The LTI awards granted in March 2020 were made at a time when the true impact of COVID-19 was just beginning to emerge. The share price fell significantly after the grant was made before recovering some of that ground by the end of the year. I wrote to our major shareholders before the AGM confirming that the Committee would consider any potential windfall gains prior to vesting and would use its discretion where appropriate.
After considering a number of options, we continue to believe that assessing windfall gains prior to vesting, rather than at grant, is the optimal time to consider any adjustments.
For the 2021 LTI award this framework ensures the following factors are taken into account:  the level of the grant price in comparison to pre COVID-19 levels;  the level of share price appreciation (if any) over the period up to vest;  consideration of whether share price appreciation was unique to NatWest Group and indicative of strong management performance; and
 whether any reduction had been applied to award levels at pre-grant.
On the final point above, as set out earlier in this letter, the 2021 LTI award levels were significantly reduced to reflect the impact of COVID-19. The significant reductions applied prior to grant will, in line with the framework, be an important factor in determining whether any windfall gains have arisen prior to vesting.
It is pleasing to see that the number of colleagues at NatWest Group who believe they are paid fairly increased again during 2020, to a level significantly above the Global Financial Services Norm. In the UK, our rates of pay continue to exceed the Living Wage foundation benchmarks. For our major hubs outside the UK, we continue to pay above the minimum and Living Wage rates in the Republic of Ireland as well as exceeding the minimum wage benchmarks in India and Poland.
Response to shareholder feedback Priority areas have been identified for the first time to provide increased transparency to shareholders on the goals considered to be key deliverables for the year. This is intended to address stakeholder feedback on the level of discretion afforded to the Committee under our LTI construct.
The revised remuneration requirements under the fifth Capital Requirements Directive (CRD V) will be another focus for the Committee during 2021. It will bring about some changes to remuneration arrangements for Material Risk Takers, including extending the minimum deferral period from three to four years for variable pay awards.
I hope this letter and the rest of the report will help to explain the Committee’s approach to pay decisions for the year and why we believe these strike an appropriate balance. I would like to thank my fellow Committee members and all the stakeholders who provided valuable input during a most challenging and unusual year and look forward to our continued engagement in 2021.
Performance is assessed using a robust framework against pre-set objectives which include measures related to our strategy and purpose. The measures are demanding but set at a level which executive directors would reasonably be expected to achieve, encouraging safe and secure growth.
Appropriate for a less incentivised culture, which is consistent with how remuneration is structured across the wider bank.
Investors continue to call for restraint, meaningful shareholdings and flexibility of pay design. Evolving regulatory expectations are also taken into account.
Amendments were made to the policy at the 2020 AGM to align with the UK Corporate Governance Code and best practice guidance on pension rates and postemployment shareholding requirements.
How will executive directors be paid for the 2021 performance year?
Pension (cash) £110,000 £75,000 The pension rate remains at 10% of base salary, in line with the rate for the wider workforce.
Benefits (cash) £26,250 £26,250 No change to the standard level of benefit funding. Other benefits can be paid within the terms of the policy.
Fixed share allowance (shares) £1,100,000 £750,000 No change. The allowance is set at 100% of base salary, paid quarterly in shares and released over three years.
Maximum award levels remain unchanged. Awards are delivered entirely in shares.
Retention 12-month retention period applied to each vesting. The combination of vesting and retention periods mean shares are released four to eight years after grant.
Leaver terms Awards lapse unless individual qualifies as a good leaver. No pro-rating of awards after grant for good leavers.
Details on why the disapplication of pro-rating is considered appropriate can be found on page 132.
Expected to vest at 80% of maximum opportunity over time, taking into account the pre-grant and pre-vest tests.
Reductions have been applied to all grants since the construct was introduced.
Grants made in 2021 onwards will use an adjusted share price, calculated with reference to estimated dividend yields and the length of the vesting period.
All colleagues Certain colleagues depending on location, grade or role Senior executives only
Colleagues in the UK receive pension funding at 10% of base salary, which is the same rate that applies to executive directors. Rates in other locations reflect local market practice.
Some colleagues receive funding which they can use towards the cost of benefits or take as cash.
Individuals in some jurisdictions can also participate in one or more of the company’s share plans. This provides them with an efficient way to buy NatWest Group plc shares and aligns their interests with shareholders.
They form an element of fixed remuneration for regulatory purposes and are delivered in cash and/or shares depending on the level of the allowance and the seniority of the recipient.
The annual bonus pool is based on a balanced scorecard of measures including Finance, Risk, Customer and People & Culture measures.
Allocation from the pool depends on performance of the business area and the individual.
Awards are made in cash and/or shares with larger awards paid out over several years. Where appropriate, awards can be adjusted or cancelled through malus and clawback.
LTI awards encourage the creation of a sustainable business. Executive directors and certain members of senior executive committees receive LTI awards rather than annual bonus.
Awards are delivered entirely in shares based on progress against the scorecard of Finance, Risk, Customer and People & Culture measures, aligned with our purpose.
Engagement on remuneration also takes place with representatives from Unite in Great Britain and Offshore and the Financial Services Union in Ulster Bank.
In 2018, the CAP was established in response to the revised UK Corporate Governance Code to promote colleague voice in the boardroom. The CAP is chaired by Lena Wilson as a designated non-executive director and facilitates regular dialogue between colleagues and Board members. It includes colleagues who volunteered to be involved, representatives from trade union bodies and works councils, the colleague-led networks and junior management teams.
* References to “colleagues” here includes all employees and, in some instances, it also captures other members of the wider workforce, for example, contractors and agency workers.
Supporting colleagues throughout the COVID-19 pandemic From the outset, supporting colleagues has been a priority and a summary of the measures put in place is set out below:  NatWest Group did not furlough any colleagues during 2020.  Pay was protected until the end of September regardless of the need to take time off for COVID-19 related illness, dependants care, isolation or childcare.
 A commitment was made to pay expenses incurred to travel to work if normal public transport was disrupted or not safe.  Home working was quickly made available to over 50,000 colleagues, who could also request equipment to work from home effectively.  A virtual GP service was made available, allowing colleagues to access a doctor 24 hours a day.  Silvercloud was launched, which contains a guided suite of wellbeing programmes to help support mental health.  NatWest Group maintained all its internships and did not cut any apprenticeship programmes during 2020.  Support continues for colleagues through a comprehensive employment policy suite. In particular, there are competitive leave and sickness absence policies, where all COVID-19 sickness absences continue to be fully paid.
Fair reward is one of the key things that NatWest Group is committed to in order to provide a great place to work for everyone.
This is underpinned by the Group’s Reward Policy – a global framework for the design of remuneration programmes in NatWest Group. The objective is to deliver reward in a way that is aligned to the current and future needs of the business, enabling managers to use reward as a business tool alongside other people initiatives.
Our Fair Pay Charter Principles to support fairness for all our colleagues 1. Simplicity The reward proposition has been simplified to make it easier for colleagues to understand.
3. Flexibility Colleagues are supported in working flexibly, in ways that balance customer and business needs and their personal circumstances. Colleagues can also select the combination and level of benefits that best meets their needs.
4. Transparency Pay decisions reflect the performance of NatWest Group and the individual, taking into account the behaviours and values demonstrated. Information on salary ranges and the annual pay review is readily available to all colleagues.
10. Security There is an appropriate mix of fixed and variable pay and a core level of benefits. NatWest Group is an accredited Living Wage Employer in the UK with rates of pay that exceed the Living Wage Foundation Benchmarks.
Our View survey 2020 favourable score Versus 2019 Versus GFS Norm Total Reward 80 +1 +9 Colleagues who think they are paid fairly for the work they do 73 +2 +13 Understand how their pay is determined 89 +1 +16 Understand how their bonus is determined 78 +3 +2 Believes the bank’s benefit programme fits their needs 81 -2 +6 Manager regularly gives them recognition for work well done 87 no change +4
Fair rewards Paying colleagues fairly for the work they do and being really clear on how they can make their pay work for them
Great leadership Equipping all managers to give their teams the support and leadership they need to thrive
Having a simple and transparent pay structure supports colleagues in doing the right thing for customers. All Grade A and the majority of Grade B level colleagues are remunerated through fixed pay only, which was increased when variable pay was removed. This provides them with greater security and allows them to fully focus on the needs of the customer.
The NatWest Group Learning Academy was launched in 2020 to recognise the importance of having a continuous learning culture. The aim is to help colleagues learn and reflect as well as build current and future skills.
In 2015 a target was set for each business area to have >30% women in their most senior roles by 2020. 14 of our 15 businesses have achieved this. Overall, there are now 39% women in this population, representing a 10% increase since 2015. NatWest Group is committed to full gender balance by 2030. In 2018, a goal was set to have 14% Black, Asian and Minority Ethnic leaders in the UK by 2025. At 10%, this has increased by 2% since targets were introduced. During 2020, a new goal was set to have c.3% Black colleagues in UK senior roles by 2025.
Inclusivity continues to score highly in the colleague opinion survey, with colleagues scoring NatWest Group 17 points above the GFS Norm.
Alignment with executive pay Targets to support building the capability of colleagues, strengthening culture and building a diverse workforce with an inclusive environment are part of the measures that impact the pay awarded to executive directors. See pages 135 to 138 for further details.
 Creation of a Racial Equality Taskforce setting out new targets and commitments and help for teams to talk about racism.  Developed a new mandatory learning module called ‘inclusion with purpose’ to help to educate on bias, power and privilege and micro aggressions to support behaviour change.
 Founding partners and category sponsor for the 2020 British LGBT Awards.
 Met Hampton-Alexander and Parker Review Board requirements on gender and ethnicity.
 Founding signatory to HMT’s Women in Finance Charter  Signatory to the UN Women Empowerment Principles  A Times Top 50 Employer for Women (since 2005)  Rated in the top organisations in Bloomberg’s Global Gender
Equality Index  Ranked Leader level in Govt.’s Disability Confident Scheme  Rated Gold in the Business Disability Forum benchmark  Founding signatory of UK Govt.’s Race Equality Charter  Named as a Top 10 Outstanding Employer in the Investing in
Race and Ethnicity 2020 Ethnicity 100+ list  Top Global Stonewall Employer since benchmark’s inception  Signatory to the UN Principles for Responsible Banking and 2030 UN Sustainability Development  Expert Level in the Scottish Carer Positive campaign  Ranked Top 5 overall in the McKenzie-Delis Packer Review  Working Families UK Best Practice Awards (2020/2019)  Diversity in Finance Awards (2020): Initiative of the Year and
How executive remuneration is linked to NatWest Group’s ESG approach and purpose In addition to financial targets, the 2020 performance goals used to determine variable pay for executive directors included a range of ESG measures. These were set to reflect the new strategy and key focus areas of Climate, Enterprise & Learning. New goals were created around climate (‘to be a leading bank helping to address the climate challenge’), enterprise (‘new business creation irrespective of gender, background or geography’) and people targets were focussed on shared purpose and building the capability of colleagues. The Blueprint for Better Business (BfBB) framework was used to complement the existing balanced scorecard. The ESG goals and measures for 2020 are set out below with details of the performance assessment against the targets on page 135 to 138.
 Achieve targets for Net Promoter Scores across top 5 customer journeys.
 Achieve improved net trust scores for NatWest and Royal Bank of Scotland.
 Creation of new businesses, ensuring everyone has the same opportunity to progress irrespective of gender, background or geography.
 Achieve the capability targets.  Achieve the culture targets based on the
 The requirement will apply for two years at a level equal to the lower of the shareholding requirement immediately prior to departure or the actual shareholding on departure. Procedures are in place to assist with the enforcement of the requirement, as described in the policy on the next page.
 The pension rate for executive directors has been aligned with the rate applicable to the wider workforce in the UK, currently 10% of base salary.
 The Committee works closely with the Group Sustainable Banking Committee (SBC), which has a specific focus on people and culture. The decision to remove front-line incentives for large numbers of colleagues in recent years, in order to align with the desired culture, was something that both committees supported.
 Having a simplified construct for executive directors, with only one form of variable pay, was one of the main intents behind the current policy.
 The LTI construct is based on lower maximum award levels compared to typical market practice and reasonable performance expectations, which helps to create more predictable outcomes and encourage safe and secure growth.
 Variable pay cannot be awarded above the level of fixed pay which is considered to be a restrained and proportionate approach to executive remuneration. Any variable pay awarded is subject to the achievement of performance against strategic goals and delivered over a long time horizon.
 Malus allows the amount of any unvested variable pay awards to be reduced, potentially to zero, prior to payment. Clawback allows for recovery of variable pay awards that have already vested. The circumstances in which NatWest Group may apply malus or clawback include: - conduct which results in significant financial losses for NatWest Group; - the individual failing to meet appropriate standards of fitness and propriety; - an individual’s misbehaviour or material error; - NatWest Group or the individual’s business unit suffering a material failure of risk management; and - for malus and in-year bonus reduction only, circumstances where there has been a material downturn in financial performance.
Remuneration policy for executive directors The remuneration policy was approved at the AGM on 29 April 2020 and will apply until the 2023 AGM unless changes are required. There are no changes requiring shareholder approval at this time. The table summarises the key features of the policy. In the event of any conflict the approved policy, which can be found under the Governance section of natwestgroup.com, takes precedence over the information set out below.
A fixed allowance paid entirely in shares. The shares vest immediately, subject to any deductions for tax and are released in equal tranches over a three-year retention period.
Executive directors can select from a range of standard benefits including: company car; private medical cover; life assurance; and critical illness insurance. Executive directors are also entitled to travel assistance in connection with company business including the use of a car and driver. NatWest Group will meet the cost of any tax on the benefit.
Further benefits including relocation costs may be offered in line with market practice. NatWest Group may also put in place certain security arrangements for executive directors and meet the cost of any tax due on these benefits.
Provision of a monthly pension allowance paid in cash and based on a percentage of salary. Opportunity to use the cash to participate in a defined contribution pension scheme.  CEO – 10% of base salary  CFO – 10% of base salary
Pension allowances for executive directors have been aligned with the wider workforce in the UK, currently 10% of base salary. The rate may be increased or reduced in order to remain aligned with the workforce.
Delivery in shares with the ability to adjust awards through malus and clawback further supports longerterm alignment with shareholders’ interests.
Performance will be assessed in the areas of Finance, Risk, Customers, People, Culture and purpose to determine whether the executive has achieved what would reasonably have been expected in the circumstances. Risk & Control and Stakeholder Perception underpins will also apply.
The vesting level of the award can vary between 0% and 100% of the original number of shares granted, subject to the delivery of sustained performance.
Purpose and link to strategy Operation Maximum potential value Fees To provide competitive fixed remuneration that reflects the skills, experience and time commitment required for the role.
Reimbursement of reasonable out-of-pocket expenses incurred in connection with the performance of duties.
A Boardroom Inclusion Policy is in place which aims to promote diversity and inclusion in the composition of the Board. The framework aims to ensure NatWest Group can attract, motivate and retain the best talent and avoid limiting potential caused by bias, prejudice or discrimination.The policy on the recruitment of new directors aims to be competitive and to structure pay in line with the framework applicable to current directors, recognising that some adjustment to quantum within that framework may be necessary to secure the preferred candidate. A buy-out policy exists to replace awards forfeited or payments foregone, which is in line with regulatory requirements. The Committee will minimise buy-outs wherever possible and ensure they are no more generous than, and on substantially similar terms to, the original awards or payments they are replacing.
Executive directors As set out in executive directors’ service contracts, NatWest Group or the executive director is required to give 12 months’ notice to the other party to terminate the employment. There is discretion for NatWest Group to make a payment in lieu of notice (based on salary only) which is released in monthly instalments. The executive director must take all reasonable steps to find alternative work and any remaining instalments will be reduced as appropriate to offset income from any such work.
Under the Board Appointment Policy, non-executive directors are appointed for an initial term of three years, subject to annual re-election by shareholders. At the end of this initial term, a further three-year term may be agreed. Non-executive directors may be invited to serve beyond six years, up to a maximum tenure of nine years. The Chairman is not subject to the Board Appointment Policy but is subject to the requirements relating to the maximum tenure period for chairs under the Code. All directors stand for annual election or re-election by shareholders at the company’s AGM.
On termination, share awards will be treated in accordance with the relevant plan rules as approved by shareholders. LTI awards normally lapse on leaving unless the termination is for one of a limited number of specified good leaver reasons. Under the remuneration policy approved by shareholders at the 2017 and 2020 AGMs, LTI awards made in 2018 onwards will be pro-rated for the period worked prior to grant but following grant no further pro-rating will be applied to good leavers.
No pro-rating after grant is fundamental to the LTI construct and allows for a fair level of value to be delivered to the executives whilst having significantly lower maximum variable pay levels compared to peers. NatWest Group operates an LTI only construct, whilst peers also offer annual bonus awards (which typically are also not subject to pro-rating after grant). Without the removal of pro-rating, executives at NatWest Group could potentially receive no variable pay for the year of joining, in line with regulatory requirements, or in the final year of employment.
Notes: (1) Fixed remuneration for 2019 reflects a part-year position for Ms Rose as she joined the Board on 1 November 2019. (2) The fixed share allowance is based on 100% of salary and, as part of fixed remuneration, is not subject to any performance conditions. In April 2020, Ms Rose announced she would forgo 25% of her fixed pay for the rest of the year. This was achieved through a reduction of £426,078 to her fixed share allowance. NatWest Group made a comparable donation to the NET Coronavirus Appeal.
Note: (1) Conditional share awards were granted equating to c.136% of base salary for Ms Rose and c.147% of base salary for Ms Murray. The number of shares was calculated taking into account performance and the maximum potential award for each individual. The award price of £1.701 was based on the average share price over five business days prior to grant. Subject to the pre-vest assessment, these awards will be eligible to vest in equal amounts between years 2023 and 2027. Service conditions and malus provisions apply up until vest, and clawback provisions apply for a period of at least seven years from the date of grant.
overnance 2018 LTI award - Pre-vest performance assessment framework LTI awards were made in early 2018 following an assessment of performance over the 2017 financial year. In accordance with the LTI construct, the Committee has undertaken a further review of performance for 2017 to consider whether anything has come to light which might call into question the original award. Any indication of underperformance is reviewed to assess whether it would be appropriate to make a reduction. The process that has been followed to determine whether sustainable performance has been delivered for the 2018 LTI award is set out below. An assessment of performance was provided by internal control functions and PwC provided an independent view to the Committee.
Pre-vest test for 2018 LTI award - when looking back to performance for 2017, and ‘knowing what we know now’, has NatWest Group: YES NO
Where the answer is ‘Yes’, three further questions have been considered: 1. Is the underperformance due to factors within management’s reasonable control in the circumstances? 2. Can the underperformance be linked back to the performance year to which the award relates, rather than performance developments since? 3. Is it appropriate to reflect the underperformance in the current pre-vest test (i.e. if the underperformance has not been adequately reflected in other ways such as subsequent pre-grant tests for awards granted in the interim)?
Has NatWest Group breached a minimum capital ratio over the period?
YES NPS has fallen since 2017 for three out of the six targeted customer areas.
BRC assessment and recommendation to invoke the Risk & Control underpin Following a detailed investigation by management, the BRC concluded that there had not been a full appreciation across management of the scale and complexity of the challenges related to the remediation of CDD during 2017. This had led to issues with the in-year remediation plan which had not been fully reflected at grant or in subsequent grants. Following the steps above, the BRC recommended that the Committee consider the application of the Risk & Control underpin for 2018 LTI awards.
