Innovation – TIC has continued to oversee the development and delivery of NatWest Group’s innovation approach supporting NatWest Group’s long-term strategic priorities. This included an overview of innovation activity underway from seed to scale and how innovation activity aligns to the bank’s broader purpose and strategy. The Committee also considered innovation investment prioritisation and how this has been informed. From a macro perspective, the Committee discussed top technology trends across the industry and areas which had been most impacted by the COVID-19 crisis and considered how NatWest Group might respond to these.
TIC also considered emerging skills, capabilities and technologies critical to future success such as data management, greater use of cloud and increased opportunities to partner.
External Insights Obtaining an external view of the industry, external trends, developments and competitor activity has been valuable to the Committee. It allows the Committee to better understand both opportunities and emerging threats from continued market disruption.
During 2020, Michael Dell (Dell Technologies Inc.) joined the Committee and provided his views on external trends and challenges, including innovation priorities and the technology advances accelerated by COVID19. Astro Teller, CEO and Captain of Moonshots of Alphabet's Google X, joined the Committee to share more about Google X and his perspectives on emerging and disruptive technologies.
The Committee is supported by management and the CEO, Chief Administration Officer, Chief Risk Officer, CFO, Director of Innovation, Director of Strategy & Corporate Development and Chief Technology Officer are all standing attendees.
The Committee held three scheduled meetings during 2020. An ad hoc meeting was also convened to consider the viability assessment of the Mettle and Bó propositions. All meetings were convened virtually. Details of meeting attendance can be found on page 100 of the Corporate governance report.
The Committee will track progress on the outcomes of the evaluation during 2021.
Conclusion I am delighted to chair this Committee as it continues to support the Board in an area critical to the bank’s future strategy.
I want to take the opportunity to thank the Committee members and attendees for their direction, enthusiasm and support in 2020. In particular, I would like to thank Alison Davis, my predecessor, for chairing the Committee since it was established in 2017. Her strong technology and innovation knowledge and experience provided great benefit to the Committee throughout her tenure. I would also like to thank Lena Wilson who stepped down from the Committee in March 2020.
Dear Shareholder, This is my fourth report as Chairman of the Group Performance and Remuneration Committee (the Committee). It has been a year unlike any other in living memory. As a result, I felt that it was particularly important as part of my letter this year to not only share a summary of the key activities and decisions, but to add some colour on our thinking and our approach to balancing the varied considerations of an unprecedented year.
Setting the scene The Committee is acutely aware of the significant adverse impact that the COVID-19 pandemic has had on our customers, our stakeholders, including our shareholders, and broader society. This has significantly influenced our decisions this year.
Bonus pool for the wider workforce We recognise that while underlying performance has been resilient, profitability and shareholder value have been severely impacted. Share price performance has unsurprisingly been highly volatile but not entirely unexpected given the macroeconomic environment. Analysis of our share price shows a clear correlation with that of competitors over the period, which indicates share price movements were largely sector driven, which in turn was a reaction to the pandemic.
The absence of dividend payments during the year, in line with guidance from our regulators in April 2020, will have disappointed ordinary shareholders. The capital and liquidity of NatWest Group has remained very strong through the period. In December 2020, the PRA eased its restriction on shareholder capital distributions and the Board has confirmed its intention to pay a dividend of 3p per ordinary share in respect of financial year 2020, this being the maximum amount permitted under the regulations.
Balanced against such factors, the Committee has been mindful of the role that colleagues have performed in NatWest Group’s reaction to the pandemic. Our colleagues have worked tirelessly, often in difficult circumstances, demonstrating real resilience and huge commitment to continue to serve our customers. They have reacted with speed and agility to an unprecedented set of circumstances and have taken a proactive approach to deliver business support schemes offered by the Government whilst taking a careful approach to the management of risk. The Committee felt it was appropriate to recognise this exceptional contribution of our colleagues in serving the needs of customers during the year.
NatWest Group has not benefitted from any direct government support although it is acknowledged that government intervention to support the economy has mitigated some of the risks resulting from the pandemic. NatWest Group has also taken steps to protect all its employees. It decided that no colleagues should be furloughed, it protected pay for six months, including for those colleagues unable to work during this period, and implemented a broad range of initiatives to provide practical and emotional support. This is explained in further detail in this report.
In reaching its decision to pay a bonus pool to the wider workforce, the Committee has relied on a multi-step process in order to assess performance and balance this against relevant external factors. We believe that proceeding with a significantly reduced bonus pool demonstrates the restraint and caution expected by our shareholders and regulators, yet still offers a fair level of reward for colleagues in recognition of their performance in exceptional circumstances.
The agreed bonus pool is £206 million, which is down 33% on 2019. The Committee feels this is appropriate to reflect NatWest Group’s business mix and the varied performance of its business units during the year. The vast majority of the pool will be allocated to revenue-generating business units and the teams which were pivotal in enabling colleagues to seamlessly work from home during the pandemic. Immediate cash bonuses continue to be limited to £2,000.
Long-term incentive (LTI) awards Turning to LTI awards, the Committee decided early in the year not to make any adjustment to performance targets for 2020 as a result of the pandemic. These targets formed the basis of the pre-grant assessment for LTI awards to be granted in 2021.
The 2021 LTI awards proposed have been adjusted with reference to performance over 2020 and have also been subjected to a further reduction of an amount greater than the overall reduction to the bonus pool, in order to reinforce the ‘one bank’ approach underpinning senior leadership at NatWest Group.
Variable pay for executive directors is delivered entirely in shares with no annual bonus. The main performance test takes place before granting the LTI award with a further assessment prior to vesting to ensure that the performance has proved to be sustainable.
Nearly 70% of expected remuneration for our executive directors is delivered in shares; far higher than typical market practice. Extensive deferral and retention periods are in place and LTI awards are subject to malus and clawback provisions. Furthermore, our executive directors are required to acquire substantial shareholdings which must be retained for two years post-employment. This creates clear alignment between the executives and shareholders, which is one of the main intents of the remuneration construct.
An assessment of performance against the pre-set and unadjusted 2020 performance targets resulted in a recommended LTI award level of £1,450,000, or 75% of Ms Rose’s maximum LTI award level. This grant was then subject to an overall pay restraint reduction of 38% to reflect the impact of COVID-19, resulting in a notional LTI award of £899,000 for Ms Rose, or 47% of her maximum LTI award level. Ms Rose had already indicated that she did not wish to accept an LTI award for this year and accordingly no award will be made.
The Committee agreed that Ms Murray had performed strongly during 2020. Highlights included management of crucial parts of the COVID-19 agenda, especially management of the capital, liquidity and funding plans, and delivery of annual cost reductions in line with target. There had also been improved management of investor engagement with positive feedback received. Ms Murray had also made a significant contribution to progress on key strategic priorities and had demonstrated excellent leadership, with good progress having been made on transforming the Finance function, its executive team and its inclusion agenda.
An assessment of performance against the pre-set and unadjusted 2020 performance targets resulted in a recommended LTI award level of £1,100,000, or 73% of Ms Murray’s maximum LTI award level. This grant was then subject to an overall pay restraint reduction of 38% to reflect the impact of COVID-19, resulting in a LTI award for 2020 of £682,000, or 45% of her maximum LTI award level.
As a result, the Group Board Risk Committee (BRC) recommended that the Committee consider making a pre-vest adjustment to Ms Rose’s 2018 LTI award using the Risk & Control underpin. The Committee was advised that management had not fully appreciated the scale and complexity of the challenges relating to the remediation of CDD during 2017. While Ms Rose was not primarily responsible for the 2017 CDD remediation plan, she had associated responsibility as the CEO of one of the franchises in which remediation was required. The Committee agreed that this should result in a 5% pre-vest reduction on Ms Rose’s original maximum LTI award level.
Full details of the pre-vest assessment for both Ms Rose and Mr McEwan can be found on page 135.
While the performance cycle has completed, the shares from the 2018 LTI award will vest in tranches up to 2025 and remain subject to retention and malus and clawback provisions to ensure recipients maintain a long-term focus in their decision-making.
In order to help guide our judgement in these circumstances, and to reassure shareholders that there is rigour involved, a framework has been implemented to assess whether windfall gains have arisen over the period from grant to vest and the factors to consider in making any adjustments.
Other workforce considerations Fairness The Committee continued to review remuneration arrangements for the wider workforce during the year and worked closely with the Sustainable Banking Committee. A decision was taken to introduce a Fair Pay Charter for NatWest Group, which is based around ten key principles and builds on the existing elements of our fair pay approach.
Gender and ethnicity The Committee considers gender and ethnicity pay gap metrics to be another important indicator and full details can be found in the Strategic report and on natwestgroup.com. This is the third year that we have published ethnicity pay gap information on a voluntary basis. We are confident that colleagues are paid fairly, and policies and processes are kept under review to make sure this continues to be the case.
Financial wellbeing We also discussed the financial wellbeing of colleagues. Following a successful campaign over the last two years, the number of colleagues saving nothing for life after work has reduced by 13% and pension contributions have increased by over £31 million. Colleagues have access to a range of flexible benefits and in certain jurisdictions they can choose to join one of our employee share plans. The Committee agreed to the extension of our popular Sharesave plan to Poland and India for the first time.
Engaging with colleagues I enjoyed attending another meeting with the Colleague Advisory Panel (CAP) during the year, which provides direct engagement between colleagues and Board members. I provided the CAP with an update on our approach to executive director remuneration and how it aligns with the wider company pay policy. Feedback was positive with members stating that the principles behind executive director pay were clear and fair.
In addition to the commitment to maintain workforce pay at the outset of COVID-19 and not to place colleagues on furlough, measures were put in place to enable colleagues to work safely and productively, including home working support. A virtual GP service was also introduced together with a guided suite of wellbeing programmes to help support mental health. Steps were also taken to maintain internships and NatWest Group did not cut any apprenticeship programmes during 2020.
Looking ahead NatWest Group will shortly publish an Environmental, Social and Governance (ESG) report, to provide additional information on ESG issues to investors, regulators, customers, suppliers, colleagues and other stakeholders. The report will be available on natwestgroup.com. Along with the Fair Pay Charter, this provides a further platform for us to explain how various aspects of wider workforce remuneration provide a link between culture, pay and ESG.
The Committee has also approved targets for executive remuneration to support the updated strategic goals, with new measures on financial capability and return on equity. ESG measures form an integral part of our LTI goals. For 2021, there are targets related to our climate ambitions as well as supporting enterprise and building financial capability, aligned with our purpose.
Together with the new ratings that have been introduced to indicate the extent of over or underperformance against targets, this will provide additional insight into how the Committee viewed performance over the year and the factors it regarded as having more of a bearing on executive pay decisions. The priority areas for 2021 include financial and risk performance as well as measures related to climate, enterprise, customers, shared purpose and culture.
The maximum value of LTI awards is smaller than traditional long-term incentive plans and there are significant shareholding requirements in place, which apply both during and after employment.
The policy was introduced in 2017 and reflected the Executive Remuneration Working Group and Government announcements on executive pay, calling for reduced complexity and quantum.
Base salary (cash) £1,100,000 £750,000 No changes proposed for 2021. Salary will be reviewed annually within the terms of the policy.
Performance assessed ‘in the round’ against pre-set goals, within a framework that uses priority areas and ratings rather than traditional formulaic weightings.
Pro-rata vesting over years three to seven from grant. LTI awards vest over a long timeframe and remain subject to malus and clawback provisions.
Following approval of the policy at the 2020 AGM, LTI awards can be granted using an adjusted share price to reflect the absence of dividends during the vesting period.
Base salary is intended to provide a competitive level of fixed cash remuneration.
Base salaries are reviewed annually and reflect the talents, skills and competencies that the individual brings to the business.
Colleagues are provided with additional funding which they can use to save in one of the company’s pension schemes.
Benefits offered include private medical cover, dental cover, personal accident insurance, life assurance and critical illness insurance.
Role-based allowances reflect the skills and experience required for certain roles.
The purpose is to support a culture where individuals are rewarded for superior performance.
Awards vest in equal tranches across years 3 to 7 following grant, followed by a 12-month retention period, and can be adjusted through malus and clawback.
Listening to colleagues There is a well-developed process in place to listen to the views of the workforce. This provides opportunities to improve by assessing colleague sentiment and checking progress in making NatWest Group a great place to work.
A colleague opinion (Our View) survey provides all colleagues with the opportunity to have a say on what it feels like to work at NatWest Group, twice per year. Nearly 50,000 colleagues participated in the latest survey, which took place in September 2020. Regular engagement with colleagues also takes place throughout the year. Board members would normally visit business areas to hear directly from colleagues along with townhall meetings and question and answer sessions with senior executives. Due to the restrictions in place for most of the year, there has been more focus on regular online engagement. Feedback from colleagues is included in the people measures that impact executive pay.
Following each meeting, a summary is provided to the Board and a follow-up call is held so that members of the CAP can hear how their views were shared and what happened as a result. Feedback has been good with members highlighting that the CAP is open, transparent, engaging and members feel able to share their views with the Board.
The CAP met four times in 2020 and provided views to the Board on areas such as purpose, inclusion and COVID-19 support for colleagues and customers. In November, the CAP heard directly from the Committee Chairman on the executive directors’ remuneration policy; how such policy aligns with the broader reward policy; how pay is managed; fair pay; and colleague sentiment on reward. CAP members were appreciative of the in-depth explanation of executive director remuneration. Members’ feedback was positive, stating that the principles behind executive director pay were clear and fair.
 Steps were taken to ensure all physical distancing and protective measures were in place, including the use of static desks, recommendations on the use of face coverings and thermal imaging where appropriate.
Further details on NatWest Group’s broader response to the pandemic and support for colleagues can be found in the Strategic report.
Our approach to reward and fairness Reward is an important part of the colleague proposition at NatWest Group contributing to making colleagues feel valued, respected and recognised for the work that they do.
This means NatWest Group will pay colleagues fairly for the job they do and be clear on how they can make their pay and benefits work for them.
2. Consistency The structure of pay and benefits is consistent for colleagues based on their location and role, with a clear rationale for exceptions.
5. Listening Colleagues are surveyed regularly, and engagement sessions are held on reward with our colleague representatives and the Colleague Advisory Panel.
7. Reliability Pay is well administered with colleagues paid accurately and on time. Colleagues can access their payslips and other pay documents 24/7 via Workday.
8. Inclusive NatWest Group requires fairness and inclusion and that judgement is exercised with thought and integrity. There is a Group-wide commitment to rewarding colleagues in a way that is free from discrimination.
9. Competitive A competitive total reward proposition is provided that enables NatWest Group to attract, motivate and retain colleagues based on market rates for their role, location, performance, skills and experience.
The Our View survey compares responses to questions from colleagues at NatWest Group against the position in other companies, known as the Global Financial Services (GFS) Norm. The 2020 results show that sentiment on reward, benefits and recognition continues to be good. All areas are above the GFS Norm, significantly in some cases. The Total Reward category and three of the five specific questions improved during the year.
Excellent development Help to build the capabilities needed to thrive and do a great job (both now and in the future)
Regular performance conversations, coaching and development help colleagues to do their best every day. Colleague performance and development is managed continuously through setting goals and regular check-ins to discuss progress, development and feedback. Importantly, performance is assessed not just on what has been achieved but also on how it has been achieved. Critical People Capability behaviours are used to provide a consistent Group-wide behavioural measure.
The long-term success of NatWest Group depends on building and nurturing a healthy culture where colleagues are engaged, and where the working environment is underpinned by robust risk behaviours.
Our Values and Our Code are there to guide colleagues in their interactions with customers and to reinforce the right behaviours and long-term decision making.
There has been continued progress for 2020 with four of the BSB survey categories improving during the year, four staying the same and only one, on resilience, showing a slight decline.
The goal is to create a sustainable, progressive, inclusive and diverse workplace, that champions potential, helping people, families and businesses to thrive. NatWest Group’s positive action approach ensures that people policies and processes are inclusive and accessible – from attracting and recruiting colleagues to how we reward and engage them - and is helping to achieve a better balance of diversity throughout the organisation.
Highlights of building a healthy and inclusive workplace in 2020 Recognition
 Launched the NatWest Group Learning Academy to assist with learning in areas such as being purpose-led, climate and diversity & inclusion.
 Promoted greater ESG awareness for colleagues with tools on the intranet and a travel and home carbon calculator.
 Hosted our 2nd Disability Conference in Scotland in collaboration with the Business Disability Forum.
 Greater focus on financial wellbeing, with initiatives targeted at encouraging colleagues to save more for life after work.
 Won the 2020 REBA Wellbeing Award for Best Approach to Long-term Financial Wellbeing
Further information on NatWest Group’s approach to culture, developing colleagues and inclusion can be found in the Strategic report.
Purpose and BfBB alignment Performance goals 2020 performance measures for 2021 LTI awards
Build the capability of colleagues to realise their potential. Build up and strengthen a healthy culture. Embed our shared purpose across the business and brands. Develop a diverse workforce and inclusive environment.
Banking Standards Board assessment.  Achieve the shared purpose targets.  Progress on the number of women across the top three layers and number of Black, Asian and Minority Ethnic UK employees in the top four layers of NatWest Group.
 Achieve CET1 ratio target for NatWest Group and NWH Group, with appropriate repatriation of capital to NatWest Group.
 A formal post-employment shareholding requirement was introduced for executive directors under the 2020 policy, in order to fully comply with the Code and the Investment Association’s Principles of Remuneration.
 The Committee considers a range of information on the broader workforce, for example, the Group-wide remuneration policy principles, annual pay outcomes including diversity information across the workforce, bonus pool allocations, the deferral policy, and the annual Sharesave offer for colleagues.
 Culture is part of a suite of measures used to assess progress in building a healthy and inclusive workplace and performance against culture targets directly impacts the variable pay of both senior executives and other colleagues. The governance of culture is clearly laid out with specific Senior Management Function roles having defined accountabilities, which is taken into account in their pay decisions.
 In 2020, the committees held a joint session to review wider workforce remuneration focusing on the areas of colleague recognition, fair pay and financial wellbeing.
 The majority of the remuneration is share-based, creating clear alignment with shareholders. There is clarity for executives, by having performance conditions that they should reasonably be expected to achieve, and detailed disclosure to provide transparency for shareholders.
 Risk is taken into account at various stages of the performance assessment, supported by the use of underpins. Malus and clawback provide further tools to deliver risk-adjusted performance.
