Strategic report and business review An overview of our business, our 2020 financial and non-financial performance and progress in terms of Our Purpose-led strategy to champion potential, helping people, families and businesses to thrive.
Risk and capital management report A detailed overview of the management of key risks relating to our business operations and disclosures on our capital, liquidity and funding position.
£14.1bn approved through government schemes of which £12.9 billion was drawndown.
Building deeper relationships and evolving our propositions to meet the needs of our customers throughout their lives.
I would like to thank Baroness Noakes and Alison Davis for their outstanding contributions to the Board over many years. I would also like to welcome Yasmin back to the Board and thank all of my colleagues for their continued dedication in the face of extremely challenging circumstances.
As the leading bank for UK business, we know that we have a crucial role to play in removing the barriers that women face when starting and scaling up their businesses.
Support Throughout the course of the year, we provided exceptional levels of support to those who needed it and demonstrated that we have truly put Our Purpose at the heart of this business.
Our robust balance sheet and sector-leading capital strength, underpinned by a resilient business with strong capacity for growth, gives us the flexibility to navigate the uncertain outlook, support our customers and deliver sustainable returns to shareholders.
We will be more relevant to our customers by building deeper relationships and evolving our propositions to meet their needs throughout their lives, with the aim of growing the number of needs we meet per customer.
of our UK and Ireland customers’ homes at or above EPC or equivalent rating C by 2030. (1)
£20bn additional funding and financing for climate and sustainable finance by 2021.
(3) In line with the 2015 Paris Agreement by the end of 2021.
Many people struggle to manage their finances and save for the future. Research shows that 22% of UK adults have less than £100 in savings.(1) Building good financial habits and improving relationships with money can transform people’s lives.
To be a leading learning organisation is one of our three areas of focus, under Our Purpose-led strategy. Through our learning agenda, we encourage everyone to develop good money management skills. You’re never too young to start, that’s why we deliver free MoneySense lessons in schools, inspiring 5-18 year olds to grow in financial confidence. When face to face lessons were no longer possible, we launched MoneySense Mondays, interactive lessons streamed in real-time on Facebook Live, that could be joined by parents and children from their homes.
Medium term outlook We expect to achieve a return on tangible equity of 9-10% and a CET1 capital ratio of 13-14% by 2023. Supporting this we are targeting above market rate lending growth per annum across our UK and RBS International retail and commercial businesses and expect annual cost reduction of around 4%, excluding the impact of the phased withdrawal from the Republic of Ireland, along with continued strategic cost reduction.
Created with the independent games developer Stormcloud Games, Island Saver is an open world, non-violent, first-person game, set on the idyllic Savvy Islands with an array of environments to explore. Designed for 7-12 year olds, players are armed with a ‘trash blaster’ and tasked with cleaning up the islands of litterbugs that have polluted paradise. Learning through play is at the heart of Island Saver and woven into the gameplay are a series of money and environmental learning points. These range from a simple work-toearn loop, as characters earn coins by recycling litter, to saving money in bank accounts and using a PIN. As players progress through the game they’ll also be introduced to the more advanced money concepts including paying tax, bartering, borrowing money, scams and foreign exchange.
We increased the number of frontline staff to support customers and introduced a range of digital solutions to adapt to changing customer needs. We provided further support for customers through Tyl, our merchant acquiring and payments solution, Mentor Live, our digital business support service, and Free Agent, our award-winning online accounting software.
• Our position in sustainability benchmarking indices improved and we were the first UK bank to list a green bond on the London Stock Exchange (LSE).
The majority of the Board’s planned direct engagement activity with stakeholders was unfortunately cancelled in 2020, due to COVID-19 restrictions. Virtual alternatives were arranged where feasible, and directors were kept informed about stakeholder engagement activity which was taking place at an operational level via regular and focused management reporting. Further details are set out below and in the stakeholder engagement section on pages 46 to 47.
Investors Our directors engaged with investors throughout the year, keeping them informed on our progress, strategy and financial performance. This helped the Board to build an understanding of what matters to our investors, and provided useful opportunities for questions and feedback. The timeline above provides an overview of key investor engagement activities during 2020.
The Group Sustainable Banking Committee supported the Board by discussing our new Supplier Charter and approach to suppliers in relation to our Modern Slavery and Human Rights obligations.
The Board were regularly updated on NatWest Group’s wider community engagement activities throughout the year, with particular emphasis on the COVID-19 support provided to our local communities.
• Digitise where possible the loan application journey for our Commercial Banking customers, in order to give quicker end-to-end times on application.
Source: Operational NPS. Question: “Thinking about your recent experiences with NatWest’s [channel or service], how likely are you to recommend NatWest to a friend, family member or business associate?”. Latest base size: 6,718.
• For more information on our Inclusion work, including our positive action approaches, refer to natwestgroup.com 2020 Global Gender Profile (*)
Scenario planning In order to help lenders focus on meeting the needs of UK households and businesses during the pandemic, the Bank of England cancelled its 2020 stress test. The European Banking Authority also decided to postpone its stress test. However, the Group continued with its own scenario planning, particularly with scenarios designed to incorporate the likely economic impacts of the pandemic. Three scenarios in particular were used to illustrate the consequences of modest, medium and extreme impacts. The second of these scenarios aligned relatively closely with the Bank of England’s published stress scenario. In all three cases, the Group was able to withstand the most severe impacts without breaching regulatory capital thresholds.
NatWest Group operates in markets that are highly competitive raising the threat of a loss of market share and reduced revenue and profitability. The risks mainly relate to changes in regulation, developments in financial technology (including digital currency), new entrants to the market and shifts in customer behaviour. The Group closely monitors the competitive environment and adapts strategy as appropriate to deliver innovative and compelling propositions for customers.
