TIDM83NF
RNS Number : 9948G
Natwest Markets PLC
30 July 2021
NatWest Markets Group
Interim Results 2021
ci.natwest.com
NatWest Markets Group (NWM Group)
Results for the half year ended 30 June 2021
Becoming a more sustainable business
We continued to support customers with innovative financial
solutions while delivering on plans to become a more sustainable
part of NatWest Group. We have further developed our capability to
offer better integrated solutions, particularly in foreign exchange
and funds financing targeted to the investment management
community. We continued to build momentum and grow our Climate and
Sustainable Financing and Funding, with a strong performance during
the first half of 2021 delivering GBP6.3 billion (Full year 2020:
GBP7.2 billion) towards NatWest Group's 2020 to 2021 target of
GBP20 billion.
Robust business continuity plans remained in place, to ensure
that we were able to support customers and protect employees during
the COVID-19 pandemic, with the vast majority of the workforce
working remotely throughout the first half of 2021. In the various
regions where we operate, a small proportion of employees continue
to operate from the workplace, primarily those in regulated roles
and key oversight functions.
Financial review
NWM Group reported a loss of GBP119 million for H1 2021 compared
with a loss of GBP129 million in H1 2020. Income was down by GBP513
million to GBP296 million, largely reflecting reduced levels of
customer activity and own credit adjustments compared with H1 2020
when the market reacted to the COVID-19 pandemic. Operating
expenses decreased by GBP334 million to GBP480 million in H1 2021,
largely due to lower litigation and conduct costs reflecting
continued progress in closing legacy matters during the period, and
continued progress on underlying cost reductions.
Income and costs
-- Total income was GBP296 million, compared with GBP809 million in H1
2020. Income excluding asset disposals/strategic risk reduction and
own credit adjustments was GBP335 million in H1 2021 compared with
GBP819 million in H1 2020, driven by weaker performance in Fixed Income
and a reduction in Currencies as volumes were impacted by low volatility
during the current period, in addition to increased levels of customer
activity in the comparative period as the market reacted to the COVID-19
pandemic. Own credit adjustments were down by GBP52 million compared
with H1 2020 when credit spreads widened across the market at the
onset of the COVID-19 pandemic.
-- Operating expenses of GBP480 million in H1 2021 were GBP334 million
lower than GBP814 million in H1 2020. Litigation and conduct costs
of GBP68 million credit reflects continued progress in closing legacy
matters during the period, and were GBP181 million lower than in H1
2020. Other operating expenses were down GBP136 million to GBP453
million in H1 2021, primarily reflecting continued progress on underlying
cost reductions.
-- The impairment release for H1 2021 was GBP16 million, driven mainly
by credit improvements in the period and releases on individual IFRS
9 Stage 2 and Stage 3 exposures, compared with a charge of GBP45 million
in H1 2020 when expected credit loss (ECL) provisions increased in
the early stages of the COVID-19 pandemic.
Balance sheet
-- NWM Group's total assets and liabilities decreased by GBP51.2 billion
and GBP50.1 billion to GBP221.9 billion and GBP213.7 billion respectively
at 30 June 2021, compared with 31 December 2020. The decreases primarily
reflect lower derivative fair values, largely driven by increases
in interest rates across major currencies.
-- Valuation reserves, comprised of credit valuation adjustments (CVA),
funding valuation adjustment (FVA), bid-offer and product and deal
specific reserves, decreased to GBP678 million at 30 June 2021 (31
December 2020 - GBP803 million). There was a reallocation of FVA to
CVA during the period following an update to the risk management of
certain exposures. The net decrease across CVA, FVA and bid-offer
reserves was driven by reduced exposures, due to increases in interest
rates and trade exit activity, in addition to reduced risk.
-- On 9 June 2021 NWM Plc paid an interim ordinary dividend to its parent
company, NatWest Group plc, of GBP250 million, with the total interim
ordinary dividends paid in H1 2021 amounting to GBP750 million.
Liquidity and funding
-- NWM Plc's liquidity portfolio at 30 June 2021 was GBP17.7 billion
with a LCR of 227% (31 December 2020 - GBP19.4 billion with LCR 268%).
-- NWM Plc issued GBP2.5 billion of term senior unsecured debt securities
in H1 2021, including benchmark transactions of $1.25 billion of notes
under the US MTN programme and EUR1.25 billion of notes issued under
the EMTN programme, and other private placements.
Financial review
Capital and leverage
-- Total NWM Plc RWAs were GBP24.6 billion at 30 June 2021, compared
with GBP25.6 billion at 31 December 2020. The decrease reflected lower
levels of credit, counterparty credit and operational risk, offset
by an increase in market risk. Following the announcement of GBP LIBOR
cessation in March 2021, the market risk RWAs became elevated by GBP2.5
billion as a result of including modelled GBP LIBOR basis risk post
4 January 2022. Regulatory approval has been obtained in July 2021
to update the VaR model and this will remove this impact in Q3 2021.
If this model approval was back dated to Q2 2021 the reported RWAs
would have been GBP22.1 billion. Underlying levels of market risk
were low and progress continues to be made on asset disposals in line
with the strategy.
-- NWM Plc's CET1 ratio was 20.2% at 30 June 2021 compared with 21.7%
at 31 December 2020. The decrease in the period reflected the impact
of dividends paid and other reserve movements, partially offset by
the reduction in RWAs.