 As set out above, culture is part of a balanced scorecard that is used to assess performance, and this includes consideration of both what has been achieved and how it has been achieved.
 The CAP provides a formal mechanism for engagement between the workforce and Board members. The Committee Chairman meets with the CAP each year to discuss executive remuneration and its alignment with the wider pay policy. The Chairman of the CAP is also a member of the Committee.
 If the CAP expresses any concerns on pay matters these would be raised with the Committee. Further information on the CAP and how colleagues’ views are taken into account is set out earlier in this report.
 Discretion can be applied under the company’s share plan rules where appropriate and the Committee has applied downwards discretion in the past, and also again this year, to LTI outcomes. Discretion is only used to ensure a fair outcome for the director and for shareholders and any use of discretion will be disclosed.
 When assessing performance, the Committee can exercise its judgement to determine the appropriate vesting of LTI awards, supported by the application of underpins, which helps to avoid any potentially unintended outcomes that might arise from the application of formulaic performance criteria.
 The Committee also has discretion to make minor amendments to the directors’ remuneration policy to reflect changing legal or regulatory requirements, provided there is no material advantage to the directors, and can also use discretion to apply malus and clawback to LTI awards.
 The above list of circumstances is not exhaustive and NatWest Group may consider any further circumstances as it deems appropriate.
Purpose and link to strategy Operation Maximum potential value Base Salary To provide a competitive level of cash remuneration which, along with other elements of fixed pay, ensures less reliance on variable pay and discourages excessive risk-taking.
The rates for 2021 are unchanged:  CEO – £1,100,000  CFO – £750,000
Future salary increases will not normally be greater than the average salary increase for the wider workforce over the period. Other than in exceptional circumstances, the salary will not increase by more than 15% over the course of this policy.
An award of shares with an annual value of up to 100% of base salary at the time of award.
Benefits To provide a range of flexible and market competitive benefits that is valued by recipients and assists them in carrying out their duties effectively.
Long-term incentive (LTI) award To support a culture where individuals are rewarded for the delivery of sustained performance, taking into account NatWest Group’s strategy and purpose.
LTI awards are subject to:  a one-year pre-grant performance period;  a pre-vest performance assessment at the end of a three-year period, with vesting taking place from years three to seven after grant;  malus prior to vesting and clawback which applies for seven (potentially ten) years from award; and
The number of shares awarded may be calculated using a share price discounted to reflect the absence of the right to receive dividends during the vesting period.
The maximum award for current directors at the time of grant is capped at:  CEO - 175% of salary.  CFO - 200% of salary.
Prior performance will be taken into account when determining the value of the award at the time of grant. A robust framework is used to consider performance against pre-set objectives for each of the categories and the Committee then uses its judgement to consider the appropriate outcome, taking all relevant circumstances into account.
Following cessation of employment, executive directors are required to hold shares of a value equal to the lower of their shareholding requirement immediately prior to departure or the actual shareholding on departure, for a period of two years. The requirement encompasses vested and unvested shares. A fixed number of shares for the post-employment requirement will be determined at the date of departure.
 CEO - 400% of salary.  CFO - 250% of salary.
Requirements may be reviewed in future but are not expected to be reduced.
Procedures are in place to assist with the enforcement of the shareholding requirements, both during and after employment. Executive directors have agreed to be bound by the terms of the requirements and nominee accounts will be used to hold shares subject to restrictions.
No variable pay is provided so that the Chairman and non-executive directors can maintain appropriate independence.
The rates for the year ahead are set out in the Annual report on remuneration.
Other than in exceptional circumstances, fees will not increase by more than 15% over the course of this policy.
The Chairman and non-executive directors are entitled to travel assistance in connection with company business including the use of a car and driver. NatWest Group will meet the cost of any tax due on the benefit. Other benefits may be offered in line with market practice. The Chairman is entitled to private medical cover and life insurance cover.
Chairman and non-executive directors The Chairman and the non-executive directors do not have service contracts, they have letters of appointment. They do not have notice periods and no compensation would be paid in the event of termination of appointment, other than standard payments payable for the period served up to the termination date.
Effective dates of appointment for directors: Howard Davies - 14 July 2015 Frank Dangeard – 16 May 2016 Yasmin Jetha - 21 June 2017* Alison Rose - 1 November 2019 Patrick Flynn – 1 June 2018 Mike Rogers – 26 January 2016 Katie Murray - 1 January 2019 Morten Friis – 10 April 2014 Mark Seligman – 1 April 2017
Robert Gillespie – 2 December 2013 Lena Wilson – 1 January 2018 * Yasmin Jetha’s first appointment to the Board following which she stepped down in 2018 to serve solely as a director of key entities in preparation for the ring-fencing regime before re-joining the Board on 1 April 2020.
NatWest Group can continue to honour any previous commitments or arrangements entered into with current or former directors that may have different terms, including terms agreed prior to appointment as an executive director.
Annual bonus n/a n/a n/a n/a Long-term incentive award (5) 650 1,007 — 140 Total variable remuneration 650 1,007 — 140
(3) Includes standard benefit funding for all at £26,250 per annum. In addition, Ms Rose received travel assistance in connection with company business (£23,029) and an upgrade to the existing home security system (£31,793) with Katie Murray also receiving travel assistance (£3,952) and home security arrangements (£16,939).
(4) The executive directors receive a monthly cash allowance and can choose to participate in the company’s defined contribution pension arrangements. (5) The 2020 value for Ms Rose relates to an LTI award granted in 2018, prior to becoming an executive director. The pre-vest performance assessment has now taken place as set out on the next page. No discretion was exercised by the Committee as a result of the share price changing over the performance period. The estimated value above for Ms Rose is £850,000 lower than the maximum award available in 2018 (£1.5m). Of that reduction, £275,000 is due to adjustments under the pre-grant and pre-vest performance assessments and the remaining £575,000 is as a result of the fall in share price over the period. No dividend equivalents were paid on the award prior to vesting. Ms Murray did not receive an LTI award in 2018 due to being on a different remuneration construct at that time.
The awards were subject to a pre-grant assessment of performance over 2019 and a further assessment will take place following the end of the 2022 financial year. Further details of the LTI performance assessment framework can be found on the pages that follow as well as the 2019 Annual Report and Accounts.
If the answer to each of these questions is “Yes”, the Committee may decide that a further adjustment prior to vesting is appropriate, and it has the discretion to decide the amount.
Further analysis Three areas were investigated - share price, customer and risk with a specific focus on Customer Due Diligence remediation.  Supported by external opinion, it was concluded that share price underperformance was not due to factors within management’s reasonable control, given the close correlation in share price performance over the period with our main competitors.
 While NPS had declined in some areas and management’s decisions to close branches had a bearing, this had already been accounted for through adjustments to LTI awards in subsequent years.
 Whilst on risk there had been no material deterioration in risk culture or profile over the period, it was felt appropriate that consideration of management performance relating to Customer Due Diligence and associated matters (CDD) should be assessed using the Risk & Control underpin.
Have there been indicators of a material deterioration in the risk culture or profile, taking into account annual assessments by the Risk function and the BRC?
1. Remained safe and secure, taking into account financial results and the capital position?
2. Been a good bank for customers taking into account customer and advocacy performance?
3. Operated in an environment in which risk is seen as part of the way we work and think?
Has there been a material fall in the NatWest Group share price over the period?
NO No material deterioration but expected improvement to CEC2 rating not consistently achieved in subsequent years.
A summary of the agreed award level for Ms Rose and the estimated vesting value is set out below.
Pre-grant assessment of performance in 2020 (for LTI awards to be granted in 2021) For each of the core performance areas, the Committee considers whether the executive director has achieved what would reasonably have been expected over the performance year prior to grant. The achievement of reasonable or ‘target’ performance expectations can deliver full or nearly full pay-out of the LTI awards, as long as executives deliver good, sustainable performance. This approach reflects the significantly reduced level of LTI awards expected to be granted under the company’s LTI construct, in comparison to traditional LTI structures, which is designed to create more predictable outcomes and encourage safe and secure growth within risk appetite.
The Committee follows a robust process to review performance against pre-set goals relevant to NatWest Group’s strategic aims for that year but applies its judgement without a formulaic range for vesting or mechanistic weightings. Performance is assessed taking into account circumstances applying over the period. Risk & Control and Stakeholder Perception underpins also apply under which the Committee can consider if there are any other factors that would lead to a downwards adjustment. Awards may be reduced, potentially down to zero, further to the application of either the pre-grant or pre-vest tests where there has been significant underperformance or risk management failings. In line with feedback received from some shareholders, ratings have been added to the table below to show the extent of under or overperformance.
Achieve NatWest Group cost reduction target of £250m based on operating expense reduction.
NatWest Group CET1 was 18.5% at year end which exceeded the target, with limited distributions due to COVID-19 restrictions. NWH Group was 17.5%. Capital repatriation was appropriate and all risk appetites have been considered.
Achieve net loan growth target of >3% for retail and commercial franchises consisting of Retail Banking, Ulster, Private, Commercial and RBSI.
RWA reduction of £11.0bn at year end, which exceeded the target and was capital accretive.
Positive progress towards (‘1’) generative with NatWest Group and NWH Group to be rated (‘2’) systematic as a minimum.
Targets for top 5 customer journeys prioritised for 2020. NPS improvement of: 8 points for account opening; 4 points for paying a person or bill; 2 points for keeping purchases and payments safe; 8 points for commercial lending; and 3 points for business servicing.
NPS for Retail Banking customer journeys were 9 points off target for account opening (due to a high volume of applications in H1 leading to extended processing times) and 1 point off target for paying a person or bill. The NPS for keeping purchases and payments safe exceeded target by 4 points due to fraud prevention improvements introduced in March.
The net trust score improved for NatWest (England & Wales) but narrowly missed target by 1 point. The net trust score for Royal Bank of Scotland missed target by 17 points.
To be a leading bank helping to address the climate challenge
NatWest Group will set sector-specific targets for high impact sectors that are scenario-based for aggregate balance sheet alignment to the objectives of the 2015 Paris Agreement, and be in a position to publish such targets at or before the time of the FY2020 results announcements to give full transparency to all our stakeholders.
NatWest Group has developed and will publish in February 2021: (i) 2019 financed emissions estimates for four high impact sectors and (ii) emissions intensity estimates for 2030 and 2050 for three of those four sectors. These emissions intensity estimates illustrate, based on assumed scenarios, what the emissions intensities of each of the three sectors would need to be for NatWest Group to meet its overall 2030 emissions reductions and 2050 alignment with the Paris Agreement. The Bank has chosen to assess Paris Alignment using estimates rather than targets. This is because of evolving methodologies, data refinement and ongoing broader market engagement work.
NatWest Group and NWH Group achieving capability targets of 12 points above the Global Financial Services Norm3 as measured through the ‘Our View’ colleague survey.
NatWest Group and NWH Group achieving the culture target to be equal to the Banking Standards Board Norm3 as measured through the ‘Our View’ colleague survey.
Achieving the shared purpose target for NatWest Group and NWH Group, to be 1 point above the Banking Standards Board Norm as measured through the ‘Our View’ colleague survey.
The NatWest Group and NWH Group shared purpose scores each exceeded the target by 5 points.
To increase the percentage of Black, Asian and Minority Ethnic UK employees in the top four layers from 9% to 10% on aggregate.
The NatWest Group and the NWH Group inclusion index scores each exceeded the target by 4 points.
UK Government lending schemes and £16.2 billion mortgage lending, including £3.0 billion related to the Metro Bank mortgage portfolio acquisition. (2) Data only tracked against select initiatives which included those focused on female and social purpose-led entrepreneurs. For 2021 reporting will reflect all initiatives.
Outcome of the pre-grant assessment for the 2021 LTI award The Committee also received advice from the BRC and the SBC in making its final assessment. As part of its ‘performance in the round’ judgement, the Committee noted that targets had been met or exceeded for six of the areas above, one was partially met and four were missed, albeit narrowly in some cases. Of these areas the resilience of underlying financial performance, despite the exceptionally challenging environment, and the progress in embedding and demonstrating the Group’s purpose internally and externally were viewed as having a significant bearing on the overall view of performance. Whilst progress against the enterprise goal fell significantly short of target, the Committee acknowledged the response had been appropriate in prioritising support to existing customers over new business growth.
Alison Rose Turning to individual performance, Ms Rose was considered to have had a highly impressive first full year in her CEO role. Despite it being a remarkably challenging year, an effective launch of the Group’s purpose and her strong leadership and energy through the pandemic had resulted in an excellent operating performance. There had been effective engagement with key external stakeholders, some progress on customer scores and good people scores in a difficult year. Underlying financial performance was viewed as very respectable despite the impact of COVID-19 on results. NatWest Group continued to be behind target on risk measures, although risk culture had continued to improve. Taking into account performance against the core goals as set out above and the uniquely challenging and unanticipated external events of 2020, the Committee agreed an LTI award level of £899,000 would be appropriate. This would equate to 82% of salary and 47% of the maximum LTI award level. This outcome included an exceptional COVID-19 reduction of 38% to reflect the impact of the pandemic on the wider economic environment and NatWest Group’s performance and affordability, otherwise performance against the pre-set and unadjusted 2020 performance targets would have resulted in an award level equal to 75% of Ms Rose’s maximum. This is below the longterm guidance of 80% for assumed average vesting over a CEO’s tenure. The Committee went on to acknowledge that Ms Rose had informed the Board in April that she did not wish to be considered for an LTI award for 2020 and, therefore, no award will be made.
Pre-vest performance assessment for 2021 LTI awards The pre-vest assessment for LTI awards due to be granted in March 2021 will operate in a similar way to the pre-vest framework in place for 2018 LTI awards, as described in detail on page 134. In early 2024, the Committee will look back to consider whether anything has come to light that would indicate that the pre-grant assessment based on the 2020 performance year did not represent a correct view of performance at that time, thereby requiring a reduction or cancellation in the vesting of the award. Underpins provide scope to consider significant risk and control, stakeholder or reputational matters not already captured in the performance assessment. Full details of the assessment will be disclosed prior to the first vesting taking place in 2024.
Total remuneration for the Chairman and non-executive directors for 2020 There were no changes to the number of Committees during the year. One change was made to the level of fees, with the Chairman of the CAP receiving a temporary increase from £15,000 to £30,000 per annum to reflect the additional engagement with the workforce as a result of COVID-19. The increase applies for the period from 1 April 2020 to 31 March 2021. For NatWest Group plc Board directors who also serve on the boards and committees of NatWest Holdings Limited, National Westminster Bank Plc, The Royal Bank of Scotland plc and Ulster Bank Limited, the fees below reflect membership of all five boards and their respective board committees. Where appropriate, directors also received fees for membership of other subsidiary company boards and committees including NatWest Markets Plc, the value of which is included below. The year on year (YoY) percentage change for fees and benefits has been added below in line with new reporting regulations. Membership of Board Committees is reviewed regularly and changes in membership will impact the level of fees paid to non-executive directors from one year to the next. Two directors left during the year which had a further impact and the benefits figures have largely fallen due to there being significantly less travel in 2020.
Non-executive directors £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 change £000 £000 change £000 £000
(2) Non-executive directors are reimbursed expenses incurred in connection with travel and attendance at Board meetings. These expenses are taxable where the meetings take place at the company’s main offices and NatWest Group settles the tax on behalf of the non-executive directors.
(3) Under the ‘Other’ column, Frank Dangeard received a composite fee as Chairman of the NatWest Markets Plc (NWM Plc) Board. (4) Alison Davis and Baroness Noakes stepped down from the Board on 31 March 2020 and 31 July 2020 respectively. Yasmin Jetha re-joined the Board on 1 April 2020 after previously stepping down in 2018 to serve solely as a director of key entities in preparation for the ring-fencing regime.
Payments for loss of office There were no payments for loss of office made to directors in 2020.
Payments to past directors Ross McEwan stepped down from the Board as CEO in October 2019. The Board agreed that Mr McEwan qualified for good leaver treatment, as per the requirements in the policy section of this report, in respect of his unvested LTI awards. In line with good leaver status, outstanding LTI awards granted in 2018, 2019 and 2020 will continue to vest on their scheduled vesting dates and pro‐rating will not apply. All awards remain subject to a performance assessment prior to vesting and the potential application of malus and clawback provisions.
As set out on page 135, Mr McEwan received an LTI award of 592,328 shares in 2018 which was reduced to 542,968 shares following the prevest assessment and the application of the Risk & Control underpin. The remaining shares are due to vest between 2021 and 2025, subject to the good leaver criteria continuing to be met and the potential application of malus and clawback provisions. The value of the shares is £765,585, based on the average share price over October to December 2020. Similar disclosures will be made in future reports for Mr McEwan’s 2019 and 2020 LTI awards, once the pre-vest assessment has taken place. In addition, Mr McEwan received assistance with his UK tax return in relation to a tax year during which he was still employed by NatWest Group, with a value of £2,108. There are no other payments to past directors to disclose for 2020.
Engagement with shareholders Every year an extensive consultation is undertaken with major shareholders and other stakeholders prior to the Committee making any final decisions on remuneration and variable pay awards. In late 2020, meetings took place with a number of institutional shareholders, UK Government Investments (UKGI) and other stakeholders. A range of topics were discussed including the impact of COVID-19 on remuneration decisions, potential approaches to windfall gains and the disclosure framework for LTI awards.
As part of the discussions on COVID-19, it was explained that NatWest Group had not placed any colleagues on furlough or sought other forms of government support. Shareholders were interested in the reasons for withdrawing dividend payments during the year and the Committee Chairman explained that NatWest Group remained very well capitalised, with the decision made at the request of regulators as a precaution. It was clear from the discussions that windfall gains from LTI awards was a key area of focus, due to the high volatility in share prices, although views on how such gains should be mitigated were not always aligned across investors. The Committee acknowledged these concerns and a new framework was established to address potential windfall gains as explained earlier in this report.
Implementation of remuneration policy in 2021 Details are set out below of remuneration to be awarded in 2021 to executive directors. The salary, benefits, pension and fixed share allowance for the CEO and CFO are unchanged. The LTI pre-grant assessment has been completed with the Committee making a recommendation to the Board on the CFO’s LTI award. The Board approved the recommendation, as set out below. Details of the performance measures and assessment relating to the CEO and CFO LTI awards can be found on pages 135 to 138.