Technology and Innovation Committee Assists the Board in overseeing , supporting and challenging actions being taken by management in relation to technology and innovation.
• Building a purpose led bank and Our strategy • How we create value • Our business performance
This product, launched in late October 2020, offers lower interest rates for customers purchasing homes with an Energy Performance Certificate (EPC) rating of A or B, rewarding them for playing their part in helping to drive the UK transition to a low carbon economy.
We have developed financed emissions estimates for four sectors – residential mortgages, oil and gas, automotive and agriculture. Also, developed emissions intensity estimates for 2030 and 2050, for three of the four sectors.
Upgrade our job need cars of around 300 vehicles to electric models by 2025 (EV100)
• The Group Audit Committee considers non-financial disclosures related to the broader ethical, social and governance agenda.
• For the residential mortgage portfolio analysis was completed at property level to assess transition risk by reviewing energy efficiency of properties, and physical risk though exposure to flood risk.
(3) Green bond public issuance and green bond private placements represent the NWM Group share of the notional (total underwriting amount lead managed by NWM Group), based on the number of underwriters within a specific deal. Green bonds and private placements totalling a notional amount of £22.7 billion, account for approximately 4% of the total lead managed transactions by NWM Group during the year.
2) Set the minimum level of offsets that we will maintain through to 2025 to 120,000 tCO2e, aligned to our 2019 market based emissions; instead of 2020 emissions (93,144 tCO2e), which are lower than 2019.
Scope 3(5) CO2e emissions from business travel, paper, waste and water (tonnes)
• UK and RoI retail branch upgrades – We have invested in upgrading the equipment that serves our retail branches during 2019-20, including boiler replacements to more energy efficient models, upgrades to air conditioning units and installation of building management systems (BMS). We estimate that the installation of a BMS in our branches, which optimises all the large energy-using equipment, saves on average 7,000 kWh annually, compared to not having a BMS installed.
Emission intensity estimates for 2030 and 2050: Currently, there is limited guidance on modelling Paris aligned emissions intensities for agriculture, with the SBTi guidance on agriculture, forestry and other land use (AFOLU) due to be released in Q2 2021. For the 2030 and 2050 preliminary emissions intensity estimates, we have used Scope 1 and 2 emissions pathways from the CCC sixth Carbon Budget. We constructed revenue projections for the agriculture sector in the UK to 2050 based on the assumption that food demand grows in line with the World Bank's population forecasts for the UK. Based on this approach, the emissions intensity of NatWest Group’s agriculture portfolio would need to reduce from 2,205 tCO2e/£m revenue to 1,449 tCO2e/£m revenue in 2030 to be on track to meet the 2015 Paris Agreement goals.
PCAF data quality score: a. Scope 1 and Scope 2: (i) Publicly available data: We were able to use data from customers’ externally available disclosures for 97% customers. This achieved data quality score of 2.
This achieved overall data quality score of 2.4 for Scope 1 and 2, and 2.6 for Scope 3.
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.
relation to dividends from UBI DAC. (3) IFRS volatility relates to loans which are economically hedged but for which hedge accounting is not permitted under IFRS. (4) Asset disposals/strategic risk reduction in 2020 relates to the cost of exiting positions and the impact of risk reduction transactions entered into, in respect of the strategic announcement on 14 February 2020. Prior period comparatives refer to the previously disclosed NatWest Markets legacy business disposal losses.
 Trading assets decreased by £7.8 billion, 10%, to £69.0 billion mainly driven by reductions in reverse repos and cash collateral. Trading liabilities decreased by £1.7 billion, 2%, to £72.3 billion due to reductions in repos.
 Net Interest margin decreased by 9 basis points due to the impact of negative rates on increased liquid assets.
 Other expenses were stable as front office non-staff cost reduction actions and a 5.6% headcount reduction were offset by a higher bank levy charge.
 Customer deposits increased by £1.2 billion, or 3.8%, due to short term placement inflows across both Institutional and Local Banking.
(3) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 15% of the period average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes), assuming 28% tax rate.
5 Patrick Flynn Appointed: 1 June 2018 Experience: Previously, Patrick was the Chief Financial Officer and a member of the Executive Board of ING Group from April 2009 to May 2017, and prior to that, he worked for HSBC for 20 years. Patrick is a Fellow of Chartered Accountants Ireland.
External appointments: Non-executive director and Chairman of the Audit Committee of Smiths Group plc.
Page Our Board 97 Corporate governance 99 Report of the Group Nominations and Governance Committee 106 Report of the Group Audit Committee 107 Report of the Group Board Risk Committee 112 Report of the Group Sustainable Banking Committee 116 Report of the Technology and Innovation Committee 118 Directors’ remuneration report 119 Compliance report 151 Report of the directors 153 Statement of directors’ responsibilities 156
Board and committee changes We said farewell to two of our longer-serving directors during 2020. Alison Davis stepped down on 31 March 2020, and Baroness Noakes left the Board on 31 July 2020. I would like to record my thanks to Alison and Sheila for their immense contribution during their time with NatWest Group.
 Lena Wilson stepped down as a member of the Technology and Innovation Committee on 31 March 2020; and joined the Group Performance and Remuneration Committee on 1 April 2020 and the Group Board Risk Committee on 1 August 2020.
In addition to scheduled meetings, additional meetings of the Board and its Committees were held on an ad hoc basis throughout the year to receive updates and deal with timecritical matters. There were 16 additional Board meetings held in 2020 compared to 6 additional meetings held in 2019. In response to the COVID-19 pandemic, the Board met virtually on a weekly basis in the initial stages, later moving to fortnightly and this accounted for 10 of the 16 additional meetings held in 2020.