RemCo assessment and final outcome Following the recommendation from the BRC to consider the application of the Risk & Control underpin, it was agreed that the awards of four individuals holding 2018 LTI awards would be adjusted. Ross McEwan was viewed as having supervisory responsibility for the CDD remediation plan during 2017 and Alison Rose was considered to have had associated responsibility, in her role as CEO of Commercial and Private Banking during 2017. Of the two other recipients, one was also considered to have associated responsibility, with the other being considered primarily responsible for the 2017 plan. The Committee considered at length the differing level of involvement and responsibility for the CDD remediation programme in 2017 across the four individuals, to ensure fair and proportionate adjustments were made.
Mr McEwan received an LTI award of 592,328 shares in 2018 following the application of the pre-grant performance assessment which resulted in a reduction of 10% from the maximum award level of 658,142 shares. Under the pre-vest assessment above, a further reduction of 7.5% of the maximum award was applied using the Risk & Control underpin, resulting in a balance of 542,968 shares. As a member of the Executive Committee at the time, Ms Rose received a 2018 LTI award of 488,906 shares following the pre-grant test, representing a 13.33% reduction from the maximum possible award. The Committee and the Board agreed that a further reduction of 5% on Ms Rose’s LTI maximum award level would be appropriate using the Risk & Control underpin. Applying a slightly lower reduction for Ms Rose compared to Mr McEwan was considered to be proportionate as while Ms Rose, as a franchise CEO, had associated responsibility for CDD remediation in 2017, Mr McEwan had supervisory oversight of the in-year remediation plan. Further details on Mr McEwan’s arrangements can be found in the payments to past directors section.
Note: (1) Based on a share price of £1.41, the average over the three-month period from October to December 2020.
NatWest Group cost savings are £277m and have exceeded the target.
Achieve CET1 ratio targets of 15% for NatWest Group and 13.5% for NWH Group, with appropriate repatriation of capital to the NatWest Group.
Retail and commercial net lending growth was 6.8% for the year, exceeding target and including lending under UK Government support schemes¹.
Progress towards execution of the NatWest Markets strategic review, with RWA reduction of £6-8billion and capital ratio accretive in year 1.
The control environment rating across NatWest Group and NWH Group remained a 3, meaning the required target was not attained.
Risk culture has continued to improve with all except one area of NatWest Group now having attained a ‘2’ systematic rating. The absence of a ‘2’ rating Group-wide does, however, mean the target has not been met.
Customer performance continued to be mixed with targets being met for 3 out of 5 customer journeys during 2020.
NPS for Commercial Banking customer journeys exceeded target by 3 points for commercial lending and 2 points for business servicing. Strong customer performance across Commercial Banking was attributed to the NatWest Group’s response to the COVID-19 pandemic. The commercial lending performance did not include ‘CBILs’ lending but had it done so the associated NPS target would still have been exceeded by 1 point.
Net trust score improvement of 6 percentage-points for NatWest (England & Wales) and improvement of 10 percentage-points for Royal Bank of Scotland (Scotland).
Create an additional 6,500 new businesses, ensuring everyone has the same opportunity to progress irrespective of gender, background or geography, with support being distributed as follows: 75% to the UK regions outside London & South East, 60% to females, 20% to Black, Asian and Minority Ethnic individuals and 10% to people intending to create purpose-led businesses.
The COVID-19 pandemic has driven a fundamental shift in the macroeconomic context which has meant starting a new business has not been a priority at this time, with NatWest Group shifting its focus to supporting surviving and declining businesses.
In terms of the original 6,500 new business target, 1,926 new businesses were created, with available data indicating distribution as follows²: 72% to UK regions outside London & South East; 80% to females; 26% to Black, Asian and Minority Ethnic individuals; and 52% to purpose-led businesses.
Whilst the original target has not been met, the shift in the focus to supporting existing customers has been effective. A revised internal aim of 750,000 value-add customer interventions and 250,000 interventions aimed at helping customers survive and thrive through the pandemic has been significantly exceeded with around 6.4m interventions logged. For the purposes of the LTI performance assessment, this, however, remains a miss in terms of the original disclosed target.
Progress towards climate positive operations by 2025 with reduction in carbon emissions from our direct operational footprint by 10% in 2020.
The pandemic accelerated progress against the carbon emissions target, achieving a 33% reduction in emissions during 2020, made up of a 21% reduction in energy use in our buildings and a 67% reduction in business travel.
Funding and financing for climate and sustainable finance totalled c.£12bn, achieving 60% of the total 2020-22 target.
The NatWest Group and the NWH Group building capability scores exceeded the target by 4 points and 5 points respectively.
The NatWest Group and the NWH Group culture scores exceeded the target by 8 points and 9 points respectively.
The percentage of females in the top three layers of NatWest Group, in aggregate, increased from 35% to 39% during 2020.
The percentage of Black, Asian and Minority Ethnic UK employees in the top four layers of NatWest Group, in aggregate, increased from 9% to 10% during 2020.
Achieving the inclusion target for NatWest Group and NWH Group, to be 10 points above the Global Financial Services Norm as measured through the ‘Our View’ colleague survey.
Notes: (1) Across the retail and commercial businesses net lending increased by £20.9 billion in comparison to 2019 supported by £12.9 billion drawdowns against
Katie Murray Ms Murray’s performance in 2020 was also considered to be strong, with highlights including managing crucial parts of the COVID-19 agenda, especially capital, liquidity and funding plans, and driving annual cost reductions in line with target. There had been improved management of investor engagement with positive feedback received and Ms Murray had demonstrated excellent leadership and had made progress on transforming the Finance function and its executive team as well as its inclusion agenda. In light of performance achieved, the Committee agreed that an LTI award of £682,000 would be appropriate, which equates to 90% of salary and 45% of the maximum award available. Again, this outcome included an exceptional COVID-19 reduction of 38%, otherwise performance against the pre-set unadjusted 2020 performance targets would have resulted in an award level equal to 73% of Ms Murray’s maximum. This is also below the long-term guidance of 80% for assumed average vesting.
Committee (% of max.) LTI award to be made in 2021
Note: (1) 2021 LTI award for Ms Murray represents a 38% reduction on her 2020 LTI award.
Total single figure of remuneration for the Chairman and non-executive directors during 2020 Fees Benefits (1) Total
Chairman (composite fee) £000 £000 change £000 £000 change £000 £000
Fees Benefits (2) Total Board N&G GAC BRC RemCo SBC TIC SID CAP Other 2020 2019 YoY% 2020 2019 YoY% 2020 2019
No variable pay is provided to the Chairman and non-executive directors in line with the Code.
Notes: (1) The benefits column for Howard Davies, Chairman, includes private medical cover (£11,007) as well as life cover and expenses in connection with attendance at Board meetings (c.£1,000 in total). In April 2020, the Chairman announced he would donate 25% of his fees for the rest of the year to the NET Coronavirus Appeal.
Key to table: N&G Group Nominations and Governance Committee SBC Group Sustainable Banking Committee GAC Group Audit Committee TIC Technology and Innovation Committee BRC Group Board Risk Committee SID Senior Independent Director RemCo Group Performance and Remuneration Committee CAP Colleague Advisory Panel
Disclosure relating to LTI awards was another theme from the engagement meetings, with feedback that greater clarity on the factors the Committee had taken into account in exercising its discretion would be welcomed. As a result, the Committee agreed to make two enhancements to LTI disclosures: inclusion of a ratings system to give some indication of the extent of over or underperformance against the targets for the current year; and the identification of the measures the Committee is expecting to be priority areas for the performance year ahead. The intention is to provide shareholders with additional insight on how the Committee viewed performance over the year and which factors had more of a bearing than others in determining the final outcome. The first disclosures to incorporate these features are included in this report.
More generally, meetings also take place with retail shareholders allowing Board members to hear directly from the wider shareholder base on any matters of importance. Three virtual retail shareholder events were held in 2020 providing shareholders with the opportunity to pose questions to a panel of executives and non-executive directors. Similar events are planned for 2021. Shareholders continue to play a vital role in developing remuneration practices and the Committee is very grateful for their involvement in the process.
Salary Standard benefits (1) Pension (% of salary) 100% of salary (2) LTI award (3) assessment over 2020 (4)
The value of benefits received will be disclosed each year. (2) Fixed share allowance payable broadly in arrears, currently in four instalments per year, with shares released in equal amounts over a three-year period. (3) If the maximum LTI award was made, the maximum remuneration receivable by the CEO and CFO would increase by £962,500 and £750,000 respectively from the amounts shown above in the event that there was a 50% increase in the NatWest Group plc share price over the period from grant to vest.
(4) The Committee agreed that, if Ms Rose had not indicated she did not wish to be considered for an award, it would have granted her an LTI award in 2021 of £899,000, which reflected adjustments for the performance assessment and a further exceptional reduction in light of the impact of COVID-19.
Timing of payments to executive directors further assessment at the end of three years before any vesting takes place first vesting in March 2024, then 12-month retention period applies 20%
Performance Goals for 2021 (for the pre-grant assessment of LTI awards to be made in 2022) Performance will be assessed across four core areas using a balanced scorecard and with measures that align with NatWest Group’s purpose. It should be noted that the pre-grant assessment for LTI awards operates over a one-year period based on strategic targets for that year and, in this respect, it has some similarities to the operation of annual bonus awards rather than traditional long-term incentive awards. Targets are disclosed in advance where these are not deemed commercially sensitive.
Achieve NatWest Group cost reduction target based on operating expense reduction.
reduction towards our medium-term target of £20bn by the end of 2021.
Achieve or maintain an effective control environment rating. Ensure a safe, simple and smart approach is adopted in the execution of purpose-led strategic, operating model and cost change programmes.
NatWest Group and NWH Group to each achieve a control environment rating of ‘2’, with documented evidence to support progress against regulatory responsibilities and priorities.
Achievement of targets across the top 4 customer journeys to be prioritised in 2021.
Support removal of barriers to UK enterprise growth through provision of learning, networking, and funding interventions.
Support 35,000 businesses through enterprise programmes with 200,000 customer interactions to start, run and grow a business, with support being distributed:  75% to UK regions outside of London
& South East;  60% to females;  20% to Black, Asian and Minority
Ethnic individuals;  10% to people intending to create purpose-led businesses.
Measures for assessing pre-grant performance leading to 2022 LTI awards Targets
£8 billion of funding and financing for climate and sustainable finance in 2021.
Complete initial ‘footprinting’ estimate of total 2019 financed emissions and develop estimates aligned with the 2015 Paris Agreement.
NatWest Group to be 7 points above and NWH Group to be 8 points above the Banking Standards Board Norm*.
Progress on the number of women in senior roles across the top three layers of NatWest Group.
Based on achieving the inclusion index target for NatWest Group and NWH Group, as measured through the NatWest Group ‘Our View’ colleague survey.
*Willis Towers Watson’s Global Financial Services Norm. The Banking Standards Board Norm is based on the average score across all participating banks. For the CFO, performance will be assessed in line with the framework above and the performance of the Finance function will also be taken into account.
The pay ratios are reflective of a diverse range of roles and pay levels across NatWest Group as a large financial services company. The median employee identified for the 2020 comparison works in the Retail Banking division and the median pay ratio is believed to be consistent with the pay, reward and progression policies for UK employees taken as a whole. For each individual, NatWest Group is committed to paying a fair rate for the role performed, using consistent reward policies and with opportunities for progression. The steps that NatWest Group takes to ensure employees are paid fairly are set out earlier in this report. The change in total remuneration ratios since 2018 is largely driven by the more volatile nature of variable pay for the CEO. An additional factor that caused the ratio to fall in 2020 was the CEO’s decision in April 2020 to forgo 25% of her fixed pay for the rest of the year with NatWest Group making a comparable donation to the NET Coronavirus Appeal. The trend based on a comparison of salary only is more stable over the period.
(4) The data for the three employees identified has been considered and fairly reflects pay at the relevant quartiles amongst the UK employee population. Each of the three individuals was a full-time employee during the year and none received an exceptional award which would otherwise inflate their pay figures.
Annual change 2019 to 2020 Salary Benefits (2) Annual Bonus Chief Executive Officer (1) 8.2% 0% n/a Chief Financial Officer 0% 0% n/a
Notes: (1) As highlighted in last year’s report, Alison Rose was appointed as CEO on 1 November 2019 on a salary of £1.1m, which was 10% higher than her predecessor. The change took place towards the end of the year and the table above is based on a full financial year comparison. Part of the 2019 salary increase was reflected in last year’s table with the remainder shown above. No change has been made to Ms Rose’s salary in 2020.
(3) The data above is based on full year average salary costs of UK based employees of NatWest Group, excluding the CEO and the CFO. This is considered to be the most representative comparator group as it covers the majority of employees and the CEO and CFO are based in the UK.
Notes: (1) Shares owned beneficially as at 31 December 2020 or date of stepping down from the Board if earlier. The interests shown above include shares held by persons closely associated with the directors. As at 18 February 2021, there were no changes to the shares held shown above, other than the acquisition of 101 shares by Katie Murray at the end of January 2021 as part of one of the company’s share plans.
Notes: (1) The award price is normally calculated based on the average share price over a period prior to grant.
(4) Awards granted under the Sharesave plan where colleagues can choose to save from their salary with an option to buy shares at the end of the savings period.
Shareholder dilution and share sourcing The company can use new issue, market purchase or treasury shares to satisfy the exercise of share options and the vesting of share awards under its share plans. NatWest Group’s share plans contain best practice dilution limits that govern the number of shares that may be issued to satisfy share plan awards. Such limits will continue to be monitored.
Total Shareholder Return (TSR) performance The graph below shows the performance of NatWest Group over the past ten years in terms of TSR compared with that of the companies comprising the FTSE 100 Index. This index has been selected because it represents a cross-section of leading UK companies. The TSR for FTSE UK banks for the same period has been added as a further comparison. Source: Datastream
Annual bonus against maximum opportunity SH 0% 0% 0% n/a n/a n/a n/a n/a n/a n/a
Relative importance of spend on pay The table below shows a comparison of remuneration expenditure against distributions to ordinary and preference shareholders. A change to the disclosure from last year is the removal of data on taxation and other charges. This was provided previously for additional context but is not required under the regulations and the change has been made to align with more standard market practice. Information on taxation payments made by NatWest Group is still available on natwestgroup.com.
Remuneration paid to all employees (1) 3,365 3,516 -4.29% Distributions to holders of ordinary shares (2) — 3,018 n/a Distributions to holders of preference shares and paid-in equity 381 406 -6.16% Notes: (1) Remuneration paid to all employees represents total staff expenses per Note 3 to the Financial Statements, exclusive of social security and other staff costs. (2) Dividends that were proposed for payment during 2020 were withdrawn in line with regulatory requirements. The Board has confirmed its intention to pay a dividend of 3p per ordinary share in respect of financial year 2020, which is the maximum amount permitted under current regulatory requirements, subject to approval by shareholders at the Annual General Meeting on 28 April 2021.
Membership of the Group Performance and Remuneration Committee All members of the Committee are independent non-executive directors. In order to be considered for the role of Committee Chairman, an individual must first have served on a remuneration committee for at least 12 months.
The role and responsibilities of the Committee The Committee is responsible for:  approving the remuneration policy for all colleagues and reviewing the effectiveness of its implementation;  reviewing performance and making recommendations to the Board on arrangements for executive directors;  approving performance and remuneration for a defined ‘in scope’ population capturing members and attendees of the Group and NWH Executive Committees, the direct reports of the CEO and heads of key legal entities, control function heads and the Company Secretary. The Committee also approves arrangements where individuals earn total compensation above £1 million; and
 setting the remuneration framework and principles for colleagues identified as Material Risk Takers (MRTs) falling within the scope of UK regulatory requirements.
To mitigate potential conflicts of interest, directors are not involved in decisions regarding their own remuneration and remuneration advisers are appointed by the Committee rather than management. Attendees also play an important role in advising the Committee but are not present when their own remuneration is discussed. The Group Chief HR Officer may be present when discussions take place on senior executive pay, as there is considerable benefit from her participation, but is never present for discussions on her remuneration.
 Assessments of vesting levels for LTI awards granted in 2017.
 Regulatory updates and submissions.  Total pay spend across the wider workforce, including analysis by colleague level, geography and diversity.
 An enhancement to MRT identification and reporting for subsidiary entities.
Second half of 2020  A ‘masterclass’ session with SBC to consider wider workforce remuneration.  Half-year and year-end performance reviews for the ‘in scope’ population.  Remuneration arrangements for the departing and incoming members of the Group’s Executive Committees.
Members continued to see the benefits of the masterclass, with broad support for annual joint engagement sessions with the SBC on areas of mutual interest around the changing nature of the workforce, diversity and inclusion and wider workforce remuneration. Some concerns were expressed over the granular detail often included within papers. However, it was acknowledged that this was principally driven by the heavily regulated nature of the banking sector.
Annual report on remuneration – 2020 Vote No. of shares Percentage
Remuneration policy for all colleagues The remuneration policy supports the business strategy and is designed to promote the long-term success of NatWest Group. It aims to reward the delivery of good performance provided this is achieved in a manner consistent with NatWest Group values and within acceptable risk parameters.
They are delivered in cash and/or shares depending on the level of the allowance and the seniority of the recipient. Shares are subject to a three-year retention period.
Operation In most jurisdictions, benefits or a cash equivalent are provided from a flexible benefits account.
Pension funding forms part of fixed remuneration and NatWest Group does not actively provide discretionary pension benefits.
Operation The annual bonus pool is based on a balanced scorecard of measures including Financial & Business Delivery, Customer, People & Culture and Risk & Control measures. Allocation from the pool depends on performance of the business area and the individual.
Independent control functions exist for key legal entities outside the ring-fence (NWM Plc and RBS International), with dual solid reporting lines into both the legal entity CEO and the NatWest Group Control Function Head.
The deferral period varies from three years for standard MRTs, rising to five years for individuals identified as Risk Manager MRTs and seven years for Senior Managers under the UK’s Senior Managers Regime. All awards are subject to malus and clawback provisions. For MRTs, a minimum of 50% of any annual bonus is delivered in shares and a twelve-month retention period will apply post vesting in line with regulatory requirements.
Shareholding requirements The requirements promote long-term alignment between senior executives and shareholders.
Company share plans The purpose is to provide an easy way for individuals to hold shares in NatWest Group plc, which helps to encourage long-term thinking and provides a direct involvement in NatWest Group’s performance.
Criteria for identifying MRTs The EBA has issued criteria for identifying MRT roles, which captures those staff whose activities have a material influence over NatWest Group’s performance or risk profile. The criteria are both qualitative (based on the nature of the role) and quantitative (for example those who exceed the stipulated total remuneration threshold).
The qualitative criteria can be summarised as: staff within the management body; senior management; other staff with key functional or managerial responsibilities; and staff who individually, or as part of a Committee, have authority to approve new business products or to commit to credit risk exposures and market risk transactions above certain levels.
The quantitative criteria are: individuals earning €500,000 or more in the previous year; individuals in the top 0.3% of earners of the relevant legal entity for the previous year; and individuals who earned more than the lowest paid identified staff per certain qualitative criteria. In addition to the qualitative and quantitative criteria, NatWest Group has applied its own minimum standards to identify roles that are considered to have a material influence over its risk profile.
Risk in the remuneration process NatWest Group’s approach to remuneration promotes effective risk management through having a clear distinction between fixed remuneration, which reflects the role undertaken by an individual, and variable remuneration, which is directly linked to performance and can be risk-adjusted. Fixed pay is set at an appropriate level to discourage excessive risk-taking, and at a level which would allow NatWest Group to pay zero variable pay.