Executive directors’ remuneration to be awarded in 2021 Fixed share allowance Maximum LTI award following pre-grant
Notes: (1) Amount shown relates to standard benefit funding. Executive directors are also entitled to travel assistance and security arrangements in line with the policy.
Variable pay pre-grant assessment at the end of 2020 based on performance over year
March 2021 shares released over 2025 to 2029 due to a combination of vesting dates and a 12-month retention period following each vesting 33%Fixed share allowance shares released over three years
in comparison to 2020, excluding any change in the direct cost base of Ulster
Targets will be disclosed as part of the performance assessment in the 2021
Achieve RoTE target for NatWest Group. Targets will be disclosed as part of the performance assessment in the 2021 DRR.
Markets strategic review. To be measured with reference to RWA reduction and capital accretion.
Material progress towards the desired risk culture target where ‘risk is part of the way we work and think’.
NPS improvement of: 6 points for NatWest Account Opening or be 4th or better; 2 points for NatWest Commercial Lending; 2 points for NatWest Day-to-Day Business
NPS improvement of: 1 point for NatWest Retail Main Bank or be 5th or better; 4 points for NatWest Business Banking and be 3rd or better; 5 points for Mid-Markets NPS or be first by
Increase the number of customers who have saved at least £100.
Help an additional 500,000 customers to start saving at least £100.
Deliver financial capability interactions that require active engagement, give knowledge or skills and change behaviour.
NatWest Group to reach 3.2 million individuals through agreed financial capability interactions.
Reduce carbon emissions from our direct operational footprint by 25% of NatWest Group’s 2019 baseline position.
Develop estimates aligned with the 2015 Paris Agreement for a further 4 sectors.
Based on achieving the capability targets for NatWest Group and NWH Group as measured through the NatWest Group ‘Our View’ colleague survey.
NatWest Group to be 15 points above and NWH Group to be 16 points above the Global Financial Services Norm*.
Based on achieving the culture target for NatWest Group and NWH Group, as measured through the NatWest Group ‘Our View’ colleague survey.
Based on the Banking Standards Board assessment and achieving the shared purpose target for NatWest Group and NWH Group, as measured through the NatWest Group ‘Our View’ colleague survey.
To increase the percentage of females in the top three layers of NatWest Group from 39% to 40% on aggregate.
Progress on the number of Black, Asian and Minority Ethnic UK employees in the top four layers of NatWest Group.
To increase the percentage of Black, Asian and Minority Ethnic UK employees in the top four layers from 10% to 11% on aggregate.
Chairman and non-executive directors’ annual fees for 2021 The fees are unchanged from those in place at the end of 2020.
Fees for NatWest Group plc Board (1) Rates from 1 January 2021
Other fees for NatWest Group plc Board directors Chairman of NatWest Markets Plc (composite fee to cover all boards and committees) £260,000 Chairman of the Colleague Advisory Panel January to March 2021 £30,000
Other external directorships Agreement from the Board must be sought before directors accept any additional roles outside of NatWest Group. Procedures are in place to make sure that regulatory limits on the number of directorships held are complied with. The Board would also consider whether it was appropriate for executive directors to retain any remuneration receivable in respect of any new external directorships, taking into account the nature of the appointment. Details of the directorships held by directors can be found in the biographies section of the Corporate governance report.
CEO to employee pay ratios The ratios compare the total remuneration of the CEO, as set out in this report, against the remuneration of the median UK employee as well as employees at the lower and upper quartiles. A significant proportion of the CEO’s pay is delivered in LTI awards, where awards are linked to performance and share price movements over the longer term. Therefore, the ratios will depend significantly on LTI outcomes and may fluctuate from one year to the next. None of the three individuals identified at the 25th, 50th and 75th quartiles this year received LTI awards. The table also includes ratios based on salary only as well as remuneration values for further comparison.
Supplementary information on pay ratio table: (1) The data for 2020 is based on remuneration earned by Alison Rose, as set out in the single figure of remuneration table in this report. (2) The employees at the 25th, 50th and 75th percentiles (lower, median and upper quartile) were determined as at 31 December of the relevant year, based on full-time equivalent remuneration for all UK employees. This includes fixed pay (salary, pension funding and where relevant benefit funding and other allowances) and also any variable pay where the amount to be paid has been used. For employees that work part-time, fixed pay is grossed up to the full-time equivalent.
(3) ‘Option A’ methodology was selected as this is considered the most statistically accurate method under the reporting regulations. UK employees receive a pension funding allowance set as a percentage of salary. Some employees, but not the CEO, continue to participate in the defined benefit pension scheme under which it would be possible to recognise a higher value, which would in turn reduce the ratios. However, for simplicity and consistency with regulatory disclosures, the pension funding allowance value has been included in the calculation for all employees.
(2) Standard benefit funding for executive directors remained unchanged between 2019 and 2020. The figure above excludes any other benefits to executive directors such as travel assistance in connection with company business, the value of which is disclosed each year in the total remuneration table.
Summary of remuneration levels for employees in 2020 43,144 employees earned total remuneration up to £50,000 12,606 employees earned total remuneration between £50,000 and £100,000 4,813 employees earned total remuneration between £100,000 and £250,000 803 employees earned total remuneration over £250,000
Directors’ interests in NatWest Group plc shares and shareholding requirements The shareholding requirement is to hold shares to the value of 400% of salary for the CEO and 250% of salary for the CFO. A post-employment shareholding requirement was introduced at the 2020 AGM. Further details can be found in the policy section of this report.
Note: (1) The calculation is based on a share price of £1.68 as at 31 December 2020. During the year the share price ranged from £0.93 to £2.44.
(2) The share interest held is over 10,000 American Depositary Receipts representing 20,000 ordinary shares. (3) 10,000 shares are held in the name of M Seligman & Co Ltd, of which Mr Seligman and Louise Seligman are shareholders.
(2) Performance assessment has taken place and outstanding awards remain subject to deferral periods and employment conditions before vesting. These awards count on a net of tax basis towards meeting the shareholding requirement. (3) Awards shown are still subject to the LTI pre-vest performance assessment and also subject to deferral periods and employment conditions before vesting. The pre-vest assessment of the 2018 LTI award concluded in January 2021, as set out earlier in this report.
The award price is the option price at which shares can be bought at the end of the savings period. Sharesave options are normally exercisable for a period of six months from the maturity date.
CEO pay over the same period 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
RM 73% 62% 56% 89% 41% 78%LTI vesting rates against maximum opportunity (2)
Notes: (1) For 2013 and 2019, the table reflects where more than one individual has served as CEO during the year. The CEOs are Alison Rose (AR), Ross McEwan (RM)
The Committee held seven scheduled meetings in 2020 and a further eight ad hoc meetings. Details of members and attendance can be found in the Corporate governance report on page 100.
The terms of reference of the Committee are reviewed annually and available on natwestgroup.com.
Summary of the principal activity in 2020 Tasks undertaken by the Committee included reviewing and, where appropriate, approving: First half of 2020  2019 performance assessments and remuneration arrangements for the Committee’s ‘in scope’ population.
 The directors’ remuneration policy with support from shareholders at the AGM.
 Fixed pay proposals for the year ahead.  The 2020 Sharesave offer.  2020 variable pay proposals and the 2020
Performance evaluation The 2020 performance evaluation was conducted internally by the Chief Governance Officer and Company Secretary. This was structured around: operating rhythm; purpose & priorities; culture & dynamics; and input & support. The Committee was considered to have managed well in a difficult year and had been particularly supportive and responsive to multiple urgent requests from management. Ad hoc meetings aside, members agreed the operating rhythm was appropriate, with the Committee well sighted on wider workforce remuneration and also sufficiently engaged on the impact of COVID-19 on remuneration.
There was also a genuine appreciation for the Committee Chairman’s dedication to the role, with members noting significant time commitment required from the Chairman in liaising with key internal and external stakeholders in order to deliver the year end pay process. Actions arising from the evaluation will be tracked during 2021.
Advisers to the Committee PricewaterhouseCoopers LLP (PwC) was first appointed as remuneration adviser by the Committee in 2010, following a review of potential advisers and the services provided. An annual review of the quality of advice and the associated level of fees was undertaken during 2020, following which the Committee agreed to retain the services of PwC. The Committee will continue to review the performance of its advisers each year.
PwC is a signatory to the voluntary code of conduct in relation to remuneration consulting in the UK. As well as receiving advice from PwC, the Committee took account at meetings of the views of the Chairman; the CEO; the CFO; the Group Chief HR Officer; the Director of Reward & Employment; and the Group Chief Risk Officer. The Committee also received input from the BRC, the GAC and the SBC. Input was also received from Performance and Remuneration Committees for key legal entities across NatWest Group.
PwC provides professional services in the ordinary course of business including assurance, advisory, tax and legal advice to NatWest Group subsidiaries. The Committee is satisfied that the advice received is independent and objective, and receives an annual statement setting out protocols that have been followed by PwC to maintain independence. There are no connections between PwC and individual directors to be disclosed.
Fees paid to PwC for advising the Committee are based on a fixed fee structure to cover standard services with any exceptional items charged on a time/cost basis. Fees for 2020 in relation to directors’ remuneration amounted to £136,830 excluding VAT (2019 - £194,463).
The remuneration policy applies the same principles to everyone, including MRTs, with some minor adjustments to the policy where necessary to comply with local regulatory requirements. The key elements of the policy are set out below.
Role-based allowance Certain MRT roles receive a role-based allowance. The purpose is to provide fixed pay that reflects the skills and experience required for the role.
Operation Role-based allowances are fixed allowances which form an element of overall fixed remuneration for regulatory purposes and are based on the role the individual performs.
Benefits and pension The purpose is to provide a range of flexible and competitive benefits.
Annual bonus The purpose is to support a culture where individuals recognise the importance of serving customers well and are rewarded for superior performance.
Individual performance assessment is supported by a structured performance management framework. This is designed to assess performance against longer term business requirements across a range of financial and non-financial metrics as well as an evaluation of adherence to internal controls and risk management. A balanced scorecard is used to align with the business strategy. Each individual will have defined measures of success appropriate to their role.
For awards made in respect of the 2020 performance year, immediate cash awards continue to be limited to a maximum of £2,000. In line with regulatory requirements, a significant proportion of annual bonus awards for more senior roles is deferred and includes partial delivery in shares.
The fifth Capital Requirements Directive (CRD V) took effect on 28 December 2020 which will impact remuneration requirements for the 2021 performance year. This includes extending the minimum deferral period from three to four years for MRTs and also some changes to the criteria for identifying MRTs. Further details will be included in next year’s report.
Long-term incentive (LTI) awards The purpose and operation of LTI awards is explained in detail in the Directors’ remuneration report. Instead of an annual bonus, NatWest Group provides executive directors and certain members of NatWest Group’s senior executive committees with LTI awards. Any awards made are subject to a performance assessment prior to grant and again prior to vesting.
Operation Executive directors and certain members of NatWest Group’s senior executive committees are required to build up and hold a shareholding equivalent to a percentage of salary. There is a restriction on the number of shares that individuals can sell until the requirement is met.
In 2019, MRTs were identified for five key ‘institutions’ within NatWest Group but this has been expanded to eleven entities for 2020 to bring greater focus on MRT identification across subsidiary entities. The MRT criteria are applied for each of these institutions, and consequently some MRTs are identified in relation to more than one entity.
Personal hedging strategies The conditions attached to discretionary share-based awards prohibit the use of any personal hedging strategies to lessen the impact of a reduction in value of such awards. These conditions are explicitly acknowledged and accepted by recipients when any sharebased awards are granted.
Focus on risk is achieved through clear risk input into performance goals, performance reviews, the determination of variable pay pools, incentive plan design and the application of malus and clawback. The Committee is supported by the BRC and the Risk function.
Remuneration and culture NatWest Group continues to assess conduct and its impact on remuneration as part of the annual Group-wide bonus pool process and also via the accountability review framework. NatWest Group has taken steps in recent years to remove incentives for colleagues where this could drive unintended behaviours. The Committee will continue to review workforce remuneration and the alignment of incentives and reward with culture.
This allows NatWest Group to respond to instances where new information would change the variable pay decisions made in previous years and/or the decisions to be made in the current year. Potential outcomes under the accountability review process are:  Malus - to reduce (to zero if appropriate)
the amount of any unvested variable pay awards prior to payment;  Clawback - to recover awards that have already vested; and
 In-year bonus reductions - to adjust variable pay that would have otherwise been awarded for the current year.
As part of the acceptance of variable pay awards, MRTs must agree to terms that state that malus and clawback may be applied. Any variable pay awarded to MRTs in respect of the 2014 performance year onwards is subject to clawback for seven years from the date of grant.
For awards made in respect of the 2016 performance year onwards, this period can be extended to ten years for MRTs who perform a ‘senior management function’ under the Senior Managers Regime where there are outstanding internal or regulatory investigations at the end of the normal sevenyear clawback period.
The circumstances in which malus, clawback or in-year bonus reduction may be applied can be found on page 130.
Remuneration of MRTs The quantitative disclosures below are made in accordance with regulatory requirements in relation to 1,605 individuals who have been identified as MRTs for NatWest Group plc (NatWest Group). The number of MRTs identified has increased since last year due to the increase in the number of legal entities for which MRTs are identified.
Identifying MRTs for additional entities results in the application of a lower threshold for certain MRT criteria (including the one relating to credit risk exposures), because the threshold to be used (as required by regulations) is set at 0.5% of the CET1 capital of each entity. In the course of carrying out MRT analysis in H1 2020 it was identified that the Business Approval Authority Framework used in some areas of the business referred to NatWest Holdings Limited but was otherwise silent on legal entity. A prudent approach was taken, applying the lowest applicable legal entity threshold to a broad population, even if the individual had not and would not be expected to expose that particular entity to credit risk. This issue and approach taken was discussed with the PRA.
Senior Other Annual bonus mgmt MRTs Total Number of beneficiaries 8 1,307 1,315 £m £m £m NatWest Group plc EDs — — — NatWest Group plc NEDs — — — Corporate Functions
overnance 4. Outstanding deferred remuneration The table below includes deferred remuneration awarded or paid out in 2020 in respect of prior performance years. Deferred remuneration reduced during the year relates to long-term incentives lapsed when performance conditions were not met, longterm incentives and deferred awards forfeited on leaving and malus adjustments of prior year deferred awards and long-term incentives.
Severance payments and/or arrangements can be made to colleagues who leave NatWest Group in certain situations, including redundancy. Such payments are calculated by a pre-determined formula set out within the relevant social plans, policies, agreements or local laws. Where local laws permit, there is a cap on the maximum amount that can be awarded.
No severance payments in excess of contractual payments, local policies, standards or statutory amounts were made to MRTs during the year, other than payments to four individuals of £50,000; £50,000; €55,836; and £460,000. The two non-standard payments of £50,000 related to enhanced outplacement support, one of which was to a senior management MRT. The two other payments were made to MRTs in commercial settlement of potential legal proceedings related to the termination of their respective employment.
Ratio of fixed to Senior Other variable mgmt MRTs Total Number of beneficiaries 16 1,307 1,323 ratio ratio ratio NatWest Group plc EDs 1:0.43 - 1:0.43 NatWest Group plc NEDs - - - Corporate Functions 1:0.53 1:0.27 1:0.30 Control Functions 1:0.43 1:0.18 1:0.19 NatWest Holdings 1:0.42 1:0.20 1:0.21 NatWest Markets 1:0.49 1:0.59 1:0.59 RBS International 1:0.43 1:0.22 1:0.24 Consolidated 1:0.47 1:0.29 1:0.30 7. Discount Rate Under CRD IV regulations, a notional discount is available which allows variable pay to be awarded at a level that would otherwise exceed the 1:1 ratio, provided that at least 25% of variable pay is delivered ‘in instruments’ (shares) and deferred over five years or more. The discount rate was not used for remuneration awarded in respect of the 2020 performance year.
 Those who manage large business areas.  Income generators responsible for high levels of income including those involved in managing trading activity and supporting clients with more complex financial transactions, including financial restructuring.
 Provision 33 that the Group Performance and Remuneration Committee (Group RemCo) should have delegated responsibility for setting remuneration for the Chairman and executive directors.
Further information on how NatWest Group plc has applied the Principles, and complied with the Provisions, of the Code can be found in the Governance section of this Report, which includes cross-references to relevant sections of the Strategic Report and other related disclosures.
NatWest Group plc has also implemented the recommendations arising from the Walker Review and complied in all material respects with the Financial Reporting Council Guidance on Audit Committees issued in September 2012 and April 2016.
Under the US Sarbanes-Oxley Act of 2002, specific standards of corporate governance and business and financial disclosures and controls apply to companies with securities registered in the US. NatWest Group plc complies with all applicable sections of the US Sarbanes-Oxley Act of 2002, subject to a number of exceptions available to foreign private issuers.
The Internal Audit function undertakes independent assurance activities and provides reports to the Board and executive management on the quality and effectiveness of governance, risk management and internal controls to monitor, manage and mitigate risks in achieving the bank’s objectives. In addition, the Board receives a risk management report at each scheduled Board meeting. Executive management committees in each of NatWest Group’s businesses also receive regular reports on significant risks facing their business and how these are being controlled. Details of the bank’s approach to risk management are given in the Risk & Capital Management section of the Annual Report and Accounts.
Ongoing processes for the identification, evaluation and management of the principal risks faced by NatWest Group operated throughout the period from 1 January 2020 to 19 February 2021, the date the directors approved the Annual Report and Accounts. These included the semi-annual Control Environment Certification process, which requires senior members of the executive and management to assess the adequacy and effectiveness of their internal control frameworks and certify that their business or function is compliant with the requirements of Sarbanes-Oxley Section 404 and the UK Corporate Governance Code Section C2. Policies are in place to govern these processes. Reports on internal controls arising from them are reviewed by the Board and meet the requirements of the Financial Reporting Council’s Guidance On Risk Management Internal Control & Related Financial & Business Reporting.
Internal control over financial reporting NatWest Group plc is required to comply with Section 404 of the US Sarbanes-Oxley Act of 2002 and assess the effectiveness of internal control over financial reporting as of 31 December 2020.
NatWest Group has assessed the effectiveness of its internal control over financial reporting as of 31 December 2020 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 publication of ‘Internal Control - Integrated Framework'.
Based on its assessment, management has concluded that, as of 31 December 2020, NatWest Group’s internal control over financial reporting is effective.
