 The next triennial actuarial valuation for the Main section will have an effective date of 31 December 2020. Under current legislation, agreement with the Trustee would need to be reached no later than 31 March 2022.
Risk appetite NatWest Group maintains an independent view of the risk inherent in its pension funds. NatWest Group has an annually reviewed pension risk appetite statement incorporating defined metrics against which risk is measured.
NatWest Group also undertakes stress tests on its material defined benefit pension schemes each year. These tests are also used to satisfy the requests of regulatory bodies such as the Bank of England.
Compliance & conduct risk Definition Compliance risk is the risk that the behaviour of NatWest Group towards customers fails to comply with laws, regulations, rules, standards and codes of conduct. Such a failure may lead to breaches of regulatory requirements, organisational standards or customer expectations and could result in legal or regulatory sanctions, material financial loss or reputational damage.
Conduct risk is the risk that the conduct of NatWest Group and its subsidiaries and its staff towards customers – or in the markets in which it operates – leads to unfair or inappropriate customer outcomes and results in reputational damage, financial loss or both.
Compliance & conduct risk continued Key developments in 2020  A customer-focused COVID-19 response was mobilised, which included prioritised resource and operational capacity, forbearance and participation in government schemes.
 Work to develop a Digitised Rules Mapping platform was a significant management focus. The platform aims to facilitate riskbased rules mapping to regulatory obligations. This will enable more efficient risk management of regulatory compliance matters as well as intelligent risk taking.
Risk appetite Risk appetite for compliance and conduct risks is set at Board level. Risk appetite statements articulate the levels of risk that legal entities, businesses and functions work within when pursuing their strategic objectives and business plans.
A range of controls is operated to ensure the business delivers good customer outcomes and is conducted in accordance with legal and regulatory requirements. A suite of policies addressing compliance and conduct risks set appropriate standards across NatWest Group. Examples of these include the Complaints Management Policy, Client Assets & Money Policy, and Product Lifecycle Policy as well as policies relating to customers in vulnerable situations, cross-border activities and market abuse. Continuous monitoring and targeted assurance is carried out as appropriate.
Financial crime risk Definition Financial crime risk is presented by criminal activity in the form of money laundering, terrorist financing, bribery and corruption, sanctions and tax evasion. It does not include fraud risk management.
Sources of risk Financial crime risk may be presented if NatWest Group’s customers, employees or third parties undertake or facilitate financial crime, or if NatWest Group’s products or services are used to facilitate such crime. Financial crime risk is an inherent risk across all lines of business.
 A new Financial Crime executive steering committee was established to provide oversight of the transformation plan and its implementation.
Governance The Financial Crime Risk Executive Committee, which is chaired by the Group Chief Financial Crime Risk Officer, is the principal financial crime risk management forum. The committee reviews and, where appropriate, escalates material financial crime risks and issues across NatWest Group to the Executive Risk Committee and the Board Risk Committee.
Risk appetite There is no appetite to operate in an environment where systems and controls do not enable the identification, assessment, monitoring, management and mitigation of financial crime risk. The NatWest Group’s systems and controls must be comprehensive and proportionate to the nature, scale and complexity of its businesses. There is no tolerance to systematically or repeatedly breach relevant financial crime regulations and laws.
Mitigation Through the financial crime framework, relevant policies, systems, processes and controls are used to mitigate financial crime risk. This includes the use of dedicated screening and monitoring controls to identify people, organisations, transactions and behaviours that may require further investigation or other actions. Centralised expertise is available to detect and disrupt threats to NatWest Group and its customers. Intelligence is shared with law enforcement, regulators and government bodies to strengthen national and international defences against those who would misuse the financial system for criminal motives.
Key developments in 2020  Climate-related risk was elevated to a principal risk. In line with
NatWest Group’s risk management framework, the elevation will see the implementation of a dedicated risk policy, risk appetite statement and risk appetite measures, which are reportable to the Board Risk Committee.
 To support alignment with the 2015 Paris Agreement, NatWest Group developed the capability to estimate financed emissions and emissions intensities for the following: residential mortgages, agriculture (primary farming), automotive manufacturers and oil & gas extractors. The residential mortgage portfolio and these three sectors were deemed the most material in terms of their proportion of NatWest Group’s total loans and investments and susceptibility to disruption resulting from climate change.
 In preparation for the Bank of England’s 2021 Climate Biennial Exploratory Scenario, NatWest Group developed and tested a scenario analysis methodology to quantify a range of climaterelated risks to support business decision making and the development of management actions. Dry runs were conducted on a cross section of NatWest Group’s wholesale and retail counterparties.
 Enhancements have been made to the Environmental, Social & Ethical risk management framework to mitigate reputational risk from carbon intensive sectors and support the transition to a lower carbon economy.
The Board approved the allocation of Senior Management Function responsibility for identifying and managing financial risks from climate change jointly to the Group Chief Executive Officer (CEO) and the Group Chief Risk Officer. This updated accountability supports the CEO’s ownership of NatWest Group’s strategic climate purpose. This responsibility includes ensuring that the financial risks from climate change are adequately reflected in risk management frameworks, and that NatWest Group can identify, measure, monitor, manage, and report on its exposure to these risks.
Work continued in 2020 to integrate climate-related risk into the risk management framework, including the development of appropriate risk appetite metrics. Where climate-related risk is deemed to have a material impact on a particular risk discipline, then changes to policies and procedures will be made accordingly. Availability of data and the robustness of risk measurement methodologies will influence the timing of any proposed changes.
In 2020, NatWest Group became the first major UK bank to join the Partnership for Carbon Accounting (PCAF), underlining its commitment to measuring and reducing its climate impact in accordance with the 2015 Paris Agreement. Furthermore, in 2020, NatWest Group also joined the Science Based Targets initiative (SBTi), following its launch of guidance to support financial institutions in aligning lending and investment activities with the 2015 Paris Agreement.
Additional activity in 2020 focused on preparation for the Bank of England’s 2021 Climate Biennial Exploratory Scenario. Scenario analysis allows NatWest Group to test a range of possible future climate pathways and understand the nature and magnitude of the risks they present. The purpose of scenario analysis is not to forecast the future but to understand and prepare to manage risks that could arise. During 2020, NatWest Group developed and tested a methodology to use scenario analysis to quantify the size of a range of climate-related risks and tested this on a cross section of our commercial and retail counterparties.
Climate-related financial risk continued Three scenarios developed by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), were used as the starting point for analysing physical and transition-related climaterelated risk over the period 2020-2050. The impacts of these scenarios were applied to a sample of the balance sheet comprising wholesale and retail counterparties. The scenarios were: Hot House World – no new policy action takes place to reduce greenhouse gas emissions. This leads to more than 3°C of warming and severe physical risks.  Orderly – immediate and global action to reduce emissions in a measured way, at a rate that is fast enough to keep climate change within 2°C with 67% probability; leading to net zero emissions before 2070.
 Disorderly – ambitious new climate policies are introduced, but only in 2030. Like the Orderly scenario, emissions are sufficiently limited to keep global warming below 2°C, but the transition is faster as a result of delayed action.
NatWest Group continues to participate in several industry-wide initiatives to develop consistent risk measurement methodologies.
NatWest Group is a founding signatory of the United Nations Environment Programme Finance Initiative (UNEP FI) Principles for Responsible Banking, which aims to promote sustainable finance around the globe. In 2020, NatWest Group also took part in Phase II of the UNEP FI pilot alongside other peer banks. As part of this, an exploratory climate scenario analysis on future flooding impacts on our mortgage portfolio was conducted. NatWest Group is also represented on the Climate Financial Risk Forum established by the PRA and FCA to shape the financial service industry’s response to the challenges posed by climate risk.
 The transformation agenda was impacted by COVID-19, with some activities being re-prioritised. A full risk assessment on the impact of the reprioritised activity was completed to ensure the potential impacts were understood and mitigated.
 Operational resilience remained a key focus. A series of scenarios – setting out the crystallisation of severe but plausible combinations of significant risks – were developed in order to support planning and appropriate forward-looking risk management strategies.
Governance A strong operational risk management function is vital to support NatWest Group’s ambitions to serve its customers better. Improved management of operational risk against defined appetite is vital for stability and reputational integrity.
The first line of defence is responsible for managing operational risks directly while the second line is responsible for proactive oversight and continuous monitoring of operational risk management across NatWest Group. The second line is responsible for reporting and escalating key concerns to Executive Risk Committee and Board Risk Committee.
Risk appetite Operational risk appetite supports effective management of material operational risks. It expresses the level and types of operational risk NatWest Group is willing to accept to achieve its strategic objectives and business plans. NatWest Group’s operational risk appetite statement encompasses the full range of operational risks faced by its legal entities, businesses and functions.
CEC covers material risks and the underlying key controls, including financial, operational and compliance controls, as well as supporting risk management frameworks. The CEC outcomes, including forwardlooking assessments for the next two half-yearly cycles and progress on control environment improvements, are reported to Group Audit Committee and Board Risk Committee. They are also shared with external auditors.
The CEC process helps to ensure compliance with the NatWest Group Policy Framework, Sarbanes-Oxley 404 requirements concerning internal control over financial reporting (as referenced in the compliance report on page 152), and certain requirements of the UK Corporate Governance Code.
NatWest Group uses the standardised approach to calculate its Pillar 1 operational risk capital requirement. This is based on multiplying three years’ average historical gross income by coefficients set by the regulator based on business line. As part of the wider Internal Capital Adequacy Assessment Process an operational risk economic capital model is used to assess Pillar 2A, which is a risk-sensitive add-on to Pillar 1. The model uses historical loss data (internal and external) and forward-looking scenario analysis to provide a risk-sensitive view of NatWest Group’s Pillar 2A capital requirement.
Operational resilience NatWest Group manages and monitors operational resilience through its risk and control assessment methodology. This is underpinned by setting and monitoring risk indicators and performance metrics for key business services. Progress continues on the response to regulator expectations on operational resilience, with involvement in a number of industry-wide operational resilience forums. This enables a more holistic view of the operational resilience risk profile and the pace of ongoing innovation and change, both internally and externally.
All financial impacts associated with an operational risk event are reported against the date they were recorded in NatWest Group’s financial accounts. A single event can result in multiple losses (or recoveries) that may take time to crystallise. Losses and recoveries with a financial accounting date in 2020 may relate to events that occurred, or were identified in, prior years. NatWest Group purchases insurance against specific losses and to comply with statutory or contractual requirements.
COVID-19 associated operational risk costs impacted upon the trend of increased losses recorded against the Business Disruption and System Failures event category. The increase in fraud continues to be primarily the result of NatWest Group having an increased liability for reimbursing customers impacted by authorised push payment scams.
Clients, products and business practices (48) 867 (40%) 92% 1% 4% Execution, delivery and process management 11 20 9% 2% 3% 4% Employment practices and workplace safety 2 2 2% — 1% 1% Business disruption and system failures 69 — 57% — 1% —
 Enhanced model risk appetite measures were approved and monitored throughout 2020, with remediation plans under close management.
 All NatWest Group models are now recorded within a single model inventory, providing increased transparency.
Model risk continued Governance A governance framework is in place to ensure policies and processes relating to models are appropriate and effective. Two roles are key to this – Model Risk Owners and Model Risk Officers. Model Risk Owners, in the first line, are responsible for model approval and ongoing performance monitoring. Model Risk Officers, in the second line, are responsible for oversight, including ensuring that models are independently validated prior to use and on an ongoing basis aligned to the model’s risk rating. Model risk matters are escalated to senior management in several ways. These include model risk oversight committees, as well as the relevant business and function model management committees. The Group Model Risk Oversight Committee provides a direct escalation route to the Group Executive Risk Committee and, where applicable, onwards to the Group Board Risk Committee.
Ongoing performance monitoring is conducted by the first line and overseen by the second line to ensure parameter estimates and model constructs remain fit for purpose, model assumptions remain valid and that models are being used consistently with their intended purpose. This allows timely action to be taken to remediate poor model performance and/or any control gaps or weaknesses.
Sources of risk Reputational risks originate from internal actions and external events. The three primary drivers of reputational risk have been identified as: failure in internal execution; a conflict between NatWest Group’s values and the public agenda; and contagion (when NatWest Group’s reputation is damaged by failures in the wider financial sector).
 The correlation between reputational risk and climate change issues remained a significant area of focus, supported by work to enhance the consideration of such issues within the reputational risk framework. As part of this work, enhancements were made to the Environmental, Social & Ethical risk management framework to mitigate reputational risk from carbon intensive sectors and support the transition to a lower carbon economy.
Opinion In our opinion:  the financial statements of NatWest Group plc (the ‘Parent Company’) and its subsidiaries (together, the ‘Group’) give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2020 and of the Group’s loss for the year then ended;  the Group financial statements have been properly prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the European Union;  the Parent Company financial statements have been properly prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 as applied in accordance with section 408 of the Companies Act 2006; and
 the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
 Balance sheet as at 31 December 2020;  Statement of changes in equity for the year then ended;  Cash flow statement for the year then ended; and  Related notes 1 to 12 to the financial statements including a summary of critical accounting policies.
Concern assessment process and also engaged with management early to ensure all key factors were considered in their assessment;  We evaluated management’s going concern assessment which included reviewing their evaluation of long-term business and strategic plans, capital adequacy, liquidity and funding positions. It also assessed these positions considering internal stress tests which included consideration of principal and emerging risks. The Group’s risk profile and risk management practices were considered including credit risk, market risk, compliance and conduct risk, and operational risk;  We evaluated management’s assessment by considering viability under different scenarios including the impact of the Group’s strategic plans and the economic impact of COVID-19. We used economic specialists in assessing the macroeconomic assumptions in the forecast through benchmarking to institutional forecasts, HMT consensus and peer comparative economic forecasts. We also considered other commitments of the Group including those in respect of its subsidiaries;  We considered the Group’s operational resilience and their response to the impact COVID-19 had on its business operations, including the operations of its third party providers; and
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group and parent company’s ability to continue as a going concern for a period up to 19 February 2022 being not less than twelve months from when the financial statements are authorised for issue.
In relation to the group and parent company’s reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s ability to continue as a going concern.
Risk Our response to the risk Expected Credit Loss Provisions At 31 December 2020 the Group reported total gross loans of £372.4 billion (2019: £336.8 billion) and £6.2 billion of expected credit losses (ECL) (2019: £3.8 billion).
Controls testing: We evaluated the design and operating effectiveness of controls across the processes relevant to ECL, including the judgements and estimates noted. These controls, among others, included  the allocation of assets into stages including management’s monitoring of stage effectiveness;  recording and approval of payment deferrals and government supported lending such as bounce back loans and Coronavirus Business Interruption Loan Schemes (CBILs);  model governance including monitoring, the governance and review of both in-model adjustments and post model adjustments and model validation;  data accuracy and completeness;  credit monitoring;  multiple economic scenarios;  individual provisions and  production of journal entries and disclosures.
In evaluating the governance process, we observed the executive finance and risk committee meetings where the inputs, assumptions and adjustments to the ECL were discussed and approved, among other procedures.
Based on our assessment of the key judgements we used specialists to support the audit team in the areas of economics, modelling and, collateral and business valuations.
Staging: We evaluated the criteria used to allocate a financial asset to stage 1, 2 or 3 in accordance with IFRS 9; this included peer benchmarking to assess staging levels. We recalculated the assets in stage 1, 2 and 3 to assess if they were allocated to the appropriate stage and performed sensitivity analysis to assess the impact of different criteria on the ECL and also considered the impact of performing collective staging downgrades to industries and geographic regions particularly impacted by COVID-19.
To test credit monitoring which drives the probability of default estimates used in the staging calculation, we recalculated the risk ratings for a sample of performing loans and focused our testing on high risk industries impacted by COVID-19. We also assessed the timing of the annual review performed by management on each wholesale loan exposure to evaluate whether it appropriately considered COVID-19 risk factors by considering independent publicly available information.
Model estimations - We performed a risk assessment on all models involved in the ECL calculation to select a sample of models to test. We involved modelling specialists to assist us to test this sample of ECL models by testing the assumptions, inputs and formulae used. This included a combination of assessing the appropriateness of model design and formulae used, alternative modelling techniques, recalculating the Probability of Default, Loss Given Default and Exposure at Default, and model implementation. We also considered the results of internal model validation results.
To evaluate data quality, we agreed a sample of ECL calculation data points to source systems, including balance sheet data used to run the models and historic loss data to monitor models. We also tested the ECL data points from the calculation engine through to the general ledger and disclosures. We included COVID-19 specific data points in this testing.
Risk Our response to the risk Expected Credit Loss Provisions continued
Adjustments - We tested material in-model and post-model adjustments including those which were applied as a result of COVID-19. With our modelling specialists, we assessed the completeness of these adjustments and their appropriateness by considering the data, judgments, methodology, sensitivities, and governance of these adjustments as well as considering model shortcomings.
Risk Our response to the risk Impairment of goodwill and deferred tax assets and, in the parent company accounts, investments in group undertakings. At 31 December 2020, the Group had reported goodwill of £5.6 billion (2019: £5.6 billion) and deferred tax assets of £0.6 billion (2019: £0.7 billion). The parent company has reported investments in group undertakings of £46.2 billion (2019: £55.8 billion).
 Disclosure adequacy including key assumptions, the sensitivity of changes to these assumptions as well as an explanation of the impairment testing performed.
Revenue forecasts: We evaluated the underlying business strategies, comparing to expected market trends and considering anticipated balance sheet growth. We obtained an understanding of the Group’s strategy and considered its expected impact on the forecasts and the extent to which decisions had been factored into the forecasts, where appropriate, in accordance with the relevant accounting standards. We also inspected the findings from the review performed by management including their own sensitivity analysis of the forecasts.
Cost forecasts: We tested how previous management forecasts, including the impact of cost reduction programmes, compared to actual results to evaluate the accuracy of the forecasting process. We involved our cost transformation specialists to assist us in assessing the achievability of future cost reduction plans by evaluating the details of the underlying initiatives and how cost ratios compared to peer banks and commentaries from external analysts.
Disclosure: We evaluated the adequacy of disclosures in the financial statements including the appropriateness assumptions and sensitivities disclosed. We tested the data and calculations included in the disclosures.
Key observations communicated to the Group Audit Committee We are satisfied that management methodologies, judgements and assumptions supporting the carrying value of goodwill, deferred tax assets and, in the parent company accounts, investments in group undertakings, were reasonable and in accordance with IFRS. We highlighted the following matters to the Group Audit Committee:  There is inherent uncertainty in predicting revenue and costs over the five-year forecast period, particularly with respect to the impact of
 Our stress testing on Commercial goodwill indicated that it is the most at risk of impairment based on the level of headroom and the various scenario analyses performed. We are, however, satisfied that management’s conclusion that the goodwill is recoverable as at 31 December 2020 is appropriate and that they have adequately disclosed reasonably possible alternative scenarios relating to the key assumptions that could result in an impairment.
Controls testing: We evaluated the design and operating effectiveness of controls over the identification, estimation, monitoring and disclosure of provisions related to legal and conduct matters considering the potential for management override of controls. The controls tested, among others, included those to identify and monitor claims, determine when a provision is required and to ensure the completeness and accuracy of data used to estimate provisions.
Relevant references in the Annual Report and Accounts Report of the Group Audit Committee Accounting policies Note 20 and 26 on the financial statements
Risk Our response to the risk Valuation of financial instruments with higher risk characteristics including related income from trading activities As reported in note 12 to the financial statements, as at 31 December 2020 the company held financial instruments that did not trade in active markets. This included reported level 3 assets of £1.7 billion (2019: £2.5 billion) and level 3 liabilities of £0.9 billion (2019: £1.3 billion) whose value is dependent upon unobservable inputs.