-- Total MREL for NWM Plc at 30 June 2021 was GBP10.8 billion, or 43.8%
of RWAs, down from GBP12.7 billion or 49.6% of RWAs at 31 December
2020. The reduction in the period was largely due to the redemption
of a $1.5 billion internal instrument issued to NatWest Group plc
and the reduction in CET1 capital.
NWM Group business review
The table below sets out the performance key metrics and
ratios(1).
30 June 31 March 31 December
2021 2021 2020
---------------------------------------
Balance sheet
Total assets 221.9 230.2 273.1
Funded assets 113.3 108.1 107.5
Derivative assets 108.6 122.1 165.6
--------------------------------------- -------- -----------
Liquidity and funding
Liquidity coverage ratio (LCR) (%) (2) 227 233 268
Liquidity portfolio (GBPbn) (2) 17.7 16.5 19.4
Total wholesale funding (GBPbn) (3) 20.7 18.8 20.6
Total funding including repo (GBPbn) 71.6 67.9 75.9
Capital and leverage
Common Equity Tier (CET1) ratio (%) 20.2 21.1 21.7
CRR leverage ratio (%) (2) 4.7 4.9 5.2
Risk-weighted assets (RWAs) (GBPbn) 24.6 24.7 25.6
Total Capital ratio (%) 28.9 29.8 30.3
Total MREL (GBPbn) (4) 10.8 11.1 12.7
Total MREL ratio (%) 43.8 44.8 49.6
--------------------------------------- ------- -------- -----------
Notes:
(1) Capital, leverage and RWAs are based on PRA transitional
arrangements for NWM Plc. Regulatory capital is monitored and
reported at NWM Plc level.
(2) These metrics have been presented for NWM Plc as they are
monitored and reported for regulatory purposes.
(3) Excludes derivative cash collateral received, customer
deposits, repo and intra-NatWest Group balances.
(4) Includes senior internal debt instruments issued to NatWest
Group plc with a regulatory value of GBP3.7 billion (31 March 2021
- GBP3.7 billion; 31 December 2020 - GBP4.9 billion).
Outlook (1)
NatWest Markets Plc, like all companies, continues to deal with
a range of significant risks and uncertainties in the external
economic, political and regulatory environment. The outlook remains
uncertain. We will continue to actively monitor market
conditions.
We retain the medium-term target capital metrics, including RWA
reduction, as set out in the NatWest Markets Plc 2020 Annual Report
and Accounts. We expect 2021 exit and disposal costs to be no more
than GBP0.1 billion for the full year.
Depending on market conditions in H2 2021, NWM Group will
continue its plans for moderate term issuance to cover maturities
and support business initiatives with the rest of NatWest
Group.
Note:
(1) The targets, expectations and trends discussed in this section represent
management's current expectations and are subject to change, including
as a result of the factors described in the Risk Factors section
on pages 156 to 172 of the NatWest Markets Plc 2020 Annual Report
and Accounts, and the Summary Risk Factors set out on pages 48 and
49 of this announcement for H1 2021. These statements constitute
forward-looking statements. Refer to Forward-looking statements
in this announcement.
Financial review
The segmental analysis of key income statement lines for the
half year ended 30 June 2021 is set out below. Commentary refers to
the tables below as well as the consolidated income statement shown
on page 25.
Half year ended 30 Half year ended 30
June 2021 June 2020
Central Central
NatWest items NatWest items
& &
Markets other Total Markets other Total
Income statement GBPm GBPm GBPm GBPm GBPm GBPm
------- ------- ----- ------- ------- -----
Net interest income (4) - (4) (39) - (39)
Non-interest income 294 6 300 848 - 848
--------------------------------- ------- ------- ----- ------- ------- -----
Total income 290 6 296 809 - 809
Strategic costs (89) (6) (95) (105) (7) (112)
Litigation and conduct costs 2 66 68 (2) (111) (113)
Other operating expenses (455) 2 (453) (610) 21 (589)
--------------------------------- ------- ------- ----- ------- ------- -----
Operating expenses (542) 62 (480) (717) (97) (814)
Operating (loss)/profit before
impairments (252) 68 (184) 92 (97) (5)
Impairment releases/(losses) 16 - 16 (40) (5) (45)
--------------------------------- ------- ------- ----- ------- ------- -----
Operating (loss)/profit before
tax (236) 68 (168) 52 (102) (50)
Tax credit/(charge) 49 (79)
--------------------------------- ------- ------- ----- ------- ------- -----
Loss for the period (119) (129)
--------------------------------- ------- ------- ----- ------- ------- -----
Income
--------------------------------- ------- ------- ----- ------- ------- -----
Fixed Income (1,2,3,4) 43 - 43 403 - 403
Currencies (2,4) 205 - 205 336 - 336
Capital Markets (1,2,3,4) 166 - 166 219 - 219
Capital Management Unit & other
(2,5) 13 6 19 (44) - (44)
Revenue share paid to other
NatWest Group segments (98) - (98) (95) - (95)
--------------------------------- ------- ------- ----- ------- ------- -----
Income excluding Asset disposals
and OCA 329 6 335 819 - 819
Asset disposals/Strategic risk
reduction (6) (40) - (40) (63) - (63)
Own credit adjustments (OCA) 1 - 1 53 - 53
--------------------------------- ------- ------- ----- ------- ------- -----
Total income 290 6 296 809 - 809
--------------------------------- ------- ------- ----- ------- ------- -----
Notes:
(1) Fixed Income comprises Rates and Credit trading. Rates was presented
as a separate business in NWM Group results publications prior to
the Q3 2020 Interim Management Statement (H1 2020: GBP451 million).
