Risk Factors on pages 111 to 112 of this announcement. These statements constitute forward-looking statements. Refer to Forward-looking statements in this announcement. |
| (2) | Go-forward group excludes Ulster Bank RoI and discontinued operations. |
| (3) | Denotes cash investment spend excluding certain regulatory and legacy programmes. |
NatWest Group – Form 6-K Interim Results 2022 | 6 |
Our Purpose in action
We champion potential, helping people, families and businesses to thrive. We are breaking down barriers, building financial confidence and delivering sustainable growth and returns by living up to our purpose. Some key achievements from H1 2022 include:
People and families
| - | We have proactively contacted 2.7 million personal and business customers year to date, offering support and information on the cost of living. We have also launched an online Cost of Living hub to share resources and tools, and to inform customers of the support that is available to them through third parties. |
| - | We delivered 3.7 million financial capability interactions in H1 2022, including carrying out 0.4 million financial health checks. |
| - | In Retail Banking, we have completed £1.4 billion of green mortgages (which give a discounted interest rate to energy efficient properties) since they were launched in Q4 2020, including £661 million in H1 2022. |
| - | Our support for young people continues with the launch of our new pocket money product, NatWest Rooster Money, which helps children build money confidence and develop positive money habits around saving and spending. We acquired Rooster along with 130,000 customers and since the beginning of the year added 17,000 new customers plus a smooth connection to Rooster via the main Mobile App. |
Businesses
| - | We completed £11.9 billion of climate and sustainable funding and financing in H1 2022, bringing the cumulative contribution to £20.0 billion against our target of £100 billion between 1 July 2021 and the end of 2025. |
| - | We announced an additional £1.25 billion lending package to the UK farming community and our 40,000 customers within it, building on an earlier set of measures for the sector announced in June 2022. |
| - | To provide certainty to SMEs, Business Current Accounts remain available without a minimum charge and we are freezing the standard published tariffs on these accounts for the next 12 months. |
| - | NatWest Markets won the ‘Most Impressive Investment Bank for Corporate Green and ESG-Linked Bonds’ as well as the ‘Most Impressive FIG (Financial Institutions Group) House in Sterling’ at the 2022 Global Capital Bond Awards in June 2022. |
Colleagues
| - | To support our colleagues with the rising cost of living, we announced a permanent increase in base pay averaging £1,000 for more than 22,000 colleagues globally. |
| - | We announced a three-year partnership with the University of Edinburgh to make climate education available to all colleagues across the bank, including the delivery of more in-depth Climate Change Transformation and Sector Specific programmes for over 16,000 roles which require a broader level of knowledge. |
| - | To support our colleagues who are carers, unpaid carers’ leave can now be taken day-by-day, instead of only in full-week blocks, up to a maximum of four weeks in a year, and up to a maximum of 18 weeks in total. |
| - | Building on our campaign to support learning for the future, colleagues are now able to take two dedicated, learning-for-the-future days each year to support the development of future skills. |
Communities
| - | To help with the rising cost of living, we announced a new £4 million hardship fund to provide grants and support, delivered through partner organisations including Citizens Advice, StepChange and Money Advice Trust. |
| - | We launched the pilot scheme for the NatWest Thrive with Marcus Rashford programme. The programme aims to help more young people pursue their dreams, appreciate their strengths and become more money confident. |
| - | In collaboration with Aston University, we published the report ‘Time to change: A blueprint for advancing the UK’s ethnic minority businesses’, which sets out recommendations for policymakers, companies and entrepreneurs to advance the growth potential of ethnic minority businesses. |
| - | To champion female entrepreneurship in the UK, NatWest Group and The Telegraph launched the ‘100 Female Entrepreneurs to Watch’ list. 10 female entrepreneurs will be selected from the list for further support, and one business will receive a £10,000 investment grant from NatWest Group as well as a year’s mentorship from a Rose Review board member. |
| - | We pledged £100,000 to support 500 Ukrainian students to continue their studies at Polish universities and polytechnics following the Russian invasion. |
Business performance summary
Half year ended | Quarter ended | |||||||||
30 June | 30 June | 30 June | 31 March | 30 June | ||||||
2022 | 2021 | 2022 | 2022 | 2021 | ||||||
| £m |
| £m |
| £m |
| £m |
| £m | |
Continuing operations |
|
|
|
|
|
|
|
|
|
|
Total income |
| 6,219 |
| 5,141 |
| 3,211 |
| 3,008 |
| 2,571 |
Operating expenses |
| (3,653) |
| (3,499) |
| (1,833) |
| (1,820) |
| (1,695) |
Profit before impairment releases |
| 2,566 |
| 1,642 |
| 1,378 |
| 1,188 |
| 876 |
Operating profit before tax |
| 2,620 |
| 2,325 |
| 1,396 |
| 1,224 |
| 1,473 |
Profit attributable to ordinary shareholders |
| 1,891 |
| 1,842 |
| 1,050 |
| 841 |
| 1,222 |
Excluding notable items within total income (1) |
|
|
|
|
|
|
|
|
|
|
Total income excluding notable items (2) |
| 5,898 |
| 5,111 |
| 3,114 |
| 2,784 |
| 2,532 |
Operating expenses |
| (3,653) |
| (3,499) |
| (1,833) |
| (1,820) |
| (1,695) |
Profit before impairment releases and excluding notable items |
| 2,245 |
| 1,612 |
| 1,281 |
| 964 |
| 837 |
Operating profit before tax and excluding notable items |
| 2,299 |
| 2,295 |
| 1,299 |
| 1,000 |
| 1,434 |
Go-forward group (3) |
|
|
|
|
|
|
|
|
|
|
Total income (2) |
| 6,186 |
| 5,076 |
| 3,199 |
| 2,987 |
| 2,541 |
Total income excluding notable items (2) |
| 5,865 |
| 5,046 |
| 3,102 |
| 2,763 |
| 2,502 |
Other operating expenses |
| (3,241) |
| (3,291) |
| (1,636) |
| (1,605) |
| (1,608) |
Profit before impairment releases/(losses) (2) | 2,787 | 1,816 | 1,507 | 1,280 | 971 | |||||
Return on tangible equity |
| 14.1% | 12.8% | 16.5% | 11.9% | 17.3% | ||||
Performance key metrics and ratios |
|
|
|
|
|
| ||||
Bank net interest margin (2,4) |
| 2.59% | 2.35% | 2.72% | 2.46% | 2.35% | ||||
Bank average interest earning assets (2,4) |
| £337bn | £321bn | £340bn | £333bn | £323bn | ||||
Cost:income ratio (2) |
| 58.3% | 67.6% | 56.7% | 60.1% | 65.5% | ||||
Loan impairment rate (2) |
| (3bps) | (37bps) | (2bps) | (1bp) | (65bps) | ||||
Total earnings per share attributable to ordinary shareholders - basic |
| 17.4p | 15.6p | 10.0p | 7.5p | 10.6p | ||||
Return on tangible equity (2) |
| 13.1% | 11.7% | 15.2% | 11.3% | 15.6% | ||||
| 30 June |
| 31 March |
| 31 December | |
2022 | 2022 | 2021 | ||||
£bn | £bn | £bn | ||||
Balance sheet |
|
|
|
|
|
|
Total assets |
| 806.5 |
| 785.4 |
| 782.0 |
Funded assets (2) |
| 697.1 |
| 685.4 |
| 675.9 |
Loans to customers - amortised cost |
| 362.6 |
| 365.3 |
| 359.0 |
Loans to customers and banks - amortised cost and FVOCI |
| 376.4 |
| 375.7 |
| 369.8 |
Go-forward group net lending (2) |
| 361.6 |
| 359.0 |
| 352.3 |
Total impairment provisions |
| 3.5 |
| 3.7 |
| 3.8 |
Expected credit loss (ECL) coverage ratio |
| 0.93% | 0.98% | 1.03% | ||
Assets under management and administration (AUMA) (2) |
| 32.9 | 35.0 | 35.6 | ||
Go-forward group customer deposits (2) |
| 476.2 | 465.6 | 461.4 | ||
Customer deposits |
| 492.1 | 482.9 | 479.8 | ||
Liquidity and funding |
|
|
|
| ||
Liquidity coverage ratio (LCR) |
| 159% | 167% | 172% | ||
Liquidity portfolio |
| 268 | 275 | 286 | ||
Net stable funding ratio (NSFR) (5) |
| 153% | 152% | 157% | ||
Loan:deposit ratio (2) |
| 71% | 73% | 72% | ||
Total wholesale funding |
| 76 | 76 | 77 | ||
Short-term wholesale funding |
| 24 | 22 | 23 | ||
Capital and leverage |
|
|
|
| ||
Common Equity Tier (CET1) ratio (6) |
| 14.3% | 15.2% | 18.2% | ||
Total capital ratio (6) |
| 19.3% | 20.4% | 24.7% | ||
Pro forma CET1 ratio, pre foreseeable items (7) |
| 15.6% | 16.1% | 19.5% | ||
Risk-weighted assets (RWAs) |
| 179.8 | 176.8 | 157.0 | ||
UK leverage ratio (8) |
| 5.2% | 5.5% | 5.9% | ||
Tangible net asset value (TNAV) per ordinary share |
| 267p |
| 269p |
| 272p |
Number of ordinary shares in issue (millions) (9) |
| 10,436 |
| 10,622 |
| 11,272 |
| (1) | Refer to the following page for details of notable items within total income. |
| (2) | Refer to the Non-IFRS financial measures appendix for details of basis of preparation and reconciliation of non-IFRS financial measures and performance metrics. |
| (3) | Go-forward group excludes Ulster Bank RoI and discontinued operations. |
| (4) | NatWest Group excluding Ulster Bank RoI and liquid asset buffer. |
| (5) | The NSFR is presented on a spot basis. |
| (6) | Based on the PRA Rulebook Instrument transitional arrangements, therefore includes transitional relief on grandfathered capital instruments and transitional arrangements for the capital impact of IFRS 9 expected credit loss (ECL) accounting. For additional information, refer to page 70. On 1 January 2022 the proforma CET1 ratio was 15.9% following regulatory changes. |
| (7) | The pro forma CET1 ratio at 30 June 2022 excludes foreseeable items of £2,341 million: £500 million for ordinary dividends, £1,750 million for special dividends and £91 million foreseeable charges (31 March 2022 excludes foreseeable items of £1,623 million: £1,096 million for ordinary dividends and £527 million foreseeable charges; 31 December 2021 excludes foreseeable charges of £2,036 million: £846 million for ordinary dividends and £1,190 million foreseeable charges and pension contributions). |
| (8) | The UK leverage exposure is calculated in accordance with the Leverage Ratio (CRR) part of the PRA Rulebook, and transitional Tier 1 capital is calculated in accordance with the PRA Rulebook. For additional information, refer to page 68 and 71. |
| (9) | The number of ordinary shares in issue excludes own shares held. |
Summary consolidated income statement for the period ended 30 June 2022
Half year ended | Quarter ended | |||||||||
30 June | 30 June | 30 June | 31 March | 30 June | ||||||
2022 | 2021 | 2022 | 2022 | 2021 | ||||||
£m | £m | £m | £m | £m | ||||||
Net interest income |
| 4,334 |
| 3,744 |
| 2,307 |
| 2,027 |
| 1,900 |
Non-interest income |
| 1,885 |
| 1,397 |
| 904 |
| 981 |
| 671 |
Total income |
| 6,219 |
| 5,141 |
| 3,211 |
| 3,008 |
| 2,571 |
Litigation and conduct costs |
| (169) |
| 18 |
| (67) |
| (102) |
| 34 |
Other operating expenses |
| (3,484) |
| (3,517) |
| (1,766) |
| (1,718) |
| (1,729) |
Operating expenses |
| (3,653) |
| (3,499) |
| (1,833) |
| (1,820) |
| (1,695) |
Profit before impairment releases |
| 2,566 |
| 1,642 |
| 1,378 |
| 1,188 |
| 876 |
Impairment releases |
| 54 |
| 683 |
| 18 |
| 36 |
| 597 |
Operating profit before tax |
| 2,620 |
| 2,325 |
| 1,396 |
| 1,224 |
| 1,473 |
Tax charge |
| (795) |
| (432) |
| (409) |
| (386) |
| (199) |
Profit from continuing operations |
| 1,825 |
| 1,893 |
| 987 |
| 838 |
| 1,274 |
Profit from discontinued operations, net of tax |
| 190 |
| 177 |
| 127 |
| 63 |
| 83 |
Profit for the period |
| 2,015 |
| 2,070 |
| 1,114 |
| 901 |
| 1,357 |
Attributable to: |
|
|
|
|
|
|
|
|
|
|
Ordinary shareholders |
| 1,891 |
| 1,842 |
| 1,050 |
| 841 |
| 1,222 |
Preference shareholders |
| — |
| 9 |
| — |
| — |
| 4 |
Paid-in equity shareholders |
| 121 |
| 178 |
| 62 |
| 59 |
| 91 |
Non-controlling interests |
| 3 |
| 41 |
| 2 |
| 1 |
| 40 |
| 2,015 |
| 2,070 |
| 1,114 |
| 901 |
| 1,357 | |
Notable items within total income (1) |
|
|
|
|
|
|
|
|
|
|
Commercial & Institutional |
|
|
|
|
|
|
|
|
|
|
Fair value, disposal losses and asset |
|
|
|
|
|
|
|
|
|
|
disposals/strategic risk reduction (2) |
| (45) |
| (62) |
| (45) |
| — |
| (44) |
Tax variable lease repricing |
| — |
| 32 |
| — |
| — |
| 32 |
Own credit adjustments |
| 52 |
| 1 |
| 34 |
| 18 |
| (1) |
Central items & other |
|
|
|
|
|
|
|
|
|
|
Share of associate (losses)/profits for Business Growth |
|
|
|
|
|
|
|
|
|
|
Fund |
| (13) |
| 129 |
| (36) |
| 23 |
| 8 |
Loss on redemption of own debt |
| (24) |
| (138) |
| — |
| (24) |
| (20) |
Liquidity Asset Bond sale gains/(losses) |
| 36 |
| 25 |
| (5) |
| 41 |
| 20 |
Interest and FX risk management derivatives |
|
|
|
|
|
|
|
|
|
|
not in accounting hedge relationships |
| 315 |
| 44 |
| 149 |
| 166 |
| 45 |
Own credit adjustments |
| — |
| (1) |
| — |
| — |
| (1) |
Total |
| 321 |
| 30 |
| 97 |
| 224 |
| 39 |
| (1) | Refer to page 2 of the Non-IFRS financial measures appendix. |
| (2) | As previously reported H1 2021 and Q2 2021 includes fair value and disposal gains/(losses) in the banking book H1 2021 - £22 million (Q2 2021 – (£8) million) and H1 2021 - £40 million (Q2 2021 – (£36) million) of asset disposals/strategic risk reduction relating to the costs 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 announcements of 14 February 2020. |
NatWest Group – Form 6-K Interim Results 2022 | 10 |
Business performance summary
Chief Financial Officer review
We have made good progress against our strategic objectives and our capital and liquidity position remains robust. We have delivered a strong financial performance in the first half of the year, with a RoTE of 13.1%, reflecting the strong profit and capital generation capacity of the business in the current interest rate environment. We also saw strong growth in lending and deposits across the business.
We continue to monitor the evolving economic outlook and are mindful of the impact that higher levels of inflation, higher interest rates and supply chain shortages are having on our customers.
We are pleased to announce an interim dividend of 3.5 pence per share and a special dividend of £1,750 million, representing total distributions deducted from capital of £3.3 billion when combined with the directed buyback in the first quarter. We have also now completed the £750 million on-market buyback programme we announced in February.
Financial performance
Total income of £6,219 million was £1,078 million, or 21.0%, higher compared with H1 2021. Total income in the Go-forward group increased by 21.9% to £6,186 million compared with H1 2021. Excluding notable items, income was 16.2% higher than H1 2021, primarily driven by volume growth and favourable yield curve movements. We have also seen increased payment card fees and markets income in Commercial & Institutional and higher spend-related fee income in Retail Banking. Net interest margin of 1.69% was 18 basis points higher compared with Q1 2022. Bank NIM of 2.72% was 26 basis points higher than Q1 2022 reflecting the beneficial impact of recent base rate rises.
Operating expenses of £3,653 were £154 million, or 4.4%, higher compared with H1 2021. Other operating expenses in the Go-forward group were £50 million, or 1.5%, lower than H1 2021 as we continue with our 3-year investment programme. We remain on track to achieve our full year cost reduction target of around 3% in 2022, although savings will not be linear across the remaining quarters.
We have reported a £54 million impairment release, £46 million in the Go-forward group for the first half of 2022, reflecting the continued low levels of realised losses we have seen across our portfolio; we do recognise the significant uncertainty in the economic outlook and are monitoring activity closely. Compared with Q1 2022, our ECL provisions have reduced by £0.2 billion to £3.5 billion, and our ECL coverage ratio has reduced from 0.98% to 0.93%. 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 17.2%, of total impairment provisions. PMAs have been pivoted more towards expected pressure from cost of living increases and supply chain issues rather than concerns over COVID-19 impacts. We will continue to assess this position regularly.
As a result, we are pleased to report an interim attributable profit of £1,891 million, with earnings per share of 17.4 pence and a RoTE of 13.1%.
Net lending increased by £3.6 billion during H1 2022 to £362.6 billion. Net lending in the Go-forward group increased by £9.3 billion over the first half of the year. Mortgage lending increased by £6.3 billion, with gross new lending of £20.6 billion in the first half, compared with £21.4 billion in H1 2021 and £18.3 billion in H2 2021. Net lending in Commercial & Institutional grew by £3.1 billion reflecting growth across all areas of the business including increases in facility utilisation and funds activity, partly offset by continued UK Government financial support scheme repayments.
Customer deposits increased by £12.3 billion during H1 2022 to £492.1 billion. Customer deposits increased by £14.8 billion in the Go-forward group during the first half of the year principally reflecting a £5.7 billion increase in Commercial & Institutional, largely due to improved market liquidity, and treasury repo activity of £4.7 billion. We have seen a slowdown in Retail Banking deposit growth, with balances up by £1.6 billion in the first half of the year.
TNAV per share reduced by 2 pence in the quarter to 267 pence principally reflecting the full year ordinary dividend payment and movements in cashflow hedging and other reserves partially offset by the attributable profit for the period.
Capital
The CET1 ratio remains strong at 14.3%, including 16 basis points of IFRS 9 transitional relief. The c.160 basis point reduction compared with 1 January 2022 principally reflects total distributions of c.190 basis points and increased RWAs of c.30 basis points partially offset by the attributable profit of c.110 basis points. The total capital ratio decreased by 540 basis points to 19.3% compared with Q4 2021.
Compared to the 1 January position, RWAs increased by £3.5 billion to £179.8 billion principally reflecting lending growth, FX movements and model updates.
When combined with the directed buyback in the first quarter, the proposed interim and special dividends bring total distributions deducted from capital in the first half to £3.3 billion, or c.32 pence per share.
The special dividend will return material capital to shareholders whilst ensuring the UK Government’s shareholding remains below 50% which the Board has determined is the interests of all the Group’s stakeholders. The proposed consolidation will be set to reduce the share count as if we were buying back at the market price thereby offsetting the dilutive impact to TNAV per share of the substantial special dividend.
Funding and liquidity
The LCR decreased by 8 percentage points to 159% in the quarter, representing £76.1 billion headroom above 100% minimum requirement. The main drivers of this include an increase in cash outflows from wholesale funding and credit facilities to our customers and an increase in customer lending which outstripped growth in customer deposits. Total wholesale funding increased by £0.6 billion in the quarter to £76.4 billion. Short term wholesale funding increased by £1.6 billion in the quarter to £23.6 billion.
Business performance summary
Retail Banking
Half year ended | Quarter ended | |||||||||
30 June | 30 June | 30 June | 31 March | 30 June | ||||||
2022 | 2021 | 2022 | 2022 | 2021 | ||||||
£m | £m | £m | £m | £m | ||||||
Total income |
| 2,554 |
| 2,150 |
| 1,337 |
| 1,217 |
| 1,094 |
Operating expenses |
| (1,242) |
| (1,187) |
| (597) |
| (645) |
| (600) |
of which: Other operating expenses |
| (1,184) |
| (1,178) |
| (593) |
| (591) |
| (593) |
Impairment (losses)/releases |
| (26) |
| 57 |
| (21) |
| (5) |
| 91 |
Operating profit |
| 1,286 |
| 1,020 |
| 719 |
| 567 |
| 585 |
Return on equity |
| 26.3% | 27.5% | 29.5% | 23.1% | 32.0% | ||||
Net interest margin |
| 2.53% | 2.26% | 2.62% | 2.43% | 2.27% | ||||
Cost:income ratio |
| 48.6% | 55.2% | 44.7% | 53.0% | 54.8% | ||||
Loan impairment rate |
| 3bps |
| (6)bps |
| 4bps |
| 1bps |
| (20)bps |
As at | ||||||
30 June | 31 March | 31 December | ||||
2022 | 2022 | 2021 | ||||
£bn | £bn | £bn | ||||
Net loans to customers (amortised cost) |
| 188.7 |
| 184.9 |
| 182.2 |
Customer deposits |
| 190.5 |
| 189.7 |
| 188.9 |
RWAs |
| 53.0 |
| 52.2 |
| 36.7 |
During H1 2022, Retail Banking continued to pursue sustainable growth with an intelligent approach to risk, delivering a return on equity of 26% and an operating profit of £1,286 million.
To support our customers, we launched a new Cost of Living hub, online and in app, which provides tools and support including Financial Health Checks, budget planner, top 10 tips to save, advice on what to do if customers think they are going to miss a payment and links to third parties, including PayPlan and Citizens Advice. In addition, for our younger customers we launched NatWest Rooster Money aimed at building their money confidence and developing positive money habits around earning, saving, and spending. This complements our existing MoneySense education programme which has recently recommenced in-school workshops.
Retail Banking completed £1.5 billion of climate and sustainable funding and financing in H1 2022 which will contribute towards the NatWest Group target of £100 billion between 1 July 2021 and the end of 2025.
H1 2022 performance
| - | Total income was £404 million, or 18.8%, higher than H1 2021 reflecting higher deposit income, supported by recent base rate rises, combined with strong mortgage balance growth, higher unsecured balances and higher transactional-related fee income, partially offset by lower mortgage margins. |
| - | Operating expenses of £1,242 million were £55 million, or 4.6%, higher compared with H1 2022. Other operating expenses were £6 million, or 0.5%, higher than H1 2021 due to higher investment spend and increased costs for financial crime and fraud prevention. This was partly offset by a 9.2% reduction in operational headcount, as a result of continued customer digital adoption and automation of end-to-end customer journeys. Cost income ratio of 48.6 percent in H1 2022. |
| - | Impairment losses of £26 million in H1 2022 continue to reflect a low level of stage 3 defaults, partly offset by provision releases in stage 2. ECL provision includes post model adjustments of £179 million relating to economic uncertainty, as at 30 June 2022. |
| - | Net loans to customers increased by £6.5 billion, or 3.6%, in H1 2022 reflecting continued mortgage growth of £5.9 billion, with gross new mortgage lending of £18.9 billion representing flow share of around 13%. Cards balances increased by £0.3 billion and personal advances increased by £0.3 billion in H1 2022 from improving customer demand. |
| - | Customer deposits increased by £1.6 billion, or 0.8%, in H1 2022 with growth slowing towards pre-COVID-19 levels, reflecting higher customer spend levels. |
| - | RWAs increased by £16.3 billion in H1 2022 primarily reflecting 1 January 2022 regulatory changes of £15.3 billion, higher lending partially offset by quality improvements. |
NatWest Group – Form 6-K Interim Results 2022 | 12 |
Q2 2022 performance
| - | Total income was £120 million, or 9.9%, higher than Q1 2022 reflecting higher deposit income, supported by recent base rate rises, higher mortgage balances, higher unsecured balances and higher transactional-related fee income, partially offset by the non-repeat of an insurance profit share and lower mortgage margins. |
| - | Net interest margin was 19 basis points higher than Q1 2022 reflecting higher deposit returns, partly offset by mortgage margin pressure. Mortgage back book margin was 148 basis points in the period and application margins increased to around 60 basis points at the end of the quarter. |
| - | Operating expenses of £597 million were £48 million, or 7.4%, lower compared with Q1 2022. Other operating expenses were £2 million, or 0.3%, higher than Q1 2022 primarily due to higher property related provision costs. |
| - | Impairment losses of £21 million in Q2 2022 continue to reflect a low level of stage 3 defaults, partly offset by provision releases in stage 2. |
| - | Net loans to customers increased by £3.8 billion, or 2.1% compared with Q1 2022 reflecting continued mortgage growth of £3.3 billion, with gross new mortgage lending of £9.8 billion representing flow share of around 13%. Cards balances increased by £0.3 billion and personal advances increased by £0.2 billion in Q2 2022 as customer demand and spend levels continued to improve. |
| - | Customer deposits increased by £0.8 billion, or 0.4% in Q2 2022 with growth slowing towards pre-COVID-19 levels, reflecting higher customer spend levels. |
| - | RWAs increased by £0.8 billion, or 1.5%, in Q2 2022 primarily reflecting lending growth partially offset by quality improvements. |
Business performance summary
Private Banking
Half year ended | Quarter ended | |||||||||
30 June | 30 June | 30 June | 31 March | 30 June | ||||||
2022 | 2021 | 2022 | 2022 | 2021 | ||||||
£m | £m | £m | £m | £m | ||||||
Total income |
| 461 |
| 368 |
| 245 |
| 216 |
| 183 |
Operating expenses |
| (285) |
| (249) |
| (146) |
| (139) |
| (128) |
of which: Other operating expenses |
| (284) |
| (254) |
| (146) |
| (138) |
| (128) |
Impairment releases |
| 11 |
| 27 |
| 6 |
| 5 |
| 27 |
Operating profit |
| 187 |
| 146 |
| 105 | 82 | 82 | ||
Return on equity |
| 20.9% | 14.2% | 23.5% | 18.2% | 15.9% | ||||
Net interest margin |
| 3.34% | 2.62% | 3.60% | 3.07% | 2.60% | ||||
Cost:income ratio |
| 61.8% | 67.7% | 59.6% | 64.4% | 69.9% | ||||
Loan impairment rate |
| (12)bps |
| (30)bps |
| (13)bps |
| (11)bps |
| (60)bps |
Net new money (£bn) (1) |
| 1.4 |
| 1.6 |
| 0.6 |
| 0.8 |
| 1.0 |
As at | ||||||
30 June | 31 March | 31 December | ||||
2022 | 2022 | 2021 | ||||
£bn | £bn | £bn | ||||
Net loans to customers (amortised cost) |
| 18.8 |
| 18.7 |
| 18.4 |
Customer deposits |
| 41.6 |
| 40.3 |
| 39.3 |
RWAs |
| 11.3 |
| 11.5 |
| 11.3 |
Assets under management (AUMs) (1) |
| 28.1 |
| 29.6 |
| 30.2 |
Assets under administration (AUAs) (1) |
| 4.8 |
| 5.4 |
| 5.4 |
Total assets under management and administration (AUMA) (1) |
| 32.9 |
| 35.0 |
| 35.6 |
| (1) | Refer to the Non-IFRS financial measures appendix for details of basis of preparation and reconciliation of non-IFRS financial measures and performance metrics. |
Private Banking operating profit of £187 million in H1 2022 was supported by robust deposit and lending growth with strong net new money despite volatile investment market conditions. Return on equity of 20.9% represents an increase of 7 percentage points compared with H1 2021.
Coutts achieved B Corp Certification in July 2021, and since then we’ve engaged with over 60 clients and 10 suppliers to support them in achieving B Corp status. We have also worked with NatWest Group’s ‘Purpose Led Accelerator’ to provide a deep dive on the B Corp Certification journey to 130 entrepreneurs and business leaders.
H1 2022 performance
| - | Total income was £93 million, or 25.3%, higher than H1 2021 reflecting strong balance growth and higher deposit income, supported by recent interest rate rises and higher card and payment related fee income as transactional volumes continued to improve. Net interest margin was 72 basis points higher than H1 2021 reflecting higher deposit income. |
| - | Operating expenses of £285 million were £36 million, or 14.5%, higher compared with H1 2022. Other operating expenses were £30 million, or 11.8%, higher than H1 2021 principally due to continued investment in people and technology to enhance our AUMA growth propositions and increased costs for financial crime and fraud. |
| - | A net impairment release of £11 million in H1 2022 reflects the continued low levels of credit risk in the portfolio. |
| - | Net loans to customers increased by £0.4 billion, or 2.2%, in H1 2022 due to continued strong mortgage lending growth, whilst RWAs were broadly in line with Q4 2021. |
| - | Customer deposits increased by £2.3 billion, or 5.9%, in H1 2022 as customers continue to build and retain liquidity. |
| - | AUMA balances decreased by £2.7 billion, or 7.6%, in H1 2022 largely driven by lower global investment markets. Net new money was £1.4 billion in H1 2022, which was £0.2 billion less than H1 2021, and represented 7.9% of opening AUMA balances on an annualised basis representing a strong performance given volatile investment market conditions. |
Q2 2022 performance
| - | Total income was £29 million, or 13.4%, higher than Q1 2022 reflecting higher deposit income, supported by further interest rate rises and continued balance growth. Net interest margin increased by 53 basis points compared with Q1 2022 reflecting higher deposit returns. |
| - | Net loans to customers increased by £0.1 billion, or 0.5%, compared with Q1 2022 supported by continued mortgage lending growth. |
| - | AUMA balances reduced by £2.1 billion, or 6.0%, in the quarter as growth was more than offset by lower global investment markets. Net new money was £0.6 billion, which was £0.2bn lower than Q1 2022, and represented 8.0% of opening AUMA balances on an annualised basis. |
Business performance summary
Commercial & Institutional
Half year ended | Quarter ended | |||||||||
30 June | 30 June | 30 June | 31 March | 30 June | ||||||
2022 | 2021 | 2022 | 2022 | 2021 | ||||||
£m | £m | £m | £m | £m | ||||||
Net interest income |
| 1,764 |
| 1,487 |
| 961 |
| 803 |
| 762 |
Non-interest income |
| 1,173 |
| 987 |
| 601 |
| 572 |
| 459 |
Total income |
| 2,937 |
| 2,474 |
| 1,562 |
| 1,375 |
| 1,221 |
Operating expenses |
| (1,820) |
| (1,824) |
| (898) |
| (922) |
| (909) |
of which: Other operating expenses |
| (1,734) |
| (1,789) |
| (854) |
| (880) |
| (874) |
Impairment releases |
| 59 |
| 613 |
| 48 |
| 11 |
| 488 |
Operating profit |
| 1,176 |
| 1,263 |
| 712 |
| 464 |
| 800 |
Return on equity |
| 11.4% | 12.1% | 14.0% | 8.8% | 15.9% | ||||
Net interest margin |
| 2.84% | 2.49% | 3.09% | 2.69% | 2.52% | ||||
Cost:income ratio |
| 61.1% | 73.0% | 56.6% | 66.3% | 73.7% | ||||
Loan impairment rate |
| (9)bps |
| (96)bps |
| (15)bps |
| (3)bps |
| (153)bps |
As at | ||||||
30 June | 31 March | 31 December | ||||
2022 | 2022 | 2021 | ||||
£bn | £bn | £bn | ||||
Net loans to customers (amortised cost) |
| 127.3 |
| 126.6 |
| 124.2 |
Customer deposits |
| 223.2 |
| 217.9 |
| 217.5 |
Funded assets |
| 343.4 |
| 334.6 |
| 321.3 |
RWAs |
| 103.0 |
| 100.3 |
| 98.1 |
During H1 2022 Commercial & Institutional delivered a strong performance with a return on equity of 11.4% and operating profit of £1,176 million.
Commercial & Institutional remains well positioned to support its customers in the current macro-economic environment. Our balance sheet strength means we are able to meet our customers’ financing requirements and our product suite allows us to support customers’ risk management during times of macroeconomic volatility. Our specialist Relationship Managers and business hubs located across the UK offer advice and support to those facing a cost of business, as well as living, crisis. We continually monitor all sectors to proactively identify the most vulnerable. As a result, for example, we have developed a tailored support package for our agricultural customer base who are facing extreme impacts on supply costs and profit margins.
Commercial & Institutional completed £10.3 billion of climate and sustainable funding and financing in H1 2022 delivering a cumulative £17.3 billion since 1 July 2021, contributing toward the NatWest Group target of £100 billion between 1 July 2021 and the end of 2025. To ensure that as many SMEs as possible can realise benefits from their carbon-reduction efforts and innovation, we have reduced the lower threshold for our Green Loans offering for SMEs from £50,000 to £25,000.