Management’s estimates which required significant judgement include:  Complex models - Complex model-dependent valuations, which include interest rate swaps linked to pre-payment behaviour and interest rate and foreign exchange options with exotic features; such as those having multiple call dates and variable notional amounts;  Illiquid inputs - Pricing inputs and calibrations for illiquid instruments, including rarely traded debt securities. Additionally, derivative instruments whose valuation is dependent upon discount rates associated with complex collateral arrangements; and
 Fair value adjustments - The appropriateness and completeness of fair value adjustments made to derivatives including Funding Valuation Adjustments (FVA) and Credit Valuation Adjustments (CVA) relating to derivative counterparties whose credit spread is not directly market observable, and material product and deal specific adjustments on long dated derivative portfolios.
Controls testing: We evaluated the design and operating effectiveness of controls relating to financial instrument valuation and related income statement measurement including independent price verification, model review and approval, collateral management, and income statement analysis. We also observed the NatWest Group Executive Valuation and NWM Valuation Committees where valuation inputs, assumptions and adjustments were discussed and approved.
 Revaluing a sample of counterparty level FVA and CVAs, comparing funding spreads to third party data and independently challenging illiquid CVA inputs.
We also assessed whether there were any indicators of aggregate bias in financial instrument marking
Comparing against historic and forecast activity: We performed back-testing analysis of recent trade activity to evaluate the drivers of significant differences between book value and trade value and to assess the impact on the fair value of similar instruments within the portfolio. We also obtained and assessed the appropriateness of management’s estimate of 2021 budgeted losses in respect of asset disposals and risk reduction transactions and considered any impact on fair values at year-end and relevant disclosures. The assessment included back-testing 2020 budgeted losses against realised asset disposals and risk reduction transactions. We performed an analysis of significant disagreements with counterparty collateral calls to assess the potential impact on the fair value of the underlying (and similar) financial instruments.
Key observations communicated to the Group Audit Committee We are satisfied that the assumptions used by management to reflect the fair value of financial instruments with higher risk characteristics and the recognition of related income is reasonable and in accordance with IFRS. We highlighted the following matters to the Group Audit Committee:  Complex-model dependent valuations were appropriate based on the output of our independent re-valuations, analysis of trade activity and peer benchmarking;  The fair value estimates of hard-to-price portfolios appropriately reflected pricing information available at 31 December 2020; and
Controls testing - We evaluated the design and operating effectiveness of controls over the actuarial assumptions setting process, the data inputs used in the actuarial calculation and the measurement of the fair value of the schemes’ assets.
Key observations communicated to the Group Audit Committee We are satisfied that the valuation and disclosure of the net pension balance are reasonable and in accordance with IFRS. We highlighted the following matters to the Group Audit Committee:  Our benchmarking of key actuarial assumptions including the discount rate, inflation, longevity and pension payments concluded that assumptions were within a reasonable range;  No material differences were identified through our independent valuation testing for a sample of pension assets; and
Controls testing We tested user access by assessing the controls in place for in-scope applications and verifying the addition and periodic recertification of users’ access. During 2020, the Group consolidated their access management tools and moved further in-scope application onto a strategic platform (SLX) which will facilitate most of the Group’s Manage Access IT General Controls across applications and infrastructure platforms. We performed procedures around the transition process between IT tools, focusing on the completeness of user data and the adequacy of the control environment. A number of systems are outsourced to third party service providers. For these systems, we tested IT general controls through evaluating the relevant Service Organisation Controls reports (where available). This included assessing the timing of the reporting, the controls tested by the service auditor and whether they address relevant IT risks and the impact COVID-19 had on the overall control environment. We also tested required complementary user entity controls performed by management. Where a SOC report was not available we identified and reviewed compensating business controls to address this risk.
Where control deficiencies were identified, we tested remediation activities performed by management and compensating controls in place and assessed what additional testing procedures were necessary to mitigate any residual risk.
 For a robust control environment, the Group should seek to build and end-to-end view of controls across both infrastructure and application layers, including documentation of automated business controls, and IT general controls at the application layer.
 A high volume of control deficiencies had been remediated prior to year end, and the remaining compensated for, however, we have seen examples where further diligence could be applied to ensure consistent and continued effective control operation.
In the prior year, our auditor’s report included a key audit matter in relation to Recycling of foreign exchange reserve triggered by Alawwal bank merger and liquidation of RFS Holding BV during 2019. We did not consider this to be a key audit matter in the current year as the materiality of foreign exchange reserves decreased significantly. .
We determined materiality for the Group to be £160 million (2019: £160 million), which is 5% (2019: 5%) of the loss before tax of the Group of £351 million (2019: profit before tax of the Group of £4,232 million) adjusted for certain loan impairment charges arising from COVID-19, loss on redemption of own debt, non-recurring conduct expenses and strategic costs. The largest impact was an adjustment of £2.5 billion to reflect preCOVID -19 loan impairment charges, using 2019 as a basis. We believe removing items that would otherwise have a disproportionate impact on materiality reflects the most useful measure for users of the financial statements and is consistent with the prior year. The 5% basis used for Group materiality is consistent with the wider industry, and is the standard for listed and regulated entities.
Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.
Opinions on other matters prescribed by the Companies Act 2006 In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit:  the information given in the Strategic report and the Report of the directors for the financial year for which the financial statements are prepared is consistent with the financial statements; and  the Strategic report and the Report of the directors have been prepared in accordance with applicable legal requirements.
Corporate Governance Statement The Listing Rules require us to review the directors’ statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to the group and company’s compliance with the provisions of the UK Corporate Governance Code specified for our review.
Responsibilities of directors As explained more fully in the Statement of directors’ responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
 We understood how the Group is complying with those frameworks by making inquiries of management, internal audit and those responsible for legal and compliance matters. We also reviewed correspondence between the Group and regulatory bodies; reviewed minutes of the Board and Risk Committees; and gained an understanding of the Group’s governance framework.
 We assessed the susceptibility of the Group’s financial statements to material misstatement, including how fraud might occur by considering the controls established to address risks identified to prevent or detect fraud. We also identified the risks of fraud in our key audit matters as described above and identified areas that we considered when performing our fraud procedures, such as cybersecurity, the impact of remote working, implementation of new government supported lending products, and the appropriateness of sources used when performing confirmation testing on accounts such as cash, loans and securities.
 Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations. Our procedures involved inquiries of legal counsel, executive management, and internal audit. We also tested controls and performed procedures to respond to the fraud risks as identified in our key audit matters. These procedures were performed by both the primary team and component teams with oversight from the primary team.
 The Group operates in the banking industry which is a highly regulated environment. As such, the Senior Statutory Auditor considered the experience and expertise of the engagement team to ensure that the team had the appropriate competence and capabilities, involving specialists where appropriate.
Other matters we are required to address  Following the recommendation from the Group Audit Committee, we were appointed by the Group at its annual general meeting on 4 May 2016 to audit the financial statements for the year ending 31 December 2016 and subsequent financial periods.  The period of total uninterrupted engagement including previous renewals and reappointments is 5 years, covering periods from our appointment through 31 December 2020.
 The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Parent Company and we remain independent of the Group and the Parent Company in conducting the audit.  The audit opinion is consistent with the additional report to the Group Audit Committee.
Fees and commissions receivable 2,734 3,359 3,218 Fees and commissions payable (722) (848) (861) Income from trading activities 1,125 932 1,507 Other operating income (90) 2,763 882
Premises and equipment (1,223) (1,259) (1,383) Other administrative expenses (1,845) (2,828) (3,372) Depreciation and amortisation (905) (1,176) (731) Impairment of other intangible assets (9) (44) (37)
Earnings per ordinary share 8 (6.2p) 26.0p 13.5p Earnings per ordinary share - fully diluted 8 (6.2p) 25.9p 13.4p
(Loss)/profit for the year (434) 3,800 2,151 Items that do not qualify for reclassification Remeasurement of retirement benefit schemes - contributions in preparation for ring-fencing (1) — — (2,053)
Attributable to: Paid-in equity holders 355 367 355 Non-controlling interests (45) 250 17
Settlement balances 2,297 4,387 Loans to banks - amortised cost* 11 6,955 7,554 Loans to customers - amortised cost 11 360,544 326,947 Securities subject to repurchase agreements 11,542 4,269 Other financial assets excluding securities subject to repurchase agreements 43,606 57,183 Other financial assets 15 55,148 61,452
Howard Davies Alison Rose-Slade Katie Murray NatWest Group plc Chairman Group Chief Executive Officer Group Chief Financial Officer Registered No. SC45551
The accounts were approved by the Board of directors on 19 February 2021 and signed on its behalf by:
Paid-in equity - at 1 January 4,058 4,058 4,058 Redeemed/reclassified (1) (1,277) — — Securities issued during the period (2) 2,218 — — At 31 December 4,999 4,058 4,058
FVOCI reserve - at 1 January 138 343 255 Implementation of IFRS 9 on 1 January 2018 — — 34 Unrealised gains/(losses) 76 (107) 97 Realised losses/(gains) (3) 152 (90) (42)
Cash flow hedging reserve - at 1 January 35 (191) 227 Amount recognised in equity 321 573 (63) Amount transferred from equity to earnings (50) (279) (518)
Foreign exchange reserve - at 1 January 1,343 3,278 2,970 Retranslation of net assets 297 (428) 195 Foreign currency (losses)/gains on hedges of net assets (55) 83 (33) Tax 6 (110) 23 Recycled to profit or loss on disposal of businesses (4) 17 (1,480) 123 At 31 December 1,608 1,343 3,278
Retained earnings - at 1 January 13,946 14,312 17,130 Implementation of IFRS 9 on 1 January 2018 — — (105) Implementation of IFRS 16 on 1 January 2019 (5) — (187) — (Loss)/profit attributable to ordinary shareholders and other equity owners (372) 3,539 2,159 Equity preference dividends paid (26) (39) (182) Paid-in equity dividends paid (355) (367) (355) Ordinary dividends paid — (3,018) (241) Unclaimed dividend 2 — — Redemption of equity preference shares (6) — — (2,805) Redemption/reclassification of paid-in equity (1) (355) — — Realised (losses)/gains in period on FVOCI equity shares - tax — — — Remeasurement of the retirement benefit schemes - contributions in preparation for ring-fencing (7) — — (2,053) - other movements 4 (142) 86 - tax 22 24 539 Changes in fair value of credit in financial liabilities designated at FVTPL
Shares issued under employee share schemes (11) (6) (2) Share-based payments 4 (113) (32)
Own shares held - at 1 January (42) (21) (43) Shares issued under employee share schemes 95 39 87 Own shares acquired (77) (60) (65)
(4) Includes £290 million recycled on completion of the Alawwal bank merger in June 2019 (with a further £48m shown in Tax), £1,102 million recycled on the subsequent liquidation of RFS Holdings B.V. (with a further £65m shown in Tax), and £67m attributable to the capital repayment by UBI DAC in 2019. The Alawwal bank merger resulted in the derecognition of the associate investment in Alawwal bank and recognition of a new investment in SABB held at FVOCI. The recycling gains arising from the liquidation of RFS Holdings B.V. and capital repayment by UBI DAC, have been calculated using the step-by-step method in IFRIC 16 ‘Hedges of a Net Investment in a Foreign Operation’ and by reference to the absolute reduction in ownership interest respectively. Amount recycled also includes £2,661 million related to historical hedge relationship taken to non interest income.
(5) Years ended 31 December 2020 and 31 December 2019 prepared under IFRS 16 Leases. Year ended 31 December 2018 prepared under IAS 17 Leases. (6) During 2018, non-cumulative US dollar, Euro and Sterling preference shares were redeemed. (7) On 17 April 2018 NatWest Group agreed a Memorandum of Understanding (MoU) with the Trustees of the NatWest Group Pension Fund in connection with the requirements of ring-fencing. NWM Plc could not continue to be a participant in the Main section and separate arrangements were required for its employees. Under the MoU, NWB Plc made a contribution of £2 billion on 9 October 2018 to strengthen funding of the Main section in recognition of the changes in covenant. Also under the MoU, NWM Plc made a £53 million contribution to the NWM section in Q1 2019.
Net increase/(decrease) in cash and cash equivalents 38,611 (8,348) (13,669) Cash and cash equivalents at 1 January 100,588 108,936 122,605 Cash and cash equivalents at 31 December 29 139,199 100,588 108,936
Note: (1) Includes interest received of £10,007 million (2019 - £11,245 million, 2018 - £10,927 million) and interest paid of £2,414 million (2019 - £3,318 million,
NatWest Group plc is incorporated in the UK and registered in Scotland. Its accounts are presented in accordance with the Companies Act 2006.
Amendments to IFRS 3 Business Combinations (IFRS 3) - Changes to the definition of a business The IASB amended IFRS 3 to provide additional guidance on the definition of a business. The amendment aims to help entities when determining whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendments are in line with current accounting policy and therefore did not affect the accounts.
Interest Rate Benchmark Reform (IBOR reform) Phase 1 amendments to IFRS 9 and IAS 39 The IASB issued 'Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and
Interest Rate Benchmark Reform (IBOR reform) Phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Phase 2 of the IASB’s IBOR project (published in August 2020) addresses the wider accounting issues arising from the IBOR reform. The amendments are effective for annual reporting periods beginning on or after 1 January 2021 with early application permitted. As NatWest Group early adopted these amendments for the annual period ending on 31 December 2020, which have been endorsed by the EU and UK in January 2021, NatWest Group has applied International Accounting Standards, which have been adopted for use within the UK. NatWest Group’s IBOR transition program remains on-track and key milestones have been met. Conversion from rates subject to reform to alternative risk-free rates (RFRs) is expected to increase as RFR-based products become more widely available and key market-driven conversion events occur.
Accounting policy change - balances held with central banks The definitions of central banks and the classification of amounts that are held in cash and balances at central banks and loans to banks - amortised cost have been refined. Amounts not subject to mandatory or term deposit restrictions that are held with central banks are now classified as Cash and balances with central banks, irrespective of jurisdiction. Amounts that are subject to mandatory restrictions or time deposit restrictions of more than 24 hours are classified as Loans to banks - amortised cost. Previously, this also included amounts subject to restrictions of less than 24 hours. This change in accounting policy resulted in a £5.0 billion increase in Cash and balances at central banks and a corresponding reduction in Loans to banks - amortised cost at 31 December 2020, and a balance sheet reclassification from Loans to banks - amortised cost to Cash and balances at central banks of £3.1 billion at 31 December 2019 (1 January 2019 - £2.5 billion). These did not impact the consolidated cash flow statement.
Fees in respect of services are recognised as the right to consideration accrues through the performance of each distinct service obligation to the customer. The arrangements are generally contractual and the cost of providing the service is incurred as the service is rendered. The price is usually fixed and always determinable.
6. Intangible assets and goodwill Intangible assets acquired by NatWest Group are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to profit or loss over the assets' estimated useful economic lives using methods that best reflect the pattern of economic benefits and is included in Depreciation and amortisation. These estimated useful economic lives are: Computer software 3 to 12 years Other acquired intangibles 5 to 10 years
Expenditure on internally generated goodwill and brands is written-off as incurred. Direct costs relating to the development of internaluse computer software are capitalised once technical feasibility and economic viability have been established. These costs include payroll, the costs of materials and services, and directly attributable overheads. Capitalisation of costs ceases when the software is capable of operating as intended. During and after development, accumulated costs are reviewed for impairment against the benefits that the software is expected to generate. Costs incurred prior to the establishment of technical feasibility and economic viability are expensed as incurred, as are all training costs and general overheads. The costs of licences to use computer software that are expected to generate economic benefits beyond one year are also capitalised.
7. Impairment of non-financial assets At each balance sheet date, NatWest Group assesses whether there is any indication that its intangible assets, rights of use or property, plant and equipment are impaired. If any such indication exists, NatWest Group estimates the recoverable amount of the asset and the impairment loss, if any. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.
9. Leases As lessor Finance lease contracts are those which transfer substantially all the risks and rewards of ownership of an asset to a customer. All other contracts with customers to lease assets are classified as operating leases.
Rental income from operating leases is recognised in other operating income on a straight-line basis over the lease term unless another systematic basis better represents the time pattern of the asset’s use. Operating lease assets are included within Property, plant and equipment and depreciated over their useful lives.
10. Provisions and contingent liabilities NatWest Group recognises a provision for a present obligation resulting from a past event when it is more likely than not that it will be required to transfer economic benefits to settle the obligation and the amount of the obligation can be estimated reliably.
11. Tax Income tax expense or income, comprising current tax and deferred tax, is recorded in the income statement except income tax on items recognised outside profit or loss which is credited or charged to other comprehensive income. The tax consequences of servicing equity instruments are recognised in the income statement.
Deferred tax is the tax expected to be payable or recoverable in respect of temporary differences between the carrying amount of an asset or liability for accounting purposes and the carrying amount for tax purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent their recovery is probable.
Accounting for taxes is judgmental and carries a degree of uncertainty because tax law is subject to interpretation, which might be questioned by the relevant tax authority. NatWest Group recognises the most likely current and deferred tax liability or asset, assessed for uncertainty using consistent judgments and estimates. Current and deferred tax assets are only recognised where their recovery is deemed probable, and current and deferred tax liabilities are recognised at the amount that represents the best estimate of the probable outcome having regard to their acceptance by the tax authorities.
Other financial assets which are managed under a business model of both ‘held to collect and sell’ and have contractual cash flows comprising solely of payments of principal and interest are measured at fair value through other comprehensive income (‘FVOCI’).
Judgement is exercised as follows:  Models – in certain low default portfolios,
 Multiple economic scenarios (MES) – the central, or base, scenario is most critical to the ECL calculation, independent of the
 Significant increase in credit risk - IFRS 9 requires that at each reporting date, an entity shall assess whether the credit risk on an account has increased significantly since initial recognition. Part of this assessment requires a comparison to be made between the current lifetime PD (i.e. the current probability of default over the remaining lifetime) with the equivalent lifetime PD as determined at the date of initial recognition.
The typical time frames from initial impairment to write-off for NatWest Group’s collectivelyassessed portfolios are:  Retail mortgages: write-off usually occurs within five years, or earlier, when an account is closed, but can be longer where the customer engages constructively,
 Credit cards: the irrecoverable amount is typically written off after twelve arrears cycles or at four years post default any remaining amounts outstanding are written off,
 Overdrafts and other unsecured loans: write-off occurs within six years,
A financial liability is removed from the balance sheet when the obligation is discharged, or is cancelled, or expires.
17. Sale and repurchase transactions Securities subject to a sale and repurchase agreement under which substantially all the risks and rewards of ownership are retained by NatWest Group continue to be shown on the balance sheet and the sale proceeds recorded as a financial liability. Securities acquired in a reverse sale and repurchase transaction under which NatWest Group is not exposed to substantially all the risks and rewards of ownership are not recognised on the balance sheet and the consideration paid is recorded as a financial asset. Sale and repurchase transactions that are not accounted for at fair value through profit or loss are measured at amortised cost. The difference between the consideration paid or received and the repurchase or resale price is treated as interest and recognised in interest income or interest expense over the life of the transaction.
The consideration for any ordinary shares of NatWest Group plc purchased by NatWest Group (treasury shares) is deducted from equity. On the cancellation of treasury shares their nominal value is removed from equity and any excess of consideration over nominal value is treated in accordance with the capital maintenance provisions of the Companies Act 2006.
On the sale or re-issue of treasury shares the consideration received and related tax are credited to equity, net of any directly attributable incremental costs.
20. Derivatives and hedging Derivative financial instruments are initially recognised, and subsequently measured, at fair value. NatWest Group’s approach to determining the fair value of financial instruments is set out in the Critical accounting policies section and key sources of estimation uncertainty entitled Fair value - financial instruments; further details are given in Notes 10 and 12 to the accounts.
Hedge relationships are formally designated and documented at inception in line with the requirements of IAS 39 Financial instruments – Recognition and measurement. The documentation identifies the hedged item, the hedging instrument and details of the risk that is being hedged and the way in which effectiveness will be assessed at inception and during the period of the hedge. If the hedge is not highly effective in offsetting changes in fair values or cash flows attributable to the hedged risk, consistent with the documented risk management strategy, hedge accounting is discontinued. Hedge accounting is also discontinued if NatWest Group revokes the designation of a hedge relationship.