Credit trading and Capital Markets were previously reported as Financing.
(2) Income of GBP(40) million, GBP(8) million and GBP(14) million reported
within Fixed Income, Currencies and Capital Markets respectively
at H1 2020 relates to business that was subsequently transferred
to Capital Management Unit during 2020.
(3) Income of GBP33 million reported within Capital Markets at H1 2020
relates to business that subsequently transferred to Fixed Income
during 2020.
(4) Income of GBP47 million and GBP5 million reported within Fixed Income
at H1 2020 relates to business that was subsequently transferred
to Currencies and Capital Markets respectively during 2020.
(5) Capital Management Unit was set up in Q3 2020 to manage capital
usage and optimisation across all parts of NatWest Markets. The
income shown here relates to legacy assets. Other relates to income
booked to the Central items & other operating segment.
(6) Asset disposals/Strategic risk reduction relates to the costs of
exiting positions, which includes changes in carrying value to align
to the expected exit valuation, and the impact of risk reduction
transactions entered into, in respect of the strategic announcements
of 14 February 2020.
-- Net interest income was a net expense of GBP4 million in H1 2021 compared
with GBP39 million net expense in H1 2020.
-- Non-interest income of GBP300 million in H1 2021 decreased by GBP548
million compared with GBP848 million in H1 2020, reflecting a weaker
performance in the Fixed Income business and reduced Currencies income
as volumes were impacted by low volatility in the current period,
in addition to increased customer activity and elevated own credit
adjustments at the onset of the COVID-19 crisis in the comparative
period. H1 2021 also included a GBP20 million loss from a liability
management exercise which thereafter reduces the cost of funding.
Asset disposals/Strategic risk reduction of GBP(40) million was driven
by a number of transactions, compared with GBP(63) million in the
comparative period which was largely driven by a single significant
transaction undertaken to mitigate the RWA usage of NWM Group.
-- Operating expenses were GBP480 million in H1 2021, a decrease of GBP334
million from GBP814 million in H1 2020. Litigation and conduct costs
of GBP68 million credit reflects continued progress in closing legacy
matters during the period, and were GBP181 million lower than GBP113
million in H1 2020. Strategic costs were GBP95 million in H1 2021,
compared with GBP112 million in H1 2020, as work continued on the
refocusing of NWM Group. Other operating expenses decreased to GBP453
million in H1 2021 from GBP589 million in H1 2020, primarily reflecting
ongoing progress on underlying cost reductions.
-- Impairment releases were GBP16 million in H1 2021, largely driven
by credit improvements in the period and releases on individual IFRS
9 Stage 2 and Stage 3 exposures, compared with a charge of GBP45 million
in H1 2020 when ECL provisions increased at the onset of the COVID-19
pandemic.
-- NatWest Markets operating loss before tax was GBP236 million compared
with a profit of GBP52 million in H1 2020. Income excluding asset
disposals and own credit adjustments of GBP329 million was GBP490
million lower than GBP819 million in H1 2020, reflecting a weaker
performance in Fixed Income and reduction in Currencies in the current
period, in addition to increased customer activity in the comparative
period as the market reacted to COVID-19. Asset disposals of GBP(40)
million in the period was driven by a number of transactions, compared
with GBP(63) million in H1 2020 that included GBP40 million from a
single significant transaction. Own credit adjustments were GBP52
million lower than in H1 2020 when credit spreads widened at the onset
of the COVID-19 crisis. Operating expenses of GBP542 million were
lower compared with GBP717 million in H1 2020, largely driven by a
decrease in other operating expenses reflecting continued progress
on underlying cost reductions.
-- Central items & other operating profit before tax was GBP68 million
in H1 2021 compared with a GBP102 million loss in H1 2020. Litigation
and conduct costs of GBP66 million credit in the current period reflects
continued progress in closing legacy matters, and were GBP177 million
lower than in H1 2020.
Financial review
The segmental analysis of key income statement lines for the
quarter ended 30 June 2021 is set out below.
Q2 2021 Q1 2021 Q2 2020
----------------------- ----------------------- -----------------------
Central Central Central
NatWest items NatWest items NatWest items
& & &
Markets other Total Markets other Total Markets other Total
Income statement GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Net interest income 3 - 3 (7) - (7) 4 - 4
Non-interest income 99 6 105 195 - 195 265 - 265
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Total income 102 6 108 188 - 188 269 - 269
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Strategic costs (59) (4) (63) (30) (2) (32) (75) (5) (80)
Litigation and conduct costs 2 79 81 - (13) (13) - (9) (9)
Other operating expenses (226) - (226) (229) 2 (227) (285) 15 (270)
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Operating expenses (283) 75 (208) (259) (13) (272) (360) 1 (359)
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Operating profit/(loss) before
impairments (181) 81 (100) (71) (13) (84) (91) 1 (90)
Impairment releases/(losses) 10 - 10 6 - 6 (45) (5) (50)
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Operating (loss)/profit before
tax (171) 81 (90) (65) (13) (78) (136) (4) (140)
Tax credit 32 17 3
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Loss for the period (58) (61) (137)
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Income
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Fixed Income (1,2,3,4) 5 - 5 38 - 38 226 - 226
Currencies (2,4) 87 - 87 118 - 118 142 - 142
Capital Markets (1,2,3,4) 92 - 92 74 - 74 131 - 131
Capital Management Unit &
other (2,5) 5 6 11 8 - 8 (17) (17)
Revenue share paid to other
NatWest Group segments (50) - (50) (48) - (48) (48) - (48)
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Income excluding Asset disposals
and OCA 139 6 145 190 - 190 434 - 434
Asset disposals/Strategic
risk reduction (6) (36) - (36) (4) - (4) (63) - (63)
Own credit adjustments (OCA) (1) - (1) 2 - 2 (102) - (102)
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Total income 102 6 108 188 - 188 269 - 269
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Notes:
(1) Fixed Income comprises Rates and Credit trading. Rates was presented
as a separate business in NWM Group results publications prior to
the Q3 2020 Interim Management Statement (Q2 2020: GBP175 million).