H1 2022 performance
| - | Total income was £463 million, or 18.7%, higher than H1 2021 primarily reflecting strong balance sheet growth, higher interest rates supporting deposit returns, improved markets and card payment fees. Markets income(1) of £427 million, was £98 million, or 29.8%, higher than H1 2021 with good performance across the product suite. |
| - | Net interest margin was 35 basis points higher than H1 2021 reflecting higher deposit returns. |
| - | Operating expenses of £1,820 million were £4 million, or 0.2%, lower compared with H1 2021. Other operating expenses were £55 million, or 3.1%, lower than H1 2021 due to ongoing cost management, and non-repeat of H1 2021 restructuring costs, partly offset by continued investment in the business. |
| - | An impairment release of £59 million in H1 2022 compared with an impairment release of £613 million in H1 2021, reflecting a continued low level of stage 3 defaults more than offset by good book provision releases. ECL provision includes post model adjustments of £388 million relating to economic uncertainty, as at 30 June 2022. |
| - | Net loans to customers increased by £3.1 billion, or 2.5%, in H1 2022 with growth in facility utilisation and funds activity within Corporate & Institutions, partly offset by continued UK Government financial support scheme repayments. Invoice and asset finance balances within the Commercial Mid-market business increased by £0.8 billion. |
| - | Customer deposits increased by £5.7 billion, or 2.6%, in H1 2022 due to overall increased customer liquidity and strong growth in the funds business. |
| - | RWAs increased by £4.9 billion, or 5.0%, in H1 2022 primarily reflecting 1 January 2022 regulatory changes, business and FX movements, partly offset by risk parameter improvements. |
NatWest Group – Form 6-K Interim Results 2022 | 15 |
Business performance summary
Commercial & Institutional continued
Q2 2022 performance
| - | Total income was £187 million, or 13.6%, higher than Q1 2022 due to continued balance sheet growth, higher deposit returns from an improved interest rate environment and increased card payment fees. |
| - | Net interest margin was 40 basis points higher than Q1 2022 reflecting higher deposit returns. |
| - | Operating expenses of £898 million were £24 million, or 2.6%, lower compared with Q1 2022. Other operating expenses were £26 million, or 3.0%, lower than Q1 2022 primarily reflecting increased capitalisation of certain investment costs, business efficiencies partly offset by the annual pay revision. |
| - | Net loans to customers increased by £0.7 billion, or 0.6%, in Q2 2022 due to increased funds activity and facility utilisation within Corporate & Institutions partly offset by UK Government scheme repayments, primarily in the Commercial Mid-market business. |
| - | Customer deposits increased by £5.3 billion, or 2.4%, in Q2 2022 reflecting continued customer liquidity and increased fund inflows. |
| - | RWAs increased by £2.7 billion, or 2.7%, in Q2 2022 mainly reflecting business movements and model updates. |
| (1) | Markets income excludes asset disposals/strategic risk reduction, own credit risk adjustments and central items. |
Business performance summary
Ulster Bank RoI
Continuing operations | Half year ended | Quarter ended | ||||||||
| 30 June |
| 30 June |
| 30 June |
| 31 March |
| 30 June | |
| 2022 |
| 2021 |
| 2022 |
| 2022 |
| 2021 | |
| £m |
| £m |
| £m |
| £m |
| £m | |
Total income |
| 33 |
| 65 |
| 12 |
| 21 |
| 30 |
Operating expenses |
| (254) |
| (239) |
| (141) |
| (113) |
| (125) |
of which: Other operating expenses |
| (243) |
| (226) |
| (130) |
| (113) |
| (121) |
Impairment releases/(losses) |
| 8 |
| (13) |
| (21) |
| 29 |
| (9) |
Operating loss |
| (213) |
| (187) |
| (150) |
| (63) |
| (104) |
As at | ||||||
30 June | 31 March | 31 December | ||||
2022 | 2022 | 2021 | ||||
£bn | £bn | £bn | ||||
Net loans to customers - amortised cost |
| 1.0 |
| 6.3 |
| 6.7 |
Customer deposits |
| 15.9 |
| 17.3 |
| 18.4 |
RWAs |
| 10.8 |
| 11.2 |
| 9.1 |
Ulster Bank ROI continues to make progress on its phased withdrawal from the Republic of Ireland.
| - | A significant milestone was reached with the successful completion of a migration of an initial tranche of commercial customers to Allied Irish Banks, p.l.c. (AIB). Remaining migrations of the c. €4.2 billion of gross performing commercial loans will be completed in phases mainly over H2 2022, with the final cohorts in H1 2023. |
| - | Confirmation was received from the Irish competition authority (the CCPC) that it had cleared the sale of c.€7.6 billion of gross performing non-tracker mortgages, the Lombard asset finance business, the business direct loan book, and 25 branches to Permanent TSB p.l.c. (PTSB). Shareholders of PTSB’s holding company have also approved this transaction. |
| - | A legally binding agreement was reached with AIB for the sale of a c.€6 billion portfolio of gross performing tracker and linked mortgages. Completion of this sale, which is subject to obtaining any relevant regulatory approvals and satisfying the conditions of the legally binding agreement, is expected to occur in Q2 2023. UBIDAC now has binding agreements in place for c.90% of its total gross customer lending portfolio. |
| - | In other transactions, UBIDAC also announced that it will transfer its existing life assurance intermediary activities to Irish Life Financial Services Ltd and its Home and Car Insurance renewal rights to Aviva Direct. |
| - | ‘Choose, Move & Close’ letters have been sent to customers since April with tranches of letters being sent out on a weekly basis. Customers have six months to choose a new provider, move their banking relationship and close their account with Ulster Bank. |
| - | Work continues on managing the residual activities of the bank, including remaining asset sales. |
H1 2022 performance
| - | Total income was £32 million, or 49.2% (€36 million, or 48.6% in euro terms), lower than H1 2021 reflecting reduced business levels following the decision to withdraw, coupled with the cost of an inter-group liquidity facility that was put in place as part of the arrangements to manage deposit outflows. |
| - | Operating expenses of £254 million were £15 million, or 6.3%, higher compared with H1 2021. Other operating expenses were £17 million, or 7.5%, (€30 million, or 11.6% in euro terms), higher than H1 2021, due to higher withdrawal-related programme costs and a one-off pension charge being partially offset by lower regulatory levies and a 5.3% reduction in headcount. Ulster Bank RoI incurred £26 million (€31 million) of withdrawal-related direct costs in H1 2022. |
| - | A net impairment release of £8 million (€9 million) in H1 2022 reflects improvements in the reducing portfolio and releases of COVID-related post-model adjustments, partially offset by new post-model adjustments for current macro-economic and divestment risks. |
| - | Net loans to customers decreased by £5.7 billion, or 85.1%, (€6.7 billion, or 84.8% in euro terms) in H1 2022 as £5.1 billion (€5.9 billion) of tracker loans were reclassified as Assets held for sale and as repayments continue to exceed gross new lending. |
| - | Customer deposits decreased by £2.5 million, or 13.6%, (€3.5 billion, or 16.0% in euro terms), in H1 2022 due to reducing personal deposits as customers continue to close their accounts. |
| - | RWAs increased by £1.7 billion (€1.7 billion) in H1 2022 due to temporary model adjustments as a result of new regulations applicable to IRB models, partially offset by asset sales, other repayments and facility maturities in the context of the phased withdrawal. |
Q2 2022 performance
| - | Total income was £9 million, or 42.9%, (€12 million, or 48.0% in euro terms) lower than Q1 2022 reflecting reduced business levels and the cost of the inter-group liquidity facility. |
| - | Operating expenses of £141 million were £28 million, or 24.8%, higher compared with Q1 2022. Other operating expenses were £17 million, or 15.0%, (€20 million, or 14.9% in euro terms) higher than Q1 2022 due to higher withdrawal-related programme costs and a one-off pension charge. |
| - | Impairment losses of £21 million (€26 million) in Q2 2022 reflect post-model adjustments for current macro-economic and divestment risks. |
| - | RWAs reduced by £0.4 billion (€0.6 billion) in Q2 2022 due to asset sales, other repayments and facility maturities in the context of the phased withdrawal. |
Business performance summary
Ulster Bank RoI continued
Total Ulster Bank RoI including discontinued operations
Half year ended | Quarter ended | |||||||||
30 June | 30 June | 30 June | 31 March | 30 June | ||||||
2022 | 2021 | 2022 | 2022 | 2021 | ||||||
£m | £m | £m | £m | £m | ||||||
Total income |
| 185 |
| 243 |
| 86 |
| 99 |
| 119 |
Operating expenses |
| (278) |
| (261) |
| (154) |
| (124) |
| (136) |
of which: Other operating expenses |
| (267) |
| (248) |
| (143) |
| (124) |
| (132) |
Impairment releases/ (losses) |
| 70 |
| 11 |
| 45 |
| 25 |
| (1) |
Operating loss |
| (23) |
| (7) |
| (23) |
| — |
| (18) |
| As at | |||||
| 30 June |
| 31 March |
| 31 December | |
| 2022 |
| 2022 |
| 2021 | |
| £bn |
| £bn |
| £bn | |
Net loans to customers - amortised cost |
| 15.2 |
| 15.5 |
| 15.7 |
Customer deposits |
| 15.9 |
| 17.3 |
| 18.4 |
RWAs |
| 10.8 |
| 11.2 |
| 9.1 |
Central items & other
Half year ended | Quarter ended | |||||||||
30 June | 30 June | 30 June | 31 March | 30 June | ||||||
2022 | 2021 | 2022 | 2022 | 2021 | ||||||
£m | £m | £m | £m | £m | ||||||
Central items not allocated |
| 184 |
| 83 |
| 10 |
| 174 |
| 110 |
An operating profit of £184 million within central items not allocated includes gains resulting from risk management derivatives not in hedge accounting relationships of £315 million.
Segment performance
| Half year ended 30 June 2022 | |||||||||||||
Go-forward group | ||||||||||||||
Retail | Private | Commercial & | Central items & | Total excluding | Ulster | Total | ||||||||
Banking | Banking | Institutional | other | Ulster Bank RoI | Bank RoI | NatWest Group | ||||||||
£m | £m | £m | £m | £m | £m | £m | ||||||||
Continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
| 2,340 |
| 315 |
| 1,764 |
| (91) |
| 4,328 |
| 6 |
| 4,334 |
Own credit adjustments |
| — |
| — |
| 52 |
| — |
| 52 |
| — |
| 52 |
Other non-interest income |
| 214 |
| 146 |
| 1,121 |
| 325 |
| 1,806 |
| 27 |
| 1,833 |
Total income |
| 2,554 |
| 461 |
| 2,937 |
| 234 |
| 6,186 |
| 33 |
| 6,219 |
Direct expenses |
| (320) |
| (102) |
| (736) |
| (2,181) |
| (3,339) |
| (145) |
| (3,484) |
Indirect expenses |
| (864) |
| (182) |
| (998) |
| 2,142 |
| 98 |
| (98) |
| — |
Other operating expenses |
| (1,184) |
| (284) |
| (1,734) |
| (39) |
| (3,241) |
| (243) |
| (3,484) |
Litigation and conduct costs |
| (58) |
| (1) |
| (86) |
| (13) |
| (158) |
| (11) |
| (169) |
Operating expenses |
| (1,242) |
| (285) |
| (1,820) |
| (52) |
| (3,399) |
| (254) |
| (3,653) |
Operating profit/(loss) before impairment (losses)/releases |
| 1,312 |
| 176 |
| 1,117 |
| 182 |
| 2,787 |
| (221) |
| 2,566 |
Impairment (losses)/releases |
| (26) |
| 11 |
| 59 |
| 2 |
| 46 |
| 8 |
| 54 |
Operating profit/(loss) |
| 1,286 |
| 187 |
| 1,176 |
| 184 |
| 2,833 |
| (213) |
| 2,620 |
Income excluding notable items |
| 2,554 |
| 461 |
| 2,930 |
| (80) |
| 5,865 |
| 33 |
| 5,898 |
Additional information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on tangible equity (1) |
| na |
| na |
| na |
| na |
| 14.1% | na |
| 13.1% | |
Return on equity (1) |
| 26.3% | 20.9% | 11.4% | nm |
| nm | nm |
| na | ||||
Cost:income ratio (1) |
| 48.6% | 61.8% | 61.1% | nm |
| 54.5% | nm |
| 58.3% | ||||
Total assets (£bn) |
| 216.2 |
| 30.0 |
| 451.5 |
| 87.1 |
| 784.8 | 21.7 |
| 806.5 | |
Funded assets (£bn) (1) |
| 216.2 |
| 30.0 |
| 343.4 |
| 85.8 |
| 675.4 |
| 21.7 |
| 697.1 |
Net loans to customers - amortised cost (£bn) |
| 188.7 |
| 18.8 |
| 127.3 |
| 26.8 |
| 361.6 |
| 1.0 |
| 362.6 |
Loan impairment rate (1) |
| 3bps |
| (12)bps |
| (9)bps |
| nm |
| (3)bps |
| nm |
| (3)bps |
Impairment provisions (£bn) |
| (1.5) |
| (0.1) |
| (1.4) |
| — |
| (3.0) |
| (0.4) |
| (3.4) |
Impairment provisions - stage 3 (£bn) |
| (0.9) |
| — |
| (0.7) |
| — |
| (1.6) |
| (0.4) |
| (2.0) |
Customer deposits (£bn) |
| 190.5 |
| 41.6 |
| 223.2 |
| 20.9 |
| 476.2 |
| 15.9 |
| 492.1 |
Risk-weighted assets (RWAs) (£bn) |
| 53.0 |
| 11.3 |
| 103.0 |
| 1.7 |
| 169.0 |
| 10.8 |
| 179.8 |
RWA equivalent (RWAe) (£bn) |
| 53.0 |
| 11.3 |
| 101.4 |
| 2.2 |
| 167.9 |
| 10.8 |
| 178.7 |
Employee numbers (FTEs - thousands) |
| 13.9 |
| 2.0 |
| 11.8 |
| 29.4 |
| 57.1 |
| 1.8 |
| 58.9 |
Third party customer asset rate (2) |
| 2.59% | 2.65% | 3.01% | nm |
| nm |
| nm |
| nm | |||
Third party customer funding rate (2) |
| (0.07%) | (0.07%) | (0.06%) | nm |
| nm |
| 0.05% | nm | ||||
Bank average interest earning assets (£bn) (1) |
| 186.8 | 19.0 | 125.2 | nm |
| 336.9 |
| na |
| 336.9 | |||
Bank net interest margin (1) |
| 2.53% | 3.34% | 2.84% | nm |
| 2.59% | na |
| 2.59% | ||||
nm = not meaningful, na = not applicable.
For the notes to this table, refer to page 23.
NatWest Group – Form 6-K Interim Results 2022 | 19 |
Segment performance
| Half year ended 30 June 2021 | |||||||||||||
Go-forward group | ||||||||||||||
Retail | Private | Commercial & | Central items & | Total excluding | Ulster | Total | ||||||||
Banking | Banking | Institutional | other | Ulster Bank RoI | Bank RoI | NatWest Group | ||||||||
£m | £m | £m | £m | £m | £m | £m | ||||||||
Continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
| 1,976 |
| 232 |
| 1,487 |
| 34 |
| 3,729 |
| 15 |
| 3,744 |
Own credit adjustments |
| — |
| — |
| 1 |
| (1) |
| — |
| — |
| — |
Other non-interest income |
| 174 |
| 136 |
| 986 |
| 51 |
| 1,347 |
| 50 |
| 1,397 |
Total income |
| 2,150 |
| 368 |
| 2,474 |
| 84 |
| 5,076 |
| 65 |
| 5,141 |
Direct expenses |
| (359) |
| (92) |
| (874) |
| (2,051) |
| (3,376) |
| (141) |
| (3,517) |
Indirect expenses |
| (819) |
| (162) |
| (915) |
| 1,981 |
| 85 |
| (85) |
| — |
Other operating expenses |
| (1,178) |
| (254) |
| (1,789) |
| (70) |
| (3,291) |
| (226) |
| (3,517) |
Litigation and conduct costs |
| (9) |
| 5 |
| (35) |
| 70 |
| 31 |
| (13) |
| 18 |
Operating expenses |
| (1,187) |
| (249) |
| (1,824) |
| — |
| (3,260) |
| (239) |
| (3,499) |
Operating profit/(loss) before impairment releases/(losses) |
| 963 |
| 119 |
| 650 |
| 84 |
| 1,816 |
| (174) |
| 1,642 |
Impairment releases/(losses) |
| 57 |
| 27 |
| 613 |
| (1) |
| 696 |
| (13) |
| 683 |
Operating profit/(loss) |
| 1,020 |
| 146 |
| 1,263 |
| 83 |
| 2,512 |
| (187) |
| 2,325 |
Income excluding notable items |
| 2,150 |
| 368 |
| 2,503 |
| 25 |
| 5,046 |
| 65 |
| 5,111 |
Additional information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on tangible equity (1) |
| na |
| na |
| na |
| na |
| 12.8% | na |
| 11.7% | |
Return on equity (1) |
| 27.5% | 14.2% | 12.1% | nm |
| nm |
| nm |
| na | |||
Cost:income ratio (1) |
| 55.2% | 67.7% | 73.0% | nm |
| 63.7% | nm |
| 67.6% | ||||
Total assets (£bn) |
| 204.2 |
| 27.7 |
| 442.2 |
| 76.4 |
| 750.5 |
| 25.4 |
| 775.9 |
Funded assets (£bn) (1) |
| 204.2 |
| 27.7 |
| 334.5 |
| 74.5 |
| 640.9 |
| 25.4 |
| 666.3 |
Net loans to customers - amortised cost (£bn) |
| 178.1 |
| 18.0 |
| 125.2 |
| 24.7 |
| 346.0 |
| 16.7 |
| 362.7 |
Loan impairment rate (1) |
| (6)bps |
| (30bps) |
| (96bps) |
| nm |
| (40)bps |
| nm |
| (37)bps |
Impairment provisions (£bn) |
| (1.6) |
| (0.1) |
| (2.3) |
| — |
| (4.0) |
| (0.7) |
| (4.7) |
Impairment provisions - stage 3 (£bn) |
| (0.8) |
| — |
| (1.0) |
| — |
| (1.8) |
| (0.4) |
| (2.2) |
Customer deposits (£bn) |
| 184.1 |
| 34.7 |
| 212.4 |
| 17.5 |
| 448.7 |
| 18.5 |
| 467.2 |
Risk-weighted assets (RWAs) (£bn) |
| 35.6 |
| 11.2 |
| 104.0 |
| 1.7 |
| 152.5 |
| 10.5 |
| 163.0 |
RWA equivalent (RWAe) (£bn) |
| 35.6 |
| 11.3 |
| 105.8 |
| 1.8 |
| 154.5 |
| 10.5 |
| 165.0 |
Employee numbers (FTEs - thousands) |
| 15.3 |
| 1.9 |
| 12.3 |
| 27.1 |
| 56.6 |
| 1.9 |
| 58.5 |
Third party customer asset rate (2) |
| 2.70% | 2.36% | 2.71% | nm |
| nm |
| nm |
| nm | |||
Third party customer funding rate (2) |
| (0.07%) | — | (0.02%) | nm |
| nm |
| 0.01% | nm | ||||
Bank average interest earning assets (£bn) (1) |
| 176.3 | 17.9 | 120.5 | nm |
| 320.6 |
| na |
| 320.6 | |||
Bank net interest margin (1) |
| 2.26% | 2.62% | 2.49% | nm |
| 2.35% | na |
| 2.35% | ||||
nm = not meaningful, na = not applicable.
For the notes to this table, refer to page 23.
NatWest Group – Form 6-K Interim Results 2022 | 20 |
Segment performance
| Quarter ended 30 June 2022 | |||||||||||||
Go-forward group | ||||||||||||||
Retail | Private | Commercial & | Central items & | Total excluding | Ulster | Total | ||||||||
Banking | Banking | Institutional | other | Ulster Bank RoI | Bank RoI | NatWest Group | ||||||||
£m | £m | £m | £m | £m | £m | £m | ||||||||
Continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
| 1,228 |
| 172 |
| 961 |
| (56) |
| 2,305 |
| 2 |
| 2,307 |
Own credit adjustments |
| — |
| — |
| 34 |
| — |
| 34 |
| — |
| 34 |
Other non-interest income |
| 109 |
| 73 |
| 567 |
| 111 |
| 860 |
| 10 |
| 870 |
Total income |
| 1,337 |
| 245 |
| 1,562 |
| 55 |
| 3,199 |
| 12 |
| 3,211 |
Direct expenses |
| (159) |
| (53) |
| (329) |
| (1,144) |
| (1,685) |
| (81) |
| (1,766) |
Indirect expenses |
| (434) |
| (93) |
| (525) |
| 1,101 |
| 49 |
| (49) |
| — |
Other operating expenses |
| (593) |
| (146) |
| (854) |
| (43) |
| (1,636) |
| (130) |
| (1,766) |
Litigation and conduct costs |
| (4) |
| — |
| (44) |
| (8) |
| (56) |
| (11) |
| (67) |
Operating expenses |
| (597) |
| (146) |
| (898) |
| (51) |
| (1,692) |
| (141) |
| (1,833) |
Operating profit/(loss) before Impairment (losses)/releases |
| 740 |
| 99 |
| 664 |
| 4 |
| 1,507 |
| (129) |
| 1,378 |
Impairment (losses)/releases |
| (21) |
| 6 |
| 48 |
| 6 |
| 39 |
| (21) |
| 18 |
Operating profit/(loss) |
| 719 |
| 105 |
| 712 |
| 10 |
| 1,546 |
| (150) |
| 1,396 |
Income excluding notable items |
| 1,337 |
| 245 |
| 1,573 |
| (53) |
| 3,102 |
| 12 |
| 3,114 |
Additional information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on tangible equity (1) |
| na |
| na |
| na |
| na |
| 16.5% | na |
| 15.2% | |
Return on equity (1) |
| 29.5% | 23.5% | 14.0% | nm |
| nm | nm |
| na | ||||
Cost:income ratio (1) |
| 44.7% | 59.6% | 56.6% | nm |
| 52.4% | nm |
| 56.7% | ||||
Total assets (£bn) |
| 216.2 | 30.0 | 451.5 | 87.1 |
| 784.8 | 21.7 |
| 806.5 | ||||
Funded assets (£bn) (1) |
| 216.2 | 30.0 | 343.4 | 85.8 |
| 675.4 | 21.7 |
| 697.1 | ||||
Net loans to customers - amortised cost (£bn) |
| 188.7 | 18.8 | 127.3 | 26.8 |
| 361.6 | 1.0 |
| 362.6 | ||||
Loan impairment rate (1) |
| 4bps | (13bps) | (15bps) | nm |
| (4)bps | nm |
| (2)bps | ||||
Impairment provisions (£bn) |
| (1.5) | (0.1) | (1.4) | — |
| (3.0) | (0.4) |
| (3.4) | ||||
Impairment provisions - stage 3 (£bn) |
| (0.9) | — | (0.7) | — |
| (1.6) | (0.4) |
| (2.0) | ||||
Customer deposits (£bn) |
| 190.5 | 41.6 | 223.2 | 20.9 |
| 476.2 | 15.9 |
| 492.1 | ||||
Risk-weighted assets (RWAs) (£bn) |
| 53.0 | 11.3 | 103.0 | 1.7 |
| 169.0 | 10.8 |
| 179.8 | ||||
RWA equivalent (RWAe) (£bn) |
| 53.0 | 11.3 | 101.4 | 2.2 |
| 167.9 | 10.8 |
| 178.7 | ||||
Employee numbers (FTEs - thousands) |
| 13.9 | 2.0 | 11.8 | 29.4 |
| 57.1 | 1.8 |
| 58.9 | ||||
Third party customer asset rate (2) |
| 2.59% | 2.77% | 3.19% | nm |
| nm | nm |
| nm | ||||
Third party customer funding rate (2) |
| (0.10%) | (0.13%) | (0.09%) | nm |
| nm | 0.04% | nm | |||||
Bank average interest earning assets (£bn) (1) |
| 188.1 | 19.1 | 124.9 | nm |
| 340.0 | na |
| 340.0 | ||||
Bank net interest margin (1) |
| 2.62% | 3.60% | 3.09% | nm |
| 2.72% | na |
| 2.72% | ||||
nm = not meaningful, na = not applicable.
For the notes to this table, refer to page 23.
NatWest Group – Form 6-K Interim Results 2022 | 21 |
Segment performance
| Quarter ended 31 March 2022 | |||||||||||||
Go-forward group | ||||||||||||||
Retail | Private | Commercial & | Central items & | Total excluding | Ulster | Total | ||||||||
Banking | Banking | Institutional | other | Ulster Bank RoI | Bank RoI | NatWest Group | ||||||||
£m | £m | £m | £m | £m | £m | £m | ||||||||
Continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
| 1,112 |
| 143 |
| 803 |
| (35) |
| 2,023 |
| 4 |
| 2,027 |
Own credit adjustments |
| — |
| - |
| 18 |
| - |
| 18 |
| - |
| 18 |
Other non-interest income |
| 105 |
| 73 |
| 554 |
| 214 |
| 946 |
| 17 |
| 963 |
Total income |
| 1,217 |
| 216 |
| 1,375 |
| 179 |
| 2,987 |
| 21 |
| 3,008 |
Direct expenses |
| (161) |
| (49) |
| (407) |
| (1,037) |
| (1,654) |
| (64) |
| (1,718) |
Indirect expenses |
| (430) |
| (89) |
| (473) |
| 1,041 |
| 49 |
| (49) |
| - |
Other operating expenses |
| (591) |
| (138) |
| (880) |
| 4 |
| (1,605) |
| (113) |
| (1,718) |
Litigation and conduct costs |
| (54) |
| (1) |
| (42) |
| (5) |
| (102) |
| - |
| (102) |
Operating expenses |
| (645) |
| (139) |
| (922) |
| (1) |
| (1,707) |
| (113) |
| (1,820) |
Operating profit/(loss) before impairment (losses)/releases |
| 572 |
| 77 |
| 453 |
| 178 |
| 1,280 |
| (92) |
| 1,188 |
Impairment (losses)/releases |
| (5) |
| 5 |
| 11 |
| (4) |
| 7 |
| 29 |
| 36 |
Operating profit/(loss) |
| 567 |
| 82 |
| 464 |
| 174 |
| 1,287 |
| (63) |
| 1,224 |
Income excluding notable items |
| 1,217 |
| 216 |
| 1,357 |
| (27) |
| 2,763 |
| 21 |
| 2,784 |
Additional information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on tangible equity (1) |
| na |
| na |
| na |
| na |
| 11.9% | na | 11.3% | ||
Return on equity (1) |
| 23.1% | 18.2% | 8.8% | nm |
| nm | nm | na | |||||
Cost:income ratio (1) |
| 53.0% | 64.4% | 66.3% | nm |
| 56.7% | nm | 60.1% | |||||
Total assets (£bn) |
| 210.7 |
| 29.6 | 433.5 | 89.3 |
| 763.1 | 22.3 | 785.4 | ||||
Funded assets (£bn) (1) |
| 210.7 |
| 29.6 | 334.6 | 88.2 |
| 663.1 | 22.3 | 685.4 | ||||
Net loans to customers - amortised cost (£bn) |
| 184.9 |
| 18.7 | 126.6 | 28.8 |
| 359.0 | 6.3 | 365.3 | ||||
Loan impairment rate (1) |
| 1bp |
| (11)bps | (3)bps | nm |
| — | nm | (1)bp | ||||
Impairment provisions (£bn) |
| (1.5) |
| (0.1) | (1.6) | — |
| (3.2) | (0.4) | (3.6) | ||||
Impairment provisions - stage 3 (£bn) |
| (0.9) |
| — | (0.7) | — |
| (1.6) | (0.4) | (2.0) | ||||
Customer deposits (£bn) |
| 189.7 |
| 40.3 | 217.9 | 17.7 |
| 465.6 | 17.3 | 482.9 | ||||
Risk-weighted assets (RWAs) (£bn) |
| 52.2 |
| 11.5 | 100.3 | 1.6 |
| 165.6 | 11.2 | 176.8 | ||||
RWA equivalent (RWAe) (£bn) |
| 52.2 |
| 11.5 | 102.6 | 1.9 |
| 168.2 | 11.2 | 179.4 | ||||
Employee numbers (FTEs - thousands) |
| 14.0 |
| 1.9 | 11.8 | 28.7 |
| 56.4 | 1.8 | 58.2 | ||||
Third party customer asset rate (2) |
| 2.59% | 2.53% | 2.83% | nm |
| nm | nm | nm | |||||
Third party customer funding rate (2) |
| (0.05)% | (0.01%) | (0.02%) | nm |
| nm | 0.06% | nm | |||||
Bank average interest earning assets (£bn) (1) |
| 185.5 | 18.9 | 121.0 | nm |
| 333.3 | na | 333.3 | |||||
Bank net interest margin (1) |
| 2.43% | 3.07% | 2.69% | nm |
| 2.46% | na | 2.46% | |||||
nm = not meaningful, na = not applicable.
For the notes to this table, refer to the following page.
NatWest Group – Form 6-K Interim Results 2022 | 22 |
Segment performance
| Quarter ended 30 June 2021 | |||||||||||||
Go-forward group | ||||||||||||||
Retail | Private | Commercial & | Central items & | Total excluding | Ulster | Total | ||||||||
Banking | Banking | Institutional | other | Ulster Bank RoI | Bank RoI | NatWest Group | ||||||||
£m | £m | £m | £m | £m | £m | £m | ||||||||
Continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
| 1,003 |
| 117 |
| 762 |
| 10 |
| 1,892 |
| 8 |
| 1,900 |
Own credit adjustments |
| — |
| — |
| (1) |
| (1) |
| (2) |
| — |
| (2) |
Other non-interest income |
| 91 |
| 66 |
| 460 |
| 34 |
| 651 |
| 22 |
| 673 |
Total income |
| 1,094 |
| 183 |
| 1,221 |
| 43 |
| 2,541 |
| 30 |
| 2,571 |
Direct expenses |
| (171) |
| (49) |
| (428) |
| (999) |
| (1,647) |
| (82) |
| (1,729) |
Indirect expenses |
| (422) |
| (79) |
| (446) |
| 986 |
| 39 |
| (39) |
| — |
Other operating expenses |
| (593) |
| (128) |
| (874) |
| (13) |
| (1,608) |
| (121) |
| (1,729) |
Litigation and conduct costs |
| (7) |
| — |
| (35) |
| 80 |
| 38 |
| (4) |
| 34 |
Operating expenses |
| (600) |
| (128) |
| (909) |
| 67 |
| (1,570) |
| (125) |
| (1,695) |
Operating profit/(loss) before impairment releases/(losses) |
| 494 |
| 55 |
| 312 |
| 110 |
| 971 |
| (95) |
| 876 |
Impairment releases/(losses) |
| 91 |
| 27 |
| 488 |
| — |
| 606 |
| (9) |
| 597 |
Operating profit/(loss) |
| 585 |
| 82 |
| 800 |
| 110 |
| 1,577 |
| (104) |
| 1,473 |
Income excluding notable items |
| 1,094 |
| 183 |
| 1,234 |
| (9) |
| 2,502 |
| 30 |
| 2,532 |
Additional information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on tangible equity (1) |
| na |
| na | na | na |
| 17.3% | na | 15.6% | ||||
Return on equity (1) |
| 32.0% | 15.9% | 15.9% | nm |
| nm | nm | na | |||||
Cost:income ratio (1) |
| 54.8% | 69.9% | 73.7% | nm |
| 61.3% | nm | 65.5% | |||||
Total assets (£bn) |
| 204.2 |
| 27.7 | 442.2 | 76.4 |
| 750.5 | 25.4 | 775.9 | ||||
Funded assets (£bn) (1) |
| 204.2 |
| 27.7 | 334.5 | 74.5 |
| 640.9 | 25.4 | 666.3 | ||||
Net loans to customers - amortised cost (£bn) |
| 178.1 |
| 18.0 | 125.2 | 24.7 |
| 346.0 | 16.7 | 362.7 | ||||
Loan impairment rate (1) |
| (20)bps |
| (60)bps | (153)bps | nm |
| (69)bps | nm | (65)bps | ||||
Impairment provisions (£bn) |
| (1.6) |
| (0.1) | (2.3) | — |
| (4.0) | (0.7) | (4.7) | ||||
Impairment provisions - stage 3 (£bn) |
| (0.8) |
| — | (1.0) | — |
| (1.8) | (0.4) | (2.2) | ||||
Customer deposits (£bn) |
| 184.1 |
| 34.7 | 212.4 | 17.5 |
| 448.7 | 18.5 | 467.2 | ||||
Risk-weighted assets (RWAs) (£bn) |
| 35.6 |
| 11.2 | 104.0 | 1.7 |
| 152.5 | 10.5 | 163.0 | ||||
RWA equivalent (RWAe) (£bn) |
| 35.6 |
| 11.3 | 105.8 | 1.8 |
| 154.5 | 10.5 | 165.0 | ||||
Employee numbers (FTEs - thousands) |
| 15.3 |
| 1.9 | 12.3 | 27.1 |
| 56.6 | 1.9 | 58.5 | ||||
Third party customer asset rate (2) |
| 2.67% | 2.36% | 2.81% | nm |
| nm | nm | nm | |||||
Third party customer funding rate (2) |
| (0.06)% | — | (0.04%) | nm |
| nm | 0.01% | nm | |||||
Bank average interest earning assets (£bn) (1) |
| 177.3 | 18.1 | 121.0 | nm |
| 323.0 | na | 323.0 | |||||
Bank net interest margin (1) |
| 2.27% | 2.60% | 2.52% | nm |
| 2.35% | na | 2.35% | |||||
nm = not meaningful, na = not applicable.
| (1) | Refer to the appendix for details of basis of preparation and reconciliation of non-IFRS performance measures where relevant. |
| (2) | 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 for customer funding rate calculation. |
Risk and capital management
Credit risk
Economic loss drivers
Introduction
The portfolio segmentation and selection of economic loss drivers for IFRS 9 follow closely the approach used in stress testing. To enable robust modelling, the forecasting models for each portfolio segment (defined by product or asset class and, where relevant, industry sector and region) are based on a selected, small number of economic factors (typically three to four) that best explain the temporal variations in portfolio loss rates. The process to select economic loss drivers involves empirical analysis and expert judgment.
The most material economic loss drivers are shown in the table below.
Portfolio | Economic loss drivers |
UK retail mortgages | UK unemployment rate, sterling swap rate, UK house price index, UK household debt to income |
UK retail unsecured | UK unemployment rate, sterling swap rate, UK household debt to income |
UK large corporates | World GDP, UK unemployment rate, sterling swap rate, stock price index |
UK commercial | UK GDP, UK unemployment rate, sterling swap rate |
UK commercial real estate | UK GDP, UK commercial property price index, sterling swap rate, stock price index |
RoI retail mortgages | RoI unemployment rate, European Central Bank base rate, RoI house price index |
| (1) | This is not an exhaustive list of economic loss drivers but shows the most material drivers for the most significant portfolios. |
Economic scenarios
At 30 June 2022, the range of anticipated future economic conditions was defined by a set of four internally developed scenarios and their respective probabilities. In addition to the base case, they comprised upside, downside and extreme downside scenarios. The scenarios primarily reflected a range of outcomes associated with the most prominent risks facing the economy, and the associated effects on labour and asset markets.
The four economic scenarios are translated into forward-looking projections of credit cycle indices (CCIs) using a set of econometric models. Subsequently the CCI projections for the individual scenarios are averaged into a single central CCI projection according to the given scenario probabilities. The central CCI projection is then overlaid with an additional mean reversion assumption, i.e. after reaching their worst forecast position the CCIs start to gradually revert to their long-run average of zero.
Upside – This scenario assumes a very strong recovery through 2022 as consumers dip into excess savings built up since amidst COVID-19. The labour market remains resilient, with the unemployment rate falling substantially below pre-COVID-19 levels. Inflation is marginally higher than the base case but eventually retreats close to the target without substantial tightening and with no major effect on growth. The housing market shows a strong performance.
Base case – After a strong recovery in 2021, growth moderates in 2022 as real incomes decline and consumer confidence falls. The unemployment rate decreases initially but subsequently increases above pre-COVID-19 levels, although remains low by historical standards. Inflation remains elevated at close to current levels through to early 2023 before retreating. Interest rates are raised to 2% to control price pressures. There is a gradual cooling in the housing market, but activity remains firm. As inflation retreats, economic growth returns to its pre-COVID-19 pace over the course of 2023, remaining steady through the forecast period.
Downside – This scenario assumes that inflation accelerates to 15%, triggered by further escalation in geopolitical tensions and an associated rise in energy prices. This undermines the recovery, harming business and consumer confidence and pushing the economy into recession. Unemployment rate rises above the levels seen during COVID-19 and there is a modest decline in house prices. Inflation subsequently normalises, paving the way for cuts to interest rates and recovery.
Extreme downside – The trigger for the extreme downside is similar to the downside scenario. However, in this scenario, inflation remains more persistent, necessitating a significant degree of rate tightening. This tighter policy and fall in real income leads to a deep recession. There is widespread job shedding in the labour market while asset prices see deep corrections, with housing market falls higher than those seen during previous episodes. The recovery is tepid throughout the five-year period, meaning only a gradual decline in joblessness.
For June 2022, the four scenarios were deemed appropriate in capturing the uncertainty in economic forecasts and the non-linearity in outcomes under different scenarios. These four scenarios were developed to provide sufficient coverage across potential rises in unemployment, inflation and asset price falls around which there are pronounced levels of uncertainty.
The tables below provide details of the key economic loss drivers under the four scenarios.
The main macroeconomic variables for each of the four scenarios used for expected credit loss (ECL) modelling are set out in the main macroeconomic variables table below. The compound annual growth rate (CAGR) for GDP is shown. It also shows the five-year average for unemployment and the Bank of England base rate. The house price index and commercial real estate figures show the total change in each asset over five years.