Fair value hedge - in a fair value hedge, the gain or loss on the hedging instrument is recognised in profit or loss. The gain or loss on the hedged item attributable to the hedged risk is recognised in profit or loss and, where the hedged item is measured at amortised cost, adjusts the carrying amount of the hedged item. Hedge accounting is discontinued if the hedge no longer meets the criteria for hedge accounting; or if the hedging instrument expires or is sold, terminated or exercised; or if hedge designation is revoked. If the hedged item is one for which the effective interest rate method is used, any cumulative adjustment is amortised to profit or loss over the life of the hedged item using a recalculated effective interest rate.
Critical accounting policy Note Deferred tax 7 Fair value - financial instruments 12 Loan impairment provisions 14 Goodwill 16 Provisions for liabilities and charges 20
Effective 1 January 2022  Onerous Contracts – Cost of Fulfilling a
 Fees in the “10 per cent” test for Derecognition of Financial Liabilities (Amendments to IFRS 9).
NatWest Group is assessing the effect of adopting these standards and amendments on its financial statements but do not expect the effect to be material.
Balances at central banks 90 321 358 Loans to banks - amortised cost 246 405 164 Loans to customers - amortised cost 9,252 9,795 9,993 Other financial assets 483 854 534
Internal funding of trading businesses 19 168 42 Interest payable 2,322 3,328 2,393 Net interest income 7,749 8,047 8,656
Alawwal bank merger in June 2019; In 2019, £1,102 million of FX recycling gains arising on the liquidation of RFS Holdings BV and £67 million in relation to a capital repayment by UBI DAC. The recycling gains and capital repayment have been calculated using the step-by-step method in IFRIC 16 and by reference to the proportion of equity applied to the FX translation reserve.
(5) Includes income from activities other than banking. 2018 includes insurance recoveries of £357 million. (6) 2020 includes £58 million loss on acquisition of a £3.0 billion prime UK mortgages portfolio from Metro Bank plc.
Temporary and contract costs 258 401 442 Social security costs 320 300 307 - defined benefit schemes (see Note 5) 215 188 307
(4) Includes litigation and conduct costs, net of amounts recovered. Refer to Notes 20 and 26 for further details.
Financial statem ents 3 Operating expenses continued The fair value of options granted in 2020 was determined using a pricing model that included: expected volatility of shares determined at the grant date based on historical volatility over a period of up to five years; expected option lives that equal the vesting period; expected dividends on equity shares; and risk-free interest rates determined from UK gilts with terms matching the expected lives of the options.
Options are exercisable within six months of vesting; 6.3 million options were exercisable at 31 December 2020 (2019 – 3.2 million; 2018 – 4.9 million). The weighted average share price at the date of exercise of options was £1.57 (2019 - £2.49; 2018 - £2.13). At 31 December 2020, exercise prices ranged from £1.12 to £2.27 (2019 - £1.68 to £2.91; 2018 - £1.68 to £3.43) and the remaining average contractual life was 2.3 years (2019 - 2.7 years; 2018 – 2.9 years). The fair value of options granted in 2020 was £8 million (2019 - £11 million; 2018 - £21 million).
Deferred performance awards 2020 2019 2018 Value at Shares Value at Shares Value at Shares grant awarded grant awarded grant awarded £m (million) £m (million) £m (million)
The awards granted in 2020 vest in equal tranches on their anniversaries, predominantly over three years.
The market value of awards vested/exercised in 2020 was £13 million (2019 - £10 million; 2018 - £5 million). There are no vested options of shares exercisable up to 2021 (2019 - nil; 2018 - 2 million).
Bonus awarded 206 307 335 Less: deferral of charge for amounts awarded for current year (77) (110) (130) Income statement charge for amounts awarded in current year 129 197 205
Add: current year charge for amounts deferred from prior years 114 127 86 Less: forfeiture of amounts deferred from prior years (11) (25) (66) Income statement charge for amounts deferred from prior years 103 102 20
Actual Expected 2018 2019 2020 2021 and beyondYear in which income statement charge is expected to be taken for deferred bonus awards £m £m £m £m £m Bonus awards deferred from 2018 and earlier 86 127 30 13 7 Bonus awards deferred from 2019 — — 84 12 10 Less: forfeiture of amounts deferred from prior years (66) (25) (11) — — Bonus awards for 2020 deferred — — — 58 19 4 Segmental analysis The directors manage NatWest Group primarily by class of business and present the segmental analysis on that basis. This includes the review of net interest income for each class of business. Interest receivable and payable for all reportable segments is therefore presented net. Segments charge market prices for services rendered between each other; funding charges between segments are determined by NatWest Group Treasury, having regard to commercial demands. The segment performance measure is operating profit/(loss).
Reportable operating segments: The reportable operating segments are as follows: Retail Banking serves individuals and mass affluent customers in the UK and includes Ulster Bank customers in Northern Ireland.
Commercial Banking serves start-up, SME, commercial and corporate customers in the UK.
NatWest Markets (NWM) helps NatWest Group’s corporate and institutional customers manage their financial risks safely and achieve their short-term and long-term sustainable financial goals.
Central items & other includes corporate functions, such as NatWest Group Treasury, finance, risk management, compliance, legal, communications and human resources. Central functions manages NatWest Group capital resources and NatWest Group-wide regulatory projects and provides services to the reportable segments. Balances in relation to legacy litigation issues and the international private banking business are included in Central items in the relevant periods.
Allocation of central balance sheet items NatWest Group allocates all central costs relating to Services and Functions to the business using appropriate drivers; these are reported as indirect costs in the segmental income statements. Assets and riskweighted assets held centrally, mainly relating to NatWest Group Treasury, are allocated to the business using appropriate drivers.
External segment Total External segment Total External segment Total Total revenue (1) £m £m £m £m £m £m £m £m £m
Note: (1) Total revenue comprises interest receivable, fees and commissions receivable, income from trading activities and other operating income.
External segment Total External segment Total External segment Total Total income £m £m £m £m £m £m £m £m £m
Fees and commissions receivable - Credit and debit card fees 427 28 154 12 2 — — 623 fiduciary services
Fees and commissions receivable - Credit and debit card fees 402 22 175 13 — — — 612 - Investment management, trustee and
Assets Liabilities Assets Liabilities Assets Liabilities £m £m £m £m £m £m
Defined benefit schemes NatWest Group sponsors a number of pension schemes in the UK and overseas, including the Main section of the NatWest Group Pension Fund (the “Main section”) which operates under UK trust law and is managed and administered on behalf of its members in accordance with the terms of the trust deed, the scheme rules and UK legislation.
The schemes generally provide a pension of one-sixtieth of final pensionable salary for each year of service prior to retirement up to a maximum of 40 years and are contributory for current members. These have been closed to new entrants for over ten years, although current members continue to build up additional pension benefits, currently subject to 2% maximum annual salary inflation, while they remain employed by NatWest Group.
The Main section corporate trustee is NatWest Pension Trustee Limited (the Trustee), a wholly owned subsidiary of NWB Plc, Principal Employer of the Main section. The Board of the Trustee comprises four member trustee directors selected from eligible active staff, deferred and pensioner members who apply and six appointed by NatWest Group. Under UK legislation, a defined benefit pension scheme is required to meet the statutory funding objective of having sufficient and appropriate assets to cover its liabilities (the pensions that have been promised to members).
Investment strategy The assets of the Main section, which is typical of other group schemes, represent 90% of plan assets at 31 December 2020 (2019 - 90%) and are invested as shown below.
The Main section’s holdings of derivative instruments are summarised in the table below: Notional Fair value Notional Fair value amounts Assets Liabilities amounts Assets Liabilities £bn £m £m £bn £m £m
Equity and bond call options 1 169 1 1 122 — Equity and bond put options 3 1 19 5 3 1
The schemes do not invest directly in NatWest Group but can have exposure to NatWest Group. The trustees of the respective UK schemes are responsible for ensuring that indirect investments in NatWest Group do not exceed the 5% regulatory limit.
Statement of comprehensive income Return on plan assets excluding recognised interest income 5,486 — — (5,486) 6,027 — — (6,027) Experience gains and losses — (427) — (427) — (455) — (455) Effect of changes in actuarial financial assumptions — 5,419 — 5,419 — 5,974 — 5,974 Effect of changes in actuarial demographic assumptions — 138 — 138 — 185 — 185
Contributions by plan participants and other scheme members 9 9 — — 14 14 — — Liabilities extinguished upon settlement — — — — (2) (3) — (1)
Notes: (1) Defined benefit obligations are subject to annual valuation by independent actuaries. (2) NatWest Group recognises the net pension scheme surplus or deficit as a net asset or liability. In doing so, the funded status is adjusted to reflect any schemes with a surplus that NatWest Group may not be able to access, as well as any minimum funding requirement to pay in additional contributions. This is most relevant to the Main section, where the surplus is not recognised. Other NatWest Group schemes that this applies to include the Ulster Bank Limited scheme and the NatWest Markets section.
Net assets of schemes in surplus (included in Other assets, Note 17) 723 614 Net liabilities of schemes in deficit (included in Other liabilities, Note 20) (121) (119)
Inflation assumption (RPI) 2.9 2.9 RPI swap yield curve Rate of increase in salaries 1.8 1.8 Rate of increase in deferred pensions 3.0 3.0 Rate of increase in pensions in payment 2.7 2.8 Modelled allowance for relevant caps and floors Lump sum conversion rate at retirement 20 20 18% Longevity at age 60: years years Current pensioners
Significant judgement is required when setting the criteria for bonds to be included in the basket of bonds that is used to determine the discount rate used in the IAS 19 valuations. The criteria include issue size, quality of pricing and the exclusion of outliers. Judgement is also required in determining the shape of the yield curve at long durations; a constant credit spread relative to gilts is assumed. Sensitivity to the main assumptions is presented below.
Financial statem ents 5 Pensions continued The chart below shows the projected benefit payment pattern for the Main section in nominal terms. These cashflows are based on the most recent formal actuarial valuation, effective 31 December 2017.
0.25% increase in credit spreads (6) (2,384) 2,378 Longevity increase of one year — 1,930 (1,930) 0.25% additional rate of increase in pensions in payment — 1,608 (1,608) Increase in equity values of 10% (1) 454 — 454 0.25% increase in interest rates/discount rate (2,330) (1,973) (357)
0.25% increase in credit spreads (5) (1,973) 1,968 Longevity increase of one year — 1,706 (1,706) 0.25% additional rate of increase in pensions in payment — 1,326 (1,326) Increase in equity values of 10% (1) 430 — 430
Financial statem ents 5 Pensions continued The defined benefit obligation of the Main section is attributable to the different classes of scheme members in the following proportions: Active members 14.2 13.6 Deferred members 50.9 49.7 Pensioners and dependants 34.9 36.7
The experience history of NatWest Group schemes is shown below: Main section All schemes
6 Auditor’s remuneration Amounts payable to NatWest Group's auditors for statutory audit and other services are set out below. All audit-related and other services are approved by the Group Audit Committee and are subject to strict controls to ensure the external auditor’s independence is unaffected by the provision of other services. The Group Audit Committee recognises that for certain assignments, the auditors are best placed to perform the work economically; for other work, NatWest Group selects the supplier best placed to meet its requirements. NatWest Group’s auditors are permitted to tender for such work in competition with other firms where the work is permissible under audit independence rules.
Notes: (1) The 2020 audit fee was approved by the Group Audit Committee. At 31 December 2020, £23 million has been billed and paid in respect of the 2020 NatWest
Group audit fees. (2) Comprises fees of £1.1 million (2019 - £1.1 million) in relation to reviews of interim financial information, £3.2 million (2019 - £1.4 million) in respect of reports to
Current tax Charge for the year (191) (673) (1,025) Over provision in respect of prior years 86 122 125
(Under)/over provision in respect of prior years (90) 19 (35) Tax charge for the year (83) (432) (1,208)
The actual tax charge differs from the expected tax charge, computed by applying the standard rate of UK corporation tax of 19% (2019 and 2018 – 19%), as follows: £m £m £m
Non-taxable items: - Alawwal bank merger gain disposal — 215 — - FX recycling on the liquidation of RFS Holdings — 279 — - other non-taxable items 28 80 47 Taxable foreign exchange movements (3) (1) (27) Losses brought forward and utilised 16 27 14 Increase/(decrease) in the carrying value of deferred tax assets in respect of: - UK losses 7 129 7
Deferred tax asset (901) (1,011) Deferred tax liability 291 266 Net deferred tax asset (610) (745)
Implementation of IFRS16 on 1 January 2019 — — — — — (60) (60) Acquisitions and disposals of subsidiaries (1) (1) — 18 — — 16 Charge/(credit) to income statement 28 (43) 41 (81) (28) (36) (119) Charge/(credit) to other comprehensive income 362 — — 30 — (20) 372 Currency translation and other adjustments — (4) — (1) 13 (4) 4
Charge/(credit) to income statement 15 (234) 33 114 55 (5) (22) Charge/(credit) to other comprehensive income 119 — — 51 — (7) 163 Currency translation and other adjustments 1 (2) — — (9) 4 (6)
Judgment - NatWest Group has considered the carrying value of deferred tax assets and concluded that, based on management’s estimates, sufficient taxable profits will be generated in future years to recover recognised deferred tax assets.
NWM Plc – NWM Plc expects that the balance of recognised deferred tax asset at 31 December 2020 of £62 million (2019 - £75 million) in respect of tax losses amounting to approximately £325 million will be recovered by the end of 2027. The movement in the current financial year reflects a £22 million decrease in the carrying value of the deferred tax asset, offset by a £9m increase due to the UK tax rate change impact.
RBS plc – A deferred tax asset of £200 million has been recognised in respect of losses of £1,053 million of total losses of £4,242 million carried forward at 31 December 2020. The losses were transferred from NatWest Markets Plc as a consequence of the ring fencing regulations. RBS plc expects the deferred tax asset to be utilised against future taxable profits by the end of 2026.
NatWest Market N.V. (NWM N.V.) – NWM N.V. Group management did not recognise a deferred tax asset in respect of losses carried forward at 31 December 2020 due to the implications from the wider strategic review of the NWM franchise, and the uncertainty around the consequences of Brexit on the volume and pace of transfers of business from NWM Plc and NWB Plc to NWM N.V..
Unrecognised deferred tax Deferred tax assets of £4,965 million (2019 - £4,653 million; 2018 - £5,118, million) have not been recognised in respect of tax losses and other temporary differences carried forward of £25,091 million (2019 - £23,555 million; 2018 - £25,597 million) in jurisdictions where doubt exists over the availability of future taxable profits. Of these losses and other temporary differences, £714 million expire within five years and £4,496 million thereafter. The balance of tax losses and other temporary differences carried forward has no expiry date.
8 Earnings per share £m £m £m Earnings (Loss)/Profit attributable to ordinary shareholders (753) 3,133 1,622
Loans Reverse repos 19,404 24,095 Collateral given 18,760 20,579 Other loans 1,611 1,947 Total loans 39,775 46,621 Securities Central and local government
Collateral received 23,229 21,509 Other deposits 1,804 1,606 Total deposits 44,069 51,000 Debt securities in issue 1,408 1,762 Short positions 26,779 21,187
Financial statem ents 10 Derivatives Companies within NatWest Group transact derivatives as principal either as a trading activity or to manage balance sheet foreign exchange, interest rate and credit risk.
Cash flow hedges of interest rate risk relates to exposures to the variability in future interest payments and receipts due to the movement of benchmark interest rates on forecast transactions and on recognised financial assets and financial liabilities. This variability in cash flows is hedged by interest rate swaps, fixing the hedged cash flows. For these cash flow hedge relationships, the hedged items are actual and forecast variable interest rate cash flows arising from financial assets and financial liabilities with interest rates linked to the relevant benchmark rate LIBOR, EURIBOR, SONIA, the Bank of England Official Bank Rate or the European Central Bank Refinance Rate. The variability in cash flows due to movements in the relevant benchmark rate is hedged; this risk component is identified using the risk management systems of NatWest Group. This risk component comprises the majority of cash flow variability risk.
Exchange rate risk also arises in NatWest Group where payments are denominated in different currencies than the functional currency. Residual risk positions are hedged with forward foreign exchange contracts. Exposure to the variability in future payments due to the movement of foreign exchange rates is hedged, fixing the exchange rate the payments will be settled in. The derivatives are documented as cash flow hedges.
For all cash flow hedging and fair value hedge relationships NatWest Group determines that there is an adequate level of offsetting between the hedged item and hedging instrument by assessing the initial and ongoing effectiveness by comparing movements in the fair value of the expected highly probable forecast interest cash flows/fair value of the hedged item attributable to the hedged risk with movements in the fair value of the expected changes in cash flows from the hedging interest rate swap. Hedge effectiveness is measured on a cumulative basis over a time period management determines to be appropriate. NatWest Group uses either the actual ratio between the hedged item and hedging instrument(s) or one that minimises hedge ineffectiveness to establish the hedge ratio for hedge accounting.
The disclosures made for the notional of hedging instruments and risk exposures affected by interest rate benchmark reform contain information for both the hedging instrument and hedged risks even if only one of these will be directly impacted by the reform.
The notional of hedging instruments affected by interest rate benchmark reform is as follows: 2020 2019 £bn £bn
Fair value hedging - Other CCY LIBOR 1.1 — Cash flow hedging
Financial statem ents 10 Derivatives continued The table below analyses assets and liabilities, subject to hedging derivatives.
Carrying value Impact on value used as ceased to be of hedged hedged items a basis to adjusted for assets and included in determine hedging liabilities carrying value ineffectiveness (1) gains or losses 2020 £m £m £m £m Fair value hedging - interest rate Loans to banks and customers - amortised cost 7,947 1,242 323 77 Other financial assets - securities 34,665 2,254 1,568 —
Other financial liabilities - debt securities in issue 29,317 1,336 (746) —
Cash flow hedging - exchange rate Other financial liabilities - debt securities in issue 9,582 52
Fair value hedging - interest rate Loans to banks and customers - amortised cost 6,716 1,023 165 86 Other financial assets - securities 35,796 1,274 1,474 —
Cash flow hedging - interest rate Bank and customer deposits 75,837 225 Other financial liabilities - debt securities in issue 1,009 14
Note: (1) The change in fair value used for hedge ineffectiveness instruments derecognised in the year.
Financial statem ents 10 Derivatives continued The following risk exposures will be affected by interest rate benchmark reform (notional, hedged adjustment): Hedged Hedged
The following table shows an analysis of cash flow hedge reserve and foreign exchange hedge reserve.
Interest rate risk Amount recognised in equity 318 — 585 — Amount transferred from equity to net interest income (19) — (243) — Foreign exchange risk Amount recognised in equity 3 (57) (12) 83 Amount transferred from equity to net interest income (35) — (36) — Amount transferred from equity to non interest income — 2 — 2,752 Amount transferred from equity to operating expenses 4 — — —
Assets £m £m £m £m £m Cash and balances at central banks 124,489 124,489 Trading assets 68,990 68,990
Settlement balances 2,297 2,297 Loans to banks - amortised cost (2) 6,955 6,955 Loans to customers - amortised cost (3) 360,544 360,544
Cash and balances at central banks* 80,993 80,993 Trading assets 76,745 76,745
Settlement balances 4,387 4,387 Loans to banks - amortised cost* (2) 7,554 7,554 Loans to customers - amortised cost (3) 326,947 326,947
Customer deposits 369,247 369,247 Settlement balances 4,069 4,069 Trading liabilities 73,949 73,949
Notes: (1) Includes net hedging derivatives assets of £93 million (2019 - £202 million) and net hedging derivatives liabilities of £130 million (2019 - £22 million). (2) Includes items in the course of collection from other banks of £148 million (2019 - £50 million). (3) Includes finance lease receivables of £9,061 million (2019 - £9,212 million).
(6) Includes lease liabilities of £1,698 million (2019 - £1,823 million) held at amortised cost.
 The contractual cash flow characteristics of financial assets are assessed with reference to whether the cash flows represent SPPI. A level of judgement is made in assessing terms that could change the contractual cash flows so that it would not meet the condition for SPPI are considered, including contingent and leverage features, non-recourse arrangements and features that could modify the time value of money.