A robust process is used to assess risk performance. A range of measures are considered, specifically capital, liquidity and funding risk, credit risk, market risk, pension risk, compliance & conduct risk, financial crime, operational risk, business risk and reputational risk. Consideration is also given to overall risk culture.
Remuneration arrangements are in line with regulatory requirements and the steps taken to ensure appropriate and thorough risk adjustment are also fully disclosed and discussed with the PRA and the FCA.
Variable pay determination For the 2020 performance year, NatWest Group operated a robust multi-step process, which is control function led, to assess performance and determine the appropriate bonus pool by business area and function. At multiple points throughout the process, reference is made to Group-wide business performance (from both affordability and appropriateness perspectives) and the need to distinguish between go-forward and resolution activities.
Following further review against overall performance and conduct, and taking into account input from the CFO on affordability, the CEO will make a final recommendation to the Committee, informed by all the previous steps in the process and her strategic view of the business. The Committee will then make an independent decision on the final bonus pool taking all of these earlier steps into account.
The assessment process for LTI awards to executive directors and other recipients is also founded on a balanced scorecard approach. The scorecard is aligned with the multi-step bonus pool process, reflecting a consistent risk management performance assessment.
The governance of culture is clearly laid out with Senior Management Function roles having clearly defined accountabilities, which is taken into account in their pay decisions. The Board and SBC also play key roles in building cultural priorities. Frameworks are in place to measure progress.
Accountability review process and malus/clawback The accountability review process was introduced in 2012 to identify any material risk management, control and general policy breach failures, and to ensure accountability for those events.
During 2020 a number of issues and events were considered under the accountability review framework. The outcomes covered a range of actions including reduction (to zero where appropriate) of unvested awards through malus, and suspension of awards pending further investigation.
The Business Approval Authority Framework was reviewed in Q3 2020 to make this more legal-entity specific, and as a consequence, MRT status has been withdrawn for c.600 colleagues from September 2020. However, these colleagues remain subject to the MRT remuneration rules (including ‘de minimis’ rules where applicable) and associated governance for the 2020 performance year. They will not be MRTs for 2021 and the expectation is that population will revert to a more normalised level.
Details of remuneration paid to MRTs identified for subsidiary institutions is included in Pillar 3 reporting, which can be found on natwestgroup.com.
1. Number of MRTs by business area Number of Senior Other beneficiaries mgmt MRTs Total NatWest Group plc EDs 2 0 2 NatWest Group plc NEDs 0 11 11
One individual is included in the table above as they have been identified as an MRT in relation to a role within a subsidiary entity. However, they do not receive any remuneration for this role and are not an MRT in relation to their primary role for NatWest Group. Therefore, no remuneration is included for this individual in the remaining tables.
2. Aggregate remuneration expenditure Aggregate remuneration expenditure in respect of 2020 performance was as follows: Aggregate Senior Other remuneration mgmt MRTs Total Number of beneficiaries 21 1,583 1,604 £m £m £m NatWest Group plc EDs 4.19 - 4.19 NatWest Group plc NEDs - 2.53 2.53 3. Fixed and variable remuneration Fixed remuneration paid in 2020 Fixed remuneration consisted of salaries, allowances, pension and benefit funding.
Senior Other Fixed remuneration mgmt MRTs Total Number of beneficiaries 21 1,583 1,604 £m £m £m NatWest Group plc EDs 3.51 - 3.51 NatWest Group plc NEDs - 2.53 2.53
Long-term incentive awards vest subject to the extent to which performance conditions were met and can result in zero payment.
Senior Other Long-term incentives mgmt MRTs Total Number of beneficiaries 8 — 8 £m £m £m NatWest Group plc EDs 0.68 — 0.68 NatWest Group plc NEDs — — Corporate Functions 0.83 — 0.83 Control Functions 1.07 — 1.07 NatWest Holdings 0.83 — 0.83 NatWest Markets 0.56 — 0.56 RBS International 0.37 — 0.37
Senior Other Category of deferred mgmt MRTs Total remuneration £m £m £m Unvested from prior year 34.25 139.31 173.56 Awarded during year 12.76 108.68 121.43 Paid out (retained) 6.94 42.32 49.26 Paid out (released) 0.79 68.03 68.82 Reduced from prior years 3.83 7.38 11.21 Unvested at year end 35.45 130.26 165.71 5. Guaranteed Awards (including ‘Sign-on’ awards) and Severance Payments NatWest Group does not offer ‘Sign-on awards’. Guaranteed awards may only be granted to new hires in exceptional circumstances in compensation for awards forgone in their previous company and are limited to the first year of service. No new hire guarantees were made to MRTs in respect of the 2020 performance year.
(2) Where applicable, the table is based on an average exchange rate of €1.12518 to £1 for 2020.
Colleagues who earned total remuneration of over €1 million in 2020 represent just 0.1% of the workforce. These individuals include those who manage major businesses and functions with responsibility for significant assets, earnings or areas of strategic activity and can be grouped as follows:  The CEOs responsible for each area and their direct reports.
Statement of compliance NatWest Group plc is committed to high standards of corporate governance, business integrity and professionalism in all its activities.
Throughout the year ended 31 December 2020, NatWest Group plc has applied the Principles and complied with all of the Provisions of the UK Corporate Governance Code issued by the Financial Reporting Council dated July 2018 (the ‘Code’) except in relation to:  Provision 17, in respect of the requirement that the Group Nominations and Governance Committee should ensure plans are in place for orderly succession to both the board and senior management positions and oversee the development of a diverse pipeline for succession; and
In respect of Provision 17, the Board considers this is a matter of significant importance which should rightly be reserved for the full Board. Adopting this approach ensures that all directors have an opportunity to contribute to succession planning discussions for Board and senior management, in support of achieving an appropriate balance of skills, experience, knowledge and diversity at senior levels within NatWest Group and on the Board. It also means that all directors have an opportunity to review, consider and become familiar with the next generation of executive leaders.
In respect of Provision 33, the Board also considers that this is a matter which should rightly be reserved for the Board and this is an approach the Board has adopted for a number of years. Remuneration for the executive directors is first considered by the Group RemCo which then makes recommendations to the Board for consideration. This approach allows all non-executive directors, and not just those who are members of the Group RemCo, to participate in decisions on the executive directors’ and the Chairman’s remuneration and also allows the executive directors to input to the decision on the Chairman’s remuneration. The Board believes this approach is very much in line with the spirit of the Code and no director is involved in decisions regarding his or her own remuneration. A copy of the Code can be found at www.frc.org.uk.
The Board does not anticipate any changes to its approach on these aspects of the Code.
NatWest Group operates a three lines of defence model, which provides a framework for responsibilities and accountabilities across the organisation. As part of its second line of defence role, the Risk function oversees and challenges the firm-wide management of risk and the efficacy of the related controls. In addition, the Risk function is responsible for developing material risk policies and strategic frameworks for the business to use.
While several planned activities designed to enhance the control environment were disrupted by the extensive impact of COVID19 (thereby delaying the achievement of the NatWest Group’s control environment target), the control environment remained largely stable in 2020. There was continuing management focus on the delivery of regulatory programmes – including the internal transformation programme established in response to updated IRB regulation from the Prudential Regulatory Authority (PRA) and the European Banking Authority (EBA) – as well as a review of the controls and processes relating to certain regulatory reporting. There was also significant focus on work to enhance controls relating to financial crime risks – including ongoing work to strengthen customer due diligence standards. The focus of the of NatWest Group in establishing and maintaining a robust risk culture made a valuable contribution to the overall control environment.
The remediation of known control issues remained a focus of the Group Audit Committee and the Board Risk Committee during 2020. For further information on their oversight of remediation of the most significant issues, please refer to the Report of the Group Audit Committee and the Report of the Board Risk Committee. The Group Audit Committee has received confirmation that management has taken, or is taking, action to remedy significant failings or weaknesses identified through NatWest Group’s control framework. The Group Audit Committee and the Board Risk Committee will continue to focus on such remediation activity, particularly in view of the transformation agenda.
While not being part of the Group’s system of internal control, the Group’s independent auditors present to the Group Audit Committee reports that include details of any significant internal control deficiencies they have identified. Further, the system of internal controls is also subject to regulatory oversight in the UK and overseas. Additional details of regulatory oversight are given in the Risk & Capital Management section.
(iv) The NYSE standards require that the compensation committee of a listed company be composed entirely of independent directors. Although the members of the Group RemCo are deemed independent in compliance with the provisions of the Code, the Board has not assessed the independence of the members of the Group RemCo and Group RemCo has not assessed the independence of any compensation consultant, legal counsel or other adviser, in each case, in accordance with the independence tests prescribed by the NYSE Standards. The NYSE Standards require that the compensation committee must have direct responsibility to review and approve the CEO’s remuneration. As stated at the start of this Compliance report, in the case of NatWest Group plc, the Board rather than the Group RemCo reserves the authority to make the final determination of the remuneration of the CEO. (v) The NYSE Standards require listed companies to adopt and disclose corporate governance guidelines. Throughout the year ended 31 December 2020, NatWest Group plc has complied with all of the provisions of the Code (subject to the exception described above) and the Code does not require NatWest Group plc to disclose the full range of corporate governance guidelines with which it complies. (vi) The NYSE Standards require listed companies to adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. NatWest Group has adopted a code of conduct which is supplemented by a number of key policies and guidance dealing with matters including, among others, anti-bribery and corruption, anti-money laundering, sanctions, confidentiality, inside information, health, safety and environment, conflicts of interest, market conduct and management records. This code of conduct applies to all officers and employees and is fully aligned to the PRA and FCA Conduct Rules which apply to all directors. The Code of Conduct is available to view on NatWest Group’s website at natwestgroup.com.
The directors present their report together with the audited accounts for the year ended 31 December 2020.
Other information incorporated into this report by reference can be found at: Page/Note Strategic report 2
At 31 December 2020, HMT’s holding in the company’s ordinary shares was 61.9%.
Activities NatWest Group is engaged principally in providing a wide range of banking and other financial services. Further details of the organisational structure and business overview of NatWest Group, including the products and services provided by each of its operating segments and the markets in which they operate are contained in the Business review. Details of the strategy for delivering the company’s objectives can be found in the Strategic report.
Results and dividends UK company law provides that dividends can only be paid if a company has sufficient distributable profits available to cover the dividend. A company’s distributable profits are its accumulated, realised profits not previously distributed or capitalised, less its accumulated, realised losses not previously written off in a reduction or re-organisation of capital.
The loss attributable to the ordinary shareholders of NatWest Group plc for the year ended 31 December 2020 amounted to £753 million compared with a profit of £3,133 million for the year ended 31 December 2019, as set out in the consolidated income statement on page 258.
In 2019 NatWest Group paid an interim dividend of £241 million, or 2.0p per ordinary share (2018 - £241 million, or 2.0p per ordinary share) and a special dividend of £1,449 million, or 12.0p per ordinary share (2018 – nil). In addition, the company had announced that the directors had recommended a final dividend of £364 million, or 3.0p per ordinary share (2018 – £422 million, or 3.5p per ordinary share), and a further special dividend of £606 million, or 5.0p per ordinary share (2018 £904 million, or 7.5p per ordinary share), both of which were subject to shareholders’ approval at the AGM on 29 April 2020.
Authority to repurchase shares At the Annual General Meeting in 2020 shareholders authorised the company to make market purchases of up to 1,209,390,919 ordinary shares. The directors have not exercised this authority to date. Shareholders will be asked to renew this authorisation at the Annual General Meeting in 2021.
On 6 February 2019 the company held a General Meeting and shareholders approved a special resolution to give the company authority to make off-market purchases of up to 4.99 per cent of its ordinary share capital in issuance from HM Treasury (or its nominee) at such times as the Directors may determine is appropriate. Full details of the proposal are set out in the Circular and Notice of General Meeting available on natwestgroup.com. This authority was renewed at the 2020 Annual General Meeting and Shareholders will be asked to renew this authorisation at the Annual General Meeting in 2021.
The rights and obligations attached to the company’s ordinary shares and preference shares are set out in our Articles of Association, copies of which can be obtained from Companies House in the UK or can be found at natwestgroup.com. Non-cumulative preference share details are set out in Note 21 of the consolidated accounts.
On a show of hands at a General Meeting of the company, every holder of ordinary shares and cumulative preference shares, present in person or by proxy and entitled to vote, shall have one vote.
On a poll, every holder of ordinary shares or cumulative preference shares present in person or by proxy and entitled to vote, shall have four votes for every share held. The notices of Annual General Meetings and General Meetings specify the deadlines for exercising voting rights and appointing a proxy or proxies to vote in relation to resolutions to be passed at the meeting.
The rules governing the powers of directors, including in relation to issuing or buying back shares and their appointment, are set out in our Articles of Association. It will be proposed at the 2021 Annual General Meeting that the directors’ authorities to allot shares under the Companies Act 2006 (the Companies Act) be renewed. The Articles of Association may only be amended by a special resolution at a general meeting of shareholders. The company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities and/or voting rights. There are no persons holding securities carrying special rights with regard to control of the company. A number of the company’s employee share plans include restrictions on transfers of shares while shares are subject to the plans. Note 3 sets out a summary of the plans.
Directors The names and brief biographical details of the current directors are shown on pages 97 and 98.
Howard Davies, Frank Dangeard,, Patrick Flynn, Morten Friis, Robert Gillespie, Katie Murray, Mike Rogers, Alison Rose, Mark Seligman and Lena Wilson all served throughout the year and to the date of signing of the financial statements.
Listing Rule 9.8.4 The information to be disclosed in the Annual Report and Accounts under LR 9.8.4, is set out in this Directors’ report with the exception of details of contracts of significance under LR 9.8.4 (10) and (11) given in Additional Information on page 363.
Political donations At the Annual General Meeting in 2020, shareholders gave authority under Part 14 of the Companies Act 2006, for a period of one year, for the company (and its subsidiaries) to make political donations and incur political expenditure up to a maximum aggregate sum of £100,000. This authorisation was taken as a precaution only, as the company has a longstanding policy of not making political donations or incurring political expenditure within the ordinary meaning of those words.
Directors’ disclosure to auditors Each of the directors at the date of approval of this report confirms that: (a) so far as the director is aware, there is no relevant audit information of which the company’s auditors are unaware; and (b) the director has taken all the steps that he/she ought to have taken as a director to make himself/herself aware of any relevant audit information and to establish that the company’s auditors are aware of that information.
The directors are responsible for the preparation of the Annual Report and Accounts. The directors are required to prepare Group accounts, and as permitted by the Companies Act 2006 have elected to prepare company accounts, for each financial year in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. They are responsible for preparing accounts that present fairly the financial position, financial performance and cash flows of NatWest Group. In preparing those accounts, the directors are required to:  select suitable accounting policies and then apply them consistently;  make judgements and estimates that are reasonable and prudent; and  state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts.
The directors confirm that to the best of their knowledge:  the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and
Katie Murray Frank Dangeard Patrick Flynn Morten Friis Robert Gillespie Yasmin Jetha Mike Rogers Mark Seligman Lena Wilson
Presentation of information Where indicated by a bracket in the margins, certain information in the Risk and capital management section (pages 157 to 245) is within the scope of the Independent auditor’s report. Update on COVID-19 The unprecedented challenge posed by the global pandemic – for families, businesses and governments around the world – also led to a number of significant risk management challenges. NatWest Group remained committed to supporting its customers while operating safely and soundly in line with its strategic objectives. Most notably, the credit risk profile was heightened due to deteriorating economic conditions. NatWest Group provided a significant level of payment holidays during the crisis, and facilitated a high volume of loans through the UK government CBILS, CLBILS and BBLS initiatives. This is detailed in the Credit risk section.
The framework ensures that NatWest Group’s principal risks – which are detailed in this section – are appropriately controlled and managed. In addition, there is a process to identify and manage top risks, which are those which could have a significant negative impact on NatWest Group’s ability to meet its strategic objectives. A complementary process operates to identify emerging risks. Both top and emerging risks are reported to the Board on a regular basis alongside reporting on the principal risks.
Risk management framework continued Governance Committee structure The diagram shows NatWest Group plc’s risk committee structure in 2020 and the main purposes of each committee.
(5) The Group Executive Disclosure Committee is chaired by the Group Chief Financial Officer and supports her in discharging her accountabilities relating to the production and integrity of the Group’s financial information and disclosures.
Supports the Group CFO in overseeing the effective management of the Group’s current and future balance sheet in line with Boardapproved strategy and risk appetite.
Group CEO in forming recommendations to the Board and relevant board committees.
Assists the Board in carrying out its accounting, internal control and financial reporting responsibilities. Reviews the effectiveness of internal controls systems relating to financial management and compliance with financial reporting, asset safeguarding and accounting laws.
Supports the Group CRO in reviewing and evaluating all significant expected credit losses and the Group CFO in reviewing and evaluating related provisions and valuations. .
Risk management framework continued Risk management structure The diagram shows NatWest Group’s risk management structure in 2020 and key risk management responsibilities.
Specialist Risk Directors and Chief Operating Officer) to facilitate effective management of the risks facing NWH. Risk committees in the customer businesses and key functional risk committees oversee risk exposures arising from management and business activities and focus on ensuring that these are adequately monitored and controlled. The Directors of Risk, (Retail Banking; Commercial Banking; wealth businesses; Financial & Strategic Risk; Non-Financial Risk & Frameworks and Compliance & Conduct) as well as the Director, Financial Crime Risk NatWest Holdings and the Chief Operating Officer report to the NWH Chief Risk Officer. The Director of Risk, Ulster Bank Ireland DAC reports to the Ulster Bank Ireland DAC Chief Executive. He also has a reporting line to the NWH Chief Risk Officer and to the Chair of the Ulster Bank Ireland DAC Board Risk Committee.
(5) The Chief Risk Officers for NWM and RBSI have dual reporting lines into the Group Chief Risk Officer and the respective Chief Executive Officers of their entities. There are additional reporting lines to the NWM and RBSI Board Risk Committee chairs and a right of access to the respective Risk Committees.
Leads the NWH Risk function. Responsibilities include policy, governance, frameworks, oversight and challenge, risk culture and reporting. Delivers risk services across NatWest Group governed by appropriate service level agreements. Contributes to NWH strategy as a member of the NWH Executive Committee.
Leads the NWM Risk function. Responsibilities include policy, governance, frameworks, oversight and challenge, risk culture and reporting. Contributes to NWM strategy as a member of the NWM Executive Committee.
Leads the RBSI Risk function. Responsibilities include policy, governance, frameworks, oversight and challenge, risk culture and reporting. Contributes to RBSI strategy as a member of the RBSI Executive Committee.
 Ensuring the framework remains effective and acts as a strong control environment for risk appetite.
 Assessing the level of embedding of risk appetite across the organisation.
NatWest Group’s risk profile is frequently reviewed and monitored and management focus is concentrated on all strategic risks, material risks and emerging risk issues. Risk profile relative to risk appetite is reported regularly to the Board and senior management.
Anti-money laundering, sanctions, anti-bribery and corruption and tax evasion processes and controls are also tested and monitored. This helps provide an independent understanding of the financial crime control environment, whether or not controls are adequate and effective and whether financial crime risk is appropriately identified, managed and mitigated.
Stress testing Stress testing – capital management Stress testing is a key risk management tool and a fundamental component of NatWest Group’s approach to capital management. It is used to quantify and evaluate the potential impact of specified changes to risk factors on the financial strength of NatWest Group, including its capital position.