Notes: (1) Morten Friis assumed the role of BRC Chair and was appointed to N&G on 1 August 2020.
 A pre-Board meeting with the Chairman, Group CEO, Group CFO and Chief Governance Officer and Company Secretary to ensure the Board and executive management are aligned on Board agendas.
Risk & Conduct  COVID-19 updates  Risk reports  Regulatory submissions  Risk appetite framework
Board leadership and company purpose Role of the Board The Board is collectively responsible for promoting the long-term sustainable success of the company, driving both shareholder value and contribution to wider society. The Board’s role is to provide leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed. The Board establishes NatWest Group’s purpose, values and strategy and leads the development of NatWest Group’s culture. The Board sets the strategic aims of the company and its subsidiaries, ensures that the necessary resources are in place for NatWest Group to meet its objectives, is responsible for the raising and allocation of capital and reviews business and financial performance. It ensures that the company’s obligations to its shareholders and other key stakeholders are understood and met.
Chairman and Group CEO The role of Chairman is distinct and separate from that of the Group CEO and there is a clear division of responsibilities, with the Chairman leading the Board and the Group CEO managing the business day to day.
Composition, succession and evaluation The Board is structured to ensure that the directors provide NatWest Group plc with the appropriate combination of skills, experience and knowledge as well as independence. Given the nature of NatWest Group’s businesses, experience of banking and financial services is clearly of benefit, and the Board has a number of directors with substantial experience in that area, including retail and commercial banking. In addition, the directors have relevant experience in customer service; government and regulatory matters; mergers and acquisitions; corporate recovery, resolution and insolvency; stakeholder management; environmental, social and governance, technology, digital and innovation; finance and accountancy; risk; and change management.
2020 Performance evaluation The 2020 Board evaluation was internally facilitated by the Chief Governance Officer and Company Secretary, Jan Cargill, during Q4 2020. The process included:  holding 1:1 interviews with directors;  discussing key findings and recommendations for action with the Chairman; and
Valuation methodologies – The GAC considered valuation methodologies and assumptions for; the impacts of the COVID-19 pandemic and resultant volatility, financial instruments carried at fair value and scrutinised judgements made by management in relation to the carrying value of intangible assets.
Dear Shareholder I am delighted to present my first report as Chairman of the Board Risk Committee (the Committee or BRC), a role which I assumed on 1 August 2020. I would like to thank Baroness Noakes for her diligence and dedication throughout her tenure as Chairman of the BRC, for which we are very grateful.
The BRC has an important role in supporting the Board and overseeing the management of risk, and this report describes how the Committee fulfilled this responsibility during 2020. More detail on the remit of the Committee can also be found in its terms of reference which are reviewed annually and available at natwestgroup.com.
Having regard to all the matters set out above, the Committee has considered carefully a spectrum of compensation outcomes, including the possibility of no bonus payments. The Committee has concluded, weighing up all the relevant factors, it is appropriate to deliver variable pay for this year at a significantly moderated level in comparison to prior years.
Overall, the Committee believes the approach we have taken on LTI awards demonstrates restraint on executive pay whilst still paying fairly for the role performed.
Some investors highlighted that disclosing greater detail on the factors leading to LTI outcomes would be welcomed. As a result, the pre-grant disclosures in this report for performance year 2020 have been expanded with ratings to give an indication of the extent of over or underperformance against targets. I hope this enables shareholders to better understand our deliberations for this year and in future.
The Committee agreed that Ms Rose’s first full year as CEO had been highly impressive. The effective launch of NatWest Group’s purpose-led strategy was a particular highlight. Ms Rose had displayed strong leadership and energy in helping to navigate the business through a remarkably challenging year, with significant progress having been made on key strategic priorities, including the implementation of the ‘one bank’ transformation programme and strengthening her executive team through internal and external hiring of talent.
We have also made a pre-vest reduction of 7.5% of maximum to Ross McEwan’s award in relation to the same issue. The reduction in Mr McEwan’s 2018 LTI award was greater than Ms Rose’s as he was considered to have had supervisory oversight responsibility.
Assessments prior to grant and again prior to vesting. Risk & control and stakeholder perception underpins also apply.
Aligning wider workforce and executive pay The Committee retains oversight of the remuneration policy for all colleagues*. Consistent with the principles for executive remuneration, the aim is to deliver a simple and transparent pay policy which promotes the long-term success of NatWest Group. The remuneration policy supports a culture where individuals are rewarded for delivering sustained performance in line with risk appetite and for demonstrating the right behaviours. The same principles apply to everyone with some minor adjustments where necessary to comply with local regulatory requirements.
A great place to work In order to create a great place to work for everyone, NatWest Group is committed to providing: a fulfilling job; excellent development; fair rewards and great leadership; underpinned by a healthy and inclusive workplace where colleagues can be themselves.
A fulfilling role in a great team A challenging but rewarding job where colleagues have the tools to succeed and a sense of direction and purpose
NatWest Group continues to target colleague financial wellbeing with a strategy that focuses on budgeting & planning, savings & investment, debt management, protection and saving for life after work.
Progress on culture is monitored and feedback is received from regulators and industry bodies, including the Banking Standards Board’s (BSB) annual assessment of culture in the UK banking sector.
Pay gaps and pay ratio disclosures The latest gender and ethnicity pay gap reporting for NatWest Group together with the steps being taken to address the position can be found in the ‘Our Colleagues’ section of the Strategic report and on natwestgroup.com. The CEO to employee pay ratios and further information on remuneration for the wider workforce can be found later in this report.
