In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, of the five reporting components of the Group, we selected four components based on size and risk, which represent the principal reporting legal entities within the Group.
NatWest Holdings (NWH) Full United Kingdom NatWest Markets (NWM) Full United Kingdom, United States, and Netherlands RBS International Specific Channel Islands RBS AA Holdings Specific United Kingdom
The table below illustrates the coverage obtained from the work performed by our audit teams. We considered total assets, total equity and total income to verify we had appropriate overall coverage.
Notes: (1) Full scope: audit procedures on all significant accounts. (2) Specific scope: audit procedures on selected accounts. (3) Other procedures: considered in analytical procedures.
As a result of the COVID-19 outbreak and resulting lockdown restrictions in all of the countries where full or specific scope audit procedures have been performed, we have modified our audit strategy to allow for the audit to be performed remotely at both the Group and component locations. This approach was supported through remote user access to the Group’s financial systems and the use of EY software collaboration platforms for the secure and timely delivery of requested audit evidence.
Involvement with component teams In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the components by us, as the primary audit engagement team, or by component auditors from other EY global network firms operating under our instruction.
The primary audit engagement team interacted regularly with the component audit teams where appropriate throughout the course of the audit, which included holding planning meetings, maintaining regular communications on the status of the audits, reviewing key working papers and taking responsibility for the scope and direction of the audit process. The primary audit team continued to follow a programme of oversight visits that has been designed to ensure that the Senior Statutory Auditor, or another Group audit partner, visits all full scope and specific scope locations. During the current year’s audit cycle, due to COVID-19, the visits undertaken by the primary audit team were necessarily virtual visits. These visits involved video call meetings with local management, and discussions on the audit approach with the component team and any issues arising from their work. The primary team interacted regularly with the component teams and maintained a continuous and open dialogue with component teams, as well as holding formal closing meetings quarterly, to ensure that the primary team were fully aware of their progress and results of their procedures. The primary team also reviewed key working papers and were responsible for the scope and direction of the audit process. This, together with the additional procedures at Group level, gave us appropriate evidence for our opinion on the Group financial statements
Management’s judgements and estimates are especially subjective due to significant uncertainty associated with the assumptions used. Uncertainty associated with COVID-19 and its consequent implications including lockdowns and recovery assumptions as well as government intervention, increased the level of judgement in ECL. Assumptions with increased complexity in respect of the timing and measurement of ECL include:  Staging - Allocation of assets to stage 1, 2, or 3 on a timely basis using criteria in accordance with IFRS 9 considering the impact of COVID-19 and related government support measures, such as payment deferrals, on customer behaviours and the identification of underlying significant deterioration in credit risk;  Model estimations - Accounting interpretations, modelling assumptions and data used to build and run the models that calculate the ECL considering the impact of COVID-19 on model performance and any additional data to be considered in the ECL calculation;  Economic scenarios - Inputs, assumptions and weightings used to estimate the impact of multiple economic scenarios particularly those influenced by COVID-19 and Brexit including any changes to scenarios required through 31 December 2020;  Adjustments - Appropriateness, completeness and valuation of model adjustments including any COVID-19 specific adjustments due to the increased uncertainty and less reliance on modelled outputs which increases the risk of management override;  Individual provisions - Measurement of individual provisions including the assessment of multiple scenarios considering the impact of COVID-19 on exit strategies, collateral valuations and time to collect; and
We performed an overall assessment of the ECL provision levels by stage to assess if they were reasonable by considering the overall credit quality of the Group’s portfolios, risk profile, impact of the COVID-19 including geographic considerations and high risk industries, the impact government support measures, such as payment deferrals, may have had on delaying expected defaults, credit risk management practices and the macroeconomic environment by considering trends in the economy and industries to which the Group is exposed. We also considered the appropriateness of provisions applied to government supported lending such as bounce back loans and CBILs which included assessing the respective eligibility criteria. We performed peer benchmarking where available to assess overall staging and provision coverage levels. For a sample of industries, we also assessed the ECL against an independently developed methodology estimating unsustainable debt levels.
Economic scenarios - We involved economic specialists to assist us to evaluate the base case and alternative economic scenarios, including evaluating probability weights and comparing these to other scenarios from a variety of external sources. This assessment included the latest developments related to COVID-19 and Brexit at 31 December 2020, including the announcement of planned vaccines. We assessed whether forecasted macroeconomic variables were complete and appropriate, such as GDP, unemployment rate, interest rates and the House Price Index. With the support of our modelling specialists we evaluated the correlation and translation of the macroeconomic factors to the ECL.
Individual provisions - We involved valuation specialists to recalculate a sample of individual provisions including the alternative scenarios and evaluating probability weights assigned. The sample was based on a number of factors, including higher risk sectors such as commercial real estate, retail, leisure and aviation, and materiality. We considered the impact COVID-19 had on collateral valuations and time to collect as well as whether planned exit strategies remained viable.
Disclosure - We tested the data flows used to populate the disclosures and assessed the adequacy of disclosures for compliance with the accounting standards and regulatory considerations including expectations of COVID-19 specific disclosures.
Key observations communicated to the Group Audit Committee We are satisfied that provisions for the impairment of loans were reasonable and recognised in accordance with IFRS 9. We highlighted the following matters to the Group Audit Committee:  Overall provision levels were reasonable which also considered available peer information and our understanding of the credit environment;  Our testing of models and model assumptions identified some instances of under estimation. We aggregated these differences and were satisfied that the overall estimate recorded was reasonable;  The in-model and post-model adjustments applied were reasonable and addressed model shortcomings identified;  We recalculated the staging of all retail and wholesale exposures in material portfolios and noted no material differences. We also performed sensitivity analysis on the staging criteria and noted that substantial changes would be needed to the criteria to result in a material difference;  For individually assessed impairments, in a few instances we reported judgemental differences in respect of the extent of the impairment identified, however, none of these differences were considered material; and
We noted improvements to the governance framework throughout the year to respond to the challenges posed by COVID-19. Control deficiencies were identified, particularly in data processes and models where compensating controls were identified and operated effectively. Relevant references in the Annual Report and Accounts Report of the Group Audit Committee Credit Risk section of the Risk and capital management section Accounting policies Note 14 on the financial statements
The recognition and carrying value of deferred tax assets, goodwill and, in the parent company accounts, investments in group undertakings are based on estimates of future profitability, which require significant management judgement and include the risk of management bias. The recognition of deferred tax assets considers the future profit forecasts of the legal entities as well as interpretation of recent changes to tax rates and laws.
Judgements and especially challenging, complex and subjective assumptions that are difficult to audit due to the forward-looking nature and inherent uncertainties associated with such assumptions include:  Revenue forecasts which are also impacted by delivery of the Group’s Strategy  Cost forecasts in particular given the intention to significantly reduce costs over time;  Macroeconomic and model assumptions used in the recoverability and valuation assessments (discount rates, growth rates, macroeconomic assumptions) including assumptions regarding the economic consequences of COVID -19, Brexit and other political developments over an extended period.
Controls testing: We evaluated the design and operating effectiveness of controls over the preparation and review of the forecasts, the significant assumptions (such as discount rate and long-term growth rate) used in the value in use model, inputs, calculations, methodologies and judgements. This included testing controls over the selection of macroeconomic assumptions in addition to revenue and cost projections, as well as the precision applied to these. In evaluating the governance processes we reviewed the Board meeting materials and minutes where forecasts were discussed and approved, and we observed the committee meetings where the value in use model and outcomes were discussed and approved.
Macroeconomic and model assumptions: With the support of our internal economic specialists, we tested whether macroeconomic assumptions, including the impact of COVID-19, the outcome of Brexit and other geopolitical considerations at 31 December 2020, used in the Group’s forecasts were reasonable by comparing these to other scenarios from a variety of external sources. We evaluated how the discount rates and long-term growth rates used by management compared to our ranges which were assessed using peer practice, external market data and calculations performed by our valuation specialists.
Sensitivity analysis: We evaluated how management considered alternative assumptions and performed our own sensitivity and scenario analyses on certain assumptions such as cost and revenue forecasts, discount rate and long-term growth rate on both the detailed forecasts and on a stand back basis.
 The directors’ impaired NatWest Group’s investment in NWH and NWM, with there being no further headroom available. The sensitivity analyses we reviewed and our independent procedures supported these assessments.
We are satisfied that the disclosures appropriately reflect the sensitivity of the carrying value of investments in group undertakings and goodwill to certain reasonable alternative outcomes. As there are a number of other possible outcomes and it would be impracticable to estimate the effect of all of them, the directors have disclosed the uncertainty that other possible outcomes within the next financial year could require an adjustment to the carrying amount of investments in group undertakings and goodwill. Relevant references in the Annual Report and Accounts Accounting policies Note 7 and Note 16 on the Group financial statements and Note 9 on the Parent company financial statements
Regulatory scrutiny and the continued litigious environment give rise to a high level of management judgement in determining appropriate provisions and disclosures. Management judgement is needed to determine whether a present obligation exists, and a provision should be recorded at 31 December 2020 in accordance with the accounting criteria set out under IAS 37.
The most significant areas of judgement are:  Judgement and risk of management bias - Auditing the adequacy of these provisions is complex because judgement is involved in the selection and use of assumptions (such as expected claim rates, legal costs, and the timing of settlement) in the estimation of material provisions and there is a risk of management bias in the determination of whether an outflow in respect of identified material conduct or legal matters is probable and can be estimated reliably; and
Examination of regulatory correspondence: Among other procedures, we examined the relevant regulatory and legal correspondence to assess developments in certain cases. We also considered regulatory developments to identify actual or possible noncompliance with laws and regulations that might have a material effect on the financial statements. For cases which were settled during the period, we compared the actual outflows with the provision that had been recorded, considered whether further risk existed, and evaluated the level of disclosures provided.
Inquiry of legal counsel: For significant legal matters, we received confirmations from the Group’s external legal counsel for significant matters to evaluate the existence of the obligation and management’s estimate of the outflow at year-end. We also conducted inquiries with internal legal counsel over the existence of the legal obligations and related provision. We performed a test for unrecorded provisions to assess if there were cases not considered in the provision estimate by assessing against external legal confirmations and discussing with internal counsel.
Testing of assumptions: Where appropriate, we involved our conduct risk specialists to assist us in evaluating the provision. We tested the underlying data and assumptions used in the determination of the provisions recorded, including expected claim rates, legal costs, and the timing of settlement. We considered the accuracy of management’s historical estimates and peer bank settlement in similar cases by comparing the actual settlement to the provision. We assessed the reasonableness of the assumptions used by management by comparing to the results of our independently performed benchmarking and sensitivity analysis. We also developed our own range of reasonable alternative estimates and compared them to management’s provision. We tested utilisations of the PPI provision during the year and assessed the sufficiency of the remaining provision for PPI customer redress yet to be paid.
Disclosure: We evaluated the disclosures provided on conduct, litigation, regulatory, customer remediation and claims provisions to assess whether they complied with accounting standards.
The valuation of those financial instruments with higher risk characteristics involves both significant judgement and the risk of inappropriate revenue recognition through incorrect pricing as outlined below. The judgement in estimating fair value of these instruments can involve complex valuation models and significant fair value adjustments, both of which may be reliant on data inputs where there is limited market observability.
 The impact of COVID-19 on the valuation of different financial instrument portfolios
Substantive testing: Among other procedures, we involved our financial instrument valuation and modelling specialists to assist us in performing procedures including the following:  Testing complex model-dependent valuations by performing independent calculations to assess the appropriateness of models and the adequacy of assumptions and inputs used by the Group;  Independently re-pricing instruments that had been valued using illiquid pricing inputs, using alternative pricing sources to evaluate management’s valuation;  Comparing fair value adjustment methodologies to current market practice and assessing the appropriateness and adequacy of the valuation adjustment framework in light of emerging market practice; and
Throughout the year we considered the impact of COVID-19 on the valuation of the different financial instrument portfolios, particularly where markets were affected by heightened volatility. Wherever this resulted in changes in management’s marking approach we assessed the reasonableness of these changes as well as the design and operating effectiveness of associated key controls.
Valuation adjustments applied on derivative portfolios for credit, funding and other risks were appropriate and complete based on our assessment of trade activity for positions with common risk characteristics, analysis of market data and peer benchmarking. Relevant references in the Annual Report and Accounts Report of the Group Audit Committee Accounting policies Note 12 on the financial statements
Risk Our response to the risk Pension valuation and net pension asset The Group operates a number of defined benefit schemes which in aggregate are significant in the context of the overall balance sheet. At 31 December 2020, the Group reported a net pension asset of £602 million (2019: £495 million) comprising £723 million of schemes in surplus and £121 million of schemes in deficit (2019: £614 million and £119 million respectively). The net pension asset is sensitive to changes in the key judgements and estimates, which include:  Assumptions -Actuarial assumptions and inputs including discount rate, inflation, pension payment and longevity to determine the valuation of retirement benefit liabilities;  Valuations - Pricing inputs and calibrations for illiquid or complex model-dependent valuations of certain investments held by the schemes;  Augmentation cap - Quantification of trustee’s rights to unilaterally augment benefits (Augmentation cap) to determine the recognition of surplus;  Equalisation adjustments - due to court rulings in respect of Guaranteed Minimum Pensions (GMP).
Assumptions - We involved actuarial specialists to evaluate the actuarial assumptions (including the impact from the recent government announcement of RPI/CPIH transition) by comparing them to independently obtained third party sources and market practice. We assessed the impact on pension liabilities due to changes in financial, demographic and longevity assumptions over the year, including the effects of COVID-19, and whether these were supported by objective external evidence and rationales.
Valuations - We involved valuation specialists to assess the appropriateness of management’s valuation methodology including the judgements made in determining significant assumptions, including their consideration of the impact of COVID-19, used in the valuation of complex and illiquid pension assets. We tested the fair value of scheme assets by independently calculating fair value for a sample of the assets held. Our sample included cash, equity and debt instruments, derivative financial instruments and illiquid assets.
Augmentation cap and equalisation adjustments - We involved actuarial specialists to test the estimation of the augmentation cap and GMP equalisation adjustments including the inputs used in the calculation. We also assessed the methodology and judgements made in calculating these estimates and the associated accounting treatment in accordance with IAS 19 and IFRIC 14.
Disclosure - We assessed the adequacy of the disclosures made in the financial statements, including the appropriateness of the assumptions and sensitivities disclosed.
Management’s estimate of the impact of the GMP liability and augmentation cap was materially consistent with our independent estimate using our own model. Relevant references in the Annual Report and Accounts Accounting policies Note 5 on the financial statements
Risk Our response to the risk IT access management The IT environment is complex and pervasive to the operations of the Group due to the large volume of transactions processed in numerous locations daily and the reliance on automated and IT dependent manual controls. Appropriate IT controls are required to ensure that applications process data as expected and that changes are made in an appropriate manner. This risk is also impacted by the greater dependency on third-parties, increasing use of cloud platforms, decommissioning of legacy systems, and migration to new systems. Such controls contribute to mitigating the risk of potential fraud or errors as a result of changes to applications and data.
Controls  User access management across application, database and operating systems. We have identified user access deficiencies in the past and while the number of deficiencies has reduced year over year, there remains a risk of inappropriate access.
We evaluated the design and operating effectiveness of IT general controls over the applications, operating systems and databases that are relevant to financial reporting. During our planning and test of design phases, we performed procedures to determine whether the ongoing global COVID-19 pandemic had caused material changes in IT processes or controls and noted no such changes that would result in an increased IT risk.
Key observations communicated to the Group Audit Committee We are satisfied that IT controls impacting financial reporting are designed and operating effectively. The following matters were reported to the Group Audit Committee:  We have seen an overall reduction in the number of discrete IT control deficiencies identified compared to prior year.  Improvements were made to standardise access management processes and controls across the Group. However, particular attention should continue to be paid to controls over user access management including ensuring the completeness and accuracy of the data used to perform access controls. Where issues were noted in relation to access management these were remediated by year end or mitigated by compensating controls. We also performed additional testing in response to deficiencies identified, where required.
We determined materiality for the Parent Company to be £160 million (2019: £160 million) which is 0.4% (2019: 0.3%) of equity of the Parent Company and is consistent with the prior year. We believe this reflects the most useful measure for users of the financial statements as the Parent Company’s primary purpose is to act as a holding company with investments in the Group’s subsidiaries, not to generate operating profits and therefore a profit based measure is not relevant.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that performance materiality was 50% (2019: 50%) of our planning materiality, namely £80 million (2019: £80 million). We have set performance materiality at this percentage (which is at the lowest end of the range of our audit methodology) based on various considerations including the past history of misstatements, the effectiveness of the control environment and other factors affecting the entity and its financial reporting. Audit work at component teams for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to components was £30 million to £72 million (2019: £30 million to £80 million).
Reporting threshold An amount below which identified misstatements are considered as being clearly trivial. We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £8 million (2019: £8 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
Other information The other information comprises the information included in the Annual Report and Accounts including the Strategic Report, Business Review, Corporate Governance, Report of the Group Nominations and Governance Committee, Report of the Group Audit Committee, Report of the Group Board Risk Committee, Report of the Group Sustainable Banking Committee, Report of the Technology and Innovation Committee, Report of the Directors, Risk and capital Management, Non-IFRS financial measures, Risk Factors, Material Contracts, Shareholder Information, and Forward Looking Statements, other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information contained within the annual report.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon.
Matters on which we are required to report by exception In the light of the knowledge and understanding of the Group and the Parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic report or the Report of the directors. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:  adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or  the Parent Company financial statements and the part of the Directors’ Remuneration report to be audited are not in agreement with the accounting records and returns; or  certain disclosures of directors’ remuneration specified by law are not made; or  we have not received all the information and explanations we require for our audit.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements or our knowledge obtained during the audit:  Directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified;  Directors’ explanation as to its assessment of the company’s prospects, the period this assessment covers and why the period is appropriate;  Directors’ statement on fair, balanced and understandable;  Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks;  The section of the annual report that describes the review of effectiveness of risk management and internal control systems; and;  The section describing the work of the audit committee.
Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined below, to detect irregularities, including fraud. The risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the company and management.  We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the most significant are the regulations, licence conditions and supervisory requirements of the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA); Companies Act 2006; and the Sarbanes Oxley Act (SOX).
Jonathan Bourne (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London, United Kingdom
(Loss)/profit on fair value of credit in financial liabilities designated at FVTPL due to own credit risk (52) (189) 200 FVOCI financial assets (64) (71) 48
Items that do qualify for reclassification FVOCI financial assets 44 (14) 7 Cash flow hedges 271 294 (581)
Other comprehensive income/(loss) after tax 432 (2,100) (1,292) Total comprehensive (loss)/income for the year (2) 1,700 859
Note: (1) On 17 April 2018 NatWest Group agreed a Memorandum of Understanding (MoU) with the Trustees of the NatWest Group Pension Fund in connection with the requirements of ring-fencing. NWM Plc could not continue to be a participant in the Main section and separate arrangements were required for its employees. Under the MoU, NWB Plc made a contribution of £2 billion on 9 October 2018 to strengthen funding of the Main section in recognition of the changes in covenant. Also under the MoU, NWM Plc made a £53 million contribution to the NWM section in Q1 2019.
Total liabilities and equity 799,491 723,039 *2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policies Note 1.