Credit trading and Capital Markets were previously reported as Financing.
(2) Income of GBP2 million, GBP1 million and GBP5 million reported within
Fixed Income, Currencies and Capital Markets respectively at Q2
2020 relates to business that was subsequently transferred to Capital
Management Unit during 2020.
(3) Income of GBP21 million reported within Capital Markets at Q2 2020
relates to business that subsequently transferred to Fixed Income
during 2020.
(4) Income of GBP36 million and GBP2 million reported within Fixed Income
at Q2 2020 relates to business that was subsequently transferred
to Currencies and Capital Markets respectively during 2020.
(5) Capital Management Unit was set up in Q3 2020 to manage capital
usage and optimisation across all parts of NatWest Markets. The
income shown here relates to legacy assets. Other relates to income
booked to the Central items & other operating segment.
(6) Asset disposals/Strategic risk reduction relates to the costs of
exiting positions, which includes changes in carrying value to align
to the expected exit valuation, and the impact of risk reduction
transactions entered into, in respect of the strategic announcements
of 14 February 2020.
-- Net interest income was GBP3 million in Q2 2021, compared with net
expense of GBP7 million in Q1 2021 and net income of GBP4 million
in Q2 2020.
-- Non-interest income of GBP105 million decreased by GBP90 million compared
with GBP195 million in Q1 2021 and by GBP160 million compared with
GBP265 million in Q2 2020, reflecting a weaker performance in the
Fixed Income business and lower Currencies income as volumes were
impacted by low volatility in the current quarter, and the increased
levels of customer activity and elevated own credit adjustments in
Q2 2020 in the early stages of the COVID-19 pandemic. Asset disposals
of GBP(36) million reflected a number of transactions in the quarter,
compared with GBP(4) million in Q1 2021 and GBP(63) million in Q2
2020, which included GBP(40) million from a single significant transaction.
-- Operating expenses were GBP208 million in Q2 2021, compared with GBP272
million in Q1 2021 and GBP359 million in Q2 2020. Litigation and conduct
costs of GBP81 million credit in Q2 2021 reflects continued progress
in closing legacy matters during the period. Other operating expenses
of GBP226 million in Q2 2021 were comparable with GBP227 million in
Q1 2021 but down from GBP270 million in Q2 2020, reflecting ongoing
progress on underlying cost reductions.
-- Impairment releases were GBP10 million in Q2 2021, largely driven
by credit improvements on IFRS 9 Stage 1 and Stage 2 exposures, compared
with a release of GBP6 million in Q1 2021 and a charge of GBP50 million
in Q2 2020 when ECL provisions increased at the onset of the COVID-19
pandemic.
-- NatWest Markets operating loss before tax was GBP171 million compared
with GBP65 million in Q1 2021 and GBP136 million in Q2 2020. Income
excluding asset disposals and own credit adjustments was GBP139 million
in Q2 2021 (Q1 2021 - GBP190 million; Q2 2020 - GBP434 million), reflecting
a weaker performance in Fixed Income and a reduction in Currencies
in the current quarter, and the increased levels of customer activity
in Q2 2020 in the early stages of the COVID-19 pandemic. Asset disposals
of GBP(36) million in Q2 2021 included a number of transactions, compared
with GBP(4) million in Q1 2021 and GBP(63) million in Q2 2020. Operating
expenses of GBP283 million in Q2 2021 were higher compared with GBP259
million in Q1 2021, largely due to higher strategic costs, but lower
compared with GBP360 million in Q2 2020 largely due to lower other
operating expenses, reflecting ongoing progress on underlying cost
reductions.
-- Central items & other operating profit before tax was GBP81 million
compared with losses of GBP13 million in Q1 2021 and GBP4 million
in Q2 2020. Litigation and conduct costs credit of GBP79 million in
the current quarter reflects continued progress in closing legacy
matters.
Financial review
Balance sheet profile as at 30 June 2021
NWM Group's balance sheet profile is summarised below.
Commentary refers to the table below as well as the consolidated
balance sheet on page 26.