NatWest Group’s auditors have audited the effectiveness of NatWest Group’s internal control over financial reporting and have given an unqualified opinion.
Management's report on NatWest Group’s internal control over financial reporting will be filed with the Securities and Exchange Commission as part of the 2020 Annual Report on Form 20-F.
Disclosure controls and procedures As required by Exchange Act rules, management (including the Group CEO and Group CFO) have conducted an evaluation of the effectiveness and design of NatWest Group’s disclosure controls and procedures (as defined in the Exchange Act rules) as at 31 December 2020. Based on this evaluation, management (including the Group Chief Executive Officer and Chief Financial Officer) concluded that NatWest Group plc’s disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Changes in internal control There was no change in NatWest Group’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, NatWest Group’s internal control over financial reporting.
The New York Stock Exchange As a foreign private issuer with American Depository Shares representing ordinary shares, preference shares and debt securities listed on the New York Stock Exchange (the NYSE), NatWest Group plc is not required to comply with all of the NYSE governance standards applicable to US domestic companies (the NYSE Standards) provided that it follows home country practice in lieu of the NYSE Standards and discloses any significant ways in which its corporate governance practices differ from the NYSE Standards.
NatWest Group plc is also required to provide an Annual Written Affirmation to the NYSE of its compliance with the mandatory applicable NYSE Standards. In March 2020 NatWest Group plc submitted its most recent Annual Written Affirmation to the NYSE, and in August 2020 an interim written affirmation was submitted following a change in membership of the Group Audit Committee. Both affirmations confirmed NatWest Group plc’s full compliance with the applicable provisions.
The Group Audit Committee fully complies with the mandatory provisions of the NYSE Standards (including by reference to the rules of the Exchange Act) that relate to the composition, responsibilities and operation of audit committees. More detailed information about the Group Audit Committee and its work during 2020 is set out in the Group Audit Committee report on pages 107 to 111.
The Board has reviewed its corporate governance arrangements and is satisfied that these are consistent with the NYSE Standards, subject to the following departures: (i) NYSE Standards require the majority of the Board to be independent. The NYSE Standards contain different tests from the Code for determining whether a director is independent. NatWest Group plc follows the Code’s requirements in determining the independence of its directors and currently has 8 independent non-executive directors, one of whom is the senior independent director. (ii) The NYSE Standards require nonmanagement directors to hold regular sessions without management present, and that independent directors meet at least once a year. The Code requires the Chairman to hold meetings with non-executive directors without the executives present and nonexecutive directors are to meet without the Chairman present at least once a year to appraise the Chairman’s performance and NatWest Group plc complies with the requirements of the Code. (iii) The NYSE Standards require that the nominating/corporate governance committee of a listed company be composed entirely of independent directors. The Chairman of the Board is also the Chairman of the Group Nominations and Governance Committee, which is permitted under the Code (since the Chairman was considered independent on appointment). The terms of reference of the Group Nominations and Governance Committee differ in certain limited respects from the requirements set out in the NYSE Standards, including because the Group Nominations and Governance Committee does not have responsibility for overseeing the evaluation of management.
Group structure During 2018 in preparation for ring-fencing a number of changes were made to the NatWest Group structure. Following these changes the company owns three main subsidiaries, NatWest Holdings Limited (the parent of the ring-fenced group which includes National Westminster Bank Plc, The Royal Bank of Scotland plc and Ulster Bank Ireland DAC), NatWest Markets Plc (the investment bank and the parent of NatWest Markets N.V.) and The Royal Bank of Scotland International (Holdings) Limited (the parent of The Royal Bank of Scotland International Limited).
Further details of the principal subsidiary undertakings are shown in Note 9 and a full list of subsidiary undertakings and overseas branches is shown in Note 12 of the parent company accounts.
In response to a formal request from the Prudential Regulatory Authority, the Board cancelled the final ordinary and special dividend payments in relation to the 2019 financial year and did not submit them for approval at the AGM held on 29 April 2020.
The company has announced that the directors have recommended a final dividend of £364 million, or 3p per ordinary share (2019 – nil). The final dividend recommended by directors is subject to shareholders’ approval at the AGM on 28 April 2021.
Going concern NatWest Group’s business activities and financial position, the factors likely to affect its future development and performance and its objectives and policies in managing the financial risks to which it is exposed and its capital are discussed in the Business review. The risk factors which could materially affect NatWest Group’s future results are set out on pages 345 to 362. NatWest Group’s regulatory capital resources and significant developments in 2020 and anticipated future developments are detailed in the Capital, liquidity and funding section on pages 213 to 228. This section also describes NatWest Group’s funding and liquidity profile, including changes in key metrics and the build up of liquidity reserves.
Having reviewed NatWest Group’s forecasts, projections and other relevant evidence, the directors have a reasonable expectation that the Group will continue in operational existence for a period of not less than twelve months. Accordingly, the financial statements of NatWest Group and of the company have been prepared on a going concern basis.
UK Finance disclosure code NatWest Group plc’s 2020 financial statements have been prepared in compliance with the principles set out in the Code for Financial Reporting Disclosure published by the British Bankers' Association in 2010. The Code sets out five disclosure principles together with supporting guidance. The principles are that NatWest Group and other major UK banks will provide high quality, meaningful and decision-useful disclosures; review and enhance their financial instrument disclosures for key areas of interest to market participants; assess the applicability and relevance of good practice recommendations to their disclosures, acknowledging the importance of such guidance; seek to enhance the comparability of financial statement disclosures across the UK banking sector; and clearly differentiate in their annual reports between information that is audited and information that is unaudited.
Enhanced Disclosure Task Force (EDTF) and Disclosures on Expected Credit Losses (DECL) Taskforce recommendations The EDTF, established by the Financial Stability Board, published its report ‘Enhancing the Risk Disclosures of Banks’ in October 2012, with an update in November 2015 covering IFRS 9 expected credit losses (ECL). The DECL Taskforce, jointly established by the Financial Conduct Authority, Financial Reporting Council and the Prudential Regulatory Authority, published its phase 2 report recommendations in December 2019.
Viability statement 67 Business review 84 Board of directors and secretary 97 Corporate governance 99 Segmental analysis Note 4 Share Capital and other equity Note 21 Post balance sheet events Note 33 Risk factors 345
NatWest Group plc’s 2020 Annual Report and Accounts and Pillar 3 Report reflect EDTF and have regard to DECL Taskforce recommendations.
There are no restrictions on the transfer of ordinary shares in the company other than certain restrictions which may from time to time be imposed by laws and regulations (for example, insider trading laws). At the 2018 Annual General Meeting, shareholders gave authority to directors to offer a scrip dividend alternative on any dividend paid up to the conclusion of the Annual General Meeting in 2021. Shareholders will be asked to renew this authority at the Annual General Meeting in 2021. Pursuant to the UK Listing Rules, certain employees of the company require the approval of the company to deal in the company’s shares.
For shares held in the company’s other Employee Share Trusts, the voting rights are exercisable by the Trustees. However, in accordance with investor protection guidelines, the Trustees abstain from voting. The Trustees would take independent advice before accepting any offer in respect of their shareholdings for the company in a takeover bid situation. The Trustees have chosen to waive their entitlement to the dividend on shares held by the Trusts.
A change of control of the company following a takeover bid may cause a number of agreements to which the company is party to take effect, alter or terminate. All of the company’s employee share plans contain provisions relating to a change of control. In the context of the company as a whole, these agreements are not considered to be significant.
Alison Davis resigned from the Board on 31 March 2020. Baroness Noakes resigned from the Board on 31 July 2020.
Directors’ interests The interests of the directors in the shares of the company at 31 December 2020 are shown on page 144. None of the directors held an interest in the loan capital of the company or in the shares or loan capital of any of the subsidiary undertakings of the company, during the period from 1 January 2020 to 18 February 2021.
Directors’ indemnities In terms of section 236 of the Companies Act, Qualifying Third Party Indemnity Provisions have been issued by the company to its directors, members of the NatWest Group and NWH Executive Committees, individuals authorised by the PRA/FCA, certain directors and/or officers of NatWest Group subsidiaries and all trustees of NatWest Group pension schemes.
Shareholdings The table below shows shareholders that have notified NatWest Group that they hold more than 3% of the total voting rights of the company at 31 December 2020.
As at 18 February 2021, there were no changes to the shareholdings shown in the table above.
During 2020, NatWest Group made no political donations, nor incurred any political expenditure in the UK or EU and it is not proposed that NatWest Group’s longstanding policy of not making contributions to any political party be changed. Shareholders will be asked to renew this authorisation at the Annual General Meeting in 2021.
This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 247 to 257.
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of NatWest Group and to enable them to ensure that the Annual Report and Accounts complies with the Companies Act 2006. They are also responsible for safeguarding the assets of NatWest Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
In addition, NatWest Group’s operational risk profile became heightened due to the need to adapt working methods and practices to large-scale working from home and the requirement to respond to the crisis – and provide customer support – at pace. As a result of its strong balance sheet and prudent approach to risk management, NatWest Group remains well placed to withstand the impacts of the pandemic as well as providing support to customers when they need it most.
Risk management framework Introduction NatWest Group operates an enterprise wide risk management framework, which is centred around the embedding of a strong risk culture. The framework ensures the governance, capabilities and methods are in place to facilitate risk management and decisionmaking across the organisation.
All NatWest Group colleagues share ownership of the way risk is managed, working together to make sure business activities and policies are consistent with risk appetite.
Culture Culture is at the centre of both the risk management framework and risk management practice. NatWest Group’s risk culture target is to make risk part of the way employees work and think.
A focus on leaders as role models and action to build clarity, develop capability and motivate employees to reach the required standards of behaviour are key to achieving the risk culture target. Colleagues are expected to:  Take personal responsibility for understanding and proactively managing the risks associated with individual roles.  Respect risk management and the part it plays in daily work.  Understand the risks associated with individual roles.  Align decision-making to NatWest Group’s risk appetite.  Consider risk in all actions and decisions.  Escalate risks and issues early; taking action to mitigate risks and learning from mistakes and near-misses.  Challenge others’ attitudes, ideas and actions.  Report and communicate risks transparently.
Training A wide range of learning, both technical and behavioural, is offered across the risk disciplines. This training can be mandatory, rolespecific or for personal development and enables colleagues to develop the capabilities and confidence to manage risk effectively.
Our Code NatWest Group’s conduct guidance, Our Code, provides direction on expected behaviour and sets out the standards of conduct that support the values. The code explains the effect of decisions that are taken and describes the principles that must be followed. These principles cover conduct-related issues as well as wider business activities. They focus on desired outcomes, with practical guidelines to align the values with commercial strategy and actions. The embedding of these principles facilitates sound decision-making and a clear focus on good customer outcomes.
If conduct falls short of NatWest Group’s required standards, the accountability review process is used to assess how this should be reflected in pay outcomes for those individuals concerned. The NatWest Group remuneration policy ensures that the remuneration arrangements for all employees reflect the principles and standards prescribed by the PRA rulebook and the FCA handbook. Any employee falling short of the expected standards would also be subject to internal disciplinary policies and procedures. If appropriate, the relevant authority would be notified.
Page Presentation of information 157 Update on COVID-19 157 Risk management framework Introduction 157 Culture 157 Governance 158 Risk appetite 160 Identification and measurement 160 Mitigation 161 Testing and monitoring 161 Stress testing 161 Credit risk Definition, sources of risk and key developments 165 Governance and risk appetite 165 Identification and measurement 165 Mitigation 165 Assessment and monitoring and problem debt management 166 Forbearance 167 Impact of COVID-19 168 Impairment, provisioning and write-offs 169 Significant increase in credit risk and asset lifetimes 171 Economic loss drivers and UK economic uncertainty 173 Measurement uncertainty and ECL sensitivity analysis 178 Banking activities 180 Trading activities 209 Capital, liquidity and funding risk Definitions and sources of risk 213 Capital, liquidity and funding management 214 Key points 216 Minimum requirements 217 Measurement 218 Market risk Non-traded market risk 229 Traded market risk 236 Market risk – linkage to balance sheet 239 Pension risk 240 Compliance & conduct risk 240 Financial crime risk 241 Climate-related risk 242 Operational risk 243 Model risk 244 Reputational risk 245
Notes: (1) The Group Executive Risk Committee is chaired by the Group Chief Executive Officer and supports her (and other accountable executives) in discharging risk management accountabilities. (2) The Group Executive Committee is chaired by the Group Chief Executive Officer and supports her in discharging her individual accountabilities in accordance with the authority delegated to her by the Board. (3) The Group Asset & Liability Management Committee is chaired by the Group Chief Financial Officer and supports her in discharging her individual accountabilities relating to treasury and balance sheet management. (4) In addition, the Group Technical Asset & Liability Management Committee, chaired by the Group Treasurer, provides oversight of capital and balance sheet management in line with approved risk appetite under normal and stress conditions. Reviews and challenges the financial strategy, risk management, balance sheet and remuneration and policy implications of the Group’s pension schemes.
Provides oversight and advice to the Board on current and future risk exposures, risk profile, risk appetite and risk culture. Reviews the design and implementation of the risk management framework and provides input to remuneration decisions.
Reviews, challenges and debates all material risk and control matters across the
Group. Supports the CEO and other accountable executives in approval of the risk management framework, agrees executive approved risk appetite measures and discharges other risk management accountabilities.
Supports the Group CEO in discharging her individual accountabilities including matters relating to strategy, financials, capital, risk and operational issues. Monitors the implementation of culture change. Supports the
Considers material risks and approves, as appropriate, actions recommended by the Group Board Risk Committee. Monitors performance against risk appetite. Reviews and approves the risk appetite framework and qualitative statements of risk appetite for all key risks.
Ensures that NatWest Group and relevant subsidiary disclosures are accurate, complete and fair.
Notes: (1) The Group Chief Executive Officer also performs the NWH Chief Executive Officer role. (2) The Group Chief Risk Officer also performs the NWH Chief Risk Officer role. (3) The NWH Risk function provides risk management services across NWH, including to the NWH Chief Risk Officer and – where agreed – to NWM and RBSI
Chief Risk Officers. These services are managed, as appropriate, through service level agreements. (4) The NWH Risk function is independent of the NWH customer-facing franchises and support functions. Its structure is divided into three parts (Directors of Risk,
Leads the NatWest Group Risk function. Defines and delivers the risk, conduct, compliance and financial crime strategies. Defines overall risk service provision requirements to enable delivery of NatWest Group strategies, including policies, governance, frameworks, oversight and challenge, risk culture and risk reporting. Contributes to the developments of strategy, transformation and culture as a member of the Executive Committee.
Risk management framework continued Three lines of defence NatWest Group uses the industry-standard three lines of defence model to articulate accountabilities and responsibilities for managing risk. It supports the embedding of effective risk management throughout the organisation. All roles below the CEO sit within one of these three lines. The CEO ensures the efficient use of resources and the effective management of risks as stipulated in the risk management framework and is therefore considered to be outside the three lines of defence principles.
First line of defence The first line of defence incorporates most roles in NatWest Group, including those in the customer-facing franchises, Technology and Services as well as support functions such as Human Resources, Legal and Finance.  The first line of defence is empowered to take risks within the constraints of the risk management framework and policies as well as the risk appetite statements and measures set by the Board.
Second line of defence The second line of defence comprises the Risk function and is independent of the first line.  The second line of defence is empowered to design and maintain the risk management framework and its components. It undertakes proactive risk oversight and continuous monitoring activities to confirm that NatWest Group engages in permissible and sustainable risk-taking activities.
 The second line of defence advises on, monitors, challenges, approves, escalates and reports on the risk-taking activities of the first line, ensuring that these are within the constraints of the risk management framework and policies as well as the risk appetite statements and measures set by the Board.
Third line of defence The third line of defence is the Internal Audit function and is independent of the first and second lines.  The third line of defence is responsible for providing independent and objective assurance to the Board, its subsidiary legal entity boards and executive management on the adequacy and effectiveness of key internal controls, governance and the risk management in place to monitor, manage and mitigate the key risks to NatWest Group and its subsidiary companies achieving their objectives.
 The third line of defence executes its duties freely and objectively in accordance with the Institute of Internal Auditors’ Code of Ethics & Standards.
Risk appetite Risk appetite defines the level and types of risk NatWest Group is willing to accept, within risk capacity, in order to achieve strategic objectives and business plans. It links the goals and priorities to risk management in a way that guides and empowers staff to serve customers well and achieve financial targets.
Risk appetite framework The risk appetite framework bolsters effective risk management by promoting sound risk-taking through a structured approach, within agreed boundaries. It also ensures emerging risks and risk-taking activities that might be out of appetite are identified, assessed, escalated and addressed in a timely manner.
Establishing risk appetite In line with NatWest Group’s risk appetite framework, risk appetite is maintained across NatWest Group through risk appetite statements. The risk appetite statements provide clarity on the scale and type of activities that can be undertaken in a manner that is easily conveyed to staff.
The Board sets risk appetite for the most material risks to help ensure NatWest Group is well placed to meet its priorities and long-term targets even in challenging economic environments. It is the basis on which NatWest Group remains safe and sound while implementing its strategic business objectives.
Risk controls and their associated limits are an integral part of the risk appetite approach and a key part of embedding risk appetite in day-today risk management decisions. A clear tolerance for material risk types is set in alignment with business activities.
NatWest Group policies directly support the qualitative aspects of risk appetite. They ensure that appropriate controls are set and monitored.
Identification and measurement Identification and measurement within the risk management process comprise:  Regular assessment of the overall risk profile, incorporating market developments and trends, as well as external and internal factors.  Monitoring of the risks associated with lending and credit exposures.
Risk management framework continued Mitigation Mitigation is an important aspect of ensuring that risk profile remains within risk appetite. Risk mitigation strategies are discussed and agreed within NatWest Group.
When evaluating possible strategies, costs and benefits, residual risks (risks that are retained) and secondary risks (those that are due to risk mitigation actions) are considered. Monitoring and review processes are in place to evaluate results. Early identification, and effective management of changes in legislation and regulation are critical to the successful mitigation of compliance and conduct risk. The effects of all changes are managed to ensure the timely achievement of compliance. Those changes assessed as having a high or mediumhigh impact are managed more closely. Significant and emerging risks that could affect future results and performance are reviewed and monitored. Action is taken to mitigate potential risks as and when required. Further in-depth analysis, including the stress testing of exposures relative to the risk, is also carried out.