Performance assessed across four key areas, with a balanced scorecard of financial and nonfinancial measures, to encourage long-term value creation.
Unvested shares from LTI awards will count on a net of tax basis towards meeting the shareholding requirement once the pre-vest performance assessment has taken place. When the applicable retention period has passed, the executive directors can dispose of up to 25% of the net of tax shares received until the shareholding requirement is met.
The value of the private medical and life insurance cover provided to the Chairman together with any other benefits will be in line with market rates and disclosed in the Annual report on remuneration.
The main emphasis of the performance assessment is normally on the pre-grant test, which means the award has already been ‘earned’ to a large extent by the time of grant. The removal of pro-rating creates higher levels of shareholding for up to eight years post departure meaning executives can be held accountable for, and are financially exposed to, the long-term consequences of their actions, including through malus and clawback.
Risk & Control and Stakeholder Perception underpins The underpins provide scope to consider significant risk, stakeholder or reputational matters not already captured in the performance assessment, taking into account advice from the BRC and the SBC. The underpins can also be used to consider events arising during the period between grant and the end of year three. Having reviewed the facts relating to management performance with regard to CDD, and recognising its significance, BRC agreed it would be appropriate for the Committee to consider an adjustment to 2018 LTI vest levels.
Core strategic areas Measures and targets to assess pre-grant performance Performance against targets for 2020 Ratings
To increase the percentage of females in the top three layers of NatWest Group from 35% to 36% on aggregate.
NatWest Group and NWH Group to each achieve a ‘2’ systematic risk culture rating as a minimum, with key EWRMF milestones delivered and decisions made through application of a ‘purpose’ lens.
NatWest Group and NWH Group to be 13 points above the Global Financial Services Norm.
Awards held at Awards Award Awards Awards lapsed Awards Awards held atYear of award 1 January 2020 granted price £ (1) vested for performance forfeited 31 December 2020 Expected vesting dates
The remuneration policy operated broadly as intended during the year, with adjustments made for performance where appropriate. The Committee reviewed performance for senior executives and the implementation of the remuneration policy for all colleagues. The CEO’s decision to forgo part of her fixed pay and all of her variable pay for 2020 meant that total remuneration was lower than envisaged.
 Management’s assurance of the implementation of the Group-wide remuneration policy.
This section contains a number of disclosures which are required in accordance with Article 450 of the Capital Requirements Regulation, the Basel Committee on Banking Supervision Pillar 3 disclosure requirements and the European Banking Authority (EBA) guidelines on sound remuneration policies. This section should be read in conjunction with the Directors’ remuneration report starting on page 119.
Operation Colleagues in certain jurisdictions are offered the opportunity to contribute from salary and acquire shares in NatWest Group plc through company share plans. This includes Sharesave and the Buy As You Earn plan in the UK. Any shares held are not subject to performance conditions.
Variable remuneration for 2020 performance Variable remuneration consisted of a combination of annual bonus and long-term incentive awards, deferred over a three to seven year period in accordance with regulatory requirements. Under the NatWest Group bonus deferral structure, immediate cash awards are limited to £2,000 per person.
Severance payments do not reward failure or misconduct in line with regulatory requirements. Where required, remuneration is constrained within the limit of variable to fixed remuneration in accordance with EBA guidelines.
If approved, payment will be made on 4 May 2021 to shareholders on the register at the close of business on 26 March 2021. The exdividend date will be 25 March 2021. Subject to above mentioned condition, the payment of interim dividends on ordinary shares is at the discretion of the Board.
Board of directors Chairman Executive directors Non-executive directors Howard Davies Alison Rose
Risk appetite statements consist of qualitative statements of appetite supported by risk limits and triggers that operate as a defence against excessive risk-taking. They are established at NatWest Group-wide level for all strategic risks and material risks, and at legal entity, business, and function level for all other risks.
The financial and non-financial risks that NatWest Group faces are detailed in the Risk Directory. This provides a common risk language to ensure consistent terminology is used across NatWest Group. The Risk Directory is subject to annual review. This ensures that it continues to provide a comprehensive and meaningful list of the inherent risks within NatWest Group.
Testing and monitoring Targeted credit risk, compliance & conduct risk and financial crime risk activities are subject to testing and monitoring to confirm to both internal and external stakeholders – including the Board, senior management, the customer-facing businesses, Internal Audit and NatWest Group’s regulators – that policies and procedures are being correctly implemented and operating adequately and effectively. Selected key controls are also reviewed. Thematic reviews and deep dives are also carried out where appropriate.
 Scenario results are analysed by subject matter experts. Appropriate management actions are then developed.
Stress testing – climate NatWest Group will be carrying out climate scenario and stress-testing analysis as part of the Bank of England’s 2021 biennial exploratory scenario. The exercise will explore three distinct climate scenarios over a 30 year horizon to test the financial system’s resilience to climate-related risks.
Mitigation Mitigation techniques, as set out in the appropriate credit policies and transactional acceptance standards, are used in the management of credit portfolios across NatWest Group. These techniques mitigate credit concentrations in relation to an individual customer, a borrower group or a collection of related borrowers. Where possible, customer credit balances are netted against obligations. Mitigation tools can include structuring a security interest in a physical or financial asset, the use of credit derivatives including credit default swaps, creditlinked debt instruments and securitisation structures, and the use of guarantees and similar instruments (for example, credit insurance) from related and third parties. Property is used to mitigate credit risk across a number of portfolios, in particular residential mortgage lending and commercial real estate (CRE).
Credit risk continued Wholesale In the Wholesale portfolio, forbearance may involve covenant waivers, amendments to margins, payment concessions and loan rescheduling (including extensions in contractual maturity), capitalisation of arrears, and debt forgiveness or debt-for-equity swaps.