The process for stress testing consists of four broad stages: Define scenarios
 Translate scenarios into risk drivers.  Assess impact to current and projected P&L
Stress testing is used widely across NatWest Group. The diagram below summarises key areas of focus.
 Risk mitigation – by identifying actions to mitigate risks, or those that could be taken, in the event of adverse changes to the business or economic environment. Key risk mitigating actions are documented in NatWest Group’s recovery plan.
The examination of capital requirements under normal economic and adverse market conditions enables NatWest Group to determine whether its projected business performance meets internal and regulatory capital requirements.
Stress and peak-to-trough movements are used to help assess the amount of capital NatWest Group needs to hold in stress conditions in accordance with the capital risk appetite framework.
The ICAAP is used to form a view of capital adequacy separately to the minimum regulatory requirements. The ICAAP is used by the PRA to assess NatWest Group’s specific capital requirements through the Pillar 2 framework.
Capital allocation NatWest Group has mechanisms to allocate capital across its legal entities and businesses. These aim to optimise the use of capital resources taking into account applicable regulatory requirements, strategic and business objectives and risk appetite. The framework for allocating capital is approved by the Asset & Liability Management Committee.
Stress testing – liquidity Liquidity risk monitoring and contingency planning A suite of tools is used to monitor, limit and stress test the risks on the balance sheet. Limit frameworks are in place to control the level of liquidity risk, asset and liability mismatches and funding concentrations. Liquidity risks are reviewed at significant legal entity and business levels daily, with performance reported to the Asset & Liability Management Committee on a regular basis. Liquidity Condition Indicators are monitored daily. This ensures any build-up of stress is detected early and the response escalated appropriately through recovery planning.
Internal assessment of liquidity Under the liquidity risk management framework, NatWest Group maintains the Individual Liquidity Adequacy Assessment Process. This includes assessment of net stressed liquidity outflows under a range of severe but plausible stress scenarios. Each scenario evaluates either an idiosyncratic, market-wide or combined stress event as described in the table below.
NatWest Group uses the most severe outcome to set the internal stress testing scenario which underpins its internal liquidity risk appetite. This complements the regulatory liquidity coverage ratio requirement.
The recovery plan ensures risks that could delay the implementation of a recovery strategy are highlighted and preparations are made to minimise the impact of these risks. Preparations include:  Developing a series of recovery indicators to provide early warning of potential stress events.
 Clarifying roles, responsibilities and escalation routes to minimise uncertainty or delay.
 Detailing a range of options to address different stress conditions.  Appointing dedicated option owners to reduce the risk of delay and capacity concerns.
The plan is intended to enable NatWest Group to maintain critical services and products it provides to its customers, maintain its core business lines and operate within risk appetite while restoring NatWest Group’s financial condition. It is assessed for appropriateness on an ongoing basis and is updated annually. The plan is reviewed and approved by the Board prior to submission to the PRA each year. Individual recovery plans are also prepared for NatWest Holdings Limited, NatWest Markets Plc, RBS International (Holdings) Limited, Ulster Bank Ireland DAC and NatWest Markets N.V.. These plans detail the recovery options, recovery indicators and escalation routes for each entity.
Under the resolution assessment part of the PRA rulebook, NatWest Group is required to carry out an assessment of its preparations for resolution, submit a report of the assessment to the PRA and publish a summary of this report.
NatWest Group is also participating in the United Nations Environment Programme Finance Initiative focusing on analysis of how physical and transition risks could affect the agriculture and real estate sectors.
Stress testing – market risk Non-traded market risk Non-traded exposures are reported to the PRA on a quarterly basis. This provides the regulator with an overview of NatWest Group’s banking book interest rate exposure. The report includes detailed product information analysed by interest rate driver and other characteristics, including accounting classification, currency and counterparty type.
Traded market risk NatWest Group carries out daily market risk stress testing to identify vulnerabilities and potential losses in excess of, or not captured in, value-at-risk. The calculated stresses measure the impact of changes in risk factors on the fair values of the trading and fair value through other comprehensive income portfolios.
Market risk stress results are combined with those for other risks into the capital plan presented to the Board. The cross-risk capital planning process is conducted once a year, with a planning horizon of five years. The scenario narratives cover both regulatory scenarios and macroeconomic scenarios identified by NatWest Group.
Risk management framework continued Internal scenarios During 2020, NatWest Group continuously refined and reviewed a series of internal scenarios – benchmarked against the Bank of England’s illustrative scenario – as the impact of COVID-19 evolved, including actual and potential effects on economic fundamentals. These scenarios included:  The impact of travel restrictions, social distancing policies, selfisolation and sickness on GDP, employment and consumer spending.
 The impacts on business investment in critical sectors.  The effect on house prices, commercial real estate values and major project finance.  The effect of government interventions such as the Job Retention
Applying the macro-scenarios to NatWest Group’s earnings, capital, liquidity and funding positions did not result in a breach of any regulatory thresholds.
Sources of risk The principal sources of credit risk for NatWest Group are lending, offbalance sheet products, derivatives and securities financing, and debt securities. NatWest Group is also exposed to settlement risk through foreign exchange, trade finance and payments activities.
Key developments in 2020  The outlook for credit risk and asset quality deteriorated during the year driven by the unprecedented economic impact and disruption from COVID-19.
Wholesale For Wholesale credit, the framework has been designed to reflect factors that influence the ability to operate within risk appetite. Tools such as stress testing and economic capital are used to measure credit risk volatility and develop links between the framework and risk appetite limits.
The framework is supported by a suite of transactional acceptance standards that set out the risk parameters within which businesses should operate.
Identification and measurement Credit stewardship Risks are identified through relationship management and credit stewardship of customers and portfolios. Credit risk stewardship takes place throughout the customer relationship, beginning with the initial approval. It includes the application of credit assessment standards, credit risk mitigation and collateral, ensuring that credit documentation is complete and appropriate, carrying out regular portfolio or customer reviews and problem debt identification and management. Additional stewardship measures were put in place in response to COVID-19. Refer to the Impact of COVID-19 section for further details.
NatWest Group mitigates counterparty credit risk through collateralisation and netting agreements, which allow amounts owed by NatWest Group to a counterparty to be netted against amounts the counterparty owes NatWest Group.
Credit risk continued Residential mortgages – NatWest Group takes collateral in the form of residential property to mitigate the credit risk arising from mortgages. NatWest Group values residential property during the loan underwriting process by either appraising properties individually or valuing them collectively using statistically valid models. NatWest Group updates residential property values quarterly using the relevant residential property index namely: Region Index used UK (including Northern Ireland)
The current indexed value of the property is a component of the ECL provisioning calculation.
Commercial real estate valuations – NatWest Group has a panel of chartered surveying firms that cover the spectrum of geography and property sectors in which NatWest Group takes collateral. Suitable valuers for particular assets are contracted through a single service agreement to ensure consistency of quality and advice. Valuations are generally commissioned when an asset is taken as security; a material increase in a facility is requested; or a default event is anticipated or has occurred. In the UK, an independent third-party market indexation is applied to update external valuations once they are more than a year old and every three years a formal independent valuation is commissioned. In the Republic of Ireland, assets are revalued in line with the Central Bank of Ireland threshold requirements, which permits indexation for lower value residential assets, but demands regular Red Book valuations for higher value assets.
Personal Personal customers are served through a lending approach that entails offering a large number of small-value loans. To ensure that these lending decisions are made consistently, NatWest Group analyses internal credit information as well as external data supplied by credit reference agencies (including historical debt servicing behaviour of customers with respect to both NatWest Group and other lenders). NatWest Group then sets its lending rules accordingly, developing different rules for different products.
A credit assessment is carried out before credit facilities are made available to customers. The assessment process is dependent on the complexity of the transaction. Credit approvals are subject to environmental, social and governance risk policies which restrict exposure to certain highly carbon intensive industries as well as those with potentially heightened reputational impacts.
Credit grades (PD) and loss given default (LGD) are reviewed and if appropriate re-approved annually. The review process assesses borrower performance, including reconfirmation or adjustment of risk parameter estimates; the adequacy of security; compliance with terms and conditions; and refinancing risk.
Problem debt management Personal Early problem identification Pre-emptive triggers are in place to help identify customers that may be at risk of being in financial difficulty. These triggers are both internal, using NatWest Group data, and external using information from credit reference agencies. Proactive contact is then made with the customer to establish if they require help with managing their finances. By adopting this approach, the aim is to prevent a customer’s financial position deteriorating which may then require intervention from the Collections and Recoveries teams.
Collections When a customer exceeds an agreed limit or misses a regular monthly payment the customer is contacted by NatWest Group and requested to remedy the position. If the situation is not regularised then, where appropriate, the Collections team will become more fully involved and the customer will be supported by skilled debt management staff who endeavour to provide customers with bespoke solutions. Solutions include short-term account restructuring, refinance loans and forbearance which can include interest suspension and ‘breathing space’. In the event that an affordable/sustainable agreement with a customer cannot be reached, the debt will transition to the Recoveries team. For provisioning purposes, under IFRS 9, exposure to customers managed by the Collections team is categorised as Stage 2 and subject to a lifetime loss assessment, unless it is 90 days past due or has an interest non-accrual status, in which case it is categorised as Stage 3.
Wholesale Early problem identification Each segment and sector have defined early warning indicators to identify customers experiencing financial difficulty, and to increase monitoring if needed. Early warning indicators may be internal, such as a customer’s bank account activity, or external, such as a publiclylisted customer’s share price. If early warning indicators show a customer is experiencing potential or actual difficulty, or if relationship managers or credit officers identify other signs of financial difficulty, they may decide to classify the customer within the Risk of Credit Loss framework.
Heightened Monitoring customers require pre-emptive actions (outside the customer’s normal trading patterns) to return or maintain their facilities within NatWest Group’s current risk appetite prior to maturity.
Risk of Credit Loss customers are performing customers that have met the criteria for Heightened Monitoring and also pose a risk of credit loss to NatWest Group in the next 12 months should mitigating action not be taken or not be successful.
Once classified as either Heightened Monitoring or Risk of Credit Loss, a number of mandatory actions are taken in accordance with policies. Actions include a review of the customer’s credit grade, facility and security documentation and the valuation of security. Depending on the severity of the financial difficulty and the size of the exposure, the customer relationship strategy is reassessed by credit officers, by specialist credit risk or relationship management units in the relevant business, or by Restructuring.
Agreed customer management strategies are regularly monitored by both the business and credit teams. The largest Risk of Credit Loss exposures are regularly reviewed by a Risk of Credit Loss Committee. The committee members are experienced credit, business and restructuring specialists. The purpose of the committee is to review and challenge the strategies undertaken for customers that pose the largest risk of credit loss to NatWest Group.
The Risk of Credit Loss framework does not apply to problem debt management for business banking customers. These customers are, where necessary, managed by specialist problem debt management teams, depending on the size of exposure or by the business banking recoveries team where a loan has been impaired.
Restructuring Where customers are categorised as Risk of Credit Loss, relationships are mainly managed by the Restructuring team. The purpose of Restructuring is to protect NatWest Group’s capital. Restructuring does this by working with corporate and commercial customers in financial difficulty on their restructuring and repayment strategies. Restructuring will always aim to recover capital fairly and efficiently.
In the Personal portfolio, loans are reported as forborne until they meet the exit criteria set out by the European Banking Authority. These include being classified as performing for two years since the last forbearance event, making regular repayments and the loan/debt being less than 30 days past due. Exit criteria are not currently applied for Wholesale portfolios.
Types of forbearance Personal In the Personal portfolio, forbearance may involve payment concessions and loan rescheduling (including extensions in contractual maturity), capitalisation of arrears and, in the Republic of Ireland only, temporary interest-only or partial capital and interest arrangements. Forbearance support is provided for both mortgages and unsecured lending.
Wholesale In the Wholesale portfolio, customer PDs and facility LGDs are reassessed prior to finalising any forbearance arrangement. The ultimate outcome of a forbearance strategy is highly dependent on the co-operation of the borrower and a viable business or repayment outcome. Where forbearance is no longer appropriate, NatWest Group will consider other options such as the enforcement of security, insolvency proceedings or both, although these are options of last resort.
Provisioning requirements on forbearance are detailed in the Provisioning for forbearance section.
Risk appetite Personal The onset of COVID-19 resulted in a significant deterioration in the economic outlook and consequently the credit environment. In response, credit risk appetite was tightened including changes to credit score acceptance thresholds and certain credit policy criteria, for example, maximum loan-to-values on new mortgage business. The criteria were reviewed and adapted on an ongoing basis throughout the year.
Wholesale At the outset of COVID-19, Wholesale Credit Risk undertook a vulnerability assessment of sectors and conducted more frequent monitoring of these portfolios, including sub-sector and single name analysis. Additional oversight forums for both new and existing customer requests linked to sector, customer viability and transaction value were also introduced. Monitoring of government support scheme lending, including tracking customer lending journeys to prioritise resources, ensured customers could be supported in a timely manner. Risk appetite limits were reduced to reflect current risks and remain under constant review.
Commercial real estate valuations Commercial property valuations were not conducted during the initial national lockdown due to travel restrictions, during which time physical valuations were postponed. Following this period, government guidance across the UK nations in respect of local and national lockdowns, confirmed that full internal property inspections could continue subject to adopting COVID-19 secure protocols. However, this required the full co-operation of occupiers and in addition, some commercial premises remained closed. Due to the limitations of some property valuations, The Royal Institute for Chartered Surveyors introduced a Material Valuation Uncertainty Clause (MVUC) for use at the time. There was a general lifting of the MVUC for all UK real estate valuations in September. However, where there is still considerable uncertainty for a location or particular sub-sector (for example, assets valued with reference to their trading potential such as hotels), the MVUC may still apply. This position has not changed with second wave local or subsequent national lockdowns.
Assessment and monitoring Personal Reflecting the deteriorated economic outlook, underwriting standards were tightened including additional information requirements from selfemployed applicants.
Wholesale NatWest Group established guidance on credit grading in response to COVID-19 to ensure consistent and fair outcomes for customers, whilst appropriately reflecting the economic outlook.  Within the Wholesale portfolio, customer credit grades were reassessed when a request for financing was made, a scheduled customer credit review undertaken or a material event specific to that customer occurred.
 For certain types of COVID-19 related lending under government support schemes, notably BBLs, in line with the requirements of those schemes, a credit assessment was not undertaken.
In addition, NatWest Group suspended new formal repossession recovery action for Personal customers.
Wholesale In response to COVID-19, a new framework was introduced to categorise clients in a consistent manner across the Wholesale portfolio, based on the impact of COVID-19 on their financial position and outlook in relation to the sector risk appetite. This framework was extended to all Wholesale customers and supplemented the Risk of Credit Loss framework in assessing whether customers exhibited a SICR, and if support was considered to be granting forbearance. Tailored approaches were also introduced for business banking, commercial real estate and financial institutions customers.
Wholesale Customers seeking COVID-19 related support, including payment holidays, who were not subject to any wider SICR triggers and who were assessed as having the ability in the medium term post-COVID19 to be viable and meet credit appetite metrics, were not considered to have been granted forbearance.
ECL modelling The unprecedented nature of COVID-19 required various interventions in ECL modelling to ensure reasonable and supportable ECL estimates. These are detailed in the Model monitoring and enhancement section.
Credit grading models are designed to provide:  An assessment of customer and transaction characteristics.  A meaningful differentiation of credit risk.  Accurate internal default, loss and EAD estimates that are used in the capital calculation or wider risk management purposes.
Five key areas may materially influence the measurement of credit impairment under IFRS 9 – two of these relate to model build and three relate to model application:  Model build: o The determination of economic indicators that have most influence on credit loss for each portfolio and the severity of impact (this leverages existing stress testing models which are reviewed annually).
IFRS 9 ECL model design principles Modelling of ECL for IFRS 9 follows the conventional approach to divide the problem of estimating credit losses for a given account into its component parts of PD, LGD and EAD.
To meet IFRS 9 requirements, the PD, LGD and EAD parameters differ from their Pillar 1 internal ratings based counterparts in the following aspects:  Unbiased – material regulatory conservatism has been removed from IFRS 9 parameters to produce unbiased estimates.
For assets originated before IFRS 9 was introduced, comparable lifetime origination PDs did not exist. These have been retrospectively created using the relevant model inputs applicable at initial recognition.
One year point-in-time PDs are subsequently extended to forwardlooking lifetime PDs using a conditional transition matrix approach and a set of econometric models.
Wholesale Forward-looking economic information is incorporated into LGD estimates using the existing CCI framework. For low default portfolios, including sovereigns and banks, loss data is too scarce to substantiate estimates that vary with economic conditions. Consequently, for these portfolios, LGD estimates are assumed to be constant throughout the projection horizon.
 There is no EAD model for Personal loans. Instead, debt flow (i.e. combined PD x EAD) is modelled directly.
No explicit forward-looking information is incorporated, on the basis that analysis has shown that temporal variations in CCFs are mainly attributable to changes in exposure management practices rather than economic conditions.
Governance and post model adjustments The IFRS 9 PD, EAD and LGD models are subject to NatWest Group’s model risk policy that stipulates periodic model monitoring, periodic revalidation and defines approval procedures and authorities according to model materiality. Various post model adjustments (PMAs) were applied where management judged they were necessary to ensure an adequate level of overall ECL provision. All PMAs were subject to formal approval through provisioning governance, and were categorised as follows (business level commentary is provided below):  Deferred model calibrations – ECL adjustments where PD model monitoring indicated that losses were being over predicted but where it was judged that an implied ECL release was not supportable. As a consequence, any potential ECL release was deferred and retained on the balance sheet.
 Other adjustments – ECL adjustments where it was judged that the modelled ECL required to be amended.
ECL post model adjustments Retail Ulster Commercial Banking Bank RoI Banking Other Total 2020 £m £m £m £m £m
Note: (1) For 2019, the PMA for model calibrations of approximately £22 million was reported on a different basis. At that time, the value was based on the required ECL
Credit risk continued Retail Banking – The PMA for deferred model calibrations of £34 million (of which £25 million was in mortgages) reflected management’s judgement that the beneficial modelling impact, and implied ECL decrease, arising from underlying portfolio performance, that had been influenced by the various customer support mechanisms, was not supportable.
Significant increase in credit risk (SICR) Exposures that are considered significantly credit deteriorated since initial recognition are classified in Stage 2 and assessed for lifetime ECL measurement (exposures not considered deteriorated carry a 12 month ECL). NatWest Group has adopted a framework to identify deterioration based primarily on relative movements in lifetime PD supported by additional qualitative backstops. The principles applied are consistent across NatWest Group and align to credit risk management practices, where appropriate.
 Persistence (Personal and business banking customers only) – the persistence rule ensures that accounts which have met the criteria for PD driven deterioration are still considered to be significantly deteriorated for three months thereafter. This additional rule enhances the timeliness of capture in Stage 2. The persistence rule is applied to PD driven deterioration only.
The criteria are based on a significant amount of empirical analysis and seek to meet three key objectives:  Criteria effectiveness – the criteria should be effective in identifying significant credit deterioration and prospective default population.  Stage 2 stability – the criteria should not introduce unnecessary volatility in the Stage 2 population.
For ECL provisioning, all forborne but performing exposures are categorised as Stage 2 and are subject to a lifetime loss provisioning assessment. For non-performing forborne loans, the Stage 3 loss assessment process is the same as for non-forborne loans.
The transfer of Wholesale loans from impaired to performing status follows assessment by relationship managers and credit. When no further losses are anticipated and the customer is expected to meet the loan’s revised terms, any provision is written-off or released and the balance of the loan returned to performing status. This is not dependent on a specified time period and follows the credit risk manager’s assessment.