Assets Liabilities
------------------------------------------------- -------------------------------------------------
30 June 31 December 30 June 31 December
2021 2020 2021 2020
GBPbn GBPbn GBPbn GBPbn
Cash and balances at
central banks 17.1 15.8
Trading assets 70.2 68.7 75.7 72.3 Trading liabilities
--------------------------- ------- ----------- ------- ----------- ---------------------------
Securities 31.4 29.2 32.1 26.8 Short positions
Reverse repos (1) 24.7 19.4 23.7 19.0 Repos (2)
Derivative cash collateral Derivative cash collateral
given (3) 12.9 18.5 17.0 23.2 received (4)
Other trading assets 1.2 1.6 2.9 3.3 Other trading liabilities
--------------------------- ------- ----------- ------- ----------- ---------------------------
Deposits - amortised
Loans - amortised cost 7.5 9.4 4.2 4.4 cost
Settlement balances 7.5 2.3 7.1 2.2 Settlement balances
Amounts due from holding Amounts due to holding
company company
and fellow subsidiaries 1.4 1.6 6.4 8.1 and fellow subsidiaries
Other financial assets 8.9 9.0 17.6 18.2 Other financial liabilities
Other assets 0.7 0.7 0.9 1.3 Other liabilities
Liabilities excluding
Funded assets 113.3 107.5 111.9 106.5 derivatives
Derivative assets 108.6 165.6 101.8 157.3 Derivative liabilities
--------------------------- ------- ----------- ------- ----------- ---------------------------
Total assets 221.9 273.1 213.7 263.8 Total liabilities
of which:
20.7 20.6 wholesale funding (5)
short-term wholesale
8.7 9.5 funding (5)
Net derivative assets Net derivative liabilities
(6) 3.9 4.7 3.1 3.6 (6)
--------------------------- ------- ----------- ------- ----------- ---------------------------
Notes:
(1) Comprises bank reverse repos of GBP3.6 billion (31 December 2020
- GBP2.2 billion) and customer reverse repos of GBP21.1 billion
(31 December 2020 - GBP17.2 billion).
(2) Comprises bank repos of GBP1.3 billion (31 December 2020 - GBP1.0
billion) and customer repos of GBP22.4 billion (31 December 2020
- GBP18.0 billion).
(3) Comprises derivative cash collateral given relating to banks of
GBP5.8 billion (31 December 2020 - GBP7.5 billion) and customers
of GBP7.1 billion (31 December 2020 - GBP11.0 billion).
(4) Comprises derivative cash collateral received relating to banks
of GBP7.9 billion (31 December 2020 - GBP11.8 billion) and customers
of GBP9.1 billion (31 December 2020 - GBP11.4 billion).
(5) Excludes derivative cash collateral received, repo, customer deposits
and intra-NatWest Group balances.
(6) Refer to page 14 for further details.
-- Total assets and liabilities decreased by GBP51.2 billion and GBP50.1
billion to GBP221.9 billion and GBP213.7 billion respectively at 30
June 2021, compared with GBP273.1 billion and GBP263.8 billion at
31 December 2020. The decreases primarily reflect lower derivative
fair values, largely driven by increases in interest rates across
major currencies. Funded assets, which exclude derivatives, increased
by GBP5.8 billion to GBP113.3 billion.
-- Cash and balances at central banks increased by GBP1.3 billion to
GBP17.1 billion, compared with GBP15.8 billion at 31 December 2020,
driven by liquidity and capital management actions.
-- Trading assets were up by GBP1.5 billion to GBP70.2 billion at 30
June 2021, with increases in securities and reverse repos driven by
customer flows and the management of balance sheet within limits,
partially offset by a decrease in derivative cash collateral posted.
Trading liabilities increased by GBP3.4 billion to GBP75.7 billion,
with increases in short positions and repos partially offset by a
decrease in derivative cash collateral received.
-- Derivative assets and derivative liabilities were down GBP57.0 billion
to GBP108.6 billion and GBP55.5 billion to GBP101.8 billion respectively
at 30 June 2021, largely driven by increases in interest rates across
major currencies since year end 2020.
-- Settlement balance assets and liabilities were up GBP5.2 billion and
GBP4.9 billion to GBP7.5 billion and GBP7.1 billion respectively,
due to increased trading compared with the seasonally lower levels
of customer activity leading up to 31 December 2020.
-- Loans to customers - amortised cost were down GBP2.1 billion to GBP6.3
billion, largely reflecting liquidity management actions.
-- Other financial liabilities decreased by GBP0.6 billion to GBP17.6
billion (31 December 2020 - GBP18.2 billion), largely driven by maturities
in the period offset partially by new issuance. The balance at 30
June 2021 includes GBP12.1 billion of medium-term notes issued.
-- Owners' equity was down GBP1.3 billion to GBP8.1 billion (31 December
2020 - GBP9.4 billion), driven by interim dividend payments to NatWest
Group plc totalling GBP0.8 billion, and other reserve movements in
the period.
Risk and capital management
Certain disclosures in this section are within the scope of EY's
review report and are marked accordingly by a bracket in the
right-hand margin.
Market risk
Traded internal VaR
The table below shows one-day 99% internal VaR for the trading portfolios
of NWM Group, split by exposure type.