Called-up share capital - at 1 January 12,094 12,049 11,965 Ordinary shares issued 35 45 84 At 31 December 12,129 12,094 12,049
Share premium account - at 1 January 1,094 1,027 887 Ordinary shares issued 17 67 140 At 31 December 1,111 1,094 1,027
Merger reserve - at 1 January and 31 December 10,881 10,881 10,881
Owners’ equity at 31 December 43,860 43,547 45,736 Non-controlling interests - at 1 January 9 754 763 Currency translation adjustments and other movements 17 (11) 25 (Loss)/profit attributable to non-controlling interests (62) 261 (8) Dividends paid — (5) (5) Equity raised (8) — 45 — Equity withdrawn and disposals (9) — (1,035) (21)
Notes: (1) Paid-in equity reclassified to liabilities as the result of a call of US$2 billion AT1 notes in June 2020, redeemed in August 2020. (2) AT1 capital notes totalling US$1.5 billion less fees issued in June 2020. In November 2020 AT1 capital notes totalling £1.0 billion less fees were issued. (3) During the year NWM Plc sold its entire equity holding in Saudi British Bank (SABB) leading to a realised loss of £337 million after tax which was recognised through other comprehensive income and reclassified to retained earnings. Also, following a conversion of Visa B and C preference shares to Visa Class A shares a gain of £125 million has been realised. There has been a corresponding adjustment to the conversion ratio of the Visa B and C preference shares.
(8) Capital injection from RFS Holdings B.V. consortium members. (9) Distribution to RFS Holdings B.V. consortium members on completion of the Alawwal bank merger.
Cash flows from operating activities Operating (loss)/profit before tax (351) 4,232 3,359 Adjustments for: Amortisation of discounts and premiums of other financial assets 267 255 169 Depreciation, amortisation and impairment of other assets 914 1,220 768 Change in fair value taken to profit or loss of other financial assets (1,474) (280) 416 Change in fair value taken to profit or loss on other financial liabilities and subordinated liabilities 962 856 (302) Elimination of foreign exchange differences (2,497) 949 427 Other non-cash items 28 (258) 2,553 Income receivable on other financial assets (518) (854) (534) (Profit)/loss on sale of other financial assets (96) 22 (34) Loss/(profit) on sale of subsidiaries and associates 16 (2,224) — Loss on sale of other assets and net assets/liabiltiies (16) (58) (50) Interest payable on MRELs and subordinated liabilities 1,182 1,151 876 Loss on sale of MRELs and subordinated liabilities 324 — — Charges and releases on provisions 296 1,243 1,333 Defined benefit pension schemes 215 188 308 Net cash flows from trading activities 2,494 7,138 9,687 Decrease/(increase) in trading assets 4,147 (659) 7,543 (Increase)/decrease in derivative assets (16,173) (16,680) 27,494 Decrease/(increase) in settlement balance assets 2,090 (1,459) (411) (Increase)/decrease in loans to banks (554) 3,563 (1,923) (Increase)/decrease in loans to customers (33,748) (22,642) 3,080 Decrease in other financial assets 221 924 518 Decrease in other assets 8 707 541 Increase/(decrease) in banks deposits 113 (2,804) (7,099) Increase/(decrease) in customer deposits 62,492 8,333 (1,064) (Decrease)/increase in settlement balance liabilities (1,652) 1,003 222 (Decrease)/increase in trading liabilities (1,693) 1,599 (9,630) Increase/(decrease) in derivative liabilities 13,826 17,982 (25,609) (Decrease)/increase in other financial liabilities (1,085) 2,871 2,449 Increase/(decrease) in notes in circulation 546 (43) (34) Decrease in other liabilities (1,723) (2,634) (12,046) Changes in operating assets and liabilities 26,815 (9,939) (15,969) Income taxes paid (214) (278) (466) Net cash flows from operating activities (1) 29,095 (3,079) (6,748)
Cash flows from investing activities Sale and maturity of other financial assets 25,952 19,990 11,832 Purchase of other financial assets (18,825) (21,345) (19,516) Income received on other financial assets 518 854 534 Net movement in business interests and intangible assets 27 (70) (84) (481) Sale of property, plant and equipment 348 428 264 Purchase of property, plant and equipment (376) (559) (619) Net cash flows from investing activities 7,547 (716) (7,986) Cash flows from financing activities Movement in MRELs 636 1,927 6,676 Movement in subordinated liabilities (2,381) (1,064) (2,824) Issue of ordinary shares — 17 144 Own shares (acquired)/disposed (2) (21) 22
Issue of other equity instruments 2,218 — — Redemption of other equity instruments — — (2,826) Net cash flows from financing activities 90 (2,570) 389 Effects of exchange rate changes on cash and cash equivalents 1,879 (1,983) 676
Financial statem ents 1. Presentation of accounts The accounts, set out on pages 258 to 338, including these accounting policies on pages 264 to 268, and the audited sections of the Business review: Risk and capital management on pages 157 to 245, are prepared on a going concern basis (see the Report of the directors, page 153) and 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. The significant accounting policies and related judgments are set out below.
With the exception of certain financial instruments as described in Accounting policies 12 and 20 and investment property, the accounts are presented on a historical cost basis.
Definition of material – Amendments to IAS 1 – Presentation of Financial Statements (IAS 1) and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8) The IASB clarified the definition of ‘material’ and aligned the definition of material used in the Conceptual Framework and in other IFRS standards. The amendments clarify that materiality will depend on the nature or magnitude of information. Under the amended definition of materiality, an entity will need to assess whether the information, either individually or in combination with other information, is material in the context of the accounts. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users. NatWest Group’s definition and application of materiality is in line with the definition in the amendments.
2. Basis of consolidation The consolidated accounts incorporate the financial statements of NatWest Group plc and entities (including certain structured entities) that give access to variable returns and that are controlled by NatWest Group. Control is assessed by reference to our ability to enforce our will on the other entity, typically through voting rights.
Other interest relating to financial instruments measured at fair value is recognised as part of the movement in fair value.
5. Employee benefits Short-term employee benefits, such as salaries, paid absences, and other benefits are accounted for on an accruals basis over the period in which the employees provide the related services. Employees may receive variable compensation satisfied by cash, by debt instruments issued by NatWest Group or by NatWest Group plc shares. NatWest Group operates a number of share-based compensation schemes under which it awards NatWest Group plc shares and share options to its employees. Such awards are generally subject to vesting conditions.
Contributions to defined contribution pension schemes are recognised in profit or loss as employee service costs accrue.
Goodwill is measured at initial cost less any subsequent impairment losses. The gain or loss on the disposal of a subsidiary includes the carrying value of any related goodwill.
The recoverable amount of an asset that does not generate cash flows that are independent from those of other assets or groups of assets, is determined as part of the cashgenerating unit to which the asset belongs. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. For the purposes of impairment testing, goodwill acquired in a business combination is allocated to each of NatWest Group’s cash-generating units or groups of cash-generating units expected to benefit from the combination. The recoverable amount of an asset or cash-generating unit is the higher of its fair value less cost to sell or its value in use. Value in use is the present value of future cash flows from the asset or cash-generating unit discounted at a rate that reflects market interest rates adjusted for risks specific to the asset or cash-generating unit that have not been taken into account in estimating future cash flows.
As lessee On entering a new lease contract, NatWest Group recognises a right of use asset and a lease liability to pay future rentals. The liability is measured at the present value of future lease payments discounted at the applicable incremental borrowing rate. The right of use asset is depreciated over the shorter of the term of the lease and the useful economic life, subject to review for impairment.
NatWest Group has a constructive obligation to restructure. An obligation exists when NatWest Group has a detailed formal plan for the restructuring and has raised a valid expectation in those affected by starting to implement the plan or by announcing its main features.
NatWest Group recognises any onerous cost of the present obligation under a contract as a provision. An onerous cost is the unavoidable cost of meeting NatWest Group’s contractual obligations that exceed the expected economic benefits. When NatWest Group vacates a leasehold property, the right of use asset would be tested for impairment and a provision may be recognised for the ancillary contractual occupancy costs, such as rates.
Deferred tax assets and liabilities are offset where NatWest Group has a legally enforceable right to offset and where they relate to income taxes levied by the same taxation authority either on an individual NatWest Group company or on NatWest Group companies in the same tax group that intend, in future periods, to settle current tax liabilities and assets on a net basis or on a gross basis simultaneously.
Classification by product relies on specific designation criteria which are applicable to certain classes of financial assets or circumstances where accounting mismatches would otherwise arise. Classification by business model reflects how NatWest Group manages its financial assets to generate cash flows. A business model assessment determines if cash flows result from holding financial assets to collect the contractual cash flows, from selling those financial assets, or both.
Regular way purchases of financial assets classified as amortised cost are recognised on the settlement date; all other regular way transactions in financial assets are recognised on the trade date.
Financial assets which are managed under a ‘held to collect’ business model, and have contractual cash flows that comprise solely payments of principal and interest are measured at amortised cost.
13. Impairment: expected credit losses (ECL) At each balance sheet date each financial asset or portfolio of loans measured at amortised cost or at fair value through other comprehensive income, issued financial guarantee and loan commitment is assessed for impairment and presented as impairments in the income statement. Loss allowances are forward-looking, based on 12 month ECL where there has not been a significant increase in credit risk rating, otherwise allowances are based on lifetime expected losses.
ECL are a probability-weighted estimate of credit losses. The probability is determined by the risk of default which is applied to the cash flow estimates. In the absence of a change in credit rating, allowances are recognised when there is a reduction in the net present value of expected cash flows. On a significant increase in credit risk, allowances are recognised without a change in the expected cash flows, although typically expected cash flows do change also; and ECL are adjusted from 12 month to lifetime expectations.
On restructuring a financial asset without causing derecognition of the original asset, the revised cash flows are used in reestimating the credit loss. Where restructuring causes derecognition of the original financial asset, the fair value of the replacement asset is used as the closing cash flow of the original asset.
Where, in the course of the orderly realisation of a loan, it is exchanged for equity shares or property, the exchange is accounted for as the sale of the loan and the acquisition of equity securities or investment property. Where NatWest Group’s interest in equity shares following the exchange is such that NatWest Group controls an entity, that entity is consolidated.
Impaired loans are written off and therefore derecognised from the balance sheet when NatWest Group concludes that there is no longer any realistic prospect of recovery of part, or all, of the loan. For loans that are individually assessed for impairment, the timing of the write-off is determined on a case by case basis. Such loans are reviewed regularly and write-off will be prompted by bankruptcy, insolvency, renegotiation and similar events.
14. Financial guarantee contracts Under a financial guarantee contract, NatWest Group, in return for a fee, undertakes to meet a customer’s obligations under the terms of a debt instrument if the customer fails to do so. A financial guarantee is recognised as a liability; initially at fair value and, if not designated as at fair value through profit or loss, subsequently at the higher of its initial value less cumulative amortisation and any provision under the contract measured in accordance with Accounting policy 13. Amortisation is calculated to recognise fees receivable in profit or loss over the period of the guarantee.
15. Loan commitments Provision is made for ECL on loan commitments, other than those classified as held-for-trading. Syndicated loan commitments in excess of the level of lending under the commitment approved for retention by NatWest Group are classified as held-fortrading and measured at fair value through profit or loss.
19. Capital instruments NatWest Group classifies a financial instrument that it issues as a liability if it is a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or financial liabilities on potentially unfavourable terms and as equity if it evidences a residual interest in the assets of NatWest Group after the deduction of liabilities. The components of a compound financial instrument issued by NatWest Group are classified and accounted for separately as financial assets, financial liabilities or equity as appropriate. Incremental costs and related tax that are directly attributable to an equity transaction are deducted from equity.
A derivative embedded in a financial liability contract is accounted for as a stand-alone derivative if its economic characteristics are not closely related to the economic characteristics of the host contract; unless the entire contract is measured at fair value with changes in fair value recognised in profit or loss.
Gains and losses arising from changes in the fair value of derivatives that are not the hedging instrument in a qualifying hedge are recognised as they arise in profit or loss. Gains and losses are recorded in Income from trading activities except for gains and losses on those derivatives that are managed together with financial instruments designated at fair value; these gains and losses are included in Other operating income. NatWest Group enters into three types of hedge relationship: hedges of changes in the fair value of a recognised asset or liability or unrecognised firm commitment (fair value hedges); hedges of the variability in cash flows from a recognised asset or liability or a highly probable forecast transaction (cash flow hedges); and hedges of the net
21. Associates and joint ventures An associate is an entity over which NatWest Group has significant influence. A joint venture is one which it controls jointly with other parties. Investments in associates and interests in joint ventures are recognised using the equity method. They are stated initially at cost, including attributable goodwill, and subsequently adjusted for postacquisition changes in NatWest Group’s share of net assets.
23. Shares in Group entities NatWest Group plc’s investments in its subsidiaries are stated at cost less any impairment.
Critical accounting policies and key sources of estimation uncertainty The reported results of NatWest Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its accounts. UK company law and IFRS require the directors, in preparing NatWest Group's accounts, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent. In the absence of an applicable standard or interpretation, IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’, requires management to develop and apply an accounting policy that results in relevant and reliable information in the light of the requirements and guidance in IFRS dealing with similar and related issues and the IASB's ’Conceptual Framework for Financial Reporting’. The judgements and assumptions involved in NatWest Group's accounting policies that are considered by the Board to be the most important to the portrayal of its financial condition are discussed below. The use of estimates, assumptions or models that differ from those adopted by NatWest Group would affect its reported results. During 2020, estimation uncertainty has been affected by the COVID19 pandemic. The COVID-19 pandemic has continued to cause significant economic and social disruption during 2020. Key financial estimates are based on management's latest five-year revenue and cost forecasts.
Measurement of goodwill, deferred tax and expected credit losses are highly sensitive to reasonably possible changes in those anticipated conditions. Other reasonably possible assumptions about the future include a prolonged financial effect of the COVID-19 pandemic on the economy of the UK and other countries. Changes in judgements and assumptions could result in a material adjustment to those estimates in the next reporting periods. Consideration of this source of estimation uncertainty has been set out in the notes below (as applicable).
COVID-19 amendments on lease modifications – Amendments to IFRS 16 – Leases (IFRS 16) The IASB published 'amendments to IFRS 16 covering COVID-19-Related Rent Concessions’. These provide lessees with an exemption from assessing whether a COVID19 related rent concession is a lease modification. The amendment is effective for annual reporting periods beginning on or after 1 June 2020. The effect of the amendment on NatWest Group’s accounts is immaterial and will be adopted from 1 January 2021.
Other new standards and amendments that are effective for annual periods beginning after 1 January 2022, with earlier application permitted, are set out below.
Contract (Amendments to IAS 37).  Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16).
Interest income on financial instruments measured at amortised cost and debt instruments classified as FVOCI is measured using the effective interest rate which allocates the interest income or interest expense over the expected life of the asset or liability at the rate that exactly discounts all estimated future cash flows to equal the instrument's initial carrying amount. Calculation of the effective interest rate takes into account fees payable or receivable that are an integral part of the instrument's yield, premiums or discounts on acquisition or issue, early redemption fees and transaction costs. All contractual terms of a financial instrument are considered when estimating future cash flows. Included in interest receivable is finance lease income which is recognised at a constant periodic rate of return before tax on the net investment.
Net fees and commissions (1) 2,012 2,511 2,357 Income from trading activities Foreign exchange 569 448 643 Interest rate 541 532 695 Credit 3 32 45 Changes in fair value of own debt and derivative liabilities attributable to own credit risk - debt securities in issue (24) (60) 72 - derivative liabilities — (20) 20 Equities, commodities and other 36 — 32
(2) Including related derivatives. (3) Includes instruments that have failed SPPI testing under IFRS 9. (4) 2019 includes a gain of £444 million (€523 million), a legacy liability release of £256 million and an FX recycling gain of £290 million on completion of the
Notes: (1) 2020 includes cost of £144 million including accelerated depreciation of £71 million (2019 - £161 million including £40 million accelerated depreciation) in relation to the planned reduction of the property portfolio (2020 – freehold £1 million; leasehold £143 million; 2019 - freehold £4million; leasehold £157 million). (2) 2019 includes a rebate of £31 million relating to prior periods. (3) 2020 includes a £107 million charge relating to the reduction in property portfolio, leasehold £86 million and freehold £21 million (2019 - £287 million charge, leasehold £37 million and freehold £250 million).
The average number of persons employed, rounded to the nearest hundred, during the year, excluding temporary staff, was 61,400 (2019 - 64,200; 2018 - 67,600). The average number of temporary employees during 2020 was 3,200 (2019 - 4,100; 2018 - 4,000). The number of persons employed at 31 December, excluding temporary staff, by reportable segment, was as follows: Ulster Bank RoI 2,600 2,700 2,900
During the year a number of roles transferred from Retail Banking and Commercial Banking into centralised functions. Comparatives have been re-stated.
Share-based payments As described in the Remuneration report, NatWest Group grants share-based awards to employees principally on the following bases: Award plan Eligible employees Nature of award Vesting conditions (1) Settlement Sharesave UK, Republic of Ireland,
Long-term incentives (2) Senior employees Awards of ordinary shares and conditional shares
Long-term incentives 2020 2019 2018 Value at Shares Options Value at Shares Options Value at Shares Options grant awarded over shares grant awarded over shares grant awarded over shares £m (million) (million) £m (million) (million) £m (million) (million)
Bonus awards The following tables analyse NatWest Group's bonus awards for 2020.
Non-deferred cash awards (1) 35 40 (13) Total non-deferred bonus awards 35 40 (13) Deferred bond awards 111 184 (40) Deferred share awards 60 83 (28) Total deferred bonus awards 171 267 (36)
Bonus awards as a % of operating profit before tax (3) (173%) 7% Proportion of bonus awards that are deferred 83% 87% of which - deferred bond awards 65% 69% - deferred share awards 35% 31%
Reconciliation of bonus awards to income statement charge £m £m £m
RBS International (RBSI) serves retail, commercial, and corporate customers in the Channel Islands, Isle of Man and Gibraltar, and financial institution customers in those same locations in addition to the UK and Luxembourg.
Retail Ulster Commercial Private Central items Banking Bank RoI Banking Banking RBSI NWM & other (1) Total 2020 £m £m £m £m £m £m £m £m
Banking Bank RoI Banking Banking RBSI NWM & other (1) Total 2019 £m £m £m £m £m £m £m £m
Note: (1) 2020 predominantly relates to interest receivable in Treasury; 2019 predominantly related to interest receivable in Treasury and strategic disposals in Functions and 2018 predominately related to interest receivable in Treasury.
Retail Ulster Commercial Private RBS NatWest items Analysis of net fees and commissions Banking Bank RoI Banking Banking International Markets & other Total 2020 £m £m £m £m £m £m £m £m Fees and commissions receivable - Credit and debit card fees 299 21 129 9 2 — — 460 fiduciary services (1)
Note: (1) Comparisons with prior periods are impacted by the transfer of the Private Client Advice business to Private Banking from 1 January 2020.
Financial statem ents 4 Segmental analysis continued Segmental analysis of goodwill There was no movement in the goodwill held by segments for the period 1 January 2019 to 31 December 2020. The total carrying value was £5,607 million, comprised of Retail Banking £2,692 million; Commercial Banking £2,606 million; Private Banking £9 million; and RBS International £300 million.
UK USA Europe RoW Total 2020 £m £m £m £m £m Total revenue 12,511 211 944 174 13,840
Contingent liabilities and commitments 121,267 — 5,408 208 126,883 *2019 re-presented.
Financial statem ents 5 Pensions Defined contribution schemes NatWest Group sponsors a number of defined contribution pension schemes in different territories, which new employees are offered the opportunity to join.
Pension fund trustees are appointed to operate each fund and ensure benefits are paid in accordance with the scheme rules and national law. The trustees are the legal owner of a scheme’s assets, and have a duty to act in the best interests of all scheme members.