The adequacy and effectiveness of selected key controls owned and operated by the second line of defence are also tested (with a particular focus on credit risk controls). Selected controls within the scope of Section 404 of the US Sarbanes-Oxley Act 2002, as well as selected controls supporting risk data aggregation and reporting, are also reviewed.
The Risk Testing & Monitoring Forum and methodology ensures a consistent approach to all aspects of the second-line review activities. The forum also monitors and validates the annual plan and ongoing programme of reviews.
Stress testing includes:  Scenario testing, which examines the impact of a hypothetical future state to define changes in risk factors.  Sensitivity testing, which examines the impact of an incremental change to one or more risk factors.
 Identify specific vulnerabilities and risks.  Define and calibrate scenarios to examine risks and vulnerabilities.
 Aggregate impacts into overall results.  Results form part of the risk management process.
 Scenario results are used to inform business and capital plans.
Risk management framework continued Specific areas that involve capital management include:  Strategic financial and capital planning – by assessing the impact of sensitivities and scenarios on the capital plan and capital ratios.  Risk appetite – by gaining a better understanding of the drivers of, and the underlying risks associated with, risk appetite.  Risk monitoring – by monitoring the risks and horizon scanning events that could potentially affect NatWest Group’s financial strength and capital position.
The examination of capital requirements under adverse economic and market conditions is assessed through stress testing. The results of stress tests are not only used widely across NatWest Group but also by the regulators to set specific capital buffers. NatWest Group takes part in stress tests run by regulatory authorities to test industry-wide vulnerabilities under crystallising global and domestic systemic risks.
The market perceives NatWest Group to be suffering from a severe stress event, which results in an immediate assumption of increased credit risk or concerns over solvency.
A market stress event affecting all participants in a market through contagion, potential counterparty failure and other market risks. NatWest Group is affected under this scenario but no more severely than any other participants with equivalent exposure.
This scenario models the combined impact of an idiosyncratic and market stress occurring at once, severely affecting funding markets and the liquidity of some assets.
Risk management framework continued Stress testing – recovery and resolution planning The NatWest Group recovery plan explains how NatWest Group and its subsidiaries – as a consolidated group – would identify and respond to a financial stress event and restore its financial position so that it remains viable on an ongoing basis.
Fire drill simulations of possible recovery events are used to test the effectiveness of NatWest Group and individual legal entity recovery plans. The fire drills are designed to replicate possible financial stress conditions and allow senior management to rehearse the responses and decisions that may be required in an actual stress. The results and lessons learnt from the fire drills are used to enhance NatWest Group’s approach to recovery planning.
Resolution would be implemented if NatWest Group was assessed by the UK authorities to have failed and the appropriate regulator put it into resolution. The process of resolution is owned and implemented by the Bank of England (as the UK resolution authority). A multi-year programme is in place to further develop resolution capability in line with regulatory requirements.
Non-traded market risk stress results are combined with those for other risks into the capital plan presented to the Board. The cross-risk capital planning process is conducted once a year, with a planning horizon of five years. The scenario narratives cover both regulatory scenarios and macroeconomic scenarios identified by NatWest Group.
Vulnerability-based stress testing begins with the analysis of a portfolio and expresses its key vulnerabilities in terms of plausible, vulnerability scenarios under which the portfolio would suffer material losses. These scenarios can be historical, macroeconomic or forwardlooking /hypothetical. Vulnerability-based stress testing is used for internal management information and is not subject to limits. The results for relevant scenarios are reported to senior management.
NatWest Group conducts historical, macroeconomic and vulnerabilitybased stress testing. Historical stress testing is a measure that is used for internal management. Using the historical simulation framework employed for value-at-risk, the current portfolio is stressed using historical data since 1 January 2005. This methodology simulates the impact of the 99.9 percentile loss that would be incurred by historical risk factor movements over the period, assuming variable holding periods specific to the risk factors and the businesses.
Historical stress tests form part of the market risk limit framework and their results are reported daily to senior management. Macroeconomic stress tests are carried out periodically as part of the bank-wide, cross- risk capital planning process. The scenario narratives are translated into risk factor shocks using historical events and insights by economists, risk managers and the first line.
Vulnerability-based stress testing begins with the analysis of a portfolio and expresses its key vulnerabilities in terms of plausible, vulnerability scenarios under which the portfolio would suffer material losses. These scenarios can be historical, macroeconomic or forward- looking/hypothetical. Vulnerability-based stress testing is used for internal management information and is not subject to limits. The results for relevant scenarios are reported to senior management.
Regulatory stress testing NatWest Group has participated in the regulatory stress tests conducted annually by the Bank of England and biennially by the European Banking Authority (EBA). The results of these regulatory stress tests are carefully assessed and form part of the wider risk management of NatWest Group. However, in 2020 due to the impacts of COVID-19, the Bank of England and the EBA suspended their stress tests. Following the UK’s exit from the European Union on 31 December 2020, only relevant European subsidiaries of NatWest Group will take part in the EBA tests going forward. NatWest Group itself will not participate.
Credit risk Definition Credit risk is the risk that customers and counterparties fail to meet their contractual obligation to settle outstanding amounts.
 The severity of the disruption impacted both Personal and Wholesale customers.
 The overall expected credit loss (ECL) charge increased materially as a result during 2020, largely during the second quarter of the year. The ECL charge was driven by Stage 2 where, due to the forward-looking nature of the IFRS 9 ECL model, there was a large migration of exposure into this category. Stage 3 ECL charges remained supressed as a result of government support schemes mitigating against defaults at this stage.
 NatWest Group participated in government backed support mechanisms, including granting payment holidays (also referred to as payment deferrals), originating loans and offering concessions where appropriate. As the various support schemes conclude, NatWest Group anticipates further credit deterioration in portfolios.
 Further details on the impact of COVID-19 on credit risk in NatWest Group are disclosed in the impact of COVID-19 section.
Governance The Credit Risk function provides oversight of frontline credit risk management activities.
 Approving and monitoring credit limits.  Oversight of the first line of defence to ensure that credit risk remains within the appetite set by the Board and that controls are being operated adequately and effectively.
 Assessing the adequacy of ECL provisions including approving any necessary in-model and post model adjustments through NatWest Group and business unit provisions and model committees.
Risk appetite Credit risk appetite aligns to the strategic risk appetite set by the Board and is set and monitored through risk appetite frameworks tailored to NatWest Group’s Personal and Wholesale segments.
Personal The Personal credit risk appetite framework sets limits that measure and control the quality and concentration of both existing and new business for each relevant business segment. The actual performance of each portfolio is tracked relative to these limits and management action is taken where necessary. The limits apply to a range of credit risk-related measures including expected loss at both portfolio and product level, projected credit default rates across products and the loan-to-value (LTV) ratio of the mortgage portfolios.
Four formal frameworks are used, classifying, measuring and monitoring credit risk exposure across single name, sector and country concentrations and product and asset classes with heightened risk characteristics.
Credit policy standards are in place for both the Wholesale and Personal portfolios. They are expressed as a set of mandatory controls.
Asset quality All credit grades map to an asset quality (AQ) scale, used for financial reporting. Performing loans are defined as AQ1-AQ9 (where the probability of default (PD) is less than 100%) and defaulted nonperforming loans as AQ10 or Stage 3 under IFRS 9 (where the PD is 100%). Loans are defined as defaulted when the payment status becomes 90 days past due, or earlier if there is clear evidence that the borrower is unlikely to repay, for example bankruptcy or insolvency.
The valuation methodologies for collateral in the form of residential mortgage property and CRE are detailed below.
Assessment and monitoring Practices for credit stewardship – including credit assessment, approval and monitoring as well as the identification and management of problem debts – differ between the Personal and Wholesale portfolios.
For all other transactions, credit is only granted to customers following joint approval by an approver from the business and the credit risk function or by two credit officers. The joint business and credit approvers act within a delegated approval authority under the Wholesale Credit Authorities Framework Policy. The level of delegated authority held by approvers is dependent on their experience and expertise with only a small number of senior executives holding the highest approval authority. Both business and credit approvers are accountable for the quality of each decision taken, although the credit risk approver holds ultimate sanctioning authority.
Transactional acceptance standards provide detailed transactional lending and risk acceptance metrics and structuring guidance. As such, these standards provide a mechanism to manage risk appetite at the customer/transaction level and are supplementary to the established credit risk appetite.
Personal customers experiencing financial difficulty are managed by the Collections team. If the Collections team is unable to provide appropriate support after discussing suitable options with the customer, management of that customer moves to the Recoveries team. If at any point in the collections and recoveries process, the customer is identified as being potentially vulnerable, the customer will be separated from the regular process and supported by a specialist team to ensure the customer receives appropriate support for their circumstances.
In the Republic of Ireland, the relationship may pass to a specialist support team prior to any transfer to recoveries, depending on the outcome of customer financial assessment.
Credit risk continued Recoveries The Recoveries team will issue a notice of intention to default to the customer and, if appropriate, a formal demand, while also registering the account with credit reference agencies where appropriate. Following this, the customer’s debt may then be placed with a thirdparty debt collection agency, or alternatively a solicitor, in order to agree an affordable repayment plan with the customer. An option that may also be considered, is the sale of unsecured debt. Exposures subject to formal debt recovery are defaulted and categorised as Stage 3 impaired.
Risk of Credit Loss framework The framework focuses on Wholesale customers whose credit profiles have deteriorated materially since origination. Expert judgement is applied by experienced credit risk officers to classify cases into categories that reflect progressively deteriorating credit risk to NatWest Group. There are two classifications which apply to non-defaulted customers within the framework – Heightened Monitoring and Risk of Credit Loss. For the purposes of provisioning, all exposures subject to the framework are categorised as Stage 2 and subject to a lifetime loss assessment. The framework also applies to those customers that have met NatWest Group’s default criteria (AQ10 exposures). Defaulted exposures are categorised as Stage 3 impaired for provisioning purposes.
Specialists in Restructuring work with customers experiencing financial difficulties and showing signs of financial stress. Throughout Restructuring’s involvement, the mainstream relationship manager will remain an integral part of the customer relationship, unless a repayment strategy is deemed appropriate. The objective is to find a mutually acceptable solution, including restructuring of existing facilities, repayment or refinancing.
Forbearance Forbearance takes place when a concession is made on the contractual terms of a loan/debt in response to a customer’s financial difficulties.
A credit exposure may be forborne more than once, generally where a temporary concession has been granted and circumstances warrant another temporary or permanent revision of the loan’s terms.
Impact of COVID-19 COVID-19 has necessitated various changes to the “business as usual” credit risk management approaches set out above. Specific adjustments made to credit risk management as a result of COVID-19 are set out below.
Identification and measurement Credit stewardship Wholesale Natwest Group’s credit stewardship included carrying out regular portfolio or customer reviews and problem debt identification and management.
In line with existing credit policy parameters, relationship managers were able to defer annual reviews for a maximum of three months. These deferrals were used during 2020 to provide capacity to focus on supporting government lending scheme requests. Customer review meetings took place virtually unless a specific customer request was made, prior approval obtained and a risk assessment carried out.
Mitigation Personal During the COVID-19 lockdown from April to June in the UK, valuers were prohibited from conducting physical property inspections. As a result, mortgage application processing was suspended where a physical valuation was required. Applications eligible for remote valuations (known as desktops) and automated valuations (AVM) were able to continue and NatWest Group increased its valuation capacity to provide an additional quality assurance benchmark for ongoing assessment of desktop and AVM standards. Following the April to June lockdown, the application backlog was cleared once valuers were able to safely return to physical property inspections.
Customers requesting a COVID-19 related payment holiday were not subject to a credit assessment for those requests.
Portfolio performance monitoring was expanded to include insight on customers accessing payment holiday support and their performance at the end of the payment holiday period.
 A request for support using one of the government-backed COVID-19 support schemes was not, in itself, a reason for a customer’s credit grade to be amended.
 Large or complex customers were graded using financial forecasts, incorporating both the effect of COVID-19 and the estimated length of time to return to within credit appetite metrics.
 All other customers who were not subject to any wider significant increase in credit risk (SICR) triggers and who were assessed as having the ability in the medium-term post-COVID-19 to be viable and meet credit appetite metrics were graded using audited accounts.
 Tailored guidance applies to financial institutions and, where appropriate, specialist credit grading models such as CRE.
Credit risk continued Within the Wholesale portfolio, additional monitoring was implemented to identify and monitor specific sectors which had been particularly adversely affected by COVID-19 and the use of government support schemes (refer to Wholesale support schemes for further details).
Problem debt management Personal In accordance with regulatory guidance, Personal customers were able to obtain a payment holiday of up to three months, twice, if requested. Such payment holidays would not necessarily have been considered forbearance (refer to Forbearance below).
Forbearance Personal In the absence of any other forbearance or SICR triggers, customers granted COVID-19 related payment holidays were not considered forborne and were not subject to Collections team engagement. However, a subset of customers who had accessed payment holiday support, and where their risk profile was identified as relatively high risk, were collectively migrated to Stage 2. Any support provided beyond the completion of a second payment holiday is considered forbearance, provided the customer’s circumstances met the definitions for forbearance as described above.
Credit grading models Credit grading models is the collective term used to describe all models, frameworks and methodologies used to calculate PD, exposure at default (EAD), LGD, maturity and the production of credit grades.
Impairment, provisioning and write-offs In the overall assessment of credit risk, impairment provisioning and write-offs are used as key indicators of credit quality.
NatWest Group’s IFRS 9 provisioning models, which used existing Basel models as a starting point, incorporate term structures and forward-looking information. Regulatory conservatism within the Basel models has been removed as appropriate to comply with the IFRS 9 requirement for unbiased ECL estimates.
 Model application: o The assessment of the SICR and the formation of a framework capable of consistent application. o The determination of asset lifetimes that reflect behavioural characteristics while also representing management actions and processes (using historical data and experience).
o The choice of forward-looking economic scenarios and their respective probability weights.
 Point-in-time – IFRS 9 parameters reflect actual economic conditions at the reporting date instead of long-run average or downturn conditions.
 Forward-looking – IFRS 9 PD estimates and, where appropriate, EAD and LGD estimates reflect forward-looking economic conditions.
 Tenor – IFRS 9 PD, LGD and EAD are provided as multi-period term structures up to exposure lifetimes instead of a fixed one-year horizon.
IFRS 9 requires that at each reporting date, an entity shall assess whether the credit risk on an account has increased significantly since initial recognition. Part of this assessment requires a comparison to be made between the current lifetime PD (i.e. the PD over the remaining lifetime at the reporting date) with the equivalent lifetime PD as determined at the date of initial recognition.
PD estimates Personal models Personal PD models use the Exogenous, Maturity and Vintage (EMV) approach to model default rates. The EMV approach separates portfolio default risk trends into three components: vintage effects (quality of new business over time), maturity effects (changes in risk relating to time on book) and exogenous effects (changes in risk relating to changes in macro-economic conditions). The EMV methodology has been widely adopted across the industry because it enables forward-looking economic information to be systematically incorporated into PD estimates. However, the unprecedented nature of COVID-19 required certain modelling interventions that are detailed in the UK economic uncertainty section.
Credit risk continued Wholesale models Wholesale PD models use a point-in-time/through-the-cycle framework to convert one-year regulatory PDs into point-in-time estimates that accurately reflect economic conditions observed at the reporting date. The framework utilises credit cycle indices (CCIs) across a comprehensive set of region/industry segments. Further detail on CCIs is provided in the Economic loss drivers section.
LGD estimates The general approach for the IFRS 9 LGD models is to leverage corresponding Basel LGD models with bespoke adjustments to ensure estimates are unbiased and where relevant, forward-looking.
EAD estimates Personal The IFRS 9 Personal modelling approach for EAD is dependent on product type.  Revolving products use the existing Basel models as a basis, with appropriate adjustments incorporating a term structure based on time to default.
Analysis has indicated that there is minimal impact on EAD arising from changes in the economy for all Personal portfolios except mortgages. Therefore, forward-looking information is only incorporated in the mortgage EAD model (through forecast changes in interest rates).
Wholesale For Wholesale, EAD values are projected using product specific credit conversion factors (CCFs), closely following the product segmentation and approach of the respective Basel model. However, the CCFs are estimated over multi-year time horizons to produce unbiased model estimates.
 Economic uncertainty – ECL adjustments primarily arising from uncertainties associated with multiple economic scenarios (also for 2019) and credit outcomes as a result of the effect of COVID-19 and the consequences of government interventions. In both cases, management judged that additional ECL was required until further credit performance data became available on the behavioural and loss consequences of COVID-19.
uplift pending systematic updates to model parameters, although the adjustment value was included in the reported ECL. For 2020, the value of PD calibration releases that were deemed not supportable and retained on the balance sheet is disclosed. Therefore, to be consistent in approach, the PMA value for 2019 has been reported as nil. For LGD, where model monitoring outcomes were less clear, and emerged over an extended period, monitoring focused on assessing the adequacy of loss estimates, and was duly assured and governed at the year end.
The PMA for economic uncertainty included an ECL uplift of £63 million (of which £39 million was in mortgages) on a subset of customers who had accessed payment holiday support where their risk profile was identified as relatively high risk. In addition, there was a holdback of a modelled ECL release of £69 million, again due to the delayed default emergence reflective of the various customer support mechanisms (£15 million related to mortgages and £54 million related to unsecured lending). The overlay as at 31 December 2019 was reflective of the uncertainty associated with Brexit, subsequently systematically incorporated within the multiple economic scenarios. The 2020 overlay also included an ECL uplift on buy-to-let mortgages of £15 million (2019 – £8 million) to mitigate the risk of a disproportionate credit deterioration in challenging economic circumstances.
Other judgmental overlays included £13 million (2019 – £15 million) in respect of the repayment risk not captured in the models, that a proportion of customers on interest-only mortgages would not be able to repay the capital element of their loan at the end of term, as well as a £7 million overlay for an identified weakness in the mortgage PD model pending remediation.
Ulster Bank RoI – The PMA for economic uncertainty included an adjustment of £103 million in the mortgage portfolio reflecting concerns that expected losses arising from defaults in the year ahead would be significantly higher than modelled. Like Commercial Banking (further detail below), there was an overlay of £30 million in the Wholesale portfolio relative to concerns about debt recovery values and the risk of idiosyncratic credit outcomes. It also included adjustments of £10 million in respect of high risk payment break mortgage customers and £31 million in the SME portfolio reflective of the elevated risk for this sector. These two overlays were also associated with a collective migration of exposures to Stage 2. Refer to the Stage 2 decomposition analysis for further details.