Asset lifetimes The choice of initial recognition and asset duration is another critical judgement in determining the quantum of lifetime losses that apply.  The date of initial recognition reflects the date that a transaction (or account) was first recognised on the balance sheet; the PD recorded at that time provides the baseline used for subsequent determination of SICR as detailed above.
The capped approach reflects NatWest Group practice of a creditbased review of customers prior to credit card issuance and complies with IFRS 9. Benchmarking information indicates that peer UK banks use behavioural approaches in the main for credit card portfolios with average durations between three and ten years. Across Europe, durations are shorter and are, in some cases, as low as one year.
Credit risk continued Economic loss drivers Introduction The portfolio segmentation and selection of economic loss drivers for IFRS 9 follow closely the approach used in stress testing. To enable robust modelling the forecasting models for each portfolio segment (defined by product or asset class and where relevant, industry sector and region) are based on a selected, small number of economic factors, (typically three to four) that best explain the temporal variations in portfolio loss rates. The process to select economic loss drivers involves empirical analysis and expert judgement.
Base case – The current lockdown restrictions are gradually loosened enabling a recovery over the course of 2021. The rollout of the vaccines proceeds as planned. Consumer spending rebounds as accumulated household savings are spent, providing support to the recovery in consumer-facing service sectors. Unemployment rises through to the second half of 2021, peaking at 7%, before gradually retreating. Housing activity slows in the second half of 2021 with a very limited decline in prices.
Extreme downside – This scenario assumes a new variant of COVID19 necessitates a new vaccine, which substantially slows the speed of rollout, prolonging the recovery. There is a renewed sharp downturn in the economy in 2021. Firms react by shedding labour in significant numbers, leading to a very difficult recovery with the unemployment rate surpassing the levels seen in the 1980s. There are very sharp declines in asset prices. The recovery is tepid throughout the five-year period, meaning only a gradual decline in joblessness.
The tables and commentary below provide details of the key economic loss drivers under the four scenarios.
The main macroeconomic variables for each of the four scenarios used for ECL modelling are set out in the main macroeconomic variables table below. The compound annual growth rate (CAGR) for GDP is shown. It also shows the five-year average for unemployment and the Bank of England base rate. The House Price Inflation and commercial real estate figures show the total change in each asset over five years.
House Price Inflation - total change 12.5 7.6 4.4 (19.0) 22.4 17.6 8.3 4.0 (5.1) Bank of England base rate - average 0.2 — (0.1) (0.5) 1.0 0.7 0.3 — — Commercial real estate price - total change 4.3 0.7 (12.0) (31.5) 13.0 8.1 (1.3) (5.8) (15.1)
Note: (1) The five year period starts at Q3 2020 for 2020 and Q3 2019 for 2019.
Unemployment rate - annual average Extreme Extreme Upside Base case Downside downside Upside Base case Downside downside
House Price Inflation (year-on-year) 1.4 (3.6) (11.2) (29.8) (3.5) (8.4) Commercial real estate price (year-on-year) (7.7) (12.3) (29.7) (41.1) (8.2) (12.6)
Instead, NatWest Group has subjectively applied probability weights, reflecting expert views within NatWest Group. The probability weight assignment was judged to present good coverage to the central scenarios and the potential for a far more robust recovery on the upside and exceptionally challenging outcomes on the downside. A 20% weighting was applied to the upside scenario, a 40% weighting applied to the base case scenario, a 30% weighting applied to the downside scenario and a 10% weighting applied to the extreme downside scenario. NatWest Group judged a downside-biased weighting as appropriate given the risk to the outlook posed by the numerous factors influencing the path of COVID-19, the rollout of the vaccine and the pace at which social distancing restrictions can be relaxed.
The four economic scenarios are translated into forward-looking projections of CCIs using a set of econometric models. Subsequently the CCI projections for the individual scenarios are averaged into a single central CCI projection according to the given scenario probabilities. The central CCI projection is then overlaid with an additional mean reversion assumption, i.e. that after one to two years into the forecast horizon the CCI gradually revert to their long-run average of zero.
Finally, ECL is calculated using a Monte Carlo approach by averaging PD and LGD values arising from many CCI paths simulated around the central CCI projection.
UK economic uncertainty Treatment of COVID-19 relief mechanisms Use of COVID-19 relief mechanisms (for example, payment holidays, CBILS and BBLS) will not automatically merit identification of SICR and trigger a Stage 2 classification in isolation. However, a subset of Personal customers who had accessed payment holiday support, and where their risk profile was identified as relatively high risk were collectively migrated to Stage 2 (if not already captured by other SICR criteria).
 Any further damage to certain supply chains, most notably in the case of any re-tightening of lockdown rules but also delays caused by social distancing measures and possible export/import controls.
 The level of revenues lost by corporate clients and pace of recovery of those revenues may affect NatWest Group’s clients’ ability to service their borrowing, especially in those sectors most exposed to the impacts of COVID-19.
This could potentially lead to further ECL increases. However, the income statement impact of this will be mitigated to some extent by the forward-looking provisions taken as at 31 December 2020.
Accordingly, model-projected default rates in Wholesale and Personal have been adjusted by introducing lags of up to 12 months. These lags are based partly on objective empirical data (i.e. the absence of increases in realised default rates by the reporting date) and partly judgmental, based on the extension of government support measures into 2021 and their expected effectiveness.
This creates a risk of overstretched, invalid extrapolations in statistical models. Therefore, all Wholesale econometric models were updated to make them robust against extreme GDP movements by capping projected CCI values at levels corresponding to three times the default rates observed at the peak of the global financial crisis and using quarterly averages rather than spot values for CCI projections.
All in-model adjustments described have been applied by correcting the PD and LGD estimates within the core ECL calculation process and therefore consistently and systematically inform SICR identification and ECL measurement.
Government guarantees During 2020, the UK government launched a series of temporary schemes designed to support businesses deal with the impact of COVID-19. The BBLS, CBILS and CLBILS lending products are originated by NatWest Group but are covered by government guarantees. These are to be set against the outstanding balance of a defaulted facility after the proceeds of the business assets have been applied. The government guarantee is 80% for CBILS and CLBILS and 100% for BBLS. NatWest Group recognises lower LGDs for these lending products as a result, with 0% applied to the government guaranteed part of the exposure.
Notwithstanding the government guarantees, NatWest Group’s measurements of PD are unaffected and NatWest Group continues to move exposures to Stage 2 and Stage 3 where a significant deterioration in credit risk or a default is identified.
Wholesale support schemes The table below shows the uptake of Bounce Back Loan Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS) in Wholesale, by sector.
Approved Drawdown % of BBLS to Approved Drawdown % of CBILS to Approved Drawdown % of CLBILS to 2020 volume amount (£m) sector loans volume amount (£m) sector loans volume amount (£m) sector loans
Ulster Bank RoI Personal & Business Banking 11,124 11,318 11,030 9,590
Ulster Bank RoI Personal & Business Banking 27 25 29 29
Ulster Bank RoI Personal & Business Banking 0.24% 0.22% 0.26% 0.30%
Ulster Bank RoI Personal & Business Banking 0.95% 0.84% 1.06% 1.41%
Notes: (1) Variations in future undrawn exposure values across the scenarios are modelled, however the exposure position reported is that used to calculate modelled
ECL as at 31 December 2020 and therefore does not include variation in future undrawn exposure values. (2) Reflects ECL for all modelled exposure in scope for IFRS 9; in addition to loans this includes bonds and cash. The analysis excludes non-modelled portfolios and exposure relating to bonds and cash. (3) All simulations are run on a stand-alone basis and are independent of each other, with the potential ECL impact reflecting the simulated impact as at 31
December 2020. The simulations change the composition of Stage 1 and Stage 2 exposure but total exposure is unchanged under each scenario as the loan population is static.
 The relatively small ECL uplift in the downside scenario (£246 million, 7% of actual) reflected the weighting within the multiple economic scenarios used in the actual reported ECL to the downside.
 In the upside scenario, the simulated ECL reduction (£844 million, 24% of actual) was lower than the uplift observed in the extreme downside (£2.2 billion), again reflecting the expectation that the non-linearity of losses was skewed to the downside.
 In a separate simulation covering the base case economic scenario (one of the multiple economic scenarios), and assuming a 100% weighting to that scenario, the total Stage 1 and Stage 2 ECL was simulated to be approximately 8% lower than the actual reported ECL.
Credit risk – Banking activities Introduction This section details the credit risk profile of NatWest Group’s banking activities. Refer to Accounting policy 13 and Note 14 to the consolidated financial statements for policies and critical judgements relating to impairment loss determination.
Balance sheet total gross amortised cost and FVOCI 555.0 484.3 In scope of IFRS 9 ECL framework 548.8 475.5
Out of scope of IFRS 9 ECL framework 6.2 8.8 *2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for further details. The assets outside the IFRS 9 ECL framework were as follows:  Settlement balances, items in the course of collection, cash balances and other non-credit risk assets of £4.1 billion (2019 – £6.1 billion). These were assessed as having no ECL unless there was evidence that they were credit impaired.
 Equity shares of £0.3 billion (2019 – £0.9 billion) as not within the IFRS 9 ECL framework by definition.
Contingent liabilities and commitments In addition to contingent liabilities and commitments disclosed in Note 26 to the consolidated financial statements – reputationally-committed limits are also included in the scope of the IFRS 9 ECL framework. These are offset by £0.2 billion (2019 – £2.6 billion) out of scope balances primarily related to facilities that, if drawn, would not be classified as amortised cost or FVOCI, or undrawn limits relating to financial assets exclusions. Total contingent liabilities (including financial guarantees) and commitments within IFRS 9 ECL scope of £133.6 billion (2019 – £127.9 billion) comprised Stage 1 £107.4 billion (2019 – £121.7 billion); Stage 2 £25.2 billion (2019 – £5.6 billion) and Stage 3 £1.0 billion (2019 – £0.6 billion).
Credit risk – Banking activities continued Portfolio summary – segment analysis The table below shows gross loans and ECL, by segment and stage, within the scope of the IFRS 9 ECL framework.
Retail Ulster Bank Commercial Private RBS NatWest Central items Banking RoI Banking Banking International Markets & other Total 2020 £m £m £m £m £m £m £m £m Loans - amortised cost and FVOCI
ECL loss rate - annualised (basis points) (3) 45 132 174 57 73 42 10 87
Retail Ulster Bank Commercial Private RBS NatWest Central items Banking RoI Banking Banking International Markets & other Total 2019* £m £m £m £m £m £m £m £m Loans - amortised cost and FVOCI
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.
FVOCI; and £28 million (2019 – nil) related to contingent liabilities. (5) The table shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to the Financial instruments within the scope of the IFRS 9 ECL framework section for further details. Other financial assets within the scope of the IFRS 9 ECL framework were cash and balances at central banks totalling £122.7 billion (2019 – £79.2 billion) and debt securities of £53.8 billion (2019 – £59.4 billion).
Key points  The ECL requirement increased significantly year-on-year, primarily in Stage 1 and Stage 2, in expectation of credit deterioration reflecting the severity of the economic impact arising from COVID-19. The deteriorated economic outlook also resulted in a significant migration of exposures from Stage 1 to Stage 2, consequently moving from a 12 month to a life-time ECL requirement.
Credit risk – Banking activities continued Segmental loans and impairment metrics The table below shows ECL and ECL provisions coverage, by days past due, by segment and stage, within the scope of the ECL framework.
Key points  Retail Banking – Balance sheet growth was primarily due to mortgages. This reflected strong customer demand as well as the £3.0 billion acquisition of an owner-occupied mortgage portfolio from Metro Bank (for which a Stage 1 ECL charge of £9 million was incurred on acquisition).
 Unsecured lending balances decreased reflecting reduced customer demand and the pay down of existing borrowing as well as a more restrictive risk appetite reflective of the uncertain external environment. The deteriorated economic outlook, including forecast increases in unemployment, resulted in increased account level IFRS 9 PDs. Consequently, compared to 2019, a larger proportion of customer accounts exhibited a significant increase in credit risk (SICR) which caused a migration of assets from Stage 1 to Stage 2. As a result, the ECL requirement increased.
 While the granting of a COVID-19 related payment holiday did not automatically trigger a migration to Stage 2, a subset of customers who had accessed payment holiday support, and where their risk profile was identified as relatively high risk, were collectively migrated to Stage 2 and their ECL uplifted (refer to the Governance and post model adjustments section for further details). The various COVID-19 related customer support mechanisms (loan repayment holidays, government job retention scheme) continued to mask actual portfolio deterioration in the short-term, with the days past due, and flows to Stage 3 metrics, yet to be impacted. Provisions coverage increased overall. However, coverage in Stage 2 alone reduced, mainly due to a proportionately higher share of mortgage exposures where coverage levels were lower. This reflected the secured nature of the borrowing. The loss rate was significantly higher than in the prior year.
Further drawdowns on existing facilities and new lending across both the Wholesale and Personal portfolios were offset by ongoing reduction of the non-performing mortgage portfolio through the execution of a portfolio sale agreed in 2019. The deteriorated economic outlook included forecast increases in unemployment, reductions in property prices and GDP, which resulted in increased IFRS 9 PDs across all portfolios. Consequently, compared to 2019, a larger proportion of the exposures exhibited a SICR with an associated migration of assets from Stage 1 to Stage 2. As a result, the ECL increased. The various COVID-19 related customer support mechanisms (for example, loan payment breaks, government job retention scheme) masked actual portfolio deterioration in the short-term, with the days past due, and flows to Stage 3, yet to be materially affected. The loss rate was significantly higher than in the prior year.
Mortgages (1) cards personal Total Property Corporate FI Sovereign Total 2020 £m £m £m £m £m £m £m £m £m £m
Mortgages (1) cards personal Total PropertyCorporate FI Sovereign Total 2020 £m £m £m £m £m £m £m £m £m £m
Other financial assets by asset quality (2) — — — — 98 116 11,093 165,209 176,516 176,516
Off-balance sheet by asset quality (2) 14,557 14,262 10,186 39,005 17,397 58,635 17,011 1,587 94,630 133,635
Mortgages cards personal Total Property Corporate FI Sovereign Total 2019* £m £m £m £m £m £m £m £m £m £m
Other financial assets by asset quality (2) — — — — — 110 12,185 126,305 138,600 138,600
Notes: (1) Includes a portion of secured lending in Private Banking, in line with ECL calculation methodology. Private Banking and RBS International mortgages are reported in UK, which includes crown dependencies, reflecting the country of lending origination. (2) AQ bandings are based on Basel PDs and mapping is as follows: Internal asset quality band
£0.3 billion (2019 – £0.3 billion) of AQ10 Personal balances primarily relate to loan commitments, the drawdown of which is effectively prohibited. AQ10 includes £0.4 billion (2019 – £0.6 billion) of RoI mortgages which are not currently considered defaulted for capital calculation purposes for RoI but are included in Stage 3.
Credit risk – Banking activities continued Sector analysis The table below shows ECL by stage, for the Personal portfolios and key sectors of the Wholesale portfolios, that continue to be affected by COVID-19.
Of which: *2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for further details.
Notes: (1) Includes £3.7 billion of commercial cards related balances which were brought into the scope of ECL calculations during 2020. (2) Airlines and aerospace Stage 3 ECL at 31 December 2019 included £27 million of ECL related to contingent liabilities.
Wholesale forbearance The table below shows Wholesale forbearance, Heightened Monitoring and Risk of Credit Loss by sector. Personal forbearance is disclosed in the Personal portfolio section.
Heightened Monitoring and Risk of Credit Loss 1,600 155 5,771 7,526
Heightened Monitoring and Risk of Credit Loss 1,209 107 4,207 5,523
 Loans by asset quality (based on Basel II PD) – In the Personal portfolio, the asset quality distribution deteriorated slightly in credit cards, with balance reductions in higher asset quality bands. In the Wholesale portfolio, Basel II PDs were based on a through-thecycle approach. The asset quality distribution demonstrated some deterioration across the portfolio consistent with the wider impacts of COVID-19. Lending under government-backed COVID-19 related support schemes was mostly in the AQ8 band. Increased exposure in the AQ2 band in financial institutions is related to Treasury activities as customer deposit levels have increased. In addition, some AQ migration within financial institutions occurred as a result of the downgrade of the UK sovereign. For further details refer to the Asset quality section.
 Loans – Past due analysis and Stage 2 – The various COVID-19 related customer support mechanisms (capital repayment holidays, government job retention scheme, government supported lending schemes) are mitigating actual portfolio deterioration in the short term, although there have been some increases in past due exposures in the Wholesale portfolio.
 Weighted average 12 months PDs – In Personal, the Basel II pointin -time PDs have yet to be materially affected by COVID-19. The forward-looking IFRS 9 PDs increased reflecting the deteriorated economics. The IFRS 9 PDs for both unsecured loans (reported within other personal) and mortgages were under-predicting and the ECL was adjusted upwards pending the model parameters being systematically updated. In the Wholesale portfolio, the Basel II PDs were based on a through-the-cycle approach and increased less than the forward looking IFRS 9 PDs which increased, reflecting the deteriorated economic outlook.
 Other financial assets by asset quality – Consisting almost entirely of cash and balances at central banks and debt securities, held in the course of treasury related management activities, these assets were mainly within the AQ1-AQ4 category.
 Heightened Monitoring and Risk of Credit Loss – Consistent with the effects of COVID-19, increased flows into Heightened Monitoring and Risk of Credit Loss were noted across a number of sectors. The most material increases in both volumes and value were seen within other corporate and particularly in leisure, land transport & logistics and automotive sectors. In the CRE sector, inflows by value increased, but by volume remained largely stable.
Credit risk – Banking activities continued Credit risk enhancement and mitigation The table below shows exposures of modelled portfolios within the scope of the ECL framework and related credit risk enhancement and mitigation (CREM).
Gross Maximum credit risk CREM by type CREM coverage Exposure post CREM
exposure ECL Total Stage 3 Financial (1) Property Other (2) Total Stage 3 Total Stage 3 2020 £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn Financial assets Cash and balances at central banks 122.7 — 122.7 — — — — — — 122.7 —
Notes: (1) Includes cash and securities collateral. (2) Includes guarantees, charges over trade debtors, other asset finance related physical collateral as well as the amount by which credit risk exposure is reduced through netting arrangements, mainly cash management pooling, which give NatWest Group a legal right to set off the financial asset against a financial liability due to the same counterparty.
(3) NatWest Group holds collateral in respect of individual loans – amortised cost to banks and customers. This collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant and equipment; inventories and trade debtors; and guarantees of lending from parties other than the borrower. NatWest Group obtains collateral in the form of securities in reverse repurchase agreements. Collateral values are capped at the value of the loan.
(5) Stage 3 exposures post credit risk enhancement and mitigation in Wholesale mainly represent enterprise value and the impact of written down collateral values; an individual assessment to determine ECL will consider multiple scenarios and in some instances allocate a probability weighting to a collateral value in excess of the written down value.
Credit risk – Banking activities continued Personal portfolio Disclosures in the Personal portfolio section include drawn exposure (gross of provisions).
Banking Bank RoI Banking International Total Banking Bank RoI Banking International Total Personal lending £m £m £m £m £m £m £m £m £m £m
Key points  Although the economic outlook deteriorated, reflected in the IFRS 9 stage migrations and ECL described earlier, the overall credit risk profile and underlying performance of the Personal portfolio remained stable during 2020.