 NatWest Group identified those customers for whom additional borrowing would require remedial action to return to within risk appetite over the medium term, and customers who were exhibiting signs of financial stress before COVID-19. These customers were graded with reference to the impact COVID-19 had on their business.
Other judgemental overlays included a Stage 3 ECL uplift of £25 million in the mortgage portfolio to address concerns that the loss outcome under the forecast macro-economic scenarios would be higher than modelled. Similar to Retail Banking and Commercial Banking, there was also a PMA for deferred model calibrations of £2 million in the retail unsecured and business banking portfolios.
Wholesale loans granted forbearance are individually assessed in most cases. Performing loans subject to forbearance treatment are categorised as Stage 2 and subject to a lifetime loss assessment.
Commercial real estate price - four quarter growth Extreme Upside Base case Downside downside
Use of the scenarios in Wholesale lending The Wholesale lending 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 longrun average levels.
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 macroeconomic scenarios alone.
For Wholesale customers, NatWest Group continues to provide support, where appropriate, to existing customers. Those who are deemed either (a) to require a prolonged timescale to return to within NatWest Group’s risk appetite, (b) not to have been viable pre-COVID19, or (c) not to be able to sustain their debt once COVID-19 is over, will trigger a SICR and, if concessions are sought, be categorised as forborne, in line with regulatory guidance.
Extreme GDP movements – Wholesale only Due to the specific nature of COVID-19, GDP year-on-year movements in both directions are extremely sharp, many multiples of their respective extremes observed previously.
Credit risk – Banking activities continued Segmental 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.
AQ8 6.089% - 17.222% B- to CCC+ AQ9 17.222% - 100% CCC to C AQ10 100% D
Credit risk – Banking activities continued Portfolio summary – sector analysis Key points  Loans by geography – In the Personal portfolio, exposures continued to be concentrated in the UK and heavily weighted to mortgages; the vast majority of exposures in the Republic of Ireland remained in mortgages. Balance sheet growth was within mortgages including the acquisition by Retail Banking of the owneroccupied portfolio detailed earlier; unsecured lending balances reduced also as described earlier. In the Wholesale portfolio, exposures remained heavily weighted to the UK. Balance sheet growth was driven by additional drawings on existing facilities and new lending under the various government supported lending schemes which are primarily to UK customers.
 The deteriorated economic outlook resulted in increased account level IFRS 9 PDs. Consequently, compared to the 2019 year-end, a larger proportion of accounts exhibited a SICR with an associated migration of exposures from Stage 1 to Stage 2.
Retail Banking mortgage LTV distribution by region The table below shows gross mortgage lending by LTV band for Retail Banking, by geographical region.
 Other changes in net exposures increased in Stage 1 as customers drew down on existing facilities and undertook new lending supported by government schemes.
Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL Commercial Banking - other £m £m £m £m £m £m £m £m
 PD deterioration remained the primary trigger for identifying a SICR and Stage 2 treatment, although there was also an increase in arrears.
 High risk back-stops, for example, forbearance and adverse credit bureau, provide additional valuable discrimination. However, with a larger proportion of exposures triggering PD deterioration following the deteriorated economic outlook, the proportion of accounts triggering high risk backstops alone decreased.
Note: (1) The UK’s credit rating declined from AA to AA- as rated by Fitch during 2020. Moody’s and Standard & Poor’s ratings remain unchanged.
 As part of capital planning, NatWest Group will monitor its portfolio of external capital securities and assess the optimal blend and most cost effective means of financing.
CRR leverage ratio increased by c.10 basis points driven by a £3.3 billion increase in Tier 1 capital which is partially offset by a £59.2 billion increase in the leverage exposure driven by balance sheet exposures.
Capital, liquidity and funding risk continued Minimum requirements 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.
Notes: The countercyclical leverage ratio buffer is set at 35% of NatWest Group’s CCyB. As noted above the UK CCyB decreased from 1% to 0% on 11 March 2020 in response to COVID-19. Foreign exposures may be subject to different CCyB rates depending on the rate set in those jurisdictions. Following the joint announcement of UK Treasury, PRA and FCA on 16 November 2020, we expect the PRA to consult on the application of leverage ratios to individual legal entities and Groups during 2021.
Notes: (1) CRR as implemented by the Prudential Regulation Authority in the UK. End point CRR basis includes the IFRS 9 transitional uplift to capital of £1.7 billion and £0.2 billion uplift to RWAs. Excluding this adjustment, the CET1 ratio would be 17.5% and CRR leverage ratio would be 4.9%.
Attributable loss for the period (753) (753) Own credit 117 117 Share capital and reserve movements in respect of employee share schemes 63 63 Foreign exchange reserve 265 265 FVOCI reserve 222 222 Goodwill and intangibles deduction 440 440 Deferred tax assets (3) (3) Prudential valuation adjustments 145 145 Expected loss less impairment 167 167 New issues of capital instruments 2,209 1,617 3,826 Redemption of capital instruments (1,277) (751) (2,028) Net dated subordinated debt instruments (688) (688) Foreign exchange movements (355) (223) (578) Foreseeable ordinary and special dividends 604 604 Foreseeable charges 99 99 Adjustment under IFRS 9 transitional arrangements 1,747 1,747
Acquisitions and disposals (4) 1.2 — — — — — — 1.2
Undrawn commitments <1 year which may not be cancelled 1.9 1.7 Other off-balance sheet items with 20% credit conversion factor (CCF) 0.4 0.4 Items with a 20% CCF 2.3 2.1
Notes: (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
Capital, liquidity and funding risk continued Contractual maturity This table shows the residual maturity of financial instruments, based on contractual date of maturity of NatWest Group’s banking activities, including hedging derivatives. Trading activities, comprising mandatory fair value through profit or loss (MFVTPL) assets and held-for-trading (HFT) liabilities have been excluded from the maturity analysis due to their short-term nature and are shown in total in the table below.