Major classes of plan assets as a percentage of total plan assets of the Main section % % % % % %
Swaps have been executed at prevailing market rates and within standard market bid/offer spreads with a number of counterparty banks, including NWB Plc.
At 31 December 2020, the gross notional value of the swaps was £88 billion (2019 - £75 billion) and had a net positive fair value of £4,706 million (2019 - £3,340 million) against which the banks had posted approximately 104% collateral.
Changes in value of net pension (asset)/liability £m £m £m £m £m £m £m £m
Contributions by plan participants and other scheme members 10 10 — — 15 15 — — Liabilities extinguished upon settlement — — — — (188) (194) — (6)
Currency translation and other adjustments — 4 — 4 92 71 — (21) Income statement
(3) NatWest Group expects to make contributions to the Main section of £215 million in 2021. Additional contributions of up to £500 million will be paid to the Main section, should NatWest Group make distributions in 2021, in line with the ring-fencing agreement with the Trustee.
Amounts recognised on the balance sheet £m £m Fund assets at fair value 57,249 51,925 Present value of fund liabilities 48,864 44,115 Funded status 8,385 7,810 Asset ceiling/minimum funding 7,783 7,315
In 2018, the Group recognised an updated estimate of the impact of guaranteed minimum pension equalisation (£102m) following the clarity provided by the October 2018 Court ruling. Discussions around implementing changes to benefits are well advanced, and the estimate has been revised to £169m (2019: £141m) to reflect this.
Assumptions Placing a value on NatWest Group’s defined benefit pension schemes’ liabilities requires NatWest Group’s management to make a number of assumptions, with the support of independent actuaries. The ultimate cost of the defined benefit obligations depends upon actual future events and the assumptions made are unlikely to be exactly borne out in practice, meaning the final cost may be higher or lower than expected.
The most significant assumptions used for the Main section are shown below: Principal IAS 19 actuarial assumptions 2020 2019 Principal assumptions of Main section
The weighted average duration of the Main section’s defined benefit obligation at 31 December 2020 is 22 years (2019 – 21 years).
The larger outflow in the first four years represents the expected level of transfers out to 31 December 2021.
The table below shows how the net pension asset of the Main section would change if the key assumptions used were changed independently. In practice the variables have a degree of correlation and do not move completely in isolation.
(Decrease)/ Increase in (Decrease)/increase increase net pension in value of in value of (obligations)/ assets liabilities assets 2020 £m £m £m 0.25% increase in interest rates/discount rate (2,585) (2,384) (201)
The funded status is most sensitive to movements in credit spreads and longevity. The table below shows the combined change in the funded status of the Main section as a result of larger movements in these assumptions, assuming no changes in other assumptions.
Change in life expectancies -2 years -1 years No change + 1 year + 2 years 2020 £bn £bn £bn £bn £bn Change in credit spreads +50 bps 7.8 6.1 4.5 2.9 1.3
Change in credit spreads +50 bps 6.9 5.4 3.9 2.3 0.8
History of defined benefit schemes £m £m £m £m £m £m £m £m £m £m Fair value of plan assets 51,323 46,555 43,806 44,652 43,824 57,249 51,925 48,752 49,746 49,229 Present value of plan obligations 43,870 39,669 35,466 37,937 38,851 48,864 44,115 39,607 42,378 43,990 Net surplus 7,453 6,886 8,340 6,715 4,973 8,385 7,810 9,145 7,368 5,239
Experience gains/(losses) on plan liabilities 427 275 (122) (107) 658 455 279 (81) (93) 794 Experience gains/(losses) on plan assets 5,486 3,021 (1,891) 1,580 8,562 6,027 3,556 (2,090) 1,728 9,254 Actual return on plan assets 6,422 4,266 (768) 2,735 9,872 7,064 4,930 (848) 3,013 10,708 Actual return on plan assets 13.8% 9.7% (1.7%) 6.2% 32.2% 13.6% 10.1% (1.7%) 6.1% 30.9%
Fees payable for: - the audit of NatWest Group’s annual accounts (1) 4.7 3.8 3.5 - the audit of NatWest Group plc’s subsidiaries (1) 30.6 25.7 27.5
NatWest Group’s regulators in the UK and overseas, and £0.4 million (2019 - £0.7 million) in relation to non-statutory audit opinions. (3) Comprises fees of £0.4 million (2019 - £0.6 million) in respect of work performed by the auditors as reporting accountants on debt and equity issuances undertaken by NatWest Group.
Expected tax credt/(charge) 67 (804) (638) Losses and temporary differences in year where no deferred tax asset recognised (27) (4) (55) Foreign profits taxed at other rates (20) 23 (8) Items not allowed for tax: - losses on disposals and write-downs (22) (71) (44)
Tax on paid-in equity 61 73 67 UK tax rate change impact (1) 75 — — Adjustments in respect of prior years (2) (4) 141 90 Actual tax charge (83) (432) (1,208)
Notes: (1) The Finance Bill 2020 amended the rate of UK corporation tax to 19% for the financial year beginning 1 April 2020. This reverses the rate reduction to 17% for the financial year beginning 1 April 2020 previously enacted. Deferred tax balances previously based on the lower rate have been restated accordingly. (2) Prior year tax adjustments incorporate refinements to tax computations made on submission and agreement with the tax authorities. Current taxation balances include provisions in respect of uncertain tax positions, in particular in relation to restructuring and other costs where the taxation treatment remains subject to agreement with the relevant tax authorities.
Judgment: tax contingencies NatWest Group’s income tax charge and its provisions for income taxes necessarily involve a degree of estimation and judgement. The tax treatment of some transactions is uncertain and tax computations are yet to be agreed with the tax authorities in a number of jurisdictions. NatWest Group recognises anticipated tax liabilities based on all available evidence and, where appropriate, in the light of external advice. Any difference between the final outcome and the amounts provided will affect current and deferred income tax charges in the period when the matter is resolved.
Deferred tax assets in respect of carried forward tax losses are recognised if the losses can be used to offset probable future taxable profits after taking into account the expected reversal of other temporary differences. Recognised deferred tax assets in respect of tax losses are analysed further below.
UK tax losses carried forward - Ulster Bank Limited 8 15
Estimate - These estimates are partly based on forecast performance beyond the horizon for management’s detailed plans. They have regard to inherent uncertainties, such as Brexit, climate change, and the impact of COVID. The deferred tax asset in NWM Group is supported by way of future reversing temporary timing differences on which deferred tax liabilities are recognised at 31 December 2020.
UK tax losses - Under UK tax rules, tax losses can be carried forward indefinitely. As the recognised tax losses in NatWest Group arose prior to 1 April 2015, credit in future periods is given against 25% of profits at the main rate of UK corporation tax, excluding the Banking Surcharge 8% rate introduced by The Finance (No. 2) Act 2015. Deferred tax assets and liabilities at 31 December 2020 take into account the reduced rates in respect of tax losses and temporary differences and where appropriate, the banking surcharge inclusive rate in respect of other banking temporary differences.
NWB Plc – A deferred tax asset of £592 million has been recognised in respect of total losses of £3,117 million. The losses arose principally as a result of significant impairment and conduct charges between 2009 and 2012 during challenging economic conditions in the UK banking sector. NWB Plc returned to tax profitability during 2015 and expects the deferred tax asset to be utilised against future taxable profits by the end of 2026.
Financial statem ents 7 Tax continued Overseas tax losses UBI DAC – The Bank carried forward losses of £9,071 million at 31 December 2020. The losses arose principally as a result of significant impairment charges between 2008 and 2013 during challenging economic conditions in the Republic of Ireland. A deferred tax asset of £43 million has been recognised at 31 December 2020 in respect of £342 million of those total losses. The movement in the current financial year reflects a £146 million reduction in the carrying value of the deferred tax asset based on a revised economic outlook, and £:€ exchange differences. UBIDAC expects the deferred tax asset to be utilised against future taxable profits by the end of 2029.
Deferred tax liabilities of £242 million (2019 - £262 million; 2018 - £257 million) have not been recognised in respect of retained earnings of overseas subsidiaries and held-over gains on the incorporation of certain overseas branches. Retained earnings of overseas subsidiaries are expected to be reinvested indefinitely or remitted to the UK free from further taxation. No taxation is expected to arise in the foreseeable future in respect of held-over gains on which deferred tax is not recognised. Changes to UK tax legislation largely exempts from UK tax, overseas dividends received on or after 1 July 2009.
Weighted average number of shares (millions) Weighted average number of ordinary shares outstanding during the year 12,095 12,067 12,009 Effect of dilutive share options and convertible securities 23 35 52 Diluted weighted average number of ordinary shares outstanding during the year 12,118 12,102 12,061 9 Trading assets and liabilities Trading assets and liabilities comprise assets and liabilities held at fair value in trading portfolios.
Notional Assets Liabilities Notional Assets Liabilities £bn £m £m £bn £m £m Exchange rate contracts 3,328 52,239 55,107 3,750 44,792 47,141
NatWest Group applies hedge accounting to manage the following risks: interest rate, foreign exchange and net investment in foreign operations.
NatWest Group hedges the exchange rate risk of its net investment in foreign currency denominated operations with currency borrowings and forward foreign exchange contracts. NatWest Group reviews the value of the investments’ net assets, executing hedges where appropriate to reduce the sensitivity of capital ratios to foreign exchange rate movement. Hedge accounting relationships will be designated where required.
A number of the current cash flow and fair value hedges of interest rate risk that mature post 31 December 2021 will be directly affected by interest rate benchmark reform. NatWest Group early adopted the amendments to IAS 39 and IFRS 7 issued in September 2019 for reporting periods beginning 1 January 2019; these amendments are known as Phase 1 relief. The relief allows, where uncertainty arising from benchmark rate reform exists, the following:  When assessing if affected forecasted cash flows are highly probable or still expected to occur; it is assumed the IBOR based forecasted hedged cash flows are not altered as a result of interest rate benchmark reform.
 Hedge accounting relationships will not be discontinued if they fall outside the 80 – 125% range when performing a retrospective effectiveness assessment.
NatWest Group early adopted the amendments to IAS 39 issued in August 2020 for reporting periods beginning 1 January 2021; these amendments are known as Phase 2 relief and apply at the point where components of a hedge accounting relationships transition to reference an alternative interest rate benchmark. Where relationships have transitioned in the year, the impacted hedge accounting relationships had their designations amended in line with the Phase 2 relief.
 As a result of the amended designations the balances in other comprehensive income linked to the transitioned forecasted cash flows are now deemed based on the alternative benchmark interest rate.
Financial statem ents 10 Derivatives continued Included in the table above are derivatives held for hedging purposes as follows: Changes in fair Changes in fair value used for value used for hedge hedge Notional Assets Liabilities ineffectiveness (1) Notional Assets Liabilities ineffectiveness (1)
£bn £m £m £m £bn £m £m £m Fair value hedging
Note: (1) The change in fair value used for hedge ineffectiveness includes instruments that were decrecognised in the year.
Hedging assets Exchange rate risk — — 1.0 0.2 — — — 1.2
Net investment hedging Exchange rate risk 0.1 0.1 — — — — — 0.2 Principal currency hedges
Fair value hedging Hedging assets - interest rate risk 0.6 1.6 8.1 5.5 12.5 4.4 4.3 37.0 Hedging liabilities - interest rate risk — 0.5 6.3 12.7 6.6 2.0 — 28.1 Cash flow hedging Hedging assets
Net investment hedging Exchange rate risk 0.1 0.3 — — — — — 0.4 Principal currency hedges
Cash flow hedging - interest rate Loans to banks and customers - amortised cost 53,447 (601) Other financial assets - securities 2,616 (16)
Other financial liabilities - debt securities in issue 26,811 830 (807) 30
Cash flow hedging - interest rate Loans to banks and customers - amortised cost 69,254 (566) Other financial assets - securities 2,275 (16)
Cash flow hedging - exchange rate Other financial liabilities - debt securities in issue 12,264 59
Notes: (1) 2019 has been restated to align the methodology used to identify hedge relationships subject to IBOR reform. (2) Hedge relationships subject to reform are those where either the hedged item or the hedging instrument is subject to the IBOR reform.
Foreign Foreign Cash flow exchange Cash flow exchange hedge reserve hedge reserve hedge reserve hedge reserve £m £m £m £m
Cash flow hedge Cash flow hedge hedge reserve reserve hedge reserve reserve £m £m £m £m
Hedge ineffectiveness recognised in other operating income comprises: £m £m £m
Fair value hedging Gains on the hedged items attributable to the hedged risk 877 610 54 Losses on the hedging instruments (875) (585) (7) Fair value hedging ineffectiveness 2 25 47 Cash flow hedging
The main sources of ineffectiveness for interest rate risk hedge accounting relationships are:  The effect of the counterparty credit risk on the fair value of the interest rate swap which is not reflected in the fair value of the hedged item attributable to the change in interest rate (fair value hedge).  Differences in the repricing basis between the hedging instrument and hedged cash flows (cash flow hedge); and  Upfront present values on the hedging derivatives where hedge accounting relationships have been designated after the trade date (cash flow hedge and fair value hedge).
Financial statem ents 11 Financial instruments – classification The following tables analyse financial assets and liabilities in accordance with the categories of financial instruments on an IFRS 9 basis. Assets and liabilities outside the scope of IFRS 9 are shown within other assets and other liabilities.
Customer deposits 431,739 431,739 Settlement balances 5,545 5,545 Trading liabilities 72,256 72,256
Notes in circulation 2,109 2,109 *2019 data has been restated for the accounting policy change for balances held with central banks. Refer to Accounting policy changes effective 1 January 2020 for further details.
(4) Includes items in the course of transmission to other banks of £12 million (2019 - £2 million). (5) The carrying amount of other customer accounts designated as at fair value through profit or loss is the same as the principal amount for both periods. No amounts have been recognised in the profit or loss for changes in credit risk associated with these liabilities as the changes are immaterial both during the period and cumulatively.
Judgment: classification of financial assets Classification of financial assets between amortised cost and fair value through other comprehensive income requires a degree of judgement in respect of business models and contractual cashflows.  The business model criteria is assessed at a portfolio level to determine whether assets are classified as held to collect or held to collect and sell. Information that is considered in determining the applicable business model includes the portfolio’s policies and objectives, how the performance and risks of the portfolio are managed, evaluated and reported to management; and the frequency, volume and timing of sales in prior periods, sales expectation for future periods, and the reasons for sales.
Gross offset sheet agreements collateral collateral related collateral agreements sheet total
Financial statem ents 11 Financial instruments - classification continued Interest rate benchmark reform In 2020 NatWest Group continued to implement its entity-wide LIBOR programme with the view of being ready for the various transition events that are expected to occur prior to the cessation of the vast majority of the IBOR benchmark rates at the end of 2021 and the USD LIBOR in 2023. In the UK, regulators, most notably the Bank of England (BoE) and the Financial Conduct Authority (FCA), have issued guidance on how market participants are expected to approach transition as well as the regulatory expectations in relation to the credit adjustment spread calculation methodologies, conversion strategies amongst, existence of products referencing IBOR benchmark rates amongst other items.
The group-wide programme continued to address the key areas that will be affected by the IBOR reform most notably:  Client stratification, engagement and education;  Contract fall-back remediation;  Transition on an economically equivalent basis;  Effect of modifications to existing terms beyond those that are attributable to the IBOR reform;  Funding and liquidity management, planning and forecast;  Risk management;  Financial reporting and valuation; and,  Changes to processes and systems covering front-end, risk and finance systems.
NatWest Group continued to develop new products across its different segments that reference the new alternative risk-free rates and worked with clients to assess their readiness and ability to adopt new products or transition existing products. A comprehensive review of the effect of IBOR reform on funding, liquidity and risk management has also been conducted. This is expected to be fully implemented over the course of 2021. NatWest Group will continue to adapt its key systems, methodologies and processes to meet the requirements of the new risk-free rates. This is expected to be concluded in advance of the LIBOR cessation date at the end of 2021.
The table below provides an overview of IBOR related exposure by currency and nature of financial instruments. Non-derivative financial instruments are presented on the basis of their carrying amounts excluding expected credit losses while derivative financial instruments are presented on the basis of their notional amount.
Included within the table above for derivatives were currency swaps with corresponding legs also subject to IBOR reform of GBP LIBOR of £5.2 billion with USD IBOR £2.0 billion, EUR IBOR £2.9 billion and Other IBOR £0.3 billion. Currency swaps of USD IBOR of £231.7 billion with GBP LIBOR £98.5 billion, EUR IBOR £85.8 billion and Other IBOR £47.4 billion. Currency swaps of EUR IBOR of £5.1 billion with GBP LIBOR £2.3billion, USD IBOR £1.8 billion and Other IBOR £1.0 billion. Currency swaps of Other IBOR of £2.2 billion with EUR IBOR £0.7 billion, USD IBOR £1.2 billion and Other IBOR £0.3 billion.
Additionally, included above are basis swaps for GBP LIBOR of £97.0 billion, USD IBOR of £ 81.0 billion, EUR IBOR of £49.0 billion and Other IBOR of £10.0 billion.
Financial statem ents 12 Financial instruments - valuation Critical accounting policy: Fair value - financial instruments In accordance with Accounting policies 12 and 20, financial instruments classified as mandatory fair value through profit or loss, held-for-trading or designated as at fair value through profit or loss and financial assets classified as fair value through other comprehensive income are recognised in the financial statements at fair value. All derivatives are measured at fair value.
Where NatWest Group manages a group of financial assets and financial liabilities on the basis of its net exposure to either market risks or credit risk, it measures the fair value of a group of financial assets and financial liabilities on the basis of the price that it would receive to sell a net long position (i.e. an asset) for a particular risk exposure or to transfer a net short position (i.e. a liability) for a particular risk exposure in an orderly transaction at the measurement date under current market conditions.
Credit valuation adjustments are made when valuing derivative financial assets to incorporate counterparty credit risk. Adjustments are also made when valuing financial liabilities measured at fair value to reflect the NatWest Group’s own credit standing.
Total financial assets held at fair value 57,507 221,625 1,723 280,855 61,909 212,309 2,554 276,772
Risk and capital management – Credit risk. (3) The determination of an instrument’s level cannot be made at a global product level as a single product type can be in more than one level. For example, a single name corporate credit default swap could be in level 2 or level 3 depending on whether the reference counterparty’s obligations are liquid or illiquid.
Valuation techniques NatWest Group derives the fair value of its instruments differently depending on whether the instrument is a non-modelled or a modelled product.
Interest rates - these are principally benchmark interest rates such as the London Interbank Offered Rate (LIBOR), Overnight Index Swaps (OIS) rate and other quoted interest rates in the swap, bond and futures markets.
Foreign currency exchange rates - there are observable prices both for spot and forward contracts and futures in the world's major currencies.
Valuation control NatWest Group's control environment for the determination of the fair value of financial instruments includes formalised protocols for the review and validation of fair values independent of the businesses entering into the transactions.
Independent price verification (IPV) is a key element of the control environment. Valuations are first performed by the business which entered into the transaction. Such valuations may be directly from available prices, or may be derived using a model and variable model inputs. These valuations are reviewed, and if necessary amended, by a team independent of those trading the financial instruments, in the light of available pricing evidence.
Financial statem ents 12 Financial instruments - valuation continued NatWest Group contributes to consensus pricing services where there is a significant interest either from a positional point of view or to test models for future business use. Data sourced from consensus pricing services are used for a combination of control processes including direct price testing, evidence of observability and model testing. In practice this means that NatWest Group submits prices for all material positions for which a service is available.