Risk and capital management
Credit risk continued
Economic loss drivers
Main macroeconomic variables |
| 30 June 2022 |
| 31 December 2021 | ||||||||||||
Extreme | Extreme | |||||||||||||||
Upside | Base case | Downside | downside | Upside | Base case | Downside | downside | |||||||||
Five-year summary | % |
| % |
| % |
| % |
| % |
| % |
| % |
| % | |
UK |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GDP - CAGR |
| 1.7 |
| 1.1 |
| 0.8 |
| (0.1) |
| 2.4 |
| 1.7 |
| 1.4 |
| 0.6 |
Unemployment - average |
| 3.3 |
| 4.0 |
| 4.5 |
| 6.3 |
| 3.5 |
| 4.2 |
| 4.8 |
| 6.7 |
House price index - total change |
| 24.4 |
| 13.7 |
| (0.9) |
| (10.5) |
| 22.7 |
| 12.1 |
| 4.3 |
| (5.3) |
Commercial real estate price - total change |
| 7.5 |
| (2.6) |
| (6.8) |
| (14.5) |
| 18.2 |
| 7.2 |
| 5.5 |
| (6.4) |
Bank of England base rate - average |
| 1.5 |
| 1.8 |
| 0.6 |
| 2.7 |
| 1.5 |
| 0.8 |
| 0.7 |
| (0.5) |
Consumer price index - CAGR |
| 2.7 |
| 2.9 |
| 3.9 |
| 7.2 |
| 2.7 |
| 2.5 |
| 3.1 |
| 1.5 |
Republic of Ireland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GDP - CAGR |
| 4.6 |
| 3.9 |
| 2.9 |
| 2.1 |
| 4.4 |
| 3.7 |
| 2.9 |
| 1.6 |
Unemployment - average |
| 3.8 |
| 4.9 |
| 6.5 |
| 7.7 |
| 4.2 |
| 5.2 |
| 6.8 |
| 9.3 |
House price index - total change |
| 28.9 |
| 22.2 |
| 6.3 |
| (1.9) |
| 30.3 |
| 23.4 |
| 16.3 |
| 4.6 |
European Central Bank base rate - average |
| 1.3 |
| 2.0 |
| 0.1 |
| 1.4 |
| 0.8 |
| 0.1 |
| 0.2 |
| — |
World GDP - CAGR |
| 3.8 |
| 3.4 |
| 2.0 |
| 1.0 |
| 3.5 |
| 3.2 |
| 2.6 |
| 0.6 |
Probability weight |
| 21.0 |
| 45.0 |
| 20.0 |
| 14.0 |
| 30.0 |
| 45.0 |
| 20.0 |
| 5.0 |
| (1) | The five year period starts after Q1 2022 for 30 June 2022 and Q3 2021 for 31 December 2021. |
| (2) | CAGR and total change figures are not comparable with 31 December 2021 data, as the starting quarters are different. |
Probability weightings of scenarios
NatWest Group’s approach to IFRS 9 multiple economic scenarios (MES) involves selecting a suitable set of discrete scenarios to characterise the distribution of risks in the economic outlook and assigning appropriate probability weights. The scale of the economic effect of COVID-19 and the range of recovery paths had necessitated subjective assignment of probability weights. However, for June 2022, NatWest Group resurrected the quantitative approach used pre-COVID-19. The approach involves comparing UK GDP paths for NatWest Group’s scenarios against a set of 1,000 model runs, following which a percentile in the distribution is established that most closely corresponded to the scenario. The probability weight for the base case is set based on judgement while probability weights for the alternate scenarios are assigned based on these percentile scores.
A 21% weighting was applied to the upside scenario (compared to 30% at 31 December 2021), a 45% weighting applied to the base case scenario (unchanged from 31 December 2021), a 20% weighting applied to the downside scenario (unchanged from 31 December 2021) and a 14% weighting applied to the extreme downside scenario (compared to 5% at 31 December 2021).
The assigned probability weights reflect the outputs of NatWest Group’s quantitative approach and were judged to be aligned with subjective assessment of balance of the risks in the economy, presenting good coverage to the range of outcomes assumed in the central scenarios, including the potential for a robust recovery on the upside and exceptionally challenging outcomes on the downside. The current geopolitical tensions pose considerable uncertainty to the economic outlook, with respect to their persistence, range of outcomes and subsequent impacts on inflation and economic activity. Given that backdrop, and the higher possibility of a more challenging economic backdrop than assumed in the base case, NatWest Group judged it appropriate to apply a lower probability weight to the upside scenario and a higher probability to downside-biased scenarios, than at 31 December 2021.
NatWest Group – Form 6-K Interim Results 2022 | 26 |
Risk and capital management
Credit risk continued
Economic loss drivers
Annual figures
Consumer price index - four quarter growth | ||||||||
Extreme | ||||||||
Upside | Base case | Downside | downside | |||||
UK | % | % | % | % | ||||
2022 |
| 9.5 |
| 8.4 |
| 9.3 |
| 9.3 |
2023 | (0.9) | 1.1 | 8.1 | 13.7 | ||||
2024 | 2.0 | 2.0 | 0.4 | 6.4 | ||||
2025 | 2.0 | 2.0 | 1.4 | 4.2 | ||||
2026 | 2.0 | 2.0 | 1.7 | 3.6 | ||||
Worst points |
| 30 June 2022 |
| 31 December 2021 | ||||||||||||
| Extreme |
| Extreme | |||||||||||||
| Downside |
| downside |
| Downside |
| downside | |||||||||
UK |
| % |
| Quarter |
| % |
| Quarter |
| % |
| Quarter |
| % |
| Quarter |
GDP |
| (3.6) |
| Q1 2023 |
| (7.4) |
| Q3 2023 |
| (1.8) |
| Q1 2022 |
| (7.9) |
| Q1 2022 |
Unemployment rate (peak) |
| 5.1 |
| Q3 2023 |
| 9.0 |
| Q2 2024 |
| 5.4 |
| Q1 2023 |
| 9.4 |
| Q4 2022 |
House price index |
| (12.9) |
| Q2 2024 |
| (28.0) |
| Q2 2024 |
| (3.0) |
| Q3 2023 |
| (26.0) |
| Q2 2023 |
Commercial real estate price |
| (20.7) |
| Q2 2023 |
| (34.7) |
| Q1 2024 |
| (2.5) |
| Q1 2022 |
| (29.8) |
| Q3 2022 |
Bank of England base rate |
| 1.5 |
| Q4 2022 |
| 4.0 |
| Q1 2024 |
| 1.5 |
| Q4 2022 |
| (0.5) |
| Q2 2022 |
Consumer price index |
| 14.8 |
| Q2 2023 |
| 14.8 |
| Q2 2023 |
| 7.9 |
| Q4 2022 |
| 4.3 |
| Q4 2021 |
Republic of Ireland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GDP |
| — |
| Q2 2023 |
| (2.9) |
| Q3 2023 |
| (0.7) |
| Q1 2022 |
| (8.9) |
| Q2 2022 |
Unemployment rate (peak) |
| 8.6 |
| Q3 2023 |
| 10.5 |
| Q3 2023 |
| 9.4 |
| Q2 2022 |
| 15.1 |
| Q2 2022 |
House price index |
| (4.4) |
| Q2 2024 |
| (26.5) |
| Q2 2024 |
| (0.1) |
| Q4 2022 |
| (25.1) |
| Q2 2023 |
| (1) | For the unemployment rate, the figures show the peak levels. For the Bank of England base rate, the figures show highest or lowest levels. For other parameters, the figures show falls relative to the starting period. The calculations are performed over five years, with a starting point of Q1 2022 for 30 June 2022 scenarios. |
NatWest Group – Form 6-K Interim Results 2022 | 27 |
Risk and capital management
Credit risk continued
Economic loss drivers
Use of the scenarios in Personal lending
Personal lending follows a discrete scenario approach. The probability of default (PD) and loss given default (LGD) values for each discrete scenario are calculated using product-specific econometric models. Each account has a PD and LGD calculated as probability weighted-averages across the suite of economic scenarios.
Use of the scenarios in Wholesale lending
The Wholesale lending ECL methodology is based on the concept of CCIs. The CCIs represent, similar to the exogenous component in Personal, all relevant economic loss drivers for a region/industry segment aggregated into a single index value that describes the loss rate conditions in the respective segment relative to its long-run average. A CCI value of zero corresponds to loss rates at long-run average levels, a positive CCI value corresponds to loss rates below long-run average levels and a negative CCI value corresponds to loss rates above long-run average levels.
Finally, ECL is calculated using a Monte Carlo approach by averaging PD and LGD values arising from many CCI paths simulated around the central CCI projection.
The rationale for the Wholesale approach is the long-standing observation that loss rates in Wholesale portfolios tend to follow regular cycles. This allows NatWest Group to enrich the range and depth of future economic conditions embedded in the final ECL beyond what would be obtained from using the discrete macro-economic scenarios alone.
Business banking, while part of the Wholesale segment, for reporting purposes, utilises the Personal lending rather than the Wholesale lending methodology.
UK economic uncertainty
Businesses are still trying to recover fully from the effects of COVID-19 and to service additional debt which was accessed during the period. New headwinds on inflation, cost of living and supply chain disruption have arisen.
Inflation and supply chain issues are presenting significant headwinds for some businesses and sectors. These are a result of various factors and in many cases are compounding and look set to remain a feature of the economic environment into 2023. NatWest Group has considered where these are most likely to affect the customer base, including assessing which businesses that NatWest Group does not believe will fully pass the costs onto the consumer and those that can, driving further cost of living risks. In addition, while a direct impact from the Russian invasion of Ukraine is limited, the contagion events of supply chain disruption is still anticipated with European economies being dependent on Russia, Ukraine and Belarus for a number of commodities.
The effects of these risks are not expected to be fully captured by forward-looking credit modelling, particularly given the unique high inflation, low unemployment base-case outlook. Any incremental ECL effects for these risks will be captured via post-model adjustments and are detailed further in the Governance and post-model adjustments section.
Personal customers who had accessed payment holiday support, and where their risk profile was identified as relatively high risk are no longer collectively migrated into Stage 2, given the lack of observable default emergence from these segments and with the focus of high-risk segment monitoring now shifting to the effects of inflation and the growing cost of living effect on customers.
Model monitoring and enhancement
As of January 2022, a new regulatory definition of default for was introduced in line with PRA and EBA guidance. This definition of default was also adopted for IFRS 9. Underlying observed one-year default rates (after isolating one-off effects from the new definition of default) across all portfolios still trend at or below pre-COVID-19 levels. As a result, most recent back-testing of forward-looking IFRS 9 PDs continues to show some overprediction in some portfolios. As in previous quarters, model recalibrations to adjust for this overprediction have been deferred based on the judgment that low default rate actuals during COVID-19 were distorted, due to government support.
Going forward, NatWest Group expects potential increases in default emergence to come primarily from forward-looking risks like high inflation and rising interest rates, rather than from delayed COVID-19 effects. Therefore, previously applied lags to the projections from the economic forecasting models of up to 12 months have been discontinued.
For Personal mortgages, new fully redeveloped PD and LGD models were implemented in Q1, which removed the need for several model adjustments. In addition, newly approved IFRS 9 models for Personal unsecured portfolios are at a parallel run stage awaiting implementation in Q3 2022, with expected effects on staging and ECL captured at 30 June 2022 used to support the reported ECL estimates.
Scenario sensitivity – Personal only
For the unsecured Personal lending portfolios, the ECL sensitivity analyses now leverage the newly approved PD models.
NatWest Group – Form 6-K Interim Results 2022 | 28 |
Risk and capital management
Credit risk continued
UK economic uncertainty
Governance and post model adjustments
The IFRS 9 PD, EAD and LGD models are subject to NatWest Group’s model risk policy that stipulates periodic model monitoring, periodic re-validation and defines approval procedures and authorities according to model materiality. Various post model adjustments were applied where management judged they were necessary to ensure an adequate level of overall ECL provision. All post model adjustments were subject to formal approval through provisioning governance, and were categorised as follows (business level commentary is provided below):
| - | Deferred model calibrations – ECL adjustments where PD model monitoring indicated that actual defaults were below estimated levels but where it was judged that an implied ECL release was not supportable due to the influence of government support schemes on default levels in the past two years. As a consequence, any potential ECL release was deferred and retained on the balance sheet until modelled ECL levels are affirmed by new model parallel runs or similar analyses. |
| - | Economic uncertainty – ECL adjustments primarily arising from uncertainties associated with increased inflation and cost of living risks as well as supply chain disruption, along with the residual effect of COVID-19 and government support schemes. In all cases, management judged that additional ECL was required until further credit performance data became available as the full effects of these issues matures. |
| - | Other adjustments – ECL adjustments where it was judged that the modelled ECL required to be amended. |
Post-model adjustments will remain a key focus area of NatWest Group’s ongoing ECL adequacy assessment process. A holistic framework has been established including reviewing a range of economic data, external benchmark information and portfolio performance trends with a particular focus on segments of the portfolio (both commercial and consumer) that are likely to be more susceptible to inflation, cost of living and supply chain risks.
| (1) | Excludes £34 million (31 December 2021 – £49 million) of post model adjustments (mortgages – £0.4 million; other – £33.6 million (31 December 2021 – mortgages £4 million; other – £45 million)) for Ulster Bank RoI disclosed as transfers to disposal groups. |
NatWest Group – Form 6-K Interim Results 2022 | 29 |
Risk and capital management
Credit risk continued
| - | Retail Banking – The judgemental post-model adjustment for deferred model calibrations of £155 million at 31 December 2021 was no longer required. This was due, firstly, to the removal of the mortgage element of this post model adjustment because of the implementation of a new IFRS 9 PD model in Q1 2022. In addition, the effects of new PD models on loan and overdraft portfolios are now captured in the staging and ECL estimates at 30 June 2022, negating the need for further management judgement on PD calibration adjustments. |
| - | The post-model adjustment for economic uncertainty increased from £159 million to £179 million, reflecting the increased level of uncertainty since 31 December 2021 as a result of sharply rising inflation, cost of living pressures and the expected effect on consumers and the broader economy. The primary element of these economic uncertainty adjustments was a new £152 million ECL uplift, to capture the risk on segments of the Retail portfolio that are more susceptible to the effects of cost of living rises, focusing on key affordability lenses, including customers with lower incomes in fuel poverty and over-indebted borrowers. This adjustment has superseded the previously held £26 million for COVID-19 payment holiday high-risk customers and the £69 million judgemental ECL release holdback at 31 December 2021. This demonstrated management’s view of a dissipating risk of economic effects from COVID-19 with the focus now on risks associated with cost of living and affordability. The introduction of the new cost of living post-model adjustment at 30 June 2022 allocated more ECL to Stage 1 given the forward-looking nature of the cost of living and inflation threat, whereas the previous COVID-19 post-model adjustments were focused on Stage 2 (for example, high-risk payment holiday cases migrated into Stage 2). |
| - | Other judgmental overlays included a post model adjustment of £16 million to capture the effect of potential cladding risk in the portfolio. In addition, a temporary £26 million ECL reduction adjustment was in place to reflect, on a forward-looking basis, the associated effects of a new credit card PD model that is pending implementation. |
| - | Commercial & Institutional – The post-model adjustment for economic uncertainty remained broadly stable at £388 million (31 December 2021 – £391 million.) It included an overlay of £336 million to cover the residual risks from COVID-19, including the risk that government support schemes, during COVID-19 could have suppressed defaults that may materialise in future periods above expected default levels, concerns surrounding associated debt to customers that have utilised government support schemes and a new risk from inflation and supply chain issues which will present significant new headwinds for a number of sectors. The amount relating to the new inflation and supply chain risk was £107 million and is a mechanistic adjustment, where a sector-level downgrade was applied to the sectors that were considered most at risk from these headwinds. |
| - | The post-model adjustment for deferred model calibrations on the business banking portfolio was broadly unchanged at £64 million (31 December 2021 – £62 million). This reflected management’s judgment that the modelled ECL reduction remained unsupportable while portfolio performance was being underpinned by the various support schemes. New business banking models are currently being developed in H2 2022 in part to address this concern. |
| - | Other adjustments included an overlay of £9 million to mitigate the effect of operational timing delays in the identification and flagging of a significant increase in credit risk (SICR). This increased from £2 million at 31 December 2021, mainly as a result of increased Stage 1 balances and an increase in Stage 1 into Stage 3 flows. |
| - | Ulster Bank RoI – The post model adjustment for economic uncertainty reduced to £5 million from £29 million owing to a decrease in the amount of COVID-19 related adjustments. Other adjustments increased to £178 million from £156 million reflecting management opinion that continuing actions on the phased withdrawal of Ulster Bank RoI from the Republic of Ireland market will lead to higher, and/or earlier, crystallisation of losses. |
NatWest Group – Form 6-K Interim Results 2022 | 30 |
Risk and capital management
Credit risk continued
Wholesale support schemes
The table below shows the sector split for the Bounce Back Loan Scheme (BBLS) as well as associated debt split by stage. Associated debt refers to the non-BBLS lending to customers who also have BBLS lending.
31 December 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale | ||||||||||||||||||||||
Property |
| 1,480 |
| 218 |
| 99 |
| 1,797 |
| 1,232 |
| 165 |
| 55 |
| 1,452 |
| 3 |
| 13 |
| 18 |
Financial institutions |
| 33 |
| 5 |
| 1 |
| 39 |
| 9 |
| 20 |
| 3 |
| 32 |
| — |
| 1 |
| — |
Sovereign |
| 7 |
| 1 |
| — |
| 8 |
| 2 |
| — |
| — |
| 2 |
| — |
| — |
| — |
Corporate |
| 4,593 |
| 703 |
| 334 |
| 5,630 |
| 2,481 |
| 1,087 |
| 84 |
| 3,652 |
| 10 |
| 66 |
| 34 |
Of which: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture | 302 | 86 | 6 | 394 | 827 | 396 | 14 | 1,237 | 3 | 16 | 4 | |||||||||||
Airlines and aerospace |
| 5 |
| 1 |
| 1 |
| 7 |
| 1 |
| 1 |
| — |
| 2 |
| — |
| — |
| — |
Automotive |
| 309 |
| 43 |
| 21 |
| 373 |
| 119 |
| 39 |
| 2 |
| 160 |
| 1 |
| 2 |
| 1 |
Health |
| 233 |
| 26 |
| 7 |
| 266 |
| 287 |
| 131 |
| 13 |
| 431 |
| 1 |
| 7 |
| 3 |
Land transport and logistics |
| 180 |
| 32 |
| 19 |
| 231 |
| 57 |
| 26 |
| 2 |
| 85 |
| — |
| 2 |
| 1 |
Leisure |
| 706 |
| 122 |
| 55 |
| 883 |
| 367 |
| 208 |
| 25 |
| 600 |
| 1 |
| 15 |
| 9 |
Oil and gas |
| 8 |
| 2 |
| 1 |
| 11 |
| 3 |
| 1 |
| — |
| 4 |
| — |
| — |
| — |
Retail |
| 800 |
| 109 |
| 47 |
| 956 |
| 310 |
| 127 |
| 8 |
| 445 |
| 2 |
| 7 |
| 4 |
Total |
| 6,113 |
| 927 |
| 434 |
| 7,474 |
| 3,724 |
| 1,272 |
| 142 |
| 5,138 |
| 13 |
| 80 |
| 52 |
Measurement uncertainty and ECL sensitivity analysis
The recognition and measurement of ECL is complex and involves the use of significant judgment and estimation, particularly in times of economic volatility and uncertainty. 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.
The focus of the simulations is on ECL provisioning requirements on performing exposures in Stage 1 and Stage 2. The simulations are run on a stand-alone basis and are independent of each other; the potential ECL impacts reflect the simulated impact at 30 June 2022. Scenario impacts on a SICR should be considered when evaluating the ECL movements of Stage 1 and Stage 2. In all scenarios the total exposure was the same but exposure by stage varied in each scenario.
Stage 3 provisions are not subject to the same level of measurement uncertainty – default is an observed event as at the balance sheet date. Stage 3 provisions therefore have not been considered in this analysis.
The impact arising from the base case, upside, downside and extreme downside scenarios has been simulated. These scenarios are used in the methodology for Personal multiple economic scenarios as described in the Economic loss drivers section. In the simulations, NatWest Group has assumed that the economic macro variables associated with these scenarios replace the existing base case economic assumptions, giving them a 100% probability weighting and therefore serving as a single economic scenario.
These scenarios have been applied to all modelled portfolios in the analysis below, with the simulation impacting both PDs and LGDs. Modelled post model adjustments present in the underlying ECL estimates are also sensitised in line with the modelled ECL movements, but those that were judgmental in nature, primarily those for deferred model calibrations and economic uncertainty, are not (refer to the Governance and post model adjustments section). As expected, the scenarios create differing impacts on ECL by portfolio and the impacts are deemed reasonable. In this simulation, it is assumed that existing modelled relationships between key economic variables and loss drivers hold, but in practice other factors would also have an impact, for example, potential customer behaviour changes and policy changes by lenders that might impact on the wider availability of credit.
NatWest Group’s core criterion to identify a SICR is founded on PD deterioration, as discussed above. Under the simulations, PDs change and result in exposures moving between Stage 1 and Stage 2 contributing to the ECL impact.
Risk and capital management
Credit risk continued
Measurement uncertainty and ECL sensitivity analysis
|
|
|
|
|
|
|
|
| Extreme | |
30 June 2022 | Actual | Base case | Upside | Downside | downside | |||||
Stage 1 modelled exposure (£m) |
|
|
|
|
|
|
|
|
|
|
Retail Banking - mortgages |
| 164,607 |
| 164,315 |
| 165,182 |
| 164,514 |
| 162,356 |
Retail Banking - unsecured |
| 7,714 |
| 7,769 |
| 7,942 |
| 7,662 |
| 7,053 |
Wholesale - property |
| 28,433 |
| 28,747 |
| 28,878 |
| 27,461 |
| 23,382 |
Wholesale - non-property |
| 112,900 |
| 116,027 |
| 116,679 |
| 109,232 |
| 94,138 |
| 313,654 |
| 316,858 |
| 318,681 |
| 308,869 |
| 286,929 | |
Stage 1 modelled ECL (£m) |
|
|
|
|
|
|
|
|
|
|
Retail Banking - mortgages |
| 45 |
| 46 |
| 42 |
| 50 |
| 51 |
Retail Banking - unsecured |
| 131 |
| 157 |
| 152 |
| 160 |
| 141 |
Wholesale - property |
| 39 |
| 33 |
| 28 |
| 50 |
| 83 |
Wholesale - non-property |
| 155 |
| 162 |
| 160 |
| 171 |
| 149 |
| 370 |
| 398 |
| 382 |
| 431 |
| 424 | |
Stage 2 modelled exposure (£m) |
|
|
|
|
|
|
|
|
|
|
Retail Banking - mortgages |
| 8,965 |
| 9,257 |
| 8,390 |
| 9,058 |
| 11,216 |
Retail Banking - unsecured |
| 2,829 |
| 2,774 |
| 2,601 |
| 2,881 |
| 3,490 |
Wholesale - property |
| 2,902 |
| 2,588 |
| 2,457 |
| 3,874 |
| 7,953 |
Wholesale - non-property |
| 14,043 |
| 10,916 |
| 10,264 |
| 17,711 |
| 32,805 |
| 28,739 |
| 25,535 |
| 23,712 |
| 33,524 |
| 55,464 | |
Stage 2 modelled ECL (£m) |
|
|
|
|
|
|
|
|
|
|
Retail Banking - mortgages |
| 76 |
| 75 |
| 69 |
| 76 |
| 86 |
Retail Banking - unsecured |
| 345 |
| 302 |
| 265 |
| 325 |
| 424 |
Wholesale - property |
| 101 |
| 78 |
| 69 |
| 121 |
| 300 |
Wholesale - non-property |
| 543 |
| 463 |
| 420 |
| 616 |
| 1,170 |
| 1,065 |
| 918 |
| 823 |
| 1,138 |
| 1,980 | |
Stage 1 and Stage 2 modelled exposure (£m) |
|
|
|
|
|
|
|
|
|
|
Retail Banking - mortgages |
| 173,572 |
| 173,572 |
| 173,572 |
| 173,572 |
| 173,572 |
Retail Banking - unsecured |
| 10,543 |
| 10,543 |
| 10,543 |
| 10,543 |
| 10,543 |
Wholesale - property |
| 31,335 |
| 31,335 |
| 31,335 |
| 31,335 |
| 31,335 |
Wholesale - non-property |
| 126,943 |
| 126,943 |
| 126,943 |
| 126,943 |
| 126,943 |
| 342,393 |
| 342,393 |
| 342,393 |
| 342,393 |
| 342,393 | |
Stage 1 and Stage 2 modelled ECL (£m) |
|
|
|
|
|
|
|
|
|
|
Retail Banking - mortgages |
| 121 |
| 121 |
| 111 |
| 126 |
| 137 |
Retail Banking - unsecured |
| 476 |
| 459 |
| 417 |
| 485 |
| 565 |
Wholesale - property |
| 140 |
| 111 |
| 97 |
| 171 |
| 383 |
Wholesale - non-property |
| 698 |
| 625 |
| 580 |
| 787 |
| 1,319 |
| 1,435 |
| 1,316 |
| 1,205 |
| 1,569 |
| 2,404 | |
Stage 1 and Stage 2 coverage (%) |
|
|
|
|
|
|
|
|
|
|
Retail Banking - mortgages |
| 0.07 |
| 0.07 |
| 0.06 |
| 0.07 |
| 0.08 |
Retail Banking - unsecured |
| 4.51 |
| 4.35 |
| 3.96 |
| 4.60 |
| 5.36 |
Wholesale - property |
| 0.45 |
| 0.35 |
| 0.31 |
| 0.54 |
| 1.22 |
Wholesale - non-property |
| 0.55 |
| 0.49 |
| 0.46 |
| 0.62 |
| 1.04 |
| 0.42 |
| 0.38 |
| 0.35 |
| 0.46 |
| 0.70 | |
Reconciliation to Stage 1 and Stage 2 ECL (£m) |
|
|
|
|
|
|
|
|
|
|
ECL on modelled exposures |
| 1,435 |
| 1,316 |
| 1,205 |
| 1,569 |
| 2,404 |
ECL on Ulster Bank RoI modelled exposures |
| 56 |
| 56 |
| 56 |
| 56 |
| 56 |
ECL on non-modelled exposures |
| 39 |
| 39 |
| 39 |
| 39 |
| 39 |
Total Stage 1 and Stage 2 ECL |
| 1,530 |
| 1,411 |
| 1,300 |
| 1,664 |
| 2,499 |
Variance – (lower)/higher to actual total Stage 1 and Stage 2 ECL |
| — |
| (119) |
| (230) |
| 134 |
| 969 |
| (1) | Variations in future undrawn exposure values across the scenarios are modelled, however the exposure position reported is that used to calculate modelled ECL as at 30 June 2022 and therefore does not include variation in future undrawn exposure values. |
| (2) | Reflects ECL for all modelled exposure in scope for IFRS 9. The analysis excludes non-modelled portfolios and exposure relating to bonds and cash. |
| (3) | Exposures related to Ulster Bank RoI continuing operations have not been included in the simulations, the current Ulster Bank RoI ECL has been included across all scenarios to enable reconciliation to other disclosures. |
| (4) | All simulations are run on a stand-alone basis and are independent of each other, with the potential ECL impact reflecting the simulated impact as at 30 June 2022. The simulations change the composition of Stage 1 and Stage 2 exposure but total exposure is unchanged under each scenario as the loan population is static. |
| (5) | Refer to the Economic loss drivers section for details of economic scenarios. |
| (6) | Refer to the NatWest Group 2021 Annual Report on Form 20-F for 31 December 2021 comparatives. |
NatWest Group – Form 6-K Interim Results 2022 | 32 |
Risk and capital management
Credit risk continued
Measurement uncertainty and ECL adequacy
| - | During the first half of 2022, both the Stage 2 size and overall modelled ECL reduced in line with stable portfolio performance and underlying ECL driver trends. Judgmental ECL post-model adjustments, although reduced in value terms from 31 December 2021, continue to reflect economic uncertainty with the expectation of increased defaults later in 2022 and beyond, still represents 24% of total ECL (31 December 2021 – 26%). These combined factors, in conjunction with the new regulatory definition of default moving riskier Stage 2 assets to Stage 3 and a new suite of Personal IFRS 9 models, contributed to a smaller range of ECL sensitivities at 30 June 2022 compared to the 2021 year end. |
| - | If the economics were as negative as observed in the extreme downside, total Stage 1 and Stage 2 ECL was simulated to increase by £1.0 billion (approximately 63%). In this scenario, Stage 2 exposure increased significantly and was the key driver of the simulated ECL rise. The movement in Stage 2 balances in the other simulations was less significant. |
| - | In the Wholesale portfolio, there was a significant increase to ECL under both a moderate and extreme downside scenario. The Wholesale property ECL increase under a moderate and extreme downside scenario was driven by commercial real estate prices which show negative growth for 2022 and 2023 and significant deterioration in the stock index. The non-property increase under a moderate and extreme downside scenario was driven by GDP contraction, unemployment growth and interest rate changes. |
The changes in the economic outlook and scenarios used in the IFRS 9 MES framework at 30 June 2022 to capture the increased risks of inflation, cost of living and supply chain had a minimal effect on modelled ECL. Given that uncertainty has increased due to these risks, NatWest Group utilised a framework of quantitative and qualitative measures to support the directional change and levels of ECL coverage, including economic data, credit performance insights on higher risk portfolio segments and problem debt trends. This was particularly important for consideration of post-model adjustments.
As the effects of inflation, cost of living and supply chain risks evolve during 2022 and into 2023 and government support schemes have to be serviced, there is a risk of credit deterioration. However, the income statement effect of this will be mitigated by the forward-looking provisions retained on the balance sheet at 30 June 2022.
There are a number of key factors that could drive further downside to impairments, through deteriorating economic and credit metrics and increased stage migration as credit risk increases for more customers. Such factors would include an adverse deterioration in GDP and unemployment in the economies in which NatWest Group operates.
Movement in ECL provision
The table below shows the main ECL provision movements during H1 2022.
| ECL provision | |
£m | ||
At 1 January 2022 |
| 3,806 |
Transfers to disposal groups |
| (50) |
Changes in economic forecasts |
| 41 |
Changes in risk metrics and exposure: Stage 1 and Stage 2 |
| (120) |
Changes in risk metrics and exposure: Stage 3 |
| 261 |
Judgemental changes: changes in post model adjustments for Stage 1, Stage 2 and Stage 3 |
| (159) |
Write-offs and other |
| (264) |
At 30 June 2022 |
| 3,515 |
| - | ECL reduced during H1 2022 reflecting continued positive trends in portfolio performance alongside a related net release of judgemental post model adjustments and write-off activity. |
| - | Stage 3 defaults continued to be subdued on an underlying basis. Stage 3 ECL balances remained broadly stable during the quarter, mainly due to write-offs and repayments of defaulted debt largely offsetting the effect of the new regulatory default definition. |
| - | The update to the economic scenarios at 30 June 2022 resulted in a modest modelled £41 million increase in ECL. Additionally, broader portfolio performance continued to be stable, which led to some additional post model adjustments being required to ensure provision adequacy in the face of growing uncertainty due to inflation, cost of living threat and supply chain challenges. |
| - | As described in the Governance and post model adjustments section above, the new cost of living focused post model adjustments were more than offset by the retirement of previously held COVID-19 related adjustments and also significant reduction in the requirement for deferred model calibrations due to impending new model implementations in Q3 2022. |
| - | The £50 million ECL reduction due to transfer to discontinued operations relates to the phased withdrawal of Ulster Bank RoI from the Republic of Ireland. |
NatWest Group – Form 6-K Interim Results 2022 | 33 |
Risk and capital management
Credit risk – Banking activities
Introduction
This section details the credit risk profile of NatWest Group’s banking activities.
Financial instruments within the scope of the IFRS 9 ECL framework
Refer to Note 9 for balance sheet analysis of financial assets that are classified as amortised cost or fair value through other comprehensive income (FVOCI), the starting point for IFRS 9 ECL framework assessment. The table below excludes loans in disposal group of £14.3 billion (31 December 2021 – £9.1 billion).
Financial assets
30 June 2022 | 31 December 2021 | |||||||||||
Gross | ECL | Net | Gross | ECL | Net | |||||||
£bn | £bn | £bn | £bn | £bn | £bn | |||||||
Balance sheet total gross amortised cost and FVOCI |
| 605.1 |
|
|
|
|
| 596.1 |
|
|
|
|
In scope of IFRS 9 ECL framework |
| 593.4 |
|
|
|
|
| 590.9 |
|
|
|
|
% in scope |
| 98% |
|
|
|
| 99% |
|
|
| ||
Loans to customers - in scope - amortised cost |
| 365.9 |
| 3.4 |
| 362.5 |
| 361.9 |
| 3.7 |
| 358.2 |
Loans to customers - in scope - FVOCI |
| 0.1 |
| — |
| 0.1 |
| 0.3 |
| — |
| 0.3 |
Loans to banks - in scope - amortised cost |
| 10.4 |
| — |
| 10.4 |
| 7.6 |
| — |
| 7.6 |
Total loans - in scope |
| 376.4 |
| 3.4 |
| 373.0 |
| 369.8 |
| 3.7 |
| 366.1 |
Stage 1 |
| 342.1 |
| 0.4 |
| 341.7 |
| 330.8 |
| 0.3 |
| 330.5 |
Stage 2 |
| 28.5 |
| 1.0 |
| 27.5 |
| 34.0 |
| 1.4 |
| 32.6 |
Stage 3 |
| 5.8 |
| 2.0 |
| 3.8 |
| 5.0 |
| 2.0 |
| 3.0 |
Other financial assets - in scope - amortised cost |
| 190.4 |
| — |
| 190.4 |
| 184.4 |
| — |
| 184.4 |
Other financial assets - in scope - FVOCI |
| 26.6 |
| — |
| 26.6 |
| 36.7 |
| — |
| 36.7 |
Total other financial assets - in scope |
| 217.0 |
| — |
| 217.0 |
| 221.1 |
| — |
| 221.1 |
Stage 1 |
| 217.0 |
| — |
| 217.0 |
| 220.8 |
| — |
| 220.8 |
Stage 2 |
| — |
| — |
| — |
| 0.3 |
| — |
| 0.3 |
Out of scope of IFRS 9 ECL framework |
| 11.7 |
| na |
| 11.7 |
| 5.2 |
| na |
| 5.2 |
Loans to customers - out of scope - amortised cost |
| — |
| na |
| — |
| 0.8 |
| na |
| 0.8 |
Loans to banks - out of scope - amortised cost |
| 0.3 |
| na |
| 0.3 |
| 0.1 |
| na |
| 0.1 |
Other financial assets - out of scope - amortised cost |
| 11.4 |
| na |
| 11.4 |
| 4.0 |
| na |
| 4.0 |
Other financial assets - out of scope - FVOCI |
| — |
| na |
| — |
| 0.3 |
| na |
| 0.3 |
na = not applicable
The assets outside the IFRS 9 ECL framework were as follows:
| - | Settlement balances, items in the course of collection, cash balances and other non-credit risk assets of £11.4 billion (31 December 2021 – £3.7 billion). These were assessed as having no ECL unless there was evidence that they were defaulted. |
| - | Equity shares of £0.3 billion (31 December 2021 – £0.3 billion) as not within the IFRS 9 ECL framework by definition. |
| - | Fair value adjustments on loans hedged by interest rate swaps, where the underlying loan was within the IFRS 9 ECL scope of nil (31 December 2021 – £0.8 billion). |
| - | NatWest Group originated securitisations, where ECL was captured on the underlying loans of nil (31 December 2021 – £0.4 billion). |
Contingent liabilities and commitments
In addition to contingent liabilities and commitments disclosed in Note 14, reputationally-committed limits, were also included in the scope of the IFRS 9 ECL framework. These were offset by £1.4 billion (31 December 2021 – £0.8 billion) out of scope balances primarily related to facilities that, if drawn, would not be classified as amortised cost or FVOCI, or undrawn limits relating to financial assets exclusions. Total contingent liabilities (including financial guarantees) and commitments within IFRS 9 ECL scope of £133.3 billion (31 December 2021 – £127.9 billion) comprised Stage 1 £122.7 billion (31 December 2021 – £119.5 billion); Stage 2 £9.9 billion (31 December 2021 – £7.8 billion); and Stage 3 £0.7 billion (31 December 2021 – £0.6 billion).
The ECL relating to off-balance sheet exposures was £0.1 billion (31 December 2021 – £0.1 billion). The total ECL in the remainder of the Credit risk section of £3.5 billion (31 December 2021 – £3.8 billion) included ECL for both on and off-balance sheet exposures for non-disposal groups.
NatWest Group – Form 6-K Interim Results 2022 | 34 |
Risk and capital management
Credit risk – Banking activities continued
Segment analysis – portfolio summary
The table below shows gross loans and ECL, by segment and stage, within the scope of the IFRS 9 ECL framework.
For the notes to this table refer to the following page.