Reverse repos Trading assets 19,404 24,095 Loans to banks - amortised cost 153 165 Loans to customers - amortised cost 25,011 10,649
Repos Bank deposits 6,470 2,597 Customer deposits 5,167 1,765 Trading liabilities 19,036 27,885
The tables below present information on financial assets and financial liabilities that are offset on the balance sheet under IFRS or subject to enforceable master netting agreements together with financial collateral received or given.
GBP LIBOR USD IBOR (1) EUR IBOR Other IBOR IBOR reform credit losses Total £m £m £m £m £m £m £m
Loans to banks - amortised cost 23 82 101 — 6,751 (2) 6,955 Loans to customers - amortised cost 39,858 5,289 4,950 234 316,200 (5,987) 360,544
AT1 issuances NatWest Group has issued certain capital instruments (AT1), under which reset clauses are linked to IBOR rates subject to reform. Where under the contractual terms of the instrument the coupon resets to a rate which has IBOR as a specified component of its pricing structure, these are subject to IBOR reform and listed below: £m
US$ 1.15 billion 8% notes 734 US$ 2.65 billion 8.625% notes 2,046
NatWest Group‘s non-cumulative preference shares of USD$0.01 Series U (£494 million) is also subject to IBOR reform.
Where the market for a financial instrument is not active, fair value is established using a valuation technique. These valuation techniques involve a degree of estimation, the extent of which depends on the instrument’s complexity and the availability of market-based data. Further details about the valuation methodologies and the sensitivity to reasonably possible alternative assumptions of the fair value of financial instruments valued using techniques where at least one significant input is unobservable are given below.
Notes: (1) Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instrument was transferred. There were no significant transfers between level 1 and level 2. (2) For an analysis of debt securities held at mandatory fair value through profit or loss by issuer as well as ratings and derivatives, by type and contract, refer to
Financial statem ents 12 Financial instruments - valuation continued Fair value hierarchy Financial Instruments carried at fair value have been classified under the IFRS fair value hierarchy as follows.
Level 1 – instruments valued using unadjusted quoted prices in active and liquid markets, for identical financial instruments. Examples include government bonds, listed equity shares and certain exchangetraded derivatives.
Level 2 - instruments valued using valuation techniques that have observable inputs. Examples include most government agency securities, investment-grade corporate bonds, certain mortgage products, including CLOs, most bank loans, repos and reverse repos, less liquid listed equities, state and municipal obligations, most notes issued, certain money market securities, loan commitments and most OTC derivatives.
Prepayment rates - the fair value of a financial instrument that can be prepaid by the issuer or borrower differs from that of an instrument that cannot be prepaid. In valuing prepayable instruments that are not quoted in active markets, NatWest Group considers the value of the prepayment option.
The Model Oversight Review Committee sets the policy for model documentation, testing and review, and prioritises models with significant exposure being reviewed by the NatWest Group Model Risk team. Valuation Committees are made up of valuation specialists and senior business representatives from various functions and oversees pricing, reserving and valuations issues. These committees meet monthly to review and ratify any methodology changes. The Executive Valuation Committee meets quarterly to address key material and subjective valuation issues, to review items escalated by Valuation Committees and to discuss other relevant matters, including prudential valuation.
NatWest Group uses consensus prices for the IPV of some instruments. The consensus service encompasses the equity, interest rate, currency, commodity, credit, property, fund and bond markets, providing comprehensive matrices of vanilla prices and a wide selection of exotic products.
Data from consensus services are subject to the same level of quality review as other inputs used for IPV process. All sources of independent data are reviewed for quality and are applied in the IPV processes using a formalised input quality hierarchy.
In order to determine a reliable fair value, where appropriate, management applies valuation adjustments to the pricing information gathered from the above sources. The sources of independent data are reviewed for quality and are applied in the IPV processes using a formalised input quality hierarchy. These adjustments reflect NatWest Group's assessment of factors that market participants would consider in setting a price.
When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, funding and credit risk. These adjustments are presented in the table below: Adjustment £m £m Funding – FVA 140 244 Credit – CVA 390 386 Bid – Offer 148 165 Product and deal specific 172 238
Funding valuation adjustment (FVA) FVA represents an estimate of the adjustment that a market participant would make to incorporate funding costs and benefits that arise in relation to derivative exposures. FVA is calculated as a portfolio level adjustment and can result in either a funding charge or funding benefit.
As permitted by IFRS 13, netting is applied on a portfolio basis to reflect the value at which NatWest Group believes it could exit the portfolio, rather than the sum of exit costs for each of the portfolio’s individual trades. This is applied where the asset and liability positions are managed as a portfolio for risk and reporting purposes.
Product and deal specific On initial recognition of financial assets and liabilities valued using valuation techniques incorporating information other than observable market data, any difference between the transaction price and that derived from the valuation technique is deferred. Such amounts are recognised in profit or loss over the life of the transaction; when market data becomes observable; or when the transaction matures or is closed out as appropriate. At 31 December 2020, net gains of £63 million (2019 - £88 million) were carried forward. During the year, net gains of £75 million (2019 - £183 million) were deferred and £100 million (2019 - £154 million) were recognised in the income statement.
Own Credit NatWest Group takes into account the effect of its own credit standing when valuing financial liabilities recorded at fair value in accordance with IFRS. Own credit spread adjustments are made when valuing issued debt held at fair value, including issued structured notes. An own credit adjustment is applied to positions where it is believed that counterparties would consider NWM Group’s creditworthiness when pricing trades.
Trading assets and Other financial assets Loans Price-based Price % — 105 — 101
Equity Shares Price-based Price GBP — 27,737 — 25,914 Market comparables Price % — 80 — 80 Discount cash flow Discount margin % 7 9 6 9 Net asset valuation Net asset value % 80 120 80 120
Derivative assets and liabilities Credit derivatives Credit derivative pricing Credit spreads bps 2 500 6 500
Notes: (1) The table above presents the range of values for significant inputs used in the valuation of level 3 assets and liabilities. The range represents the highest and lowest values of the input parameters and therefore is not a measure of parameter uncertainty. Movements in the underlying input may have a favourable or unfavourable impact on the valuation depending on the particular terms of the contract and the exposure. For example, an increase in the credit spread of a bond would be favourable for the issuer but unfavourable for the note holder. Whilst NatWest Group indicates where it considers that there are significant relationships between the inputs, their inter-relationships will be affected by macro economic factors including interest rates, foreign exchange rates or equity index levels.
(7) Volatility: a measure of the tendency of a price to change with time. (8) Interest rate delta: these ranges represent the low/high marks on the relevant discounting curve. (9) Upfront points: where CDS contracts are standardised, the inherent spread of the trade may exceed the standard premium paid or received under the contract.
Upfront points will compensate for the difference between the standard premium and the actual premium at the start of the contract. (10) Mean reversion: a measure of how much a rate reverts to its mean level.
(11) Constant prepayment rate: the rate is used to reflect how fast a pool of assets pay down. (12) Day count: yield analysis on deposits are calculated using day count as an input, referring to the maturity of the deposit. (13) NatWest Group does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement.
Where markets are liquid, little judgment is required. However, when the information regarding the liquidity in a particular market is not clear, a judgment may need to be made. This can be more difficult as assessing the liquidity of a market is not always straightforward. For an equity traded on an exchange, daily volumes of trading can be seen, but for an over-the-counter (OTC) derivative assessing the liquidity of the market with no central exchange is more difficult.
The breadth and depth of the IPV data allows for a rules based quality assessment to be made of market activity, liquidity and pricing uncertainty, which assists with the process of allocation to an appropriate level. Where suitable independent pricing information is not readily available, the quality assessment will result in the instrument being assessed as level 3.
Modelled products For modelled products the market convention is to quote these trades through the model inputs or parameters as opposed to a cash price equivalent. A mark-to-market is derived from the use of the independent market inputs calculated using NatWest Group’s model.
The majority of derivative instruments, for example vanilla interest rate swaps, foreign exchange swaps and liquid single name credit derivatives, are classified as level 2 as they are vanilla products valued using observable inputs. The valuation uncertainty on these is considered to be low and both input and output testing may be available.
The availability and quality of independent pricing information are considered during the classification process. An assessment is made regarding the quality of the independent information. For example, where consensus prices are used for non-modelled products, a key assessment of the quality of a price is the depth of the number of prices used to provide the consensus price. If the depth of contributors falls below a set hurdle rate, the instrument is considered to be level 3. This hurdle rate is that used in the IPV process to determine the IPV quality rating. However, where an instrument is generally considered to be illiquid, but regular quotes from market participants exist, these instruments may be classified as level 2 depending on frequency of quotes, other available pricing and whether the quotes are used as part of the IPV process or not.
Financial statem ents 12 Financial instruments – valuation: level 3 sensitivities The level 3 sensitivities presented above are calculated at a trade or low level portfolio basis. They are not calculated on an overall portfolio basis and therefore do not reflect the likely potential uncertainty on the portfolio as a whole. The figures are aggregated and do not reflect the correlated nature of some of the sensitivities. In particular, for some of the portfolios the sensitivities may be negatively correlated where a downwards movement in one asset would produce an upwards movement in another, but due to the additive presentation of the above figures this correlation cannot be displayed. The actual potential downside sensitivity of the total portfolio may be less than the noncorrelated sum of the additive figures as shown in the above table.
Trading financial Total Total Trading financial Total Total assets (2) assets (3) assets liabilities assets (2) assets (3) assets liabilities £m £m £m £m £m £m £m £m
Foreign exchange and other adjustments 2 1 3 1 (3) (1) (4) (1)
Notes: (1) There were £194 million net gain on trading assets and liabilities (2019 – £596 million losses) recorded in income from trading activities. Net losses on other instruments of £21 million (2019 – £15 million gain) were recorded in other operating income and interest income as appropriate. (2) Trading assets comprise assets held at fair value in trading portfolios. (3) Other financial assets comprise fair value through other comprehensive income, designated as at fair value through profit or loss and other fair value through profit or loss.
Items where fair value approximates Carrying Fair value hierarchy level carrying value value Fair value Level 1 Level 2 Level 3 2020 £bn £bn £bn £bn £bn £bn Financial assets Cash and balances at central banks 124.5 Settlement balances 2.3
Financial assets Cash and balances at central banks* 81.0 Settlement balances 4.4
Settlement balances 4.1 Other financial liabilities - debt securities in issue 43.0 43.7 — 38.5 5.2
The assumptions and methodologies underlying the calculation of fair values of financial instruments at the balance sheet date are as follows: Short-term financial instruments For certain short-term financial instruments: cash and balances at central banks, items in the course of collection from other banks, settlement balances, items in the course of transmission to other banks, customer demand deposits and notes in circulation, carrying value is a reasonable approximation of fair value.
(b) Expected cash flows (unadjusted for credit losses) are discounted at the current offer rate for the same or similar products. The current methodology caps all loan values at par rather than modelling clients’ option to repay loans early. This approach is adopted for lending portfolios in Retail Banking, Ulster Bank RoI, Commercial Banking (SME loans) and Private Banking in order to reflect the homogeneous nature of these portfolios.
Less than More than Less than More than 12 months 12 months Total 12 months 12 months Total £m £m £m £m £m £m Assets Cash and balances at central banks* 124,489 — 124,489 80,993 — 80,993
Loans to banks - amortised cost* 6,835 120 6,955 7,541 13 7,554 Loans to customers - amortised cost 87,531 273,013 360,544 77,742 249,205 326,947
The liability is included in the time band that contains the earliest possible date on which the conditions could be fulfilled, without considering the probability of the conditions being met.
For example, if a structured note is automatically prepaid when an equity index exceeds a certain level, the cash outflow will be included in the less than three months period, whatever the level of the index at the year end. The settlement date of debt securities in issue, issued by certain securitisation vehicles consolidated by NatWest Group, depends on when cash flows are received from the securitised assets. Where these assets are prepayable, the timing of the cash outflow relating to securities assumes that each asset will be prepaid at the earliest possible date. As the repayments of assets and liabilities are linked, the repayment of assets in securitisations is shown on the earliest date that the asset can be prepaid, as this is the basis used for liabilities.
Assets by contractual maturity Cash and balances at central banks 124,489 — — — — —
Settlement balances 2,297 — — — — — Loans to banks - amortised cost 5,600 1,245 — — 1 110 Loans to customers - amortised cost 47,507 46,718 65,138 58,680 81,544 88,155
Assets by contractual maturity Cash and balances at central banks* 80,993 — — — — —
Settlement balances 4,387 — — — — — Loans to banks - amortised cost* 6,524 1,032 5 — — — Loans to customers - amortised cost 48,793 36,108 70,957 51,667 66,453 79,174
Guarantees and commitments notional amount 119,985 — — — — —
(3) NatWest Group is only called upon to satisfy a guarantee when the guaranteed party fails to meet its obligations. NatWest Group expects most guarantees it provides to expire unused. (4) NatWest Group has given commitments to provide funds to customers under undrawn formal facilities, credit lines and other commitments to lend subject to certain conditions being met by the counterparty. NatWest Group does not expect all facilities to be drawn, and some may lapse before drawdown.
Notes: (1) Includes £6 million (2019 - £4 million) related to assets classified as FVOCI. (2) ECL provisions coverage is calculated as ECL provisions divided by loans – amortised cost and FVOCI. (3) ECL provisions coverage and ECL loss rates are calculated on third party loans and related ECL provisions and charge respectively. ECL loss rate is calculated as annualised third party ECL charge divided by loans – amortised cost and FVOCI. (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
Critical accounting policy: Loan impairment provisions The loan impairment provisions have been established in accordance with IFRS 9. Accounting policy 13 sets out how the expected loss approach is applied. At 31 December 2020, customer loan impairment provisions amounted to £6,186 million (2019 - £3,792 million). A loan is impaired when there is objective evidence that the cash flows will not occur in the manner expected when the loan was advanced. Such evidence includes, changes in the credit rating of a borrower, the failure to make payments in accordance with the loan agreement, significant reduction in the value of any security, breach of limits or covenants, and observable data about relevant macroeconomic measures.
 Point-in-time – recognise current economic conditions.  Forward-looking – incorporated into PD estimates and, where appropriate, EAD and LGD estimates.
For wholesale, while conversion ratios in the historical data show temporal variations, these cannot be sufficiently explained by the CCI measure (unlike in the case of PD and some LGD models) and are presumed to be driven to a larger extent by exposure management practices. Therefore point-in-time best estimates measures for EAD are derived by estimating the regulatory model specification on a rolling five-year window.
Central and local government Other Equity Other UK US Other debt Total shares loans Total 2020 £m £m £m £m £m £m £m £m Mandatory fair value through profit or loss — — — 88 88 14 338 440 Fair value through other comprehensive income 17,458 11,742 6,802 8,591 44,593 294 15 44,902
Dividends on FVOCI equity shares include £5 million in relation to the equity holding in OTC Derivative Limited and £2 million for VISA Inc. Dividends received in relation to equity shares disposed during the year were £15 million in relation to NWG’s equity holding in SABB.
Currency translation and other adjustments — (1) (1) (180) 2 (178) Acquisition of subsidiaries — — — 1 — 1
Disposals and write-off of fully amortised assets (2) (41) (48) (89) (8,005) (113) (8,118)
Currency translation and other adjustments — 1 1 (180) 1 (179) Disposals and write-off of fully amortised assets (41) (26) (67) (8,005) (72) (8,077) Charge for the year — 282 282 — 291 291 Impairment of intangible assets — 9 9 — 44 44
Notes: (1) Principally internally generated software. (2) Write-off of fully amortised Goodwill for £8 billion in 2019 that arose on the acquisition of ABN AMRO Holding N.V..
Impairment testing involves the comparison of the carrying value of each cash-generating unit (CGU) with its recoverable amount. The carrying values of the segments reflect the equity allocations made by management which are consistent with NatWest Group’s capital targets.
The recoverable amounts for all CGUs at 31 December 2020 were based on value in use, using management's latest five-year revenue and cost forecasts. These are discounted cash flow projections over five years. The forecast is then extrapolated in perpetuity using a longterm growth rate to compute a terminal value, which comprises the majority of the value in use. The long-term growth rates have been based on expected nominal growth of the CGUs. The pre-tax risk discount rates are based on those observed to be applied to businesses regarded as peers of the CGUs.
The recoverable amount exceeds the carrying value for each CGU at 31 December 2020. Alternative scenarios applied to consider the recoverability of the Commercial Banking goodwill indicated that there were possibilities of partial / full impairment for worse economic outlooks or failure to meet income or cost forecasts. The conclusion that Commercial Banking goodwill was recoverable reflected the current ECL outlook and management plans for costs and revenues. An impairment of Commercial Banking goodwill is possible if there is a further economic deterioration or other negative effects on costs and revenues.
Assumptions Recoverable Consequential impact of 1% adverse Consequential impact of 5% adverse Pre-tax Cost: amount movement movement
Terminal discount income exceeded Discount Terminal Forecast Forecast Goodwill growth rate rate ratio (1) carrying value rate growth rate Income cost 31 December 2020 £bn % % % £bn £bn £bn £bn £bn
Terminal discount Forecast Forecast Terminal discount Forecast Forecast growth rate rate income cost growth rate rate income cost
Change in key assumptions to reduce headroom to nil (%) % % % % % % % %
Accrued income 216 275 Tax recoverable 192 46 Deferred tax (Note 7) 901 1,011
NatWest Group plc US$750 million 3.754% dated notes 2029 Tier 2 — 577 £1,000 million 3.622% dated notes 2030 (callable between May 2025 to August 2025) Tier 2 996 — US$850 million 3.032% dated notes 2035 (callable November 2030) Tier 2 634 —
NatWest Bank Plc SEK 90 million floating rate notes 2019 Tier 1 — 8
Lease liabilities (Note 22) 1,698 1,823 Provisions for liabilities and charges 1,852 2,677 Retirement benefit liabilities (Note 5) 121 119
Expected credit losses impairment charge — — — 83 83 Currency translation and other movements — 5 1 (2) 4
Notes: (1) The balance at 31 December 2020 includes provisions held in relation to offers made in 2019 and earlier years of £110 million. (2) Materially comprises provisions relating to property closures and restructuring costs.
Critical accounting policy: Provisions for liabilities The key judgement is involved in determining whether a present obligation exists. There is often a high degree of uncertainty and judgement is based on the specific facts and circumstances relating to individual events in determining whether there is a present obligation. Judgement is also involved in estimation of the probability, timing and amount of any outflows. Where NatWest Group can look to another party such as an insurer to pay some or all of the expenditure required to settle a provision, any reimbursement is recognised when, and only when, it is virtually certain that it will be received.
 Other provisions: These materially comprise provisions for onerous contracts and restructuring costs. Onerous contract provisions comprise an estimate of the costs involved with fulfilling the terms and conditions of contracts net of any expected benefits to be received. This includes provision for contractual costs such as rates associated with vacant properties. Redundancy and restructuring provisions comprise the estimated cost of restructuring, including redundancy costs where an obligation exists.
In the three years to 31 December 2020, the percentage increase in issued share capital due to non pre-emptive issuance (excluding employee share schemes) for cash was 0.43%. In addition, the company issued 35 million ordinary shares of £1 each in connection with employee share plans.
The company may redeem some or all of the non-cumulative preference shares from time to time at the rates detailed in the table on the next page plus dividends otherwise payable for the then current dividend period to the date of redemption.
Additional Tier 1 Instruments issued by NatWest Group plc having the legal form of debt are classified as equity under IFRS. The coupons on these Instruments are non-cumulative and payable at the company’s discretion. In the event NatWest Group’s CET1 ratio falls below 7% any outstanding Instruments will be converted into ordinary shares at a fixed price.
Notes: (1) Issued in August 2015. In the event of conversion, converted into ordinary shares at a price of $3.606 nominal per £1 share.
(2) Issued in August 2016. In the event of conversion, converted into ordinary shares at a price of $2.284 nominal per £1 share. (3) Issued in June 2020. In the event of conversion, converted into ordinary shares at a price of £1.754 (translated at applicable exchange rate) per £1 share.