Where unobservable inputs are used, NatWest Group may determine a range of possible valuations derived from differing stress scenarios to determine the sensitivity associated with the valuation. When establishing the fair value of a financial instrument using a valuation technique, NatWest Group considers adjustments to the modelled price which market participants would make when pricing that instrument. Such adjustments include the credit quality of the counterparty and adjustments to compensate for model limitations.
Collateral held under a credit support agreement is factored into the CVA calculation. In such cases where NatWest Group holds collateral against counterparty exposures, CVA is held to the extent that residual risk remains.
The discount rates applied to derivative cash flows in determining fair value reflect any underlying collateral agreements. Collateralised derivatives are generally discounted at the relevant OIS-related rates at an individual trade level. Reserves are held to the extent that the discount rates applied do not reflect all of the terms of the collateral agreements.
Where system generated valuations do not accurately recover market prices, manual valuation adjustments are applied either at a position or portfolio level. Manual adjustments are subject to the scrutiny of independent control teams and are subject to monthly review by senior management.
Financial statem ents 12 Financial instruments – valuation: Level 3 ranges of unobservable inputs
Financial instrument Valuation technique Unobservable inputs Units Low High Low High
Discount cash flow Credit spreads bps 69 119 53 101 Discount cash flow Discount margin bps 51 226 — —
Trading liabilities and Other financial liabilities Deposits Price-based Price % — 100 — 98
Debt securities in issue Price-based Price CCY — — 44 JPY 146 EUR
Interest rate & FX Option pricing Correlation % (50) 100 (50) 99
(5) Valuation: for private equity investments, values may be estimated by looking at past prices of similar stocks and from valuation statements where valuations are usually derived from earnings measures such as EBITDA or net asset value (NAV). Similarly for equity or bond fund investments, prices may be estimated from valuation or credit statements using NAV or similar measures.
Financial statem ents 12 Financial instruments – valuation: areas of judgment Whilst the business has simplified, the diverse range of products historically traded by NatWest Group results in a wide range of instruments that are classified into level 3 of the hierarchy. Whilst the majority of these instruments naturally fall into a particular level, for some products an element of judgment is required. The majority of NatWest Group financial instruments carried at fair value are classified as level 2. IFRS requires extra disclosures in respect of level 3 instruments.
Alternative assumptions are determined with reference to all available evidence including consideration of the following: quality of independent pricing information taking into account consistency between different sources, variation over time, perceived tradability or otherwise of available quotes; consensus service dispersion ranges; volume of trading activity and market bias (e.g. one-way inventory); day 1 profit or loss arising on new trades; number and nature of market participants; market conditions; modelling consistency in the market; size and nature of risk; length of holding of position; and market intelligence.
Level 3 The following table shows the movement in level 3 assets and liabilities in the year.
Amounts recorded in the income statement (1) 127 (21) 106 (67) (418) (1) (419) 162 Amounts recorded in the statement of comprehensive income — 63 63 — — 86 86 —
Financial statem ents 12 Financial instruments: fair value of financial instruments measured at amortised cost The following table shows the carrying value and fair value of financial instruments measured at amortised cost on the balance sheet.
Settlement balances 5.5 Other financial liabilities - debt securities in issue 43.4 44.6 — 34.7 9.9
Notes in circulation 2.1 *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.
Liabilities *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.
Note: (1) More than 12 months 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
Assets and liabilities by contractual cash flow maturity The tables on the following page, show the contractual undiscounted cash flows receivable and payable, up to a period of 20 years, including future receipts and payments of interest of financial assets and liabilities by contractual maturity. The balances in the following tables do not agree directly with the consolidated balance sheet, as the tables include all cash flows relating to principal and future coupon payments, presented on an undiscounted basis. The tables have been prepared on the following basis: Financial assets have been reflected in the time band of the latest date on which they could be repaid, unless earlier repayment can be demanded by NatWest Group. Financial liabilities are included at the earliest date on which the counterparty can require repayment, regardless of whether or not such early repayment results in a penalty. If the repayment of a financial instrument is triggered by, or is subject to, specific criteria such as market price hurdles being reached, the asset is included in the time band that contains the latest date on which it can be repaid, regardless of early repayment.
The maturity of guarantees and commitments is based on the earliest possible date they would be drawn in order to evaluate NatWest Group’s liquidity position.
Guarantees and commitments notional amount 124,166 — — — — —
(2) 3 to 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.
Financial statem ents 14 Loan impairment provisions Loan exposure and impairment metrics The table below summarises loans and related credit impairment measures within the scope of ECL framework.
Of which: individual 194 303 Of which: collective 422 287 ECL loss rate - annualised (basis points) (3) 87 20 Amounts written off 937 792 Of which: individual 191 372 Of which: collective 746 420 *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.
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 page 180 for Financial instruments within the scope of the IFRS 9 ECL framework for further details. Other financial assets within the scope of the IFRS 9 ECL framework were cash and balances at central banks totalling £122.8 billion (2019 – £79.2 billion) and debt securities of £53.8 billion (2019 – £59.4 billion).
Financial statem ents 14 Loan impairment provisions continued Credit risk enhancement and mitigation For information on Credit risk enhancement and mitigation held as security, refer to Risk and capital management – Credit risk enhancement and mitigation section.
IFRS 9 requires that at each reporting date, an entity shall assess whether the credit risk on an account has increased significantly since initial recognition. Part of this assessment requires a comparison to be made between the current lifetime PD (i.e. the probability of default over the remaining lifetime at the reporting date) with the equivalent lifetime PD as determined at the date of initial recognition.
Mandatory fair value through profit or loss — — — 305 305 45 365 715 Fair value through other comprehensive income 18,437 13,981 8,786 7,130 48,334 949 — 49,283
Goodwill Other (1) Total Goodwill Other (1) Total Cost £m £m £m £m £m £m
Intangible assets other than goodwill are reviewed for indicators of impairment. In 2020 £9 million (2019 - £44 million) of previously capitalised software was impaired primarily as a result of software which is no longer expected to yield future economic benefit.
NatWest Group’s goodwill acquired in business combinations analysed by reportable segment is in Note 4 Segmental analysis. It is reviewed annually at 31 December for impairment. No impairment was indicated at 31 December 2020 or 2019.
Recoverable amount is the higher of fair value less costs of disposal and value in use. Value in use is the present value of expected future cash flows from the CGU. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants.
Critical accounting policy: Goodwill Critical estimates Impairment testing involves a number of judgments. The key judgments are the five-year cash flow forecast, the long-term growth rate used to derive the terminal value, and the discount rate. Future value in use is primarily affected by changes in profitability, and changes in discount rate. Adverse changes could lead to value in use falling below carrying value. The most likely cause for this would be a failure to meet budgets, including cost targets, or external downgrades in the UK economy.
The impact of reasonably possible changes to the more significant variables in the value in use calculations are presented below. This reflects the sensitivity of the VIU to each key assumption on its own. It is possible that more than one change may occur at the same time.
Note: (1) Average Cost:income ratio % over the 5-year forecast period.
Financial statem ents 16 Intangible assets continued The following table gives the percentage change in key assumptions that would reduce the headroom of CGUs to nil.
Interests in associates (1) 449 436 Property, plant and equipment 4,418 4,928 Pension schemes in net surplus (Note 5) 723 614
Customer deposits - designated as at fair value through profit or loss 796 — Debt securities in issue - designated as at fair value through profit or loss 1,607 2,258
Dated loan capital 8,530 7,775 Undated loan capital 1,287 2,058 Preference shares 145 146
Redemptions NatWest Group plc €1,000 million 3.63% dated notes 2024 (callable March 2019) Tier 2 — 855 US$2,250 million 6.13% dated notes 2022 (partial redemption) Tier 2 499 — US$1,000 million 6.10% dated notes 2023 (partial redemption) Tier 2 358 — US$2,000 million 7.5% dated notes 2020 Tier 2 1,528 — US$762 million 7.648% undated notes (partial redemption) Ineligible 497 —
NatWest Markets Plc £35 million 5.5% fixed rate undated subordinated notes (callable December 2019) Tier 2 — 35 US$125.6 million floating rate notes 2020 Tier 2 97 —
NWM N.V. and subsidiaries US$16 million floating rate notes 2019 Tier 2 — 10 US$71.8 million floating rate notes 2019 Tier 2 — 56
Payment Other Litigation protection customer and other insurance (1) redress regulatory Other (2) Total Provisions for liabilities and charges £m £m £m £m £m
Estimates - Provisions are liabilities of uncertain timing or amount and are recognised when there is a present obligation as a result of a past event, the outflow of economic benefit is probable and the outflow can be estimated reliably. Any difference between the final outcome and the amounts provided will affect the reported results in the period when the matter is resolved.  PPI: The provision reflects the estimated cost of PPI redress attributable to claims prior to the Financial Conduct Authority (FCA) complaint deadline of 29 August 2019. All pre-deadline complaints have been processed which removes complaint volume estimation uncertainty from the provision estimate. NatWest Group continues to conclude remaining bank-identified closure work and conclude cases with the Financial Ombudsmen Service.
 Other customer redress: Provisions reflect the estimated cost of redress attributable to claims where it is determined that a present obligation exists.
 Litigation and other regulatory: NatWest Group is engaged in various legal proceedings, both in the UK and in overseas jurisdictions, including the US. For further information in relation to legal proceedings and discussion of the associated uncertainties, refer to Note 26.
Financial statem ents 21 Share capital and other equity Number of shares
Ordinary shares There is no authorised share capital under the company’s constitution. At 31 December 2020, the directors had authority granted at the 2020 Annual General Meeting to issue up to £604,695,460 million nominal of ordinary shares other than by pre-emption to existing shareholders.
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 Annual General Meeting on 29 April 2020.
In response to a formal request from the Prudential Regulatory Authority, the Board cancelled the final and special ordinary dividend payments in relation to the 2019 financial year and did not submit them for approval at the AGM held on 29 April 2020.
The company has announced that the directors have recommended a final dividend of £364 million, or 3p per ordinary share (2019 – nil) subject to shareholder approval at the Annual General Meeting on 28 April 2021.
If approved, payment will be made on 4 May 2021 to shareholders on the register at the close of business on 26 March 2021. The exdividend date will be 25 March 2021.
Financial statem ents 21 Share capital and other equity continued Number of shares Redemption Redemption
Non-cumulative preference shares classified as equity in issue Interest rate date on or after price per share
(4) Issued in November 2020. In the event of conversion, converted into ordinary shares at a price of £1.754 nominal per £1 share.
Capital recognised for regulatory purposes cannot be redeemed without Prudential Regulation Authority consent. This includes ordinary shares, preference shares and additional Tier 1 Instruments.
Merger reserve - the merger reserve comprises the premium on shares issued to acquire NatWest Bank Plc, less goodwill amortisation charged under previous GAAP.
Capital redemption reserve - under UK companies legislation, when shares are redeemed or purchased wholly or partly out of the company's profits, the amount by which the company's issued share capital is diminished must be transferred to the capital redemption reserve. The capital maintenance provisions of UK companies legislation apply to the capital redemption reserve as if it were part of the company’s paid up share capital. On 15 June 2017, the Court of Session approved a reduction of NatWest plc capital so that the amounts which stood to the credit of the capital redemption reserve were transferred to retained earnings.
Additional Tier 1 notes US$2.0 billion 7.5% notes callable August 2020 (1) 1,277 1,277 US$1.15 billion 8% notes callable August 2025 (1)
US$2.65 billion 8.625% notes callable August 2021 (2) 2,047 2,047 2,047 US$1.5 billion 6.000% notes callable December 2025 - June 2026 (3) — — GBP£1.0 billion 5.125% notes callable May - November 2027 (4)
Amounts recognised on balance sheet Right of use assets included in property, plant and equipment (2) 955 1,162 Additions to right of use assets 80 135
The total cash outflow for leases is £220 million (2019: £222 million), including payment of principal amount of £179 million (2019: £181 million) which are included in the operating activities in cash flow statement.
Lessor Acting as a lessor, NatWest Group provides asset finance to its customers. It purchases plant, equipment and intellectual property, renting them to customers under lease arrangements that, depending on their terms, qualify as either operating or finance leases.
Amounts included in consolidated income statement Finance leases Finance income on the net investment in leases 289 314
Lease payments total 10,360 10,548 Unguaranteed residual values (232) (215) Future drawdowns (22) (30) Unearned income (1,081) (1,196) Present value of lease payments 9,025 9,107
Lending of own issued securities NatWest Group has issued, retained, and lent debt securities under securities lending arrangements. Under standard terms in the UK and US markets, the recipient has an unrestricted right to sell or repledge collateral, subject to returning equivalent securities on maturity of the transaction. NatWest Group retains all of the risks and rewards of own issued liabilities lent under such arrangements and does not recognise them. At 31 December 2020, £1,893 million secured and nil unsecured (2019 - £1,704 million secured, £424 million unsecured) of own issued liabilities have been retained and lent under securities lending arrangements. At 31 December 2020, £2,029 million (2019 - £1,745 million) of loans and other debt instruments provided security for secured own issued liabilities that have been retained and lent under securities lending arrangements.
Unconsolidated structured entities NatWest Group’s interest in unconsolidated structured entities is analysed below.
Financial statem ents 24 Asset transfers Transfers that do not qualify for derecognition NatWest Group enters into securities repurchase, lending and total return transactions in accordance with normal market practice which includes the provision of additional collateral if necessary. Under standard terms in the UK and US markets, the recipient has an unrestricted right to sell or repledge collateral, subject to returning equivalent securities on settlement of the transaction.
Assets pledged as collateral NatWest Group pledges collateral with its counterparties in respect of derivative liabilities and bank and stock borrowings.
Assets pledged against liabilities £m £m Trading assets 28,728 27,918 Loans to banks - amortised cost 49 39 Loans to customers - amortised cost 15,939 17,920 Other financial assets (1) 4,966 4,688
Own asset securitisations In own-asset securitisations, the pool of assets held by the SE is either originated by NatWest Group, or (in the case of whole loan programmes) purchased from third parties.
Assets parties Group (1) Total Assets parties Group (1) Total Asset type £m £m £m £m £m £m £m £m
Note: (1) Debt securities retained by NatWest Group may be pledged with central banks.
Financial statem ents 25 Capital resources The minimum requirement for own funds is set out under the Capital Requirements Regulation on a legal entity and consolidated basis. Transitional arrangements on the phasing in of end-point capital resources are set by the relevant regulatory authority.
The capital resources under the PRA transitional basis for NatWest Group are set out below.
CET1 capital 31,447 29,054 Additional Tier 1 (AT1) capital Qualifying instruments and related share premium 4,983 4,051 Qualifying instruments and related share premium subject to phase out 690 1,366 Qualifying instruments issued by subsidiaries and held by third parties subject to phase out 140 140 AT1 capital 5,813 5,557
Qualifying Tier 2 capital Qualifying instruments and related share premium 4,882 4,867 Qualifying instruments issued by subsidiaries and held by third parties 1,191 1,345 Other regulatory adjustments 400 —
It is NatWest Group policy to maintain a strong capital base, to expand it as appropriate and to utilise it efficiently throughout its activities to optimise the return to shareholders while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, NatWest Group has regard to the supervisory requirements of the PRA. The PRA uses capital ratios as a measure of capital adequacy in the UK banking sector, comparing a bank's capital resources with its risk-weighted assets (the assets and off-balance sheet exposures are ‘weighted’ to reflect the inherent credit and other risks); by international agreement, the Pillar 1 capital ratios should be not less than 8% with a Common Equity Tier 1 component of not less than 4.5%. NatWest Group has complied with the PRA’s capital requirements throughout the year.
Standby facilities, credit lines and other commitments 62,794 27,476 26,483 7,414 124,167 119,760
Banking commitments and contingent obligations, which have been entered into on behalf of customers and for which there are corresponding obligations from customers, are not included in assets and liabilities. NatWest Group's maximum exposure to credit loss, in the event of its obligation crystallising and all counterclaims, collateral or security proving valueless, is represented by the contractual nominal amount of these instruments included in the table above. These commitments and contingent obligations are subject to NatWest Group's normal credit approval processes.
Standby facilities and credit lines - under a loan commitment, NatWest Group agrees to make funds available to a customer in the future. Loan commitments, which are usually for a specified term, may be unconditionally cancellable or may persist, provided all conditions in the loan facility are satisfied or waived. Commitments to lend include commercial standby facilities and credit lines, liquidity facilities to commercial paper conduits and unutilised overdraft facilities.
Contractual obligations for future expenditure not provided for in the accounts The following table shows contractual obligations for future expenditure not provided for in the accounts at the year end.
Note: (1) Of which due within 1 year: £267 million (2019 – £285 million).
The Financial Services Compensation Scheme The Financial Services Compensation Scheme (FSCS), the UK's statutory fund of last resort for customers of authorised financial services firms, pays compensation if a firm is unable to meet its obligations. The FSCS funds compensation for customers by raising management expenses levies and compensation levies on the industry. In relation to protected deposits, each deposit-taking institution contributes towards these levies in proportion to their share of total protected deposits on 31 December of the year preceding the scheme year (which runs from 1 April to 31 March), subject to annual maxima set by the Prudential Regulation Authority. In addition, the FSCS has the power to raise levies on a firm that has ceased to participate in the scheme and is in the process of ceasing to be authorised for the costs that it would have been liable to pay had the FSCS made a levy in the financial year it ceased to be a participant in the scheme.
NatWest Group recognises a provision for a liability in relation to these Matters when it is probable that an outflow of economic benefits will be required to settle an obligation resulting from past events, and a reliable estimate can be made of the amount of the obligation.
In many of these Matters, it is not possible to determine whether any loss is probable, or to estimate reliably the amount of any loss, either as a direct consequence of the relevant proceedings and regulatory matters or as a result of adverse impacts or restrictions on NatWest Group’s reputation, businesses and operations. Numerous legal and factual issues may need to be resolved, including through potentially lengthy discovery and document production exercises and determination of important factual matters, and by addressing novel or unsettled legal questions relevant to the proceedings in question, before a liability can reasonably be estimated for any claim. NatWest Group cannot predict if, how, or when such claims will be resolved or what the eventual settlement, damages, fine, penalty or other relief, if any, may be, particularly for claims that are at an early stage in their development or where claimants seek substantial or indeterminate damages.
The future outflow of resources in respect of any Matter may ultimately prove to be substantially greater than or less than the aggregate provision that NatWest Group has recognised. Where (and as far as) liability cannot be reasonably estimated, no provision has been recognised. NatWest Group expects that in future periods, additional provisions, settlement amounts and customer redress payments will be necessary, in amounts that are expected to be substantial in some instances.
For a discussion of certain risks associated with NatWest Group’s litigation and regulatory matters (including investigations and customer redress programmes), see the Risk Factor relating to legal, regulatory and governmental actions and investigations set out on page 360.
Litigation Residential mortgage-backed securities (RMBS) litigation in the US NatWest Group companies continue to defend RMBS-related claims in the US in which plaintiffs allege that certain disclosures made in connection with the relevant offerings of RMBS contained materially false or misleading statements and/or omissions regarding the underwriting standards pursuant to which the mortgage loans underlying the RMBS were issued. The remaining RMBS lawsuits against NatWest Group companies consist of cases filed by the Federal Deposit Insurance Corporation and the State of New Mexico that together involve the issuance of less than US$400 million of RMBS issued primarily from 2005 to 2007. In addition, NWMSI previously agreed to settle a purported RMBS class action entitled New Jersey Carpenters Health Fund v. Novastar Mortgage Inc. et al. for US$55.3 million. This was paid into escrow pending court approval of the settlement, which was granted in March 2019, but which is now the subject of an appeal by a class member who does not want to participate in the settlement.