Commercial Banking – The PMA for economic uncertainty included an overlay of £409 million (£450 million across NatWest Group’s Wholesale portfolio) based on a judgemental thesis, reflecting concern that the unprecedented nature of COVID-19 could result in longer debt recovery periods and lower values than history suggested, and also the risk of idiosyncratic credit outcomes. It also included an overlay of £52 million in respect of elevated concerns around borrowers’ ability to refinance facilities at the end of the contractual term. Additionally, it included overlays to address the effects of customer support mechanisms. Similar to Retail Banking, the overlay as at 31 December 2019 was reflective of the uncertainty associated with Brexit, subsequently systematically incorporated within the multiple economic scenarios.
There was also a PMA for deferred model calibrations on the business banking portfolio reflecting management’s judgement that the beneficial modelling impact, and implied ECL decrease, was not supportable again whilst portfolio performance was being underpinned by the various support mechanisms. Other adjustments included an overlay of £19 million to mitigate the effect of operational timing delays in the identification and flagging of a SICR.
Other – The PMAs in the other businesses were for similar reasons as those described above.
The framework comprises the following elements:  IFRS 9 lifetime PD assessment (the primary driver) – on modelled portfolios, the assessment is based on the relative deterioration in forward-looking lifetime PD and is assessed monthly. To assess whether credit deterioration has occurred, the residual lifetime PD at balance sheet date (which PD is established at date of initial recognition (DOIR)) is compared to the current PD. If the current lifetime PD exceeds the residual origination PD by more than a threshold amount, deterioration is assumed to have occurred and the exposure transferred to Stage 2 for a lifetime loss assessment. For Wholesale, a doubling of PD would indicate a SICR subject to a minimum PD uplift of 0.1%. For Personal portfolios, the criteria vary by risk band, with lower risk exposures needing to deteriorate more than higher risk exposures, as outlined in the following table:  Qualitative high-risk backstops – the PD assessment is complemented with the use of qualitative high-risk backstops to further inform whether significant deterioration in lifetime risk of default has occurred. The qualitative high-risk backstop assessment includes the use of the mandatory 30+ days past due backstop, as prescribed by IFRS 9 guidance, and other features such as forbearance support, Wholesale exposures managed within the Risk of Credit Loss framework, and adverse credit bureau results for Personal customers. Where a Personal customer was granted a payment holiday (also referred to as a payment deferral) in response to COVID-19, they were not automatically transferred into Stage 2. However, a subset of Personal customers who had accessed payment holiday support, and where their risk profile was identified as relatively high risk, were collectively migrated to Stage 2 (if not in Stage 2 already). Any support provided beyond completion of the second payment holiday was considered forbearance. Wholesale customers accessing the various COVID-19 support mechanisms were assessed as detailed in the Impact of COVID-19 section.
Credit risk continued Provisioning for forbearance Personal The methodology used for provisioning in respect of Personal forborne loans will differ depending on whether the loans are performing or nonperforming and which business is managing them due to local market conditions.
The loan would continue to be reported as forborne until it meets the exit criteria set out by the European Banking Authority.
Additionally, for some forbearance types, a loan may be transferred to the performing book if a customer makes payments that reduce loan arrears below 90 days (Retail Banking collections function).
In the absence of any other forbearance or SICR triggers, customers granted COVID-19 related payment holidays were not considered forborne. However, any support provided beyond completion of a second payment holiday is considered forbearance.
Wholesale Provisions for forborne loans are assessed in accordance with normal provisioning policies. The customer’s financial position and prospects – as well as the likely effect of the forbearance, including any concessions granted, and revised PD or LGD gradings – are considered in order to establish whether an impairment provision increase is required.
Customers seeking COVID-19 related support, including payment holidays, who were not subject to any wider SICR triggers and who were assessed as having the ability in the medium term post-COVID19 to be viable and meet credit appetite metrics, were not considered to have been granted forbearance. Refer to the Impact of COVID-19 section for further details.
o Revolving facilities – for Personal portfolios (except credit cards), asset duration is based on behavioural life and this is normally greater than contractual life (which would typically be overnight). For Wholesale portfolios, asset duration is based on annual counterparty review schedules and will be set to the next review date.
In the case of credit cards, the most significant judgement is to reflect the operational practice of card reissuance and the associated credit assessment as enabling a formal re-origination trigger. As a consequence, a capped lifetime approach of up to 36 months is used on credit card balances. If the approach was uncapped the ECL impact is estimated at approximately £110 million (2019 – £90 million). However, credit card balances originated under the 0% balance transfer product, and representing approximately 12% of drawn cards balances, have their ECL calculated on a behavioural life-time approach as opposed to being capped at a maximum of three years.
The most material economic loss drivers for the Personal portfolio include unemployment rates, house price indices and the Bank of England and the European Central Bank base rates. For the Wholesale portfolio, in addition to interest and unemployment rates, national GDP, stock price indices and world GDP are primary loss drivers.
Economic scenarios As at 31 December 2020, the range of anticipated future economic conditions was defined by a set of four internally developed scenarios and their respective probabilities. They comprised upside, base case, downside and extreme downside scenarios. The scenarios primarily reflect a range of outcomes for the path of COVID-19 and associated effects on labour and asset markets. The scenarios were consistent with the UK-EU Trade and Cooperation Agreement and are summarised as follows: Upside – This scenario assumes a very strong recovery through 2021, facilitated by a very rapid rollout of the vaccine. Economic output regains its pre-COVID-19 peak by the end of the year. The rebound in consumer spending from an easing in lockdown restrictions is rapid, enabling a more successful reabsorption of furloughed labour compared to the base case. That limits the rise in unemployment. Consequently, the effect on asset prices is more limited compared to the base case.
Downside – This scenario assumes the rollout of the COVID-19 vaccine is slower compared to base case, leading to a more sluggish recovery. Business confidence is slower to return while households remain more cautious. This scenario assumes that the labour market and asset market damage is greater than in the base case. Unemployment peaks at 9.4%, surpassing the financial crisis peak and causing more scarring.
In contrast, as at 31 December 2019, NatWest Group used five discrete scenarios to characterise the distribution of risks in the economic outlook. For 2020, 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, asset price falls and the degree of permanent damage to the economy, around which there are pronounced levels of uncertainty at this stage.
Extreme Upside Base case Downside downside Upside 2 Upside 1 Base case Downside 1 Downside 2
House Price Inflation - total change 21.0 13.3 6.8 (7.0) 29.3 25.7 15.5 10.8 4.2 European Central Bank base rate - average 0.1 — — — 1.5 0.8 — — —
House Price Inflation - four quarter growth Extreme Extreme Upside Base case Downside downside Upside Base case Downside downside
Credit risk continued Worst points The worst points refer to the worst four-quarter rate of change for GDP, House Price Inflation and commercial real estate price and the worst quarterly figures for unemployment between 2020 and 2025.
House Price Inflation — (3.6) (11.2) (32.0) Commercial real estate price (3.4) (10.1) (28.9) (40.4)
Credit risk continued Economic loss drivers 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 impact of COVID-19 and the range of recovery paths necessitates a change of approach to assigning probability weights from that used in recent updates. Previously GDP paths for NatWest Group’s scenarios were compared against a set of 1,000 model runs, following which a percentile in the distribution was established that most closely corresponded to the scenario. This approach does not produce meaningful outcomes in the current circumstances because GDP is highly volatile and highly uncertain.
Use of the scenarios in Personal lending Personal lending follows a discrete scenario approach which means that for each account, PD and LGD values are calculated as probability weighted averages across the individual, discrete economic scenarios. The PD values for each discrete scenario are in turn calculated using product specific econometric models that aggregate forecasts of the relevant economic loss drivers into forecasts of the exogenous component of the respective PD models (refer to IFRS 9 ECL model design principles).
Business banking, while part of the Wholesale segment, for reporting purposes, utilises the Personal lending rather than the Wholesale lending methodology.
As some of the government support mechanisms conclude, NatWest Group anticipates further credit deterioration in the portfolios. 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. A key factor would be a more adverse deterioration in GDP and unemployment in the economies in which NatWest Group operates, but also, among others:  The timing and nature of governmental exit plans from lockdown, notably in the UK and the Republic of Ireland, and any future repeated lockdown requirements.
 The progress of COVID-19, with potential for changes in worker/consumer behaviour and sickness levels.
 The efficacy of the various government support initiatives in terms of their ability to defray customer defaults is yet to be proven, notably over an extended period.
 Higher unemployment if companies fail to restart jobs after periods of staff furlough.
Credit risk continued Model monitoring and enhancement The abrupt and prolonged interruption of a wide range of economic activities due to COVID-19 and the subsequent government interventions to support businesses and individuals, has resulted in patterns in the data of key economic loss drivers and loss outcomes, that are markedly different from those that NatWest Group’s models have been built on. To account for these structural changes, model adjustments have been applied and model changes have been implemented.
Government support Most notably as a result of various government support measures, the increase in model-predicted defaults caused by the sharp contraction in GDP and consumer spending in Q2 2020 has to date not materialised.
In Wholesale lending, most importantly business and commercial banking, model-projected default rates have also been scaled down based on the expectation that credit extended under various government support loan schemes will allow many businesses, not only to delay, but to sustainably mitigate their default risk profile.
Industry sector detail – Wholesale only The economic impact of COVID-19 is highly differentiated by industry sector, with hospitality and other contact-based leisure, service, travel and passenger transport activities significantly more affected than the overall economy. On the other hand, the corporate and commercial econometric forecasting models used in Wholesale are sector agnostic. Sector performance was therefore monitored throughout the year and additional adjustments were applied when PDs were deemed inconsistent with expected loss outcomes at sector level. No such interventions were necessary at the year end.
Scenario sensitivity – Personal only For the Personal lending portfolio, the forward-looking components of the IFRS 9 PD models were modified, leveraging existing econometric models used in stress testing to ensure that PDs appropriately reflect the forecasts for unemployment and house prices in particular.
Notes: (1) The UK government has extended these support schemes to 31 March 2021 and NatWest Group continues to lend under the schemes to customers who meet the applicable lending criteria.
Credit risk continued Measurement uncertainty and ECL sensitivity analysis The recognition and measurement of ECL is complex and involves the use of significant judgement and estimation, particularly in times of economic volatility and uncertainty. This includes the formulation and incorporation of multiple forward-looking economic conditions 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 as at 31 December 2020. Scenario impacts on 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 upside, downside and extreme downside scenarios has been simulated. These scenarios are three of the four discrete scenarios 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 thus 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 overlays 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 economic uncertainty, were 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.
The simulated ECL impacts in the December 2020 sensitivity analysis were significantly higher than in the sensitivity analysis carried out at December 2019 (refer to the NatWest Group plc (formerly The Royal Bank of Scotland Group plc) 2019 Annual Report and Accounts for further details). The relative ECL movements across the scenarios were reflective of a higher actual reported ECL, including certain treatments to capture the idiosyncratic risk of COVID-19, with the economics in the extreme downside scenario significantly more adverse than in the 2019 downside 2 scenario.
Extreme 2020 Actual Upside Downside downside Stage 1 modelled exposure (£m)
Ulster Bank RoI Personal & Business Banking 1,738 1,544 1,832 3,272
Ulster Bank RoI Personal & Business Banking 95 83 107 152
Ulster Bank RoI Personal & Business Banking 5.47% 5.38% 5.84% 4.65%
Ulster Bank RoI Personal & Business Banking 12,862 12,862 12,862 12,862
Ulster Bank RoI Personal & Business Banking 122 108 136 181
Reconciliation to Stage 1 and Stage 2 ECL (£m) ECL on modelled exposures 3,531 2,687 3,777 5,725 ECL on non-modelled exposures 68 68 68 68
Total Stage 1 and Stage 2 ECL 3,599 2,755 3,845 5,793 Variance – (lower)/higher to actual total Stage 1 and Stage 2 ECL (844) 246 2,194
(4) Refer to the Economic loss drivers section for details of economic scenarios. (5) 2019 comparatives are not included as the sensitivity scenario analysis relates to the 31 December 2020 balance sheet position. Refer to the NatWest Group plc (formerly The Royal Bank of Scotland Group plc) 2019 Annual Report and Accounts for the sensitivity analysis carried out at that time.
 During 2020, ECL increased materially as a result of COVID-19 disruption and a negative economic outlook. Downside risk persisted and was reflected in the scenario weightings with heavier weighting to the downside than to the upside. Judgemental ECL post model adjustments reflected heightened uncertainty and expectation of increased defaults in 2021 and beyond. To a certain extent, these adjustments dampen the ECL uplift in the downside scenario, particularly in Wholesale which had already observed a larger proportionate increase in actual reported ECL and coverage.
 If the economics were as negative as observed in the extreme downside, overall Stage 1 and Stage 2 ECL was simulated to increase by over 60%. The non-linearity was more apparent in the Personal portfolio driven by mortgages, with the ECL mitigation impact of Wholesale portfolio securitisations observed in downside scenarios, where ECL did not increase to the same extent.
 The simulated value of exposures in Stage 2 increased significantly in the extreme downside and was the key driver of the simulated ECL increase. The movement in Stage 2 balances in the other simulations was less marked, with the exception of Wholesale, where a significant reduction was observed in the upside scenario reflecting the sensitivity of SICR criteria to relatively small movements in PD.
 Fair value adjustments on loans hedged by interest rate swaps, where the underlying loan was within the IFRS 9 ECL scope – £1.4 billion (2019 – £1.1 billion).
Credit risk – Banking activities continued Portfolio summary – segment analysis
ECL loss rate - annualised (basis points) (3) 25 (15) 38 (4) 1 (53) 1 20 *2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for further details.
(4) Includes a £12 million charge (2019 – £2 million) related to other financial assets, of which £2 million (2019 – £1 million release) related to assets classified as
 The various customer support mechanisms continued to mitigate against flows to default during the year. Hence, there was a more limited impact on Stage 3 ECL requirements which reduced slightly year-on-year reflecting the lower Stage 3 stock of exposures, driven by the sale of legacy non-performing mortgages in Ulster Bank RoI.
 Reflecting the continued high level of uncertainty arising from COVID-19, management judged that certain ECL post model adjustments were necessary. Refer to the Governance and post model adjustments section for further detail.
 Reflective of the economic environment, the annualised loss rate was elevated and significantly above the previously advised view of NatWest Group’s normalised blended long-term loss rate of 30 to 40 basis points.
 Business level commentary is provided in the Segmental loans and impairment metrics section.
Not past Not past Stage 1 due 1-30 DPD >30 DPD Total Stage 3 Total Stage 1 due 1-30 DPD >30 DPD Total Stage 3 Total 2020 £m £m £m £m £m £m £m £m £m £m £m £m £m £m
Not past Total Amounts Stage 1 due 1-30 DPD >30 DPD Total Stage 3 Total charge Loss rate written-off
Notes: (1) 30 DPD – 30 days past due, the mandatory 30 days past due backstop as prescribed by the IFRS 9 guidance 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.
Credit risk – Banking activities continued  Ulster Bank RoI – Balances remained broadly flat year-on-year.
Credit risk – Banking activities continued Portfolio summary – sector analysis 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.
Credit risk – Banking activities continued Portfolio summary – sector analysis
Mortgages (1) cards personal Total Property Corporate FI Sovereign Total 2019* £m £m £m £m £m £m £m £m £m £m
Off-balance sheet by asset quality (2) 14,348 16,686 12,332 43,366 15,383 51,390 16,742 1,022 84,537 127,903
AQ1 0% - 0.034% AAA to AA AQ2 0.034% - 0.048% AA to AA-
AQ4 0.095% - 0.381% BBB+ to BBBAQ5 0.381% - 1.076% BB+ to BB AQ6 1.076% - 2.153% BB- to B+
(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.
Loans - amortised cost Off-balance sheet and FVOCI Loan Contingent ECL provisions
Stage 1 Stage 2 Stage 3 Total commitments (1) liabilities Stage 1 Stage 2 Stage 3 Total 2020 £m £m £m £m £m £m £m £m £m £m
 Loans by stage – In both the Personal and Wholesale portfolios, the deteriorated economic outlook resulted in increased account level IFRS 9 PDs. Consequently, compared to 2019, a larger proportion of accounts exhibited a SICR with an associated migration of exposures from Stage 1 to Stage 2, the vast majority of which were up-to-date with payments. In the absence of any other forbearance or SICR triggers, customers granted COVID-19 related payment holidays were not considered forborne and did not result in an automatic trigger to Stage 2. However, a subset of personal customers who had accessed payment holiday support, and where their risk profile was identified as relatively high risk, were collectively migrated to Stage 2.
 ECL provision by geography – In line with loans by geography, the vast majority of ECL related to exposures in the UK and the Republic of Ireland.
 ECL provisions by stage – Stage 1 and Stage 2 provisions increased reflecting the deteriorated economic outlook. As outlined above, Stage 3 provisions have yet to be materially impacted by COVID-19, being mitigated by the various customer support mechanisms detailed earlier. In mortgages, the Stage 3 ECL reduction was primarily a result of a debt sale in Ulster Bank RoI, where the exposure value also reduced.
 ECL provisions coverage – Overall provisions coverage increased. In Stage 2 alone, at a total Personal level, coverage reduced, due to a proportionately higher share of mortgage exposures where coverage levels were lower reflecting the secured nature of the borrowing. In Wholesale, overall provisions coverage increased, primarily due to the effect of the deteriorated economic conditions. Stage 1 and Stage 2 coverage increased, particularly in those sectors suffering the most disruption as a result of COVID-19. The decrease in Stage 3 coverage was due to a small number of individual cases with low ECL.
 The ECL charge and loss rate – Reflecting the deteriorated economic outlook, the impairment charge was elevated, with the loss rate significantly higher than the prior year.
 Loans by residual maturity – In mortgages, the vast majority of exposures remained greater than five years. In unsecured lending – credit cards and other – exposures were concentrated in less than five years. In Wholesale, with the exception of financial institutions where new lending was concentrated in less than 1 year, the majority of new lending was for residual maturity of onefive years, with some greater than five years in line with lending under the government support schemes.