Half year ended
-------------------------------------------------------------------------------------------------------
30 June 2021 30 June 2020 31 December 2020
--------------------------------- --------------------------------- ---------------------------------
Period Period Period
Traded Internal Average Maximum Minimum end Average Maximum Minimum end Average Maximum Minimum end
VaR
(1-day 99%) GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ------- ------- ------- ------ ------- ------- ------- ------ ------- ------- ------- ------
Interest rate 11.3 19.0 4.5 17.4 10.1 20.2 6.1 6.1 7.3 11.4 4.8 6.3
Credit spread 11.0 13.4 9.4 11.2 16.3 27.2 8.7 17.7 14.4 18.8 10.0 10.3
Currency 3.9 9.4 2.0 2.4 4.2 8.4 2.1 3.9 4.1 7.0 2.1 3.0
Equity 0.5 0.8 0.2 0.2 0.8 2.0 0.3 0.3 0.4 0.8 0.2 0.7
Commodity 0.2 0.5 - - 0.1 0.3 - 0.1 0.2 0.6 - 0.2
Diversification
(1) (13.5) (15.5) (14.8) (9.6) (10.9) (10.3)
----------------
Total 13.4 23.9 9.5 15.7 16.7 25.7 10.1 18.5 15.5 22.2 10.2 10.2
---------------- ------- ------- ------- ------ ------- ------- ------- ------ ------- ------- ------- ------
Note:
(1) NWM Group benefits from diversification across various financial
instrument types, currencies and markets. The extent of the diversification
benefit depends on the correlation between the assets and risk factors
in the portfolio at a particular time. The diversification factor is
the sum of the VaR on individual risk types less the total.
Key points
* The increase in average interest rate VaR, compared
to the prior period, reflected a rise in tenor basis
risk in sterling flow trading. This related to the
transition from LIBOR to alternative risk-free rates.
The regulator has approved an update of the VaR model,
which will remove this impact during Q3 2021.
* The decrease in average credit spread VaR mostly
reflected a tightening of credit spreads over the
period.
* Traded VaR remained within appetite throughout the
period.
Risk and capital management
Capital, liquidity and funding risk
Capital, RWAs and leverage
Capital resources, RWAs and leverage based on the PRA
transitional arrangements for NWM Plc are set out below. Regulatory
capital is monitored and reported at legal entity level for large
subsidiaries of NatWest Group.
30 June 31 December
2021 2020
Capital adequacy ratios % %
CET1 20.2 21.7
Tier 1 23.9 25.2
Total 28.9 30.3
----------------------------- ------- -----------
Capital (1) GBPm GBPm
CET1 4,969 5,547
Tier 1 5,864 6,433
Total 7,100 7,753
----------------------------- ------- -----------
Risk-weighted assets
Credit risk 5,941 6,902
Counterparty credit risk 7,424 8,130
Market risk 9,197 8,150
Operational risk 2,020 2,382
----------------------------- ------- -----------
Total RWAs 24,582 25,564
Leverage (2)
----------------------------- ------- -----------
CRR leverage exposure (GBPm) 124,600 123,927
Tier 1 capital (GBPm) 5,864 6,433
CRR leverage ratio (%) 4.7 5.2
----------------------------- ------- -----------
Notes:
(1) CRR end-point for UK banks set by the PRA is 10.5% minimum
total capital ratio, with a minimum CET1 ratio of 7.0%.
(2) Leverage exposure is broadly aligned to the accounting value
of on and off-balance sheet exposures albeit subject to specific
adjustments for derivatives, securities financing positions and
off-balance sheet exposures.
Key points
-- NWM Plc's Common Equity Tier 1 (CET1) ratio decreased to
20.2%, from 21.7% at 31 December 2020, primarily reflecting reserve
movements in the period, partially offset by the GBP1.0 billion
decrease in RWAs. NWM Plc's CRR leverage ratio decreased to 4.7% at
30 June 2021 (31 December 2020 - 5.2%), primarily driven by the
decrease in Tier 1 capital.
-- During 2020, the European Commission amended the prudent
valuation Regulatory Technical Standard such that, due to the
exceptional levels of market volatility, the aggregation factor was
increased from 50% to 66% until 31 December 2020 inclusive. From 1
January 2021 the aggregation factor reverted to 50% from 66%. This
has increased NWM Plc's Prudential Valuation Adjustment (PVA)
deduction by GBP115 million.
-- RWAs were GBP24.6 billion at 30 June 2021, compared with
GBP25.6 billion at 31 December 2020. The decrease reflected lower
levels of credit, counterparty credit and operational risk; offset
by an increase in market risk. The increase in market risk RWAs
compared to the prior period reflected a rise in tenor basis risk
in sterling flow trading. This related to the transition from LIBOR
to alternative risk-free rates. The regulator has approved an
update of the VaR model, which will remove this impact during Q3
2021.
Risk and capital management
Capital, liquidity and funding risk continued
Capital resources
The minimum requirement for own funds is set out for NWM Plc legal
entity under the Capital Requirements Regulation. Transitional
arrangements on the phasing in of end-point capital resources are
set by the PRA.
30 June 31 December
2021 2020
Shareholders' equity GBPm GBPm
Shareholders' equity 7,980 9,152
Other equity instruments (904) (904)
--------------------------------------------------- ------- -----------
7,076 8,248
Regulatory adjustments and deductions
Own credit 50 43
Defined benefit pension fund adjustment (176) (174)
Cash flow hedging reserve (116) (201)
Prudential valuation adjustments (236) (251)
Expected losses less impairments (2) (1)
Instruments of financial sector entities where the
institution has a significant investment (1,631) (1,624)
Adjustments under IFRS 9 transitional arrangements 4 7
Foreseeable ordinary dividends - (500)
--------------------------------------------------- ------- -----------
(2,107) (2,701)
CET1 capital 4,969 5,547
--------------------------------------------------- ------- -----------
Additional Tier 1 (AT1) capital
Qualifying instruments and related share premium 904 904
Qualifying instruments and related share premium
subject to phase out 217 219
--------------------------------------------------- ------- -----------
1,121 1,123
Tier 1 deductions
Instruments of financial sector entities where the
institution has a significant investment (226) (237)
-------
Tier 1 capital 5,864 6,433
--------------------------------------------------- ------- -----------
Qualifying Tier 2 capital
Qualifying instruments and related share premium 1,614 1,704
-------
Tier 2 deductions
Instruments of financial sector entities where the
institution has a significant investment (397) (406)
Other regulatory adjustments 19 22
--------------------------------------------------- ------- -----------
(378) (384)
Tier 2 capital 1,236 1,320
--------------------------------------------------- ------- -----------
Total regulatory capital 7,100 7,753
--------------------------------------------------- ------- -----------
Risk and capital management
Capital, liquidity and funding risk continued
Leverage exposure
The leverage exposure below is based on the CRR Delegated
Act.