NatWest Group plc optimises capital efficiency by maintaining reserves in subsidiaries, including regulated entities. Certain preference shares and subordinated debt are also included within regulatory capital. The remittance of reserves to the company or the redemption of shares or subordinated capital by regulated entities may be subject to maintaining the capital resources required by the relevant regulator.
UK law prescribes that only the reserves of the company are taken into account for the purpose of making distributions and in determining permissible applications of the share premium account.
Rental expense on short term leases (1) (4) Income from subleasing right of use assets 4 9 £m £m
Notes: (1) Includes impairment of right of use assets of £89 million (2019: £86 million). (2) Includes right of use asset for plant and equipment of £8 million (2019: £23 million) and depreciation of £2 million (2019: £5 million). (3) Contractual cashflows of lease liabilities is shown in Note 13.
Financial statem ents 22 Leases continued The following tables show undiscounted lease receivables from operating leases: £m £m
Financial statem ents 23 Structured entities A structured entity (SE) is an entity that has been designed such that voting or similar rights are not the dominant factor in deciding who controls the entity, for example, when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. SEs are usually established for a specific, limited purpose. They do not carry out a business or trade and typically have no employees. They take a variety of legal forms - trusts, partnerships and companies - and fulfil many different functions. As well as being a key element of securitisations, SEs are also used in fund management activities in order to segregate custodial duties from the provision of fund management advice.
NatWest Group involvement in client securitisations takes a number of forms. It may: sponsor or administer a securitisation programme; provide liquidity facilities or programme-wide credit enhancement; and purchase securities issued by the vehicle.
Other credit risk transfer securitisations NatWest Group also transfers credit risk on originated loans and mortgages without the transfer of assets to an SE. As part of this, NatWest Group enters into credit derivative and financial guarantee contracts with consolidated SEs. At 31 December 2020, debt securities in issue by such SEs (and held by third parties) were £772 million (2019 - £673 million). The associated loans and mortgages at 31 December 2020 were £10,027 million (2019 - £9,001 million). At 31 December, ECL in relation to non-defaulted assets was reduced by £183 million (2019 - £29 million) as a result of financial guarantee contracts with consolidated SEs.
Covered debt programme Group companies have assigned loans to customers and debt investments to bankruptcy remote limited liability partnerships to provide security for issues of debt securities. NatWest Group retains all of the risks and rewards of these assets and continues to recognise them. The partnerships are consolidated by NatWest Group and the related covered bonds included within other financial liabilities. At 31 December 2020, £10,758 million (2019 - £9,630 million) of loans to customers and £318 million (2019 - £280 million) of debt investments provided security for debt securities in issue and other borrowing of £4,105 million (2019 - £7,241 million).
Securities sold under repurchase transactions and transactions with the substance of securities repurchase agreements are not derecognised if NatWest Group retains substantially all the risks and rewards of ownership. The fair value (and carrying value) of securities transferred under such transactions included on the balance sheet, are set out below. All of these securities could be sold or repledged by the holder.
The following assets have failed derecognition (1) £m £m Trading assets 20,526 23,247 Loans to banks - amortised cost 5 — Loans to customers - amortised cost 39 — Other financial assets 11,542 4,269
Note: (1) Associated liabilities were £31,932 million (2019 – £27,342 million).
Note: (1) Includes assets pledged for pension derivatives and stock borrowings.
The table below analyses the asset categories for those own-asset securitisations where the transferred assets continue to be recorded on NatWest Group’s balance sheet.
Held by Held by Held by Held by third NatWest third NatWest
PRA transitional basis £m £m Shareholders’ equity (excluding non-controlling interests) Shareholders’ equity 43,860 43,547 Preference shares - equity (494) (496) Other equity instruments (4,999) (4,058)
Regulatory adjustments and deductions Own credit (1) (118) Defined benefit pension fund adjustment (579) (474) Cash flow hedging reserve (229) (35) Deferred tax assets (760) (757) Prudential valuation adjustments (286) (431) Goodwill and other intangible assets (6,182) (6,622) Expected losses less impairments — (167) Foreseeable ordinary and special dividends (364) (968) Foreseeable charges (266) (365) Adjustment under IFRS 9 transitional arrangements 1,747 Other regulatory adjustments — (2)
A number of subsidiaries and sub-groups within NatWest Group, principally banking entities, are subject to various individual regulatory capital requirements in the UK and overseas. Furthermore, the payment of dividends by subsidiaries and the ability of members of NatWest Group to lend money to other members of NatWest Group may be subject to restrictions such as local regulatory or legal requirements, the availability of reserves and financial and operating performance.
Financial statem ents 26 Memorandum items Contingent liabilities and commitments The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31 December 2020. Although NatWest Group is exposed to credit risk in the event of a customer’s failure to meet its obligations, the amounts shown do not, and are not intended to, provide any indication of NatWest Group's expectation of future losses.
Less than less than less than Over 1 year 3 years 5 years 5 years 2020 2019 £m £m £m £m £m £m
Guarantees – NatWest Group gives guarantees on behalf of customers. A financial guarantee represents an irrevocable undertaking that NatWest Group will meet a customer's specified obligations to third party if the customer fails to do so. The maximum amount that NatWest Group could be required to pay under a guarantee is its principal amount as disclosed in the table above. NatWest Group expects most guarantees it provides to expire unused.
Other commitments - these include documentary credits, which are commercial letters of credit providing for payment by NatWest Group to a named beneficiary against presentation of specified documents, forward asset purchases, forward deposits placed and undrawn note issuance and revolving underwriting facilities, and other short-term trade related transactions.
Capital expenditure on property, plant and equipment 15 20 Contracts to purchase goods or services (1) 729 614
Financial statem ents 26 Memorandum items continued Trustee and other fiduciary activities In its capacity as trustee or other fiduciary role, NatWest Group may hold or place assets on behalf of individuals, trusts, companies, pension schemes and others. The assets and their income are not included in NatWest Group's financial statements. NatWest Group earned fee income of £245 million (2019 - £250 million; 2018 - £257 million) from these activities.
In August 2020, a complaint was filed in the United States District Court for the Northern District of California by several United States consumer borrowers against the USD ICE LIBOR panel banks and their affiliates, alleging that the normal process of setting USD ICE LIBOR amounts to illegal price-fixing, and also that banks in the United States have illegally agreed to use LIBOR as a component of price in variable consumer loans. The NatWest Group defendants are NatWest Group plc, NWM Plc, NWMSI and NWB Plc. The plaintiffs seek damages and to prevent the enforcement of LIBOR-based instruments through injunction. Defendants have filed a motion to transfer the matter to federal court in New York and will seek dismissal.
FX litigation NWM Plc, NWMSI and / or NatWest Group plc are defendants in several cases relating to NWM Plc’s foreign exchange (FX) business, each of which is pending before the same federal judge in the SDNY. In 2015, NWM Plc paid US$255 million to settle the consolidated antitrust class action on behalf of persons who entered into over-thecounter FX transactions with defendants or who traded FX instruments on exchanges. That settlement received final court approval in August 2018. In November 2018, some members of the settlement class who opted out of the settlement filed their own non-class complaint in the SDNY asserting antitrust claims against NWM Plc, NWMSI and other banks. Those opt-out claims are proceeding in discovery. In December 2018, some of the same claimants, as well as others, filed proceedings in the High Court of Justice of England and Wales, asserting competition claims against NWM Plc and several other banks. The claim was served in April 2019.
One other FX-related class action, on behalf of ‘consumers and enduser businesses’, is proceeding in the SDNY against NWM Plc and others. Plaintiffs have filed a motion for class certification, which defendants are opposing. The 2020 settlement of another class action, on behalf of ‘indirect purchasers’ of FX instruments (which plaintiffs define as persons who transacted FX instruments with retail foreign exchange dealers that transacted directly with defendant banks), received final court approval in November 2020. NWM Plc has paid the settlement in that case (which was covered by an existing provision).
In May 2019, a cartel class action was filed in the Federal Court of Australia against NWM Plc and four other banks on behalf of persons who bought or sold currency through FX spots or forwards between 1 January 2008 and 15 October 2013 with a total transaction value exceeding AUS $0.5 million. The claimant has alleged that the banks, including NWM Plc, contravened Australian competition law by sharing information, coordinating conduct, widening spreads and manipulating FX rates for certain currency pairs during this period. NatWest Group plc has been named in the action as an ‘other cartel participant’, but is not a respondent. The claim was served in June 2019. The claimant sought permission to amend its claim to strengthen its claim of alleged breaches of competition law, but this was refused by the court in the form sought by the claimant. The claimant now seeks a further opportunity to amend its claim.
In July and December 2019, two separate applications seeking opt-out collective proceedings orders were filed in the UK Competition Appeal Tribunal against NatWest Group plc, NWM Plc and other banks. Both applications have been brought on behalf of persons who, between 18 December 2007 and 31 January 2013, entered into a relevant FX spot or outright forward transaction in the EEA with a relevant financial institution or on an electronic communications network. A hearing to determine class certification and which of the applications should be permitted to represent the class is scheduled to take place in July 2021.
Certain other foreign exchange transaction related claims have been or may be threatened. NatWest Group cannot predict whether any of these claims will be pursued, but expects that some may.
In addition, in June 2017, TeraExchange filed a complaint against NatWest Group companies, including NatWest Group plc, as well as a number of other credit default swap dealers, in the SDNY. TeraExchange alleges it would have established exchange-like trading of credit default swaps if the defendant dealers had not engaged in an unlawful antitrust conspiracy. In October 2018, the court dismissed all claims against NatWest Group companies.
In the primary action, filed in December 2010, the trustee is seeking to clawback a total of US$276.3 million in redemptions that NWM N.V. allegedly received from certain Madoff feeder funds and certain swap counterparties. In March 2020, the bankruptcy court denied the trustee’s request for leave to amend its complaint to include additional allegations against NWM N.V., holding that, even with the proposed amendments, the complaint would fail as a matter of law to state a valid claim against NWM N.V. The trustee has commenced an appeal of the bankruptcy court’s decision, which has been stayed pending the result of appeals in different proceedings, against different defendants, that involve similar issues. In the second action, filed in October 2011, the trustee seeks to recover an additional US$21.8 million. This action has been stayed pending the result of the appeal in the primary action.
Interest rate hedging products and similar litigation NatWest Group continues to deal with a small number of active litigation claims in the UK relating to the alleged mis-selling of interest rate hedging products.
Separately, NWM Plc is defending claims filed in France by two French local authorities relating to structured interest rate swaps. The plaintiffs allege, among other things, that the swaps are void for being illegal transactions, that they were mis-sold, and that information / advisory duties were breached. One of the claims is being appealed to the Supreme Court and the other has been remitted from the Supreme Court to the Court of Appeal for reconsideration of one aspect. NWM N.V. was a defendant in the latter case but has been dismissed from the proceedings.
Financial statem ents 26 Memorandum items continued Litigation and regulatory matters NWM N.V. and certain other financial institutions are defendants in several actions pending in the United States District Courts for the Eastern and Southern Districts of New York, filed by a number of US nationals (or their estates, survivors, or heirs), most of whom are or were US military personnel, who were killed or injured in attacks in Iraq between 2003 and 2011. NWM Plc is also a defendant in some of these cases.
The NatWest Markets business is currently responding to a separate criminal investigation by the USAO and DoJ concerning unrelated trading by certain NatWest Markets former traders involving alleged spoofing. The NPA (referred to above) has been extended as the criminal investigation has progressed and related discussions with the USAO and the DoJ, including relating to the impact of such alleged conduct on the status of the NPA and the potential consequences thereof, have been ongoing. The duration and outcome of these matters remain uncertain, including in respect of whether settlement may be reached. Material adverse collateral consequences, in addition to further substantial costs and the recognition of further provisions, may occur depending on the outcome of the investigations, as further described in the Risk Factor relating to legal, regulatory and governmental actions and investigations set out on page 360.
Foreign exchange related investigations In 2014 and 2015, NWM Plc paid significant penalties to resolve investigations into its FX business by the FCA, the Commodity Futures Trading Commission, the DoJ, and the Board of Governors of the Federal Reserve System. In May and June 2019, NatWest Group plc and NWM Plc reached settlements totalling approximately EUR 275 million in connection with the European Commission and certain other related competition law investigations into FX trading. NWM Plc continues to co-operate with ongoing investigations from competition authorities on similar issues relating to past FX trading. The exact timing and amount of future financial penalties, related risks and collateral consequences remain uncertain and may be material.
FCA investigation into NatWest Group’s compliance with the Money Laundering Regulations 2007 In July 2017, the FCA notified NatWest Group that it was undertaking an investigation into NatWest Group’s compliance with the UK Money Laundering Regulations 2007 in relation to certain money service businesses and related parties. The investigation is assessing both criminal and civil culpability. NatWest Group is co-operating with the investigation, including responding to information requests from the FCA.
Financial statem ents 26 Memorandum items continued Litigation and regulatory matters FCA mortgages market study In December 2016, the FCA launched a market study into the provision of mortgages. In March 2019 the final report was published. This found that competition was working well for many customers but also proposed remedies to help customers shop around more easily for mortgages. A period of consultation is underway and the FCA has indicated that it intends to provide updates on the remedies in due course.
In April 2016, the CBI commenced an investigation alleging that it suspected UBI DAC of breaching specified provisions of the Consumer Protection Code 2006 in its treatment of certain tracker mortgage customers. This investigation is ongoing.
UBI DAC identified further legacy business issues, as an extension to the tracker mortgage review. These remediation programmes are ongoing. NatWest Group has made provisions of €164 million (£147 million), of which €144 million (£129 million) had been utilised by 31 December 2020 for these programmes.
Financial statem ents 27 Analysis of the net investment in business interests and intangible assets
Dividends received from associates — — 5 Cash expenditure on intangible assets (348) (380) (364) Net outflow of cash (70) (84) (481)
28 Analysis of changes in financing during the year Share capital, share premium, and paid-in equity Subordinated liabilities MRELs
Certain members of NatWest Group are required by law or regulation to maintain balances with the central banks in the jurisdictions in which they operate. Natwest Markets N.V. had mandatory reserve deposits with De Nederlandsche Bank N.V. of €81 million (2019 - €47 million).
No directors accrued benefits under defined benefit schemes or defined contribution schemes during 2020 and 2019.
Compensation of key management The aggregate remuneration of directors and other members of key management during the year was as follows: Short-term benefits 18,718 22,067 Post-employment benefits 474 401 Share-based payments 3,249 2,435
For the purposes of IAS 24 ‘Related Party Disclosures’, key management comprise directors of the company and Persons Discharging Managerial Responsibilities (PDMRs) of NatWest Group plc. The captions in the NatWest Group's primary financial statements include the following amounts attributable, in aggregate, to key management: Loans to customers - amortised cost 5,165 1,662 Customer deposits 45,747 37,727
Key management have banking relationships with NatWest Group entities which are entered into in the normal course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with other persons of a similar standing or, where applicable, with other employees. These transactions did not involve more than the normal risk of repayment or present other unfavourable features.
NatWest Group enters into transactions with many of these bodies. Transactions include the payment of: taxes – principally UK corporation tax (Note 7) and value added tax; national insurance contributions; local authority rates; and regulatory fees and levies (including the bank levy (Note 3) and FSCS levies (Note 26) - together with banking transactions such as loans and deposits undertaken in the normal course of banker-customer relationships.
Bank of England facilities NatWest Group may participate in a number of schemes operated by the Bank of England in the normal course of business.
(c) In accordance with IAS 24, transactions or balances between NatWest Group entities that have been eliminated on consolidation are not reported.
33 Post balance sheet events NatWest Group has announced a phased withdrawal from the Republic of Ireland and has entered into a non-binding Memorandum of Understanding (‘MOU’) with Allied Irish Banks, p.l.c. for the sale of a c.€4bn portfolio of performing commercial loans. The potential sale contemplated by the MoU remains subject to due diligence, further negotiation and agreement of final terms and definitive documentation, as well as obtaining regulatory and other approvals and satisfying other conditions. The proposed sale may not be concluded on the terms contemplated in the MoU, or at all. No estimate of any financial effect of the potential transaction can be made at the date of approval of these accounts.
Assets Derivatives with subsidiaries 1,580 979 Amounts due from subsidiaries 4 26,910 25,018 Other financial assets 579 277 Investments in Group undertakings 9 46,229 55,808 Other assets 117 1 Total assets 75,415 82,083
Owners’ equity includes a total comprehensive loss for the year, dealt with in the accounts of the parent company, of £9,598 million (2019 - £2,712 million profit). This is due to a VIU write down in subsidiaries that eliminates on consolidation in the Group Accounts.
Statement of changes in equity for the year ended 31 December 2020 £m £m £m
Paid-in equity - at 1 January 4,047 4,047 4,047 Redeemed/reclassified (2) (1,277) — — Securities issued during the period (3) 2,209 — — At 31 December 4,979 4,047 4,047
Retained earnings - at 1 January 36,485 37,181 38,042 Implementation of IFRS 9 on 1 January 2018 — — 231 (Loss)/profit attributable to ordinary shareholders and other equity owners (9,573) 2,728 2,491 Equity preference dividends paid (26) (39) (182) Ordinary dividend paid — (3,018) (241) Paid-in equity dividends paid (355) (367) (355) Unclaimed dividend 2 — — Redemption of equity preference shares (4) — — (2,805) Redemption/reclassification of paid-in equity (2) (355) — —
The accompanying notes on pages 326 to 338 form an integral part of these financial statements.
Cash flow statement for the year ended 31 December 2020 £m £m £m
Operating (loss)/profit before tax (9,698) 2,799 2,341 Adjustments for: Write-down of investment in group undertakings 9,606 1,489 293 Change in fair value taken to profit or loss on other financial liabilities and subordinated liabilities 672 221 (144) Elimination of foreign exchange differences (540) (526) 986 Other non-cash items (31) (23) 478 Dividends received from subsidiaries (485) (5,596) — Profit on sale of investment in group undertakings — 1,739 — Interest payable on MRELs and subordinated liabilities 537 513 846 Loss on sale of MRELs and subordinated liabilities 324 — — Charges and releases on provisions (8) (25) — Net cash flows from trading activities 377 591 4,800 Increase in derivative assets with subsidiaries (598) (436) (380) (Increase)/decrease in amounts due from subsidiaries (792) 863 12,290 Increase in other financial assets (302) (36) (131) (Increase)/decrease in other assets (2) 113 (16) Increase/(decrease) in amounts due to subsidiaries 289 (193) 466 Increase in derivative liabilities with subsidiaries 391 266 161 Increase/(decrease) in other financial liabilities 2 (1) — Decrease in other liabilities (33) — (211) Change in operating assets and liabilities (1,045) 576 12,179 Income taxes received 40 15 49 Net cash flows from operating activities (1) (628) 1,182 17,028
Net movement in business interests (27) (676) (9,481) Disposal of subsidiaries and associates — 234 — Dividends received from subsidiaries 485 3,751 — Net cash flows from investing activities 458 3,309 (9,481)
Issue of paid in equity 2,209 — — Redemption of other equity instruments — — (2,805) Net cash flows from financing activities (182) (4,258) (7,486)
The parent company is incorporated in the UK and registered in Scotland. The accounts are prepared on the historical cost basis except that derivatives and certain financial instruments which are stated at fair value. Recognised financial assets and financial liabilities in fair value hedges are adjusted for changes in fair value in respect of the risk that is hedged.
The accounting policies that are applicable to the parent company are included in NatWest Group plc’s accounting policies which are set out on pages 264 to 268 of the consolidated financial statements, except that it has no policy regarding ‘Basis of consolidation’.
Future accounting developments International Financial Reporting Standards A number of IFRSs and amendments to IFRS were in issue at 31 December 2020. NatWest Group plc is assessing the effect of adopting these standards on its financial statements.