London Interbank Offered Rate (LIBOR) and other rates litigation NWM Plc and certain other members of NatWest Group, including NatWest Group plc, are defendants in a number of class actions and individual claims pending in the United States District Court for the Southern District of New York (SDNY) with respect to the setting of LIBOR and certain other benchmark interest rates. The complaints allege that certain members of NatWest Group and other panel banks violated various federal laws, including the US commodities and antitrust laws, and state statutory and common law, as well as contracts, by manipulating LIBOR and prices of LIBOR-based derivatives in various markets through various means.
Several class actions relating to USD LIBOR, as well as more than two dozen non-class actions concerning USD LIBOR, are part of a coordinated proceeding in the SDNY. In December 2016, the SDNY held that it lacks personal jurisdiction over NWM Plc with respect to certain claims. As a result of that and other decisions, all NatWest Group companies have been dismissed from each of the USD LIBOR-related class actions (including class actions on behalf of over-the-counter plaintiffs, exchange-based purchaser plaintiffs, bondholder plaintiffs, and lender plaintiffs), but seven non-class cases in the co-ordinated proceeding remain pending against NatWest Group defendants. The dismissal of NatWest Group companies for lack of personal jurisdiction is the subject of a pending appeal to the United States Court of Appeals for the Second Circuit. In March 2020, NatWest Group companies finalised a settlement resolving the class action on behalf of bondholder plaintiffs (those who held bonds issued by nondefendants on which interest was paid from 2007 to 2010 at a rate expressly tied to USD LIBOR). The amount of the settlement (which was covered by an existing provision) has been paid into escrow pending court approval of the settlement.
In addition, there are two class actions relating to JPY LIBOR and Euroyen TIBOR. The first class action, which relates to Euroyen TIBOR futures contracts, was dismissed by the SDNY in September 2020 on legal grounds, and the plaintiffs have commenced an appeal to the United States Court of Appeals for the Second Circuit. The second class action, which relates to other derivatives allegedly tied to JPY LIBOR and Euroyen TIBOR, is the subject of a motion to dismiss that remains pending in the SDNY.
Financial statem ents 26 Memorandum items continued Litigation and regulatory matters In addition to the above, five other class action complaints were filed against NatWest Group companies in the SDNY, each relating to a different reference rate. The SDNY dismissed all claims against NWM Plc in the case relating to Euribor for lack of personal jurisdiction in February 2017. The SDNY dismissed, for various reasons, the case relating to the Singapore Interbank Offered Rate and Singapore Swap Offer Rate in July 2019, the case relating to Pound Sterling LIBOR in August 2019, and the case relating to Swiss Franc LIBOR in September 2019. Plaintiffs are appealing each of these four dismissals to the United States Court of Appeals for the Second Circuit. In the class action relating to Swiss Franc LIBOR, NWM Plc and the plaintiffs reached a settlement in principle in February 2021. The amount of the settlement, which remains subject to final documentation and court approval, is covered by an existing provision. In the fifth class action, which relates to the Australian Bank Bill Swap Reference Rate, the SDNY in February 2020 declined to dismiss the amended complaint as against NWM Plc and certain other defendants, but dismissed it as to other members of NatWest Group (including NatWest Group plc). The claims against non-dismissed defendants (including NWM Plc) are now proceeding in discovery.
NWM Plc was also named as a defendant in a motion to certify a class action relating to LIBOR in the Tel Aviv District Court in Israel. NWM Plc filed a motion for cancellation of service, which was granted in July 2020. The claimants appealed that decision and in November 2020 the appeal was refused and the claim dismissed by the Appellate Court. The claim could in future be recommenced depending on the outcome of a separate case under appeal to Israel’s Supreme Court.
In January 2019, a class action antitrust complaint was filed in the SDNY alleging that the defendants (USD ICE LIBOR panel banks and affiliates) have conspired to suppress USD ICE LIBOR from 2014 to the present by submitting incorrect information to ICE about their borrowing costs. The NatWest Group defendants are NatWest Group plc, NWM Plc, NWMSI and NWB Plc. The defendants made a motion to dismiss this case, which was granted by the court in March 2020. Plaintiffs’ appeal of the dismissal is pending in the United States Court of Appeals for the Second Circuit.
In November 2020, proceedings were issued in the High Court of Justice of England and Wales against NWM Plc by a claimant who seeks an account of profits or damages in respect of alleged historic FX trading misconduct. The claimant has also issued similar proceedings against a number of other banks. The claim against NWM Plc makes allegations of fraud, deceit and dishonesty, as well as breaches of contract, fiduciary duties, duties of confidence and other matters, in respect of FX services provided by NWM Plc during the period 2006 to 2010. NWM Plc awaits service of the claim.
Two motions to certify FX-related class actions were filed in the Tel Aviv District Court in Israel in September and October 2018, and were subsequently consolidated into one motion. The consolidated motion, which names The Royal Bank of Scotland plc (now NWM Plc) as the defendant, was served on NWM Plc in May 2020. NWM Plc has filed a motion for cancellation of service.
Swaps antitrust litigation NWM Plc and other members of NatWest Group, including NatWest Group plc, as well as a number of other interest rate swap dealers, are defendants in several cases pending in the SDNY alleging violations of the US antitrust laws in the market for interest rate swaps. There is a consolidated class action complaint on behalf of persons who entered into interest rate swaps with the defendants, as well as non-class action claims by three swap execution facilities (TeraExchange, Javelin, and trueEx). The plaintiffs allege that the swap execution facilities would have successfully established exchange-like trading of interest rate swaps if the defendants had not unlawfully conspired to prevent that from happening through boycotts and other means. Discovery in these cases is complete, and the plaintiffs’ motion for class certification remains pending.
Odd lot corporate bond trading antitrust litigation NWMSI is the subject of a class action antitrust complaint filed in the SDNY against NWMSI and several other securities dealers. The complaint alleges that, from August 2006 to the present, the defendants conspired artificially to widen spreads for odd lots of corporate bonds bought or sold in the United States secondary market and to boycott electronic trading platforms that would have allegedly promoted pricing competition in the market for such bonds. Defendants filed a motion to dismiss the operative complaint in this matter in December 2020.
EUA trading litigation HMRC issued a tax assessment in 2012 against NatWest Group plc for approximately £86 million regarding a value-added-tax (VAT) matter in relation to the trading of European Union Allowances (EUAs) by a joint venture subsidiary in 2009. NatWest Group plc has lodged an appeal, which is due to be heard in June 2021, before the First-tier Tribunal (Tax), a specialist tax tribunal, challenging the assessment (the ‘Tax Dispute’). In the event that the assessment is upheld, interest and costs would be payable, and a penalty of up to 100 per cent of the VAT held to have been legitimately denied by HMRC could also be levied.
Separately, NWM Plc was a named defendant in civil proceedings before the High Court of Justice of England and Wales brought in 2015 by ten companies (all in liquidation) (the ‘Liquidated Companies’) and their respective liquidators (together, ‘the Claimants’). The Liquidated Companies previously traded in EUAs in 2009 and were alleged to be defaulting traders within (or otherwise connected to) the EUA supply chains forming the subject of the Tax Dispute. The Claimants claimed approximately £71.4 million plus interest and costs and alleged that NWM Plc dishonestly assisted the directors of the Liquidated Companies in the breach of their statutory duties and/or knowingly participated in the carrying on of the business of the Liquidated Companies with intent to defraud creditors. The trial in that matter concluded in July 2018 and judgment was issued in March 2020. The court held that NWM Plc and Mercuria Energy Europe Trading Limited were liable for dishonestly assisting and knowingly being a party to fraudulent trading during a seven business day period in 2009. In October 2020, the High Court quantified damages against NWM Plc at £45 million plus interest and costs, and permitted it to appeal to the Court of Appeal. The appeal hearing is due to take place in March 2021.
Offshoring VAT assessments HMRC issued protective tax assessments in 2018 against NatWest Group plc totalling £143 million relating to unpaid VAT in respect of the UK branches of two NatWest Group companies registered in India. NatWest Group formally requested reconsideration by HMRC of their assessments, and this process was completed in November 2020. HMRC upheld their original decision and, as a result, NatWest Group plc lodged an appeal with the Tax Tribunal and an application for judicial review with the High Court of Justice of England and Wales, both in December 2020. In order to lodge the appeal with the Tax Tribunal, NatWest Group plc was required to pay the £143 million to HMRC, and payment was made on 16 December 2020.
In October 2017, the trial court dismissed claims against NWB Plc with respect to two of the 18 terrorist attacks at issue. In March 2018, the trial court granted a request by NWB Plc for leave to file a renewed summary judgment motion in respect of the remaining claims, and in March 2019, the court granted summary judgment in favour of NWB Plc. The plaintiffs’ appeal of the judgment to the United States Court of Appeals for the Second Circuit is pending.
The first of these actions was filed in the United States District Court for the Eastern District of New York in November 2014. In September 2019, the district court dismissed the case, finding that the claims were deficient for several reasons, including lack of sufficient allegations as to the alleged conspiracy and causation. The plaintiffs are appealing the decision to the United States Court of Appeals for the Second Circuit. Another action, filed in the SDNY in 2017, was dismissed in March 2019 on similar grounds, but remains subject to appeal to the United States Court of Appeals for the Second Circuit. Other follow-on actions that are substantially similar to the two that have now been dismissed are pending in the same courts.
Regulatory matters (including investigations and customer redress programmes) NatWest Group’s businesses and financial condition can be affected by the actions of various governmental and regulatory authorities in the UK, the US, the EU and elsewhere. NatWest Group has engaged, and will continue to engage, in discussions with relevant governmental and regulatory authorities, including in the UK, the US, the EU and elsewhere, on an ongoing and regular basis, and in response to informal and formal inquiries or investigations, regarding operational, systems and control evaluations and issues including those related to compliance with applicable laws and regulations, including consumer protection, investment advice, business conduct, competition/anti-trust, VAT recovery, anti-bribery, anti-money laundering and sanctions regimes.
The NatWest Markets business in particular has been providing, and continues to provide, information regarding a variety of matters, including, for example, offering of securities, the setting of benchmark rates and related derivatives trading, conduct in the foreign exchange market, product mis-selling and various issues relating to the issuance, underwriting, and sales and trading of fixed-income securities, including structured products and government securities, some of which have resulted, and others of which may result, in investigations or proceedings.
Any matters discussed or identified during such discussions and inquiries may result in, among other things, further inquiry or investigation, other action being taken by governmental and regulatory authorities, increased costs being incurred by NatWest Group, remediation of systems and controls, public or private censure, restriction of NatWest Group’s business activities and/or fines. Any of the events or circumstances mentioned in this paragraph or below could have a material adverse effect on NatWest Group, its business, authorisations and licences, reputation, results of operations or the price of securities issued by it, or lead to material additional provisions being taken.
Investigations US investigations relating to fixed-income securities In the US, NatWest Group companies have in recent years been involved in investigations relating to, among other things, issuance, underwriting and trading in RMBS and other mortgage-backed securities and collateralised debt obligations (CDOs). Investigations by the US Department of Justice (DoJ) and several state attorneys general relating to the issuance and underwriting of RMBS were previously resolved. In December 2020, RBS Financial Products, Inc. agreed to pay US$18.2 million to resolve such an investigation by the State of Maryland. RBS Financial Products, Inc. has paid the settlement amount, which was covered by an existing provision.
In October 2017, NWMSI entered into a non-prosecution agreement (NPA) with the United States Attorney for the District of Connecticut (USAO) in connection with alleged misrepresentations to counterparties relating to secondary trading in various forms of assetbacked securities. In the NPA, the USAO agreed not to file criminal charges relating to certain conduct and information described in the NPA, conditioned on NWMSI and affiliated companies complying with the NPA’s reporting and conduct requirements during its term, including by not engaging in conduct during the NPA that the USAO determines was a felony under federal or state law or a violation of the anti-fraud provisions of the United States securities law.
Systematic Anti-Money Laundering Programme assessment In December 2018, the FCA commenced a Systematic Anti-Money Laundering Programme assessment of NatWest Group. The FCA provided its written findings to NatWest Group in June 2019, and NatWest Group responded on 8 August 2019. On 28 August 2019, the FCA instructed NatWest Group to appoint a Skilled Person under section 166 of the Financial Services and Markets Act 2000 to provide assurance on financial crime governance arrangements in relation to two financial crime change programmes. NatWest Group is cooperating with the Skilled Person’s review, which is ongoing.
Customer redress programmes FCA review of NatWest Group’s treatment of SMEs In 2014, the FCA appointed an independent Skilled Person under section 166 of the Financial Services and Markets Act 2000 to review NatWest Group’s treatment of SME customers whose relationship was managed by NatWest Group’s Global Restructuring Group (GRG) in the period 1 January 2008 to 31 December 2013. In response to the Skilled Person’s final report and update in 2016, NatWest Group announced redress steps for SME customers in the UK and the Republic of Ireland that were in GRG between 2008 and 2013. These steps were (i) an automatic refund of certain complex fees; and (ii) a new complaints process, overseen by an independent third party. The complaints process has since closed to new complaints.
NatWest Group’s remaining provisions in relation to these matters at 31 December 2020 were £30 million.
Investment advice review During October 2019, the FCA notified NatWest Group of its intention to appoint a Skilled Person under section 166 of the Financial Services and Markets Act 2000 to conduct a review of whether NatWest Group’s past business review of investment advice provided during 2010 to 2015 was subject to appropriate governance and accountability and led to appropriate customer outcomes. NatWest Group is co-operating with the Skilled Person’s review and, subject to discussion with the FCA, expects to conduct additional review / remediation work during 2021. Accordingly, NatWest Group recognised an increased provision in relation to these matters at 31 December 2020.
Review and investigation of treatment of tracker mortgage customers in Ulster Bank Ireland DAC In December 2015, correspondence was received from the CBI setting out an industry examination framework in respect of the sale of tracker mortgages from approximately 2001 until the end of 2015. The redress and compensation phase has concluded, although an appeals process is currently anticipated to run until at least the end of 2021. NatWest Group has made provisions totalling €335 million (£301 million), of which €284 million (£255 million) had been utilised by 31 December 2020 in respect of redress and compensation.
Fair value given for businesses acquired (1) — (55) (113) Additional investment in associates (40) — (9) Net outflow of cash in respect of acquisitions (40) (55) (122)
Sale of interests in associates 27 — — Net assets sold 288 351 — Profit on disposal 3 — — Net inflow of cash in respect of disposals 318 351 —
AT1 reclassification to subordinated liabilities (1,277) — — 1,632 — —
Interest on subordinated liabilities/MRELs 509 506 461 673 645 415 29 Analysis of cash and cash equivalents 2020 2019 2018 £m £m £m
Other financial assets 173 459 40 Loans to banks - amortised cost (1) 5,317 6,558 5,918 Cash and cash equivalents 139,199 100,588 108,936
Note: (1) Includes cash collateral posted with bank counterparties in respect of derivative liabilities of £7,592 million (2019 - £7,570 million; 2018 - £7,302 million).
Non-executive Directors 1,708 1,881 Chairman and executive directors - emoluments 4,349 4,783
Amounts receivable under long-term incentive plans and share option plans 609 741
The executive directors may participate in the company's long-term incentive plans, executive share option and sharesave schemes and details of their interests in the company's shares arising from their participation are given in the directors' remuneration report. Details of the remuneration received by each director are also given in the directors' remuneration report.
Key management comprises members of the NatWest Group plc and NWH Ltd Boards, members of the NatWest Group plc and NWH Ltd Executive Committees, and the Chief Executives of NatWest Markets Plc and RBS International (Holdings) Limited. This is on the basis that these individuals have been identified as Persons Discharging Managerial Responsibilities of NatWest Group plc under the new governance structure.
Financial statem ents 32 Related parties UK Government The UK Government through HM Treasury is the ultimate controlling party of The NatWest Group plc. The UK government’s shareholding is managed by UK Government Investments Limited, a company wholly owned by the UK Government. As a result the UK Government and UK Government controlled bodies are related parties of the Group.
NatWest Group provides guarantees for certain subsidiary liabilities to the Bank of England.
On 18 February 2021, NatWest Group reached final agreement with the Official Receiver in relation to a portfolio of historical PPI claims. NatWest Group carried adequate provision for this outcome and there is no further charge/release as a result.
Other liabilities 151 168 Total liabilities 30,976 28,296 Owners’ equity 44,439 53,787 Total liabilities and equity 75,415 82,083
Called-up share capital - at 1 January (1) 12,094 12,049 11,965 Ordinary shares issued 35 45 84 At 31 December 12,129 12,094 12,049
Cash flow hedging reserve - at 1 January 67 83 20 Amount recognised in equity 4 18 103 Amount transferred from equity to earnings (33) (39) (25)
Notes: (1) Details of the company’s share capital are set out in Note 21 to the consolidated accounts. (2) Paid-in equity reclassified to liabilities as the result of a call of US$2 billion AT1 notes in June 2020, redeemed in August 2020. (3) AT1 capital notes totalling US$1.5 billion less fees issued in June 2020. In November 2020 AT1 capital notes totalling £1.0 billion less fees were issued. (4) During 2018, non-cumulative US dollar, Euro and Sterling preference shares were redeemed.
Movement in MRELs (147) (142) (3,317) Movement in subordinated liabilities (1,972) (709) (710) Issue of ordinary shares 109 17 144
Effects of exchange rate changes on cash and cash equivalents 1 (1) 1
Net (decrease)/increase in cash and cash equivalents (351) 232 62 Cash and cash equivalents at 1 January 539 307 245 Cash and cash equivalents at 31 December (2) 188 539 307
Financial statem ents 1. Presentation of accounts The accounts are prepared on a going concern basis (refer to the Report of the directors on page 153) and in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006.
2. Critical accounting policies and sources of estimation uncertainty The reported results of the company are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. The judgements and assumptions involved in the company’s accounting policies that are considered by the Board to be the most important to the portrayal of its financial condition are those involved in assessing the impairment, if any, in its investments in subsidiaries. At each reporting date, the company assesses whether there is any indication that its investment in a subsidiary is impaired. If any such indication exists, the company undertakes an impairment test by comparing the carrying value of the investment in the subsidiary with its estimated recoverable amount. The recoverable amount of an investment in a subsidiary is the higher of its fair value less cost to sell and its value in use. Impairment testing inherently involves a number of judgments: the choice of appropriate discount and growth rates; and the estimation of fair value.
3 Derivatives with subsidiaries – designated hedges Fair value hedging is used to hedge loans and other financial liabilities, and cash flow hedging is used to hedge other financial liabilities and subordinated liabilities.
Fair value hedging - interest rate contracts 25.0 1,537 359 25.2 953 243 Cash flow hedging - exchange rate contracts 5.8 7 3 8.4 23 —
Derivatives with subsidiaries 1,580 1,580 Amounts due from subsidiaries 15,506 — 11,404 — 26,910 Other financial assets 576 3 579 Investment in Group undertakings 46,229 46,229 Other assets 117 117
Derivatives with subsidiaries 979 979 Amounts due from subsidiaries 14,029 — 10,984 5 25,018 Other financial assets 274 3 277 Investment in Group undertakings 55,808 55,808 Other assets 1 1
Liabilities Bank and customer deposits - amortised cost 542 307 Other liabilities 70 16 Subordinated liabilities 111 116 Amounts due to subsidiaries 723 439
Note: (1) Intercompany derivatives are included within derivative classification on the balance sheet.
GBP LIBOR USD IBOR (1) EUR IBOR Other IBOR IBOR reform losses Total £m £m £m £m £m £m £m
AT1 Issuances As part of its capital management activities NatWest Group plc has acquired certain equity instruments issued by its subsidiaries which contain reset clauses linked to IBOR rates subject to reform. These are reported in investment in group undertakings.