 Off-balance sheet exposures by asset quality – In Personal, undrawn exposures were reflective of available credit lines in credit cards and current accounts and reduced reflecting an initiative to right-size customer unutilised borrowing limits. Additionally, the mortgage portfolio had undrawn exposure, where a formal offer had been made to a customer but had not yet been drawn down. 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 distribution in mortgages remained heavily weighted to the highest quality bands AQ1-AQ4, with credit card concentrated in the risk bands AQ5-AQ8. In Wholesale, undrawn exposures increased reflecting the effect of COVID-19 and the utilisation of the various government support schemes. The vast majority of new corporate loan commitments were in the AQ5-AQ8 asset quality bands.
 Wholesale forbearance – The value of Wholesale forbearance increased significantly during the year. Customers seeking COVID19 related support, including payment holidays, who were not subject to any wider SICR triggers and who were assessed as having the ability in the medium term post-COVID-19 to be viable and meet credit appetite metrics, were not considered to have been granted forbearance. The leisure, CRE and automotive sectors represented the largest share of forbearance flow in the Wholesale portfolio by value, with the increase in automotive resulting from forbearance completed on individually significant exposures. In addition, within the retail sector, there was a high volume of lower value forbearance. Payment holidays and covenant waivers were the most common forms of forbearance granted.
Financial assets Cash and balances at central banks 79.2 — 79.2 — — — — — — 79.2 —
Contingent liabilities and commitments *2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for further details.
(4) Stage 3 mortgage exposures have relatively limited uncovered exposure reflecting the security held. On unsecured credit cards and other personal borrowing, the residual uncovered amount reflects historical experience of continued cash recovery post default through on going engagement with customers.
(6) £0.3 billion (2019 – £0.3 billion) Personal Stage 3 balances primarily relate to loan commitments, the draw down of which is effectively prohibited. (7) The Personal gross exposure value includes £10.0 billion (2019 – £9.6 billion) in respect of pipeline mortgages where a committed offer has been made to a customer but where the funds have not yet been drawn down. When drawn down, the exposure would be covered by a security over the borrower’s property.
Notes: (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) Retail Banking excludes additional lending to existing customers.
 Unsecured balances declined, with the decrease primarily a result of reductions in overdrafts and credit card utilisation in Retail Banking, following the COVID-19 lockdown. NatWest Group also responded to COVID-19 with a more cautious approach to new lending, to protect NatWest Group and customers from potentially unaffordable borrowing.
Retail Banking and Ulster Bank RoI having only limited exposures in the highest LTV bands. The relatively high coverage level in the lowest LTV band for Retail Banking included the effect of timediscounting on expected recoveries. Additionally, this also reflected the modelling approach that recognised an element of expected loss on mortgages that were not subject to formal repossession activity.
Note: (1) 2020 regional data was based on the Office for National Statistics mapping (previously Halifax), therefore 2019 data has been represented on the same basis.
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. All disclosures in the CRE section are based on current exposure (gross of provisions and risk transfer). Current exposure is defined as: loans; the amount drawn under a credit facility plus accrued interest; contingent obligations; the issued amount of the guarantee or letter of credit; derivatives – the markto -market value, netted where netting agreements exist and net of legally enforceable collateral.
Key points  Overall – The majority of the CRE portfolio was located and managed in the UK. Business appetite and strategy remained aligned across the segments.
 The retail and leisure sectors were heavily affected by the lockdown, resulting in low rental payments, and these sectors remained under stress. The office sector was more resilient overall, albeit the smaller serviced-office sub-sector came under some stress given the short-term nature of income and site closures. Demand for office space in the medium-term was expected to decline, with flexible working trends continuing post COVID-19. Market sentiment remained negative for most retail assets, but there were tentative signs of improvement for retail warehousing (accounting for approximately 15% of the retail sub-sector) where investment in industrial assets was demonstrating increased demand. The residential development sector continued to attract institutional capital and was generally performing well.
 Stage transfers (for example, exposures moving from Stage 1 to Stage 2) are a key feature of the ECL movements, with the net remeasurement 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.
 There were small ECL flows from Stage 3 to Stage 1. This does not, however, indicate that accounts returned from Stage 3 to Stage 1 directly. On a similar basis, there were flows from Stage 1 to Stage 3 including transfers due to unexpected default events. The small number of write-offs in Stage 1 and Stage 2 reflect the effect of portfolio debt sales and also staging at the start of the analysis period.
 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.
Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL NatWest Group total £m £m £m £m £m £m £m £m
 In Stage 3, reflecting the various customer support mechanisms available, ECL was less affected than in Stage 2. 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.
 In Stage 3, reflecting the various customer support mechanisms available, new flows to default were suppressed and consequently the ECL requirement reduced.
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
Net re-measurement of ECL on stage transfer (64) 343 108 387 Changes in risk parameters (model inputs) 47 26 67 140 Other changes in net exposure 584 15 (1,063) (69) (57) (13) (536) (67) Other (P&L only items) — (2) (26) (28) Income statement (releases)/charges (2) 298 136 432
Key points  The increase in ECL in Stage 2 was primarily due to the deterioration in the economic outlook, causing PDs to increase.  The updated economics also resulted in a net migration of assets from Stage 1 to Stage 2 with a consequent increase from a 12 month ECL to a lifetime ECL. While the granting of a COVID-19 related payment holiday did not automatically trigger a migration to Stage 2, a subset of customers who had accessed payment holiday support, and where their risk profile was identified as relatively high risk, were collectively migrated to Stage 2 and their ECL uplifted, refer to the Governance and post model adjustments section for further details.
 In Stage 3, reflecting the various customer support mechanisms available that mitigated against defaults, ECL was affected relatively less. In addition, debt sales also contributed to a slight ECL reduction year-on-year.
Net re-measurement of ECL on stage transfer (44) 46 10 12 Changes in risk parameters (model inputs) 16 28 73 117 Other changes in net exposure 50 1 (81) (2) (413) (1) (444) (2) Other (P&L only items) — — (24) (24) Income statement (releases)/charges (27) 72 58 103
Key points  The increase in ECL in Stage 1 and Stage 2 was primarily due to the deterioration in the economic outlook.
 The updated economics also resulted in a net migration of assets from Stage 1 to Stage 2 with a consequent increase from a 12month ECL to a lifetime ECL.
Currency translation and other adjustments 40 (2) (441) — (4) — (405) (2) Inter-group transfers — — — — — — — — Transfers from Stage 1 to Stage 2 (14,605) (99) 14,605 99 — — — — Transfers from Stage 2 to Stage 1 3,842 59 (3,842) (59) — — — —
 Flows into Stage 3 were mainly due to a relatively small number of individual cases. Government support mechanisms continued to suppress a higher level of flows into Stage 3.
Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL Commercial Banking - business banking £m £m £m £m £m £m £m £m
Currency translation and other adjustments — — — (1) 1 (2) 1 (3) Transfers from Stage 1 to Stage 2 (2,545) (18) 2,545 18 — — — — Transfers from Stage 2 to Stage 1 790 58 (790) (58) — — — —
 Flows of defaulted exposure into Stage 3 were suppressed reflecting the various government customer support mechanisms available, with ECL reducing during the year including the effect of a debt sale.
Currency translation and other adjustments 311 — 147 — 15 5 473 5
Currency translation and other adjustments 564 — (84) — 2 7 482 7
Transfers from Stage 1 to Stage 2 (2,757) (7) 2,757 7 — — — — Transfers from Stage 2 to Stage 1 936 11 (936) (11) — — — —
Key point  The increase in ECL in Stage 1 and Stage 2 was primarily due to the deterioration in the economic outlook, causing both PDs and LGDs to increase.
Credit risk – Banking activities continued Stage 2 decomposition – arrears status and contributing factors The tables below show Stage 2 decomposition for the Personal and Wholesale portfolios.
UK mortgages RoI mortgages Credit cards Other Total Loans ECL Loans ECL Loans ECL Loans ECL Loans ECL
Personal - Other driver (adverse credit, forbearance etc) 3,864 8 596 9 94 14 196 17 4,750 48
 However, a subset of customers who had accessed payment holiday support, and where their risk profile was identified as relatively high risk, were collectively migrated to Stage 2. For mortgages, in Retail Banking, approximately £1 billion of exposures were collectively migrated from Stage 1 to Stage 2, and approximately £340 million in Ulster Bank RoI. The impact of collective migrations on unsecured lending was much more limited.
 As expected, ECL coverage was higher in accounts that were more than 30 days past due than those in Stage 2 for other reasons.
Key points  The deteriorated economic outlook due to COVID-19, including significant reductions in GDP and commercial real estate valuations, resulted in increased IFRS 9 PDs. Consequently, compared to 2019, a larger proportion of the exposures exhibited a SICR causing Stage 2 exposures to increase significantly.
Notes: (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.
 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 trigger decreased over the period as more exposures were captured under the PD deterioration Stage 2 trigger.
 PD persistence relates to the business banking portfolio only, with the reason for the year-on-year increase the same as described above for the Personal portfolio.
Credit risk – Banking activities continued Stage 3 vintage analysis The table below shows estimated vintage analysis of the material Stage 3 portfolios totalling 83% of the Stage 3 loans of £6.4 billion.
Asset quality The table below shows asset quality bands of gross loans and ECL, by stage, for the Personal portfolio.
Key points  In the Personal portfolio, the asset quality distribution overall was broadly stable with the Basel II point-in-time PDs yet to reflect the expected credit deterioration.
 The high level of Stage 3 impaired assets (AQ10) in RoI mortgages, reflected the legacy mortgage portfolio and the residual effects from the global financial crisis. The reduction in the year was a result of deleveraging through the execution of a portfolio sale agreed in 2019 and improvements in the portfolio.
 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.
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.
AQ5-AQ8 142 — — 142 — — — — — — — — AQ9 — — — — — — — — — — — —
Credit risk – Banking activities continued Key points  Across the Wholesale portfolio, the asset quality band distribution differed, reflecting the diverse nature of the sectors.  Asset quality deterioration, however, was observed across most sectors as the impacts of COVID-19 affected customers’ operations and markets.
 The level of asset quality deterioration was mitigated by government support schemes in relation to COVID-19.
Potential for offset not recognised under IFRS (44,133) (44,133) — (28,973) (28,973) —
Potential for offset not recognised under IFRS (33,740) (33,740) — (29,773) (29,773) —
GBP USD EUR Other Total Assets Liabilities Notional Assets Liabilities £bn £bn £bn £bn £bn £m £m £bn £m £m
Options purchased 20,527 — 15,300 — Options written — 20,190 — 13,198
Notes: (1) The notional amount of interest rate derivatives includes £7,390 billion (2019 – £7,090 billion) in respect of contracts cleared through central clearing counterparties.
(3) 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 one-way collateral agreements in their favour.
Credit risk – Trading activities continued Derivatives: settlement basis and central counterparties The table below shows the third party derivative notional and fair value by trading and settlement method.
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. A significant proportion (more than 95%) of these positions are trading securities in NatWest Markets.
Credit risk – Cross border exposure Cross border exposures comprise both banking and trading activities, including reverse repurchase agreements. Exposures comprise loans and advances, including finance leases and instalment credit receivables, and other monetary assets, such as debt securities. The geographical breakdown is based on the country of domicile of the borrower or guarantor of ultimate risk. Cross border exposures include non-local currency claims of overseas offices on local residents but exclude exposures to local residents in local currencies. The table shows cross border exposures greater than 0.5% of NatWest Group’s total assets.
Capital, liquidity and funding risk 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 NatWest Group operates within its regulatory requirements and risk appetite.
Sources of risk Capital The eligibility of instruments and financial resources as regulatory capital is laid down by applicable regulation. Capital is categorised under two tiers (Tier 1 and Tier 2) according to the ability to absorb losses, degree of permanency and the ranking of absorbing losses on either a going or gone concern basis. There are three broad categories of capital across these two tiers:  CET1 capital. CET1 capital must be perpetual and capable of unrestricted and immediate use to cover risks or losses as soon as these occur. This includes ordinary shares issued and retained earnings.
Minimum requirement for own funds and eligible liabilities (MREL) In addition to capital, other specific loss-absorbing instruments, including senior notes issued by NatWest Group, may be used to cover certain gone concern capital requirements which, is referred to as MREL. Gone concern refers to the situation in which resources must be available to enable an orderly resolution, in the event that the Bank of England (BoE) deems that NatWest Group has failed or is likely to fail.
Liquidity NatWest Group maintains a prudent approach to the definition of liquidity resources. NatWest Group manages its liquidity to ensure it is always available when and where required, taking into account regulatory, legal and other constraints. Following ring-fencing legislation, liquidity is no longer considered fungible across NatWest Group. Principal liquidity portfolios are maintained in the UK Domestic Liquidity Sub-Group (UK DoLSub) (primarily in NatWest Bank Plc), UBI DAC, NatWest Markets Plc, RBS International Limited and NWM N.V.. Some disclosures in this section where relevant are presented, on a consolidated basis, for NatWest Group, the UK DoLSub and on a solo basis for NatWest Markets Plc.
Liquidity resources are divided into primary and secondary liquidity as follows:  Primary liquid assets include cash and balances at central banks,
Capital planning is integrated into NatWest Group’s wider annual budgeting process and is assessed and updated at least monthly. Regular returns are submitted to the PRA which include a two-year rolling forecast view. Other elements of capital management, including risk appetite and stress testing, are set out on pages 160 and 161.
 Capital plans are produced for NatWest Group, its key operating entities and its businesses over a five year planning horizon under expected and stress conditions. Stressed capital plans are produced to support internal stress testing in the ICAAP for regulatory purposes.
 Capital plans are developed to maintain capital of sufficient quantity and quality to support NatWest Group’s business, its subsidiaries and strategic plans over the planning horizon within approved risk appetite, as determined via stress testing, and minimum regulatory requirements.
 Capital planning informs potential capital actions including buy backs, redemptions, dividends and new issuance to external investors or via internal transactions.
Liquidity risk management NatWest Group manages its liquidity risk taking into account regulatory, legal and other constraints to ensure sufficient liquidity is available where required to cover liquidity stresses. The principal levels at which liquidity risk is managed are:  NatWest Group  NatWest Holdings Group  UK DoLSub  UBI DAC  NatWest Markets Plc  NatWest Markets Securities Inc.
The UK DoLSub is PRA regulated and comprises NatWest Group’s four licensed deposit-taking UK banks: National Westminster Bank Plc (NWB Plc), The Royal Bank of Scotland plc (RBS plc), Coutts & Company and Ulster Bank Limited.
Capital, liquidity and funding risk continued Relief measures The economic impact of COVID-19 during the year was significant. While liquidity, capital and funding were closely monitored throughout, NatWest Group benefited from its strong positions – particularly in relation to CET1 – going into the crisis. Prudent risk management continues to be important as the full economic effects of the global pandemic unfold.
 Prudential Valuation Adjustment (PVA) – The European Commission amended the prudent valuation Regulatory Technical Standard such that, due to the exceptional levels of market volatility, the aggregation factor was increased from 50% to 66% until 31 December 2020 inclusive. This has reduced NatWest Group’s PVA deduction by c.£120 million.
 Market Risk Value-at-risk (VaR) model capital multiplier – the CRR COVID-19 amendment allowed for back-testing exceptions due to the exceptional levels of market volatility caused by COVID-19 to be excluded from the capital multiplier. This approach resulted in c.£1.4 billion benefit.
Loss absorbing capital increased by £4.2 billion to £63.9 billion primarily due to an increase in CET1 (explained above), new issuance of $1.6 billion Senior debt, AT1 issuances of $1.5 billion and £1.0 billion, and Tier 2 issuances of £1.0 billion and $0.85 billion. These were partially offset by the redemption of a $2.0 billion AT1 instrument and a $0.5 billion partial redemption of a Tier 2 instrument, FX movements and Tier 2 regulatory amortisation.
RWAs reduced by £8.9 billion in 2020, reflecting reductions in market risk (£3.6 billion), counterparty credit risk (£3.5 billion) and credit risk RWAs (£1.1 billion) mainly in NatWest Markets as the business seeks to reduce RWAs through capital optimisation and exit activity. RWAs also decreased by c.£1.9 billion due to the CRR COVID-19 amendment for the SME & Infrastructure supporting factors, and NPL de-recognitions in Ulster Bank ROI. The acquisition of prime UK mortgages from Metro Bank resulted in a £1.2 billion increase in credit risk RWAs.
The Liquidity Coverage Ratio (LCR) increased by 13% during the year to 165% driven by an increase in the liquidity portfolio offset with a lower level of increased net outflows. The increased liquidity portfolio was primarily driven by significant growth in customer deposits in NatWest Holdings which outstripped growth in customer lending during the year.
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, 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 our minimum requirements and our MDA threshold requirements.
Minimum Capital Requirements 6.4% 8.6% 11.4% Capital conservation buffer 2.5% 2.5% 2.5% Countercyclical capital buffer (1) — — — G-SIB buffer (2) — — — MDA Threshold (3) 8.9% n/a n/a
Notes: (1) Many countries announced reductions in their countercyclical capital buffer rates in response to COVID-19. Most notably for NatWest Group, the Financial Policy
Type Liquidity coverage ratio (LCR) 100% Net stable funding ratio (NSFR) (1) —
Note: (1) NSFR reported in line with CRR2 regulations finalised in June 2019. Following the joint announcement of UK Treasury, PRA and FCA on 16 November 2020 to postpone the future EU CRR2 element of the Basel 3 package, we understand the PRA is due to consult on a binding Net Stable Funding ratio (NSFR) requirement to be introduced from January 2022.
Capital, liquidity and funding risk continued Measurement Capital, risk-weighted assets and leverage: Key metrics The table below sets out the key capital and leverage ratios. Refer to Note 25 to the consolidated financial statements for a more detailed breakdown of regulatory capital.
(2) Based on the daily average of on-balance sheet items and three month-end average of off-balance sheet items. (3) Presented on CRR end point Tier 1 capital (including IFRS 9 transitional adjustment). The UK leverage ratio excludes central bank claims from the leverage exposure where deposits held are denominated in the same currency and of contractual maturity that is equal or longer than that of the central bank claims. Excluding the IFRS 9 transitional adjustment, the UK leverage ratio would be 6.1%.
Key points  NatWest Group has elected to take advantage of the transitional regulatory capital rules in respect of expected credit losses following the adoption of IFRS 9, it had previously had a negligible impact up to Q4 2019. The CRR COVID-19 amendment now requires a full CET1 addback for the movement in stage 1 and stage 2 ECL from 1 January 2020 for the next two years. The IFRS 9 transitional arrangement impact on NatWest Group CET1 regulatory capital at 31 December 2020 is £1.7 billion.