NatWest Group – Form 6-K Interim Results 2022 | 35 |
Risk and capital management
Credit risk – Banking activities continued
Segment analysis – portfolio summary
| (1) | Includes £3 million (31 December 2021 – £5 million) related to assets classified as FVOCI. |
| (2) | ECL provisions coverage is calculated as ECL provisions divided by loans – amortised cost and FVOCI. It is calculated on third party loans and total ECL provisions. |
| (3) | Includes a £2 million release (30 June 2021 – £4 million charge) related to other financial assets, of which nil (30 June 2021 – nil) related to assets classified as FVOCI; and £3 million (30 June 2021 – £2 million release) related to contingent liabilities. |
| (4) | The table shows gross loans only and excludes amounts that were 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 £178.4 billion (31 December 2021 – £176.3 billion) and debt securities of £38.6 billion (31 December 2021 – £44.9 billion). |
| - | Stage 3 loans increased, as write-offs and repayments were more than offset by the effect of the new regulatory definition of default, which in isolation led to an increase of approximately £0.7 billion in Stage 3 balances, mostly in retail mortgages and new Wholesale defaults on government scheme lending. |
| - | Underlying flows into default remained subdued during H1 2022. However, it is expected that defaults will increase as the year progresses and growing inflationary pressures on businesses, consumers and the broader economy continue to evolve. |
| - | Stage 2 loans and ECL reduced further during the first half of 2022, with positive trends in underlying risk metrics maintained since 31 December 2021 and migration of exposures into Stage 3 because of the new regulatory default definition mentioned previously. |
| - | Reflecting the stable portfolio performance and resultant ECL releases, there was a net impairment release of £54 million for the first half of the year for continued operations. |
NatWest Group – Form 6-K Interim Results 2022 | 36 |
Risk and capital management
Credit risk – Banking activities continued
Segment analysis – portfolio summary
The table below shows Ulster Bank RoI disposal groups for Personal and Wholesale, by stage, for gross loans, off-balance sheet exposures and ECL. The tables in the rest of the Credit risk section are shown on a continuing basis and therefore exclude these exposures.
31 December 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal |
| 5,547 |
| 210 |
| 34 |
| 5,791 |
| — |
| — |
| 4 |
| 6 |
| 7 |
| 17 |
Wholesale |
| 2,647 |
| 639 |
| 7 |
| 3,293 |
| 1,665 |
| 115 |
| 10 |
| 78 |
| 4 |
| 92 |
Total |
| 8,194 |
| 849 |
| 41 |
| 9,084 |
| 1,665 |
| 115 |
| 14 |
| 84 |
| 11 |
| 109 |
Segment loans and impairment metrics
The table below shows gross loans and ECL provisions, by days past due, by segment and stage, within the scope of the ECL framework.
31 December 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Banking |
| 168,013 |
| 12,275 |
| 863 |
| 456 |
| 13,594 |
| 1,884 |
| 183,491 |
| 134 |
| 516 |
| 38 |
| 36 |
| 590 |
| 850 |
| 1,574 |
Private Banking |
| 17,600 |
| 902 |
| 27 |
| 38 |
| 967 |
| 270 |
| 18,837 |
| 12 |
| 29 |
| — |
| — |
| 29 |
| 37 |
| 78 |
Personal |
| 14,350 |
| 137 |
| 24 |
| 11 |
| 172 |
| 232 |
| 14,754 |
| 6 |
| 2 |
| — |
| — |
| 2 |
| 18 |
| 26 |
Wholesale |
| 3,250 |
| 765 |
| 3 |
| 27 |
| 795 |
| 38 |
| 4,083 |
| 6 |
| 27 |
| — |
| — |
| 27 |
| 19 |
| 52 |
Commercial & Institutional |
| 107,368 |
| 17,352 |
| 455 |
| 670 |
| 18,477 |
| 2,081 |
| 127,926 |
| 129 |
| 750 |
| 23 |
| 11 |
| 784 |
| 751 |
| 1,664 |
Personal |
| 2,647 |
| 21 |
| 17 |
| 11 |
| 49 |
| 57 |
| 2,753 |
| 2 |
| 1 |
| — |
| — |
| 1 |
| 10 |
| 13 |
Wholesale |
| 104,721 |
| 17,331 |
| 438 |
| 659 |
| 18,428 |
| 2,024 |
| 125,173 |
| 127 |
| 749 |
| 23 |
| 11 |
| 783 |
| 741 |
| 1,651 |
Central items & other |
| 32,283 |
| 90 |
| — |
| — |
| 90 |
| — |
| 32,373 |
| 17 |
| 11 |
| — |
| — |
| 11 |
| — |
| 28 |
Ulster Bank RoI |
| 5,560 |
| 747 |
| 58 |
| 48 |
| 853 |
| 787 |
| 7,200 |
| 10 |
| 58 |
| 3 |
| 3 |
| 64 |
| 388 |
| 462 |
Personal |
| 5,165 |
| 510 |
| 52 |
| 46 |
| 608 |
| 609 |
| 6,382 |
| 7 |
| 15 |
| 3 |
| 3 |
| 21 |
| 301 |
| 329 |
Wholesale |
| 395 |
| 237 |
| 6 |
| 2 |
| 245 |
| 178 |
| 818 |
| 3 |
| 43 |
| — |
| — |
| 43 |
| 87 |
| 133 |
Total loans |
| 330,824 |
| 31,366 |
| 1,403 |
| 1,212 |
| 33,981 |
| 5,022 |
| 369,827 |
| 302 |
| 1,364 |
| 64 |
| 50 |
| 1,478 |
| 2,026 |
| 3,806 |
Of which: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal |
| 190,175 |
| 12,943 |
| 956 |
| 524 |
| 14,423 |
| 2,782 |
| 207,380 |
| 149 |
| 534 |
| 41 |
| 39 |
| 614 |
| 1,179 |
| 1,942 |
Wholesale |
| 140,649 |
| 18,423 |
| 447 |
| 688 |
| 19,558 |
| 2,240 |
| 162,447 |
| 153 |
| 830 |
| 23 |
| 11 |
| 864 |
| 847 |
| 1,864 |
For the notes to this table refer to the following page.
NatWest Group – Form 6-K Interim Results 2022 | 37 |
Risk and capital management
Credit risk – Banking activities continued
Segment loans and impairment metrics
The table below shows ECL and ECL provisions coverage, by days past due, by segment and stage, within the scope of the ECL framework.
| (1) | 30 DPD – 30 days past due, the mandatory 30 days past due backstop as prescribed by IFRS 9 for a SICR. |
| (2) | ECL provisions on contingent liabilities and commitments are included within the Financial assets section so as not to distort ECL coverage ratios. |
Segment loans and impairment metrics
| - | Retail Banking – Balance sheet growth continued during H1 2022, primarily in mortgages, where new lending remained strong. Unsecured lending balances increased during H1 2022, following the easing of COVID-19 restrictions. Total ECL coverage reduced slightly during 2022, reflective of low unemployment and stable portfolio performance, while maintaining sufficient ECL coverage for key portfolios above 2019 levels, given increased inflationary and cost of living pressures. Stage 3 ECL increased overall, mainly because of the IFRS 9 alignment to the new regulatory default definition, implemented on 1 January 2022. This change resulted in an increase in Stage 3 exposures of approximately £0.7 billion, mostly in mortgages. Stage 2 balances decreased during the first half of the year, reflecting continued stability in IFRS 9 PD estimates and the consequence of the migration of balances into Stage 3 under the new regulatory default definition. The implementation of new mortgage IFRS 9 models resulted in lower Stage 3 ECL coverage due to reduced loss estimates for cases where the customer was not subject to repossession activity and was the primary driver for the change in overall Retail Stage 3 coverage during H1 2022. |
| - | Commercial & Institutional – The balance sheet increased during H1 2022, mainly attributable to growth in exposure to financial institutions. Sector appetite is regularly reviewed with continued focus on appetite to high oversight sectors. Strategic reductions and right sizing of appetite limits continued to be achieved. Stage 2 balances continued to fall mainly reflecting positive portfolio performance which lowered PDs and resulted in exposure migrating back into Stage 1. In addition, some deterioration in government scheme lending resulted in exposure moving from Stage 2 into Stage 3. PD deterioration remained the primary driver of cases moving into Stage 2. The ECL release was largely due to improvements in underlying PDs and reduced Stage 2 balances, as assets migrated back into Stage 1. |
NatWest Group – Form 6-K Interim Results 2022 | 38 |
Risk and capital management
Credit risk – Banking activities continued
Sector analysis – portfolio summary
The table below shows financial assets and off-balance sheet exposures gross of ECL and related ECL provisions, impairment and past due by sector, asset quality and geographical region.
For the notes to this table refer to page 40.
NatWest Group – Form 6-K Interim Results 2022 | 39 |
Risk and capital management
Credit risk – Banking activities continued
Sector analysis – portfolio summary
| (1) | Includes a portion of Private Banking lending secured against residential real estate, in line with ECL calculation methodology. Private Banking and RBS International mortgages are reported in UK, which includes crown dependencies, reflecting the country of lending origination. |
| (2) | At 30 June 2022, Stage 3 included £330 million in respect of mortgages and £451 million of total lending for cases in default due to probation. |
| (3) | 30 DPD – 30 days past due, the mandatory 30 days past due backstop as prescribed by the IFRS 9 guidance for a SICR. |
| (4) | Days past due – Personal products: at a high level, for amortising products, the number of days past due is derived from the arrears amount outstanding and the monthly repayment instalment. For credit cards, it is based on payments missed, and for current accounts the number of continual days in excess of borrowing limit. Wholesale products: the number of days past due for all products is the number of continual days in excess of borrowing limit. |
| (5) | AQ bandings are based on Basel PDs and the mapping is as follows: |
Risk and capital management
Credit risk – Banking activities continued
Sector analysis – portfolio summary
Internal asset quality band | Probability of default range | Indicative S&P rating |
AQ1 | 0% - 0.034% | AAA to AA |
AQ2 | 0.034% - 0.048% | AA to AA- |
AQ3 | 0.048% - 0.095% | A+ to A |
AQ4 | 0.095% - 0.381% | BBB+ to BBB- |
AQ5 | 0.381% - 1.076% | BB+ to BB |
AQ6 | 1.076% - 2.153% | BB- to B+ |
AQ7 | 2.153% - 6.089% | B+ to B |
AQ8 | 6.089% - 17.222% | B- to CCC+ |
AQ9 | 17.222% - 100% | CCC to C |
AQ10 | 100% | D |
£0.3 billion (31 December 2021 – £0.3 billion) of AQ10 Personal balances primarily relate to loan commitments, the drawdown of which is effectively prohibited.
NatWest Group – Form 6-K Interim Results 2022 | 41 |
Risk and capital management
Credit risk – Banking activities continued
Sector analysis – portfolio summary
The table below shows ECL by stage, for the Personal portfolios and selected sectors of the Wholesale portfolios.
31 December 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Personal |
| 190,175 |
| 14,423 |
| 2,782 |
| 207,380 |
| 40,351 |
| 60 |
| 149 |
| 614 |
| 1,179 |
| 1,942 |
Mortgages |
| 180,418 |
| 11,543 |
| 2,050 |
| 194,011 |
| 16,827 |
| — |
| 32 |
| 174 |
| 562 |
| 768 |
Credit cards |
| 2,924 |
| 933 |
| 90 |
| 3,947 |
| 15,354 |
| — |
| 59 |
| 141 |
| 60 |
| 260 |
Other personal |
| 6,833 |
| 1,947 |
| 642 |
| 9,422 |
| 8,170 |
| 60 |
| 58 |
| 299 |
| 557 |
| 914 |
Wholesale |
| 140,649 |
| 19,558 |
| 2,240 |
| 162,447 |
| 83,231 |
| 4,254 |
| 153 |
| 864 |
| 847 |
| 1,864 |
Property |
| 28,679 |
| 3,101 |
| 742 |
| 32,522 |
| 15,882 |
| 460 |
| 24 |
| 111 |
| 239 |
| 374 |
Financial institutions |
| 52,263 |
| 732 |
| 46 |
| 53,041 |
| 16,906 |
| 992 |
| 14 |
| 39 |
| 4 |
| 57 |
Sovereigns |
| 5,904 |
| 121 |
| 8 |
| 6,033 |
| 1,212 |
| — |
| 19 |
| 1 |
| 2 |
| 22 |
Corporate |
| 53,803 |
| 15,604 |
| 1,444 |
| 70,851 |
| 49,231 |
| 2,802 |
| 96 |
| 713 |
| 602 |
| 1,411 |
Of which: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Agriculture |
| 3,722 |
| 1,229 |
| 133 |
| 5,084 |
| 993 |
| 24 |
| 11 |
| 39 |
| 78 |
| 128 |
Airlines and aerospace |
| 779 |
| 668 |
| 44 |
| 1,491 |
| 1,528 |
| 221 |
| 1 |
| 39 |
| 15 |
| 55 |
Automotive |
| 5,133 |
| 1,304 |
| 38 |
| 6,475 |
| 3,507 |
| 65 |
| 9 |
| 32 |
| 10 |
| 51 |
Health |
| 3,818 |
| 1,235 |
| 133 |
| 5,186 |
| 799 |
| 9 |
| 9 |
| 58 |
| 48 |
| 115 |
Land transport and logistics |
| 3,721 |
| 833 |
| 39 |
| 4,593 |
| 3,069 |
| 188 |
| 4 |
| 53 |
| 12 |
| 69 |
Leisure |
| 3,712 |
| 4,050 |
| 340 |
| 8,102 |
| 1,874 |
| 107 |
| 11 |
| 247 |
| 133 |
| 391 |
Oil and gas |
| 1,482 |
| 141 |
| 52 |
| 1,675 |
| 1,126 |
| 453 |
| 1 |
| 14 |
| 28 |
| 43 |
Retail |
| 6,380 |
| 1,342 |
| 180 |
| 7,902 |
| 4,872 |
| 410 |
| 8 |
| 29 |
| 66 |
| 103 |
Total |
| 330,824 |
| 33,981 |
| 5,022 |
| 369,827 |
| 123,582 |
| 4,314 |
| 302 |
| 1,478 |
| 2,026 |
| 3,806 |
NatWest Group – Form 6-K Interim Results 2022 | 42 |
Risk and capital management
Credit risk – Banking activities continued
Wholesale forbearance
The table below shows Wholesale forbearance, Heightened Monitoring and Risk of Credit Loss by sector. Personal forbearance is disclosed in the Personal portfolio section on page 45. This table show current exposure but reflects risk transfers where there is a guarantee by another customer.
| - | Loans by geography – In Personal, exposures continued to be concentrated in the UK and heavily weighted to mortgages and the vast majority of exposure in the Republic of Ireland was also in mortgages. Balance sheet growth during the year was mainly in mortgages. Unsecured lending balances grew slightly as noted previously. In Wholesale, exposures were mainly in the UK. Balance sheet growth was primarily due to increased lending to financial institutions. Wholesale exposure to high oversight sectors reduced in leisure and oil and gas, largely offset by an increase in retail. Agriculture was added to the disclosure due to the effect on the sector from inflation and supply chain issues. |
| - | Loans by stage – In both Wholesale and Personal, continued strong credit performance resulted in a smaller proportion of accounts exhibiting a SICR and there was, therefore, an associated migration of exposures from Stage 2 into Stage 1. Personal customers who had accessed payment holiday support, and where their risk profile was identified as relatively high, are no longer collectively migrated into Stage 2. The relevance of this collective SICR identification is no longer considered as pertinent in the context of the current inflation and cost of living related economic uncertainty. Stage 3 loans increased due to the effect of the new regulatory definition of default, mostly impacting mortgages and new Wholesale defaults on government scheme lending. |
| - | Loans – Past due analysis – Despite the risks of inflation, cost of living pressures and supply chain issues, the past due profile of the key portfolios remained stable, reflecting the broader observations on portfolio performance. The implementation of the new regulatory default definition for Wholesale included refinements to the days past due calculations, which explains the uplift in early arrears, with the largest increase in corporates. |
| - | Weighted average 12 months PDs – In Personal, the Basel II point-in-time PDs improved slightly during 2022 due to stable credit performance in the portfolios. For IFRS 9 PDs, there were decreases across the product groups, with the exception of mortgages, as a result of new IFRS 9 PD model implementation in Q1 2022. In Wholesale, the Basel II PDs were based on a through-the-cycle approach and decreased less than the forward-looking IFRS 9 PDs which reduced, reflecting positive portfolio performance. For further details refer to the Asset quality section. |
| - | ECL provision by geography – In line with the loans by geography, the vast majority of ECL related to exposures in the UK, noting the reduction in RoI mostly due to the phased withdrawal of Ulster Bank RoI from the Republic of Ireland and moving of assets to discontinued operations. |
| - | ECL provisions by stage – Stage 2 provisions reduced during H1 2022 reflecting continued strong credit performance of the portfolios, this along with increased lending led to an increase in Stage 1 provisions. As outlined above, Stage 3 provisions have yet to be materially affected by the risks of inflation, cost of living and supply chain, with increases relating to the introduction of the new regulatory definition of default more than offset by write offs. |
| - | ECL provisions coverage – Overall provisions coverage reduced, driven by a combination of robust underlying portfolio performance reflecting recent strong growth in the portfolio within risk appetite and continued stable portfolio performance. |
| - | The ECL charge and loss rate – Reflecting the continued stable portfolio performance and default trends, the impairment charge was a release for H1 2022, mainly as a result of releases in Wholesale portfolios. |
NatWest Group – Form 6-K Interim Results 2022 | 43 |
Risk and capital management
Credit risk – Banking activities continued
| - | Loans by residual maturity – The maturity profile of the portfolios remained consistent with prior periods. In mortgages, as expected, the vast majority of exposures were greater than five years. In unsecured lending – cards and other – exposures were concentrated in less than five years. In Wholesale, with the exception of financial institutions where lending was concentrated in less than one year, the majority of lending was for residual maturity of one to five years, with some greater than five years in line with lending under the government support schemes. |
| - | Other financial assets by asset quality – Consisting almost entirely of cash and balances at central banks and debt securities, held in the course of treasury related management activities, these assets were mainly within the AQ1-AQ4 bands. |
| - | Off-balance sheet exposures by asset quality – In Personal, undrawn exposures were reflective of available credit lines in credit cards and current accounts. Additionally, the mortgage portfolio had undrawn exposures, where a formal offer had been made to a customer but had not yet drawn down; the value increased in line with the pipeline of offers. There was also a legacy portfolio of flexible mortgages where a customer had the right and ability to draw down further funds. The asset quality was aligned to the wider portfolio. |
| - | Wholesale forbearance – Forbearance flow continued to decrease in the first half of 2022. The leisure sector continued to represent the largest share of forbearance flow as it continued to experience disruption beyond the COVID-19 restrictions evident throughout 2021. Labour shortages, airport capacity issues, rising fuel costs and consumer uncertainty continue to weigh on the sector recovery. Payment holidays and covenant waivers were the most common forms of forbearance granted. |
| - | Heightened Monitoring and Risk of Credit Loss – Risk of Credit Loss framework exposures continued to reduce and were below pre-COVID-19 levels. Inflows were also trending lower. The sector breakdown of exposures remained consistent with prior periods. |
NatWest Group – Form 6-K Interim Results 2022 | 44 |
Risk and capital management
Credit risk – Banking activities continued
Personal portfolio
Disclosures in the Personal portfolio section include drawn exposure (gross of provisions).
| (1) | Includes accounts which have an interest only sub-account and a capital and interest sub-account to provide a more comprehensive view of interest only exposures. |
| (2) | Retail Banking excludes a non-material amount of provisions held on relatively small legacy portfolios. |
| (3) | Comprises unsecured lending except for Private Banking, which includes both secured and unsecured lending. It excludes loans that are commercial in nature. |
| (4) | The new lending LTV in the comparative has been amended to reflect LTV at time of lending origination rather than LTV at reporting period. |
| - | The mortgage portfolio grew steadily in H1 2022, benefiting from buoyant housing market activity and customers re-mortgaging ahead of anticipated Bank of England interest rate rises. |
| - | LTV ratios continued to improve as house prices increased as a result of housing market demand. |
| - | The existing mortgage stock and new business were closely monitored against agreed risk appetite parameters. These included loan-to-value ratios, buy-to-let concentrations, new-build concentrations and credit quality. Affordability assessments and assumptions were continuously reviewed considering inflationary pressure, interest rate rises and taxation changes. |
| - | The buy-to-let portfolio grew in H1 2022. This growth was expected and within risk appetite following strategy and customer journey simplification implemented in H2 2021. |
| - | Forbearance flows were subdued in H1 2022 compared to historical norms after an increase in forbearance in H2 2021, following the end of COVID-19 payment holidays. |
| - | Unsecured lending increased during H1 2022, with resilient customer demand after the easing of COVID-19 restrictions. |
| - | As set out above ECL has reduced, for further detail of movements in ECL provisions at product level refer to the Flow statements section. |
| - | As at 30 June 2022, £121.8 billion, 63%, of the total residential mortgages portfolio had Energy Performance Certificate (EPC) data available (31 December 2021 – £116.2 billion, 62%). Of which, 40% of UK properties were rated as EPC C or above (31 December 2021 – 38%). In addition to the Retail Banking portfolio, during Q2 2022 EPC data became available for the Private Banking portfolio for all periods. EPC data source and limitations are provided on page 60 of the 2021 NatWest Group Climate-related Disclosures Report. |
NatWest Group – Form 6-K Interim Results 2022 | 45 |
Risk and capital management
Credit risk – Banking activities continued
Personal portfolio
Mortgage LTV distribution by stage
The table below shows gross mortgage lending and related ECL by LTV band. Mortgage lending not within the scope of Governance and post-model adjustments reflected portfolios carried at fair value.
For the notes to this table refer to the following page.
NatWest Group – Form 6-K Interim Results 2022 | 46 |
Risk and capital management
Credit risk – Banking activities continued
Personal portfolio
Mortgages |
| ECL provisions |
| ECL provisions coverage (2) | ||||||||||||||||||||||||
Ulster Bank RoI | Not within | Of which: | ||||||||||||||||||||||||||
IFRS 9 | gross new | |||||||||||||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | ECL scope | Total | lending | Stage 1 | Stage 2 | Stage 3 | Total (1) | Stage 1 | Stage 2 | Stage 3 | Total | |||||||||||||||
30 June 2022 |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| % |
| % |
| % |
| % |
≤50% |
| 275 |
| 43 |
| 233 |
| — |
| 551 |
| — |
| 6 |
| 9 |
| 146 |
| 161 |
| 2.2 |
| 20.9 |
| 62.7 |
| 29.2 |
>50% and ≤70% |
| 76 |
| 21 |
| 100 |
| — |
| 197 |
| — |
| 2 |
| 7 |
| 61 |
| 70 |
| 2.6 |
| 33.3 |
| 61.0 |
| 35.5 |
>70% and ≤80% |
| 6 |
| 5 |
| 48 |
| — |
| 59 |
| — |
| 1 |
| 3 |
| 29 |
| 33 |
| 16.7 |
| 60.0 |
| 60.4 |
| 55.9 |
>80% and ≤90% |
| 1 |
| 1 |
| 33 |
| — |
| 35 |
| — |
| — |
| 1 |
| 20 |
| 21 |
| — |
| 100.0 |
| 60.6 |
| 60.0 |
>90% and ≤100% |
| — |
| 1 |
| 22 |
| — |
| 23 |
| — |
| — |
| 1 |
| 13 |
| 14 |
| — |
| 100.0 |
| 59.1 |
| 60.9 |
>100% |
| — |
| — |
| 23 |
| — |
| 23 |
| — |
| — |
| — |
| 13 |
| 13 |
| — |
| — |
| 56.5 |
| 56.5 |
Total |
| 358 |
| 71 |
| 459 |
| — |
| 888 |
| — |
| 9 |
| 21 |
| 282 |
| 312 |
| 2.5 |
| 29.6 |
| 61.4 |
| 35.1 |
Other | 17 | — | 1 | — | 18 | — | — | — | — | — | — | — | — | — | ||||||||||||||
Total | 375 | 71 | 460 | — | 906 | — | 9 | 21 | 282 | 312 | 2.4 | 29.6 | 61.3 | 34.4 | ||||||||||||||
31 December 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
≤50% |
| 2,660 |
| 221 |
| 274 |
| — |
| 3,155 |
| 13 |
| 4 |
| 6 |
| 138 |
| 148 |
| 0.2 |
| 2.7 |
| 50.4 |
| 4.7 |
>50% and ≤70% |
| 1,497 |
| 172 |
| 128 |
| — |
| 1,797 |
| 16 |
| 2 |
| 5 |
| 59 |
| 66 |
| 0.1 |
| 2.9 |
| 46.1 |
| 3.7 |
>70% and ≤80% |
| 484 |
| 67 |
| 60 |
| — |
| 611 |
| 9 |
| 1 |
| 2 |
| 28 |
| 31 |
| 0.2 |
| 3.0 |
| 46.7 |
| 5.1 |
>80% and ≤90% |
| 231 |
| 51 |
| 55 |
| — |
| 337 |
| 1 |
| 1 |
| 2 |
| 26 |
| 29 |
| 0.4 |
| 3.9 |
| 47.3 |
| 8.6 |
>90% and ≤100% |
| 82 |
| 26 |
| 37 |
| — |
| 145 |
| 1 |
| — |
| 1 |
| 19 |
| 20 |
| — |
| 3.8 |
| 51.4 |
| 13.8 |
>100% |
| 33 |
| 16 |
| 41 |
| — |
| 90 |
| — |
| — |
| 1 |
| 23 |
| 24 |
| — |
| 6.3 |
| 56.1 |
| 26.7 |
Total with LTVs |
| 4,987 |
| 553 |
| 595 |
| — |
| 6,135 |
| 40 |
| 8 |
| 17 |
| 293 |
| 318 |
| 0.2 |
| 3.1 |
| 49.2 |
| 5.2 |
Other |
| 25 |
| — |
| 4 |
| — |
| 29 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
Total |
| 5,012 |
| 553 |
| 599 |
| — |
| 6,164 |
| 40 |
| 8 |
| 17 |
| 293 |
| 318 |
| 0.2 |
| 3.1 |
| 48.9 |
| 5.2 |
| (1) | Excludes a non-material amount of provisions held on relatively small legacy portfolios. |
| (2) | ECL provisions coverage is ECL provisions divided by mortgages. |
| - | ECL coverage rates for each Stage increased through the LTV bands with both Retail Banking and Ulster Bank RoI having only limited exposures in the highest LTV bands. The reduced coverage level in the lower LTV bands for Retail Banking reflects the implementation of new IFRS 9 LGD model with a modelling approach that now captures a reduced loss expectation from non-repossession recovery action. |
| - | Continued stable portfolio performance alongside the new IFRS 9 PD and LGD model implementations have resulted in reduced coverage across most LTV bands in Stage 2 and Stage 3. The increased ECL across Stage 1 LTV bands was driven by higher Stage 1 PDs as a result of the new PD model implementation and also the proportionate allocation of the new cost of living post model adjustment to Stage 1. |
NatWest Group – Form 6-K Interim Results 2022 | 47 |
Risk and capital management
Credit risk – Banking activities continued
Commercial real estate (CRE)
The CRE portfolio comprises exposures to entities involved in the development of, or investment in, commercial and residential properties (including house builders but excluding housing associations, construction and the building materials sub-sector). The sector is reviewed regularly by senior executive committees. Reviews include portfolio credit quality, capital consumption and control frameworks. The CRE tables in this section include information on exposures which are out of scope of ECL calculations or part of disposal groups.
| (1) | Geographical splits are based on country of collateral risk. |
| (2) | Properties including houses, flats and student accommodation. |
| (3) | Properties including offices in central business districts, regional headquarters and business parks. |
| (4) | Properties including high street retail, shopping centres, restaurants, bars and gyms. |
| (5) | Properties including distribution centres, manufacturing and warehouses. |
| (6) | Properties that do not fall within the other categories above. Mixed generally relates to a mixture of retail/office with residential. |
NatWest Group – Form 6-K Interim Results 2022 | 48 |
Risk and capital management
Credit risk – Banking activities continued
Commercial real estate
CRE LTV distribution by stage
The table below shows CRE current exposure and related ECL by LTV band.
| (1) | Includes exposures relating to non-modelled portfolios and other exposures carried at fair value. |
| (2) | ECL provisions coverage is ECL provisions divided by current exposure. |
| (3) | Relates mainly to business banking, rate risk management products and unsecured corporate lending. |
| (4) | Relates to the development of commercial and residential properties. LTV is not a meaningful measure for this type of lending activity. |
Overall – The majority of the CRE portfolio was located and managed in the UK. Business appetite and strategy was aligned across NatWest Group.
2022 trends – H1 2022 saw a relatively flat performance, as the growth noted in Q1 began to subside due to deterioration in the wider economic outlook. The residential sector continued to perform well, although, with . house price growth coupled with rising borrowing costs the outlook is uncertain. Uncertainty in the office sector remained, with the full consequences of the limited return to work, still to flow through to the sector. The industrial sector continued to perform strongly reflecting the structural change in retail. The retail sector continued to exhibit mixed performance based on changing consumer habits.
Credit quality – NatWest Group entered 2022 with a conservatively positioned CRE portfolio. The majority of the defaults experienced during 2021 were in the retail sector, particularly in the fashion-led shopping centre sub-sector. NatWest Group completed a strategic sale of a portfolio of these loans during 2021, achieving a rebalance of the portfolio at that stage. Rental payments have now normalised, but uncertainty still remains and the portfolio continues to be actively reviewed and managed.
During H1 2022, Heightened Monitoring stock reduced by both volume and value, most materially within the investment sub-sector (retail, residential and office).
Risk appetite – Lending appetite continued to be gradually and selectively increased by sub-sector aligned to our purpose led approach.