Carrying Carrying value Fair value value Fair value £bn £bn £bn £bn
Other financial liabilities - debt securities in issue (3) 17.1 17.7 16.7 17.3
7 Financial instruments - maturity analysis Remaining maturity The following table shows the residual maturity of financial instruments based on contractual date of maturity.
Held-for-trading liabilities amounting to £1.3 billion (2019 - £0.8 billion) have been excluded from the tables.
0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years 2020 £m £m £m £m £m £m Liabilities by contractual maturity
Dated loan capital 7,768 6,980 Undated loan capital 175 666 Preference shares 1 1
Note: (1) Table excludes amounts due to NatWest Group subsidiaries of £111 million (2019 - £116 million).
US$2,250 million 6.13% dated notes 2022 Tier 2 1,234 1,737 US$650 million 6.425% dated notes 2043 (callable January 2034) (1) Ineligible 593 554 US$2,000 million 6.00% dated notes 2023 Tier 2 1,574 1,578 US$1,000 million 6.10% dated notes 2023 Tier 2 419 773 US$2,250 million 5.13% dated notes 2024 Tier 2 1,778 1,769 US$750 million 3.754% dated notes 2029 Tier 2 551 569 US$850 million 3.032% dated notes 2035 (callable November 2030) Tier 2 606 —
Note: (1) The call is on the underlying security in the partnership, rather than the internal issued debt.
Note: (1) The company can satisfy interest payment obligations by issuing sufficient ordinary shares to appointed trustees to enable them, on selling these shares, to settle the interest payment.
Preference shares (1) treatment £m £m £0.5 million 11% and £0.4 million 5.5% cumulative preference shares of £1 (not callable) Ineligible 1 1
Currency translation and other adjustments — (38) Additional investments in Group undertakings 27 2,523 Disposals — (1,973) Impairment of investments (9,606) (1,451)
In 2020 the company invested additional capital in its subsidiaries of £27 million of equity (NWM Plc and RBS AA Holdings). The 2019 additional investments were mainly related to NatWest Markets Plc.
The key judgement is in determining the recoverable amount. This is the higher of net realisable value and value in use, being an assessment of the discounted future cash flows of the entity. The 2020 charge is mostly related to the company’s investment in NatWest Holdings Limited which was impaired by £9 billion at 30 June 2020 and £320 million at 31 December 2020, primarily due to the decline in net realisable value as a result of challenging market conditions, including the impact of the COVID-19 pandemic. The company’s investment in NatWest Markets Plc was impaired by £286 million at 31 December 2020, due to a decline in net realisable value. Therefore, the carrying value of investments in Group undertakings at the year end is supported by the respective net realisable values of the entities.
Financial statem ents 10 Analysis of changes in financing during the year Share capital, share premium, and paid-in equity Subordinated liabilities MRELs
The following table details active related undertakings incorporated in the UK which are 100% owned by NatWest Group and fully consolidated for accounting purposes
Entity name Activity treatment Notes Voyager Leasing Ltd BF FC (6) Walton Lake Developments Ltd INV DE (2) West Register (Hotels Number 3) Ltd INV DE (1)
Regulatory Entity name Activity treatment Notes SFK Kommunfastigheter AB BF FC (12) Sjöklockan KB BF FC (12) Skinnarängen KB BF FC (12) Solbänken KB BF FC (12) Strand European Holdings AB BF FC (12) Svenskt Energikapital AB BF FC (12) Svenskt Fastighetskapital AB BF FC (12) Svenskt Fastighetskapital Holding AB BF FC (12) The RBS Group Ireland Retirement Savings Trustee Ltd TR DE (23) The Royal Bank of Scotland International (Holdings) Ltd BF FC (37) The Royal Bank of Scotland International Ltd CI FC (37) Tilba Ltd BF FC (17) Tygverkstaden 1 KB BF FC (12) Ulster Bank (Ireland) Holdings Unlimited Company INV FC (23) Ulster Bank Dublin Trust Company Unlimited Company TR FC (23) Ulster Bank Holdings (ROI) Ltd BF FC (23) Ulster Bank Ireland Designated Activity Company CI FC (23) Ulster Bank Pension Trustees (RI) Ltd TR DE (23)
The following table details related undertakings which are 100% owned by NatWest Group ownership but are not consolidated for accounting purposes
Regulatory Entity name Activity treatment Notes RBS Capital LP II BF DE (44) RBS Capital Trust II BF DE (43) RBS International Employees' Pension Trustees Ltd BF DE (49)
Regulatory Entity name Activity treatment Notes RBS Retirement And Death Provision Company Ltd BF DE (75) RBSG Capital Corp. BF DE (9) West Granite Homes Inc. INV DE (52)
The following table details active related undertakings incorporated in the UK where NatWest Group ownership is less than 100% Accounting Regulatory Group
London Rail Leasing Ltd BF EAJV PC 50 (20) Natwest Covered Bonds (LM) Ltd BF IA PC 20 (47) Natwest Covered Bonds LLP BF FC FC 73 (2) Natwest Markets Secured Funding (LM) Ltd BF FC PC 20 (47) Pollinate Networks Ltd OTH EAA DE 30 (82) RBS Sempra Commodities LLP BF FC FC 51 (1) Silvermere Holdings Ltd BF FC FC 95 (11) Vizolution Ltd OTH EAA PC 5 (81)
Accounting Regulatory Group Entity name Activity treatment treatment % Notes Ardmore Securities No.1 DAC BF FC DE 0 (80) Ardmore Securities No.2 DAC BF FC DE 0 (80) Celtic Issuer Holdings Limited BF FC DE 0 (86) Celtic Residential Irish Mortgage Securitisation No 14 DAC BF FC DE 0 (86) Celtic Residential Irish Mortgage Securitisation No 15 DAC BF FC DE 0 (86) CITIC Capital China Mezzanine Ltd BF IA PC 33 (42) Dunmore Securities No.1 DAC BF FC DE 0 (80) Eris Finance S.R.L. BF IA PC 45 (19) Förvaltningsbolaget Klöverbacken Skola KB BF FC FC 51 (12) Foundation Commercial Property Ltd OTH EAJV PC 50 (37) German Public Sector Finance B.V. BF EAJV PC 50 (40) Herge Holding B.V. BF EAJV PC 63 (85) Lunar Funding VIII Ltd BF FC DE 0 (84) Lunar Luxembourg SA BF FC DE 0 (84) Lunar Luxembourg Series 2019-04 BF FC DE 0 (84)
Accounting Regulatory Group Entity name treatment treatment % Notes AA Merchant Services B.V. FC FC 100 (4) Arran Cards Funding Plc FC FC 0 (53) Belfast Bankers' Clearing Company Ltd EAA DE 25 (3) Celtic Residential Irish Mortgage Securitisation No 09 Plc FC DE 0 (87) Celtic Residential Irish Mortgage Securitisation No 10 Plc FC DE 0 (87) Celtic Residential Irish Mortgage Securitisation No 11 Plc FC DE 0 (87) Coutts & Co Trustees (Suisse) S.A. FC FC 100 (54) CTB Ltd FC FC 100 (57) Euro Sales Finance Ltd FC FC 100 (6) First Active Holdings Ltd FC FC 100 (23) First Active Insurances Services Ltd FC FC 100 (88) First Active Investments No. 4 Ltd FC FC 100 (88) Isobel AssetCo Ltd FC FC 75 (46) Isobel EquityCo Ltd FC FC 75 (46) Isobel HoldCo Ltd FC FC 75 (46) Isobel Intermediate HoldCo Ltd FC FC 75 (46) Isobel Loan Capital Ltd FC FC 75 (46) Isobel Mezzanine Borrower Ltd FC FC 75 (46)
Financial statem ents 12 Related undertakings continued The following table details related undertakings that are dormant
The following table details related undertakings that are in administration. Accounting Regulatory Group
Germany, Hong Kong, Japan, Singapore NatWest Markets Plc Turkey, United Arab Emirates
Key: BF Banking and financial institution CI Credit institution INV Investment (shares or property) holding company SC Service company TR Trustee OTH Other DE Deconsolidated FC Full consolidation PC Pro-rata consolidation EAA Equity accounting – Associate EAJV Equity accounting – Joint venture IA Investment accounting NC Not consolidated
Notes Registered addresses Country of incorporation (1) RBS Gogarburn, 175 Glasgow Road, Edinburgh, EH12 1HQ, Scotland UK (2) 1 Princes Street, London, EC2R 8BP, England UK (3) Scottish Provident Building 7 Donegall Square West Belfast BT1 6JH, Northern Ireland UK (4) Claude Debussylaan 94, 1082 MD, Amsterdam Netherlands (5) c/o Epicenter, Mikonkatu 9, 6th Floor, 00100, Helsinki Finland (6) 250 Bishopsgate, London, EC2M 4AA, England UK (7) One Edinburgh Quay, 133 Fountainbridge, Edinburgh, EH3 9QG, Scotland UK (8) 40, Avenue J.F Kennedy, Kirchberg L 1855 Luxembourg (9) 251, Little Falls Drive, Wilmington, Delaware, 19808 USA (10) c/o Nordisk Renting Oy, Mikonkatu 9, 00100 Helsinki Finland (11) 6-8 George Street, Edinburgh, EH2 2PF, Scotland UK (12) c/o Nordisk Renting AB, Jakobsbergsgatan 13, 8 storey, Box 14044, SE-111 44, Stockholm Sweden (13) Hieronymus Heyerdahlsgate 1, Postboks 2020 Vika, 0125, Oslo Norway (14) 13-15 York Buildings, London, WC2N 6JU, England UK (15) 24/26 City Quay, Dublin 2, D02 NY19 RoI (16) Victoria Place, 5th Floor, 31 Victoria Street, Hamilton, HM 10 Bermuda
Financial statem ents 12 Related undertakings continued Notes Registered addresses Country of incorporation (17) 2 Athol Street, Douglas, IM99 1AN Isle Of Man (18) 6th Floor, Building 2, Tower A, GIL IT/ITES SEZ, Candor TechSpace, Sector 21, Dundahera, Gurugram, Haryana, 122016 India (19) Via Vittorio Alfieri 1, Conegliano TV, IT-TN 31015 Italy (20) 99 Queen Victoria Street, London, EC4V 4EH, England UK (21) c/o Advokatfirmaet Wirsholm AS, Dokkveien 1, NO-0250, Oslo Norway (22) Roßmarkt 10, Frankfurt am Main, 60311 Germany (23) Ulster Bank Group Centre, George's Quay, Dublin 2, D02 VR98 RoI (24) c/o Nordisk Renting AS, 9 Etasje, Klingenberggata 7, NO-0161, Oslo Norway (25) 24/25 St Andrew Square, Edinburgh, Midlothian, EH2 1AF, Scotland UK (26) c/o Adv Jan-Erik Svensson, HC Andersens Boulevard 12, Kopenhaum V, 1553 Denmark (27) 44 Esplanade, St Helier, JE4 9WG Jersey (28) Regency Court, Glategny Esplanade, St Peter Port, GY1 3AP Guernsey (29) c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm Sweden (30) Hudsun Chambers, PO Box 986, Road Town, Tortola British Virgin Islands (31) Wiśniowy Business Park, ul. 1-go Sierpnia 8A, Warsaw, 02-134 Poland (32) Wisniowy Business Park Ul Ilzecka 26, Building E, Warsaw, 02-135 Poland (33) 11-16 Donegall Square East, Belfast, Co Antrim, BT1 5UB, Northern Ireland UK (34) c/o Estera Trust (Cayman) Ltd, Clifton House, 75 Fort Street, PO Box 1350, Grand Cayman, KY1-1108 Cayman Islands (35) Ashurst L26, 181 William Street, Melbourne, VIC, 3000 Australia (36) 36 St Andrew Square, Edinburgh, EH2 2YB, Scotland UK (37) Royal Bank House, 71 Bath Street, St Helier, JE4 8PJ Jersey (38) 4 Atlantic Quay, 70 York Street, Glasgow, G2 8JX, Scotland UK (39) 5 Harbourmaster Place, Dublin 1, D01 E7E8 RoI (40) De entree 99 -197, 1101HE Amsterdam Zuidoost Netherlands (41) c/o CE Serviced Offices Pvt Ltd, Level 1, Tower A, Building No 10, Phase III, DLF Cyber City, Gurgaon, Haryana, 122002 India (42) Boundary Hall, Cricket Square, 171 Elgin Avenue, George Town, Grand Cayman, KY1-1104 Cayman Islands (43) 301, Bellevue Parkway, 3rd Floor, Wilmington, DE, 19809 USA (44) 1209, Orange Street, Wilmington, New Castle County, DE, 19801 USA (45) First Floor, 1 Exchange Place, Dublin 1, D01 R8W8 RoI (46) 40 Berkeley Square, London, W1J 5AL, England UK (47) 1 Bartholomew Lane London EC2N 2AX, England UK (48) Riverside One, Sir John Rogersons Quay, Dublin 2, D02 X576 RoI (49) 23/25 Broad Street, St Helier, JE4 8ND Jersey (50) 440 Strand, London, WC2R OQS, England UK (51) Lerchenstrasse 18, Zurich, CH-8022 Switzerland (52) 200, Bellevue Parkway, Suite 210, Wilmington, DE 19809 USA (53) 35 Great St Helen's, London, EC3A 6AP, England UK (54) c/o Regus Rue du Rhone Sarl, Rue du Rhone 14, 1204, Geneva Switzerland (55) 24 Demostheni Severi, 1st Floor, Nicosia, 1080 Cyprus (56) c/o Denis Crowley & Co Chartered Accountants, Unit 6 Riverside Grove, Co. Cork, P43 W221 RoI (57) Suite 200B, 2nd Floor, Centre of Commerce, One Bay Street, PO Box N-3944, Nassau Bahamas (58) Level 54, Hopewell Centre, 183 Queen's Road East Hong Kong (59) 114 West 47th Street, New York, 10036 USA (60) The Mill, High Street, Rocester, Staffordshire, ST14 5JW, England UK (61) c/o Maples Corporate Services Ltd, PO Box 309, 121 South Church Street, George Town, Grand Cayman, KY1-1104 Cayman Islands (62) 3rd Floor, 1 St Ann Street, Manchester, M2 7LR, England UK (63) Gate House, Turnpike Road, High Wycombe, Buckinghamshire, HP12 3NR, England UK (64) One Dockland Central, Guild Street, IFSC, Dublin 1, D01 E4X0 RoI (65) Claude Debussylaan 24, 1082 MD, Amsterdam Netherlands (66) Cornwall Buildings, 45-51 Newhall Street, Birmingham, West Midlands, B3 3QR, England UK (67) c/o Visma Services Danmark A/S, Lyskaer 3C-3D, 2730 Herlev, Hjortespring Denmark (68) 254, 13th Floor, Rua Boa Vista, Sao Paulo, 01014-907 Brazil (69) PO Box 384, The Albany, South Esplanade, St Peter Port, GY1 4NF Guernsey (70) 46, Avenue John F. Kennedy, L-1855 Luxembourg (71) 12/14 Veer Nariman Road, Brady House 4th floor, Fort, Mumbai 400001 India (72) Madison Building, Midtown, Queensway Gibraltar (73) Kokermolen 16, 3994 Dh Houten Netherlands (74) 16 Library Place, St. Helier, JE4 8NH Jersey (75) PO Box 236, First Island House, Peter Street, St Helier, JE4 8SG Jersey (76) Tirolerweg 8, Zug, CH- 6300 Switzerland (77) 66-72, Gaspé House, Esplanade, St Helier, JE2 3QT Jersey (78) PO Box 230, Heritage Hall, Le Marchant Street, St Peter Port, GY1 4JH Guernsey (79) Clarendon House, Two Church Street, Suite 104, Reid Street, Hamilton, HM 11 Bermuda (80) 3rd Floor, Fleming Court, Fleming's Place, Dublin 4, D04 N4X9 RoI (81) Office Block A, Bay Studios Business Park, Fabian Way, Swansea, SA1 8QB, Wales UK (82) The Chestnuts Brewers End, Takeley, Bishop's Stortford, CM22 6QJ, England UK (83) Smith and Williamson Llp 25 Moorgate London EC2R 6AY, England UK (84) Grand Pavilion Commercial Centre, 802 West Bay Road, P.O. Box 31119, Cayman Islands (85) Verlengde Poolseweg 16, Breda, 4818CL Netherlands (86) Block A , George's Quay Plaza, George's Quay, Dublin 2, Dublin RoI (87) Pinnacle 2, Eastpoint Business Park, Dublin 3, Dublin, D03 P580 RoI (88) 13-18 City Quay, Dublin 2, Dublin, D02 ED70 RoI
As described in the Accounting policies, NatWest Group prepares its financial statements in accordance with the basis set out in the accounting policies, page 264 which constitutes a body of generally accepted accounting principles (GAAP). This document contains a number of adjusted or alternative performance measures, also known as non-GAAP or non-IFRS performance measures. These measures are adjusted for certain items which management believe are not representative of the underlying performance of the business and which distort period-on-period comparison. The non-IFRS measures provide users of the financial statements with a consistent basis for comparing business performance between financial periods and information on elements of performance that are one-off in nature. The non-IFRS measures also include the calculation of metrics that are used throughout the banking industry. These non-IFRS measures are not measures within the scope of IFRS and are not a substitute for IFRS measures. These measures include: Measure Basis of preparation Additional analysis or reconciliation
Comprises customer loans in the Retail Banking, Ulster Bank RoI, Commercial Banking, Private Banking and RBSI operating segments.
Net interest income of the banking business less the NatWest Markets (NWM) element as a percentage of interest-earning assets of the banking business less the NWM element.
Third party customer funding rate is calculated as interest payable on third-party customer deposits as a percentage of third-party customer deposits, including interest bearing and non-interest bearing customer deposits. This excludes intragroup items, bank deposits and debt securities in issue.
(Loss)/profit attributable to ordinary shareholders (£m) (753) 3,133 Average total equity (£m) 43,774 45,160 Adjustment for other owners equity and intangibles (£m) (11,872) (11,960) Adjusted total tangible equity (£m) 31,902 33,200 Return on tangible equity (%) (2.4%) 9.4%
RWAe applying equity factor (£bn) 5.4 1.9 8.8 1.3 1.1 5.6
Adjustment for Alawwal bank merger gain (£m) — — — — — (150)
RWAe applying equity factor (£bn) 5.1 2.4 10.2 1.3 1.1 8.1
Strategic and conduct Other operating Strategic and conduct Other operating Operating expenses costs costs expenses expenses costs costs expenses expenses
Impairment of other intangible assets 7 — 2 9 44 — — 44
Banking RoI Banking Banking International Markets & other Group Year ended 31 December 2020 £m £m £m £m £m £m £m £m
Operating lease depreciation — — (145) — — — — (145)
NatWest Group net interest income 7,749 8,047 8,656 Less: NWM net interest income 57 188 (112) Net interest income excluding NWM 7,806 8,235 8,544 Average interest earning assets (IEA) 493,471 448,556 436,957 Less: NWM average IEA 37,929 35,444 27,851 Bank average IEA excluding NWM 455,542 413,112 409,106
This report has been prepared for NatWest Group to comply with the Capital Requirements (Country by Country Reporting) Regulations 2013 which implement Article 89 of the Capital Requirements Directive IV.