 Personal lending increased during 2020 primarily due to mortgage growth and, in Retail Banking the acquisition of a £3 billion portfolio of owner occupied mortgages from Metro Bank. Unsecured lending reduced due to lower credit cards and overdraft usage during COVID-19.
 New mortgage lending was slightly lower than in 2019. COVID-19 restrictions affected volumes in the second and third quarters of the year. The existing mortgage stock and new business were closely monitored against agreed risk appetite parameters. These included loan-to-value ratios, buy-to-let concentrations, new-build concentrations and credit quality. These criteria were appropriately amended during the year to manage the effects of COVID-19 on the credit risk profile and underwriting standards were maintained.
 As at 31 December 2020, £2 billion (1%) of the UK Retail Banking mortgage portfolio had active COVID-19 payment holidays. This compared with £37 billion (22%) which had requested a payment holiday during 2020.
 By value, the proportion of mortgages on interest only and mixed terms (capital and interest only) reduced. This was mainly due to low proportions of buy-to-let and owner occupier interest only new business.
 37% of the stock of lending was in Greater London and the South East (2019 – 35%). The average weighted loan-to-value for these regions was 54% (2019 – 52%) compared to all regions 56%.
 In the Retail Banking mortgage portfolio, 83% of customer balances were on fixed rates (61% of these on five-year deals). In addition, 99% of all new mortgage completions were fixed rate deals (45% of these on five-year deals).
 As detailed previously, the deteriorated economic outlook, including forecast increases in unemployment and declines in house prices, resulted in an increased ECL requirement.
Credit risk – Banking activities continued Personal portfolio Mortgage LTV distribution by stage The table below shows gross mortgage lending and related ECL by LTV band. Mortgage lending not within the scope of IFRS 9 ECL reflected portfolios carried at fair value.
IFRS 9 which; ECL gross newRetail Banking Stage 1 Stage 2 Stage 3 scope Total lending Stage 1 Stage 2 Stage 3 Total (1) Stage 1 Stage 2 Stage 3 Total
Key points  ECL coverage rates increased through the LTV bands with both
≤50% ≤80% ≤100% ≤150% >150% Total average LTV Other Total Total
By geography and sub-sector (1) £m £m £m £m £m £m £m £m
(2) Properties including houses, flats and student accommodation. (3) Properties including offices in central business districts, regional headquarters and business parks. (4) Properties including high street retail, shopping centres, restaurants, bars and gyms. (5) Properties including distribution centres, manufacturing and warehouses. (6) Properties that do not fall within the other categories above. Mixed generally relates to a mixture of retail/office with residential.
Credit risk – Banking activities continued Commercial real estate (CRE) CRE LTV distribution by stage The table below shows CRE current exposure and related ECL by LTV band.
IFRS 9 ECL Stage 1 Stage 2 Stage 3 scope (3) Total Stage 1 Stage 2 Stage 3 Total (1) Stage 1 Stage 2 Stage 3 Total
Notes: (1) Comprises gross lending, interest rate hedging derivatives and other assets carried at fair value that are managed as part of the overall CRE portfolio. (2) The exposure in Stage 3 mainly related to legacy assets. (3) Includes exposures relating to non-modelled portfolios and other exposures carried at fair value, including derivatives. (4) ECL provisions coverage is ECL provisions divided by current exposure. (5) Relates mainly to business banking, rate risk management products and unsecured corporate lending. The low Stage 3 ECL provisions coverage was driven by a single large exposure, which was written down to the expected recoverable amount. (6) Relates to the development of commercial and residential properties. LTV is not a meaningful measure for this type of lending activity.
 Credit quality – Despite significant challenges across the CRE sector, with customers utilising COVID-19 related government support measures, Heightened Monitoring inflows by volume were stable. By value however, Heightened Monitoring and Risk of Credit Loss exposures increased, with a rise of migration into AQ10. This increase was largely due to individually significant names, particularly in the retail sub-sector.
 Risk appetite – Appetite in CRE remained cautious. Pre-COVID-19 conservative lending criteria remained in place, including lower leverage required for new London office originations and parts of the retail sector. From January 2021, new minimum standards were introduced for CRE lending appetite for residential new build lending, which requires properties to achieve a minimum Energy Performance Certificate rating of B. In addition, standard lending terms for CRE now include NatWest Group’s preference for green leases to be used by commercial landlords. Green leases are a mechanism for landlords and tenants to work together to improve the sustainability of a building.
Credit risk – Banking activities continued Flow statements The flow statements that follow show the main ECL and related income statement movements. They also show the changes in ECL as well as the changes in related financial assets used in determining ECL. Due to differences in scope, exposures in this section may therefore differ from those reported in other tables, principally in relation to exposures in Stage 1 and Stage 2. These differences do not have a material ECL impact. Other points to note:  Financial assets include treasury liquidity portfolios, comprising balances at central banks and debt securities, as well as loans. Both modelled and non-modelled portfolios are included.
 Amounts written-off represent the gross asset written-down against accounts with ECL, including the net asset write-down for any debt sale activity.
 The effect of any change in PMAs during the year is typically reported under changes in risk parameters, as are any impacts arising from changes to the underlying models. Refer to the section on Governance and post model adjustments for further details.
Currency translation and other adjustments 3,334 2 (304) 5 142 11 3,172 18 Transfers from Stage 1 to Stage 2 (117,545) (581) 117,545 581 — — — — Transfers from Stage 2 to Stage 1 48,342 865 (48,342) (865) — — — —
Net re-measurement of ECL on stage transfer (689) 2,204 493 2,008 Changes in risk parameters (model inputs) 366 815 328 1,509 Other changes in net exposure 84,180 202 (14,261) (271) (1,666) (44) 68,253 (113) Other (P&L only items) — (1) (161) (162) Income statement (releases)/charges (121) 2,747 616 3,242
Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL Retail Banking - mortgages £m £m £m £m £m £m £m £m
Currency translation and other adjustments — — — — 19 19 19 19 Transfers from Stage 1 to Stage 2 (28,812) (8) 28,812 8 — — — — Transfers from Stage 2 to Stage 1 8,899 18 (8,899) (18) — — — —
Net re-measurement of ECL on stage transfer (16) 165 5 154 Changes in risk parameters (model inputs) 8 (2) 57 63 Other changes in net exposure 16,685 8 (1,911) (13) (219) (13) 14,555 (18) Other (P&L only items) — — (25) (25) Income statement (releases)/charges — 150 24 174
Key points  The increase in ECL in Stage 2 was primarily due to the deterioration in the economic outlook, causing both PDs and LGDs to increase. Stage 1 ECL increased reflecting the economic environment, and also approximately £9 million of ECL resulted from the acquisition of the owner-occupied mortgage portfolio from Metro Bank.
 The updated economics also resulted in a net migration of assets from Stage 1 to Stage 2 with a consequent increase from a 12 month ECL to a lifetime ECL. While the granting of a COVID-19 related payment holiday did not automatically trigger a migration to Stage 2, a subset of customers who had accessed payment holiday support, and where their risk profile was identified as relatively high risk, were collectively migrated to Stage 2 and their ECL uplifted, refer to the Governance and post model adjustments section for further details.
 In Stage 3, the ECL cost within changes in risk parameters included the monthly assessment of the loss requirement, capturing underlying portfolio movements.
 Write-off occurs once the repossessed property has been sold and there is a residual shortfall balance remaining outstanding. Write-off would typically be within five years from default but can be longer.
Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL Retail Banking - credit cards £m £m £m £m £m £m £m £m
Transfers from Stage 1 to Stage 2 (1,485) (56) 1,485 56 — — — — Transfers from Stage 2 to Stage 1 1,059 105 (1,059) (105) — — — —
Net re-measurement of ECL on stage transfer (71) 261 44 234 Changes in risk parameters (model inputs) 10 (63) 10 (43) Other changes in net exposure (110) 27 (190) (27) (36) (2) (336) (2) Other (P&L only items) — — (3) (3) Income statement (releases)/charges (34) 171 49 186
Key points  The increase in ECL in Stage 1 and Stage 2 was primarily due to the deterioration in the economic outlook, causing PDs to increase.  The updated economics also resulted in a net migration of assets from Stage 1 to Stage 2 with a consequent increase from a 12 month ECL to a lifetime ECL.
 Charge-off (analogous to partial write-off) typically occurs after 12 missed payments.
Currency translation and other adjustments — — — — 3 3 3 3 Transfers from Stage 1 to Stage 2 (3,953) (99) 3,953 99 — — — — Transfers from Stage 2 to Stage 1 1,350 96 (1,350) (96) — — — —
 Write-off occurs once recovery activity with the customer has been concluded or there are no further recoveries expected, but no later than six years after default.
 The reduction in ECL in Stage 3 reflected ongoing deleveraging of the Ulster Bank RoI mortgage non-performing portfolio through the execution of a portfolio sale agreed in 2019.
 In Stage 3, the ECL cost within changes in risk parameters included the forward-looking effect of forecast reductions in house prices and the application of post-model adjustments.
 Write-off generally occurs once the repossessed property has been sold and there is a residual shortfall balance remaining outstanding or when the loan is sold to a third party.
Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial
Commercial Banking - commercial assets ECL assets ECL assets ECL assets ECL real estate £m £m £m £m £m £m £m £m
Net re-measurement of ECL on stage transfer (45) 242 102 299 Changes in risk parameters (model inputs) 106 77 69 252 Other changes in net exposure 2,474 33 (1,756) (25) (174) 6 544 14 Other (P&L only items) — — — — Income statement (releases)/charges 94 294 177 565
 Stage 3 recovery values started to show evidence of being negatively affected by deteriorated market conditions, leading to higher ECL charges.
Net re-measurement of ECL on stage transfer (56) 147 45 136 Changes in risk parameters (model inputs) 15 29 12 56 Other changes in net exposure 7,558 9 (245) (20) (42) (11) 7,271 (22) Other (P&L only items) — (2) (48) (50) Income statement (releases)/charges (32) 154 (2) 120
Key points  The increase in ECL in Stage 1 and Stage 2 was primarily due to the deterioration in the economic outlook, causing both PDs and LGDs to increase.
 The updated economics also resulted in a migration of assets from Stage 1 to Stage 2 with a consequential increase from a 12 month ECL to a lifetime ECL.
 The portfolio continued to benefit from cash recoveries post writeoff, which are reported as other (P&L only items). Write-off occurs once recovery activity with the customer has been concluded or there are no further recoveries expected, but no later than five years after default.
Transfers from Stage 1 to Stage 2 (49,620) (227) 49,620 227 — — — — Transfers from Stage 2 to Stage 1 24,151 376 (24,151) (376) — — — —
Net re-measurement of ECL on stage transfer (304) 731 150 577 Changes in risk parameters (model inputs) 88 592 24 704 Other changes in net exposure 10,287 97 (7,810) (103) (590) (13) 1,887 (19)
 The updated economics also resulted in the migration of assets from Stage 1 to Stage 2 with a consequential increase from a 12 month ECL to a lifetime ECL.
 The migration of exposures from Stage 2 to Stage 1 included the effect of the slight reduction in PDs arising from the relative improvement in the multiple economic scenarios in the second half of the year compared to the mid-year point, partially reversing some migrations into Stage 2 in the first half of 2020.
 For flows into Stage 3, defaults were suppressed reflecting the various government customer support mechanisms available.
 Other changes in net exposures increased in Stage 1 as customers drew down on existing facilities and undertook new borrowings supported by the government schemes.
Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL NatWest Markets (1) £m £m £m £m £m £m £m £m
2020 £m £m £m £m £m £m £m £m £m £m Personal - Other driver (adverse credit, forbearance etc) 4,364 24 849 36 114 20 123 16 5,450 96
Key points  The deteriorated economic outlook, including forecast increases in unemployment, resulted in increased account level IFRS 9 PDs. Consequently, compared to 2019, a larger proportion of accounts exhibited a SICR causing Stage 2 exposures to increase significantly.
 In the absence of PD deterioration or other backstop SICR triggers, the granting of a COVID-19 related payment holiday did not automatically result in a migration to Stage 2.
Loans ECL Loans ECL Loans ECL Loans ECL Loans ECL 2020 £m £m £m £m £m £m £m £m £m £m Wholesale - Other driver (forbearance, RoCL etc) 958 46 3,610 210 325 5 107 1 5,000 262
Wholesale - Other driver (forbearance, RoCL etc) 1,092 16 3,219 43 169 1 1 — 4,481 60
 There was an increase in flows on to the Risk of Credit Loss framework. However, these were recorded under PD deterioration if the Stage 2 trigger was also met.
 In Ulster Bank RoI, approximately £400 million of exposures relating to small and medium size enterprises were collectively migrated from Stage 1 to Stage 2 reflective of the elevated risk for this sector.
Credit risk – Banking activities continued Stage 2 decomposition by a significant increase in credit risk trigger
Adverse credit bureau recorded with credit reference agency 2,936 10.5 — — 51 3.7 46 1.4 3,033 8.8
Adverse credit bureau recorded with credit reference agency 3,236 31.2 — — 59 4.7 102 4.4 3,397 22.6
Key points  The primary driver of credit deterioration was PD which, including persistence, accounted for the majority of movements into Stage 2. There was also a collective migration of a subset of customers who had accessed payment holiday support, and where their risk profile was identified as relatively high risk.
 The increase in exposures in Stage 2 due to persistence, primarily within UK mortgages, reflected the slight reduction in PDs arising from the relative improvement in the multiple economic scenarios in the second half of the year compared to the mid-year point; exposures cannot migrate back to Stage 1 until their PD has been back within the criteria threshold for three consecutive months.
Key points  PD deterioration continued to be the primary trigger of migration of exposures from Stage 1 to Stage 2. As the economic outlook deteriorated, it accounted for a higher proportion of the balances migrated to Stage 2.
 NatWest Group continued to appraise its IFRS 9 SICR rules in the context of effectiveness, volatility and industry consistency. The recent PD driven increase in Stage 2 exposures in the Wholesale portfolio, highlighted the gradual diminished impact on ECL of the threshold for better quality portfolios under stress, suggesting possible conservatism in the SICR rules for these portfolios. As an illustration, an increase of the de minimus PD threshold to 0.75% (from 0.1%) in the SICR rules could decrease the Wholesale portfolio Stage 2 exposure by 11% with only a four basis point reduction on good book ECL coverage.
 Wholesale – The increase in the proportion of loans in Stage 3 for less than one year was mainly due to individually large exposures within the CRE sector, which were new into Stage 3. Exposures which were in Stage 3 for in excess of five years were mainly related to customers being in a protracted formal insolvency process or subject to litigation or a complaints process.
Gross loans ECL provisions ECL provisions coverage Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
Note: (1) AQ10 includes £0.4 billion (2019 – £0.6 billion) of RoI mortgages which are not currently considered defaulted for capital calculation purposes for RoI but are included in Stage 3.
 The majority of exposures were in AQ1-AQ4, with a significant proportion in AQ5-AQ8. As expected, mortgage exposures had a higher proportion in AQ1-AQ4 than unsecured borrowing.
 ECL provisions coverage showed the expected trend with increased coverage in the poorer asset quality bands, and also by stage.
 The increase in AQ10 exposure in property was largely due to individually significant commercial real estate customers, particularly in the retail sub-sector.
 Within the Wholesale portfolio, customer credit grades were reassessed as and when a request for financing was made, a scheduled customer credit review was undertaken or a material event specific to that customer occurred.
 As previously noted, a request for support using one of the government-backed COVID-19 support schemes would prompt credit grades to be reassessed but was not, in itself, a reason for a customer’s credit grade to be amended. For further details, refer to the Impact of COVID-19 section.
Securities financing transactions and collateral The table below shows securities funding transactions in NatWest Markets and Treasury. Balance sheet captions include balances held at all classifications under IFRS 9.
Of which: netting Of which: netting Total can be offset arrangements Total can be offset arrangements 2020 £m £m £m £m £m £m
Credit risk – Trading activities continued Derivatives The table below shows derivatives by type of contract. The master netting agreements and collateral shown do not result in a net presentation on the balance sheet under IFRS 9. A significant proportion (more than 90%) of the derivatives relate to trading activities in NatWest Markets. The table also includes hedging derivatives in Treasury.
Options purchased 7,277 — 5,649 — Options written — 7,662 — 6,117
Asset quality of uncollateralised derivative assets AQ1-AQ4 3,464 3,361 AQ5-AQ8 1,283 972 AQ9-AQ10 29 22 Net exposure 4,776 4,355
(2) Transactions with certain counterparties with whom NatWest Group has netting arrangements but collateral is not posted on a daily basis; certain transactions with specific terms that may not fall within netting and collateral arrangements; derivative positions in certain jurisdictions for example China where the collateral agreements are not deemed to be legally enforceable.
Traded on Settled Not settled Traded on Traded Traded on Traded recognised by central by central recognised over the recognised over the exchanges counterparties counterparties Total exchanges counter exchanges counter 2020 £bn £bn £bn £bn £m £m £m £m
Central and local government Financial UK US Other institutions Corporate Total 2020 £m £m £m £m £m £m
Short Net of short Government Banks Other Total positions positions 2020 £m £m £m £m £m £m
Definitions Regulatory capital consists of reserves and instruments issued, have a degree of permanency and are capable of absorbing losses. A number of strict conditions set by regulators must be satisfied to be eligible as capital.
 Tier 2 capital. Tier 2 capital is NatWest Group’s supplementary capital and provides loss absorption on a gone concern basis. Tier 2 capital absorbs losses after Tier 1 capital. It typically consists of subordinated debt securities with a minimum maturity of five years.
 Secondary liquid assets are eligible as collateral for local central bank liquidity facilities. These assets include own-issued securitisations or whole loans that are retained on balance sheet and pre-positioned with a central bank so that they may be converted into additional sources of liquidity at very short notice.
Funding NatWest Group maintains a diversified set of funding sources, including customer deposits, wholesale deposits and term debt issuance. NatWest Group also retains access to central bank funding facilities.
For further details on capital constituents and the regulatory framework covering capital, liquidity and funding requirements, please refer to the NatWest Group Pillar 3 Report 2020 Capital, liquidity and funding section.
Capital management is critical in supporting the businesses and is enacted through an end-to-end framework across businesses and the legal entities. Capital is managed within the organisation at the following levels; NatWest Group consolidated, NWH Group sub consolidated, NatWest Markets Plc, NatWest Markets N.V. and RBS International Limited. The subsidiaries within NWH Group are governed by the same principles, processes and management as NatWest Group. Note that although the aforementioned entities are regulated in line with Basel III principles, local implementation of the framework differs across geographies.
 Decisions on capital actions will be influenced by strategic and regulatory requirements, risk appetite, costs and prevailing market conditions.
Capital planning is one of the tools that NatWest Group uses to monitor and manage capital risk on a going and gone concern basis, including the risk of excessive leverage.
NatWest Group categorises its liquidity portfolio, including its locally managed liquidity portfolios, into primary and secondary liquid assets. The size of the liquidity portfolios are determined by referencing NatWest Group’s liquidity risk appetite. NatWest Group retains a prudent approach to setting the composition of the liquidity portfolios, which is subject to internal policies applicable to all entities and limits over quality of counterparty, maturity mix and currency mix.
Funding risk management NatWest Group manages funding risk through a comprehensive framework which measures and monitors the funding risk on the balance sheet including quantitative and qualitative analysis of the behavioural aspects of its assets and liabilities as well as the funding concentration.