NatWest Group – Form 6-K Interim Results 2022 | 49 |
Risk and capital management
Credit risk – Banking activities continued
Flow statements
The flow statements that follow show the main ECL and related income statement movements. They also show the changes in ECL as well as the changes in related financial assets used in determining ECL. Due to differences in scope, exposures may differ from those reported in other tables, principally in relation to exposures in Stage 1 and Stage 2. These differences do not have a material ECL affect. Other points to note:
| - | Financial assets include treasury liquidity portfolios, comprising balances at central banks and debt securities, as well as loans. Both modelled and non-modelled portfolios are included. |
| - | Stage transfers (for example, exposures moving from Stage 1 into Stage 2) are a key feature of the ECL movements, with the net re-measurement cost of transitioning to a worse stage being a primary driver of income statement charges. Similarly, there is an ECL benefit for accounts improving stage. |
| - | Changes in risk parameters shows the reassessment of the ECL within a given stage, including any ECL overlays and residual income statement gains or losses at the point of write-off or accounting write-down. |
| - | Other (P&L only items) includes any subsequent changes in the value of written-down assets (for example, fortuitous recoveries) along with other direct write-off items such as direct recovery costs. Other (P&L only items) affects the income statement but does not affect balance sheet ECL movements. |
| - | Amounts written-off represent the gross asset written-down against accounts with ECL, including the net asset write-down for any debt sale activity. |
| - | There were flows from Stage 1 into Stage 3 including transfers due to unexpected default events. The small number of write-offs in Stage 1 and Stage 2 reflected the effect of portfolio debt sales and also staging at the start of the analysis period. |
| - | The effect of any change in PMAs during the year is typically reported under changes in risk parameters, as are any effects arising from changes to the underlying models. Refer to the section on Governance and post model adjustments for further details. |
| - | All movements are captured monthly and aggregated. Interest suspended post default is included within Stage 3 ECL with the movement in the value of suspended interest during the year reported under currency translation and other adjustments. |
NatWest Group – Form 6-K Interim Results 2022 | 50 |
Risk and capital management
Credit risk – Banking activities continued
Flow statements
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total | |||||||||
Financial | Financial | Financial | Financial | |||||||||||||
assets | ECL | assets | ECL | assets | ECL | assets | ECL | |||||||||
Retail Banking - mortgages | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||
At 1 January 2022 |
| 159,966 |
| 24 |
| 10,748 |
| 155 |
| 1,267 |
| 250 |
| 171,981 |
| 429 |
Currency translation and other adjustments |
| — |
| — |
| — |
| — |
| 3 |
| 2 |
| 3 |
| 2 |
Transfers from Stage 1 to Stage 2 |
| (5,576) |
| (3) |
| 5,576 |
| 3 |
| — |
| — |
| — |
| — |
Transfers from Stage 2 to Stage 1 |
| 5,869 |
| 53 |
| (5,869) |
| (53) |
| — |
| — |
| — |
| — |
Transfers to Stage 3 |
| (37) |
| — |
| (910) |
| (28) |
| 947 |
| 28 |
| — |
| — |
Transfers from Stage 3 |
| 14 |
| 1 |
| 241 |
| 11 |
| (255) |
| (12) |
| — |
| — |
Net re-measurement of ECL on stage transfer |
|
| (50) |
|
| 47 |
|
|
| (13) |
|
|
| (16) | ||
Changes in risk parameters (model inputs) |
|
| 32 |
|
| (49) |
|
|
| 3 |
|
|
| (14) | ||
Other changes in net exposure |
| 5,899 |
| — |
| (801) |
| (10) |
| (174) |
| (7) |
| 4,924 |
| (17) |
Other (P&L only items) |
|
| (2) |
|
| (1) |
|
|
| (26) |
|
|
| (29) | ||
Income statement (releases)/charges |
|
| (20) |
|
| (13) |
|
|
| (43) |
|
|
| (76) | ||
Amounts written-off |
| — |
| — |
| — |
| — |
| (20) |
| (20) |
| (20) |
| (20) |
Unwinding of discount |
|
| — |
|
| — |
|
|
| (19) |
|
|
| (19) | ||
At 30 June 2022 |
| 166,135 |
| 57 |
| 8,985 |
| 76 |
| 1,768 |
| 212 |
| 176,888 |
| 345 |
Net carrying amount |
| 166,078 |
|
| 8,909 |
|
| 1,556 |
|
|
| 176,543 |
|
| ||
At 1 January 2021 |
| 132,390 |
| 23 |
| 28,079 |
| 227 |
| 1,291 |
| 236 |
| 161,760 |
| 486 |
2021 movements |
| 16,915 |
| (4) |
| (12,510) |
| (47) |
| 61 |
| 14 |
| 4,466 |
| (37) |
At 30 June 2021 |
| 149,305 |
| 19 |
| 15,569 |
| 180 |
| 1,352 |
| 250 |
| 166,226 |
| 449 |
Net carrying amount |
| 149,286 |
|
| 15,389 |
|
| 1,102 |
|
|
| 165,777 |
|
| ||
| - | Despite the strong portfolio growth during 2022 so far, ECL levels for mortgages reduced during the same period. The decrease in ECL was primarily a result of stable portfolio performance alongside the implementation of new IFRS 9 models in Q1 2022. Collectively, this resulted in lower levels of ECL requirement. |
| - | More specifically, strong credit performance resulted in the migration of assets from Stage 2 into Stage 1, with an associated decrease from lifetime ECL to a 12 month ECL. In addition, the introduction of the new cost of living post model adjustment at 30 June 2022 allocated more ECL to Stage 1 given the forward-looking nature of the cost of living and inflation threat, whereas the previous COVID-19 post model adjustments were focused on Stage 2 (for example, high risk payment holiday cases migrated into Stage 2). Refer to the Governance and post model adjustments section for more information. |
| - | The Stage 3 inflow relates to the IFRS 9 adoption of the new regulatory definition of default in January 2022. However, the Stage 3 ECL levels reduced since 31 December 2021 primarily due to reduced LGD estimates as a result of the new model implementation in Q1 2022 alongside stable underlying default levels. The relatively small ECL cost for net re-measurement on stage transfer included the effect of risk targeted ECL adjustments, when previously in Stage 2. Refer to the Governance and post model adjustments section for further details. |
| - | Write-off occurs once the repossessed property has been sold and there is a residual shortfall balance remaining outstanding. This would typically be within five years from default but can be longer. Given repossession activity remains subdued relative to pre-COVID-19 levels, write-offs remained at a lower level. |
Risk and capital management
Credit risk – Banking activities continued
Flow statements
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total | |||||||||
Financial | Financial | Financial | Financial | |||||||||||||
assets | ECL | assets | ECL | assets | ECL | assets | ECL | |||||||||
Retail Banking - credit cards | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||
At 1 January 2022 |
| 2,740 |
| 58 |
| 947 |
| 141 |
| 91 |
| 60 |
| 3,778 |
| 259 |
Currency translation and other adjustments |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
Transfers from Stage 1 to Stage 2 |
| (626) |
| (23) |
| 626 |
| 23 |
| — |
| — |
| — |
| — |
Transfers from Stage 2 to Stage 1 |
| 450 |
| 59 |
| (450) |
| (59) |
| — |
| — |
| — |
| — |
Transfers to Stage 3 |
| (12) |
| — |
| (54) |
| (22) |
| 66 |
| 22 |
| — |
| — |
Transfers from Stage 3 |
| — |
| — |
| 4 |
| 2 |
| (4) |
| (2) |
| — |
| — |
Net re-measurement of ECL on stage transfer |
| (35) | 90 |
|
| 16 |
|
| 71 | |||||||
Changes in risk parameters (model inputs) |
| (2) |
| (34) |
|
| 7 |
| (29) | |||||||
Other changes in net exposure |
| 252 |
| 7 |
| (49) |
| (28) |
| (12) |
| 1 |
| 191 |
| (20) |
Other (P&L only items) |
|
| — |
|
| — |
|
| (2) |
|
| (2) | ||||
Income statement (releases)/charges |
|
| (30) |
|
| 28 |
|
| 22 |
|
| 20 | ||||
Amounts written-off |
| — |
| — |
| — |
| — |
| (33) |
| (33) |
| (33) |
| (33) |
Unwinding of discount |
|
| — |
|
| — |
|
| (3) |
|
| (3) | ||||
At 30 June 2022 |
| 2,804 |
| 64 |
| 1,024 |
| 113 |
| 108 |
| 68 |
| 3,936 |
| 245 |
Net carrying amount |
| 2,740 |
|
| 911 |
|
| 40 |
|
| 3,691 |
| ||||
At 1 January 2021 |
| 2,250 |
| 52 |
| 1,384 |
| 220 |
| 114 |
| 75 |
| 3,748 |
| 347 |
2021 movements |
| 92 |
| (6) |
| (293) |
| (39) |
| (25) |
| (18) |
| (226) |
| (63) |
At 30 June 2021 |
| 2,342 |
| 46 |
| 1,091 |
| 181 |
| 89 |
| 57 |
| 3,522 |
| 284 |
Net carrying amount |
| 2,296 |
| 910 |
|
| 32 |
|
| 3,238 |
| |||||
| - | The overall decrease in ECL was mainly due to the reduction in Stage 2 ECL reflecting the stable portfolio performance, causing PDs to decrease. This resulted in reduced levels of SICR identification and ECL requirement. |
| - | In addition, a temporary adjustment for an ECL release is in place to reflect, on a forward-looking basis, the associated effects of a new credit card PD model that is pending implementation in Q3 2022. This is captured in changes in risk parameters for Stage 1 and Stage 2. |
| - | Cards balances have grown since the 2021 year end, in line with industry trends in the UK, as unsecured borrowing demand increased. |
| - | Reflecting the strong credit performance observed during 2022, Stage 3 inflows remained subdued and the effect of the IFRS 9 adoption of the new regulatory definition of default was minimal for Cards, therefore Stage 3 ECL movement was low in H1 2022. |
| - | Charge-off (analogous to partial write-off) typically occurs after 12 missed payments. |
Risk and capital management
Credit risk – Banking activities continued
Flow statements
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total | |||||||||
Financial | Financial | Financial | Financial | |||||||||||||
assets | ECL | assets | ECL | assets | ECL | assets | ECL | |||||||||
Retail Banking - other personal unsecured | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||
At 1 January 2022 |
| 4,548 |
| 52 |
| 1,967 |
| 294 |
| 629 |
| 540 |
| 7,144 |
| 886 |
Currency translation and other adjustments |
| — |
| (3) |
| — |
| — |
| 6 |
| — |
| 6 |
| (3) |
Transfers from Stage 1 to Stage 2 |
| (1,019) |
| (18) |
| 1,019 |
| 18 |
| — |
| — |
| — |
| — |
Transfers from Stage 2 to Stage 1 |
| 788 |
| 105 |
| (788) |
| (105) |
| — |
| — |
| — |
| — |
Transfers to Stage 3 |
| (16) |
| — |
| (198) |
| (56) |
| 214 |
| 56 |
| — |
| — |
Transfers from Stage 3 |
| 1 |
| 2 |
| 14 |
| 8 |
| (15) |
| (10) |
| — |
| — |
Net re-measurement of ECL on stage transfer |
|
| (94) |
|
| 119 |
|
| 65 |
|
| 90 | ||||
Changes in risk parameters (model inputs) |
|
| 13 |
|
| (14) |
|
| 33 |
|
| 32 | ||||
Other changes in net exposure |
| 518 |
| 6 |
| (241) |
| (34) |
| (48) |
| (12) |
| 229 |
| (40) |
Other (P&L only items) |
|
| — |
|
| — |
|
| — |
|
| — | ||||
Income statement (releases)/charges |
|
| (75) |
|
| 71 |
|
| 86 |
|
| 82 | ||||
Amounts written-off |
| — |
| — |
| — |
| — |
| (53) |
| (53) |
| (53) |
| (53) |
Unwinding of discount |
|
| — |
|
| — |
|
| (4) |
|
| (4) | ||||
At 30 June 2022 |
| 4,820 |
| 63 |
| 1,773 |
| 230 |
| 733 |
| 615 |
| 7,326 |
| 908 |
Net carrying amount |
| 4,757 |
|
| 1,543 |
|
| 118 |
| — |
| 6,418 |
| |||
At 1 January 2021 |
| 3,385 |
| 59 |
| 3,487 |
| 450 |
| 596 |
| 495 |
| 7,468 |
| 1,004 |
2021 movements |
| 435 |
| (4) |
| (963) |
| (102) |
| (3) |
| 9 |
| (531) |
| (97) |
At 30 June 2021 |
| 3,820 |
| 55 |
| 2,524 |
| 348 |
| 593 |
| 504 |
| 6,937 |
| 907 |
Net carrying amount |
| 3,765 |
|
| 2,176 |
|
| 89 |
|
| 6,030 |
| ||||
| - | Overall ECL has remained stable, with a modest increase driven by Stage 3 ECL linked to the IFRS 9 adoption of the new regulatory definition of default in January 2022, with underlying Stage 3 inflows remaining stable, reflecting the strong credit performance observed during 2022. |
| - | More specifically, the reduced PDs alongside muted portfolio deterioration, resulted in migration of assets from Stage 2 into Stage 1, with an associated decrease from lifetime ECL to a 12 month ECL and kept Stage 2 levels stable. |
| - | Unsecured retail balances have grown since the 2021 year end, in line with industry trends in the UK, as unsecured borrowing demand increased. |
| - | Write-off occurs once recovery activity with the customer has been concluded or there are no further recoveries expected, but no later than six years after default. |
Risk and capital management
Credit risk – Banking activities continued
Flow statements
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total | |||||||||
Financial | Financial | Financial | Financial | |||||||||||||
assets | ECL | assets | ECL | assets | ECL | assets | ECL | |||||||||
Commercial & Institutional total | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||
At 1 January 2022 |
| 152,224 |
| 129 |
| 19,731 |
| 785 |
| 2,155 |
| 750 |
| 174,110 |
| 1,664 |
Currency translation and other adjustments |
| 2,455 |
| (1) |
| 124 |
| — |
| 14 |
| 2 |
| 2,593 |
| 1 |
Inter-group transfers |
| (660) |
| — |
| — |
| — |
| — |
| — |
| (660) |
| — |
Transfers from Stage 1 to Stage 2 |
| (10,291) |
| (21) |
| 10,291 |
| 21 |
| — |
| — |
| — |
| — |
Transfers from Stage 2 to Stage 1 |
| 10,378 |
| 273 |
| (10,378) |
| (273) |
| — |
| — |
| — |
| — |
Transfers to Stage 3 |
| (102) |
| — |
| (682) |
| (25) |
| 784 |
| 25 |
| — |
| — |
Transfers from Stage 3 |
| 100 |
| 8 |
| 92 |
| 14 |
| (192) |
| (22) |
| — |
| — |
Net re-measurement of ECL on stage transfer |
|
| (248) |
|
| 214 |
|
| 83 |
|
| 49 | ||||
Changes in risk parameters (model inputs) |
|
| 27 |
|
| (31) |
|
| 5 |
|
| 1 | ||||
Other changes in net exposure |
| 8,223 |
| 18 |
| (2,409) |
| (74) |
| (313) |
| (17) |
| 5,501 |
| (73) |
Other (P&L only items) |
|
| (1) |
|
| (1) |
|
| (34) |
|
| (36) | ||||
Income statement releases |
|
| (204) |
|
| 108 |
|
| 37 |
|
| (59) | ||||
Amounts written-off |
| — |
| — |
| — |
| — |
| (94) |
| (94) |
| (94) |
| (94) |
Unwinding of discount |
|
| — |
|
| — |
|
| (26) |
|
| (26) | ||||
At 30 June 2022 |
| 162,327 |
| 185 |
| 16,769 |
| 631 |
| 2,354 |
| 706 |
| 181,450 |
| 1,522 |
Net carrying amount |
| 162,142 |
| — |
| 16,138 |
| — |
| 1,648 |
| — |
| 179,928 |
| — |
At 1 January 2021 |
| 131,307 |
| 296 |
| 42,290 |
| 1,836 |
| 2,998 |
| 1,249 |
| 176,595 |
| 3,381 |
2021 movements |
| 221 |
| (63) |
| (11,194) |
| (532) |
| (452) |
| (302) |
| (11,425) |
| (897) |
At 30 June 2021 |
| 131,528 |
| 233 |
| 31,096 |
| 1,304 |
| 2,546 |
| 947 |
| 165,170 |
| 2,484 |
Net carrying amount |
| 131,295 |
|
| 29,792 |
|
| 1,599 |
|
| 162,686 |
| ||||
| - | There was an uplift in Stage 1 exposure from new and increased lending specifically to financial institutions along with movements in currency translations. Stage 1 ECL increased due to an uplift in post model adjustments, the largest adjustment being a new adjustment for inflation and supply chain issues and additional ECL on loans that migrated from Stage 2 and Stage 3. |
| - | Stage 2 exposure and ECL reduced reflecting positive portfolio performance which lowered PDs, with net effect of stage transfers leading to a significant reduction in ECL. In addition, a reduction in the Stage 2 economic uncertainty adjustment further reduced ECL. |
| - | Flows into Stage 3 increased due to defaults on government scheme lending, but the government guarantee has meant this has not led to an increase in ECL. In addition, write-offs led to an overall reduction in Stage 3 ECL. |
Risk and capital management
Credit risk – Banking activities continued
Flow statements
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total | |||||||||
Financial | Financial | Financial | Financial | |||||||||||||
assets | ECL | assets | ECL | assets | ECL | assets | ECL | |||||||||
Commercial & Institutional- business banking | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||
At 1 January 2022 |
| 6,673 |
| 11 |
| 1,376 |
| 60 |
| 44 |
| 10 |
| 8,093 |
| 81 |
Currency translation and other adjustments |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
Transfers from Stage 1 to Stage 2 |
| (866) |
| (3) |
| 866 |
| 3 |
| — |
| — |
| — |
| — |
Transfers from Stage 2 to Stage 1 |
| 491 |
| 21 |
| (491) |
| (21) |
| — |
| — |
| — |
| — |
Transfers to Stage 3 |
| (12) |
| — |
| (69) |
| (4) |
| 81 |
| 4 |
| — |
| — |
Transfers from Stage 3 |
| 16 |
| 1 |
| 15 |
| 2 |
| (31) |
| (3) |
| — |
| — |
Net re-measurement of ECL on stage transfer |
|
| (20) |
|
| 35 |
|
| 11 |
|
| 26 | ||||
Changes in risk parameters (model inputs) |
|
| 7 |
|
| 22 |
|
| 2 |
|
| 31 | ||||
Other changes in net exposure |
| (442) |
| 2 |
| (382) |
| (9) |
| (46) |
| (6) |
| (870) |
| (13) |
Other (P&L only items) |
|
| (2) |
|
| 1 |
|
| (1) |
|
| (2) | ||||
Income statement (releases)/charges |
|
| (13) |
|
| 49 |
|
| 6 |
|
| 42 | ||||
Amounts written-off |
| — |
| — |
| — |
| — |
| (1) |
| (1) |
| (1) |
| (1) |
Unwinding of discount |
|
| — |
|
| — |
|
| (1) |
|
| (1) | ||||
At 30 June 2022 |
| 5,860 |
| 19 |
| 1,315 |
| 88 |
| 47 |
| 16 |
| 7,222 |
| 123 |
Net carrying amount |
| 5,841 |
|
| 1,227 |
|
| 31 |
|
| 7,099 |
| ||||
| - | At a total level, exposure reduced mainly due to the repayment of government scheme debt. |
| - | Exposure moved from Stage 1 into Stage 2 due to a deterioration in some government scheme lending. ECL increased, reflecting a higher probability of default on additional lending to customers that had government scheme lending. |
Risk and capital management
Credit risk – Banking activities continued
Flow statements
| Stage 1 | Stage 2 | Stage 3 | Total | ||||||||||||
Financial | Financial | Financial | Financial | |||||||||||||
| assets |
| ECL |
| assets |
| ECL |
| assets |
| ECL |
| assets |
| ECL | |
Commercial & Institutional - corporate | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||
At 1 January 2022 |
| 44,089 |
| 83 |
| 14,296 |
| 599 |
| 1,350 |
| 521 |
| 59,735 |
| 1,203 |
Currency translation and other adjustments |
| 537 |
| (1) |
| 102 |
| — |
| 11 |
| 3 |
| 650 |
| 2 |
Inter-group transfers |
| (11) |
| — |
| (84) |
| (4) |
| 1 |
| — |
| (94) |
| (4) |
Transfers from Stage 1 to Stage 2 |
| (6,425) |
| (14) |
| 6,425 |
| 14 |
| — |
| — |
| — |
| — |
Transfers from Stage 2 to Stage 1 |
| 6,742 |
| 189 |
| (6,742) |
| (189) |
| — |
| — |
| — |
| — |
Transfers to Stage 3 |
| (55) |
| — |
| (419) |
| (16) |
| 474 |
| 16 |
| — |
| — |
Transfers from Stage 3 |
| 21 |
| 5 |
| 49 |
| 9 |
| (70) |
| (14) |
| — |
| — |
Net re-measurement of ECL on stage transfer |
|
| (170) |
| — |
| 142 |
|
| 49 |
|
| 21 | |||
Changes in risk parameters (model inputs) |
|
| 12 |
|
| (44) |
|
| (12) |
|
| (44) | ||||
Other changes in net exposure |
| 4,389 |
| 10 |
| (1,099) |
| (47) |
| (200) |
| (4) |
| 3,090 |
| (41) |
Other (P&L only items) |
|
| (1) |
|
| (2) |
|
| (31) |
|
| (34) | ||||
Income statement (releases)/charges |
|
| (149) |
|
| 49 |
|
| 2 |
|
| (98) | ||||
Amounts written-off |
| — |
| — |
| — |
| — |
| (77) |
| (77) |
| (77) |
| (77) |
Unwinding of discount |
|
| — |
|
| — |
|
| (18) |
|
| (18) | ||||
At 30 June 2022 |
| 49,287 |
| 114 |
| 12,528 |
| 464 |
| 1,489 |
| 464 |
| 63,304 |
| 1,042 |
Net carrying amount |
| 49,173 |
|
| 12,064 |
|
| 1,025 |
|
| 62,262 |
| ||||
| - | There was a rise in Stage 1 exposure from new and increased lending along with movements in currency translations. ECL increased due to a rise in post model adjustments with a new adjustment for inflation and supply chain issues and additional ECL on loans that migrated from Stage 2 and Stage 3. |
| - | Stage 2 exposure and ECL reduced reflecting positive portfolio performance which lowered PDs. The net effect of stage transfers led to a significant reduction in Stage 2 ECL, and there were further reductions due to a decrease in the economic uncertainty adjustment. |
| - | Flows into Stage 3 increased due to defaults on government scheme lending, but the government guarantee has meant this has not led to an increase in ECL. In addition, write-offs have led to an overall reduction in Stage 3 ECL. |
| - | The portfolio benefit from cash recoveries post write-off, which are reported as other (P&L only items). Write-off occurs once recovery activity with the customer has been concluded or there are no further recoveries expected, but no later than five years after default. |
Risk and capital management
Credit risk – Banking activities continued
Flow statements
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total | |||||||||
Financial | Financial | Financial | Financial | |||||||||||||
assets | ECL | assets | ECL | assets | ECL | assets | ECL | |||||||||
Commercial & Institutional - property |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
At 1 January 2022 |
| 25,352 |
| 20 |
| 2,777 |
| 84 |
| 661 |
| 204 |
| 28,790 |
| 308 |
Currency translation and other adjustments |
| 10 |
| — |
| 1 |
| — |
| 1 |
| (4) |
| 12 |
| (4) |
Inter-group transfers |
| 7 |
| — |
| (17) |
| — |
| (1) |
| — |
| (11) |
| — |
Transfers from Stage 1 to Stage 2 |
| (1,612) |
| (3) |
| 1,612 |
| 3 |
| — |
| — |
| — |
| — |
Transfers from Stage 2 to Stage 1 |
| 1,310 |
| 23 |
| (1,310) |
| (23) |
| — |
| — |
| — |
| — |
Transfers to Stage 3 |
| (19) |
| — |
| (137) |
| (5) |
| 156 |
| 5 |
| — |
| — |
Transfers from Stage 3 |
| 22 |
| 2 |
| 25 |
| 2 |
| (47) |
| (4) |
| — |
| — |
Net re-measurement of ECL on stage transfer |
|
| (23) |
|
| 28 | 12 | 17 | ||||||||
Changes in risk parameters (model inputs) |
|
| 11 |
|
| (6) | 9 | 14 | ||||||||
Other changes in net exposure |
| 986 |
| 3 |
| (468) |
| (14) |
| (64) |
| (8) |
| 454 |
| (19) |
Other (P&L only items) |
|
| — |
|
| — |
|
| — |
|
| — | ||||
Income statement (releases)/charges |
|
| (9) |
|
| 8 |
|
| 13 |
|
| 12 | ||||
Amounts written-off |
| — |
| — |
| — |
| — |
| (15) |
| (15) |
| (15) |
| (15) |
Unwinding of discount |
|
| — |
|
| — |
|
| (6) |
|
| (6) | ||||
At 30 June 2022 |
| 26,056 |
| 33 |
| 2,483 |
| 69 |
| 691 |
| 193 |
| 29,230 |
| 295 |
Net carrying amount |
| 26,023 |
|
| 2,414 |
|
| 498 |
|
| 28,935 |
| ||||
| - | There was a rise in Stage 1 exposure from new and increased lending along with movements in currency translations. ECL increased due to a rise in post model adjustments with a new adjustment for inflation and supply chain issues and additional ECL on loans that migrated from Stage 2 and Stage 3. |
| - | Stage 2 exposure and ECL reduced reflecting positive portfolio performance which lowered PDs and a reduction in the economic uncertainty adjustment. |
Risk and capital management
Credit risk – Banking activities continued
Flow statements
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total | |||||||||
Financial | Financial | Financial | Financial | |||||||||||||
assets | ECL | assets | ECL | assets | ECL | assets | ECL | |||||||||
Commercial & Institutional - other | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||
At 1 January 2022 |
| 76,109 |
| 15 |
| 1,282 |
| 43 |
| 100 |
| 15 |
| 77,491 |
| 73 |
Currency translation and other adjustments |
| 1,908 |
| — |
| 21 |
| — |
| 2 |
| 2 |
| 1,931 |
| 2 |
Inter-group transfers |
| (655) |
| — |
| 101 |
| 4 |
| — |
| (1) |
| (554) |
| 3 |
Transfers from Stage 1 to Stage 2 |
| (1,387) |
| (1) |
| 1,387 |
| 1 |
| — |
| — |
| — |
| — |
Transfers from Stage 2 to Stage 1 |
| 1,835 |
| 39 |
| (1,835) |
| (39) |
| — |
| — |
| — |
| — |
Transfers to Stage 3 |
| (17) |
| — |
| (57) |
| — |
| 74 |
| — |
| — |
| — |
Transfers from Stage 3 |
| 41 |
| — |
| 4 |
| — |
| (45) |
| — |
| — |
| — |
Net re-measurement of ECL on stage transfer |
|
| (34) |
|
| 8 |
|
| 10 |
|
| (16) | ||||
Changes in risk parameters (model inputs) |
|
| (4) |
|
| (3) |
|
| 8 |
|
| 1 | ||||
Other changes in net exposure |
| 3,290 |
| 4 |
| (460) |
| (4) |
| (3) |
| — |
| 2,827 |
| — |
Other (P&L only items) |
|
| — |
|
| — |
|
| (1) |
|
| (1) | ||||
Income statement (releases)/charges |
|
| (34) |
|
| 1 |
|
| 17 |
|
| (16) | ||||
Amounts written-off |
| — |
| — |
| — |
| — |
| (1) |
| (1) |
| (1) |
| (1) |
Unwinding of discount |
|
| — |
|
| — |
|
| — |
|
| — | ||||
At 30 June 2022 |
| 81,124 |
| 19 |
| 443 |
| 10 |
| 127 |
| 33 |
| 81,694 |
| 62 |
Net carrying amount |
| 81,105 |
|
| 433 |
|
| 94 |
|
| 81,632 |
| ||||
| - | There was an uplift in Stage 1 exposure from new and increased lending along with movements in currency translations and an increase from exposures moving from Stage 2. Stage 1 ECL was broadly unchanged as the exposures that returned to Stage 1 are now subject to 12 months ECL , generating a significant ECL release on re-measurement. |
| - | Stage 2 exposure and ECL reduced reflecting positive portfolio performance which lowered PDs, this led to large exposure transfers to Stage 1 and a significant reduction in ECL. |
| - | Stage 3 exposure increased due to stage transfers. There was also a significant increase in Stage 3 ECL and charge due to two individual cases. |
Risk and capital management
Credit risk – Banking activities continued
Stage 2 decomposition by a significant increase in credit risk trigger
| UK mortgages |
| RoI mortgages |
| Credit cards |
| Other |
| Total |
| |||||||||||
30 June 2022 | £m | % | £m | % | £m | % | £m | % | £m | % | |||||||||||
Personal trigger (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
PD movement |
| 5,158 |
| 57.3 |
| 23 |
| 32.0 |
| 565 |
| 54.5 |
| 808 |
| 47.0 |
| 6,554 |
| 55.4 | |
PD persistence |
| 1,228 |
| 13.6 |
| 5 |
| 7.0 |
| 329 |
| 31.7 |
| 369 |
| 21.5 |
| 1,931 |
| 16.3 | |
Adverse credit bureau recorded with |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
credit reference agency |
| 1,936 |
| 21.5 |
| — |
| — |
| 49 |
| 4.7 |
| 85 |
| 5.0 |
| 2,070 |
| 17.5 | |
Forbearance support provided |
| 140 |
| 1.6 |
| 1 |
| 1.0 |
| 1 |
| 0.1 |
| 22 |
| 1.3 |
| 164 |
| 1.4 | |
Customers in collections |
| 269 |
| 3.0 |
| 3 |
| 4.0 |
| 2 |
| 0.2 |
| 17 |
| 1.0 |
| 291 |
| 2.5 | |
Collective SICR and other reasons (2) |
| 163 |
| 1.8 |
| 39 |
| 55.0 |
| 91 |
| 8.8 |
| 404 |
| 23.6 |
| 697 |
| 5.9 | |
Days past due >30 |
| 111 |
| 1.2 |
| — |
| — |
| — |
| — |
| 10 |
| 0.6 |
| 121 |
| 1.0 | |
| 9,005 |
| 100 |
| 71 |
| 100 |
| 1,037 |
| 100 |
| 1,715 |
| 100 |
| 11,828 |
| 100 | ||
31 December 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Personal trigger (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
PD movement |
| 2,707 |
| 24.6 |
| 83 |
| 14.9 |
| 560 |
| 60.1 |
| 1,008 |
| 51.8 |
| 4,358 |
| 30.2 | |
PD persistence |
| 3,103 |
| 28.2 |
| 21 |
| 3.8 |
| 270 |
| 28.9 |
| 771 |
| 39.6 |
| 4,165 |
| 28.9 | |
Adverse credit bureau recorded with |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
credit reference agency |
| 3,657 |
| 33.3 |
| — |
| — |
| 60 |
| 6.4 |
| 73 |
| 3.7 |
| 3,790 |
| 26.3 | |
Forbearance support provided |
| 178 |
| 1.6 |
| 6 |
| 1.1 |
| 2 |
| 0.2 |
| 28 |
| 1.4 |
| 214 |
| 1.5 | |
Customers in collections |
| 82 |
| 0.8 |
| 33 |
| 6.0 |
| 3 |
| 0.3 |
| 15 |
| 0.8 |
| 133 |
| 0.9 | |
Collective SICR and other reasons (2) |
| 1,197 |
| 10.9 |
| 409 |
| 74.0 |
| 38 |
| 4.1 |
| 46 |
| 2.4 |
| 1,690 |
| 11.7 | |
Days past due >30 |
| 66 |
| 0.6 |
| 1 |
| 0.2 |
| — |
| — |
| 6 |
| 0.3 |
| 73 |
| 0.5 | |
| 10,990 |
| 100 |
| 553 |
| 100 |
| 933 |
| 100 |
| 1,947 |
| 100 |
| 14,423 |
| 100 | ||
For the notes to the table refer to the following page.
| - | The strong credit performance of the portfolio resulted in either decreased or stable account level IFRS 9 PDs during the year so far for most products. UK mortgages was the exception, where the implementation of a new IFRS 9 PD model in Q1 2022 increased the proportion of accounts exhibiting significant PD deterioration. |
| - | Personal customers who had accessed COVID-19 payment holiday support, and where their risk profile was identified as relatively high risk are no longer collectively migrated into Stage 2, given the lack of default emergence from these segments and with the focus of high risk segment monitoring now shifting to the effects of inflation and the growing cost of living effect on customers. In UK mortgages at 31 December 2021, approximately £0.8 billion of exposures were previously collectively migrated from Stage 1 into Stage 2. |
| - | In the other lending category, there was an increase in ‘Collective SICR and other reasons’ as a result of the net migration of assets into Stage 2 of £0.5 billion reflecting, on a forward-looking basis, the staging effect of new retail unsecured PD models that are pending implementation in Q3 2022. |
Risk and capital management
Credit risk – Banking activities continued
Stage 2 decomposition by a significant increase in credit risk trigger
| Property |
| Corporate |
| Financial institution |
| Other |
| Total |
| |||||||||||
Loans | ECL | Loans | ECL | Loans | ECL | Loans | ECL | Loans | ECL |
| |||||||||||
30 June 2022 |
| £m | % | £m | % | £m | % | £m | % | £m | % | ||||||||||
Wholesale trigger (1) | |||||||||||||||||||||
PD movement |
| 1,202 |
| 41.2 |
| 8,752 |
| 65.6 |
| 130 |
| 47.9 |
| 86 |
| 54.4 |
| 10,170 |
| 61.1 | |
PD persistence |
| 69 |
| 2.4 |
| 215 |
| 1.6 |
| 3 |
| 1.1 |
| — |
| — |
| 287 |
| 1.7 | |
Risk of Credit Loss |
| 810 |
| 27.7 |
| 2,141 |
| 16.1 |
| 64 |
| 23.6 |
| 57 |
| 36.1 |
| 3,072 |
| 18.4 | |
Forbearance support provided |
| 105 |
| 3.6 |
| 682 |
| 5.1 |
| 4 |
| 1.5 |
| — |
| — |
| 791 |
| 4.7 | |
Customers in collections |
| 29 |
| 1.0 |
| 102 |
| 0.8 |
| 1 |
| 0.4 |
| — |
| — |
| 132 |
| 0.8 | |
Collective SICR and other reasons (2) |
| 497 |
| 17.0 |
| 894 |
| 6.7 |
| 66 |
| 24.4 |
| 15 |
| 9.5 |
| 1,472 |
| 8.8 | |
Days past due >30 |
| 208 |
| 7.1 |
| 542 |
| 4.1 |
| 3 |
| 1.1 |
| — |
| — |
| 753 |
| 4.5 | |
| 2,920 |
| 100 |
| 13,328 |
| 100 |
| 271 |
| 100 |
| 158 |
| 100 |
| 16,677 |
| 100 | ||
31 December 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Wholesale trigger (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
PD movement |
| 942 |
| 30.3 |
| 10,553 |
| 67.7 |
| 595 |
| 81.3 |
| 84 |
| 69.4 |
| 12,174 |
| 62.2 | |
PD persistence |
| 139 |
| 4.5 |
| 553 |
| 3.5 |
| 6 |
| 0.8 |
| 1 |
| 0.8 |
| 699 |
| 3.6 | |
Risk of Credit Loss |
| 962 |
| 31.0 |
| 2,626 |
| 16.8 |
| 71 |
| 9.7 |
| 34 |
| 28.1 |
| 3,693 |
| 18.9 | |
Forbearance support provided |
| 101 |
| 3.3 |
| 489 |
| 3.1 |
| 6 |
| 0.8 |
| — |
| — |
| 596 |
| 3.0 | |
Customers in collections |
| 27 |
| 0.9 |
| 88 |
| 0.6 |
| 1 |
| 0.1 |
| — |
| — |
| 116 |
| 0.6 | |
Collective SICR and other reasons (2) |
| 762 |
| 24.6 |
| 1,189 |
| 7.6 |
| 35 |
| 4.8 |
| 2 |
| 1.7 |
| 1,988 |
| 10.2 | |
Days past due >30 |
| 168 |
| 5.4 |
| 106 |
| 0.7 |
| 18 |
| 2.5 |
| — |
| — |
| 292 |
| 1.5 | |
| 3,101 |
| 100 |
| 15,604 |
| 100 |
| 732 |
| 100 |
| 121 |
| 100 |
| 19,558 |
| 100 | ||
| (1) | The table is prepared on a hierarchical basis from top to bottom, for example, accounts with PD deterioration may also trigger backstop(s) but are only reported under PD deterioration. |
| (2) | Includes customers where a PD assessment cannot be undertaken due to missing PDs. |
| - | PD deterioration continued to be the primary trigger of migration of exposures from Stage 1 into Stage 2. There was a reduction in cases triggering PD deterioration reflecting positive portfolio performance which is lowering PDs. |
| - | Moving exposures on to the Risk of Credit Loss framework remained an important backstop indicator of a SICR. The exposures classified under the Stage 2 Risk of Credit Loss framework decreased over the period again reflecting positive portfolio performance. |
| - | PD persistence related to the Business Banking portfolio only. A reduction in PDs in Q4 2021 meant that some Business Banking customers were only in Stage 2 because of persistence and with PDs marginally improving in 2022, they have now returned to Stage 1. |
| - | There was an increase in customers meeting the >30 days past due trigger as a result of regulatory definition of default changes where all customer borrowing is now categorised as past due, previously it was assessed at a facility level. |
NatWest Group – Form 6-K Interim Results 2022 | 60 |
Risk and capital management
Credit risk – Banking activities continued
Asset quality
The table below shows asset quality bands of gross loans and ECL, by stage, for the Personal portfolio.
Risk and capital management
Credit risk – Banking activities continued
Asset quality
Gross loans | ECL provisions |
| ECL provisions coverage | |||||||||||||||||||||
Stage 1 |
| Stage 2 |
| Stage 3 | Total |
| Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | ||||||||||
31 December 2021 | £m | £m | £m | £m | £m | £m | £m | £m | % | % | % | % | ||||||||||||
UK mortgages | ||||||||||||||||||||||||
AQ1-AQ4 | 93,956 | 3,157 | — | 97,113 | 8 | 40 | — | 48 | 0.01 | 1.27 | — | 0.05 | ||||||||||||
AQ5-AQ8 | 81,160 | 7,325 | — | 88,485 | 17 | 103 | — | 120 | 0.02 | 1.41 | — | 0.14 | ||||||||||||
AQ9 | 290 | 508 | — | 798 | — | 14 | — | 14 | — | 2.76 | — | 1.75 | ||||||||||||
AQ10 | — | — | 1,451 | 1,451 | — | — | 269 | 269 | — | — | 18.54 | 18.54 | ||||||||||||
175,406 | 10,990 | 1,451 | 187,847 | 25 | 157 | 269 | 451 | 0.01 | 1.43 | 18.54 | 0.24 | |||||||||||||
RoI mortgages | ||||||||||||||||||||||||
AQ1-AQ4 | 3,669 | 226 | — | 3,895 | 5 | 5 | — | 10 | 0.14 | 2.21 | — | 0.26 | ||||||||||||
AQ5-AQ8 | 1,335 | 176 | — | 1,511 | 2 | 6 | — | 8 | 0.15 | 3.41 | — | 0.53 | ||||||||||||
AQ9 | 8 | 151 | — | 159 | — | 6 | — | 6 | — | 3.97 | — | 3.77 | ||||||||||||
AQ10 | — | — | 599 | 599 | — | — | 293 | 293 | — | — | 48.91 | 48.91 | ||||||||||||
5,012 | 553 | 599 | 6,164 | 7 | 17 | 293 | 317 | 0.14 | 3.07 | 48.91 | 5.14 | |||||||||||||
Credit cards | ||||||||||||||||||||||||
AQ1-AQ4 | 44 | 1 | — | 45 | 1 | — | — | 1 | 2.27 | — | — | 2.22 | ||||||||||||
AQ5-AQ8 | 2,874 | 894 | — | 3,768 | 58 | 130 | — | 188 | 2.02 | 14.54 | — | 4.99 | ||||||||||||
AQ9 | 6 | 38 | — | 44 | — | 11 | — | 11 | — | 28.95 | — | 25.00 | ||||||||||||
AQ10 | — | — | 90 | 90 | — | — | 60 | 60 | — | — | 66.67 | 66.67 | ||||||||||||
2,924 | 933 | 90 | 3,947 | 59 | 141 | 60 | 260 | 2.02 | 15.11 | 66.67 | 6.59 | |||||||||||||
Other personal | ||||||||||||||||||||||||
AQ1-AQ4 | 831 | 88 | — | 919 | 6 | 19 | — | 25 | 0.72 | 21.59 | — | 2.72 | ||||||||||||
AQ5-AQ8 | 5,950 | 1,723 | — | 7,673 | 51 | 243 | — | 294 | 0.86 | 14.10 | — | 3.83 | ||||||||||||
AQ9 | 52 | 136 | — | 188 | 1 | 37 | — | 38 | 1.92 | 27.21 | — | 20.21 | ||||||||||||
AQ10 | — | — | 642 | 642 | — | — | 557 | 557 | — | — | 86.76 | 86.76 | ||||||||||||
6,833 | 1,947 | 642 | 9,422 | 58 | 299 | 557 | 914 | 0.85 | 15.36 | 86.76 | 9.70 | |||||||||||||
Total | ||||||||||||||||||||||||
AQ1-AQ4 | 98,500 | 3,472 | — | 101,972 | 20 | 64 | — | 84 | 0.02 | 1.84 | — | 0.08 | ||||||||||||
AQ5-AQ8 | 91,319 | 10,118 | — | 101,437 | 128 | 482 | — | 610 | 0.14 | 4.76 | — | 0.60 | ||||||||||||
AQ9 | 356 | 833 | — | 1,189 | 1 | 68 | — | 69 | 0.28 | 8.16 | — | 5.80 | ||||||||||||
AQ10 | — | — | 2,782 | 2,782 | — | — | 1,179 | 1,179 | — | — | 42.38 | 42.38 | ||||||||||||
190,175 | 14,423 | 2,782 | 207,380 | 149 | 614 | 1,179 | 1,942 | 0.08 | 4.26 | 42.38 | 0.94 | |||||||||||||
| - | In the Personal portfolio, the asset quality distribution improved overall with high quality new business written during H1 2022 and existing portfolio quality being maintained. |
| - | The majority of exposures were in AQ1-AQ4, with a significant proportion in AQ5-AQ8. As expected, mortgage exposures have a higher proportion in AQ1-AQ4 than unsecured borrowing. |
| - | The increase in AQ10/Stage 3 balances was mainly because of the IFRS 9 alignment to the new regulatory default definition, implemented on 1 January 2022. This change resulted in an increase in Stage 3 exposures of approximately £0.7 billion, mostly in mortgages. |
| - | In other Personal, the relatively high level of exposures in AQ10 reflected that impaired assets can be held on the balance sheet, with commensurate ECL provision for up to six years after default. |
| - | ECL provisions coverage shows the expected trend with increased coverage in the poorer asset quality bands, and also by stage. |
| - | As noted previously, across all asset quality bands, migration from Stage 2 into Stage 1 was observed as the effect of improved economic scenarios enhanced IFRS 9 PDs and therefore reduced Stage 2 exposure. |
NatWest Group – Form 6-K Interim Results 2022 | 62 |
Risk and capital management
Credit risk – Banking activities continued
Asset quality
The table below shows asset quality bands of gross loans and ECL, by stage, for the Wholesale portfolio.