 Ring-fenced to meet regulatory requirement, where NatWest Group has in place an operational continuity in resolution (OCIR) investment mandate wherein PRA requires critical service providers to hold segregated liquidity buffers covering at least 50% of their annual fixed overheads.
Incremental Total Period end Average Total Incremental Total Period end Average Total income income notional notional yield income income notional notional yield £m £m £bn £bn % £m £m £bn £bn %
The downward rate scenario at 31 December 2020 allows interest rates to fall to negative rates. The downward rate scenario at 31 December 2019 assumed that interest rates would floor at 0%, or the then negative rate. This assumption affected only euro, not sterling or US dollar, interest rates.
 The estimated impact on managed margin portfolios of the downward shift into negative interest rates is affected by assumptions regarding the extent to which negative rates are passed through to both deposits and loans.
Net realised gains arising from disposals (248) 114 Unrealised gains included in Tier 1 or Tier 2 capital 82 (40)
Governance Market risk policy statements set out the governance and risk management framework. Responsibility for identifying, measuring, monitoring and controlling market risk arising from trading activities lies with the relevant trading business. The Market Risk function independently advises on, monitors and challenges the risk-taking activities undertaken by the trading business ensuring these are within the constraints of the market risk framework, policies, and risk appetite statements and measures.
 Model Risk Management review – As part of the model lifecycle, all risk models (including the VaR model) are independently reviewed to ensure the model is still fit for purpose given current market conditions and portfolio profile. For further detail on the independent model validation carried out by Model Risk Management refer to page 244. More information relating to pricing and market risk models is presented in the Pillar 3 report.
 Although traded VaR fluctuated throughout 2020, it remained broadly unchanged year-on-year on an average basis, due to business de-risking.
 The exceptions in the Credit business were mainly driven by bond mark-downs due to overall market weakness.
Key point  Despite the market volatility and illiquidity resulting from COVID-19, SVaR decreased year-on-year on an average basis, primarily due to the ongoing business de-risking.
NatWest Bank Plc (a subsidiary of NatWest Group) is the principal employer of the Main section and could be required to fund any deficit that arises.
The potential impact of climate change is one of the factors considered in managing the assets of the Main section. The Trustee monitors the risk to its investments from changes in the global environment and invests, where return justifies the risk, in sectors that reduce the world’s reliance on fossil fuels, or that may otherwise promote environmental benefits. Further details regarding the Main section Trustee’s approach to managing climate change risk can be found in its Responsible Ownership Policy. The Trustee has reported in line with the Task Force on Climate-related Financial Disclosures in its Annual Report and Accounts.
Within these broad categories specific climate risk factors have been identified, which give rise to climate-related risks over the short, medium and long-term.
In H1 2020, due to the impacts of COVID-19, the formal certification process was suspended. It resumed again in H2.
Notes: (1) Based on the volume and value of events (the proportion and cost of operational risk events to NatWest Group) where the associated loss is more than or equal to £10,000.
Standards of conduct are in place across NatWest Group requiring strict adherence to policies, procedures and ways of working to ensure business is transacted in a way that meets – or exceeds – stakeholder expectations.
COVID-19 and a continuing low interest rate environment, the achievement of new strategic objectives, execution risk in the planned cost reductions, the impact of regulatory and climate change developments, and the impact of competition and disruption in banking business models over an extended period.
Attributable to: Ordinary shareholders 38,367 38,993 41,182 Preference shareholders 494 496 496 Paid-in equity holders 4,999 4,058 4,058 Non-controlling interests (36) 9 754
The accompanying notes on pages 269 to 322, the accounting policies on pages 264 to 268 and the audited sections of the Business review and Risk and capital management on pages 84 to 96 and 157 to 246 form an integral part of these financial statements.
IFRS 7)' as a first reaction to the potential effects the IBOR reform could have on financial reporting. The amendments focused on hedge accounting and allow hedge relationships affected by the IBOR reform to be accounted for as continuing hedges. Amendments are effective for annual reporting periods beginning on or after 1 January 2020 with early application permitted. NatWest Group early adopted these amendments for the annual period ending on 31 December 2019.
Financial statem ents method used to generate a range of alternative outcomes and their probabilities.
Financial statem ents investment in a foreign operation (net investment hedges).
 Classification of Liabilities as Current or Non-current (Amendments to IAS 1).
Other operating income Loss on redemption of own debt (324) — — Operating lease and other rental income 232 250 256 Changes in the fair value of financial assets and liabilities designated at fair value (54) (17) (26) through profit or loss (2) Changes in fair value of other financial assets at fair value through profit or loss (3) 2 58 18 Hedge ineffectiveness 24 48 (65) (Loss)/profit on disposal of amortised cost assets (18) 42 44 Profit/(loss) on disposal of fair value through other comprehensive income assets 96 (22) 34 Profit on sale of property, plant and equipment 13 58 50 Share of (losses)/profits of associated entities (30) (14) 83 (Loss)/profit on disposal of subsidiaries and associates (4) (16) 2,224 (72)
Financial statem ents 4 Segmental analysis continued Retail Ulster Commercial Private Central items
Financial statem ents 5 Pensions continued Funding and contributions by NatWest Group In the UK, the trustees of defined benefit pension schemes are required to perform funding valuations every three years. The trustees and the sponsor, with the support of the Scheme Actuary, agree the assumptions used to value the liabilities and a Schedule of Contributions required to eliminate any funding deficit. The funding assumptions incorporate a margin for prudence over and above the expected cost of providing the benefits promised to members, taking into account the sponsor’s covenant and the investment strategy of the scheme. Similar arrangements apply in the other territories where the NatWest Group sponsors defined benefit pension schemes. The last funding valuation of the Main section was at 31 December 2017. The next funding valuation, as at 31 December 2020, is to be agreed by 31 March 2022.