30 June 31 December
2021 2020
Leverage GBPm GBPm
-------------------------------------------- --------- -----------
Cash and balances at central banks 13,922 11,736
Trading assets 51,035 52,169
Derivatives 106,405 164,104
Net loans to customers 21,873 23,827
Other assets 7,150 4,246
-------------------------------------------- --------- -----------
Total assets 200,385 256,082
Derivatives
- netting (108,882) (169,152)
- potential future exposures 34,692 35,654
Securities financing transactions gross up 1,230 999
Undrawn commitments 4,540 5,037
Regulatory deductions and other adjustments (5,763) (2,977)
Exclusion of core UK-group exposures (1,602) (1,716)
-------------------------------------------- --------- -----------
Leverage exposure 124,600 123,927
-------------------------------------------- --------- -----------
Liquidity portfolio
The table below shows the liquidity portfolio by LCR product,
with the incorporation of discounts (or haircuts) used within the
internal stressed outflow coverage. Secondary liquidity comprises
assets eligible for discount at central banks, which do not form
part of the liquid asset portfolio for LCR or stressed outflow
coverage purposes.
Liquidity value
(1)
30 June 31 December
2021 2020
NatWest Markets Plc GBPm GBPm
---------------------------------------------------------- ------- -----------
Cash and balances at central banks 14,071 11,773
AAA to AA- rated governments 3,176 7,207
A+ and lower rated governments 33 79
Government guaranteed issuers, public sector entities - -
and government sponsored entities
International organisations and multilateral development
banks 233 144
---------------------------------------------------------- ------- -----------
LCR level 1 bonds 3,442 7,430
---------------------------------------------------------- ------- -----------
LCR level 1 assets 17,513 19,203
LCR level 2 assets - -
Non-LCR eligible assets - -
---------------------------------------------------------- ------- -----------
Primary liquidity 17,513 19,203
Secondary liquidity (2) 223 224
---------------------------------------------------------- ------- -----------
Total liquidity value 17,736 19,427
---------------------------------------------------------- ------- -----------
GBP USD EUR Other Total
Total liquidity portfolio GBPm GBPm GBPm GBPm GBPm
30 June 2021 8,891 2,821 5,988 36 17,736
31 December 2020 8,838 3,793 6,716 80 19,427
-------------------------- ----- ----- ----- ----- ------
Notes:
(1) Liquidity value was aligned to the internal stressed outflow
coverage, which is stated after discounts (or haircuts) are applied
to the instruments.
(2) Comprises assets eligible for discounting at the Bank of England and other central banks.
Risk and capital management
Capital, liquidity and funding risk continued
Funding sources
The table below shows NWM Group's carrying values of the principal
funding sources based on contractual maturity.
30 June 2021 31 December 2020
----------------------------- -----------------------------
Short-term Long-term Short-term Long-term
less more less more
than than than than
1 year 1 year Total 1 year 1 year Total
------------------------
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ---------- --------- ------ ---------- --------- ------
Bank deposits 1,364 330 1,694 1,294 514 1,808
of which: repos
(amortised cost) 526 - 526 200 - 200
Customer deposits 2,417 43 2,460 2,526 92 2,618
of which: repos
(amortised cost) 128 - 128 - - -
Trading liabilities (1)
Repos (2) 23,720 - 23,720 19,036 - 19,036
Derivative cash
collateral received 17,017 - 17,017 23,226 - 23,226
Other bank and customer
deposits 919 726 1,645 818 985 1,803
Debt securities in issue 378 827 1,205 527 881 1,408
------------------------ ---------- --------- ------ ---------- --------- ------
42,034 1,553 43,587 43,607 1,866 45,473
Other financial
liabilities
Customer deposits
(designated fair
value) 546 172 718 616 180 796
Debt securities in issue
commercial paper and
certificates
of deposits 3,651 143 3,794 3,253 168 3,421
medium term notes (MTNs) 2,852 9,222 12,074 4,441 8,407 12,848
Subordinated liabilities 280 771 1,051 - 1,105 1,105
------------------------ ---------- --------- ------ ---------- --------- ------
7,329 10,308 17,637 8,310 9,860 18,170
Amounts due to holding
company and
fellow subsidiaries (3)
Internal MREL 952 2,920 3,872 - 5,181 5,181
Other bank and customer
deposits 651 - 651 925 - 925
Subordinated liabilities - 1,678 1,678 - 1,753 1,753
------------------------ ---------- --------- ------ ---------- --------- ------
1,603 4,598 6,201 925 6,934 7,859
Total funding 54,747 16,832 71,579 56,662 19,266 75,928
------------------------ ---------- --------- ------ ---------- --------- ------
Of which: available in
resolution
(4) - 5,369 5,369 - 8,039 8,039
------------------------ ---------- --------- ------ ---------- --------- ------
Notes:
(1) Funding sources excludes short positions of GBP32,111 million
(31 December 2020 - GBP26,779 million) reflected as trading liabilities
on the balance sheet.