Risk and capital management
Credit risk – Banking activities continued
Asset quality
Gross loans | ECL provisions | ECL provisions coverage |
| ||||||||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total |
| |||||||||||||
31 December 2021 |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m | % | % | % | % | |||||
Property |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
AQ1-AQ4 |
| 13,529 |
| 223 |
| — |
| 13,752 |
| 3 |
| 7 |
| — |
| 10 |
| 0.02 |
| 3.14 |
| — |
| 0.07 | |
AQ5-AQ8 |
| 15,126 |
| 2,742 |
| — |
| 17,868 |
| 21 |
| 94 |
| — |
| 115 |
| 0.14 |
| 3.43 |
| — |
| 0.64 | |
AQ9 |
| 24 |
| 136 |
| — |
| 160 |
| — |
| 10 |
| — |
| 10 |
| — |
| 7.35 |
| — |
| 6.25 | |
AQ10 |
| — |
| — |
| 742 |
| 742 |
| — |
| — |
| 239 |
| 239 |
| — |
| — |
| 32.21 |
| 32.21 | |
| 28,679 |
| 3,101 |
| 742 |
| 32,522 |
| 24 |
| 111 |
| 239 |
| 374 |
| 0.08 |
| 3.58 |
| 32.21 |
| 1.15 | ||
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
AQ1-AQ4 |
| 18,378 |
| 1,027 |
| — |
| 19,405 |
| 8 |
| 48 |
| — |
| 56 |
| 0.04 |
| 4.67 |
| — |
| 0.29 | |
AQ5-AQ8 |
| 35,351 |
| 13,922 |
| — |
| 49,273 |
| 88 |
| 621 |
| — |
| 709 |
| 0.25 |
| 4.46 |
| — |
| 1.44 | |
AQ9 |
| 74 |
| 655 |
| — |
| 729 |
| — |
| 44 |
| — |
| 44 |
| — |
| 6.72 |
| — |
| 6.04 | |
AQ10 |
| — |
| — |
| 1,444 |
| 1,444 |
| — |
| — |
| 602 |
| 602 |
| — |
| — |
| 41.69 |
| 41.69 | |
| 53,803 |
| 15,604 |
| 1,444 |
| 70,851 |
| 96 |
| 713 |
| 602 |
| 1,411 |
| 0.18 |
| 4.57 |
| 41.69 |
| 1.99 | ||
Financial institutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
AQ1-AQ4 |
| 50,121 |
| 63 |
| — |
| 50,184 |
| 7 |
| 1 |
| — |
| 8 |
| 0.01 |
| 1.59 |
| — |
| 0.02 | |
AQ5-AQ8 |
| 2,138 |
| 667 |
| — |
| 2,805 |
| 7 |
| 38 |
| — |
| 45 |
| 0.33 |
| 5.70 |
| — |
| 1.60 | |
AQ9 |
| 4 |
| 2 |
| — |
| 6 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |
AQ10 |
| — |
| — |
| 46 |
| 46 |
| — |
| — |
| 4 |
| 4 |
| — |
| — |
| 8.70 |
| 8.70 | |
| 52,263 |
| 732 |
| 46 |
| 53,041 |
| 14 |
| 39 |
| 4 |
| 57 |
| 0.03 |
| 5.33 |
| 8.70 |
| 0.11 | ||
Sovereign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
AQ1-AQ4 |
| 5,787 |
| 35 |
| — |
| 5,822 |
| 19 |
| 1 |
| — |
| 20 |
| 0.33 |
| 2.86 |
| — |
| 0.34 | |
AQ5-AQ8 |
| 117 |
| 86 |
| — |
| 203 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |
AQ9 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |
AQ10 |
| — |
| — |
| 8 |
| 8 |
| — |
| — |
| 2 |
| 2 |
| — |
| — |
| 25.00 |
| 25.00 | |
| 5,904 |
| 121 |
| 8 |
| 6,033 |
| 19 |
| 1 |
| 2 |
| 22 |
| 0.32 |
| 0.83 |
| 25.00 |
| 0.36 | ||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
AQ1-AQ4 |
| 87,815 |
| 1,348 |
| — |
| 89,163 |
| 37 |
| 57 |
| — |
| 94 |
| 0.04 |
| 4.23 |
| — |
| 0.11 | |
AQ5-AQ8 |
| 52,732 |
| 17,417 |
| — |
| 70,149 |
| 116 |
| 753 |
| — |
| 869 |
| 0.22 |
| 4.32 |
| — |
| 1.24 | |
AQ9 |
| 102 |
| 793 |
| — |
| 895 |
| — |
| 54 |
| — |
| 54 |
| — |
| 6.81 |
| — |
| 6.03 | |
AQ10 |
| — |
| — |
| 2,240 |
| 2,240 |
| — |
| — |
| 847 |
| 847 |
| — |
| — |
| 37.81 |
| 37.81 | |
| 140,649 |
| 19,558 |
| 2,240 |
| 162,447 |
| 153 |
| 864 |
| 847 |
| 1,864 |
| 0.11 |
| 4.42 |
| 37.81 |
| 1.15 | ||
| - | Across the Wholesale portfolio, the asset quality band distribution differed, reflective of the underlying quality of counterparties within each segment. |
| - | Asset quality improvement was observed across most segments as the economy recovered from the effects of COVID-19. |
| - | Within the Wholesale portfolio, customer credit grades were reassessed as and when a request for financing was made, a scheduled customer credit review was undertaken or a material event specific to that customer occurred. |
| - | ECL provisions coverage showed the expected trend with increased coverage in the poorer asset quality bands, and also by stage. |
| - | The low provision coverage for Stage 3 loans in financial institutions for 2021 reflected the secured nature of one exposure classified AQ10. |
NatWest Group – Form 6-K Interim Results 2022 | 64 |
Risk and capital management
Credit risk – Trading activities
This section details the credit risk profile of NatWest Group’s trading activities.
Securities financing transactions and collateral
The table below shows securities financing transactions in NatWest Markets and Treasury. Balance sheet captions include balances held at all classifications under IFRS 9.
| - | Reverse repos and repos increased on both gross and carrying value basis when compared to 2021. These trends are consistent with trading assets and liabilities having been managed within limits at 31 December 2021. |
| - | Reverse repo and repo transactions are primarily backed by highly-rated sovereign, supranational and agency collateral. |
NatWest Group – Form 6-K Interim Results 2022 | 65 |
Risk and capital management
Credit risk – Trading activities continued
Derivatives
The table below shows derivatives by type of contract. The master netting agreements and collateral shown do not result in a net presentation on the balance sheet under IFRS. A significant proportion (more than 90%) of the derivatives relate to trading activities in NatWest Markets. The table also includes hedging derivatives in Treasury.
| (1) | The notional amount of interest rate derivatives included £7,730 billion (31 December 2021 – £6,173 billion) in respect of contracts cleared through central clearing counterparties. |
| (2) | Transactions with certain counterparties with whom NatWest Group has netting arrangements but collateral is not posted on a daily basis; certain transactions with specific terms that may not fall within netting and collateral arrangements; derivative positions in certain jurisdictions, for example China, where the collateral agreements are not deemed to be legally enforceable. |
| (3) | Includes transactions with securitisation vehicles and funds where collateral posting is contingent on NatWest Group’s external rating. |
| (4) | Mainly large corporates with whom NatWest Group may have netting arrangements in place, but operational capability does not support collateral posting. |
| (5) | Sovereigns and supranational entities with no collateral arrangements, collateral arrangements that are not considered enforceable, or one-way collateral agreements in their favour. |
NatWest Group – Form 6-K Interim Results 2022 | 66 |
Risk and capital management
Credit risk – Trading activities continued
Debt securities
The table below shows debt securities held at mandatory fair value through profit or loss by issuer as well as ratings based on the lowest of Standard & Poor’s, Moody’s and Fitch.
NatWest Group – Form 6-K Interim Results 2022 | 67 |
Risk and capital management
Capital, liquidity and funding risk
Introduction
NatWest Group continually ensures a comprehensive approach is taken to the management of capital, liquidity and funding, underpinned by frameworks, risk appetite and policies, to manage and mitigate capital, liquidity and funding risks. The framework ensures the tools and capability are in place to facilitate the management and mitigation of risk ensuring that NatWest Group operates within its regulatory requirements and risk appetite.
Key developments
CET1 | The CET1 ratio decreased by 390 basis points to 14.3%. The decrease is primarily due to a £22.8 billion increase in RWAs and a £2.9 billion decrease in CET1 capital. The CET1 decrease is mainly driven by: - the directed buyback of £1.2 billion; - foreseeable dividend accrual of £2.3 billion (special dividend will be paid on 16 September 2022, subject to approval at a General Meeting, with the notice and circular publication on 9 August 2022 and the General Meeting scheduled for 25 August 2022); - a £0.3 billion decrease in the IFRS 9 transitional adjustment; - the removal of adjustment for prudential amortisation on software development costs of £0.4 billion; - a £0.3 billion decrease due to FX loss on retranslation on the redemption of a USD instrument; and - other reserve movements. These reductions were partially offset by the £1.9 billion attributable profit in the period. |
MREL (LAC) | MREL (LAC) ratio as a percentage of risk-weighted assets decreased to 31.7% from 39.8% due to a £22.8 billion increase in RWAs and £5.4 billion decrease in MREL resources. The ratio remains well above the minimum of 22.2%, calculated as 2 x (Pillar 1 + Pillar 2A). |
In the first half of 2022 there were redemptions of $3 billion and €1.5 billion Senior debt, and $1 billion Tier 1 instruments. These were partially offset by new issuances of $1 billion and £0.75 billion Senior debt. | |
Total RWAs | Total RWAs increased by £22.8 billion to £179.8 billion during H1 2022 reflecting: - An increase in credit risk RWAs of £23.6 billion, primarily due to £19.4 billion of model adjustments applied as a result of new regulation applicable to IRB models from 1 January 2022, in addition to increased exposure in Commercial & Institutional and Retail Banking. This was partially offset by improved risk metrics in Commercial & Institutional and Retail Banking. - An increase in market risk RWAs of £0.6 billion, driven by a raised capital multiplier for NWM Plc affecting VaR and SVaR calculations. - An increase in counterparty credit risk RWAs of £0.4 billion, mainly driven by the implementation of SA-CCR affecting the RWA calculation for non-internally modelled exposure. - A decrease in operational risk RWAs of £1.9 billion following the annual recalculation. |
UK leverage ratio | The leverage ratio at 30 June 2022 is 5.2% and has been calculated in accordance with changes to the UK’s leverage ratio framework which were introduced by the PRA and came into effect from 1 January 2022. As at 31 December 2021, the UK leverage ratio was 5.9%, which was calculated under the prior year’s UK leverage methodology. The key driver of the decrease is a £3.5 billion decrease in Tier 1 capital. |
Liquidity portfolio | The liquidity portfolio decreased by £18.0 billion to £268.4 billion, with primary liquidity decreasing by £10.3 billion to £198.3 billion. The decrease in primary liquidity is driven by shareholder distributions (share buyback and dividends), redemption of Senior debt, maturing commercial papers and certificates of deposit and a marginal increase in lending outstripping growth in deposits. The reduction in secondary liquidity is due to a reduction in the pre-positioned collateral at the Bank of England. |
NatWest Group – Form 6-K Interim Results 2022 | 68 |
Risk and capital management
Capital, liquidity and funding risk continued
Maximum Distributable Amount (MDA) and Minimum Capital Requirements
NatWest Group is subject to minimum capital requirements relative to RWAs. The table below summarises the minimum capital requirements (the sum of Pillar 1 and Pillar 2A), and the additional capital buffers which are held in excess of the regulatory minimum requirements and are usable in stress.
Where the CET1 ratio falls below the sum of the minimum capital and the combined buffer requirement, there is a subsequent automatic restriction on the amount available to service discretionary payments (including AT1 coupons), known as the MDA. Note that different capital requirements apply to individual legal entities or sub-groups and that the table shown does not reflect any incremental PRA buffer requirements, which are not disclosable.
The current capital position provides significant headroom above both NatWest Group’s minimum requirements and its MDA threshold requirements.
| (1) | In response to COVID-19 many countries reduced their CCyB rates. In December 2021, the Financial Policy Committee announced an increase in the UK CCyB rate from 0% to 1% effective from 13 December 2022. A further increase from 1% to 2% was announced on 5 July 2022, effective 5 July 2023. In June 2022, the Central Bank of Ireland announced that the CCyB on Irish exposures will increase from 0% to 0.5%, applicable from 15 June 2023. This is the first step towards a gradual increase which, conditional on macro-financial developments, would see a CCyB of 1.5% announced by mid-2023, which is expected to be applicable from June 2024. |
| (2) | Pillar 2A requirements for NatWest Group are set on a nominal capital basis. The PRA has confirmed that from Q4 2022 Pillar 2A will be set as a variable amount with the exception of some fixed add-ons. |
| (3) | The headroom does not reflect excess distributable capital and may vary over time. |
NatWest Group – Form 6-K Interim Results 2022 | 69 |
Risk and capital management
Capital, liquidity and funding risk continued
Capital and leverage ratios
The table below sets out the key capital and leverage ratios. From 1 January 2022, NatWest Group is subject to the requirements set out in the PRA Rulebook. Therefore, going forward the capital and leverage ratios are being presented under these frameworks on a transitional basis.
| (1) | Based on current PRA rules, therefore includes the transitional relief on grandfathered capital instruments and the transitional arrangements for the capital impact of IFRS 9 expected credit loss (ECL) accounting. The impact of the IFRS 9 transitional adjustments at 30 June 2022 was £0.3 billion for CET1 capital, £62 million for total capital and £32 million RWAs (31 December 2021 - £0.6 billion CET1 capital, £0.5 billion total capital and £36 million RWAs). Excluding these adjustments, the CET1 ratio would be 14.1% (31 December 2021 – 17.8%). The transitional relief on grandfathered instruments at 30 June 2022 was £0.2 billion (31 December 2021 - £0.9 billion). Excluding both the transitional relief on grandfathered capital instruments and the transitional arrangements for the capital impact of IFRS 9 expected credit loss (ECL) accounting, the end-point Tier 1 capital ratio would be 16.3% (31 December 2021 – 20.3%) and the end-point Total capital ratio would be 19.3% (31 December 2021 – 23.8%). |
Risk and capital management
Capital, liquidity and funding risk continued
Capital and leverage ratios continued
| 30 June |
| 31 December | |
2022 | 2021 | |||
Leverage | £m | £m | ||
Cash and balances at central banks |
| 179,525 |
| 177,757 |
Trading assets |
| 65,604 |
| 59,158 |
Derivatives |
| 109,342 |
| 106,139 |
Financial assets |
| 412,115 |
| 412,817 |
Other assets |
| 25,705 |
| 17,106 |
Assets of disposal groups |
| 14,187 |
| 9,015 |
Total assets |
| 806,478 |
| 781,992 |
Derivatives |
|
|
|
|
- netting and variation margin |
| (107,295) |
| (110,204) |
- potential future exposures |
| 20,552 |
| 35,035 |
Securities financing transactions gross up |
| 5,184 |
| 1,397 |
Other off balance sheet items |
| 45,095 |
| 44,240 |
Regulatory deductions and other adjustments |
| (16,314) |
| (8,980) |
Claims on central banks |
| (176,163) |
| (174,148) |
Exclusion of bounce back loans |
| (6,785) |
| (7,474) |
UK leverage exposure |
| 570,752 |
| 561,858 |
UK leverage ratio (%) (1) |
| 5.2 |
| 5.9 |
| (1) | The UK leverage exposure is calculated in accordance with the Leverage Ratio (CRR) part of the PRA Rulebook, and transitional Tier 1 capital is calculated in accordance with the PRA Rulebook. Excluding the IFRS 9 transitional adjustment, the UK leverage ratio would be 5.1% (31 December 2021 – 5.8%). |
Capital flow statement
The table below analyses the movement in CET1, AT1 and Tier 2 capital for the half year ended 30 June 2022. It is being presented on a transitional basis as calculated under the PRA Rulebook Instrument requirements.
| - | The CET1 decrease is primarily due to the directed buyback of £1.2 billion, foreseeable dividend accrual of £2.3 billion, a £0.3 billion decrease in the IFRS 9 transitional adjustment, the removal of adjustment for prudential amortisation on software development costs of £0.4 billion, £0.3 billion due to FX loss on retranslation on the redemption of a USD instrument and other reserve movements in the period, partially offset by an attributable profit in the period of £1.9 billion. |
| - | The AT1 and Tier 2 movements are due to the end of the 2021 transitional relief on grandfathered instruments. In Tier 2 there was also a £0.2 billion decrease in the Tier 2 surplus provisions. |
NatWest Group – Form 6-K Interim Results 2022 | 71 |
Risk and capital management
Capital, liquidity and funding risk continued
Capital resources
NatWest Group’s regulatory capital is assessed against minimum requirements that are set out under the UK Capital Requirements Regulation to determine the strength of its capital base. This note shows a reconciliation of shareholders’ equity to regulatory capital.
NatWest Group – Form 6-K Interim Results 2022 | 72 |
Risk and capital management
Capital, liquidity and funding risk continued
Loss absorbing capital
The following table illustrates the components of estimated loss absorbing capital (LAC) in NatWest Group plc and operating subsidiaries and includes external issuances only. The table is prepared on a transitional basis, including the benefit of regulatory capital instruments issued from operating companies, to the extent they meet the current MREL criteria.
| (1) | Par value reflects the nominal value of securities issued. |
| (2) | Regulatory capital instruments issued from operating companies are included in the transitional LAC calculation, to the extent they meet the current MREL criteria. |
| (3) | LAC value reflects NatWest Group’s interpretation of the Bank of England’s approach to setting a minimum requirement for own funds and eligible liabilities (MREL), published in December 2021 (updating June 2018). MREL policy and requirements remain subject to further potential development, as such NatWest Group’s estimated position remains subject to potential change. Liabilities excluded from LAC include instruments with less than one year remaining to maturity, structured debt, operating company senior debt, and other instruments that do not meet the MREL criteria. The LAC calculation includes Tier 1 and Tier 2 securities before the application of any regulatory caps or adjustments. |
| (4) | Corresponding shareholders’ equity was £38.6 billion (31 December 2021 - £41.8 billion). |
| (5) | Regulatory amounts reported for AT1, Tier 1 and Tier 2 instruments incudes grandfathered instruments as per the transitional provisions allowed under CRR2 (until 28 June 2025). |
| (6) | (i) CRR1 non-compliant instruments (2021) - All Tier 1 and Tier 2 instruments that were grandfathered under CRR1 compliance have lost their regulatory value and no longer form part of our regulatory capital resources from 1 January 2022. As at 31 December 2021, these are reported under the "Tier 1 capital: end-point CRR non-compliant" and "Tier 2 capital: end-point CRR non-compliant" categories. |
(ii) CRR2 non-compliant instruments (2022) - From January 2022, All Tier 1 and Tier 2 instruments that were grandfathered under CRR2 compliance (until 28 June 2025) are reported under "Tier 1 capital: end-point CRR non-compliant" and "Tier 2 capital: end-point CRR non-compliant" category.
NatWest Group – Form 6-K Interim Results 2022 | 73 |
Risk and capital management
Capital, liquidity and funding risk continued
Loss absorbing capital
The following table illustrates the components of the stock of outstanding issuance in NatWest Group plc and its operating subsidiaries including external and internal issuances.
| (1) | The balances are the IFRS balance sheet carrying amounts, which may differ from the amount which the instrument contributes to regulatory capital. Regulatory balances exclude, for example, issuance costs and fair value movements, while dated capital is required to be amortised on a straight-line basis over the final five years of maturity. |
| (2) | Balance sheet amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR. |
| (3) | Internal issuance for NWB Plc, RBS plc and UBIDAC represents AT1, Tier 2 or Senior unsecured issuance to NatWest Holdings Limited and for NWM N.V. and NWM SI to NWM Plc. |
| (4) | Senior unsecured debt does not include CP, CD and short/medium term notes issued from NatWest Group operating subsidiaries. |
| (5) | Tier 1 (inclusive of AT1) does not include CET1 numbers. |
NatWest Group – Form 6-K Interim Results 2022 | 74 |
Risk and capital management
Capital, liquidity and funding risk continued
Risk-weighted assets
The table below analyses the movement in RWAs during the half year, by key drivers.
The table below analyses segmental RWAs.
Total RWAs increased by £22.8 billion to £179.8 billion during the period mainly reflecting:
| - | Model updates totalling £21.1 billion primarily due to model adjustments applied as a result of new regulation applicable to IRB models from 1 January 2022 within Retail Banking, Commercial & Institutional and Ulster Bank ROI. |
| - | Business movements totalling £2.8 billion driven by increased credit risk exposures within Retail Banking and Commercial & Institutional, partially offset by a reduction in credit risk exposures within Ulster Bank ROI. |
| - | There was a partially offsetting decrease of approximately £2.8 billion RWAs due to improved risk metrics within Commercial & Institutional and Retail Banking. |
NatWest Group – Form 6-K Interim Results 2022 | 75 |
Risk and capital management
Capital, liquidity and funding risk continued
Funding sources
The table below shows the carrying values of the principal funding sources based on contractual maturity. Balance sheet captions include balances held at all classifications under IFRS 9.
| (1) | Includes £12.0 billion (31 December 2021 – £12.0 billion) relating to Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises participation. |
| (2) | Excludes short positions of £24.8 billion (31 December 2021 - £25.0 billion). |
| (3) | Comprises central & other bank repos of £3.1 billion (31 December 2021 - £0.8 billion), other financial institution repos of £23.4 billion (31 December 2021 - £17.0 billion) and other corporate repos of £2.9 billion (31 December 2021 - £1.6 billion). |
| (4) | Eligible liabilities (as defined in the Banking Act 2009 as amended from time to time) that meet the eligibility criteria set out in the regulations, rules, policies, guidelines, or statements of the Bank of England including the Statement of Policy published by the Bank of England in December 2021 (updating June 2018). The balance consists of £20.4 billion (31 December 2021 - £23.4 billion) under debt securities in issue (senior MREL) and £5.8 billion (31 December 2021 - £6.2 billion) under subordinated liabilities. |
NatWest Group – Form 6-K Interim Results 2022 | 76 |
Risk and capital management
Capital, liquidity and funding risk continued
Liquidity portfolio
The table below shows the liquidity portfolio by product, with primary liquidity aligned to internal stressed outflow coverage and regulatory LCR categorisation. Secondary liquidity comprises assets eligible for discount at central banks, which do not form part of the liquid asset portfolio for LCR or internal stressed outflow purposes.
| (1) | NatWest Group includes the UK Domestic Liquidity Sub-Group (UK DoLSub), NatWest Markets Plc and other significant operating subsidiaries that hold liquidity portfolios. These include The Royal Bank of Scotland International Limited, NWM N.V. and Ulster Bank Ireland DAC who hold managed portfolios that comply with local regulations that may differ from PRA rules. |
| (2) | NWH Group comprises UK DoLSub & Ulster Bank Ireland DAC who hold managed portfolios that comply with local regulations that may differ from PRA rules. |
| (3) | UK DoLSub comprises NatWest Group’s three licensed deposit-taking UK banks within the ring-fenced bank: NWB Plc, RBS plc and Coutts & Company. Ulster Bank Limited was previously a member of the UK DoLSub and was removed from the UK DoLSub effective 1 January 2022. |
| (4) | Comprises assets eligible for discounting at the Bank of England and other central banks. |
| (5) | NatWest Markets Plc liquidity portfolio is reported in the NatWest Markets Plc Company Announcement. |
NatWest Group – Form 6-K Interim Results 2022 | 77 |
Risk and capital management
Non-traded market risk
Non-traded market risk is the risk to the value of assets or liabilities outside the trading book, or the risk to income, that arises from changes in market prices such as interest rates, foreign exchange rates and equity prices, or from changes in managed rates.
Key developments
| - | In the UK, the base rate has risen from 0.25% at 31 December 2021 to 1.25% at 30 June 2022. Market concerns increasingly centred on the speed and extent to which central banks will raise their policy rates and use other monetary policy tightening measures to manage inflation. |
| - | The five-year sterling swap rate increased to 2.48% at the end of June 2022 from 1.05% at the end of December 2021. The ten-year sterling swap rate also increased, to 2.33% from 0.95%. |
| - | The structural hedge notional increased by £24 billion from £206 billion to £230 billion, mainly due to increased hedging of higher deposit volumes realised through the pandemic. The structural hedge yield rose over the same period to 0.78% from 0.71% as new hedges were booked at current market rates and maturing hedges were replaced. |
| - | Sterling weakened against both the US dollar and the euro over the period. Against the dollar, sterling was 1.21 at 30 June 2022 compared to 1.35 at 31 December 2021. Against the euro, it was 1.16 at 30 June 2022 compared to 1.19 at 31 December 2021. Structural foreign currency exposure decreased, in sterling equivalent terms, by £267 million over the period, mainly due to increased hedging of euro exposure. |
Non-traded internal VaR (1-day 99%)
The following table shows one-day internal banking book Value-at-Risk (VaR) at a 99% confidence level, split by risk type.
| (1) | Pipeline risk is the risk of loss arising from Personal customers owning an option to draw down a loan – typically a mortgage – at a committed rate, where interest rate changes may result in greater or fewer customers than anticipated taking up the committed offer. |
| (2) | NatWest Group benefits from diversification across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR. |
| - | Credit spread VaR decreased in H1 2022 reflecting bond disposals in the period. In addition, the heightened market volatility in March 2020, resulting from the onset of the COVID-19 crisis, dropped out of the rolling window for VaR calculation during H1 2022. |
| - | The credit spread VaR decrease was the main driver of the reduction in total non-traded VaR. |
| - | Interest rate VaR rose on an average basis, reflecting an increase in hedging undertaken to reduce the sensitivity of interest income to downward interest rate shocks. |
| - | The increase in equity VaR reflects the agreement to invest in Permanent TSB as part of the UBIDAC withdrawal strategy. |
NatWest Group – Form 6-K Interim Results 2022 | 78 |
Risk and capital management
Non-traded market risk continued
Structural hedging
NatWest Group has a significant pool of stable, non and low interest-bearing liabilities, principally comprising equity and money transmission accounts. These balances are usually hedged, either by investing directly in longer-term fixed-rate assets (such as fixed-rate mortgages or UK government gilts) or by using interest rate swaps, which are generally booked as cash flow hedges of floating-rate assets, in order to provide a consistent and predictable revenue stream.
After hedging the net interest rate exposure externally, NatWest Group allocates income to equity or products in structural hedges by reference to the relevant interest rate swap curve. Over time, this approach has provided a basis for stable income attribution to products and interest rate returns. The programme aims to track a time series of medium-term swap rates, but the yield will be affected by changes in product volumes and NatWest Group’s capital composition.
The table below shows the total income and total yield, incremental income relative to short-term cash rates, and the period-end and average notional balances allocated to equity and products in respect of the structural hedges managed by NatWest Group.
| (1) | Incremental income represents the difference between total income (i.e. hedged income) and an unhedged return that is based on short-term cash rates. For example, the sterling overnight index average (SONIA) is used to estimate incremental income from sterling structural hedges. |
Equity structural hedges refer to income allocated primarily to equity and reserves. At 30 June 2022, the equity structural hedge notional was allocated between NWH Group and NWM Plc in a ratio of approximately 83%/17% respectively.
Product structural hedges refer to income allocated to customer products by NWH Group Treasury, mainly current accounts and customer deposits in Commercial & Institutional and Retail Banking. Other structural hedges refer to hedges managed by UBIDAC, Coutts & Co and RBS International legal entities.
At 30 June 2022, approximately 93% by notional of total structural hedges were sterling-denominated.
The following table presents the incremental income associated with product structural hedges at segment level.
Half year ended | ||||||
| 30 June |
| 30 June |
| 31 December | |
2022 | 2021 | 2021 | ||||
£m | £m | £m | ||||
Retail Banking |
| 12 |
| 168 |
| 178 |
Commercial & Institutional |
| 30 |
| 192 |
| 206 |
Total |
| 42 |
| 360 |
| 384 |
| - | The increase in the structural hedge notional mainly resulted from hedging of Retail and Commercial deposits. |
| - | The five-year sterling swap rate rose to 2.48% at 30 June 2022 from 1.05% at 31 December 2021. The ten-year sterling swap rate also rose, to 2.33% from 0.95%. Higher swap rates resulted in the total yield of the structural hedge rising to 0.78% from 0.71% in H1 2022. |
| - | Despite the increase in total yield, incremental income fell. This reflects the relative stability of the total yield of the structural hedge compared to an unhedged portfolio earning short-term cash rates. Compared to the 7-basis-point increase in the structural hedge total yield, SONIA increased 100 basis points to 1.19% at 30 June 2022 from 0.19% at 31 December 2021. |
NatWest Group – Form 6-K Interim Results 2022 | 79 |
Risk and capital management
Non-traded market risk continued
Sensitivity of net interest earnings
Net interest earnings are sensitive to changes in the level of interest rates, mainly because maturing structural hedges are replaced at higher or lower rates and changes to coupons on managed rate customer products do not always match changes in market rates of interest or central bank policy rates.
Earnings sensitivity is derived from a market-implied forward rate curve, which will incorporate expected changes in central bank policy rates such as the Bank of England base rate. A simple scenario is shown that projects forward earnings based on the 30 June 2022 balance sheet, which is assumed to remain constant. An earnings projection is derived from the market-implied curve, which is then subject to interest rate shocks. The difference between the market-implied projection and the shock gives an indication of underlying sensitivity to interest rate movements.
Reported sensitivities should not be considered a forecast of future performance in these rate scenarios. Actions that could reduce interest earnings sensitivity include changes in pricing strategies on customer loans and deposits as well as hedging. Management action may also be taken to stabilise total income also taking into account non-interest income.
Three-year 25 basis point sensitivity table
The table below shows the sensitivity of net interest earnings - for both structural hedges and managed rate accounts - on a one, two and three-year forward-looking basis to an upward or downward interest rate shift of 25 basis points.
In the upward rate scenarios, yield curves were assumed to move in parallel. The downward rate scenarios allow interest rates to fall to negative rates. At 30 June 2022, negative rates affected only euro earnings sensitivity.
| (1) | Earnings sensitivity considers only the main drivers, namely structural hedging and margin management. |
| (2) | Following a change in the basis of preparation of this table, it now excludes UBIDAC. Including UBIDAC would increase Year 1 sensitivity by 4.5%. |
The following table analyses the one-year scenarios by currency and, in addition, shows the impact over one year of a 100-basis-point upward shift in all interest rates.
(1) Following a change in the basis of preparation of this table, it now excludes UBIDAC.
NatWest Group – Form 6-K Interim Results 2022 | 80 |
Risk and capital management
Non-traded market risk continued
Foreign exchange risk
The table below shows structural foreign currency exposures.
| (1) | Economic hedges of US dollar net investments in foreign operations represent US dollar equity securities that do not qualify as net investment hedges for accounting purposes. They provide an offset to structural foreign exchange exposures to the extent that there are net assets in overseas operations available. |
| - | The increase in net investments in foreign operations resulted from increased investment in European operations. Sterling weakening against other currencies over the period also contributed to the increase. |
| - | The increase in net investment hedges notably reflected increased hedging of European operations as well as the sterling weakening. |
| - | Changes in foreign currency exchange rates affect equity in proportion to structural foreign currency exposure. For example, a 5% strengthening or weakening in foreign currencies against sterling would result in a gain or loss of £0.2 billion in equity respectively. |
NatWest Group – Form 6-K Interim Results 2022 | 81 |
Risk and capital management
Traded market risk
Traded market risk is the risk arising from changes in fair value on positions, assets, liabilities or commitments in trading portfolios as a result of fluctuations in market prices.
Traded VaR (1-day 99%)
The table below shows one-day internal value-at-risk (VaR) for NatWest Group’s trading portfolios, split by exposure type.
| Half year ended | |||||||||||||||||||||||
30 June 2022 | 30 June 2021 | 31 December 2021 | ||||||||||||||||||||||
Period | Period | Period | ||||||||||||||||||||||
Average | Maximum | Minimum | end | Average | Maximum | Minimum | end | Average | Maximum | Minimum | end | |||||||||||||
£m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||
Interest rate |
| 7.4 |
| 12.6 |
| 4.1 |
| 6.0 |
| 11.3 |
| 19.0 |
| 4.5 |
| 17.4 |
| 9.6 |
| 25.3 |
| 4.7 |
| 8.9 |
Credit spread |
| 8.5 |
| 12.0 |
| 6.5 |
| 6.9 |
| 11.0 |
| 13.4 |
| 9.4 |
| 11.2 |
| 11.6 |
| 13.2 |
| 10.0 |
| 10.7 |
Currency |
| 2.8 |
| 8.0 |
| 1.2 |
| 2.3 |
| 3.9 |
| 9.4 |
| 2.0 |
| 2.4 |
| 3.0 |
| 8.6 |
| 1.7 |
| 2.2 |
Equity |
| 0.1 |
| 0.3 |
| — |
| — |
| 0.5 |
| 0.8 |
| 0.2 |
| 0.2 |
| 0.2 |
| 0.5 |
| — |
| 0.2 |
Commodity |
| — |
| — |
| — |
| — |
| 0.2 |
| 0.5 |
| — |
| — |
| — |
| 0.1 |
| — |
| — |
Diversification (1) |
| (8.3) |
|
|
| (6.0) |
| (13.5) |
|
|
|
| (15.5) |
| (11.1) |
|
|
|
|
| (10.5) | |||
Total |
| 10.5 |
| 15.1 |
| 7.2 |
| 9.2 |
| 13.4 |
| 23.9 |
| 9.5 |
| 15.7 |
| 13.3 |
| 21.1 |
| 9.3 |
| 11.5 |
| (1) | NatWest Group benefits from diversification across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR. |
| - | The decrease in average interest rate VaR, compared to both H1 2021 and H2 2021, reflected a reduction in tenor basis risk in sterling flow trading. This followed a regulator-approved update to the VaR model, which was applied in Q3 2021 to address the impact of the transition from LIBOR to alternative risk-free rates. |
| - | Average credit spread VaR also declined because the heightened market volatility in March 2020, resulting from the onset of the COVID-19 crisis, dropped out of the rolling window for VaR calculation during H1 2022. |
NatWest Group – Form 6-K Interim Results 2022 | 82 |
Risk and capital management
Other risks
Operational risk
Risk management continued to focus on delivering strong operational resilience and a robust supply chain, with particular emphasis on internal change programmes aimed at enhancing customer experience, ensuring NatWest Group’s operations and external suppliers continue to be resilient against disruption and developing technology solutions to mitigate operational risks.
The security threat and the potential for cyber-attacks on NatWest Group and its supply chain continued to be closely monitored and timely remediation of any identified control gaps. NatWest Group continued to focus heavily on its defences during the reporting period as well as on the security of its supply chain.
Conduct & compliance risk
The impact of the cost of living challenge remained a key priority for the conduct and regulatory compliance agenda. NatWest Group continues to review forbearance and treatment for customers, recognising differing needs and support required where appropriate to provide good outcomes for all.
There was continued oversight of delivery of the mandatory and regulatory change programmes, with a particular focus on the impact of proposed regulation to enhance customer care.
In addition, there was a sustained emphasis on compliance with the UK’s ring-fencing legislation as NatWest Group continued to review and update organisational designs to best serve its customers.
Climate risk
NatWest Group continued to embed climate considerations within its risk management framework throughout the reporting period, with work focused on making iterative advancements in capabilities towards quantitative techniques in risk assessment.