Income (1) before tax (1) (received) including staff as at the year end £m £m £m temporary staff 31 December 2020
Notes: (1) A full list of NatWest Group subsidiaries' names, nature of activities and geographical locations is available at Note 12 of the parent company accounts. (2) A list of the principal subsidiaries in each jurisdiction and the nature of their activities is available at Note 9 of the parent company accounts. (3) Tax paid of £24 million in Saudi Arabia is due to capital gains tax arising on the merger of Alawwal bank with SABB during 2019. (4) Income excludes internal service fee income which has been calculated on a cost plus mark-up basis. (5) The amounts shown above are presented to the nearest million and as a result any amounts less than £0.5 million have been rounded to zero.
Set out below are certain risk factors that could adversely affect NatWest Group’s future results, its financial condition and prospects and cause them to be materially different from what is forecast or expected, and directly or indirectly impact the value of its securities in issue. These risk factors are broadly categorised and should be read in conjunction with other sections of this annual report, including the forward-looking statements section, the strategic report and the risk and capital management section. They should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties facing NatWest Group. The current COVID-19 pandemic may exacerbate any of the risks described below.
November 2020, according to estimates from the Office for National Statistics, as many restrictions were re-introduced towards the end of 2020 and at the start of 2021. The
COVID-19 pandemic has caused significant reductions in levels of personal and commercial activity, reductions in consumer spending, increased levels of corporate debt and, for some customers, personal debt, increased unemployment and significant market volatility in asset prices, interest rates and foreign exchange rates. It has also caused physical disruption and slow-down to global supply chains and working practices, all of which have affected NatWest Group’s customers. NatWest Group has significant exposures to many of the commercial sectors economically impacted by the COVID-19 pandemic, including property, retail, leisure and travel.
Further waves of infection may result in further restrictions in affected countries and regions. While vaccine treatment is currently being deployed, the pace of deployment and ultimate effectiveness is uncertain, and vaccines may fail to achieve immunisation that is significant within the population.
Even when restrictions are relaxed, they may be re-imposed, sometimes at short notice if either immunisation is insufficient or new strains of the COVID-19 virus or other diseases develop into new epidemics or pandemics.
Significant uncertainties continue as to the extent of the economic contraction and the path and length of time required to achieve economic recovery.
Whether or not these measures effectively mitigate the negative impacts of the COVID19 pandemic on NatWest Group, some of these measures, or further measures, such as negative interest rates, may also have a material adverse effect on NatWest Group’s business and performance. It is uncertain as to how long the above-mentioned financial assistance and legal and regulatory initiatives may last, how they may evolve in the future or how consumers and businesses may react to such initiatives. NatWest Group’s consumer customers and corporate clients may be negatively impacted when these support schemes and initiatives are scaled back and ultimately ended, which in turn could expose
NatWest Group to increased credit and counterparty risk. In addition, the COVID-19 pandemic related uncertainties and the range of prudential regulatory support has made reliance on analytical models and planning and forecasting for NatWest Group more complex, and may result in uncertainty impacting the risk profile of NatWest Group and/or that of the wider banking industry. The medium and long-term implications of the
COVID-19 pandemic for NatWest Group customers, the UK housing market, and the
UK and global economies and financial markets remain uncertain, and may continue to have a material adverse effect on NatWest
The adverse impact of the COVID-19 pandemic on the credit quality of NatWest
Group’s counterparties and the implementation of support schemes in response of the COVID-19 pandemic has increased NatWest Group’s exposure to counterparty risk, which may adversely affect its business, results of operations and outlook.
The effects of the COVID-19 pandemic have adversely affected the credit quality of many of NatWest Group’s borrowers and other counterparties. As a result, NatWest Group has experienced (and may continue to experience) elevated exposure to credit risk and demands on its funding from, for example, customers and borrowers drawing down upon committed credit facilities. If borrowers or other counterparties default or suffer deterioration in credit, this would increase impairment charges, credit reserves, write-downs and regulatory expected loss. An increase in drawings upon committed credit facilities may also increase NatWest Group’s
NatWest Group experiences losses and a reduction in future profitability, this is likely to affect the recoverable value of fixed assets, including goodwill and deferred taxes, which may lead to further write-downs. See also,
(MES) together with the determination of specific overlay adjustments to inform its IFRS
increases. Furthermore, the assumptions and judgments used in the MES and ECL
assessment at 31 December 2020 may not prove to be adequate resulting in incremental
CLBILS products. NatWest Group has sought to manage the risks of fraud and money laundering against the need for the fast and efficient release of funds to customers and businesses. NatWest Group may be exposed to fraud, conduct and litigation risks arising from inappropriate approval (or denial) of
BBLS or the enforcing or pursuing repayment of CBILS and BBLS (or a failure to exercise forbearance), which may have a material adverse effect on NatWest Group’s reputation and results of operations. The implementation of the initiatives and efforts mentioned above may result in litigation, regulatory and
The COVID-19 pandemic has also caused significant market volatility, which would have increased NatWest Group’s market risk RWA
Purpose-led Strategy, including its plans to repurpose the NatWest Markets franchise (the
‘NWM franchise’), which may have a material adverse effect on NatWest Group’s business, results of operations and outlook. See also,
Purpose-led Strategy, which carries significant execution and operational risks and may not achieve its stated aims and targeted outcomes’.
It is uncertain as to how the broader macroeconomic business environment and societal norms may be impacted by the
COVID-19 pandemic, which is already resulting in several significant wider societal changes. For example, one of the most visible effects of the COVID-19 pandemic has been the impact on the most vulnerable groups of society and concerns about systemic racial biases and social inequalities.
In addition, the COVID-19 pandemic has accelerated existing economic trends that may radically change the way businesses are run and people live their lives. These trends include digitalisation, decarbonisation, automation, e-commerce and agile working, each of which has resulted in significant market volatility in asset prices. There is also increasing investor, regulatory and customer scrutiny regarding how businesses address these changes and related climate, environmental, social, governance and other sustainability issues, including workplace health, safety and wellbeing, diversity and inclusion, data privacy, workforce management, human rights and supply chain management. Any failure or delay by NatWest
The COVID-19 pandemic may also result in unexpected developments or changes in financial markets, the fiscal, tax and regulatory frameworks and consumer customer and corporate client behaviour, which could intensify competition in the financial services industry. If NatWest Group is not able to adapt or compete effectively, it could experience loss of business, which in turn could adversely affect its business, results of operations and outlook.
NatWest Group has taken measures seeking to maintain the health, wellbeing and safety of its employees during the COVID-19 pandemic, these measures may be ineffective and could result in increased expenses and widespread illness could negatively affect staffing within certain functions, businesses or geographies. Certain areas of NatWest Group also continue to experience workloads that are heavier than usual as a result of increased customer requirements, NatWest Group’s
Any of the above could have a material adverse effect on NatWest Group’s business, results of operations and outlook.
The effects of the COVID-19 pandemic could affect NatWest Group’s ability to access sources of liquidity and funding, which may result in higher funding costs and failure to comply with regulatory capital, funding and leverage requirements.
A d d itio n a l in fo rm a tio n subsidiaries. In response to the COVID-19 pandemic, there have been relaxations on certain countercyclical buffer requirements and stress tests as well as the calculation of
NatWest Group capitalises goodwill, which is calculated as the excess of the cost of an acquisition over the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Acquired goodwill is recognised at cost less any accumulated impairment losses. As required by IFRS,
An impairment test compares the recoverable amount (the higher of the value in use and fair value less cost to sell) of an individual cash generating unit with its carrying value. At 31
December 2020, NatWest Group plc carried goodwill of £5.6 billion on its balance sheet.
NatWest Group operates and by the effects of the COVID-19 pandemic.
Where NatWest Group is required to recognise a goodwill impairment, it is recorded in NatWest Group’s income statement, but it has no effect on NatWest
European Union may continue to adversely affect NatWest Group and its operating environment.
UK and EU with zero tariffs and quotas on all goods that comply with the appropriate rules of origin, with minimal coverage, however, for financial services; UK-incorporated financial services providers no longer have EU
passporting rights and there is no mutual recognition regime. Financial services may largely be subject to individual equivalence decisions by relevant regulators. A number of temporary equivalence decisions have been made that cover all services offered by
Memorandum of Understanding by March 2021. There is no certainty, however, as to the form, scope and timing of any such
NatWest Group has engaged in significant and costly Brexit planning and contingency planning. NatWest Group continues to monitor regulatory developments, and NatWest Group continues to seek advice on any transitional regimes being introduced by individual EU
countries. It is updating its operating model accordingly. NatWest Group also continues to assess where NatWest Group companies can obtain bilateral regulatory permissions to permit business to continue from its UK
Group entities have applied for bilateral regulatory permissions and instead intend to move EEA business to an EEA licenced subsidiary. There is a risk that such EEA
customers. Furthermore, transferring business to an EEA based subsidiary is a complex exercise and involves legal, regulatory and executional risks, and could result in a loss of business, customers or greater than expected costs. The changes to NatWest Group’s operating model have been costly and further changes to its business operations, product offering and customer engagement could result in further costs.
The effects of the UK’s exit from the EU and the EEA are expected to continue to affect many aspects of NatWest Group’s business and operating environment, including as described elsewhere in these risk factors, and may be material and/or cause a near-term impact on impairments.
NatWest Group and its customers and counterparties who are themselves dependent on trading with the EU or personnel from the
EU. They may exacerbate the economic impacts of the COVID-19 pandemic on the
UK, the Republic of Ireland (‘ROI’) and the rest of EU/EEA.
UK law (including bank regulation), whether and what equivalence determinations will be made by the various regulators and therefore what the respective legal and regulatory arrangements will be, under which NatWest
Group’s businesses and non-UK operations and/or legal entity structure, including attendant operating, compliance and restructuring costs, level of impairments, capital requirements, regulatory environment and tax implications and as a result may adversely impact NatWest Group’s profitability, competitive position, business model and product offering.
The outlook for the global economy over the medium-term remains uncertain due to a number of factors including: the COVID-19 pandemic, resulting societal inequalities and changes, trade barriers and the increased
A d d itio n a l in fo rm a tio n possibility of and/or continuation of trade wars, widespread political instability (including as a result of populism and nationalism, which may lead to protectionist policies), an extended period of low inflation and low (or negative) interest rates, climate, environmental, social and other sustainabilityrelated risks and global regional variations in the impact and responses to these factors.
These conditions could be worsened by a number of factors including macro-economic deterioration, increased instability in the global financial system and concerns relating to further financial shocks or contagion (for example, due to economic concerns in emerging markets), market volatility or fluctuations in the value of the pound sterling, new or extended economic sanctions, volatility in commodity prices or concerns regarding sovereign debt. This may be compounded by the ageing demographics of the populations in the markets that NatWest
In addition, NatWest Group is exposed to risks arising out of geopolitical events or political developments, such as, exchange controls and other measures taken by sovereign governments that may hinder economic or financial activity levels.
Furthermore, unfavourable political, military or diplomatic events, including secession movements or the exit of other member states from the EU, armed conflict, pandemics and widespread public health crises (including the current COVID-19 pandemic and any future epidemics or pandemics), state and privately sponsored cyber and terrorist acts or threats, and the responses to them by governments and markets, could negatively affect the business and performance of NatWest Group, including as a result of the indirect effect on regional or global trade and/or NatWest
The value of NatWest Group’s financial instruments may be materially affected by market risk, including as a result of market fluctuations. Market volatility, illiquid market conditions and disruptions in the credit markets may make it extremely difficult to value certain of NatWest Group’s financial instruments, particularly during periods of market displacement. This could cause a decline in the value of NatWest Group’s financial instruments, which may have an adverse effect on NatWest Group’s results of operations in future periods, or inaccurate carrying values for certain financial instruments.
NatWest Group could realise significant losses if extreme market events were to occur.
Changes in interest rates have significantly affected and will continue to affect NatWest Group’s business and results.
Group. Monetary policy has been accommodative in recent years including initiatives implemented by the Bank of
SMEs (‘TFSME’), which have helped to support demand at a time of pronounced fiscal tightening and balance sheet repair.
However, there remains considerable uncertainty as to the future direction of interest rates and pace of change (as set by the Bank of England), including as a result of the COVID-19 pandemic and its effect on the
Conversely, while increases in interest rates may support NatWest Group’s interest income, sharp increases in interest rates could have macroeconomic effects that lead to adverse outcomes for the business. For example, they could lead to generally weaker than expected growth, or even contracting
NatWest Group operates, all of which could adversely affect the business and performance of NatWest Group.
HM Treasury may affect the price of securities issued by NatWest Group.
In its March 2020 Budget, the UK Government announced its intention to continue the process of privatisation of NatWest Group plc and to carry out a programme of sales of
NatWest Group plc ordinary shares with the objective of selling all of its remaining shares in NatWest Group plc by 2025. On 6 February 2019, NatWest Group plc obtained shareholder authority to make off-market purchases of its ordinary shares from HM
Treasury under the terms of a directed buyback contract. The authority provided by this contract was renewed at NatWest
Government held 61.9% of the issued ordinary share capital of NatWest Group plc.
Any offers or sales of a substantial number of ordinary shares by HM Treasury, expectations relating to the timing thereof, or any associated directed buyback activity by
NatWest Group, could affect the prevailing market price for the outstanding ordinary shares of NatWest Group plc.
HM Treasury has indicated that it intends to respect the commercial decisions of NatWest
Treasury’s rights as majority shareholder could give rise to conflicts between the interests of HM Treasury and the interests of other shareholders, including as a result of a change in government policy.
Decisions of major central banks (including the Bank of England, the European Central
Bank and the US Federal Reserve) and political or market events, which are outside
NatWest Group’s control, may lead to sharp and sudden variations in foreign exchange rates.
UK and ROI-focused banking group, it is subject to foreign exchange risk from capital deployed in NatWest Group’s foreign subsidiaries, branches and joint arrangements and customer transactions denominated in a currency other than the functional currency of
(including the total amount MREL eligible instruments), foreign exchange dealing activity, income and expenses, RWAs and hence the reported earnings and financial condition of NatWest Group.
Strategic risk NatWest Group is currently implementing its Purpose-led Strategy, which carries significant execution and operational risks and may not achieve its stated aims and targeted outcomes.
(ii) three areas of focus: climate change, enterprise and learning. This strategy requires an internal cultural shift across
These changes may not result in the expected outcome within the timeline and in the manner currently contemplated.
To deliver against this purpose and deliver sustainable returns, NatWest Group has been: focusing on the lifecycles of its customers using insights about customers to evolve product and service offerings; reengineering and simplifying NatWest Group by updating operational and technological capabilities and strengthening governance and control frameworks to reduce costs and improve customer journeys; focusing on innovation and partnership to drive change and achieve growth in new product areas and customer segments; and having a sharper focus on capital allocation and deploying it more effectively for customers, in particular by refocusing its NWM franchise and through its phased withdrawal from ROI.
Group has set a number of financial, capital and operational targets and expectations, both for the short term and throughout the implementation period. These include targets, amongst others, for: return on tangible equity,
Achieving these targets requires further significant reductions to NatWest Group’s cost base. Realising these cost reductions will result in material strategic costs, which may be more than currently expected. The continued focus on meeting cost reduction targets may also mean limited investment in other areas, which could affect NatWest
Group’s long-term prospects, product offering or competitive position and its ability to meet its other targets and commitments, including those related to customer satisfaction and its capacity to respond to climate -related risks and opportunities in line with its ambition. Any of the factors above, could jeopardise
Implementing the Purpose-led Strategy is highly complex as discussed above. More generally, NatWest Group may seek to adapt its strategy, including in respect of acquisitions, divestments, restructurings, reorganisations or partnerships. There remains uncertainty as to consolidation within the financial industry and the scale and timing of any further NatWest Group strategic initiatives or participation in any such consolidation.
NWM franchise and the phased withdrawal from ROI, any of which could fail to be implemented in the manner and to the extent currently contemplated, including as a result of operational, legal, execution or other issues.
are two strategic initiatives that may entail significant commercial, operational, legal and execution risks. For the risks relating to the refocusing of the NWM franchise, see
Bank, potential counterparties and other banks; (vi) customer action or inaction, or the inability to obtain necessary approvals and/or support from governmental authorities, regulators, trade unions and/or other stakeholders resulting in additional cost, resource and delays; (vii) potential loss of customers, resulting in retail and commercial deposit outflows (or a failure to attract deposit inflows) and reduced revenues and liquidity; (viii) increased people risk through the potential loss of key colleagues and institutional knowledge and increased challenges of attracting and retaining colleagues; (ix) regulatory risk, including in relation to prudential, conduct and other regulatory requirements; (x) the potential early repayment of ECB funding and no or limited access to other Euro system funding arrangements; (xi) brand and reputational risks due to press speculation and stakeholder scrutiny about the future of the ROI business.
A d d itio n a l in fo rm a tio n risk that NatWest Group may not be successful in doing so. The implementation of the Purpose-led Strategy and any other strategic initiatives could result in materially higher costs than initially contemplated
(including due to material uncertainties and factors outside of NatWest Group’s control)
and may not be completed when planned, or at all, or could be phased or could progress in a manner other than currently expected.
NWM Group to simplify its operating model and technology platform, as well as reduce its cost base and capital requirements. A focus of the NWM franchise refocusing is the intended reduction in its level of RWAs. This is intended to be achieved by exiting certain exposures and optimising inefficient capital across the NWM Group, especially in relation to its Rates products.
The refocusing of the NWM franchise entails significant execution risks and is based on management plans, projections and models and is subject to certain material assumptions and judgments which may prove to be incorrect such that the go-forward strategy is re-assessed (for example, if revenues reduce relatively faster than costs; material execution issues arise or market distress occurs; RWAs take longer to exit or are more costly to reduce than anticipated; or the key franchise legal entities, NWM Plc and NWM N.V., have difficulties accessing the funding market on acceptable terms or at all).
NWM franchise will require their continued support, as well as the support of NWM Plc and NWM N.V. management.
NatWest Group may not meet targets and be in a position to continue to make discretionary capital distributions
Group has become a UK and ROI-focused banking group and as part of its Purpose-led
Strategy, which carries significant execution and operational risks and may not achieve its stated aims and targeted outcomes’.
A number of factors, including the economic and other effects of the COVID-19 pandemic, may impact NatWest Group’s ability to maintain its CET1 ratio target and make discretionary capital distributions. See also,
NatWest Group’s ability to meet its planned reductions in its annual underlying costs may vary considerably from year to year.
NatWest Group’s long-term product offering or competitive position and its ability to meet its other targets, including those related to customer satisfaction.
There is a risk that NatWest Group may not meet its targets and expectations or be in a position to continue to distribute capital when regulatory distribution restrictions are eased, or that NatWest Group will be a viable, competitive or profitable banking business.
NatWest Group operates in markets that are highly competitive, with increasing competitive pressures and technology disruption.
The markets within which NatWest Group operates are highly competitive. NatWest
COVID-19 pandemic and may be catalysed by various regulatory and competition policy interventions, including the UK initiative on
NatWest Group’s competitors may also be better able to attract and retain customers and key employees, may have better IT systems, and may have access to lower cost funding and/or be able to attract deposits on more favourable terms than NatWest Group.
If NatWest Group is unable to offer competitive, attractive and innovative products that are also profitable and timely, it will lose share, incur losses on some or all of its activities and lose opportunities for growth. In this context, NatWest Group is investing in the automation of certain solutions and interactions within its customer-facing businesses, including through artificial intelligence. Such initiatives may result in operational, reputational and conduct risks if the technology used is defective, or is not fully integrated into NatWest Group’s current solutions. There can be no certainty that such initiatives will deliver the expected cost savings and investment in automated processes will likely also result in increased short-term costs for NatWest Group.