Amounts due to subsidiaries 542 — 111 70 723 Derivatives with subsidiaries 1,102 1,102 Other financial liabilities 3,987 17,069 21,056 Subordinated liabilities 7,944 7,944 Other liabilities 151 151
Amounts due to subsidiaries 307 — 116 16 439 Derivatives with subsidiaries 711 711 Other financial liabilities 2,677 16,654 19,331 Subordinated liabilities 7,647 7,647 Other liabilities 168 168
Assets Loans to banks and customers - amortised cost 11,404 10,984 Other financial assets/other assets 15,506 14,034 Amounts due from subsidiaries 26,910 25,018
Financial statem ents 5 Financial instruments Interest rate benchmark reform The table below provides an overview of NWG plc’s IBOR related exposure by currency and nature of financial instruments. Non-derivative financial instruments are presented on the basis of their carrying amounts excluding expected credit losses while derivative financial instruments are presented on the basis of their notional amount.
Derivatives notional - with subsidiaries (£bn) 4.1 23.7 9.8 0.1 11.4 49.1
These are outlined below: £m 6 Financial instruments - fair value of financial instruments not carried at fair value The following table shows the carrying value and fair value of financial instruments carried at amortised cost on the balance sheet.
Notes: (1) Fair value hierarchy level 2 - £6.4 billion (2019 - £6.1 billion) and level 3 - £5.3 billion (2019 - £5.2 billion). (2) Fair value hierarchy level 3. (3) Fair value hierarchy level 2.
Notes: (1) Amounts due from subsidiaries relating to non-financial instruments of nil (2019 - £5 million) have been excluded from the table. (2) Amounts due to subsidiaries relating to non-financial instruments of £70 million (2019 - £16 million) have been excluded from the table.
Financial statem ents 7 Financial instruments - maturity analysis continued Financial liabilities: contractual maturity The following table shows undiscounted cash flows payable up to 20 years from the balance sheet date, including future interest payments.
Note: (1) Amounts due to subsidiaries relating to non-financial instruments have been excluded from the tables.
Redemptions in the period are disclosed in Note 19 on the consolidated accounts.
US$106 million floating rate notes (callable semi-annually) Ineligible 78 81 US$762 million 7.648% notes (callable September 2031) (1) Ineligible 97 585
Note: (1) Further details of the contractual terms of the preference shares are given in Note 21 on the consolidated accounts.
Financial statem ents 9 Investments in Group undertakings Investments in Group undertakings are carried at cost less impairment losses. Movements during the year were as follows: £m £m
The principal subsidiary undertakings of the company are shown below. Their capital consists of ordinary shares, preference shares and additional Tier 1 notes which are unlisted with the exception of certain preference shares listed by NWB Plc. All of these subsidiaries are included in NatWest Group’s consolidated financial statements and have an accounting reference date of 31 December.
National Westminster Bank Plc (1,3) Banking Great Britain 100% The Royal Bank of Scotland plc (3) Banking Great Britain 100% Coutts & Company (2, 3) Banking Great Britain 100% Ulster Bank Ireland Designated Activity Company (3) Banking Republic of Ireland 100% NatWest Markets Plc Banking Great Britain 100% NatWest Markets N.V. (4) Banking Netherlands 100% The Royal Bank of Scotland International Limited (5) Financial Institution Jersey 100%
For full information on all related undertakings, refer to Note 12.
Issue of ordinary shares 52 17 144 — — — — Issue of Additional Tier 1 capital notes — — — — — — Issue of subordinated liabilities — — 1,631 577 — — — Issue of paid in equity 2,209 Redemption of subordinated liabilities — — (3,207) (855) (267) — — Interest on subordinated liabilities — — (396) (431) (443) — — Issue of MRELs (3) 1,178 (2,997) Maturity/redemption of MRELs (2) (1,285) (83) Interest on MRELs (142) (35) (237) Net cash inflow/(outflow) from financing 2,261 17 144 (1,972) (709) (710) (147) (142) (3,317)
Financial statem ents 12 Related undertakings Legal entities and activities at 31 December 2020 In accordance with the Companies Act 2006, the company’s related undertakings and the accounting treatment for each are listed below. All undertakings are wholly-owned by the company or subsidiaries of the company and are consolidated by reason of contractual control (Section 1162(2) CA 2006), unless otherwise indicated. NatWest Group interest refers to ordinary shares of equal values and voting rights unless further analysis is provided in the notes. Activities are classified in accordance with Annex I to the Capital Requirements Directive (“CRD IV”) and the definitions in Article 4 of the Capital Requirements Regulation.
Regulatory Entity name Activity treatment Notes 280 Bishopsgate Finance Ltd INV FC (6) Adam & Company Investment Management Ltd BF FC (11) Caledonian Sleepers Rail Leasing Ltd BF FC (2) Care Homes 1 Ltd BF FC (6) Care Homes 2 Ltd BF FC (6) Care Homes 3 Ltd BF FC (6) Care Homes Holdings Ltd BF FC (6) Churchill Management Ltd BF FC (2) Coutts & Company CI FC (50) Coutts Finance Company BF FC (50) Desertlands Entertainment Ltd BF FC (6) Distant Planet Productions Ltd BF FC (6) Esme Loans Ltd BF FC (6) FreeAgent Central Ltd SC FC (7) FreeAgent Holdings Ltd SC FC (7) G L Trains Ltd BF FC (2) Gatehouse Way Developments Ltd INV DE (2) Helena Productions Ltd BF FC (6) KUC Properties Ltd BF DE (1) Land Options (West) Ltd INV DE (1) Lombard & Ulster Ltd BF FC (33) Lombard Business Finance Ltd BF FC (6) Lombard Business Leasing Ltd BF FC (6) Lombard Corporate Finance (6) Ltd BF FC (6) Lombard Corporate Finance (7) Ltd BF FC (6) Lombard Corporate Finance (11) Ltd BF FC (6) Lombard Corporate Finance (13) Ltd BF FC (6) Lombard Corporate Finance (15) Ltd BF FC (6) Lombard Corporate Finance (December 1) Ltd BF FC (6) Lombard Corporate Finance (December 3) Ltd BF FC (6) Lombard Corporate Finance (June 2) Ltd BF FC (6) Lombard Discount Ltd BF FC (6) Lombard Finance Ltd BF FC (6) Lombard Industrial Leasing Ltd BF FC (6) Lombard Initial Leasing Ltd BF FC (6) Lombard Lease Finance Ltd BF FC (6) Lombard Leasing Company Ltd BF FC (6) Lombard Leasing Contracts Ltd BF FC (2) Lombard Lessors Ltd BF FC (6) Lombard Maritime Ltd BF FC (6) Lombard North Central Leasing Ltd BF FC (6) Lombard North Central PLC BF FC (6) Lombard Property Facilities Ltd BF FC (2) Lombard Technology Services Ltd BF FC (6) Mettle Ventures Ltd OTH FC (6) Nanny McPhee Productions Ltd BF FC (6) National Westminster Bank Plc CI FC (6) National Westminster Home Loans Ltd BF FC (6) National Westminster Properties No. 1 Ltd SC DE (6) NatWest Capital Finance Ltd BF FC (2) NatWest Corporate Investments BF FC (6) NatWest Holdings Ltd INV FC (6) NatWest Invoice Finance Ltd OTH FC (6) NatWest Markets Plc CI FC (36) NatWest Markets Secretarial Services Ltd SC FC (6) NatWest Markets Secured Funding LLP BF FC (47) NatWest Property Investments Ltd INV DE (6) NatWest Trustee and Depositary Services Ltd INV FC (6)
Regulatory Entity name Activity treatment Notes West Register (Property Investments) Ltd BF DE (1) West Register (Realisations) Ltd INV DE (1) Winchcombe Finance Ltd BF FC (6)
The following table details active related undertakings incorporated outside the UK which are 100% owned by NatWest Group and fully consolidated for accounting purposes
Regulatory Entity name Activity treatment Notes Action Corporate Services Ltd BF FC (30) Airside Properties AB BF FC (12) Airside Properties ASP Denmark AS BF FC (67) Airside Properties Denmark AS BF FC (67) Alcover A.G. BF DE (76) Alternative Investment Fund B.V. BF FC (4) Arkivborgen KB BF FC (12) Artul Koy BF FC (5) Backsmedjan KB BF FC (12) BD Lagerhus AS BF FC (13) Bilfastighet i Akalla AB BF FC (12) Brödmagasinet KB BF FC (12) C.J. Fiduciaries Ltd BF FC (37) Candlelight Acquisition LLC BF FC (9) Coutts & Co (Cayman) Ltd BF FC (34) Coutts & Co Ltd CI FC (51) Coutts General Partner (Cayman) V Ltd BF FC (61) Eiendomsselskapet Apteno La AS BF FC (13) Eurohill 4 KB BF FC (12) Fab Ekenäs Formanshagen 4 BF FC (5) Fastighets AB Flöjten I Norrköping BF FC (12) Fastighets AB Stockmakaren BF FC (29) Fastighets Aktiebolaget Sambiblioteket BF FC (12) Fastighetsbolaget Holma I Höör AB BF FC (12) Financial Asset Securities Corp. BF FC (9) First Active Ltd BF FC (23) Forskningshöjden KB BF FC (12) Förvaltningsbolaget Dalkyrkan KB BF FC (12) Fyrsate Fastighets AB BF FC (12) Gredelinen KB BF FC (12) Grinnhagen KB BF FC (12) Hatros 1 AS BF FC (13) Horrsta 4:38 KB BF FC (12) IR Fastighets AB BF FC (12) IR IndustriRenting AB BF FC (12) Kallebäck Institutfastigheter AB BF FC (12) Kastrup Commuter K/S BF FC (67) Kastrup Hangar 5 K/S BF FC (67) Kastrup V & L Building K/S BF FC (67) KB Eurohill BF FC (12) KB IR Gamlestaden BF FC (12) KB Lagermannen BF FC (12) KB Likriktaren BF FC (12) KEB Investors, L.P. BF FC (79) Keep SPV Ltd BF FC (77) Koy Lohjan Ojamonharjuntie 61 BF FC (5) Koy Pennalan Johtotie 2 BF FC (5) Koy Vantaan Rasti IV BF FC (5) Koy Espoon Entresse II BF FC (5) Koy Helsingin Mechelininkatu 1 BF FC (5) Koy Helsingin Osmontie 34 BF FC (5) Koy Helsingin Panuntie 11 BF FC (5)
Regulatory Entity name Activity treatment Notes Koy Helsingin Panuntie 6 BF FC (5) Koy Iisalmen Kihlavirta BF FC (5) Koy Jämsän Keskushovi BF FC (5) Koy Jasperintie 6 BF FC (10) Koy Kokkolan Kaarlenportti Fab BF FC (5) Koy Kouvolan Oikeus ja Poliisitalo BF FC (5) Koy Millennium BF FC (5) Koy Nummelan Portti BF FC (5) Koy Nuolialan päiväkoti BF FC (5) Koy Peltolantie 27 BF FC (10) Koy Puotikuja 2 Vaasa BF FC (5) Koy Raision Kihlakulma BF FC (5) Koy Ravattulan Kauppakeskus BF FC (5) Koy Tapiolan Louhi BF FC (5) Koy Vapaalan Service-Center BF FC (5) Läkten 1 KB BF FC (12) LerumsKrysset KB BF FC (12) Limstagården KB BF FC (12) Lombard Finance (CI) Ltd BF FC (37) Lothbury Insurance Company Ltd BF DE (78) Minster Corporate Services Ltd BF FC (30) Morar ICC Insurance Ltd BF DE (69) Narmovegen 455 AS BF FC (21) National Westminster International Holdings B.V. BF FC (73) NatWest Germany GmbH OTH FC (22) NatWest Innovation Services Inc. OTH FC (9) NatWest Markets Group Holdings Corporation BF FC (9) NatWest Markets N.V. CI FC (4) NatWest Markets Securities Inc. INV FC (9) NatWest Markets Securities Japan Ltd INV FC (58) NatWest Services (Switzerland) Ltd SC FC (51) Nordisk Renting AB BF FC (12) Nordisk Renting AS BF FC (13) Nordisk Renting Facilities Management AB BF FC (29) Nordisk Renting OY BF FC (5) Nordisk Specialinvest AB BF FC (12) Nordiska Strategifastigheter Holding AB BF FC (12) NWM Services India Private Ltd SC FC (41) Nybergflata 5 AS BF FC (13) R.B. Leasing BDA One Ltd BF FC (16) Random Properties Acquisition Corp. III INV FC (9) RBS (Gibraltar) Ltd BF FC (72) RBS AA Holdings (Netherlands) B.V. BF FC (4) RBS Acceptance Inc. BF FC (9) RBS Americas Property Corp. SC FC (9) RBS Asia Financial Services Ltd BF FC (58) RBS Asia Futures Ltd BF FC (58) RBS Assessoria Ltd SC FC (68) RBS Asset Management (Dublin) Ltd BF FC (64) RBS Commercial Funding Inc. BF FC (9) RBS Deutschland Holdings GmbH BF FC (22)
BGF Group Plc BF EAA PC 25 (14) Falcon Wharf Ltd OTH EAJV PC 50 (63) GWNW City Developments Ltd BF EAJV DE 50 (63) Higher Broughton (GP) Ltd BF EAA PC 41 (62) Higher Broughton Partnership LP BF EAA DE 41 (66) Jaguar Cars Finance Ltd BF FC FC 50 (6) JCB Finance (Leasing) Ltd BF FC FC 75 (60) JCB Finance Ltd BF FC FC 75 (60) Landpower Leasing Ltd BF FC FC 75 (60)
Financial statem ents 12 Related undertakings continued The following table details related undertakings incorporated outside the UK where NatWest Group ownership is less than 100%.
Accounting Regulatory Group Entity name Activity treatment treatment % Notes Lunar Luxembourg Series 2019-05 BF FC DE 0 (84) Lunar Luxembourg Series 2019-06 BF FC DE 0 (84) Lunar Luxembourg Series 2020-01 BF FC DE 0 (84) Lunar Luxembourg Series 2020-02 BF FC DE 0 (84) Maja Finance S.R.L. BF FC FC 98 (19) Nightingale CRE 2018-1 Ltd BF FC DE 0 (27) Nightingale Project Finance 2019 1 Ltd BF FC DE 0 (27) Nightingale Securities 2017-1 Ltd BF FC DE 0 (27) Nightingale UK Corp 2020 2 Ltd BF FC DE 0 (27) Natwest Secured Funding DAC BF FC FC 0 (39) Optimus KB BF FC FC 51 (12) Pharos Estates Ltd OTH EAA DE 49 (55) Sempra Energy Trading LLC BF FC FC 51 (9) Spring Allies Jersey Ltd BF EAA DE 49 (27) Thames Asset Global Securitization No.1 Inc. BF FC FC 0 (59) The Drive4Growth Company Ltd OTH EAA DE 20 (56) Tulip Asset Purchase Company B.V. BF FC FC 0 (65) Wiöniowy Management sp. Z.o.o. SC EAA DE 25 (32)
Accounting Regulatory Group Entity name treatment treatment % Notes Lombard Ireland Group Holdings Unlimited Company FC FC 100 (88) Lombard Ireland Ltd FC FC 100 (88) Lombard Manx Leasing Ltd FC FC 100 (17) Lombard Manx Ltd FC FC 100 (17) NatWest Nominees Ltd FC FC 100 (2) Nevis Derivatives No. 3 LLP FC FC 100 (53) RBS Asia Holdings B.V. FC FC 100 (4) RBS Asset Management Ltd FC FC 100 (6) RBS European Investments SARL FC FC 100 (70) RBS Investment Ltd FC FC 100 (1) Royal Bank Invoice Finance Ltd FC FC 100 (6) RoyScot Financial Services Ltd FC FC 100 (6) Safetosign Ltd FC FC 100 (6) Style Financial Services Ltd FC FC 100 (25) The Royal Bank of Scotland Invoice Discounting Ltd FC FC 100 (6) Total Capital Finance Ltd FC FC 100 (2) UB SIG (ROI) Ltd FC FC 100 (23) Ulster Bank Group Treasury Ltd FC FC 100 (88) West Register Hotels (Holdings) Ltd FC FC 100 (25)
Accounting Regulatory Group Entity name treatment treatment % Notes Adam & Company (Nominees) Ltd FC FC 100 (25) Atlas Nominees Ltd FC FC 100 (58) British Overseas Bank Nominees Ltd FC FC 100 (6) Buchanan Holdings Ltd FC FC 100 (2) Custom House Docks Basement Management No. 2 Ltd EAA DE 25 (45) Dixon Vehicle Sales Ltd FC FC 100 (2) Dunfly Trustee Ltd FC FC 100 (2) FIT Nominee 2 Ltd FC FC 100 (6) FIT Nominee Ltd FC FC 100 (6) Freehold Managers (Nominees) Ltd FC FC 100 (6) HPUT A Ltd NC DE 100 (6) HPUT B Ltd NC DE 100 (6) ITB1 Ltd FC FC 100 (1) ITB2 Ltd FC FC 100 (1) JCB Finance Pension Ltd FC DE 88 (33) Marigold Nominees Ltd FC FC 100 (6) Mulcaster Street Nominees Ltd FC FC 100 (37) N.C. Head Office Nominees Ltd FC FC 100 (1) National Westminster Bank Nominees (Jersey) Ltd FC FC 100 (74) NatWest FIS Nominees Ltd FC FC 100 (6)
Accounting Regulatory Group Entity name treatment treatment % Notes NatWest Group Secretarial Services Ltd FC FC 100 (1) NatWest Pension Trustee Ltd NC DE 100 (6) NatWest PEP Nominees Ltd FC FC 100 (2) Nextlinks Ltd FC FC 100 (6) Nordisk Renting A/S FC FC 100 (26) Nordisk Renting HB FC FC 100 (12) Project & Export Finance (Nominees) Ltd FC FC 100 (2) R.B. Leasing (March) Ltd FC FC 100 (6) RBOS Nominees Ltd FC FC 100 (6) RBS Investment Executive Ltd NC DE 100 (1) RBS Retirement Savings Trustee Ltd FC FC 100 (2) RBSG Collective Investments Nominees Ltd FC FC 100 (11) Sixty Seven Nominees Ltd FC FC 100 (2) Strand Nominees Ltd FC FC 100 (50) Syndicate Nominees Ltd FC FC 100 (2) TDS Nominee Company Ltd FC FC 100 (25) The Royal Bank of Scotland (1727) Ltd FC FC 100 (1) The Royal Bank of Scotland Group Ltd FC FC 100 (2) W G T C Nominees Ltd FC FC 100 (6) Williams & Glyn's Bank Ltd FC FC 100 (6)
Entity name Activity treatment treatment % Notes Loot Financial Services Ltd OTH EAA PC 26 (83)
Accounting Regulatory Group Entity name Activity treatment treatment % Notes Uniconn Ltd OTH EAA DE 30 (38)
The following table details overseas branches of NatWest Group Subsidiary Geographic location
NatWest Markets N.V. United Kingdom The Royal Bank of Scotland Gibraltar, Guernsey, Isle of Man International Ltd Luxembourg, United Kingdom
Segmental operating profit adjusted for preference share dividends and tax divided by average notional equity, allocated at an operating segment specific rate, of the period average segmental risk-weighted assets incorporating the effect of capital deductions (RWAes).
The management analysis of strategic disposals in other income and operating expenses shows strategic costs and litigation and conduct costs in separate lines. These amounts are included in staff, premises and equipment and other administrative expenses in the statutory analysis.
NatWest Group and segmental business performance commentary have been adjusted for the impact of specific items such as notable items, transfers, operating lease depreciation, strategic and litigation and conduct costs.
Notable items within income – page 87, Transfers – pages 90 and 93, Operating lease depreciation, Strategic costs and litigation and conduct costs – page 86
NIM Net interest income as a percentage of interest-earning assets. Pages 90 to 95 Funded assets Total assets less derivatives. Pages 91 and 95 ECL loss rate The annualised loan impairment charge divided by gross customer loans. Page 88 Assets under management and administration (AUMA)
Total AUMA comprises both assets under management (AUMs) and assets under administration (AUAs) managed within the Private Banking franchise. AUMs comprise assets under management, assets under custody and investment cash relating to Private Banking customers. AUAs are managed by Private Banking on behalf of Retail Banking and RBSI and a management fee is received in respect of providing this service.