 IFRS 9 Transition – NatWest Group has elected to take advantage of the transitional regulatory capital rules in respect of expected credit losses following the adoption of IFRS 9; it had previously had a negligible impact up to Q4 2019. The CRR COVID-19 amendment now requires a full CET1 addback for the movement in stage 1 and stage 2 ECL from 1 January 2020 for the next two years. The IFRS 9 transitional arrangement impact on NatWest Group CET1 regulatory capital at 31 December 2020 is £1.7 billion.
 UK Leverage exposure – The Prudential Regulation Authority (PRA) announced the ability for firms to apply for a modification by consent to permit the netting of regular-way purchase and sales settlement balances. The PRA also offered a further modification that gave an exclusion from the UK Leverage Exposure for Bounce Back Loans (BBL) and other 100% guaranteed government COVID-19 lending schemes. NatWest Group has received permission to apply these and it has reduced the UK leverage exposure by c.£2.3 billion and £8.3 billion respectively.
 CRR Leverage exposure – The CRR COVID-19 amendment accelerated a change in CRR2 to allow the netting of regular-way purchase and sales settlement balances. NatWest Group has applied this, and it has reduced the CRR leverage exposure by c.£2.3 billion.
 Infrastructure and SME RWA supporting factors – The CRR COVID-19 amendment allowed an acceleration of the planned changes to the SME supporting factor and the introduction of an Infrastructure supporting factor. NatWest Group has implemented these beneficial changes to supporting factors which have reduced RWAs by c.£1 billion for SMEs and c.£0.9 billion for Infrastructure.
 Capital buffers – Many countries announced reductions in their countercyclical capital buffer rates in response to COVID-19. Most notably for NatWest Group, the Financial Policy Committee reduced the UK rate from 1% to 0% effective from 11 March 2020. The CBI also announced a reduction of the Republic of Ireland rate from 1% to 0% effective from 1 April 2020.
 Software Assets – The CRR COVID-19 amendment accelerated the change to the regulatory treatment of software assets so this revision came in prior to the year end. The change introduces the concept of prudential amortisation for software assets so that unamortised software is no longer deducted from CET1. By applying this amendment the impact to NatWest Group is an increase of 23 bps to CET1 and an 8 bps increase to the UK leverage ratio.
Increase of 230 bps, of which 140 bps is due to an increase in CET1 capital and 90 bps due to a decrease in Risk Weighted Assets. Key drivers in the CET1 capital increase; cancellation of 2019 dividends and associated pension contribution offset by the inclusion of the 2020 foreseeable dividends and charges (40 bps), reduction in the regulatory intangibles deduction due to implementation of CRR2 amended Article 36 for the prudential treatment of software assets (23 bps), and adoption of IFRS 9 transitional arrangements on expected credit losses (100 bps) offsetting associated impairment charges through the attributable loss of £753 million (-40 bps).
The UK leverage ratio has increased by c.60 basis points driven by a £3.3 billion increase in Tier 1 capital.
The liquidity portfolio increased by £63 billion in 2020 to £262 billion, with primary liquidity increasing by £45 billion to £170 billion. The increase in primary liquidity is driven primarily by an increased customer surplus in NatWest Holdings with smaller increases in other Group entities. The increase in secondary liquidity is driven by collateral pool topups along with unencumbrance of assets following Term Funding Scheme (TFS) repayments during the year.
The net stable funding ratio (NSFR) for FY 2020 was 151% compared to 141% in prior year. The increase is mainly due to deposits growth.
Committee reduced the UK rate from 1% to 0% effective from 11 March 2020. The CBI also announced a reduction of the Republic of Ireland rate from 1% to 0% effective from 1 April 2020.
In November 2018, the Financial Stability Board announced that NatWest Group is no longer a G-SIB. From 1 January 2020, NatWest Group was released from this global buffer requirement. Pillar 2A requirements for NatWest Group are set on a nominal capital basis which result in an implied 8.9% MDA. The headroom does not reflect excess distributable capital and may vary over time.
Leverage ratios The table below summarises the minimum ratios of capital to leverage exposure under the binding PRA UK leverage framework applicable for NatWest Group.
Type CET1 Total Tier 1 Minimum ratio 2.4375% 3.2500% Countercyclical leverage ratio buffer (1) — —
End point PRA transitional End point PRA transitional CRR basis (1) basis CRR basis (1) basis £m £m £m £m
Capital flow statement The table below analyses the movement in CRR CET1, AT1 and Tier 2 capital for the year.
 Cancellation of 2019 dividends and associated pension contribution offset by the inclusion of the 2020 foreseeable dividends and charges resulted in an increase in CET1 of £0.7 billion.
 Foreign exchange movements include a £0.4 billion charge, in relation to a $2 billion AT1 redemption announcement on 28 June 2020.
Capital, liquidity and funding risk continued Risk-weighted assets The table below analyses the movement in RWAs during the year, by key drivers.
The table below analyses the movement in RWAs by segment during the year.
Retail Ulster Commercial Private RBS NatWest Central items Banking Bank RoI Banking Banking International Markets & other Total
Notes: (1) Risk parameter changes relate to changes in credit quality metrics of customers and counterparties (such as probability of default and loss given default) as well as internal ratings based model changes relating to counterparty credit risk in line with European Banking Authority Pillar 3 Guidelines. (2) Methodology changes reflect the impact of the following: (a) The implementation of the new securitisations framework from 1 January 2020; all positions have moved to the new framework. (b) The RWA reductions due to the CRR COVID-19 amendment which allowed an acceleration of the planned changes to the SME supporting factor and the introduction of an Infrastructure supporting factor. (c) Increases in RWAs of £0.5 billion in Q4 2020 due to the implementation of the CRR2 amended Article 36 for the prudential treatment of software assets.
franchises, which was partly offset by increases in Commercial Banking due to deterioration of risk parameters and model updates. o Operational risk RWAs decreased by £0.7 billion following the annual recalculation.
Capital, liquidity and funding risk continued Credit risk exposure at default (EAD) and risk-weighted assets (RWAs) The table below analyses credit risk RWAs and EADs, by on and off balance sheet.
Cash and balances at central banks* 124,489 80,993 Trading assets 68,990 76,745
Other financial assets* 422,647 395,953 Other assets 16,842 19,319 Total assets 799,491 723,039 Derivatives - netting and variation margin (172,658) (157,778) - potential future exposures 38,171 43,004 Securities financing transactions gross up 1,179 2,224 Undrawn commitments (analysis below) 45,853 42,363 Regulatory deductions and other adjustments (8,943) (8,978) CRR Leverage exposure 703,093 643,874
Claims on central banks (122,252) (73,544) Exclusion of bounce back loans (8,283) — UK leverage exposure (2) 572,558 570,330 *2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for further details.
Liquidity key metrics The table below sets out the key liquidity and related metrics monitored by NatWest Group.
(2) NatWest Group’s stressed outflow coverage (SOC) is an internal measure calculated by reference to liquid assets as a percentage of net stressed contractual and behavioural outflows over three months under the worst of three severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination of both as per ILAAP. This assessment is performed in accordance with PRA guidance.
(3) Following the joint announcement of UK Treasury, PRA and FCA on 16 November 2020 to postpone the future EU CRR2 element of the Basel 3 package, we understand the PRA is due to consult on a binding Net Stable Funding ratio (NSFR) requirement to be introduced from January 2022.
Unconditionally cancellable credit cards 1.8 2.0 Other unconditionally cancellable items 3.2 3.5 Unconditionally cancellable items (1) 5.0 5.5
Capital, liquidity and funding risk continued Loss-absorbing capital The following table illustrates the components of estimated loss-absorbing capital (LAC) in NatWest Group plc and operating subsidiaries and includes external issuances only. The table is prepared on a transitional basis, including the benefit of regulatory capital instruments issued from operating companies, to the extent they meet MREL criteria.
value (1) value value (2) value (3) value (1) value value (2) value (3) £bn £bn £bn £bn £bn £bn £bn £bn
Tier 1 capital: end point CRR compliant AT1 of which: NatWest Group plc (holdco) 5.0 5.0 5.0 5.0 4.0 4.0 4.0 4.0 of which: NatWest Group plc operating operating subsidiaries (opcos) — — — — — — — —
Senior unsecured debt securities issued by: NatWest Group plc opcos 20.9 21.5 — — 21.1 20.7 — —
criteria. (3) LAC value reflects NatWest Group’s interpretation of the Bank of England’s approach to setting a minimum requirement for own funds and eligible liabilities
Capital, liquidity and funding risk continued Loss-absorbing capital The following table illustrates the components of the stock of outstanding issuance in NatWest Group and its operating subsidiaries including external and Internal issuances.
Group plc Limited NWB Plc RBS plc UBI DAC NWM Plc N.V. Inc. Limited £bn £bn £bn £bn £bn £bn £bn £bn £bn
Tier 1 (inclusive of AT1) Externally issued 5.7 — 0.1 — — — — — — Tier 1 (inclusive of AT1) Internally issued — 3.7 2.4 1.0 — 1.1 0.2 — 0.3
(2) Balance sheet amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR. (3) Internal issuance for NWB Plc, RBS plc and UBI DAC represents AT1, Tier 2 or Senior unsecured issuance to NatWest Holdings Limited and for NWM N.V. and
Roll-off profile The following table illustrates the roll-off profile and weighted average spreads of NatWest Group’s major wholesale funding programmes.
NatWest Group plc - weighted average rate spread (bps) 183 — — 224 225 134 175 NWM Plc - weighted average rate spread (bps) 100 68 65 87 139 146 117 NatWest Bank Plc - amount (£m) 3,292 2,667 625 — — — — - weighted average rate spread (bps) 17 15 25 — — — — NWM N.V.
- weighted average rate spread (bps) 66 70 62 — — — — NWM S.I.
- weighted average rate spread (bps) 11 7 23 — — — — Securitisation - weighted average rate spread (bps) 12 — — — — 5 15 Covered bonds - weighted average rate spread (bps) 127 — — — 44 156 —
Bank Limited. (4) Comprises assets eligible for discounting at the Bank of England and other central banks. (5) Liquidity portfolio table approach has been aligned to the ILAAP methodology with effect from December 2019. (6) NatWest Markets Plc liquidity portfolio is reported in the NatWest Markets Plc Annual Report and Accounts.
Capital, liquidity and funding risk continued Funding sources The table below shows the carrying values of the principal funding sources based on contractual maturity. Balance sheet captions include balances held at all classifications under IFRS 9.
Short-term Long-term Short-term Long-term less than more than less than more than 1 year 1 year Total 1 year 1 year Total £m £m £m £m £m £m
Debt securities in issue: Commercial papers and certificates of deposit 7,086 168 7,254 4,272 6 4,278
Of which: available in resolution (5) — 28,823 28,823 — 26,168 26,168
Notes: (1) Long-term more than 1 year includes £5.0 billion of Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises participation which has been repaid early in January 2021.
(3) Excludes short positions of £26.8 billion (2019 – £21.2 billion). (4) Comprises central & other bank repos of £1.0 billion (2019 – £6.6 billion), other financial institution repos of £16.0 billion (2019 – £19.0 billion) and other corporate repos of £2.0 billion (2019 – £2.3 billion).
(5) Eligible liabilities (as defined in the Banking Act 2009 as amended from time to time) that meet the eligibility criteria set out in the regulations, rules, policies, guidelines, or statements of the Bank of England including the Statement of Policy published by the Bank of England in June 2018. The balance consists of £20.9 billion (2019 – £19.2 billion) under debt securities in issue (senior MREL) and £7.9 billion (2019 – £6.9 billion) under subordinated liabilities.
Banking activities Less than 6 months More than Trading 1 month 1-3 months 3-6 months - 1 year Subtotal 1-3 years 3-5 years 5 years Total activities Total 2020 £m £m £m £m £m £m £m £m £m £m £m Cash and balances at central banks 124,489 — — — 124,489 — — — 124,489 — 124,489 Trading assets — — — — — — — — — 68,990 68,990
Loans to banks - amortised cost 5,129 450 1,240 16 6,835 8 2 110 6,955 — 6,955 Loans to customers - amortised cost (1) 33,292 18,458 18,682 23,083 93,515 62,170 42,171 168,672 366,528 — 366,528
Notes: (1) Loans to customers excludes £6.0 billion (2019 – £3.7 billion) of impairment provisions. (2) 3-5 years includes £5.0 billion of Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises participation which has been repaid early in January 2021.
Capital, liquidity and funding risk continued Senior notes and subordinated liabilities - residual maturity profile by instrument type The table below shows NatWest Group’s debt securities in issue and subordinated liabilities by residual maturity.
The table below shows the currency breakdown. GBP USD EUR Other Total
 The net funding surplus in 2020 is mainly concentrated in the longer dated buckets, reflecting stable characteristics of customer deposits.
NatWest Group categorises its assets into four broad groups, those that are:  Already encumbered and used to support funding currently in place through own-asset securitisations, covered bonds and securities repurchase agreements.
Programmes to manage the use of assets to actively support funding are established within UK DoLSub, UBI DAC and NatWest Markets Plc.
Balance sheet encumbrance The table shows the retained encumbrance assets of NatWest Group.
(9) Other assets that are capable of being encumbered are those assets on the balance sheet that are available for funding and collateral purposes but are not readily realisable in their current form. These assets include loans that could be prepositioned with central banks but have not been subject to internal and external documentation review and diligence work.
(10) Cannot be used includes: (a) Derivatives, reverse repurchase agreements and trading related settlement balances. (b) Non-financial assets such as intangibles, prepayments and deferred tax. (c) Loans that cannot be pre-positioned with central banks based on criteria set by the central banks, including those relating to date of origination and level of documentation.
(d) Non-recourse invoice financing balances and certain shipping loans whose terms and structure prohibit their use as collateral.
(11) In accordance with market practice, NatWest Group employs securities recognised on the balance sheet, and securities received under reverse repo transactions as collateral for repos.
Non-traded market risk Definition Non-traded market risk is the risk to the value of assets or liabilities outside the trading book, or the risk to income, that arises from changes in market prices such as interest rates, foreign exchange rates and equity prices, or from changes in managed rates.
Sources of risk The key sources of non-traded market risk are interest rate risk; credit spread risk; foreign exchange risk; equity risk; and accounting volatility risk.
Each of these risk types are largely managed separately. For detailed qualitative and quantitative information on each of them, refer to the separate sub-sections following the VaR table below.
Key developments in 2020  The outbreak of COVID-19 triggered exceptional volatility in nontraded market risk factors in March 2020 and a global sell-off across all asset classes. This notably affected credit spreads (the spread between bond yield and swap rates) arising from the liquidity portfolios held by Treasury and resulted in a sharp increase in total non-traded VaR for 2020.
 During 2020, the Bank of England signalled a negative UK base rate as a possibility. This could have an adverse impact on NatWest Group’s earnings, primarily because it could result in: (i) a lower yield on the structural hedge; and (ii) a narrower margin between loan and deposit rates. The impact on earnings of a downward shift resulting in a negative base rate is discussed on page 232.
 NatWest Group continued to make progress on the transition from LIBOR to alternative risk-free rates. An increasing proportion of structural hedges and hedges of other portfolios are written against swaps linked to SONIA, instead of LIBOR.
Risk appetite NatWest Group’s qualitative appetite is set out in the non-traded market risk appetite statement.
Its quantitative appetite is expressed in terms of value-at-risk (VaR), stressed value-at-risk (SVaR), sensitivity and stress limits, and earnings-at-risk limits.
Risk measurement Non-traded internal VaR (1-day 99%) The following table shows one-day internal banking book value-at-risk (VaR) at a 99% confidence level, split by risk type. NatWest Group’s VaR metrics are explained on page 231. Each of the key risk types are discussed in greater detail in their individual sub-sections following this table.
Key points  The increase in credit spread and total VaR reflects the impact of the outbreak of COVID-19, as explained in ‘Key developments in 2020’ above.
 The decrease in equity VaR reflects the disposal of SABB in Q4 2020.
 Basis risk – captures the impact of relative changes in interest rates for financial instruments that have similar tenors but are priced using different interest rate indices, or on the same interest rate indices but with different tenors.
 Option risk – arises from option derivative positions or from optional elements embedded in assets, liabilities and/or off-balance sheet items, where NatWest Group or its customer can alter the level and timing of their cash flows. Option risk also includes pipeline risk.
To manage exposures within its risk appetite, NatWest Group aggregates interest rate positions and hedges its residual exposure, primarily with interest rate swaps.
Structural hedging aims to reduce gap risk and the sensitivity of earnings to interest rate shocks. It also provides some protection against prolonged periods of falling rates. Structural hedging is explained in greater detail below, followed by information on how NatWest Group measures NTIRR from both an economic value-based and an earnings-based perspective.
Structural hedging NatWest Group has a significant pool of stable, non and low interest-bearing liabilities, principally comprising equity and money transmission accounts. These balances are usually hedged, either by investing directly in longer-term fixed-rate assets (such as fixed-rate mortgages or UK government gilts) or by using interest rate swaps, which are generally booked as cash flow hedges of floating-rate assets, in order to provide a consistent and predictable revenue stream.
The table below shows the incremental income allocation above three-month LIBOR, total income allocation including three-month LIBOR, the period end and average notional balances, and the total yield including three-month LIBOR associated with the structural hedges managed by NatWest Group.
Equity structural hedges refer to income allocated primarily to equity and reserves. At 31 December 2020, the equity structural hedge notional was allocated between NWH Group and NWM Plc in a ratio of approximately 80/20 respectively. Rates on new equity structural hedges continued to fall, but the reduction in the hedge notional has resulted in a higher overall yield.
At 31 December 2020, approximately 92% by notional of total structural hedges were sterling-denominated.
The following table presents the incremental income associated with product structural hedges at segment level.
Key points  The five-year sterling swap rate fell to 0.08% at the end of
NatWest Group uses VaR as its value-based approach and sensitivity of net interest earnings as its earnings-based approach.
These two approaches provide complementary views of the impact of interest rate risk on the balance sheet at a point in time. The scenarios employed in the net interest earnings sensitivity approach may incorporate assumptions about how NatWest Group and its customers will respond to a change in the level of interest rates. In contrast, the VaR approach measures the sensitivity of the balance sheet at a point in time. Capturing all cash flows, VaR also highlights the impact of duration and repricing risks beyond the one-to-three-year period shown in earnings sensitivity calculations.
Non-traded market risk continued Sensitivity of net interest earnings Net interest earnings are sensitive to changes in the level of interest rates, mainly because maturing structural hedges are replaced at higher or lower rates and changes to coupons on managed rate customer products do not always match changes in market rates of interest or central bank policy rates.
Year 1 Year 2 (1) Year 3 (1) Year 1 Year 2 (1) Year 3 (1)
Note: (1) The projections for Year 2 and Year 3 consider only the main drivers of earnings sensitivity, namely structural hedging and margin management.
Non-traded market risk continued Sensitivity of fair value through other comprehensive income (FVOCI) and cash flow hedging reserves to interest rate movements NatWest Group holds most of the bonds in its liquidity portfolio at fair value. Valuation changes that are not hedged (or not in effective hedge accounting relationships) are recognised in FVOCI reserves.
Interest rate swaps are used to implement the structural hedging programme and also hedging of some personal and commercial lending portfolios, primarily fixed-rate mortgages. Generally, these swaps are booked in hedge accounting relationships. Changes in the valuation of swaps that are in effective cash flow hedge accounting relationships are recognised in cash flow hedge reserves.
+25 basis points -25 basis points +100 basis points -100 basis points +25 basis points -25 basis points +100 basis points -100 basis points £m £m £m £m £m £m £m £m
Key points  The main driver of NatWest Group’s cash flow hedge reserve sensitivity is the interest rate swaps that form part of the structural hedge.