Particular attention continues to be paid to developing a NatWest Group transition plan for which the identification, assessment and management of transition risk is a critical component.
NatWest Group has also continued to develop its data, modelling and scenario analysis capabilities to support the assessment of customers’ physical and transition risks.
The Bank of England’s findings following its Climate Biennial Exploratory Scenario – in which NatWest Group participated - were released to the industry in Q2 2022. These provided helpful insights for the continued maturing of NatWest Group’s climate risk activity for H2 2022 and beyond; NatWest Group will seek alignment with the ‘observed examples of good practice’ published by the Bank of England as appropriate.
Condensed consolidated income statement for the period ended 30 June 2022 (unaudited)
Half year ended | |||||
30 June | 30 June | ||||
| 2022 | 2021 | |||
| £m |
| £m | ||
Interest receivable |
| 5,250 |
| 4,610 | |
Interest payable |
| (916) |
| (866) | |
Net interest income |
| 4,334 |
| 3,744 | |
Fees and commissions receivable |
| 1,424 |
| 1,304 | |
Fees and commissions payable |
| (300) |
| (285) | |
Income from trading activities |
| 709 |
| 231 | |
Other operating income |
| 52 |
| 147 | |
Non-interest income |
| 1,885 |
| 1,397 | |
Total income |
| 6,219 |
| 5,141 | |
Staff costs |
| (1,808) |
| (1,880) | |
Premises and equipment |
| (534) |
| (502) | |
Other administrative expenses |
| (898) |
| (703) | |
Depreciation and amortisation |
| (413) |
| (414) | |
Operating expenses |
| (3,653) |
| (3,499) | |
Profit before impairment releases |
| 2,566 |
| 1,642 | |
Impairment releases |
| 54 |
| 683 | |
Operating profit before tax |
| 2,620 |
| 2,325 | |
Tax charge |
| (795) |
| (432) | |
Profit from continuing operations |
| 1,825 |
| 1,893 | |
Profit from discontinued operations, net of tax | 190 | 177 | |||
Profit for the period | 2,015 | 2,070 | |||
Attributable to: | |||||
Ordinary shareholders |
| 1,891 |
| 1,842 | |
Preference shareholders | — | 9 | |||
Paid-in equity holders | 121 | 178 | |||
Non-controlling interests |
| 3 |
| 41 | |
2,015 |
| 2,070 | |||
Earnings per ordinary share - continuing operations | 15.7 | p | 14.1 | p | |
Earnings per ordinary share - discontinued operations | 1.7 | p | 1.5 | p | |
Total earnings per share attributable to ordinary shareholders - basic | 17.4 | p | 15.6 | p | |
Earnings per ordinary share - fully diluted continuing operations | 15.6 | p | 14.0 | p | |
Earnings per ordinary share - fully diluted discontinued operations |
| 1.7 | p | 1.5 | p |
Total earnings per share attributable to ordinary shareholders - fully diluted | 17.3 | p | 15.5 | p | |
NatWest Group – Form 6-K Interim Results 2022 | 84 |
Condensed consolidated statement of comprehensive income for the period ended 30 June 2022 (unaudited)
Half year ended | ||||
30 June | 30 June | |||
|
| 2022 |
| 2021 |
£m |
| £m | ||
Profit for the period | 2,015 |
| 2,070 | |
Items that do not qualify for reclassification |
|
| ||
Remeasurement of retirement benefit schemes (1) | (517) | (734) | ||
Changes in fair value of credit in financial liabilities designated at fair value through profit or loss | ||||
(FVTPL) due to own credit risk | 91 | (25) | ||
Fair value through other comprehensive income (FVOCI) financial assets | 3 | 8 | ||
Tax | 123 |
| 182 | |
| (300) |
| (569) | |
Items that do qualify for reclassification | ||||
FVOCI financial assets | (458) |
| (145) | |
Cash flow hedges | (1,557) |
| (365) | |
Currency translation | 185 |
| (288) | |
Tax | 566 |
| 65 | |
| (1,264) |
| (733) | |
Other comprehensive losses after tax | (1,564) |
| (1,302) | |
Total comprehensive income for the period | 451 |
| 768 | |
Attributable to: | ||||
Ordinary shareholders | 327 |
| 535 | |
Preference shareholders | — |
| 9 | |
Paid-in equity holders | 121 |
| 178 | |
Non-controlling interests | 3 |
| 46 | |
| 451 |
| 768 | |
| (1) | Following the purchase of ordinary shares from UKGI in March 2021, NatWest Group contributed £500 million to its main pension scheme in line with the memorandum of understanding announced on 17 April 2018. After tax relief, this contribution reduced total equity by £365 million. In line with our policy, the present value of defined benefit obligations and the fair value of plan assets at the end of the interim reporting period are assessed to identity significant market fluctuations and one-off events since the end of the prior financial year. |
Condensed consolidated balance sheet as at 30 June 2022 (unaudited)
30 June | 31 December | |||
| 2022 |
| 2021 | |
| £m |
| £m | |
Assets | ||||
Cash and balances at central banks |
| 179,525 |
| 177,757 |
Trading assets | 65,604 | 59,158 | ||
Derivatives | 109,342 | 106,139 | ||
Settlement balances |
| 10,294 |
| 2,141 |
Loans to banks - amortised cost |
| 10,668 |
| 7,682 |
Loans to customers - amortised cost |
| 362,551 |
| 358,990 |
Other financial assets |
| 38,896 |
| 46,145 |
Intangible assets |
| 6,869 |
| 6,723 |
Other assets |
| 8,542 |
| 8,242 |
Assets of disposal groups | 14,187 | 9,015 | ||
Total assets |
| 806,478 |
| 781,992 |
Liabilities | ||||
Bank deposits | 24,862 | 26,279 | ||
Customer deposits | 492,075 | 479,810 | ||
Settlement balances |
| 9,779 |
| 2,068 |
Trading liabilities |
| 74,345 |
| 64,598 |
Derivatives | 102,719 | 100,835 | ||
Other financial liabilities | 47,744 | 49,326 | ||
Subordinated liabilities |
| 8,110 |
| 8,429 |
Notes in circulation | 2,947 | 3,047 | ||
Other liabilities |
| 5,270 |
| 5,797 |
Total liabilities |
| 767,851 |
| 740,189 |
Equity | ||||
Ordinary shareholders' interests | 34,727 | 37,412 | ||
Other owners' interests |
| 3,890 |
| 4,384 |
Owners’ equity | 38,617 | 41,796 | ||
Non-controlling interests |
| 10 |
| 7 |
Total equity |
| 38,627 |
| 41,803 |
Total liabilities and equity |
| 806,478 |
| 781,992 |
Condensed consolidated statement of changes in equity for the period ended 30 June 2022 (unaudited)
Half year ended | ||||
| 30 June |
| 30 June | |
| 2022 |
| 2021 | |
£m | £m | |||
Called-up share capital - at beginning of period | 11,468 | 12,129 | ||
Ordinary shares issued | — | 38 | ||
Share cancellation (1,4) | (885) | (391) | ||
At end of period |
| 10,583 | 11,776 | |
Paid-in equity - at beginning of period | 3,890 | 4,999 | ||
Securities issued during the period (2) |
| — | 937 | |
At end of period |
| 3,890 |
| 5,936 |
Share premium account - at beginning of period | 1,161 | 1,111 | ||
Ordinary shares issued |
| — | 50 | |
At end of period |
| 1,161 |
| 1,161 |
Merger reserve - at beginning and end of period | 10,881 | 10,881 | ||
FVOCI reserve - at beginning of period | 269 | 360 | ||
Unrealised losses |
| (444) |
| (113) |
Realised gains | (17) | (23) | ||
Tax |
| 125 |
| 15 |
At end of period |
| (67) | 239 | |
Cash flow hedging reserve - at beginning of period | (395) | 229 | ||
Amount recognised in equity |
| (1,386) |
| (323) |
Amount transferred from equity to earnings |
| (171) |
| (42) |
Tax |
| 426 |
| 59 |
At end of period |
| (1,526) |
| (77) |
Foreign exchange reserve - at beginning of period | 1,205 | 1,608 | ||
Retranslation of net assets |
| 307 |
| (336) |
Foreign currency (losses)/gains on hedges of net assets |
| (122) |
| 43 |
Tax |
| 14 |
| (11) |
At end of period |
| 1,404 |
| 1,304 |
Capital redemption reserve - at beginning of period | 722 | — | ||
Share cancellation (1,4) | 885 | 390 | ||
Redemption of preference shares | — | 24 | ||
At end of period |
| 1,607 |
| 414 |
Retained earnings - at beginning of period |
| 12,966 |
| 12,567 |
Profit attributable to ordinary shareholders and other equity owners |
|
| ||
- continuing | 1,822 | 1,855 | ||
- discontinued | 190 | 174 | ||
Equity preference dividends paid |
| — |
| (9) |
Paid-in equity dividends paid | (121) | (178) | ||
Ordinary dividends paid | (841) | (347) | ||
Shares repurchased during the year (1,4) | (1,958) | (748) | ||
Redemption of preference shares (5) | (750) | (24) | ||
Tax on redemption/reclassification of paid-in equity | (21) | — | ||
Realised losses/(gains) in period on FVOCI equity shares | 6 | (1) | ||
Remeasurement of the retirement benefit schemes (3) | ||||
- gross | (517) | (734) | ||
- tax | 133 | 182 | ||
Changes in fair value of credit in financial liabilities designated at fair value through profit or loss | ||||
- gross | 91 | (25) | ||
- tax | (9) | 2 | ||
Shares issued under employee share schemes |
| 5 |
| — |
Share-based payments | (33) | (82) | ||
At end of period |
| 10,963 |
| 12,632 |
Condensed consolidated statement of changes in equity for the period ended 30 June 2022 continued (unaudited)
Half year ended | ||||
30 June | 30 June | |||
2022 | 2021 | |||
£m | £m | |||
Own shares held - at beginning of period | (371) | (24) | ||
Shares issued under employee share schemes |
| 92 | 17 | |
Own shares acquired |
| — |
| (384) |
At end of period |
| (279) |
| (391) |
Owners' equity at end of period |
| 38,617 |
| 43,875 |
Non-controlling interests - at beginning of period |
| 7 |
| (36) |
Currency translation adjustments and other movements |
| — | 5 | |
Profit attributable to non-controlling interests |
| 3 |
| 41 |
At end of period |
| 10 |
| 10 |
Total equity at end of period |
| 38,627 |
| 43,885 |
Attributable to: | ||||
Ordinary shareholders |
| 34,727 |
| 37,445 |
Preference shareholders |
| — |
| 494 |
Paid-in equity holders |
| 3,890 |
| 5,936 |
Non-controlling interests |
| 10 |
| 10 |
| 38,627 |
| 43,885 | |
| (1) | In March 2022, there was an agreement with HM Treasury to buy 549.9 million ordinary shares in the Company from UK Government Investments Ltd (UKGI), at 220.5p per share for the total consideration of £1.22 billion. NatWest Group cancelled 549.9 million of the purchased ordinary shares. The nominal value of the share cancellation has been transferred to the capital redemption reserve. |
| (2) | In June 2021, AT1 capital notes totalling US$750 million less fees were issued. |
| (3) | Following the purchase of ordinary shares from UKGI in Q1 2022, NatWest Group contributed £500 million (2021 - £500 million) to its main pension scheme in line with the memorandum of understanding announced on 17 April 2018. After tax relief, this contribution reduced total equity by £365 million (2021 - £354 million). In line with our policy, the present value of defined benefit obligations and the fair value of plan assets at the end of the interim reporting period, are assessed to identity significant market fluctuations and one-off events since the end of the prior financial year. |
| (4) | NatWest Group plc repurchased and cancelled 345.6 million shares for total consideration of £756.7 million excluding fees in H1 2022, as part of the On Market Share Buyback Programme. Of the 345.6 million shares bought back, 10.7 million shares were settled and cancelled in July 2022. The nominal value of the share cancellations has been transferred to the capital redemption reserve. |
| (5) | Following an announcement of a Regulatory Call in February 2022, the Series U preference shares were reclassified to liabilities. A £254 million loss was recognised in P&L reserves due to FX unlocking. |
Condensed consolidated cash flow statement for the period ended 30 June 2022 (unaudited)
Half year ended | ||||
30 June |
| 30 June | ||
| 2022 |
| 2021 | |
| £m |
| £m | |
Operating activities | ||||
Operating profit before tax from continuing operations | 2,620 | 2,325 | ||
Operating profit before tax from discontinued operations | 190 | 180 | ||
Adjustments for non-cash items | 355 | 2,635 | ||
Net cash flows from trading activities | 3,165 | 5,140 | ||
Changes in operating assets and liabilities | 7,966 | 25,745 | ||
Net cash flows from operating activities before tax | 11,131 | 30,885 | ||
Income taxes paid | (575) | (259) | ||
Net cash flows from operating activities | 10,556 | 30,626 | ||
Net cash flows from investing activities | 5,713 | (790) | ||
Net cash flows from financing activities | (6,970) | (359) | ||
Effects of exchange rate changes on cash and cash equivalents | 2,224 | (1,935) | ||
Net increase in cash and cash equivalents | 11,523 | 27,542 | ||
Cash and cash equivalents at beginning of period | 190,706 | 139,199 | ||
Cash and cash equivalents at end of period | 202,229 | 166,741 | ||
NatWest Group – Form 6-K Interim Results 2022 | 89 |
Notes
1. Presentation of condensed consolidated financial statements
The condensed consolidated financial statements are set out on pages 84 to 110 and the Risk and capital management section on pages 24 to 83. The directors have prepared these on a going concern basis after assessing the principal risks, forecasts, projections and other relevant evidence over the twelve months from the date they are approved and in accordance with IAS 34 ‘Interim Financial Reporting’, as adopted by the UK and as issued by the International Accounting Standards Board (IASB), and the Disclosure Guidance and Transparency Rules sourcebook of the UK’s Financial Conduct Authority. They should be read in conjunction with NatWest Group plc’s 2021 Annual Report on Form 20-F.
Comparative period results have been re-presented from those previously published to reclassify certain items as discontinued operations. For further details refer to Note 8 on page 95.
2. Accounting policies
NatWest Group’s principal accounting policies are as set out on pages 36 to 42 of NatWest Group plc’s 2021 Annual Report on Form 20-F Amendments to IFRS effective from 1 January 2022 had no material effect on the condensed consolidated financial statements.
Critical accounting policies and key sources of estimation uncertainty
The judgments and assumptions that are considered to be the most important to the portrayal of NatWest Group’s financial condition are those relating to deferred tax, fair value of financial instruments, loan impairment provisions, goodwill and provisions for liabilities and charges. These critical accounting policies and judgments are noted on page 42 of NatWest Group plc’s 2021 Annual Report on Form 20-F. Management’s consideration of uncertainty is outlined in the relevant sections of NatWest Group plc’s 2021 Annual Report on Form 20-F, including the ECL estimate for the period in the Risk and capital management section contained in NatWest Group plc’s 2021 Annual Report on Form 20-F.
Information used for significant estimates
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. Changes in judgments and assumptions could result in a material adjustment to those estimates in future reporting periods. (Refer to the Summary Risk Factors on page 111 which should be read in conjunction with the Risk factors included in NatWest Group plc’s 2021 Annual Report on Form 20-F).
Notes
3. Net interest income
Half year ended | ||||
30 June |
| 30 June | ||
| 2022 |
| 2021 | |
Continuing operations |
| £m |
| £m |
Loans to customers - amortised cost |
| 4,483 |
| 4,261 |
Loans to banks - amortised cost | 582 | 217 | ||
Other financial assets |
| 185 |
| 132 |
Interest receivable |
| 5,250 |
| 4,610 |
Deposits by banks |
| 157 |
| 99 |
Customer deposits |
| 179 |
| 319 |
Other financial liabilities |
| 433 |
| 314 |
Subordinated liabilities |
| 141 |
| 130 |
Internal funding of trading businesses |
| 6 |
| 4 |
Interest payable |
| 916 |
| 866 |
Net interest income |
| 4,334 |
| 3,744 |
4. Non-interest income
Half year ended | ||||
30 June |
| 30 June | ||
| 2022 |
| 2021 | |
Continuing operations | £m | £m | ||
Net fees and commissions (1) | 1,124 | 1,019 | ||
Foreign exchange |
| 258 |
| 183 |
Interest rate |
| 416 |
| (6) |
Credit |
| 33 |
| 54 |
Equity, commodities and other |
| 2 |
| — |
Income from trading activities |
| 709 |
| 231 |
Loss on redemption of own debt | (24) | (138) | ||
Operating lease and other rental income |
| 114 |
| 108 |
Changes in fair value of financial liabilities designated at fair value through profit or loss (2) | 21 | (4) | ||
Hedge ineffectiveness |
| (22) |
| 13 |
Loss on disposal of amortised cost assets | (16) | (6) | ||
Profit on disposal of fair value through other comprehensive income assets |
| 10 |
| 24 |
Share of profit of associated entities |
| (20) |
| 129 |
Other income (3) |
| (11) |
| 21 |
Other operating income | 52 | 147 | ||
Non-interest income | 1,885 | 1,397 | ||
| (1) | Refer to Note 6 for further analysis. |
| (2) | Includes related derivatives. |
5. Operating expenses
Half year ended | ||||
30 June | 30 June | |||
| 2022 |
| 2021 | |
Continuing operations | £m | £m | ||
Salaries |
| 1,103 |
| 1,172 |
Bonus awards | 195 | 142 | ||
Temporary and contract costs | 116 | 114 | ||
Social security costs |
| 163 |
| 150 |
Pension costs | 184 | 177 | ||
- defined benefit schemes |
| 108 |
| 110 |
- defined contribution schemes |
| 76 |
| 67 |
Other |
| 47 |
| 125 |
Staff costs |
| 1,808 |
| 1,880 |
Premises and equipment |
| 534 |
| 502 |
Depreciation and amortisation |
| 413 |
| 414 |
Other administrative expenses |
| 898 |
| 703 |
Administrative expenses |
| 1,845 |
| 1,619 |
Operating expenses | 3,653 | 3,499 | ||
Notes
6. Segmental analysis
On 27 January 2022, NatWest Group announced that a new franchise, Commercial & Institutional, would be created, bringing together the Commercial, NatWest Markets and RBSI businesses to form a single franchise, with common management and objectives, to best support our customers across the full non-personal customer lifecycle. Comparatives have been re-presented. The re-presentation of operating segments does not change the consolidated financial results of NatWest Group.
The business is organised into the following reportable segments: Retail Banking, Private Banking, Commercial & Institutional, Central items & other and Ulster Bank RoI.
Analysis of operating profit/(loss) before tax
The following tables provide a segmental analysis of operating profit/(loss) before tax by the main income statement captions.
Total revenue(1)
| (1) | Total revenue comprises interest receivable, fees and commissions receivable, income from trading activities and other operating income. |
Notes
6. Segmental analysis continued
Analysis of net fees and commissions
| Go-forward group |
|
| |||||||||||
Total | ||||||||||||||
Central | excluding | Ulster | ||||||||||||
Retail | Private | Commercial & | items & | Ulster | Bank | |||||||||
Banking | Banking | Institutional | other | Bank RoI | RoI | Total | ||||||||
Half year ended 30 June 2022 | £m | £m | £m | £m | £m | £m | £m | |||||||
Continuing operations | ||||||||||||||
Fees and commissions receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Payment services | 152 | 17 | 308 | — | 477 | 26 | 503 | |||||||
- Credit and debit card fees |
| 203 |
| 8 |
| 102 |
| — |
| 313 |
| 10 |
| 323 |
- Lending and financing |
| 8 |
| 4 |
| 327 |
| — |
| 339 |
| 1 |
| 340 |
- Brokerage |
| 27 |
| 3 |
| 21 |
| — |
| 51 |
| — |
| 51 |
- Investment management, trustee and fiduciary services | 1 | 114 | 22 | — | 137 | — | 137 | |||||||
- Underwriting fees |
| — |
| — |
| 65 |
| — |
| 65 |
| — | 65 | |
- Other |
| — |
| — |
| 56 |
| (51) |
| 5 |
| — |
| 5 |
Total |
| 391 |
| 146 |
| 901 |
| (51) |
| 1,387 |
| 37 |
| 1,424 |
Fees and commissions payable |
| (172) |
| (15) |
| (148) |
| 58 |
| (277) |
| (23) |
| (300) |
Net fees and commissions |
| 219 |
| 131 |
| 753 |
| 7 |
| 1,110 |
| 14 |
| 1,124 |
Half year ended 30 June 2021 | ||||||||||||||
Continuing operations | ||||||||||||||
Fees and commissions receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Payment services | 145 | 16 | 271 | — | 432 | 26 | 458 | |||||||
- Credit and debit card fees |
| 149 |
| 4 |
| 70 |
| — |
| 223 |
| 8 |
| 231 |
- Lending and financing |
| 6 | 4 | 304 | — | 314 | 1 | 315 | ||||||
- Brokerage |
| 32 |
| 3 |
| 25 |
| — |
| 60 |
| — |
| 60 |
- Investment management, trustee and fiduciary services |
| 1 |
| 113 |
| 22 |
| — |
| 136 |
| 1 | 137 | |
- Underwriting fees |
| — |
| — |
| 77 |
| — |
| 77 |
| — |
| 77 |
- Other |
| — |
| 16 |
| 66 |
| (56) |
| 26 |
| — |
| 26 |
Total |
| 333 |
| 156 |
| 835 |
| (56) |
| 1,268 |
| 36 |
| 1,304 |
Fees and commissions payable |
| (160) |
| (32) |
| (133) |
| 46 |
| (279) |
| (6) |
| (285) |
Net fees and commissions |
| 173 |
| 124 |
| 702 |
| (10) |
| 989 |
| 30 |
| 1,019 |
Total assets and liabilities
Go-forward group | ||||||||||||||
Total | ||||||||||||||
Central | excluding | Ulster | ||||||||||||
Retail | Private | Commercial & | items & | Ulster | Bank |
| ||||||||
Banking | Banking | Institutional | other | Bank RoI | RoI | Total | ||||||||
30 June 2022 |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
| £m |
Assets |
| 216,174 |
| 30,045 |
| 451,530 |
| 87,050 |
| 784,799 |
| 21,679 |
| 806,478 |
Liabilities |
| 194,182 |
| 41,720 |
| 441,393 |
| 74,359 |
| 751,654 |
| 16,197 |
| 767,851 |
31 December 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
| 209,973 |
| 29,854 |
| 425,718 |
| 93,614 |
| 759,159 |
| 22,833 |
| 781,992 |
Liabilities |
| 192,715 |
| 39,388 |
| 411,757 |
| 77,308 |
| 721,168 |
| 19,021 |
| 740,189 |
Notes
7. Tax
The actual tax charge differs from the expected tax charge computed by applying the standard UK corporation tax rate of 19% (2021 - 19%), as analysed below:
Half year ended | ||||
30 June |
| 30 June | ||
| 2022 | 2021 | ||
Continuing operations | £m | £m | ||
Profit before tax | 2,620 | 2,325 | ||
Expected tax charge |
| (498) | (442) | |
Losses and temporary differences in period where no deferred tax assets recognised |
| (51) | (28) | |
Foreign profits taxed at other rates |
| (39) | (8) | |
Items not allowed for tax: | ||||
- losses on disposals and write-downs |
| (4) | (3) | |
- UK bank levy |
| (9) | (11) | |
- regulatory and legal actions |
| (13) | 3 | |
- other disallowable items |
| (12) | (10) | |
Non-taxable items | 8 | 25 | ||
Taxable foreign exchange movements |
| (7) | — | |
Losses bought forward and utilised |
| — | 6 | |
Increase/(decrease) in the carrying value of deferred tax assets in respect of: |
| |||
- UK losses | 10 | (5) | ||
- Ireland losses | (1) | (32) | ||
Banking surcharge |
| (207) | (173) | |
Tax on paid-in equity | 22 | 32 | ||
UK tax rate change impact | (31) | 206 | ||
Adjustments in respect of prior periods |
| 37 | 8 | |
Actual tax charge |
| (795) | (432) | |
At 30 June 2022, NatWest Group has recognised a deferred tax asset of £1,637 million (31 December 2021 - £1,195 million) and a deferred tax liability of £286 million (31 December 2021 - £359 million). These amounts include deferred tax assets recognised in respect of trading losses of £801 million (31 December 2021 - £899 million). NatWest Group has considered the carrying value of these assets as at 30 June 2022 and concluded that they are recoverable.
It was announced in the UK Government’s Budget on 27 October 2021 that the UK banking surcharge will decrease from 8% to 3% from 1 April 2023. This legislative change was substantively enacted on 2 February 2022. NatWest Group’s closing deferred tax assets and liabilities have therefore been recalculated taking into account this change of rate and the applicable period the deferred tax assets and liabilities are expected to crystallise.
NatWest Group – Form 6-K Interim Results 2022 | 94 |
Notes
8. Discontinued operations and assets and liabilities of disposal groups
Three legally binding agreements for the sale of UBIDAC business have been announced as part of the phased withdrawal from the Republic of Ireland:
On 28 June 2021 NatWest Group announced it had agreed a binding sale agreement with Allied Irish Banks, p.l.c. for the transfer of c.€4.2 billion (plus up to €2.8 billion of undrawn exposures), of gross performing commercial loans as well as those c.280 colleagues who are wholly or mainly assigned to supporting that part of the business, with the final number of roles to be confirmed as the deal completes. On 28 April 2022, approval was received from the Irish competition authority (the CCPC) in relation to this sale, which is expected to be completed in a series of transactions during 2022 and H1 2023.
On 17 December 2021 NatWest Group signed a legally binding agreement with Permanent TSB p.l.c. (PTSB) for the sale of approximately €7.6bn of gross performing non-tracker mortgages (as at 30 June 2021), the performing loans in the micro-SME business; the UBIDAC Asset Finance business, including its Lombard digital platform, and 25 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.450 colleagues will have the right to transfer under the TUPE regulations, with the final number of roles to be confirmed as the deal completes. On 22 July 2022, confirmation was received from the CCPC that it had cleared this sale. Shareholders of PTSB’s holding company have also approved this transaction.
On 1 June 2022 a legally binding agreement was reached with Allied Irish Banks, p.l.c. for the sale of c. €6 billion portfolio of gross performing tracker and linked mortgages. Completion of this sale, which is subject to obtaining any relevant regulatory approvals and satisfying the conditions of the legally binding agreement, is expected to occur in Q2 2023.
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 30 June 2022. Comparatives have been re-presented from those previously published to reclassify certain items as discontinued operations. The Ulster Bank RoI operating segment continues to be reported separately and reflects the results and balance sheet position of its continuing operations.
NatWest Group – Form 6-K Interim Results 2022 | 95 |
Notes
8. Discontinued operations and assets and liabilities of disposal groups continued
Further to the announced sales of the majority of mortgage loans held, in June 2022 UBIDAC announced the cessation of new mortgage business to its customers. This decision represents a change to the IFRS9 business model on mortgage financial assets in UBIDAC. We will reclassify these assets to fair value through profit and loss from 1 July 2022 as required by IFRS9. We anticipate a c.€350 million reduction in mortgage financial assets moving from an amortised cost basis to a fair value basis. This reclassification applies to all mortgage financial assets in UBIDAC across both our continuing and discontinued operations.
| (a) | Profit from discontinued operations, net of tax |
| (b) | Assets and liabilities of disposal groups |
| 30 June |
| 31 December | |
2022 | 2021 | |||
£m | £m | |||
Assets of disposal groups | ||||
Loans to customers - amortised cost |
| 14,178 |
| 9,002 |
Derivatives |
| 1 |
| 5 |
Other assets |
| 8 |
| 8 |
14,187 | 9,015 | |||
Liabilities of disposal groups | ||||
Other liabilities |
| 8 |
| 5 |
8 | 5 | |||
Net assets of disposal groups |
| 14,179 |
| 9,010 |
| (c) | Operating cash flows attributable to discontinued operations |
30 June | 30 June | |||
2022 | 2021 | |||
| £m |
| £m | |
Net cash flows from operating activities |
| 402 |
| 857 |
Net cash flows from investing activities | 150 | — | ||
Net increase in cash and cash equivalents |
| 552 |
| 857 |
Notes
9. Financial instruments - classification
The following tables analyse financial assets and liabilities in accordance with the categories of financial instruments in IFRS 9.
Amortised | Other |
| ||||||||
MFVTPL | FVOCI | cost | assets |
| Total | |||||
Assets |
| £m |
| £m |
| £m |
| £m |
| £m |
Cash and balances at central banks |
|
|
| 179,525 |
| 179,525 | ||||
Trading assets | 65,604 | 65,604 | ||||||||
Derivatives (1) | 109,342 | 109,342 | ||||||||
Settlement balances |
| 10,294 | 10,294 | |||||||
Loans to banks - amortised cost |
|
|
| 10,668 |
| 10,668 | ||||
Loans to customers - amortised cost (2) |
|
|
| 362,551 |
| 362,551 | ||||
Other financial assets |
| 242 | 26,691 |
| 11,963 |
| 38,896 | |||
Intangible assets | 6,869 | 6,869 | ||||||||
Other assets |
|
| 8,542 | 8,542 | ||||||
Assets of disposal groups | 14,187 | 14,187 | ||||||||
30 June 2022 |
| 175,188 |
| 26,691 |
| 575,001 |
| 29,598 |
| 806,478 |
Cash and balances at central banks | 177,757 | 177,757 | ||||||||
Trading assets | 59,158 | 59,158 | ||||||||
Derivatives (1) | 106,139 | 106,139 | ||||||||
Settlement balances | 2,141 | 2,141 | ||||||||
Loans to banks - amortised cost | 7,682 | 7,682 | ||||||||
Loans to customers - amortised cost (2) | 358,990 | 358,990 | ||||||||
Other financial assets | 317 | 37,266 | 8,562 | 46,145 | ||||||
Intangible assets | 6,723 | 6,723 | ||||||||
Other assets | 8,242 | 8,242 | ||||||||
Assets of disposal groups | 9,015 | 9,015 | ||||||||
31 December 2021 |
| 165,614 |
| 37,266 |
| 555,132 |
| 23,980 |
| 781,992 |
Held-for- | Amortised | Other | ||||||||
| trading |
| DFV |
| cost |
| liabilities |
| Total | |
Liabilities |
| £m | £m | £m | £m | £m | ||||
Bank deposits |
|
| 24,862 |
|
| 24,862 | ||||
Customer deposits |
|
| 492,075 |
|
| 492,075 | ||||
Settlement balances |
|
| 9,779 |
|
| 9,779 | ||||
Trading liabilities | 74,345 | 74,345 | ||||||||
Derivatives (1) |
| 102,719 |
|
|
| 102,719 | ||||
Other financial liabilities |
|
| 1,779 | 45,965 |
|
| 47,744 | |||
Subordinated liabilities |
|
| 340 | 7,770 |
|
| 8,110 | |||
Notes in circulation | 2,947 | 2,947 | ||||||||
Other liabilities (3) |
|
| 1,275 |
| 3,995 |
| 5,270 | |||
30 June 2022 |
| 177,064 |
| 2,119 | 584,673 |
| 3,995 |
| 767,851 | |
Bank deposits |
|
| 26,279 |
|
| 26,279 | ||||
Customer deposits |
|
| 479,810 |
|
| 479,810 | ||||
Settlement balances |
|
| 2,068 |
|
| 2,068 | ||||
Trading liabilities |
| 64,598 |
|
|
| 64,598 | ||||
Derivatives (1) |
| 100,835 |
|
|
| 100,835 | ||||
Other financial liabilities |
|
| 1,671 | 47,655 |
|
| 49,326 | |||
Subordinated liabilities |
|
| 703 | 7,726 |
|
| 8,429 | |||
Notes in circulation | 3,047 | 3,047 | ||||||||
Other liabilities (3) |
|
| 1,356 |
| 4,441 |
| 5,797 | |||
31 December 2021 |
| 165,433 |
| 2,374 | 567,941 |
| 4,441 |
| 740,189 |
| (1) | Includes net hedging derivatives assets of £136 million (31 December 2021 - £44 million) and net hedging derivatives liabilities of £166 million (31 December 2021 - £120 million). |
| (2) | Includes finance lease receivables of £8,113 million (31 December 2021 - £8,531 million). |
| (3) | Includes lease liabilities of £1,189 million (31 December 2021 - £1,263 million) in amortised cost. |
Notes
9. Financial instruments - classification continued
30 June | 31 December | |||
|
| 2022 |
| 2021 |
£m | £m | |||
Reverse repos |
|
|
| |
Trading assets | 25,893 | 20,742 | ||
Loans to banks - amortised cost |
| 8 |
| 189 |
Loans to customers - amortised cost |
| 25,084 |
| 25,962 |
|
|
|
|
|
Repos |
|
|
| |
Bank deposits |
| 4,720 |
| 7,912 |
Customer deposits |
| 19,195 |
| 14,541 |
Trading liabilities |
| 29,406 | 19,389 |
NatWest Group – Form 6-K Interim Results 2022 | 98 |
Notes
9. Financial instruments - valuation
Disclosures relating to the control environment, valuation techniques and related aspects pertaining to financial instruments measured at fair value are included in the NatWest Group plc 2021 Annual Report on Form 20-F. Valuation, sensitivity methodologies and inputs at 30 June 2022 are consistent with those described in Note 11 to the NatWest Group plc 2021 Annual Report on Form 20-F.
Fair value hierarchy
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.
| (1) | 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 instrument's 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.
| (2) | Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instrument was transferred. |
| (3) | For an analysis of debt securities held at mandatorily 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. For further information refer to the descriptions of valuation adjustments within ‘Financial instruments – valuation’ on page 70 of the NatWest Group plc 2021 Annual Report on Form 20-F.
30 June | 31 December | |||
2022 | 2021 | |||
| £m |
| £m | |
Funding – FVA |
| 121 |
| 90 |
Credit - CVA |
| 365 |
| 390 |
Bid - Offer |
| 120 |
| 113 |
Product and deal specific |
| 128 |
| 119 |
| 734 |
| 712 |
| - | Valuation reserves comprising of credit valuation adjustments (CVA), funding valuation adjustment (FVA), bid-offer and product and deal specific reserves, increased to £734 million at 30 June 2022 (31 December 2021 – £712 million). |
| - | The net increase in FVA was driven by a net increase in the underlying derivative exposure, driven by an increase in interest rates. The increase in bid-offer was driven by an increase in risk and wider bid-offer spreads. The decrease in CVA was driven by a reduction in exposures, primarily due to increases in interest rates and trade exit activity, partially offset by the net impact of credit spreads widening and specific counterparty activity. |
Notes
9. Financial instruments – valuation continued
Level 3 sensitivities
The table below shows the high and low range of fair value of the level 3 assets and liabilities.
30 June 2022 | 31 December 2021 | |||||||||||
Level 3 | Favourable | Unfavourable | Level 3 | Favourable | Unfavourable | |||||||
| £m |
| £m |
| £m |
| £m |
| £m |
| £m | |
Assets | ||||||||||||
Trading assets | ||||||||||||
Loans |
| 642 |
| 10 |
| (10) |
| 721 |
| 10 |
| (10) |
Securities |
| 2 |
| — |
| — |
| 21 |
| — |
| — |
Derivatives |
| 993 |
| 60 |
| (60) |
| 917 | 60 |
| (70) | |
Other financial assets |
|
|
|
|
|
| ||||||
Loans |
| 230 |
| 10 |
| (10) |
| 207 |
| 10 |
| (10) |
Securities |
| 192 |
| 30 |
| (30) |
| 186 |
| 20 |
| (20) |
Total financial assets held at fair value |
| 2,059 |
| 110 |
| (110) |
| 2,052 |
| 100 |
| (110) |
|
|
|
|
|
|
|
|
|
|
|
| |
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
| 1 |
| — |
| — |
| 2 |
| — |
| — |
Debt securities in issue | 2 | — | — | — | — | — | ||||||
Short positions |
| 1 |
| — |
| — |
| 1 |
| — |
| — |
Derivatives |
| 747 |
| 30 |
| (30) |
| 606 |
| 30 |
| (30) |
Total financial liabilities held at fair value |
| 751 |
| 30 |
| (30) | 609 |
| 30 |
| (30) | |
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.