Third party customer asset rate is calculated as interest receivable on third-party loans to customers as a percentage of third-party loans to customers only. This excludes intragroup items, loans to banks and liquid asset portfolios, which are included for the calculation of net interest margin.
Year ended 31 December 2020 Banking RoI Banking Banking International Markets
RWAe applying equity factor (£bn) 5.7 2.1 9.4 1.3 1.1 7.2
Premises and equipment 1,223 1,259 1,383 Other administrative expenses 1,845 2,828 3,372 Depreciation and amortisation 905 1,176 731 Impairment of other intangible assets 9 44 37 Total operating expenses 7,905 9,325 9,645
Depreciation and amortisation 86 — 645 731 Impairment of other intangible assets — — 37 37
Notes: (1) On a statutory, or GAAP, basis, strategic costs are included within staff, premises and equipment, depreciation and amortisation, impairment of other intangible assets and other administrative expenses. Strategic costs relate to restructuring provisions, related costs and projects that are transformational in nature. (2) On a statutory, or GAAP, basis, litigation and conduct costs are included within other administrative expenses.
Operating lease depreciation — — 145 — — — — 145
Operating lease depreciation — — 138 — — — — 138
Operating lease depreciation — — (138) — — — — (138)
Operating lease depreciation — — 121 — — — — 121
IV. Net interest margin Year ended 31 December 31 December 31 December £m £m £m
Net interest margin 1.57% 1.79% 1.98% Bank net interest margin (NatWest Group NIM excluding NWM) 1.71% 1.99% 2.09%
This report shows the income, profit/(loss) before tax, tax paid/(received), average and spot employee numbers on a full-time equivalent basis for the entities located in the countries in which we operate.
Country Each subsidiary or branch is allocated to the country in which it is resident for tax purposes. The data is consolidated for all the subsidiaries and branches allocated to each country.
Income and profit/(loss) before tax Income and profit/(loss) totals are reported on page 275 within the Geographical segments table.
Tax paid/(received) Tax paid/(received) disclosed under CRD IV relates to corporate tax.
Corporate tax paid represents net cash taxes paid to/(received) from the tax authorities in each jurisdiction.
Corporate tax paid is reported on a cash basis as opposed to an accounting basis and therefore does not necessarily have a direct correlation to the reported profits or losses arising in the year.
Full time equivalent employees (“FTEs”) FTEs are allocated to the country in which they are primarily based for the performance of their employment duties. The figures disclosed represent the average number of FTEs, including temporary staff, in each country during the period. The FTEs, including temporary staff as at the year end 31 December 2020, have been added for completeness.
Public subsidies received No public subsidies were received during the period.
Saudi Arabia (3) — — 24 — — United Arab Emirates — (1) — — — Middle East Region — (1) 24 — —
In March 2020, the World Health Organization declared the spread of the COVID-19 virus a pandemic. Since then, many countries, including the UK (NatWest Group’s most significant market) have at times imposed strict social distancing measures, restrictions on non-essential activities and travel quarantines, in an attempt to slow the spread and reduce the impact of the COVID-19 pandemic.
The UK economy, as well as most countries, went into recession in 2020 as measures were introduced to reduce the spread of the virus. UK economic output fell again in
Therefore, significant uncertainties remain as to how long the COVID-19 pandemic will last.
In response to the COVID-19 pandemic, central banks, governments, regulators and legislatures in the UK and elsewhere have announced historic levels of support and various schemes for impacted businesses and individuals including forms of financial assistance and legal and regulatory initiatives, including further reductions in interest rates.
RWAs. In addition, the level of household indebtedness in the UK remains high. The ability of households to service their debts could be worsened by a period of high unemployment caused by the COVID-19 pandemic, particularly if prolonged. NatWest
NatWest Group has applied an internal analysis of multiple economic scenarios
The ECL provision is sensitive to the model inputs and economic assumptions underlying the estimate. Going forward, NatWest Group anticipates observable credit deterioration of a proportion of assets resulting in a systematic uplift in defaults, which is mitigated by those economic assumption scenarios being reflected in the Stage 2 ECL across portfolios, along with a combination of post model overlays in both wholesale and retail portfolios reflecting the uncertainty of credit outcomes.
In line with certain mandated COVID-19 pandemic support schemes, NatWest Group has sought to assist affected customers with a number of initiatives including NatWest
A d d itio n a l in fo rm a tio n government actions and proceedings. These actions may result in judgments, settlements, penalties or fines. Any of the above could have a material adverse effect on NatWest
The COVID-19 pandemic may adversely affect NatWest Group’s strategy and impair its ability to meet its targets and to achieve its strategic objectives.
NatWest Group’s ability to meet the financial, capital and operational targets which it has set as part of its Purpose-led Strategy, including in relation to capital distributions and dividends to shareholders by NatWest Group plc. It is uncertain as to when NatWest Group plc will be able to resume capital distributions
Fund), including dividends to shareholders or share buybacks. It is also uncertain as to whether the PRA may, in the future, ask banks to reconsider their approaches to dividend payments and share buybacks, as it did in March 2020 in response to the COVID19 pandemic. In addition, impairments or other losses as well as increases to capital deductions may result in a decrease to
NatWest Group plc’s capital base. The form and timing of any capital distributions therefore remains uncertain, and may depend on a variety of factors, including the interests of various stakeholders (such as UKGI).
significantly in the absence of temporary changes in regulatory treatment. The risk of further RWA inflation remains and the duration of such regulatory relief is uncertain.
This may impair NatWest Group’s ability to timely deliver on certain aspects of its
Group to adapt its business strategy and to establish and maintain effective governance, procedures, systems and controls in response to these changes and to manage emerging climate, environmental, social, governance and other sustainability-related risks and opportunities may have a material adverse effect on NatWest Group’s reputation, business, results of operations and outlook and the value of NatWest Group’s securities.
See also, ‘Any failure by NatWest Group to implement effective and compliant climate change resilient systems, controls and procedures could adversely affect NatWest
NatWest Group’s operational risks as many of its employees are working remotely which may also adversely affect
January 2021, many of NatWest Group’s employees continue to work remotely. This has increased reliance on the IT systems that enable remote working and increased exposure to fraud, conduct, operational and other risks and may place additional pressure on NatWest Group’s ability to maintain effective internal controls and governance frameworks. The IT systems that enable remote working interface with third-party systems, and NatWest Group could experience service denials or disruptions if such systems exceed capacity or if a thirdparty system fails or experiences any interruptions, all of which could result in business and customer interruption and related reputational damage, significant compensation costs, regulatory sanctions and/or a breach of applicable regulations. See also, ‘NatWest Group’s operations are highly dependent on its complex IT systems
COVID-19-specific product offerings or other related direct and indirect effects. Resources have been diverted from certain ordinary course activities, and regulatory and other change projects, including the implementation of NatWest Group’s Purpose-led Strategy, which may have implications for the execution of related deliverables and meeting regulatory and other deadlines. The economic impact of the COVID-19 pandemic may also necessitate changes in the remuneration of NatWest
Group employees, in particular at a senior level. For example, in March 2020 the PRA
COVID-19 pandemic should consider taking appropriate actions with regard to the accrual, payment and vesting of variable remuneration. Any of the above could impair
Depending on the severity and duration of market volatility resulting from COVID-19 pandemic related uncertainties and the impact on capital and RWAs, NatWest Group and its subsidiaries may be required to adapt their funding plans in order to satisfy their respective capital and funding requirements, which may have a material adverse effect on
NatWest Group. NatWest Group plc may also receive less in dividends than expected from its subsidiaries. Furthermore, significant fluctuation in foreign currency exchange rates, may affect capital deployed in NatWest
NatWest Group in foreign currencies or the value of assets, liabilities, income, RWAs, capital base and expenses and the reported earnings of NatWest Group’s UK and non-UK
RWAs and leverage, which may be reinstated in the future. Any downgrading to the credit ratings and/or outlooks assigned to NatWest
Group plc, its subsidiaries and their respective debt securities as a result of the economic impact of the COVID-19 pandemic could exacerbate funding and liquidity risk, which could have a material adverse effect on
NatWest Group’s results could be adversely affected if the effects of the
Group’s cash-generating units are affected by market conditions, the economies in which
Group’s regulatory capital position. Changes in such assumptions may result in the carrying balance being impaired, which could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
ended the transition period on 31 December 2020 and provides for free trade between the
NatWest Group. The EU’s equivalence regime does not cover most lending and deposit taking, and determinations in respect of third countries have not, to date, covered the provision of investment services. In addition, equivalence determinations do not guarantee permanent access rights and can be withdrawn with short notice. The TCA is accompanied by a Joint Declaration on financial services which sets out an intention for the EU and UK to cooperate on matters of financial regulation and to agree a
entities, transferring what cannot be continued to be rendered from the UK to an EEA
subsidiary. Where such regulatory permissions are temporary or are withdrawn, a different approach may need to be taken or may result in a change in operating model or some business being ceased. Not all NatWest
licences may not be granted, and where these permissions are not obtained, further changes to NatWest Group’s operating model may be required or some business may need to be ceased. In addition, failure to obtain regulatory permissions in one part of NatWest Group may impact other parts of NatWest Group adversely. Certain permissions are required in order to maintain the ability to clear euro payments and others will allow NatWest
Group’s operating environment are difficult to predict. They may be impacted by wider global macro-economic trends and events, particularly COVID-19 pandemic related uncertainties, which may significantly impact
Group and its subsidiaries will operate. The legal and political uncertainty and any actions taken as a result of this uncertainty, as well as new or amended rules, could have a significant adverse impact on NatWest
NatWest Group faces increased political and economic risks and uncertainty in the
Scotland. Any changes to Scotland’s relationship with the UK or the EU (as an indirect result of Brexit or other developments)
NatWest Group and its subsidiaries operate, and may require further changes to NatWest
In addition, financial markets are susceptible to severe events evidenced by rapid depreciation in asset values, which may be accompanied by a reduction in asset liquidity.
Under these conditions, hedging and other risk management strategies may not be as effective at mitigating trading losses as they would be under more normal market conditions. Moreover, under these conditions, market participants are particularly exposed to trading strategies employed by many market participants simultaneously and on a large scale, increasing NatWest Group’s counterparty risk. NatWest Group’s risk management and monitoring processes seek to quantify and mitigate NatWest Group’s exposure to more extreme market moves.
political or economic climate. Further decreases in interest rates and/or continued sustained low or negative interest rates would be expected to continue to put further pressure on NatWest Group’s interest income and profitability. Zero or negative interest rates will require investment spend to implement a strategic solution to allow a potential pass-through of those interest rates in certain systems to relevant customer segments. A lower or negative interest rate environment is likely to have an adverse impact on the profitability of NatWest Group.
GDP, reduced business confidence, higher default rates on customer loans, higher levels of unemployment or underemployment, and falling property prices in the markets in which
HM Treasury (or UKGI on its behalf) could exercise a significant degree of influence over NatWest Group and further offers or sales of NatWest Group’s shares held by
Group’s Annual General Meeting on 29 April 2020. As at 31 December 2020, the UK
Group and that NatWest Group will continue to have its own independent board of directors and management team determining its own strategy. However, HM Treasury, as majority shareholder, and UK Government
HM Treasury’s shareholding, could exercise a significant degree of influence over the election of directors and appointment of senior management, NatWest Group’s capital strategy, dividend policy, remuneration policy or the conduct of NatWest Group’s operations, and other things. HM Treasury or
UKGI’s approach depends on government policy, which could change, including as a result of a general election. The manner in which HM Treasury or UKGI exercises HM
Changes in foreign currency exchange rates may affect NatWest Group’s results and financial position.
NatWest Group. NatWest Group also relies on issuing securities in foreign currencies that assist in meeting NatWest Group’s minimum requirements for own funds and eligible liabilities (‘MREL’) and NWM Plc deals foreign exchange instruments. NatWest Group maintains policies and procedures designed to manage the impact of exposures to fluctuations in currency rates. Nevertheless, changes in currency rates, particularly in the sterling-US dollar and euro-sterling rates, can adversely affect the value of assets, liabilities
In February 2020, NatWest Group announced a new strategy, focused on becoming a
COVID-19 pandemic. NatWest Group aims to deliver this strategy, referred to as its
‘Purpose-led Strategy’, through: (i) four strategic priorities: ‘supporting customers at every stage of their lives;’ ‘powered by innovation and partnerships;’ ‘simple to deal with’; and ‘sharpened capital allocation;’ and
NatWest Group as to how performance is perceived and how NatWest Group conducts its business. These changes are substantial and will take many years to fully embed.
NatWest Group’s ability to achieve its associated financial targets and generate sustainable returns.
NatWest Group may not be able to successfully (i) implement all aspects of its strategy; (ii) reach any or all of the related targets or expectations of its Purpose-led
Strategy; (iii) realise the intended strategic objectives of any other future strategic initiative, in the time frames contemplated or at all, which may require additional management actions by NatWest Group. In addition, NatWest Group’s ability to serve its target customers, scale certain ventures, deliver growth in new markets, refocus the
NWM franchise and implement a phased withdrawal from ROI may be impacted and the anticipated revenue, profitability and cost reduction levels may not be achieved in the timescale envisaged or at all. Moreover,
NatWest Group’s strategy involves a large number of concurrent and strategic actions and initiatives, including refocusing of the
‘NatWest Group is in the process of refocusing its NWM franchise, which entails significant commercial, operational and execution risks and the intended benefits for
NatWest Group may not be realised within the timeline and in the manner currently contemplated’. NatWest Group’s phased withdrawal from ROI, which may involve transfers of business, assets and liabilities to third parties, entails many risks, the most significant of which include: (i) anticipated reductions in net income, total lending and
RWAs; (ii) potential trapped or stranded capital; (iii) the diversion of management resources and attention away from day-to-day management; (iv) the recognition of disposal losses as part of the orderly run-down of certain loan portfolios which may be higher than anticipated; (v) execution risks arising from the significant uncertainties of a phased withdrawal, including the additional IT and operational expense and resource required to mitigate manual and limited customer switching and handling processes of Ulster
Any of these risks and uncertainties may cost more, be more complex or worse than currently estimated and may adversely affect
NatWest Group’s strategy in part depends on initiatives and growth in ventures that are new to NatWest Group or to the market. There is a risk, therefore, that some or all these initiatives will not succeed, or may be limited in scope or scale, including due to its current ownership structure.
The scale and scope of the intended changes present material business, operational, IT
system, internal culture, conduct and people risks to NatWest Group as the planning and implementation of the transformation programme are resource-intensive and disruptive, and will divert management resources. In addition, implementing many changes concurrently, in particular with respect to any strategic partnerships, acquisitions or divestments, will require application of robust governance and controls frameworks and robust IT systems. There is a
Changes in the economic, political and regulatory environment in which NatWest
NatWest Group to adjust aspects of its strategy or the timeframe for its implementation including in relation to its financial, capital and operational targets and expectations. Because certain initiatives depend on achieving growth in new ventures and opportunities for NatWest Group, its strategy is vulnerable to an economic downturn. NatWest Group’s strategy also requires ongoing confidence from customers and the wider market, without which customer activity and related income levels may fall or
Each of these risks, and others identified in these Risk Factors, individually or collectively could jeopardise the implementation and delivery of the Purpose-led Strategy and other strategic initiatives, result in higher than expected restructuring costs, impact NatWest
Group’s products and services offering, its reputation with customers or business model and adversely impact NatWest Group’s ability to deliver its strategy and meet its targets and guidance, each of which could have a material adverse impact on NatWest Group’s business, results of operations and outlook.
NatWest Group is in the process of refocusing its NWM franchise, which entails significant commercial, operational and execution risks and the intended benefits for NatWest Group may not be realised within the timeline and in the manner currently contemplated.
franchise entails significant commercial and operational and risks. These include risks around how it is perceived by its customers and stakeholders and the ability for NWM to retain employees required to deliver the transition and whom are key for its go-forward strategic priorities. Revenues and costs may be negatively impacted (revenues, for example, may decrease significantly more quickly than associated costs) and the implementation may be more difficult or expensive than expected, including as a result of the COVID-19 pandemic, the UK’s exit from the EU and regulatory requirements. The orderly run-down of certain of its portfolios and the reduction of its RWAs may be accompanied by the recognition of disposal losses which may be higher than anticipated, including due to a degraded economic environment (in particular, as a result of the
COVID-19 pandemic), and may not lead to a concurrent and proportionate reduction in required capital. The NWM Plc and NWM N.V.
boards support the financial plans and budgets, but continued successful implementation of this strategy within the
Strategy has set a number of financial, capital and operational targets for NatWest Group including in respect of: CET1 ratio targets, return on tangible equity (‘ROTE’), leverage ratio targets, funding plans and requirements, reductions in RWAs and the timing thereof, employee engagement, diversity and inclusion as well as environmental, social and customer satisfaction targets and discretionary capital distributions (including dividends to shareholders). See also, ‘NatWest Group is currently implementing its Purpose-led
NatWest Group’s ability to meet its targets and to successfully meet its strategy is subject to various internal and external factors and risks. These include, but are not limited to, the impact of the COVID-19 pandemic, market, regulatory, macroeconomic and political uncertainties, operational risks and risks relating to NatWest Group’s business model and strategy (including risks associated with climate, environmental, governance and other sustainability-related issues) and litigation, governmental actions, investigations and regulatory matters.
‘NatWest Group may not meet the prudential regulatory requirements for capital and MREL, or manage its capital effectively, which could trigger the execution of certain management actions or recovery options’.
Furthermore, the focus on meeting cost reduction targets may result in limited investment in other areas, which could affect
Group expects such competition to continue and intensify in response to the economic effects of the COVID-19 pandemic and other changes. These include evolving customer behaviour, technological changes (including digital currencies and the growth of digital banking, including from fintech entrants), competitor behaviour, new entrants to the market (including non-traditional financial services providers such as large retail or technology conglomerates, who may have competitive advantages in scale, technology and customer engagement), competitive foreign-exchange offerings, industry trends resulting in increased disaggregation or unbundling of financial services or conversely the re-intermediation of traditional banking services, and the impact of regulatory actions and other factors. In particular, developments in the financial sector resulting from new banking, lending and payment solutions offered by rapidly evolving incumbents, challengers and new entrants, notably with respect to payment services and products, and the introduction of disruptive technology may impede NatWest Group’s ability to grow
A d d itio n a l in fo rm a tio n or retain its share and impact its revenues and profitability, particularly in its key UK retail banking segment. Moreover, innovations such as biometrics, artificial intelligence, the cloud, blockchain, and quantum computing may rapidly facilitate industry transformation.
Open Banking (PSD2), Open Finance and other remedies imposed by the Competition and Markets Authority (CMA) which are designed to further promote competition within retail banking, as well as the competitionenhancing measures under NatWest Group’s
Increasingly many of the products and services offered by NatWest Group are, and will become, more technology intensive. For example, NatWest Group recently invested in a number of fintech ventures, including Mettle,
Cash. NatWest Group’s ability to develop such digital solutions (which also need to comply with applicable and evolving regulations) has become increasingly important to retaining and growing NatWest
Group’s customer business in the UK. There can be no certainty that NatWest Group’s innovation strategy (which includes investment in its IT capability intended to address the material increase in customer use of online and mobile technology for banking as well as selective acquisitions, which carry associated risks) will be successful or that it will allow NatWest Group to continue to grow such services in the future. Certain of
Although NatWest Group invests in new technologies and participates in industry and research led initiatives aimed at developing new technologies, such investments may be insufficient or ineffective, especially given
NatWest Group’s focus on its cost savings targets. This may limit additional investment in areas such as financial innovation and could therefore affect NatWest Group’s offering of innovative products or technologies for delivering products or services to customers and its competitive position. Furthermore, the development of innovative products depends on NatWest Group’s ability to produce underlying high-quality data, failing which its ability to offer innovative products may be compromised.