Deferred tax Credit/(charge) for the year 251 38 (280) (Decrease)/increase in the carrying value of deferred tax assets in respect of UK and Ireland losses (139) 62 7
NatWest Group’s interest rate hedging relate to the management of NatWest Group’s non-trading structural interest rate risk, caused by the mismatch between fixed interest rates and floating interest rates. NatWest Group manages this risk within approved limits. Residual risk positions are hedged with derivatives, principally interest rate swaps. Suitable larger financial instruments are fair value hedged; the remaining exposure, where possible, is hedged by derivatives documented as cash flow hedges.
 For the purpose of the prospective effectiveness assessment; it is assumed the IBOR based hedged cash flows and/ or hedged risk are not altered as a result of interest rate benchmark reform.
NatWest Group's financial assets and liabilities include: 2020 2019 £m £m
Instruments which can be offset Potential for offset not recognised by IFRS Effect of Net amount after Instruments master netting the effect of netting outside IFRS Balance and similar Cash Securities agreements and netting Balance
NatWest Group also remained engaged with regulators, standard setters and other market participants on key matters related to the IBOR reform and an open dialogue is expected throughout 2021. It is expected that the programme will meet all timelines set by the regulators.
Notes: (1) USD LIBOR is now expected to convert to alternative risk free rates in mid-2023 subject to consultation. (2) Certain loan commitments are multi-currency facilities. Where these are fully undrawn, they are allocated to the principal currency of the facility. Where the facilities are partly drawn, the remaining loan commitment is allocated to the currency with the largest drawn amount.
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total £m £m £m £m £m £m £m £m Assets
Total financial liabilities held at fair value 19,045 216,218 894 236,157 15,565 206,928 1,317 223,810
Non-modelled products are valued directly from a price input, typically on a position by position basis, and include cash, equities and most debt securities.
Price volatilities and correlations - volatility is a measure of the tendency of a price to change with time. Correlation measures the degree which two or more prices or other variables are observed to move together.
Financial statem ents 13 Financial instruments – maturity analysis continued 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years
The measurement of credit impairment under the IFRS expected loss model depends on management’s assessment of any potential deterioration in the creditworthiness of the borrower, its modelling of expected performance and the application of economic forecasts. All three elements require judgments that are potentially significant to the estimate of impairment losses. For further information and sensitivity analysis, refer to Risk and capital management – Measurement uncertainty and ECL sensitivity analysis section.
 For the life of the loan – all PD, LGD and EAD models produce term structures to allow a lifetime calculation for assets in Stage 2 and Stage 3.
Equity shares disposed during 2020 include SABB (£383 million), VISA Inc. (£186 million), and Vocalink (£16 million).
US$650 million 6.425% undated notes 2043 (partial redemption) Ineligible 187 —
Own shares held - at 31 December 2020, 16 million ordinary shares of £1 each of the company (2019 - 15 million) were held by employee share trusts in respect of share awards and options granted to employees. During the year, the employee share trusts purchased 42 million ordinary shares and delivered 41 million ordinary shares in satisfaction of the exercise of options and the vesting of share awards under the employee share plans. The company retains the flexibility to use newly issued shares, shares purchased by the NatWest Group Employee Share Ownership Trust and any available treasury shares to satisfy obligations under its employee share plans.
Investment properties are leased out on operating lease for £840 million (2019: £949 million) and had lease income for £60 million (2019: £76 million). The following table shows undiscounted lease receivables from Investment properties: £m £m
Note: (1) The maturity of contingent liabilities and commitment is based on the expiry of the agreement between NatWest Group and the customer.
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.
Financial statem ents 26 Memorandum items continued Litigation and regulatory matters Class action antitrust claims commenced in March 2019 are pending in the SDNY against NWM Plc, NWMSI and other banks in respect of Euro-denominated bonds issued by European central banks (EGBs). The complaint alleges a conspiracy among dealers of EGBs to widen the bid-ask spreads they quoted to customers, thereby increasing the prices customers paid for the EGBs or decreasing the prices at which customers sold the bonds. The class consists of those who purchased or sold EGBs in the US between 2007 and 2012. The defendants filed a motion to dismiss this matter, which was granted by the court in respect of NWM Plc and NWMSI in July 2020, subject to plaintiffs attempting to remedy the pleading deficiencies identified by the court through an amended complaint.
Issue of ordinary shares — 17 144 Issue of paid in equity 2,218 — — Issue of subordinated liabilities 1,631 577 — Redemption of subordinated liabilities (3,502) (1,108) (2,258) Interest on subordinated liabilities (510) (533) (566) Issue of MRELs 1,309 3,640 6,996 Maturity/redemption of MRELs (2) (1,285) (83) Interest on MRELs (671) (428) (237) Net cash inflow/(outflow) from financing 2,218 17 144 (2,381) (1,064) (2,824) 636 1,927 6,676 Ordinary shares issued 52 95 80 Effects of foreign exchange (234) (315) 419 (514) (683) 587 Changes in fair value of subordinated liabilities/MRELs 133 317 (243) 829 539 (59)
31 Transactions with directors and key management At 31 December 2020, amounts outstanding in relation to transactions, arrangements and agreements entered into by authorised institutions in NatWest Group, as defined in UK legislation, were £1,329,102 in respect of loans to five persons who were directors of the company at any time during the financial period.