 The implementation of CRR2 amended Article 36 for the prudential treatment of software assets has resulted in an increase to CET1 of £0.5 billion.
Counterparty Credit risk credit risk Market risk Operational risk Total £bn £bn £bn £bn £bn
(3) Other movements include: (a) Hedging activity on counterparty credit risk in NatWest Markets. (b) A transfer of assets from NatWest Markets to Commercial Banking.
(4) Acquisitions & Disposals - reflects the increase in credit risk RWAs following the acquisition of prime UK mortgages from Metro Bank.
Key point  Total RWAs decreased by £8.9 billion during the period: o The £3.6 billion decrease in market risk RWAs was mainly driven by a decrease in RNIV based RWAs due to risk reduction activity. o Counterparty credit risk RWAs reduced by £3.5 billion mainly reflecting trade novations and hedging activity in NatWest Markets. o The decrease in credit risk RWAs of £1.1 billion reflected a reduction in exposures within NatWest Markets and Ulster Bank ROI
Retail Ulster Commercial Private RBS NatWest Central items Banking Bank RoI Banking Banking International Markets & other Total 31 December 2020 £bn £bn £bn £bn £bn £bn £bn £bn
Notes: (1) Based on end point CRR Tier 1 leverage exposure under the CRR Delegated Act. (2) The UK leverage ratio excludes central bank claims from the leverage exposure where deposits held are denominated in the same currency and of contractual maturity that is equal or longer than that of the central bank claims.
Revolving credit risk facilities 28.4 25.8 Term loans 3.6 3.1 Mortgages — 0.1 Other undrawn commitments >1 year which may not be cancelled & off-balance sheet 1.2 1.5 Items with a 50% CCF 33.2 30.5 Items with a 100% CCF 5.4 4.4
Tier 2 capital: Other regulatory adjustments — — 0.4 0.4 — — — —
(MREL), published in 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 £43.9 billion (2019 - £43.5 billion). (5) Regulatory amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR. (6) NatWest Group is no longer recognised as a G-SII effective from 1 January 2020 and is therefore not subject to the CRR MREL requirement as of this date, which references CRR 2 leverage exposure. To aid comparison, the leverage exposure, and resulting ratio is disclosed according to the BoE leverage framework for all time periods.
(7) LAC value of senior unsecured debt securities issued by NatWest Group plc reflects par value for 31 December 2020 vs balance sheet value for 31 December 2019.
Senior unsecured Externally issued 20.9 — — — — — — — —
Notes: (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.
NWM SI to NWM Plc. (4) Senior unsecured debt category does not include CP, CD and short term/medium term notes issued from NatWest Group operating subsidiaries. (5) Tier 1 (inclusive of AT1) category does not include CET1 numbers.
Senior debt roll-off profile (1) 31 December 2020 H1 2021 H2 2021 2022 2023 2024 & 2025 2026 & later
- weighted average rate spread (bps) 130 — — 64 — 98 151 RBSI
Weighted average rate spread (bps) 128 47 56 87 195 138 158
(2) Based on first call date of instrument, however this does not indicate NatWest Group’s strategy on capital and funding management. The table above does not include debt accounted Tier 1 instruments although those instruments form part of the total subordinated debt balance. (3) The weighted average spread reflects the average net funding cost to NatWest Group and is calculated on an indicative basis. (4) The roll-off table is based on sterling-equivalent balance sheet values.
£m £m £m £m £m £m Cash and balances at central banks 115,820 86,575 86,575 74,289 51,080 51,080 AAA to AA- rated governments 50,901 37,086 35,875 46,622 35,960 34,585 A+ and lower rated governments 79 — — 1,277 — — Government guaranteed issuers, public sector entities and government sponsored entities 272 272 141 251 251 90 International organisations and multilateral development banks 3,140 2,579 2,154 2,393 2,149 1,717
LCR level 2 assets 124 — — — — — Non-LCR eligible assets — — — 88 — —
Notes: (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 RBS 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 four licensed deposit-taking UK banks within the ring-fenced bank: NWB Plc, RBS plc, Coutts & Company and Ulster
Other bank and customer deposits 819 985 1,804 710 896 1,606 Debt securities in issue - Medium term notes 527 881 1,408 659 1,103 1,762
(2) Includes nil (2019 – £10.0 billion) relating to Term Funding Scheme participation, £5.0 billion (2019 – nil) relating to Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises participation and £2.8 billion (2019 – £1.7 billion) relating to NatWest Group’s participation in central bank financing operations under the European Central Bank’s targeted long-term financing operations.
Trading liabilities — — — — — — — — — 72,256 72,256
In its analysis to assess and manage asset and liability maturity gaps, NatWest Group determines the expected customer behaviour through qualitative and quantitative techniques. These incorporate observed customer behaviours over long periods of time. This analysis is subject to governance through NatWest Group ALCo Technical committee down to a segment level.
Contractual maturity (1) Behavioural maturity Loans to customers Customer accounts Net funding surplus/(gap) Net surplus/(gap)
Less Greater Less Greater Less Greater Less Greater than 1-5 than than 1-5 than than 1-5 than than 1-5 than 1 year years 5 years Total 1 year years 5 years Total 1 year years 5 years Total 1 year years 5 years Total 2020 £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
Capital, liquidity and funding risk continued Encumbrance NatWest Group evaluates the extent to which assets can be financed in a secured form (encumbrance), but certain asset types lend themselves more readily to encumbrance. The typical characteristics that support encumbrance are an ability to pledge those assets to another counterparty or entity through operation of law without necessarily requiring prior notification, homogeneity, predictable and measurable cash flows, and a consistent and uniform underwriting and collection process. Retail assets including residential mortgages, credit card receivables and personal loans display many of these features.
 Not currently encumbered. In this category, NatWest Group has in place an enablement programme which seeks to identify assets capable of being encumbered and to identify the actions to facilitate such encumbrance whilst not affecting customer relationships or servicing.
Loans to banks - amortised cost 0.1 0.1 0.2 — — 6.2 0.3 0.3 6.8 7.0 Loans to customers - amortised cost 14.7 — 14.7 134.0 — 42.4 120.5 48.9 211.8 360.5 - residential mortgages
Notes: (1) Covered debts and securitisations include securitisations, conduits, covered bonds and secured notes.
(2) Excludes £1.7 billion of loans and advances to customers in 2019 providing security for retained own issued securities. There were £14 billion encumbered assets resulting from covered debts and securitisations in 2019 including those assets.
(4) Derivative cash collateral of £18.8 billion (2019 - £20.6 billion) has been included in the encumbered assets basis the regulatory requirement. (5) Total assets encumbered as a result of transactions with counterparties other than central banks are those that have been pledged to provide security and are therefore not available to secure funding or to meet other collateral needs.
(6) Assets pre-positioned at the central banks include loans provided as security as part of funding schemes and those encumbered under such schemes. (7) Ring-fenced to meet regulatory requirement includes assets ring fenced to meet operational continuity in resolution (OCIR) investment mandate. (8) Readily available for encumbrance: including assets that have been enabled for use with central banks but not pre-positioned; cash and high quality debt securities that form part of NatWest Group’s liquidity portfolio and unencumbered debt securities.
Market risk NatWest Group is exposed to non-traded market risk through its banking activities and to traded market risk through its trading activities. Non-traded and traded market risk exposures are managed and discussed separately. The non-traded market risk section begins below. The traded market risk section begins on page 236. Pensionrelated activities also give rise to market risk. Refer to page 240 for more information on risk related to pensions.
 The five-year sterling interest rate swap rate fell to 0.08% at 31 December 2020 from 0.81% at 31 December 2019. The corresponding ten-year rate fell to 0.26% from 0.93%. The structural hedge provides some protection against volatility in interest rates. As a result, the move in the structural hedge yield over the same period was less material, falling to 1.06% from 1.20%.
 Sterling strengthened against the US dollar and weakened against the euro over the period. Against the dollar, sterling was 1.37 at 31 December 2020 compared to 1.32 at 31 December 2019. Against the euro, it was 1.11 at 31 December 2020 compared to 1.18 at 31 December 2019. Structural foreign currency exposures increased, in sterling equivalent terms, by £49 million over the period.
Governance Responsibility for identifying, measuring, monitoring and controlling market risk arising from non-trading activities lies with the relevant business. Oversight is provided by the independent Risk function.
Risk positions are reported monthly to the Executive Risk Committee and quarterly to the Board Risk Committee, as well as to the Asset & Liability Management Committee (monthly in the case of interest rate, credit spread and accounting volatility risks and quarterly in the case of foreign exchange and equity risks). Market risk policy statements set out the governance and risk management framework.
The limits are reviewed to reflect changes in risk appetite, business plans, portfolio composition and the market and economic environments. To ensure approved limits are not breached and that NatWest Group remains within its risk appetite, triggers at NatWest Group and lower levels have been set and are actively managed. For further information on risk appetite and risk controls, refer to page 160.
Notes: (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.
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.
Product structural hedges refer to income allocated to customer products by NWH Treasury, mainly current accounts and customer deposits in Commercial Banking and Retail Banking (excluding Ulster Bank Limited). Other structural hedges refer to hedges managed by UBI DAC, Private Banking, Ulster Bank Limited and RBS International.
December 2020 from 0.81% at the end of December 2019. The tenyear sterling swap rate also fell, to 0.26% from 0.93%.
 The yield of the structural hedge fell as new product hedges and maturing hedges across the portfolio are reinvested at lower market rates. At 1.06%, the overall yield was still higher than market swap rates at 31 December 2020.
 The increase in hedge notional, on a period-end basis, mainly resulted from increased hedging of Personal and Commercial deposits. This reflected the increase in underlying customer deposit balances in 2020.
 Incremental income in excess of three-month LIBOR increased in 2020. This was primarily due to lower three-month LIBOR fixings, resulting in increased income benefit from the hedge.
NatWest Group’s standard VaR metrics – which assume a time horizon of one trading day and a confidence level of 99% – are based on interest rate repricing gaps at the reporting date. Daily rate moves are modelled using observations from the last 500 business days. These incorporate customer products plus associated funding and hedging transactions as well as non-financial assets and liabilities. Behavioural assumptions are applied as appropriate.
It also includes any mismatch between the maturity profile of external hedges and NatWest Group’s target maturity profile for the hedge.
Earnings sensitivity is derived from a market-implied forward rate curve. A simple scenario is shown that projects forward earnings based on the 31 December 2020 balance sheet, which is assumed to remain constant. A base-case earnings forecast is derived from the market-implied curve, which is then subject to interest rate shocks. The difference between the base-case forecast 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.
Key points  The increased favourable sensitivity to the 25-basis-point upward shifts in yield curves over 2020 was mainly driven by: (i) significantly increased volumes of savings and current accounts; and (ii) changes to estimates of the extent to which NatWest Group passes through the impact of changes in interest rates to these products.
One-year 25 and 100-basis-point sensitivity table 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.
Shifts in yield curve Shifts in yield curve basis points basis points basis points basis points basis points basis points £m £m £m £m £m £m
In the upward rate scenario, yield curves were assumed to move in parallel, at both year-ends.
The table below shows the sensitivity of FVOCI reserves and cash flow hedge reserves to a parallel shift in all rates. In this analysis, interest rates have not been floored at zero. Cash flow hedges are assumed to be fully effective and interest rate hedges of bonds in the liquidity portfolio are also assumed to be subject to fully effective hedge accounting. Hedge accounting ineffectiveness would result in some deviation from the results below, with some gains or losses recognised in P&L instead of reserves. Hedge ineffectiveness P&L is monitored, and the effectiveness of cash flow and fair value hedge relationships is regularly tested in accordance with IFRS requirements. Note that a movement in the FVOCI reserve would have an impact on CET1 capital but a movement in the cash flow hedge reserve would not be expected to do so. Volatility in both reserves affects tangible net asset value.
 Cash flow hedge reserve sensitivity fell in 2020, mainly driven by increased hedging of mortgage funding.
NatWest Group’s bond portfolios primarily comprise high-quality securities maintained as a liquidity buffer to ensure it can continue to meet its obligations in the event that access to wholesale funding markets is restricted. Additionally, other high-quality bond portfolios are held for collateral purposes and to support payment systems.
Foreign exchange risk Non-traded foreign exchange risk arises from three main sources:  Structural foreign exchange risk – arises from the capital deployed in foreign subsidiaries, branches and joint arrangements and related currency funding where it differs from sterling.
The most material non-traded open currency positions are the structural foreign exchange exposures arising from investments in foreign subsidiaries, branches and associates and their related currency funding. These exposures are assessed and managed to predefined risk appetite levels under delegated authority from the Asset & Liability Management Committee. NatWest Group seeks to limit the potential volatility impact on its CET1 ratio from exchange rate movements by maintaining a structural open currency position. Gains or losses arising from the retranslation of net investments in overseas operations are recognised in equity reserves and reduce the sensitivity of capital ratios to foreign exchange rate movements primarily arising from the retranslation of non-sterling denominated RWAs. Sensitivity is minimised where, for a given currency, the ratio of the structural open position to RWAs equals the CET1 ratio.
Foreign exchange risk The table below shows structural foreign currency exposures.
Key points  Over the period, sterling strengthened against the US dollar while it weakened against the euro.  Hedging of other non-sterling businesses decreased following the receipt of a distribution from Coutts & Co. Ltd as part of the wind down of this company’s operations.
Non-traded market risk continued Equity risk Non-traded equity risk is the potential variation in income and reserves arising from changes in equity valuations. Equity exposures may arise through strategic acquisitions, venture capital investments and restructuring arrangements.
Investments, acquisitions or disposals of a strategic nature are referred to the Acquisitions & Disposals Committee. Once approved by the Acquisitions & Disposals Committee for execution, such transactions are referred for approval to the Board, the Executive Committee, the Chief Executive, the Chief Financial Officer or as otherwise required. Decisions to acquire or hold equity positions in the non-trading book that are not of a strategic nature, such as customer restructurings, are taken by authorised persons with delegated authority.
Equity positions are carried at fair value on the balance sheet based on market prices where available. If market prices are not available, fair value is based on appropriate valuation techniques or management estimates.
The table below shows the balance sheet carrying value of equity positions in the banking book.
Key point  The decrease in equity investment and losses on disposals mainly reflect the disposal of SABB.
Traded market risk Definition 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.
Sources of risk Traded market risk mainly arises from NatWest Group’s trading activities. These activities provide a range of financing, risk management and investment services to clients − including corporations and financial institutions − around the world. From a market risk perspective, activities are focused on rates; currencies; and traded credit. NatWest Group undertakes transactions in financial instruments including debt securities, as well as securities financing and derivatives.
Key developments in 2020  COVID-19 initially resulted in periods of exceptional market volatility as well as increased illiquidity.
Traded market risk exposures are monitored against limits and analysed daily. A daily report summarising the position of exposures against limits at desk, business, franchise and NatWest Group levels is provided to senior management and market risk managers across the function. Limit reporting is supplemented with regulatory capital and stress testing information as well as ad hoc reporting.
These methods have been designed to capture correlation effects and allow NatWest Group to form an aggregated view of its traded market risk across risk types, markets and business lines while also taking into account the characteristics of each risk type.
 Ongoing model validation – VaR model performance is assessed both regularly, and on an ad-hoc basis, if market conditions or portfolio profile change significantly.
Traded VaR (1-day 99%) The table below shows one-day 99% internal VaR for NatWest Group’s trading portfolios, split by exposure type.
Note: (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.
Key points  COVID-19 and geopolitical risk resulted in periods of exceptional market volatility and increased illiquidity during 2020. Despite this volatility, traded VaR remained within appetite throughout the year.
Key points  The exceptional market volatility resulting from COVID-19 led to back-testing exceptions across NWM businesses.  The exceptions in the Rates business were mainly driven by market moves in sterling and euro rates and underperformance of US Treasuries.
Risks Not In VaR (RNIVs) The RNIV framework is used to identify and quantify market risks that are not fully captured by the internal VaR and SVaR models.
Stress testing For information on stress testing, refer to page 161.
Market risk – linkage to balance sheet The table below analyses NatWest Group’s balance sheet by non-trading and trading business.
Assets Cash and balances at central banks* 124.5 124.5 — 81.0 80.9 0.1 Interest rate
Securities 29.2 — 29.2 30.1 — 30.1 interest rate, credit spreads, equity
Derivatives 166.5 2.3 164.2 150.0 2.4 147.6 Interest rate, credit spreads, equity
Other financial assets 55.1 55.1 — 61.5 61.5 — Interest rate, credit spreads, equity
Short positions 26.8 — 26.8 21.2 — 21.2 Interest rate, credit spreads
Derivatives 160.7 5.2 155.5 146.9 4.1 142.8 Interest rate, credit spreads
Notes in circulation 2.7 2.7 — 2.1 2.1 — Interest rate *2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for further details.
(2) Trading businesses are entities that primarily have exposures that are classified as trading book under regulatory rules. For these exposures, the main methods used by NatWest Group to measure market risk are detailed in the traded market risk section above.
Pension risk Definition Pension risk is the risk to NatWest Group caused by its contractual or other liabilities to, or with respect to, a pension scheme (whether established for its employees or those of a related company or otherwise). It is also the risk that NatWest Group will make payments or other contributions to, or with respect to, a pension scheme because of a moral obligation or because NatWest Group considers that it needs to do so for some other reason.
Sources of risk NatWest Group has exposure to pension risk through its defined benefit schemes worldwide. The Main section of The NatWest Group Pension Fund (the Main section) is the largest source of pension risk with £51.3 billion of assets and £43.9 billion of liabilities at 31 December 2020 (2019 – £46.6 billion of assets and £39.7 billion of liabilities). Refer to Note 5 to the consolidated financial statements, for further details on NatWest Group’s pension obligations, including sensitivities to the main risk factors.
Key developments in 2020  There have been no material changes to NatWest Group’s exposure to pension risk during the year. In particular, the interest rate and inflation hedging, along with limited exposure to equities, has meant that the positions of the main defined benefit schemes that NatWest Group sponsors have remained resilient despite the market shocks caused by COVID-19. More details on the assets held by the schemes are set out in Note 5 to the consolidated financial statements.
 The Royal Bank of Scotland Group Pension Fund formally changed its name to the NatWest Group Pension Fund on 1 August 2020, to align with the name of NatWest Group’s parent company.