In addition, the implementation of its Purposeled Strategy, including the refocusing of its
NatWest Group’s remaining competitors gaining greater capital and other resources, including the ability to offer a broader range of products and services and geographic diversity, or the emergence of new competitors, each of which may adversely affect NatWest Group’s business, results of operations and outlook.
NatWest Group is exposed to credit risk if a customer, borrower or counterparty defaults, or under IFRS 9, suffers a sufficiently significant deterioration of credit quality such that, under SICR (‘significant increases in credit risk’) rules, it moves to Stage 2 for impairment calculation purposes. NatWest
Group’s lending strategy and associated processes may fail to identify or anticipate weaknesses or risks in a particular sector, market or borrower, or fail to adequately value physical or financial collateral. This may result in increased default rates or a higher loss given default for loans, which may, in turn, impact NatWest Group’s profitability. See also, ‘Risk and capital management — Credit
The credit quality of NatWest Group’s borrowers and other counterparties is impacted by prevailing economic and market conditions (including those caused by the
NatWest Group’s mortgage loan and wholesale property loan portfolios as at 31
Concerns about, or a default by, a financial institution could lead to significant liquidity problems and losses or defaults by other financial institutions, since the commercial and financial soundness of many financial institutions is closely related and interdependent as a result of credit, trading, clearing and other relationships. Any perceived lack of creditworthiness of a counterparty may lead to market-wide liquidity problems and losses for NatWest Group. This systemic risk may also adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with which NatWest
‘NatWest Group may not be able to adequately access sources of liquidity and funding’.
As a result, changes in borrower and counterparty credit quality may cause accelerated impairment charges under IFRS
9, increased repurchase demands, higher costs, additional write-downs and losses for
NatWest Group and an inability to engage in routine funding transactions.
NatWest Group is exposed to the financial industry, including sovereign debt securities, banks, financial intermediation providers
(including providing facilities to financial sponsors and funds, backed by assets or
NatWest Group is required by regulators in the UK, the EU and other jurisdictions in which it undertakes regulated activities to maintain adequate financial resources.
Group plc to make discretionary capital distributions (including dividends to shareholders).
Group plc currently maintains a CET1 ratio target. NatWest Group plc’s target capital ratio is based on a combination of its expected regulatory requirements and internal modelling, including stress scenarios and management’s and/or the PRA’s views on appropriate buffers above minimum operating levels.
CET1 ratio target and achieve its capital strategy. These include, amongst other things: • a depletion of its capital resources through increased costs or liabilities or reduced profits; • an increase in the quantum of RWAs in excess of that expected, including due to regulatory changes; • changes in prudential regulatory requirements including NatWest Group plc’s Total Capital Requirement set by the
• limitations on the use of double leverage, i.e. NatWest Group plc’s use of debt to invest in the equity of its subsidiaries, as a result of the Bank of England’s and/or
A minimum level of capital adequacy is required to be met by NatWest Group plc for it to be entitled to make certain discretionary payments, and institutions which fail to meet the combined buffer requirement are subject to restricted discretionary payments. The resulting restrictions are scaled according to the extent of the breach of the combined buffer requirement and calculated as a percentage of the profits of the institution since the last distribution of profits or discretionary payment which gives rise to a maximum distributable amount (MDA) (if any)
that the financial institution can distribute through discretionary payments. In the event of a breach of the combined buffer requirement, it may be necessary for NatWest
NatWest Group is required to maintain a set quantum of MREL set as the higher of its
MREL, downstream the proceeds of MREL to subsidiaries as required, or to otherwise meet its regulatory capital, MREL and leverage requirements, it may be exposed to increased regulatory supervision or sanctions, loss of investor confidence, constrained or more expensive funding and be unable to make dividend payments on its ordinary shares or maintain discretionary payments on capital instruments.
Resolution Directives I and II (‘BRRD’), as implemented in the UK, NatWest Group must maintain a recovery plan acceptable to its regulator, such that a breach of NatWest
NatWest Group plc, which could result in the dilution of NatWest Group plc’s existing shareholders. The success of such issuances will also be dependent on favourable market conditions and NatWest Group may not be able to raise the amount of capital required on acceptable terms or at all. Separately,
NatWest Group may address a shortage of capital by taking action to reduce leverage exposure and/or RWAs via asset or business disposals. These actions may, in turn, affect, among other things, NatWest Group’s product offering, credit ratings, ability to operate its businesses, pursue its current strategies and pursue strategic opportunities, any of which may affect the underlying profitability of
See also, ‘NatWest Group may become subject to the application of UK statutory stabilisation or resolution powers which may result in, among other actions, the cancellation, transfer or dilution of ordinary shares, or the write-down or conversion of certain other of NatWest Group’s securities’.
England oversight in respect of resolution, and NatWest Group could be adversely affected should the Bank of England deem
NatWest Group is subject to regulatory oversight by the Bank of England, and is required (under the PRA rulebook) to carry out an assessment of its preparations for resolution, submit a report of the assessment to the PRA, and disclose a summary of this report. The initial report is due to be submitted to the PRA on 1 October 2021 and the Bank of England’s assessment of NatWest Group’s preparations is scheduled to be released on 10 June 2022. The form and substance of the
NatWest Group has dedicated significant resources towards the preparation of NatWest
A d d itio n a l in fo rm a tio n additional costs and the dedication of additional resources. Such a scenario may result in restrictions on NatWest Group’s maximum individual and aggregate exposures, a requirement to dispose of specified assets, a requirement to cease carrying out certain activities and/or maintaining a specified amount of MREL, consequently having an adverse effect on the financial position and/or reputation of NatWest
NatWest Group may not be able to adequately access sources of liquidity and funding.
Group entities), sustained low or negative interest rates, increasing competitive pressures for retail and corporate customer deposits or the reduction or cessation of deposits by wholesale depositors, which could result in a significant outflow of deposits within a short period of time. An inability to grow or any material decrease in NatWest Group’s deposits could, particularly if accompanied by one of the other factors described above, materially affect NatWest Group’s ability to satisfy its liquidity or funding needs. In turn, this could require NatWest Group to adapt its funding plans.
Group operates; the implementation of structural reform; the legal and regulatory frameworks applicable to NatWest Group’s legal structure; business activities and the rights of its creditors; changes in rating methodologies; changes in the relative size of the loss-absorbing buffers protecting bondholders and depositors; the competitive environment, political and economic conditions in NatWest Group’s key markets
(including the impact of the COVID-19 pandemic, Brexit and any further Scottish independence referendum); any reduction of the UK’s sovereign credit rating and market uncertainty.
NatWest Group’s access to money markets, reduce the size of its deposit base and trigger additional collateral or other requirements in derivatives contracts and other secured funding arrangements or the need to amend such arrangements, which could adversely affect NatWest Group’s (and, in particular,
Group’s competitive position and threaten its prospects in the short to medium-term.
NatWest Group is subject to annual stress tests by its regulator in the UK and is also subject to stress tests by European regulators with respect to NatWest Group plc, NWM N.V.
and Ulster Bank Ireland DAC. Stress tests are designed to assess the resilience of banks to potential adverse economic or financial developments and ensure that they have robust, forward-looking capital planning processes that account for the risks associated with their business profile. If the stress tests reveal that a bank’s existing regulatory capital buffers are not sufficient to absorb the impact of the stress, then it is possible that the bank will need to take action to strengthen its capital position.
Failure by NatWest Group to meet the quantitative and qualitative requirements of the stress tests as set forth by its UK regulator or those elsewhere may result in: NatWest
NatWest Group could incur losses or be required to maintain higher levels of capital as a result of limitations or failure of various models.
NatWest Group relies on analytical models for a wide range of purposes, including to manage its business, assess the value of its assets and its risk exposure, as well as to anticipate capital and funding requirements
Group utilises models for valuations, credit approvals, calculation of loan impairment charges on an IFRS 9 basis, financial reporting and for financial crime and fraud risk management. NatWest Group’s models, and the parameters and assumptions on which they are based, are periodically reviewed and updated to maximise their accuracy.
As models analyse scenarios based on assumed inputs and a conceptual approach, model outputs therefore remain uncertain and should not be relied on. Failure of models
Group may also face adverse consequences as a result of actions based on models that are poorly developed, implemented or used, models that are based on inaccurate or compromised data or as a result of the modelled outcome being misunderstood, or by such information being used for purposes for which it was not designed.
NatWest Group’s financial statements are sensitive to the underlying accounting policies, judgments, estimates and assumptions.
A d d itio n a l in fo rm a tio n to be reasonable under the circumstances), actual results may differ due to the inherent uncertainty in making estimates, judgments and assumptions (particularly those involving the use of complex models). See also,
NatWest Group’s results and financial position, based upon materiality and significant judgments and estimates, which include loan impairment provisions, are set out in ‘Critical accounting policies and key sources of estimation uncertainty’ on page 269. New accounting standards and interpretations that have been issued by the
International Accounting Standards Board but which have not yet been adopted by NatWest
Changes in accounting standards may materially impact NatWest Group’s financial results.
Changes in accounting standards or guidance by accounting bodies or in the timing of their implementation, whether immediate or foreseeable, could result in NatWest Group having to recognise additional liabilities on its balance sheet, or in further write-downs or impairments to its assets and could also significantly impact the financial results, condition and prospects of NatWest Group.
Generally, to establish the fair value of these instruments, NatWest Group relies on quoted market prices or, where the market for a financial instrument is not sufficiently credible, internal valuation models that utilise observable market data. In certain circumstances, the data for individual financial instruments or classes of financial instruments utilised by such valuation models may not be available or may become unavailable due to prevailing market conditions. In these circumstances, NatWest Group’s internal valuation models require NatWest Group to make assumptions, judgments and estimates to establish fair value, which are complex and often relate to matters that are inherently uncertain.
The value or effectiveness of any credit protection that NatWest Group has purchased depends on the value of the underlying assets and the financial condition of the insurers and counterparties.
Group’s exposure to the risk of default by the underlying counterparties, depends on the valuation and the perceived credit risk of the instrument against which protection has been bought. Many market counterparties have been adversely affected by their exposure to residential mortgage-linked and corporate credit products, whether synthetic or otherwise, and their actual and perceived creditworthiness may deteriorate rapidly. If the financial condition of these counterparties or their actual or perceived creditworthiness deteriorates, NatWest Group may record further credit valuation adjustments on the credit protection bought from these counterparties under the CDSs. NatWest
PRA and FCA (together, the ‘Authorities’) are granted substantial powers to resolve and stabilise UK-incorporated financial institutions.
Five stabilisation options exist: (i) transfer of all of the business of a relevant entity or the shares of the relevant entity to a private sector purchaser; (ii) transfer of all or part of the business of the relevant entity to a ‘bridge bank’ wholly-owned by the Bank of England; (iii) transfer of part of the assets, rights or liabilities of the relevant entity to one or more asset management vehicles for management of the transferor’s assets, rights or liabilities; (iv) the write-down, conversion, transfer, modification, or suspension of the relevant entity’s equity, capital instruments and liabilities; and (v) temporary public ownership of the relevant entity. These tools may be applied to NatWest Group plc as the parent company or an affiliate where certain conditions are met (such as, whether the firm is failing or likely to fail, or whether it is reasonably likely that action will be taken
Moreover, there are modified insolvency and administration procedures for relevant entities, and the Authorities have the power to modify or override certain contractual arrangements in certain circumstances and amend the law for the purpose of enabling their powers to be used effectively and may promulgate provisions with retrospective applicability.
(which is required to be balanced as appropriate with the other specified objectives) refers to the protection and enhancement of the stability of the financial system of the UK. Moreover, the ‘no creditor worse off’ safeguard contained in the Banking
Act may not apply in relation to an application of the separate write-down and conversion power relating to capital instruments under the
Uncertainty exists as to how the Authorities may exercise their powers including the determination of actions undertaken in relation to the ordinary shares and other securities of
NatWest Group, which may depend on factors outside of NatWest Group’s control.
If NatWest Group is at or is approaching the point of non-viability such that regulatory intervention is required, any exercise of the resolution regime powers by the Authorities may adversely affect holders of NatWest
Group, including cancellation, transfer, dilution, write-down or conversion (as applicable). There may also be a corresponding adverse effect on the market price of such securities.
Climate-related risks and uncertainties are receiving increasing prudential and regulatory, political and societal scrutiny, both in the UK
Group’s premises and resilience may also suffer physical damage due to weather events leading to increased costs and disruption of activity and business continuity for NatWest
There are also significant uncertainties regarding the timing and speed of the transition to a low-carbon economy occurs and whether it occurs in an earlier, gradual, orderly manner or a delayed, rapid, disorderly manner. Widespread levels of adjustment to a low-carbon economy across all sectors of the economy and markets in which NatWest
Government commitments to achieving net zero carbon emissions by 2050 and 2045.
(including oil and gas), mining, infrastructure, transport (including automotive and aviation)
and agriculture are expected to be particularly impacted. The nature and timing of the farreaching commercial, technological, policy and regulatory changes that this transition will entail remain uncertain but their impact is expected to be highly significant and may be disruptive, especially if these changes do not occur in an orderly or timely manner or are not effective in reducing emissions sufficiently.
If NatWest Group fails, either to take the extent of action required or in the timeliness of the action taken, to adapt its business and operating model to the climate-related risks and opportunities and changing market expectations, or to appropriately identify, measure, manage and mitigate climate change related physical and transition risks and opportunities that NatWest Group and its customers face, NatWest Group’s reputation, business, results of operations and outlook may be impacted adversely.
In February 2020, NatWest Group announced its ambition to become the leading bank on climate in the UK and ROI, helping to address the climate challenge by setting itself the challenge to at least halve the climate impact of its financing activity by 2030 and by intending to do what is necessary to achieve alignment with the 2015 Paris Agreement.
NatWest Group’s commitment to reduce the climate impact of its financing activities may materially affect NatWest Group’s business and operations and will require significant reductions to its financed emissions and to its exposure to customers that do not align with a transition to a low-carbon economy or do not have a credible transition plan. It is anticipated that, these reductions, together with the active management of climate-related risks and other regulatory, policy and market changes, are likely to necessitate material and accelerated changes to NatWest Group’s business and existing exposures (potentially on timescales outside of risk appetite) which may have a material adverse effect on
Accordingly, NatWest Group must continue to identify, define and develop its approach to setting and publishing sector-specific targets and its goal of setting comprehensive climate impact scenario-based reduction targets and plans by 2022. It must also be able to adequately define and benchmark current climate impact from its financing activities to demonstrate its progress against its ambition to halve this impact by 2030.
NatWest Group’s ability to meet its climaterelated targets and commitments – including to at least halve the climate impact of its financing activity - will depend greatly on many factors beyond NatWest Group’s control. These include the macroeconomic environment, the extent and pace of climate change, including the timing and manifestation of physical and transition risks and the effectiveness of actions of governments, legislators, regulators, businesses, investors, customers and other stakeholders to adapt and/or mitigate the impact of climate-related risks. See also,
Group, its reputation, business, results of operations, outlook, market and competition position and may increase the climate-related risks NatWest Group faces.
Any failure by NatWest Group to implement effective and compliant climate change resilient systems, controls and procedures could adversely affect NatWest
Group develops its risk appetite for financing activities or engaging with counterparties that do not align with a transition to a low-carbon economy or do not have a credible transition plan.
European Central Bank published its ‘Guide on climate-related and environmental risks’
and in April 2019, the PRA published a supervisory statement ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’ (the ‘SS
In the SS 3/19 the PRA states that regulated entities must: • fully embed the consideration of the financial risks from climate change in their governance arrangements; • incorporate the financial risks from climate change into existing financial risk management practice; • use (long term) scenario analysis to inform strategy setting and risk assessment and identification; and
on 8 October 2020 with an update to its original plan submitted in October 2019. The updated plan stated that the COVID-19 pandemic had disrupted some elements of
NatWest Group’s original plan and, as a result, some near term activities have been delayed to 2021; this delay could potentially result in increased execution risk. Further, the updated plan advised that it will require additional operating cycles reaching into 2022 and beyond to prove embedding.
In December 2019 the Bank of England announced that it will use the 2021 biennial exploratory scenario to stress test the resilience of the current business models of the largest banks, insurers and the financial system to the physical and transition risks from climate change under a number of climate scenarios (the ‘Climate Biennial
CBES in selected areas and confirmed that the CBES, which will be exploratory in nature
Any failure of NatWest Group to fully and timely embed climate-related risks into its risk management practices and framework to appropriately identify, measure, manage and mitigate the various climate-related physical and transition risks in line with applicable legal and regulatory requirements and expectations, may have a material and
There are significant uncertainties inherent in accurately modelling the impact of climate-related risks.
Significant risks, uncertainties and variables are inherent in the assessment, measurement and mitigation of climate-related risks. These include data quality gaps and limitations, the pace at which climate science, greenhouse gas accounting standards and carbon capture and other emissions reduction solutions develop. In addition, multiple climate change scenarios dependent on a range of variable factors could unfold over the coming two or three decades, which timeframes are considerably longer than NatWest Group’s historical strategic, financial, resilience and investment planning horizons and which will affect how and when climate-related risks manifest.
The evaluation of climate-related risk exposure and the development of associated potential risk mitigation techniques largely depend on the choice of climate scenario modelling methodology and the assumptions made.
There are a number of risks and uncertainties involved in climate scenario modelling, including that: • it requires a special skill set that banks traditionally do not have and therefore
A failure to adapt NatWest Group’s business strategy, governance, procedures, systems and controls to manage emerging sustainability-related risks and opportunities may have a material adverse effect on NatWest
Investors, customers, international organisations, regulators and other stakeholders are increasingly focusing on and encouraging businesses to (i) identify, measure, manage and mitigate environmental
Furthermore, sustainability-related risks may be drivers of several different risk categories simultaneously and may exacerbate existing risks, including credit risk, operational risk
(business continuity), market risk (both current market risk positions and future investments)
Group’s business strategy and to establish and maintain effective governance, procedures, systems and controls to manage emerging sustainability-related risks and opportunities may have a material adverse effect on NatWest Group’s reputation, liquidity position, business, results of operations and outlook.
NatWest Group could have a negative impact on NatWest Group’s reputation and on investors’ risk appetite.
Ratings from ESG rating agencies and data providers that rate on an unsolicited basis as to how NatWest Group manages environmental, social and governance risks are increasingly influencing investment decisions. Any change in such ESG ratings depends on many factors some of which are beyond NatWest Group’s control (e.g. any change in rating methodology). Any reduction in the ESG ratings of NatWest Group could have a negative impact on NatWest Group’s reputation and could influence investors’ risk appetite for NatWest Group’s and/or its subsidiaries’ securities, particularly ESG
Governments, legislative and regulatory authorities in the UK, EU and elsewhere are increasingly prioritising a wide range of new climate, environmental and sustainabilityrelated laws and regulations to address the risks and opportunities associated with climate change and sustainability and to promote the transition to a more sustainable low-carbon economy. As a result, an increasing number of laws, regulations, legislative actions are likely to affect the financial sector and the real economy, including proposals, guidance, policy and regulatory initiatives many of which have been introduced or amended recently and are subject to further changes.
Many of these initiatives are focused on disclosure, developing standardised definitions for green and sustainable criteria of assets and liabilities, integrating climate change and sustainability into decisionmaking and customers access to green and
Group’s recognition of its climate financing activity and may adversely affect NatWest
In addition, NatWest Group’s EU subsidiaries will continue to be subject to an increasing array of the EU/EEA climate and sustainability-related legal and regulatory requirements, such as the EU Taxonomy and
EU Green Bond Standards. These requirements may be used as the basis for
Group not meeting investors’ expectations, may increase the cost of doing business and may restrict access of NatWest Group’s UK
In addition, NatWest Group and its subsidiaries will be subject to increasing entity wide climate and other non-financial disclosures requirements. From February 2022, NatWest Group will be required to provide enhanced climate-related disclosures consistent with the Task Force on Climaterelated Financial Disclosure (‘TCFD’)
recommendations to comply with the FCA’s proposed new stock exchange listing rules for premium listed companies. The FCA will consult on expanding this requirement to a wider scope of listed issuers in NatWest