 Forecast earnings or costs in foreign currencies – NatWest Group assesses its potential exposure to forecast foreign currency income and expenses. NatWest Group hedges forward some forecast expenses.
The sensitivity of this ratio to exchange rates is monitored monthly and reported to the Asset & Liability Management Committee at least quarterly. Foreign exchange exposures arising from customer transactions are sold down by businesses on a regular basis in line with NatWest Group policy.
Net investments Net exposures foreign in foreign investment pre-economic Economic currency operations hedges hedges hedges (1) exposures 2020 £m £m £m £m £m
Note: (1) Economic hedges of US dollar net investments in foreign operations represent US dollar equity securities that do not qualify as net investment hedges for accounting purposes. They provide an offset to structural foreign exchange exposures to the extent that there are net assets in overseas operations available. Economic hedges of other currency net investments in foreign operations represent monetary liabilities that are not booked as net investment hedges.
 Changes in foreign currency exchange rates affect equity in proportion to structural foreign currency exposure. For example, a 5% strengthening or weakening in foreign currencies against sterling would result in a gain or loss of £0.4 billion in equity respectively.
 Traded VaR remained broadly consistent on an average basis with 2019 levels despite this increased market volatility. This was due to ongoing business de-risking as part of the overall RWA reduction strategy.
Risk appetite NatWest Group’s qualitative appetite for traded market risk is set out in the traded market risk appetite statement. Quantitative appetite is expressed in terms of exposure limits. The limits at NatWest Group level comprise value-at-risk (VaR) and stressed value-at-risk (SVaR). More details on these are provided on the following pages.
The limits are reviewed to reflect changes in risk appetite, business plans, portfolio composition and the market and economic environments. The limit review has been enhanced to improve the alignment between traded market risk exposure and capital usage. This is done by analysing the relationship between VaR and SVaR and NWM Plc’s solo CET1 ratio.
To ensure approved limits are not breached and that NatWest Group remains within its risk appetite, triggers at NatWest Group and lower levels have been set such that if exposures exceed a specified level, action plans are developed by the relevant business and the Market Risk function and implemented. For more detail on risk appetite and risk controls, refer to page 160.
Monitoring and mitigation Traded market risk is identified and assessed by gathering, analysing, monitoring and reporting market risk information at desk, business, franchise and NatWest Group-wide levels. Industry expertise, continued system developments and techniques such as stress testing are also used to enhance the effectiveness of the identification and assessment of all material market risks.
Measurement NatWest Group uses VaR, SVaR and the incremental risk charge to measure traded market risk. Risks that are not adequately captured by VaR or SVaR are captured by the Risks Not In VaR (RNIV) framework to ensure that NatWest Group is adequately capitalised for market risk. In addition, stress testing is used to identify any vulnerabilities and potential losses.
The model also captures the potential impact of interest rate risk; credit spread risk; foreign currency price risk; equity price risk; and commodity price risk.
The performance and adequacy of the VaR model are tested regularly through the following processes:  Back-testing – Internal and regulatory back-testing is conducted on a daily basis. (Information on internal back-testing is provided in this section. Information on regulatory back-testing appears in the Pillar 3 report).
The table below shows internal back-testing exceptions in the major NatWest Markets businesses for the 250-business-day period to 31 December 2020. Internal back-testing compares one-day 99% traded internal VaR with Actual and Hypo P&L.
 The exceptions in the Currencies business were mainly driven by volatility in the foreign exchange market.
Average Maximum Minimum Period end Period end £m £m £m £m £m
For further qualitative and quantitative disclosures on RNIVs, refer to the Market risk section of the Pillar 3 Report.
Incremental risk charge (IRC) The IRC model quantifies the impact of rating migration and default events on the market value of instruments with embedded credit risk (in particular, bonds and credit default swaps) held in the trading book. It further captures basis risk between different instruments, maturities and reference entities. For further qualitative and quantitative disclosures on the IRC, refer to the Market risk section of the Pillar 3 Report.
Total business business Total business business £bn £bn £bn £bn £bn £bn Primary market risk factor
Loans to banks* 7.0 6.9 0.1 7.6 7.4 0.2 Interest rate
Loans to customers 360.5 360.4 0.1 326.9 326.7 0.2 Interest rate
Intangible assets 6.7 6.7 — 6.6 6.6 — Interest rate, credit spreads, equity
Liabilities Bank deposits 20.6 20.6 — 20.5 20.5 — Interest rate
Other financial liabilities 45.8 45.1 0.7 45.2 44.2 1.0 Interest rate
Pension scheme liabilities vary with changes in long-term interest rates and inflation as well as with pensionable salaries, the longevity of scheme members and legislation. Pension scheme assets vary with changes in interest rates, inflation expectations, credit spreads, exchange rates, and equity and property prices. NatWest Group is exposed to the risk that the schemes’ assets, together with future returns and additional future contributions, are estimated to be insufficient to meet liabilities as they fall due. In such circumstances, NatWest Group could be obliged (or might choose) to make additional contributions to the schemes or be required to hold additional capital to mitigate this risk.
 During 2020, the Group Pension Committee, a key component of NatWest Group’s approach to managing pension risk, was subsumed into the Group Asset & Liability Management Committee, including taking on the responsibilities previously held by the Group Pension Committee. This change was made to increase efficiency, reflecting the steps NatWest Group has taken to reduce the level of pension risk within NatWest Group in recent years, but to ensure that pension risk still receives appropriate executive attention.
Policies and standards are in place to provide formal controls for pension risk reporting, modelling, governance and stress testing. A pension risk policy, which sits within the NatWest Group policy framework, is also in place and is subject to associated framework controls.
Mitigation Following risk mitigation measures taken by the Trustee in recent years, the Main section is now well protected against interest rate and inflation risks and is being run on a low risk basis with relatively small equity risk exposure. The Main section also uses derivatives to manage the allocation of the portfolio to different asset classes and to manage risk within asset classes.
 In-life monitoring of customer outcomes was extended to ensure treatment strategies remained timely, relevant and consistent, as a result of the continued economic uncertainty arising from COVID19 and Brexit.
 Specialist training was delivered to support the continuous oversight of ring-fencing embeddedness.
 The roll-out of the Banking My Way service – which enables vulnerable customers to record their support needs – was also a focus, helping to drive tailored solutions and outcomes.
 A review of historic investment advice remediation was conducted in order to ensure the appropriate customer outcomes were achieved.
Governance NatWest Group defines appropriate standards of compliance and conduct and ensures adherence to those standards through its risk management framework. Relevant compliance and conduct matters are escalated through Executive Risk Committee and Board Risk Committee.
Monitoring and measurement Compliance and conduct risks are measured and managed through continuous assessment and reporting to NatWest Group’s senior risk committees and at Board level. The compliance and conduct risk framework facilitates the consistent monitoring and measurement of compliance with laws and regulations and the delivery of consistently good customer outcomes. The first line of defence is responsible for effective risk identification, reporting and monitoring, with oversight, challenge and review by the second line. Compliance and conduct risk management is also integrated into NatWest Group’s strategic planning cycle.
Mitigation Activity to mitigate the most-material compliance and conduct risks is carried out across NatWest Group with specific areas of focus in the customer- facing businesses and legal entities. Examples of mitigation include consideration of customer needs in business and product planning, targeted training, complaints management, as well as independent monitoring activity. Internal policies help support a strong customer focus across NatWest Group. Independent assessments of compliance with applicable regulations are also carried out at a legal entity level.
Key developments in 2020  In view of the challenges presented by COVID-19, financial crime policies were reviewed and, where appropriate, updated to reflect the evolving environment as well as industry best practice.
 A new enterprise-wide Financial Crime Hub was established in the first line to detect and prevent financial crime. The Hub will facilitate a common, consistent approach to managing financial crime.
 A multi-year transformation plan was developed to ensure that, as the financial crime threat evolves with changes in technology, the economy and wider society, risks relating to money-laundering, terrorist-financing, tax evasion, bribery and corruption and financial sanctions are managed, mitigated and controlled as effectively as possible.
NatWest Group operates a framework of preventative and detective controls designed to mitigate the risk that it could facilitate financial crime. These controls are supported by a suite of policies, procedures and detailed instructions to ensure they operate effectively.
Climate-related risk Definition Climate-related risk is the threat of financial loss or adverse nonfinancial impacts associated with climate change and the political, economic and environmental responses to it.
Sources of risk Physical risks may arise from climate and weather-related events such as heatwaves, droughts, floods, storms and sea level rises. They can potentially result in financial losses, impairing asset values and the creditworthiness of borrowers. NatWest Group could be exposed to physical risks directly by the effects on its property portfolio and, indirectly, by the impacts on the wider economy as well as on the property and business interests of its customers.
Transition risks may arise from the process of adjustment towards a low-carbon economy. Changes in policy, technology and sentiment could prompt reassessment of customers’ financial risk and may lead to falls in the value of a large range of assets. NatWest Group could be exposed to transition risks directly through the costs of adaptation within economic sectors and markets as well as supply chain disruption leading to financial impacts on it and its customers. Potential indirect effects include the erosion of NatWest Group’s competitiveness, profitability, or reputation damage.
 Climate-related risk was included as a factor in setting sector oversight classifications, which drive the frequency and level at which sector credit risk appetite is reviewed.
 Guidance was issued to ensure appropriate consideration of climate-related risk in internal risk and control assessments.
 Within operational risk, a scenario analysis pilot was performed on NatWest Group’s operations in India to assess the potential effects of climate driven events including disruption to business services, damage to physical assets and health & safety.
Governance The Board is responsible for monitoring and overseeing climaterelated risk within NatWest Group’s overall business strategy and risk appetite. The potential impact, likelihood and preparedness of climaterelated risk is reported periodically to the Board Risk Committee.
A Group-wide Climate Change Programme (GCCP) supports the delivery of climate-related objectives. The GCCP is overseen by an Executive Steering Group (ESG) which is responsible for coordinating NatWest Group’s response across climate-related regulations, risks and opportunities. The ESG is co-chaired by the Group CEO and Group Chief Risk Officer.
Risk appetite NatWest Group’s ambition is to be a leading bank in the UK and the Republic of Ireland in helping to address climate change. NatWest Group’s stated purpose is to reduce the climate impact of its financing activity by at least 50% by 2030 and to do what is necessary to achieve alignment with the 2015 Paris Agreement.
Monitoring and measurement Plans have been developed to ensure climate-related risks are considered in the tools made available to risk disciplines for risk monitoring and measurement purposes.
To align NatWest Group’s financing activity with the goals of the 2015 Paris Agreement, work focused on formulating estimated emissions intensities that are consistent with limiting global warming to wellbelow 2°C. Using a sector-based approach, NatWest Group adopted the Global Greenhouse Gas Accounting & Reporting Standard for the Financial Industry established by PCAF. In 2020, the residential mortgage portfolio and three sectors – agriculture (primary farming), automotive (manufacturers) and oil & gas (extractors) – were assessed with preliminary emissions intensities estimated for each. Work is underway to use this early analysis of the three sectors and NatWest Group’s residential mortgage portfolio to develop actions to support the transition to a low carbon economy.
Sources of risk Operational risk may arise from a failure to manage operations, systems, transactions and assets appropriately. This can take the form of human error, an inability to deliver change adequately or on time, the non-availability of technology services, or the loss of customer data. Fraud and theft – as well as the threat of cyber attacks – are sources of operational risk, as is the impact of natural and man-made disasters. Operational risk can also arise from a failure to account for changes in law or regulations or to take appropriate measures to protect assets.
Key developments in 2020  The impact of COVID-19 led to significant disruption and heightened the operational risk profile as NatWest Group adapted to new ways of working as a result of the lockdown protocols. The control environment was continually monitored to ensure the resulting challenges were safely addressed.
 The security threat and the potential for cyber attacks on NatWest Group’s supply chain remains an area for close monitoring. Significant enhancements in managing such incidents and the broader security control environment were made. This included completion of work in response to the outcome of the 2019 CBEST test.
 NatWest Group’s preparations for Brexit and the end of the transition period enabled NatWest Group to ensure that its processes and systems would ensure continuity of service for customers.
 The number of critical customer-impacting incidents continued to reduce year-on-year. There were eight Criticality 1 incidents (including COVID-19) in 2020 compared to 14 in 2019.
Mitigation The Control Environment Certification (CEC) process is a half-yearly self-assessment by the CEOs of NatWest Group’s principal businesses, functions and legal entities. It provides a consistent and comparable view on the adequacy and effectiveness of the internal control environment.
Monitoring and measurement Risk and control assessments are used across all business areas and support functions to identify and assess material operational and conduct risks and key controls. All risks and controls are mapped to NatWest Group’s Risk Directory. Risk assessments are refreshed at least annually to ensure they remain relevant and capture any emerging risks and also ensure risks are reassessed.
Operational risk continued The process is designed to confirm that risks are effectively managed in line with risk appetite. Controls are tested at the appropriate frequency to verify that they remain fit-for-purpose and operate effectively to reduce identified risks.
Scenario analysis is used to assess how severe but plausible operational risks will affect NatWest Group. It provides a forwardlooking basis for evaluating and managing operational risk exposures.
Event and loss data management The operational risk event and loss data management process ensures NatWest Group captures and records operational risk financial and non-financial events that meet defined criteria. Loss data is used for regulatory and industry reporting and is included in capital modelling when calculating economic capital for operational risk. The most serious events are escalated in a simple, standardised process to all senior management, by way of a Group Notifiable Event Process.
Percentage and value of events Historically, events aligned to the Clients, products and business practices event category have accounted for the majority of NatWest Group’s operational risk losses. However, during 2020 several large provision releases were recorded (that is, previously recorded provisions were released as they were no longer required). The value of these outweighed the provisions taken for other conduct-related matters, hence a negative movement was recorded in this category.
(2) The 2019 Clients, products and business practices figure has been restated to reflect the receipt of a reimbursement under indemnification agreements relating to US residential mortgage-backed securities.
Model risk Definition Model risk is the potential for adverse consequences arising from decisions based on model results that may be incorrect, misinterpreted, used inappropriately or based on an outdated model. NatWest Group defines a model as a quantitative method, system, or approach that applies statistical, economic, financial, accounting, mathematical or data science theories, techniques and assumptions to process input data into quantitative estimates.
Sources of risk NatWest Group uses a variety of models in the course of its business activities. Examples include the use of model outputs to support customer decisioning, measuring and assessing risk exposures (including credit, market, and climate risk), as well as calculating regulatory capital and liquidity requirements. Model applications may give rise to different risks depending on the franchise in which they are used. Model risk is therefore assessed separately for each franchise in addition to the overall assessment made for NatWest Group.
Key developments in 2020  Progress was made in embedding the model risk framework across NatWest Group to ensure all models are identified and managed as per requirements.
 As a result of COVID-19, there was an increased reliance on model performance monitoring to identify model limitations and qualitative overlays to ensure model outputs were used appropriately.
 Initial validations of climate impacting models were conducted to help the bank better understand the risks associated with the use of models for this purpose.
Risk controls Policies and procedures related to the development, validation, approval and ongoing monitoring of models are in place to ensure adequate control across the lifecycle of an individual model. Validation of material models is conducted by an independent risk function comprised of skilled, well-informed subject matter experts. This is completed for new models or amendments to existing models and as part of an ongoing periodic programme to assess model performance. The frequency of periodic validation is aligned to the risk rating of the model. The independent validation focuses on a variety of model features, including modelling approach, the nature of the assumptions used, the model’s predictive ability and complexity, the data used in the model, its implementation and its compliance with regulation. Risk monitoring and measurement The level of risk relating to an individual model is assessed through a model risk rating. A quantitative approach is used to determine the risk rating of each model, based on the model’s materiality and validation rating. This approach provides the basis for model risk appetite measures and enables model risk to be robustly monitored and managed across the NatWest Group.
Reputational risk Definition Reputational Risk is defined as the risk of damage to stakeholder trust due to negative consequences arising from internal actions or external events.
Key developments in 2020  Reputational risks arising from COVID-19 remained a key focus from Q1 onwards.  A review of the reputational risk framework and policy began in 2020. This was required to reflect the purpose, capture a more complete view of reputation at a strategic level and align with more progressive industry leaders.
Governance A reputational risk policy supports reputational risk management across NatWest Group. Reputational risk committees review relevant issues at an individual business or entity level, while the Reputational Risk Committee – which has delegated authority from the Executive Risk Committee – opines on cases, issues, sectors and themes that represent a material reputational risk. The Board Risk Committee oversees the identification and reporting of reputational risk. The Sustainable Banking Committee has a specific focus on environmental, social and ethical issues.
Risk appetite NatWest Group manages and articulates its appetite for reputational risk through a qualitative reputational risk appetite statement and quantitative measures. NatWest Group seeks continuous improvement in the identification, assessment and management of customers, transactions, products and issues that present a material reputational risk.
Monitoring and measurement Relevant internal and external factors are monitored through regular reporting to the reputational risk committees at business or entity level and escalated, where appropriate, to the Reputational Risk Committee, Board Risk Committee or the Sustainable Banking Committee.
Page Independent auditor’s report 247 Consolidated income statement 258 Consolidated statement of comprehensive income 259 Consolidated balance sheet 260 Consolidated statement of changes in equity 261 Consolidated cash flow statement 263 Accounting policies 264 Notes to the consolidated accounts 1 Net interest income 269 2 Non-interest income 269 3 Operating expenses 270 4 Segmental analysis 272 6 Auditor’s remuneration 280 8 Earnings per share 283 9 Trading assets and liabilities 283 11 Financial instruments - classification 289 12 Financial instruments - valuation 292 13 Financial instruments - maturity analysis 299 14 Loan impairment provisions 301 15 Other financial assets 302 16 Intangible assets 303 17 Other assets 304 18 Other financial liabilities 304 19 Subordinated liabilities 305 20 Other liabilities 306 21 Share capital and other equity 307 23 Structured entities 311 24 Asset transfers 312 25 Capital resources 313 26 Memorandum items 314 27 Analysis of the net investment in business interests and intangible assets 320 28 Analysis of changes in financing during the year 320 29 Analysis of cash and cash equivalents 320 30 Directors’ and key management remuneration 321 31 Transactions with directors and key management 321 32 Related parties 322 33 Post balance sheet events 322 NatWest Group plc financial statements and notes 323
We have audited the financial statements (see table below) of the Parent Company and the Group for the year ended 31 December 2020 which comprise: Group Parent Company  Consolidated balance sheet as at 31 December 2020;  Consolidated income statement for the year then ended;  Consolidated statement of comprehensive income for the year then ended;  Consolidated statement of changes in equity for the year then ended;  Consolidated cash flow statement for the year then ended;  Accounting policies;  Related Notes 1 to 33 to the financial statements;  Annual report on remuneration indicated by a bracket in the margins;  Risk and capital management section of the Business review indicated by a bracket in the margins.  The Capital Requirements (Country-by-Country
The financial reporting framework that has been applied in their preparation is applicable law and International Accounting Standards in conformity with the requirements of the Companies Act 2006 and, as regards to the group financial statements, International Financial Reporting Standards adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the European Union and as regards the Parent Company financial statements, as applied in accordance with section 408 of the Companies Act 2006.
Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group and Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
Conclusions relating to going concern In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the directors’ assessment of the Group and Parent Company’s ability to continue to adopt the going concern basis of accounting included:  In conjunction with our walkthrough of the Group’s financial close process, we confirmed our understanding of management’s Going
 We reviewed the Group’s going concern disclosures included in the annual report in order to assess that the disclosures were appropriate and in conformity with the reporting standards.