Movement in level 3 assets and liabilities
The following table shows the movement in level 3 assets and liabilities.
| (1) | Trading assets comprise assets held at fair value in trading portfolios. |
| (2) | Other financial assets comprise fair value through other comprehensive income, designated at fair value through profit or loss and other fair value through profit or loss. |
| (3) | Net losses of £5 million on trading assets and liabilities (30 June 2021 - £27 million) were recorded in income from trading activities. Net losses on other instruments of £20 million (30 June 2021 – £3 million gains) were recorded in other operating income and interest income as appropriate. |
Notes
9. 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 carried at amortised cost on the balance sheet.
| Items where |
|
|
|
|
| ||||||
approximates | Carrying | Fair value hierarchy level | ||||||||||
carrying value | value | Fair value | Level 1 | Level 2 | Level 3 | |||||||
30 June 2022 | £bn | £bn | £bn | £bn | £bn | £bn | ||||||
Financial assets |
|
|
|
|
|
| ||||||
Cash and balances at central banks |
| 179.5 | ||||||||||
Settlement balances | 10.3 | |||||||||||
Loans to banks |
| 0.7 | 10.0 | 10.0 | — | 5.9 | 4.1 | |||||
Loans to customers | 362.6 | 355.4 | — | 27.2 | 328.2 | |||||||
Other financial assets - securities |
| 12.0 | 11.7 | 4.7 | 2.1 | 4.9 | ||||||
31 December 2021 | ||||||||||||
Financial assets |
| |||||||||||
Cash and balances at central banks |
| 177.8 | ||||||||||
Settlement balances |
| 2.1 | ||||||||||
Loans to banks | 0.1 | 7.5 | 7.5 | — | 5.0 | 2.5 | ||||||
Loans to customers |
| 359.0 | 354.1 | — | 28.0 | 326.1 | ||||||
Other financial assets - securities | 8.6 | 8.6 | 4.4 | 0.7 | 3.5 | |||||||
30 June 2022 |
| |||||||||||
Financial liabilities |
| |||||||||||
Bank deposits |
| 6.2 |
| 18.7 |
| 17.6 |
| — |
| 15.1 |
| 2.5 |
Customer deposits |
| 444.1 |
| 47.9 |
| 47.9 |
| — |
| 22.1 |
| 25.8 |
Settlement balances |
| 9.8 |
|
|
|
|
| |||||
Other financial liabilities - debt securities in issue | 46.0 | 45.9 | — | 39.3 | 6.6 | |||||||
Subordinated liabilities |
|
| 7.8 |
| 7.9 |
| — |
| 7.8 | 0.1 | ||
Notes in circulation | 2.9 | |||||||||||
31 December 2021 | ||||||||||||
Financial liabilities |
|
|
|
|
|
| ||||||
Bank deposits | 4.9 |
| 21.4 |
| 21.0 |
| — |
| 18.7 |
| 2.3 | |
Customer deposits |
| 442.4 |
| 37.4 |
| 37.6 |
| — |
| 18.1 |
| 19.5 |
Settlement balances |
| 2.1 |
|
|
|
|
| |||||
Other financial liabilities - debt securities in issue |
|
| 47.7 |
| 48.6 |
| — |
| 41.4 |
| 7.2 | |
Subordinated liabilities | 7.7 | 8.3 | — | 8.2 | 0.1 | |||||||
Notes in circulation |
| 3.0 | ||||||||||
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; contractual cash flows and expected cash flows.
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. For the remaining population, fair values are determined using market standard valuation techniques, such as discounted cash flows.
Bank and customer deposits
Fair value of deposits are estimated using discounted cash flow valuation techniques.
Notes
10. Trading assets and liabilities
Trading assets and liabilities comprise assets and liabilities held at fair value in trading portfolios.
30 June | 31 December | |||
2022 | 2021 | |||
Assets |
| £m |
| £m |
Loans |
|
|
|
|
Reverse repos |
| 25,893 |
| 20,742 |
Collateral given |
| 14,378 |
| 12,047 |
Other loans |
| 1,093 |
| 1,414 |
Total loans |
| 41,364 |
| 34,203 |
Securities |
|
|
|
|
Central and local government |
|
|
|
|
- UK |
| 7,075 |
| 6,919 |
- US |
| 3,840 |
| 3,329 |
- other |
| 9,364 |
| 10,929 |
Financial institutions and corporate |
| 3,961 |
| 3,778 |
Total securities |
| 24,240 |
| 24,955 |
Total |
| 65,604 |
| 59,158 |
Liabilities |
|
|
|
|
Deposits |
|
|
|
|
Repos |
| 29,406 |
| 19,389 |
Collateral received |
| 18,276 |
| 17,718 |
Other deposits |
| 1,099 |
| 1,553 |
Total deposits |
| 48,781 |
| 38,660 |
Debt securities in issue |
| 803 |
| 974 |
Short positions |
| 24,761 |
| 24,964 |
Total |
| 74,345 |
| 64,598 |
Notes
11. Loan impairment provisions
Loan exposure and impairment metrics
The table below summarises loans and related credit impairment measures on an IFRS 9 basis.
| 30 June | 31 December | ||
| 2022 | 2021 | ||
| £m | £m | ||
Loans - amortised cost and FVOCI |
|
| ||
Stage 1 |
| 342,121 | 330,824 | |
Stage 2 |
| 28,505 | 33,981 | |
Stage 3 |
| 5,816 | 5,022 | |
Of which: individual | 1,162 | 1,215 | ||
Of which: collective |
| 4,654 | 3,807 | |
376,442 | 369,827 | |||
ECL provisions (1) |
| |||
Stage 1 |
| 408 | 302 | |
Stage 2 |
| 1,122 | 1,478 | |
Stage 3 |
| 1,985 | 2,026 | |
Of which: individual | 304 | 363 | ||
Of which: collective | 1,681 | 1,663 | ||
| 3,515 | 3,806 | ||
ECL provisions coverage (2) |
| |||
Stage 1 (%) | 0.12 | 0.09 | ||
Stage 2 (%) | 3.94 | 4.35 | ||
Stage 3 (%) | 34.13 | 40.34 | ||
| 0.93 | 1.03 | ||
Half year ended | ||||
30 June | 30 June | |||
2022 | 2021 | |||
£m | £m | |||
Impairment losses |
| |||
ECL (release)/charge (3) | (54) | (683) | ||
Stage 1 | (342) | (662) | ||
Stage 2 | 205 | (114) | ||
Stage 3 | 83 | 93 | ||
Of which: individual | (1) | (25) | ||
Of which: collective | 84 | 118 | ||
| ||||
Amounts written off |
| 215 | 517 | |
Of which: individual | 58 | 256 | ||
Of which: collective |
| 157 | 261 | |
| (1) | Includes £3 million (31 December 2021 - £5 million) related to assets classified as FVOCI. |
| (2) | ECL provisions coverage is calculated as ECL provisions divided by loans. It is calculated on third party loans and total ECL provisions. |
| (3) | Includes a £2 million release (30 June 2021 – £4 million charge) related to other financial assets, of which nil (30 June 2021 – nil) related to assets classified as FVOCI; and £3 million (30 June 2021 - £2 million) related to contingent liabilities. |
| (4) | The table shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to page 34 for 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 £178.4 billion (31 December 2021 – £176.3 billion) and debt securities of £38.6 billion (31 December 2021 – £44.9 billion). |
Notes
12. Provisions for liabilities and charges
|
|
|
| Financial |
|
|
|
| ||||
Customer | Litigation and | commitments | ||||||||||
redress (1) | other regulatory (2) | Property | and guarantees | Other (3) | Total | |||||||
£m | £m | £m | £m | £m | £m | |||||||
At 1 January 2022 |
| 474 |
| 277 |
| 231 |
| 93 |
| 193 |
| 1,268 |
Expected credit losses impairment release |
| — |
| — |
| — |
| (6) |
| — |
| (6) |
Currency translation and other movements |
| 1 |
| 18 |
| — |
| — |
| 3 |
| 22 |
Charge to income statement |
| 88 |
| 6 |
| 10 |
| — |
| 33 |
| 137 |
Release to income statement |
| (19) |
| (5) |
| (5) |
| — |
| (27) |
| (56) |
Provisions utilised |
| (76) |
| (71) |
| (16) |
| — |
| (63) |
| (226) |
At 30 June 2022 |
| 468 |
| 225 |
| 220 |
| 87 |
| 139 |
| 1,139 |
| (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) | Majority of utilisation of litigation provisions relates to resolutions of the FX-related investigation by the European Commission and the spoofing-related investigation by the US Department of Justice. |
| (3) | Other materially comprises provisions relating to restructuring costs. |
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.
13. Dividends
The 2021 final dividend was approved by shareholders at the Annual General Meeting on 28 April 2022 and the payment made on 4 May 2022 to shareholders on the register at the close of business on 18 March 2022.
NatWest Group plc announces an interim dividend for 2022 of £364 million, or 3.5 pence per ordinary share. The interim dividend will be paid on 16 September 2022 to shareholders on the register at close of business on 26 August 2022. The ex-dividend date will be 25 August 2022.
NatWest Group plc also announces that the directors have recommended a special dividend of £1,750 million, or 16.8 pence per share, and associated share consolidation, each will be subject to shareholder approval at a General Meeting on 25 August 2022. A circular containing details of the special dividend and share consolidation, as well as a notice convening a General Meeting of shareholders and a class meeting of ordinary shareholders and details of the resolutions to be considered at that General Meeting and class meeting, is expected to be published shortly. If approved by shareholders, assuming that all other conditions are satisfied, the special dividend is expected to be paid on 16 September 2022 to shareholders on the register on 26 August 2022. The ex-entitlement date for the special dividend will be 30 August 2022.
14. Contingent liabilities and commitments
The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 30 June 2022. 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.
Commitments and contingent obligations are subject to NatWest Group's normal credit approval processes.
NatWest Group – Form 6-K Interim Results 2022 | 104 |
Notes
15.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 12 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 of NatWest Group plc’s 2021 Annual Report on Form 20-F
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.
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) 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. In addition, the appellate court, 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. In February 2022, the US Court of Appeals, on similar grounds, reversed the SDNY’s prior dismissal of a fraud class action on behalf of lender plaintiffs. The appellate court remanded these matters to the SDNY for further proceedings in light of its rulings. 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.
NatWest Group – Form 6-K Interim Results 2022 | 105 |
Notes
15. Litigation and regulatory matters continued
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 39 of those failed US banks, commenced substantially similar claims against NatWest Group companies and others in the High Court of Justice of England and Wales. The action alleges collusion with regard to the setting of USD LIBOR and that the defendants breached UK and European competition law, as well as asserting common law claims of fraud under US law. The defendant banks consented to a request by the FDIC for discontinuance of the claim in respect of 20 failed US banks, leaving 19 failed US banks as claimants. The UK proceedings are at the disclosure stage but have been stayed until 31 July 2022.
In addition, there are two class actions relating to JPY LIBOR and Euroyen TIBOR. The first class action, which relates to Euroyen TIBOR futures contracts, was dismissed by the SDNY in September 2020 on jurisdictional and other grounds, and the plaintiffs have commenced an appeal to the US Court of Appeals. The second class action, which relates to other derivatives allegedly tied to JPY LIBOR and Euroyen TIBOR, was dismissed by the SDNY in relation to NWM Plc and other NatWest Group companies in September 2021. That dismissal may be the subject of a future appeal.
In addition to the above, five other class action complaints were filed against NatWest Group companies in the SDNY, each relating to a different reference rate. In February 2017, the SDNY dismissed the case relating to Euribor for lack of personal jurisdiction and in August 2019, the SDNY dismissed the case relating to Pound Sterling for various reasons. Plaintiffs’ appeals in those two cases remain pending.
In May 2022, NatWest Group companies and the plaintiffs in the class action relating to the Singapore Interbank Offered Rate and Singapore Swap Offer Rate (‘SIBOR / SOR’) finalised a settlement resolving that case. In April 2022, NatWest Group companies and the plaintiffs in the class action relating to the Australian Bank Bill Swap Reference Rate finalised a settlement resolving that case. In June 2021, NWM Plc and the plaintiffs in the Swiss Franc LIBOR class action finalised a settlement resolving that case. The amounts of the three settlements have been paid into escrow pending final court approval of the settlements.
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 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.
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$255 million to settle the consolidated antitrust class action filed in the SDNY on behalf of persons who entered into over-the-counter FX transactions with defendants or who traded FX instruments on exchanges. In 2018, some members of the settlement class who opted out of that class action settlement filed their own non-class complaint in the SDNY asserting antitrust claims against NWM Plc, NWMSI and other banks. Those opt-out claims are proceeding in discovery.
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 UK Competition Appeal Tribunal (CAT) 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. In March 2022, the SDNY denied the plaintiffs’ motion for class certification. Plaintiffs are seeking to appeal the decision.
In May 2019, a cartel class action was filed in the Federal Court of Australia against NWM Plc and four other banks on behalf of persons who bought or sold currency through FX spots or forwards between 1 January 2008 and 15 October 2013 with a total transaction value exceeding AUD $0.5 million. The claimant has alleged that the banks, including NWM Plc, contravened Australian competition law by sharing information, coordinating conduct, widening spreads and manipulating FX rates for certain currency pairs during this period. NatWest Group plc and NWMSI have been named in the action as ‘other cartel participants’, but are not respondents. The claim was served in June 2019 and, after a number of interlocutory pleading disputes, NWM Plc filed its defence in March 2022.
NatWest Group – Form 6-K Interim Results 2022 | 106 |
Notes
15. Litigation and regulatory matters continued
In July and December 2019, two separate applications seeking opt-out collective proceedings orders were filed in the CAT against NatWest Group plc, NWM Plc and other banks. Both applications were brought on behalf of persons who, between 18 December 2007 and 31 January 2013, entered into a relevant FX spot or outright forward transaction in the EEA with a relevant financial institution or on an electronic communications network. A hearing to determine class certification took place in July 2021. In March 2022, the CAT declined to certify as collective proceedings either of the applications, ruling that the opt-out basis on which they were brought was inappropriate. The CAT granted each applicant three months to revise their application for certification on an opt-in basis, if they wished to proceed. Neither applicant did so. The applicants have served judicial review proceedings, which are currently stayed. Separately, the applicants have applied for permission to appeal the CAT’s judgment.
Two motions to certify FX-related class actions were filed in the Tel Aviv District Court in Israel in September and October 2018, and were subsequently consolidated into one motion. The consolidated motion to certify, which names The Royal Bank of Scotland plc (now NWM Plc) and several other banks as defendants, was served on NWM Plc in May 2020. NWM Plc has filed a motion challenging the permission to serve the consolidated motion outside the Israeli jurisdiction, which remains pending.
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 (EC) of 16 May 2019 is unlawful, along with unspecified damages. The claimant has requested the court's permission to amend its claim to also refer to a December 2021 decision by the EC, which also described anti-competitive FX market conduct.
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 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. In March 2022, the SDNY dismissed the operative complaint, without leave to re-plead. The dismissal is subject to appeal.
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. In March 2022, the SDNY dismissed the claims against NWM Plc and NWMSI in the operative complaint on the ground that the complaint’s conspiracy allegations are insufficient. The plaintiffs have indicated that they intend to file an amended complaint.
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 three swap execution facilities (TeraExchange, Javelin, and trueEx). The plaintiffs allege that the swap execution facilities would have successfully established exchange-like trading of interest rate swaps if the defendants had not unlawfully conspired to prevent that from happening through boycotts and other means. Discovery in these cases is complete, and the plaintiffs’ motion for class certification remains pending.
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, three substantially similar class actions complaints were filed in federal court in the United States against NWM Plc and NWMSI alleging Commodity Exchange Act and common law unjust enrichment claims arising from manipulative trading known as spoofing. The complaints refer to NWM Plc’s December 2021 spoofing-related guilty plea (described below under “US investigations relating to fixed-income securities”) and purport to assert claims on behalf of those who transacted in US Treasury securities and futures and options on US Treasury securities between 2008 and 2018. In July 2022, defendants filed a motion to dismiss these claims, which have been consolidated into one matter in the United States District Court for the Northern District of Illinois.
NatWest Group – Form 6-K Interim Results 2022 | 107 |
Notes
15. Litigation and regulatory matters continued
Madoff
NWM N.V. was named as a defendant in two actions filed by the trustee for the bankruptcy estates of Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC, in bankruptcy court in New York, which together seek to clawback more than US$298 million that NWM N.V. allegedly received from certain Madoff feeder funds and certain swap counterparties. The claims were previously dismissed, but as a result of an August 2021 decision by the US Court of Appeals, they will now proceed in the bankruptcy court, where they have now been consolidated into one action, subject to NWM N.V.’s legal and factual defences. In May 2022, NWM N.V. filed a motion to dismiss the amended complaint in the consolidated action.
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 ten companies (all in liquidation) (the ‘Liquidated Companies’) and their respective liquidators (together, ‘the Claimants’). The Liquidated Companies previously traded in European Union Allowances (EUAs) in 2009 and were alleged to be VAT defaulting traders within (or otherwise connected to) EUA supply chains of which NWM Plc was a party. In March 2020, the court held that NWM Plc and Mercuria Energy Europe Trading Limited (‘Mercuria’) were liable for dishonestly assisting and knowingly being a party to fraudulent trading during a seven business day period in 2009.
In October 2020, the High Court quantified total damages against NWM Plc and Mercuria at £45 million plus interest and costs, and permitted the defendants to appeal to the Court of Appeal. In May 2021 the Court of Appeal set aside the High Court’s judgment and ordered that a retrial take place before a different High Court judge. The claimants have been denied permission by the Supreme Court to appeal that decision and the retrial will therefore proceed on a date to be scheduled. Mercuria has also been denied permission by the Supreme Court to appeal the High Court’s finding that NWM Plc and Mercuria were both vicariously liable.
Offshoring VAT assessments
HMRC issued protective tax assessments in 2018 against NatWest Group plc totalling £143 million relating to unpaid VAT in respect of the UK branches of two NatWest Group companies registered in India. NatWest Group formally requested reconsideration by HMRC of their assessments, and this process was completed in November 2020. HMRC upheld their original decision and, as a result, NatWest Group plc lodged an appeal with the Tax Tribunal and an application for judicial review with the High Court of Justice of England and Wales, both in December 2020. In order to lodge the appeal with the Tax Tribunal, NatWest Group plc was required to pay the £143 million to HMRC, and payment was made in December 2020. The appeal and the application for judicial review have both been stayed pending resolution of a separate case involving another bank.
US Anti-Terrorism Act litigation
In March 2019, the trial court granted summary judgment in favour of NWB Plc in connection with 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. 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 was denied in June 2022, bringing the matter to an end.
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 was issued, but not served, in Malaysia in 2021 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.
NatWest Group – Form 6-K Interim Results 2022 | 108 |
Notes
15. Litigation and regulatory matters continued
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. NatWest Group expects government and regulatory intervention in financial services to be high for the foreseeable future, including increased scrutiny from competition and other regulators in the retail and SME business sectors.
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.
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.
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 one count of wire fraud and one count of securities fraud in connection with historical spoofing conduct by former employees in US Treasuries markets between January 2008 and May 2014 and, separately, during approximately three months in 2018. 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 three-year period of probation and has paid a US$25.2 million criminal fine, approximately US$2.8 million in criminal forfeiture and approximately US$6.8 million in restitution out of existing provisions. The plea agreement also imposes an independent corporate monitor. In addition, NWM Plc has committed to compliance programme reviews and improvements and agreed to reporting and co-operation obligations.
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 of NatWest Group plc’s 2021 Annual Report on Form 20-F.
RBSI inspection report and referral to enforcement
The Isle of Man Financial Services Authority undertook an inspection at The Royal Bank of Scotland International Limited (RBSI), Isle of Man, in 2021, following which it issued an inspection report. The inspection was in relation to anti-money laundering and counter-terrorist financing controls and procedures relating to specific RBSI customers. In May 2022, the FSA notified RBSI that it had been referred to its Enforcement Division in relation to certain issues identified in the inspection report.
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.
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 €358 million (£308 million), of which €339 million (£292 million) had been utilised by 30 June 2022.
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 €201 million (£173 million), of which €158 million (£136 million) had been utilised by 30 June 2022 for these programmes.
NatWest Group – Form 6-K Interim Results 2022 | 109 |
Notes
16. Related party transactions
UK Government
The UK Government and bodies controlled or jointly controlled by the UK Government and bodies over which it has significant influence are related parties of NatWest Group.NatWest Group’s other transactions with the UK Government include the payment of taxes, principally UK corporation tax and value added tax; national insurance contributions; local authority rates; and regulatory fees and levies (including the bank levy and FSCS levy).
Bank of England facilities
In the ordinary course of business, NatWest Group may from time to time access market-wide facilities provided by the Bank of England.
Other related parties
(a) In their roles as providers of finance, NatWest Group companies provide development and other types of capital support to businesses. In some instances, the investment may extend to ownership or control over 20% or more of the voting rights of the investee company.
(b) NatWest Group recharges The NatWest Group Pension Fund with the cost of administration services incurred by it. The amounts involved are not material to NatWest Group.
Full details of NatWest Group’s related party transactions for the year ended 31 December 2021 are included in NatWest Group plc’s 2021 Annual Report on Form 20-F.
17. Post balance sheet events
On 22 July 2022, approval was received from the Irish competition authority (the CCPC) in relation to the agreement with PTSB for the sale of UBIDAC's performing non-tracker mortgage portfolio, asset finance business, business direct loan book and 25 branches.
The successful completion of a second tranche of commercial customers to Allied Irish Banks, p.l.c (AIB) was finalised in July 2022.
Other than as disclosed in this document, there have been no significant events between 30 June 2022 and the date of approval of this announcement which would require a change to, or additional disclosure, in the announcement.
18. Date of approval
This announcement was approved by the Board of Directors on 28 July 2022.
NatWest Group – Form 6-K Interim Results 2022 | 110 |
NatWest Group plc Summary Risk Factors
Summary of Principal Risks and Uncertainties
Set out below is a summary of the principal risks and uncertainties for the remaining six months of the financial year which could adversely affect NatWest Group. 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 137 to 158 of NatWest Group plc's 2021 Form 20-F. Any of the risks identified may have a material adverse effect on NatWest Group’s business, operations, financial condition or prospects.
Economic and political risk
- | NatWest Group faces continued economic and political risks and uncertainty in the UK and global markets, including as a result of high inflation, rising interest rates, supply chain disruption and the Russian invasion of Ukraine. |
- | 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. |
- | 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. |
- | Changes in interest rates have significantly affected and will continue to affect NatWest Group’s business and results. |
- | Changes in foreign currency exchange rates may affect NatWest Group’s results and financial position. |
- | 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. |
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. |
- | 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. |
- | 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. |
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). |
- | NatWest Group operates in markets that are highly competitive, with increasing competitive pressures and technology disruption. |
- | The impact of the COVID-19 pandemic on the credit quality of NatWest Group’s counterparties may negatively impact NatWest Group. |
- | 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 and PRA oversight in respect of resolution. Following submission of a biennial assessment of NatWest Group’s preparations for resolution to the PRA, the Bank of England has not identified any shortcomings, deficiencies or substantive impediments associated with NatWest Group’s ability to achieve resolvability outcomes, but has highlighted two areas as requiring further enhancements. NatWest Group could be adversely affected should future Bank of England assessments 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’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. |
- | 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 |
NatWest Group – Form 6-K Interim Results 2022 | 111 |
NatWest Group plc Summary Risk Factors
Summary of Principal Risks and Uncertainties continued
- | 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. |
Climate and sustainability-related risks
- | NatWest Group and its customers, suppliers and counterparties face significant climate-related risks, including in transitioning to a net zero economy, which may adversely impact NatWest Group. |
- | NatWest Group’s purpose-led strategy includes climate change as one of its three areas of focus and, following the passing of a ‘Say on Climate’ resolution by NatWest Group’s shareholders in April 2022, NatWest Group is required to publish an initial climate transition plan in 2023. NatWest Group’s climate strategy and transition plan entails significant execution and reputational risk and is unlikely to be achieved without internal and external actions including significant government policy, technology and customer changes. |
- | Any failure by NatWest Group to prepare or execute a credible transition plan or implement effective and compliant climate change resilient systems, controls and procedures could adversely affect NatWest Group’s reputation or its ability to manage climate-related risks. |
- | 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. |
- | 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. |
- | 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. |
- | 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. |
- | Remote working may adversely affect NatWest Group’s ability to maintain effective internal controls. |
- | NatWest Group relies on attracting, retaining and developing diverse 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 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 may not effectively manage the transition of LIBOR and other IBOR rates to alternative risk-free rates. |
- | 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 – Form 6-K Interim Results 2022 | 112 |
Statement of directors’ responsibilities
We, the directors listed below, confirm that to the best of our knowledge:
- | the condensed financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting', as adopted by the UK and as issued by the International Accounting Standards Board (IASB); |
- | the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and |
- | the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein). |
By order of the Board
Howard Davies | Alison Rose-Slade | Katie Murray |
Chairman | Group Chief Executive Officer | Group Chief Financial Officer |
28 July 2022
Board of directors
Chairman | Executive directors | Non-executive directors |
Howard Davies | Alison Rose-Slade Katie Murray | Frank Dangeard Patrick Flynn Morten Friis Robert Gillespie Yasmin Jetha Mike Rogers Mark Seligman Lena Wilson |
Additional information
Share information
| 30 June |
| 31 March |
| 31 December | |
2022 | 2022 | 2021 | ||||
Ordinary share price (pence) |
| 218.30 |
| 215.90 |
| 225.70 |
Number of ordinary shares in issue (millions) |
| 10,583 |
| 10,783 |
| 11,468 |
Other financial data
The following table shows NatWest Group’s issued and fully paid share capital, owners’ equity and indebtedness on a consolidated basis in accordance with IFRS as at 30 June 2022.
Under IFRS, certain preference shares are classified as debt and are included in subordinated liabilities in the table above.
The information contained in the table above has not changed materially since 30 June 2022.
NatWest Group – Form 6-K Interim Results 2022 | 114 |
Non-IFRS financial measures
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 believes 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.
Non-IFRS financial measures
1. Go-forward group income excluding notable items
Go-forward group income excluding notable items is calculated as total income excluding Ulster Bank RoI total income and excluding notable items.
The exclusion of notable items aims to remove the impact of one-offs which may distort period-on-period comparisons.
2. Go-forward group other operating expenses
Other operating expenses is calculated as total operating expenses less litigation and conduct costs. Other operating expenses of the Go-forward group excludes Ulster Bank RoI.
Our cost target for 2022 is based on this measure and we track progress against it.
3. Go-forward group profit before impairment releases/(losses)
Go-forward group profit before impairment releases/(losses) is calculated as total profit before impairment releases/(losses) less Ulster Bank Rol loss before impairment (losses)/releases.
Non-IFRS financial measures
4. Operating expenses - management view
The management analysis of operating expenses shows litigation and conduct costs on a separate line. These amounts are included within staff costs and other administrative expenses in the statutory analysis. Other operating expenses excludes litigation and conduct costs, which are more volatile and may distort comparisons with prior periods.
| Half year ended | |||||
30 June 2022 | ||||||
Litigation and | Other operating | Statutory operating | ||||
conduct costs | expenses | expenses | ||||
Operating expenses | £m | £m | £m | |||
Continuing operations |
|
|
|
|
|
|
Staff costs |
| 18 |
| 1,790 |
| 1,808 |
Premises and equipment |
| — |
| 534 |
| 534 |
Depreciation and amortisation |
| — |
| 413 |
| 413 |
Other administrative expenses |
| 151 |
| 747 |
| 898 |
Total |
| 169 |
| 3,484 |
| 3,653 |
| Half year ended | |||||
30 June 2021 | ||||||
Litigation and | Other operating | Statutory operating | ||||
conduct costs | expenses | expenses | ||||
Operating expenses | £m | £m | £m | |||
Continuing operations |
|
|
|
|
|
|
Staff costs |
| — |
| 1,880 |
| 1,880 |
Premises and equipment |
| — |
| 502 |
| 502 |
Depreciation and amortisation |
| — |
| 414 |
| 414 |
Other administrative expenses |
| (18) |
| 721 |
| 703 |
Total |
| (18) |
| 3,517 |
| 3,499 |
| Quarter ended | |||||
30 June 2022 | ||||||
Litigation and | Other operating | Statutory operating | ||||
conduct costs | expenses | expenses | ||||
Operating expenses | £m | £m | £m | |||
Continuing operations |
|
|
|
|
|
|
Staff costs |
| 11 |
| 896 |
| 907 |
Premises and equipment |
| — |
| 283 |
| 283 |
Depreciation and amortisation |
| — |
| 216 |
| 216 |
Other administrative expenses |
| 56 |
| 371 |
| 427 |
Total |
| 67 |
| 1,766 |
| 1,833 |
Quarter ended | ||||||
31 March 2022 | ||||||
Litigation and | Other operating | Statutory operating | ||||
| conduct costs |
| expenses |
| expenses | |
Operating expenses |
| £m |
| £m |
| £m |
Continuing operations |
|
|
|
|
|
|
Staff costs |
| 7 |
| 894 |
| 901 |
Premises and equipment |
| — |
| 251 |
| 251 |
Depreciation and amortisation |
| — |
| 197 |
| 197 |
Other administrative expenses |
| 95 |
| 376 |
| 471 |
Total |
| 102 |
| 1,718 |
| 1,820 |
Quarter ended | ||||||
30 June 2021 | ||||||
Litigation and | Other operating | Statutory operating | ||||
| conduct costs |
| expenses |
| expenses | |
Operating expenses |
| £m |
| £m |
| £m |
Continuing operations |
|
|
|
|
|
|
Staff costs |
| — |
| 906 |
| 906 |
Premises and equipment |
| — |
| 254 |
| 254 |
Depreciation and amortisation |
| — |
| 209 |
| 209 |
Other administrative expenses |
| (34) |
| 360 |
| 326 |
Total |
| (34) |
| 1,729 |
| 1,695 |
NatWest Group – Form 6-K Interim Results 2022 | 3 |
Non-IFRS financial measures
5. Cost:income ratio
The cost:income ratio is calculated as total operating expenses less operating lease depreciation divided by total income less operating lease depreciation.
This is a common metric used to compare profitability across the banking industry.
NatWest Group – Form 6-K Interim Results 2022 | 4 |
Non-IFRS financial measures
6. NatWest Group return on tangible equity
Return on tangible equity comprises annualised profit or loss for the period attributable to ordinary shareholders divided by average tangible equity. Average tangible equity is average total equity excluding average non-controlling interests, average other owners equity and average intangible assets.
Go-forward group return on tangible equity is calculated as annualised profit for the period less Ulster Bank RoI divided by Go-forward group total tangible equity. Go forward RWAe applying factor is the Go- forward group average RWAe as a percentage of total Natwest Group average RWAe.
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.
NatWest Group – Form 6-K Interim Results 2022 | 5 |
Non-IFRS financial measures
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 equity. Average RWAe is defined as average segmental RWAs incorporating the effect of capital deductions. This is multiplied by an allocated equity factor for each segment to calculate the average notional tangible equity.
This measure shows the return generated by operating segments on equity deployed.
| Retail |
| Private |
| Commercial & | |
Quarter ended 30 June 2022 | Banking | Banking | Institutional | |||
Operating profit (£m) |
| 719 |
| 105 |
| 712 |
Paid-in equity cost allocation (£m) |
| (20) |
| (3) |
| (47) |
Adjustment for tax (£m) |
| (196) |
| (29) |
| (166) |
Adjusted attributable profit (£m) |
| 503 |
| 73 |
| 499 |
Annualised adjusted attributable profit (£m) |
| 2,011 |
| 293 |
| 1,996 |
Average RWAe (£bn) |
| 52.4 |
| 11.3 |
| 101.0 |
Equity factor |
| 13.0% | 11.0% | 14.0% | ||
Average notional equity (£bn) |
| 6.8 |
| 1.2 |
| 14.1 |
Return on equity (%) |
| 29.5% | 23.5% | 14.0% | ||
Quarter ended 31 March 2022 |
|
|
|
|
|
|
Operating profit (£m) |
| 567 |
| 82 |
| 464 |
Paid-in equity cost allocation (£m) |
| (20) |
| (3) |
| (46) |
Adjustment for tax (£m) |
| (153) |
| (22) |
| (105) |
Adjusted attributable profit (£m) |
| 394 |
| 57 |
| 314 |
Annualised adjusted attributable profit (£m) |
| 1,576 |
| 228 |
| 1,256 |
Average RWAe (£bn) |
| 52.6 |
| 11.4 |
| 102.0 |
Equity factor |
| 13.0% | 11.0% | 14.0% | ||
Average notional equity (£bn) |
| 6.8 |
| 1.3 |
| 14.3 |
Return on equity (%) |
| 23.1% | 18.2% | 8.8% | ||
Quarter ended 30 June 2021 |
|
|
|
|
|
|
Operating profit (£m) |
| 585 |
| 82 |
| 800 |
Preference share and paid-in equity cost allocation (£m) |
| (20) |
| (5) |
| (59) |
Adjustment for tax (£m) |
| (158) |
| (22) |
| (185) |
Adjusted attributable profit (£m) |
| 407 |
| 55 |
| 556 |
Annualised adjusted attributable profit (£m) |
| 1,628 |
| 220 |
| 2,223 |
Average RWAe (£bn) |
| 35.1 |
| 11.1 |
| 107.6 |
Equity factor |
| 14.5% | 12.5% | 13.0% | ||
Average notional equity (£bn) |
| 5.1 |
| 1.4 |
| 14.0 |
Return on equity (%) |
| 32.0% | 15.9% | 15.9% |
NatWest Group – Form 6-K Interim Results 2022 | 6 |
Non-IFRS financial measures
8. Bank net interest margin
Bank net interest margin is defined as annualised net interest income of the Go-forward group, 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 excluding liquid asset buffer.
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 presents net interest margin on a basis more comparable with UK peers and excludes the impact of regulatory driven factors.
NatWest Group – Form 6-K Interim Results 2022 | 7 |
Non-IFRS financial measures
9. Tangible net asset value (TNAV) per ordinary share
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 allows for comparison with other per ordinary share metrics including the share price.
10. Go-forward group 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.
11. Go-forward group customer deposits
Go-forward group customer deposits is calculated as total customer deposits less Ulster Bank RoI customer deposits.
NatWest Group – Form 6-K Interim Results 2022 | 8 |
Performance metrics not defined under IFRS
Metrics based on GAAP measures, included as not defined under IFRS and reported for compliance with the 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 excluding reverse repos divided by total customer deposits excluding repos. Prior periods have been re-presented.
This is a common metric used to assess liquidity. The removal of repos and reverse repos reduces volatility and presents the ratio on a basis that is comparable to UK peers.
2. Loan impairment rate
Loan impairment rate is the annualised 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 Commercial & Institutional customers. AUAs comprise third party assets held on an execution-only basis in custody by Private Banking, Retail Banking and Commercial & Institutional for their customers, 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 Commercial & Institutional franchises.
Private Banking is the centre of expertise for asset management across NatWest Group servicing all client segments across Retail Banking, Private Banking and Commercial & Institutional Banking.
5. Net new money
Net new money refers to client cash inflows and outflows relating to investment products (this can include transfers from saving accounts). Net new money excludes the impact of EEA resident client outflows following the UK’s exit from the EU.
Net new money is reported and tracked to monitor the business performance of new business inflows and management of existing client withdrawals across Retail Banking, Private Banking and Commercial & Institutional Banking.
6. Wholesale funding
Wholesale funding comprises deposits by banks (excluding repos), debt securities in issue and subordinated liabilities.
Funding risk is the risk of not maintaining a diversified, stable and cost-effective funding base. The disclosure of wholesale funding highlights the extent of our diversification and how we mitigate funding risk.
Legal Entity Identifier: 2138005O9XJIJN4JPN90
NatWest Group – Form 6-K Interim Results 2022 | 9 |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorised.
NatWest Group plc
Registrant
/s/ Katie Murray | |
Group Chief Financial Officer | |
29 July 2022 |
NatWest Group – Form 6-K Interim Results 2022 | 10 |