At 31 December 2020, HM Treasury’s holding in the company’s ordinary shares was 61.9%.
Other than as disclosed in the accounts, there have been no other significant events between 31 December 2020 and the date of approval of these accounts which would require a change or additional disclosure.
Notes: (1) Includes interest received of £344 million (2019 - £371 million, 2018 - £508 million) and interest paid of £816 million (2019 - £988 million, 2018 - £819 million). (2) Cash and cash equivalents are comprised of intragroup loans and advances with a maturity of less than 3 months for 2020, 2019 and 2018.
Financial statem ents 4 Financial instruments – classification The following tables analyse NWG plc’s financial assets and liabilities in accordance with the categories of financial instruments on an IFRS 9 basis. Assets and liabilities outside the scope of IFRS 9 are shown within other assets and other liabilities.
Balances not Expected Rates subject to IBOR reform subject to credit
Note: (1) USD LIBOR is now expected to convert to alternative risk free rates in mid-2023.
Tangible equity divided by the number of ordinary shares in issue. Tangible equity is ordinary shareholders’ interest less intangible assets.
Operating lease depreciation — — (121) — — — — (121)
ECL provisions for NatWest Group. As government support schemes reduce, defaults are expected to rise with more ECLs cases moving from Stage 2 to Stage 3.
NatWest Group’s ability to hire, retain and engage well-qualified employees, especially at a senior level, which in turn may adversely impact NatWest Group’s ability to serve its customers efficiently and impact productivity across NatWest Group. This could also adversely affect NatWest Group’s reputation, and competitive position and its ability to grow its business.
NatWest Group tests goodwill for impairment at least annually, or more frequently when events or circumstances indicate that it might be impaired.
Continuing uncertainty regarding the effects of the UK’s withdrawal from the
Significant uncertainty remains as to the extent to which EU/EEA laws will diverge from
Group’s structure, independently or in conjunction with other mandatory or strategic structural and organisational changes which could adversely impact NatWest Group.
Group serves, increasing inequalities, or rapid change to the economic environment due to the adoption of technology and artificial intelligence. Any of the above developments could adversely impact NatWest Group directly (for example, as a result of credit losses) or indirectly (for example, by impacting global economic growth and financial markets and NatWest Group’s customers and their banking needs).
However, severe market events have historically been difficult to predict and
Purpose-led business, designed to champion potential and to help individuals, families and businesses to thrive. This strategy is intended to reflect the rapidly shifting environment and backdrop of unprecedented disruption in society driven by technology and changing customer expectations, as accelerated by the
Group has been seeking to implement a more strategically congruent and economically sustainable model for its NWM franchise. As part of this, NatWest Group has been refocusing the NWM franchise to principally serve NatWest Group’s corporate and institutional customer base. This requires
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.
Given the complexity of NatWest Group’s business, strategy and capital requirements,
The valuation of financial instruments, including derivatives, measured at fair value can be subjective, in particular where models are used which include unobservable inputs.
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.
CEO’ letter requiring firms to embed fully their approaches to managing climate-related financial risks by the end of 2021. In response, NatWest Group provided the PRA
(such as tackling inequality, inclusion, human rights and working conditions); and governance (such as board diversity, ethics, executive compensation and management structure) related risks and opportunities –
Failure to implement and comply with these requirements or adopt regulatory or other best practice expectations may have a material adverse effect on NatWest Group’s regulatory compliance and may result in regulatory sanction and investor disapproval.
Furthermore, there is a risk that shareholders, campaign groups, customers and special interest groups could seek to take legal action against NatWest Group for financing or contributing to climate change and environmental degradation.
NatWest Group outsources certain activities, including with respect to the implementation of new technologies, innovation and responding to regulatory and market changes.
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 customer-focused strategy, ineffective product management, unethical or inappropriate use of data, information asymmetry, implementation and utilisation of new technologies, outsourcing of customer service and product delivery, the possibility of mis-selling of financial products and mishandling of customer complaints. Some of these risks have materialised in the past and ineffective management and oversight of conduct risks may lead to further remediation and regulatory intervention or enforcement.
NatWest Group, its clients and the financial services industry more widely to risk.
In accordance with the accounting policies set out on page 267, NatWest Group has recognised deferred tax assets on losses available to relieve future profits from tax only to the extent it is probable that they will be recovered. The deferred tax assets are quantified on the basis of current tax legislation and accounting standards and are subject to change in respect of the future rates of tax or the rules for computing taxable profits and offsetting allowable losses.
The aggregate number of ordinary shares which the company may purchase from HM Treasury under the Directed Buyback Contract will not exceed 4.99%. of the company’s issued share capital and the aggregate consideration to be paid will not exceed 4.99%. of the company’s market capitalisation. The price to be paid for each ordinary share will be the market price at the time of purchase or, if the directed buyback is in conjunction with an institutional placing, the placing price.
Share and bond scams Share and bond scams are often run from ‘boiler rooms’ where fraudsters cold-call investors, offering them worthless, overpriced or even non-existent shares or bonds.They use increasingly sophisticated tactics to approach investors, offering to buy or sell shares, often pressuring investors to make a quick decision or miss out on the deal. Contact can also be in the form of email, post or word of mouth. Scams are sometimes advertised in newspapers, magazines or online as genuine investment opportunities and may offer free gifts or discounts on dealing charges.
The Royal Bank of Scotland International Limited Royal Bank House, 71 Bath Street St Helier, JE4 8PJ