NWM franchise, NatWest Group’s phased withdrawal from ROI, acquisitions, divestments, reorganisations and restructurings and partnerships, and delivery on its climate ambition, cost-reduction measures, as well as employee remuneration constraints, may also have an impact on its ability to compete effectively and intensified competition from incumbents, challengers and new entrants could affect NatWest Group’s ability to maintain satisfactory returns.
Moreover, activist investors have increasingly become engaged and interventionist in recent years, which may pose a threat to NatWest
Group’s strategic initiatives. Furthermore, continued consolidation or technological or other developments in certain sectors of the financial services industry could result in
NatWest Group has exposure to many different industries, customers and counterparties, and risks arising from actual or perceived changes in credit quality and the recoverability of monies due from borrowers and other counterparties are inherent in a wide range of NatWest Group’s businesses.
COVID-19 pandemic) and by the legal and regulatory landscape in the UK and any deterioration in such conditions or changes to legal or regulatory landscapes could worsen borrower and counterparty credit quality and consequently impact NatWest Group’s ability to enforce contractual security rights.
NatWest Group may be affected by volatility in property prices (including as a result of Brexit, the general UK political or economic climate or the COVID-19 pandemic) given that
December 2020, amounted to £228.6 billion, representing 61.4% of NatWest Group’s total customer loan exposure. If property prices were to weaken this could lead to higher impairment charges, particularly if default rates also increase. In addition, NatWest
Group’s credit risk may be exacerbated if the collateral that it holds cannot be realised as a result of market conditions or regulatory intervention or if it is liquidated at prices not sufficient to recover the net amount after accounting for any IFRS provisions already made. This is most likely to occur during periods of illiquidity or depressed asset valuations.
A d d itio n a l in fo rm a tio n investor commitments) and securitised products (typically senior lending to special purpose vehicles backed by pools of financial assets). Due to NatWest Group’s exposure to the financial industry, it also has exposure to shadow banking entities (i.e. entities which carry out banking activities outside a regulated framework). Recently, there has been increasing regulatory focus on shadow banking. In particular, the European Banking
Group to identify and monitor its exposure to shadow banking entities, implement and maintain an internal framework for the identification, management, control and mitigation of the risks associated with exposure to shadow banking entities, and ensure effective reporting and governance in respect of such exposure. If NatWest Group is unable to properly identify and monitor its shadow banking exposure, maintain an adequate framework, or ensure effective reporting and governance in respect of shadow banking exposure, this may adversely affect the business, results of operations and outlook of NatWest Group.
As at 31 December 2020, NatWest Group plc’s CET1 ratio was 18.5% and NatWest
NatWest Group plc’s current capital strategy is based on the expected accumulation of additional capital through the accrual of profits over time, planned capital actions (including issuances, redemptions, and discretionary capital distributions), RWA growth in the form of regulatory uplifts and lending growth and other capital management initiatives which focus on improving capital efficiency.
PRA, including Pillar 2 requirements and regulatory buffers as well as any applicable scalars; • reduced dividends from NatWest Group’s subsidiaries because of changes in their financial performance and/or the extent to which local capital requirements exceed
NatWest Group plc’s capital ratio, and/or ability to make capital distributions.
Group plc to reduce or cease discretionary payments (including payments of dividends to shareholders) to the extent of the breach.
England has identified single point-of-entry as the preferred resolution strategy for NatWest
Group. As a result, NatWest Group plc is the only entity that can externally issue securities that count towards its MREL requirements, the proceeds of which can then be downstreamed to meet the internal MREL
If NatWest Group plc is unable to raise the requisite amount of regulatory capital or
If, under a stress scenario, the level of capital or MREL falls outside of risk appetite, there are a range of recovery management actions
NatWest Group could take to manage its capital levels, but any such actions may not be sufficient to restore adequate capital levels. Under the EU Bank Recovery and
Group’s applicable capital or leverage requirements may trigger the application of
NatWest Group’s recovery plan to remediate a deficient capital position. NatWest Group’s regulator may request that NatWest Group carry out certain capital management actions or, if NatWest Group plc’s CET1 ratio falls below 7%, certain regulatory capital instruments issued by NatWest Group will be written-down or converted into equity and there may be an issue of additional equity by
NatWest Group is not adequately prepared to be resolved, or does not have adequate plans in place to meet resolvability requirements by 1 January 2022, NatWest Group may be required to take action to enhance its preparations to be resolvable, resulting in
NatWest Group is required to access sources of liquidity and funding through retail and wholesale deposits, as well as through the debt capital markets. As at 31 December 2020, NatWest Group plc held £452.3 billion in deposits. The level of deposits may fluctuate due to factors outside NatWest
As at 31 December 2020, NatWest Group plc’s liquidity coverage ratio was 165%. If its liquidity position were to come under stress, and if NatWest Group plc were unable to raise funds through deposits or in the debt capital markets on acceptable terms or at all, its liquidity position could be adversely affected and it might be unable to meet deposit withdrawals on demand or at their contractual maturity, to repay borrowings as they mature, to meet its obligations under committed financing facilities, to comply with regulatory funding requirements, to undertake certain capital and/or debt management activities, or to fund new loans, investments and businesses. NatWest Group may need to liquidate unencumbered assets to meet its liabilities, including disposals of assets not previously identified for disposal to reduce its funding commitments or trigger the execution of certain management actions or recovery options. In a time of reduced liquidity,
NatWest Group may be unable to sell some of its assets, or may need to sell assets at depressed prices, which in either case could negatively affect NatWest Group’s results.
Any reduction in the credit rating and/or outlooks assigned to NatWest Group plc, any of its subsidiaries or any of their respective debt securities could adversely affect the availability of funding for
NatWest Group, reduce NatWest Group’s liquidity position and increase the cost of funding.
Group plc and other NatWest Group entity credit ratings and outlooks, which could be negatively affected by a number of factors that can change over time, including: the credit rating agency’s assessment of NatWest
Group’s strategy and management’s capability; its financial condition including in respect of profitability, asset quality, capital, funding and liquidity; the level of political support for the industries in which NatWest
In addition, credit ratings agencies are increasingly taking into account sustainabilityrelated factors, including climate, environmental, social and governance related risk, as part of the credit ratings analysis, as are investors in their investment decisions.
NatWest Group entities, including, in particular, downgrades below investment grade, or a deterioration in the capital markets’ perception of NatWest Group’s financial resilience could significantly affect
NatWest Group plc’s) cost of funding and its access to capital markets and could limit the range of counterparties willing to enter into transactions with NatWest Group (and, in particular, with NatWest Group plc). This could in turn adversely impact NatWest
NatWest Group may be adversely affected if it fails to meet the requirements of regulatory stress tests.
Group’s regulators requiring NatWest Group to generate additional capital, reputational damage, increased supervision and/or regulatory sanctions, restrictions on capital distributions and loss of investor confidence.
(including to facilitate NatWest Group’s mandated stress testing). In addition, NatWest
(including due to errors in model design) or new data inputs, including to accurately reflect changes in the micro and macroeconomic environment in which NatWest Group operates (for example to account for the impact of the COVID-19 pandemic), to capture risks and exposures at the subsidiary level and to update for changes to NatWest
Group’s current business model or operations, or for findings of deficiencies by NatWest
NatWest Group’s mandated stress testing), may result in increased capital requirements or require management action. NatWest
The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income, expenses, exposures and RWAs. While estimates, judgments and assumptions take into account historical experience and other factors, (including market practice and expectations of future events that are believed
‘NatWest Group’s results could be adversely affected if the effects of the COVID-19 pandemic or other events trigger the recognition of a goodwill impairment’.
NatWest Group has some remaining credit exposure arising from over-the-counter derivative contracts, mainly credit default swaps (CDSs), and other credit derivatives, each of which are carried at fair value. The fair value of these CDSs, as well as NatWest
Group also recognises any fluctuations in the fair value of other credit derivatives. Any such adjustments or fair value changes may have a negative impact on NatWest Group’s results.
(outside of resolution) that will result in the firm no longer failing or being likely to fail).
Under the UK Banking Act, the Authorities are generally required to have regard to specified objectives in exercising the powers provided for by the Banking Act. One of the objectives
Banking Act, in circumstances where a stabilisation power is not also used. Holders of debt instruments which are subject to the power may, however, have ordinary shares transferred to or issued to them by way of compensation.
Group securities. This may result in various actions being undertaken in relation to
Climate and sustainability-related risks NatWest Group and its customers may face significant climate-related risks, including in transitioning to a low-carbon economy, which may adversely impact
Financial risks from climate change arise through two primary channels, or ‘risk factors’: physical and transition.
There are significant uncertainties as to the extent and timing of the manifestation of the physical risks of climate change, such as more extreme and frequent weather events, rising sea levels, flooding, and subsidence, heat waves and long-lasting wildfires, reductions in biodiversity and resource scarcity. Damage to the properties and operations of borrowers could impair asset values, business activities and the creditworthiness of customers leading to increased default rates, delinquencies, writeoffs and impairment charges in NatWest
Group operates will be required by several multilateral agreements, in particular the 2015
Furthermore, public and private sector institutions may also face a variety of climaterelated legal risks, both physical and transition, from potential litigation and contract liability. See also, ‘NatWest Group may be subject to potential climate, environmental and other sustainability-related litigation, enforcement proceedings, investigations and conduct risk’.
NatWest Group’s Purpose-led Strategy includes one area of focus on climate change that is likely to require material changes to the business of NatWest Group which entails significant execution risk.
NatWest Group’s climate strategy is increasingly requiring significant resource and capacity to collect third party, customer and other data and to develop and apply methodologies to understand and measure the climate impact of the emissions related to its financing activities. There is currently no single standard approach or methodology to measure such emissions and to provide a scenario-based model for alignment with the objectives of the 2015 Paris Agreement and the data, methodologies and assumptions on which emissions estimates and targets are based are also subject to change.
Any delay or failure in setting, making progress against or meeting NatWest Group’s climate-related targets and commitments may have a material adverse impact on NatWest
The prudential regulation of climate-related risks is an important driver in how NatWest
UK and in the European Union are publishing expectations as to how banks should prudently manage and transparently disclose climate-related and environmental risks under prudential rules. In November 2020, the
• develop an approach to disclosure on the financial risks from climate change.
December 2020 the Bank of England published an update on its approach to the
(i.e. not intended to be used to set capital requirements), will be launched in early June 2021. There is a risk, however, that in the future years once the climate analytics have been embedded via the CBES, it may be concluded by the regulator that financial institutions, including NatWest Group, may be required to hold additional capital to enhance their resilience against systemic and/or institution specific vulnerabilities to climaterelated risks, including potential asset devaluation shocks.
A d d itio n a l in fo rm a tio n adverse impact on NatWest Group’s regulatory compliance, prudential capital requirements, liquidity position, reputation, business, results of operations and outlook.
As a result, it is very difficult to predict and model the impact of climate-related risks into precise financial and economic outcomes and impacts. Climate-related risks present significant methodological challenges due to their forward-looking nature, the lack of historical testing capabilities, the quality, lack of standardisation and incompleteness of emissions and other climate and sub-sector related data and the immature nature of risk measurement and modelling methodologies.
NatWest Group needs to rely on third party advice, modelling, and data which is also subject to many limitations and uncertainties; • modelling of and data on climaterelated risks on financial assets is immature in nature and it is expected that techniques and understanding will evolve rapidly in the coming years; • it is challenging to benchmark or back test the climate scenarios given their forward-looking nature and the multiple possible outcomes; • there is significant uncertainty as to how the climate will evolve over the coming decades, how and when governments, regulators, businesses, investors and customers respond and how those responses impact the economy, asset valuations, land systems, energy systems, technology, policy and wider society.
Accordingly, these risks and uncertainties coupled with significantly longer timeframes make the outputs of climate-related risk modelling, including emissions reductions targets and pathways, inherently more unreliable than outputs modelled for traditional financial planning cycles based on historical financial information.
Capabilities within NatWest Group to assess the suitability of the assumptions required to model and manage climate-related risks appropriately are developing. Even when those capabilities are developed, the high level of uncertainty regarding any assumptions modelled, the highly subjective nature of risk measurement and mitigation techniques, incorrect or inadequate assumptions and judgments and data quality gaps and limitations may lead to inadequate risk management information and frameworks, or ineffective business adaptation or mitigation strategies, which may have a material adverse impact on NatWest
‘sustainability-related’ related risks and opportunities; and (ii) focus on long term sustainable value creation rather than shortterm financial value.
In addition to climate-related risks, sustainability-related risks such as environmental degradation may also adversely affect economic activity, asset pricing and valuations of issuers’ securities and, in turn, the wider financial system. There is also evidence of an interconnection between climate-related and sustainabilityrelated risks resulting in combined effects capable of potentially generating even greater adverse effects. Sustainability-related risks may impact economic activities directly (for example through lower corporate profitability or the devaluation of assets) or indirectly (for example through macro-financial changes).
They may also affect the viability or resilience of business models over the medium to longer term, particularly those business models most vulnerable to sustainability-related risks. In addition, sustainability-related risks can trigger further losses stemming directly or indirectly from legal claims (liability risks) and reputational damage as a result of the public, customers, counterparties and/or investors associating NatWest Group or its customers with adverse sustainability-related issues.
and liquidity risk (for example, net cash outflows or depletion of liquidity buffers), as well as migration risk, credit spread risk in the banking book, real estate risks and strategic risk.
Increasing levels of climate, environmental and sustainability-related laws, regulation and oversight may adversely affect
NatWest Group to increased costs of compliance, regulatory sanction and reputational damage.
A d d itio n a l in fo rm a tio n sustainable financial products and services, which may have a significant impact on the services provided by NatWest Group and its subsidiaries, especially mortgage lending, and its associated credit, market and financial risk profile. They could also impact NatWest
UK laws and regulations (such as the recently announced UK Green Taxonomy) or regarded by investors and regulators as best practice standards whether or not they apply to UK
NatWest Group is also participating in various voluntary carbon reporting and other standard setting initiatives for disclosing climate and sustainability-related information, many of which have differing objectives and methodologies and are at different stages of development in terms of how they apply to financial institutions.
These developing and evolving climate and sustainability-related requirements are likely to require NatWest Group to implement significant changes to its business models, product and other governance, internal controls over financial reporting, disclosure controls and procedures, modelling capability and risk management systems, which may increase the cost of doing business, entail additional change risk and compliance costs.
Group’s ability to achieve its strategy, including its climate ambition, as well as its reputation, business, results of operations and outlook.
Operational risks (including reliance on third party suppliers and outsourcing of certain activities) are inherent in NatWest
Group relies on third-party suppliers or vendors to provide services to it or its customers, as is increasingly the case as
Operational risks continue to be heightened as a result of the implementation of NatWest
NatWest Group’s current cost-reduction measures and conditions affecting the financial services industry generally (including the COVID-19 pandemic, Brexit and other geo-political developments) as well as the legal and regulatory uncertainty resulting therefrom. It is unclear as to how the future ways of working may evolve, including in respect of how working practices may develop, or how NatWest Group will evolve to best serve its customers. Any of the above may place significant pressure on NatWest
NatWest Group experiences a constant threat from cyberattacks across the entire NatWest
Group and against NatWest Group’s supply chain, re-enforcing the importance of due diligence of and close working relationship with the third parties on which NatWest Group relies. NatWest Group is reliant on technology, against which there is a constantly evolving series of attacks that are increasing in terms of frequency, sophistication, impact and severity. As cyberattacks evolve and become more sophisticated, NatWest Group is required to continue to invest in additional capability designed to defend against the emerging threats. In 2020, NatWest Group was subjected to a small number of Distributed
Denial of Service (‘DDOS’) attacks, which are a pervasive and significant threat to the global financial services industry. The focus is to manage the impact of the attacks and sustain availability of services for NatWest Group’s customers. NatWest Group continues to invest significant resources in the development and evolution of cyber security controls that are designed to minimise the potential effect of such attacks.
Hostile attempts are made by third parties to gain access to, introduce malware (including ransomware) into and exploit vulnerabilities of, NatWest Group’s IT systems. NatWest
See also, ‘NatWest Group’s operations are highly dependent on its complex IT systems
Any failure in NatWest Group’s cybersecurity policies, procedures or controls, may result in significant financial losses, major business disruption, inability to deliver customer services, or loss of data or other sensitive information (including as a result of an outage) and may cause associated reputational damage. Any of these factors could increase costs (including costs relating to notification of, or compensation for
NatWest Group’s ability to retain and attract customers. Regulators in the UK, US, Europe and Asia continue to recognise cybersecurity as an increasing systemic risk to the financial sector and have highlighted the need for financial institutions to improve their monitoring and control of, and resilience
and EBA requirements of the applicable legislation may result in financial losses, regulatory fines and investigations and associated reputational damage.
NatWest Group operations and strategy are highly dependent on the accuracy and effective use of data.
NatWest Group relies on the effective use of accurate data to support, monitor, evaluate, manage and enhance its operations and deliver its strategy. The availability of current, detailed, accurate and, wherever possible, machine-readable customer segment and sub-sector data is fast becoming a critical strategic asset. Failure to have current, highquality data and/or the ineffective use of such data could result in a failure to manage and report important risks and opportunities or satisfy customers’ expectations including the inability to deliver innovative products and services. This could also result in a failure to deliver NatWest Group’s strategy and could place the NatWest Group at a competitive disadvantage by increasing its costs, inhibiting its efforts to reduce costs or its ability to improve its systems, controls and processes, which could result in a failure to deliver
NatWest Group’s strategy. These data limitations or the unethical or inappropriate use of data and/or non-compliance with customer data and privacy protection laws could give rise to conduct and litigation risks and may increase the risk of operational events, losses or other adverse consequences due to inappropriate models, systems, processes, decisions or other actions.
NatWest Group’s operations are highly dependent on its complex IT systems
systems, as well as the communication networks between its branches and main data processing centres, is critical to NatWest
Individually or collectively, any critical system failure, material loss of service availability or material breach of data security could cause serious damage to NatWest Group’s ability to provide services to its customers, which could result in reputational damage, significant compensation costs or regulatory sanctions
(including fines resulting from regulatory investigations) or a breach of applicable regulations. In particular, such issues could cause long-term damage to NatWest Group’s reputation and could affect its regulatory approvals, competitive position, business and brands, which could undermine its ability to attract and retain customers. This risk is heightened as most of NatWest Group’s employees are working remotely as a result of the COVID-19 pandemic, as it outsources certain functions and as it continues to innovate and offer new digital solutions to its customers as a result of the trend towards online and mobile banking.
In 2020, NatWest Group continued to make considerable investments to further simplify, upgrade and improve its IT and technology capabilities (including migration of certain services to cloud platforms). NatWest Group also continues to develop and enhance digital services for its customers and seeks to improve its competitive position through enhancing controls and procedures and strengthening the resilience of services including cyber security. Any failure of these investment and rationalisation initiatives to achieve the expected results, due to costchallenges or otherwise, could negatively affect NatWest Group’s operations, its reputation and ability to retain or grow its customer business or adversely impact its competitive position, thereby negatively impacting NatWest Group’s business, results of operations and outlook.
NatWest Group relies on attracting, retaining and developing senior management and skilled personnel, and is required to maintain good employee relations.
NatWest Group’s ability to do this may be more difficult due to the cost reduction pressures, including the refocusing of its
This increases the cost of hiring, training and retaining skilled personnel. In addition, certain economic, market and regulatory conditions and political developments (including Brexit)
NatWest Group’s activities and includes the definition and monitoring of NatWest Group’s risk appetite and reporting on NatWest
NatWest Group’s operations are inherently exposed to conduct risks, which include business decisions, actions or reward mechanisms that are not responsive to or aligned with NatWest Group’s regulatory obligations, customers’ needs or do not reflect