(2) Comprises Central and other bank repos of GBP1,319 million (31
December 2020 - GBP1,048 million), other financial institution repos
of GBP20,487 million (31 December 2020 - GBP15,973 million) and other
corporate repos of GBP1,914 million (31 December 2020 - GBP2,015
million).
(3) Amounts due to holding company and fellow subsidiaries relating
to non-financial instruments of GBP155 million (31 December 2020
- GBP275 million) have been excluded from the table.
(4) Eligible liabilities (as defined in the Banking Act 2009 as amended
from time to time) that meet the eligibility criteria set out in
the regulations, rules, policies, guidelines, or statements of the
Bank of England including the Statement of Policy published in June
2018.
Key points
* During H1 2021, NWM Group continued to access capital
markets raising GBP2.5 billion of funding in the form
of benchmark transactions and private placements. The
benchmark transactions were $1.25 billion 3.25 year
fixed and floating rate notes issued under the US
Rule 144A programme and EUR1.25 billion five-year
fixed rate notes issued under the EMTN programme.
* Depending on market conditions in H2 2021, NWM Group
will continue its plans for moderate term issuance to
cover maturities and support business initiatives
with the rest of NatWest Group.
* NWM Group also maintains a portfolio of bi-lateral
borrowing in other formats, such as secured notes and
loans backed by banking book or other collateral.
Risk and capital management
Capital, liquidity and funding risk continued
Senior notes and subordinated liabilities - residual maturity profile
by instrument type
The table below shows NWM Group's debt securities in issue, subordinated
liabilities and internal resolution instruments by residual maturity. Trading
liabilities Other financial liabilities Amounts due to
holding
----------- ----------------------------------------
Debt Debt securities company and fellow
in issue
------------------
securities Commercial subsidiaries
----------------------
in issue paper Subordinated Internal Subordinated Total
notes
MTNs and CDs MTNs liabilities Total MREL liabilities in
issue
30 June GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
2021
Less than
1 year 378 3,651 2,852 280 6,783 952 - 8,113
1-3 years 277 133 4,882 241 5,256 2,920 832 9,285
3-5 years 155 10 3,800 - 3,810 - - 3,965
More than
5 years 395 - 540 530 1,070 - 846 2,311
--------- ----------- ---------- ------ ------------ ------ --------
Total 1,205 3,794 12,074 1,051 16,919 3,872 1,678 23,674
--------- ----------- ---------- ------ ------------ ------ -------- ------------ ------
31
December
2020
Less than
1 year 527 3,253 4,441 - 7,694 - - 8,221
1-3 years 169 165 4,444 549 5,158 5,181 - 10,508
3-5 years 240 3 3,356 - 3,359 - 889 4,488
More than
5 years 472 - 607 556 1,163 - 864 2,499
--------- ----------- ---------- ------ ------------ ------ -------- ------------ ------
Total 1,408 3,421 12,848 1,105 17,374 5,181 1,753 25,716
--------- ----------- ---------- ------ ------------ ------ -------- ------------ ------
The table below shows the currency breakdown of total notes in issue.
GBP USD EUR Other Total
30 June 2021 GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ---- ----- ------ ----- ------
Commercial paper and CDs 226 1,342 2,226 - 3,794
MTNs 476 3,588 7,531 1,684 13,279
External subordinated liabilities 94 213 744 - 1,051
Internal MREL due to NatWest Group
plc - 2,048 1,824 - 3,872
Subordinated liabilities due to NatWest
Group plc - 846 832 - 1,678
---------------------------------------- ---- ----- ------ ----- ------
Total 796 8,037 13,157 1,684 23,674
---------------------------------------- ---- ----- ------ ----- ------
31 December 2020 724 8,029 14,588 2,375 25,716
---------------------------------------- ---- ----- ------ ----- ------
Risk and capital management
Credit risk - Trading activities
This section details the credit risk profile of NWM Group's
trading activities.
Securities financing transactions and collateral
The table below shows securities financing transactions in NWM
Group. Balance sheet captions include balances held at all classifications
under IFRS 9.
Reverse repos Repos
--------------------------------- ---------------------------------
Outside Outside
Of which: netting Of which: netting
Total can be arrangements Total can be arrangements
offset offset
30 June 2021 GBPm GBPm GBPm GBPm GBPm GBPm
---------------- -------- --------- ------------ -------- --------- ------------
Gross 53,657 52,648 1,009 52,748 51,616 1,132
IFRS offset (28,374) (28,374) - (28,374) (28,374) -
---------------- -------- --------- ------------ -------- --------- ------------
Carrying value 25,283 24,274 1,009 24,374 23,242 1,132
---------------- -------- --------- ------------ -------- --------- ------------
Master netting
arrangements (2,838) (2,838) - (2,838) (2,838) -
Securities
collateral (21,302) (21,302) - (20,371) (20,371) -
---------------- -------- --------- ------------ -------- --------- ------------
Potential for
offset not
recognised
under IFRS (24,140) (24,140) - (23,209) (23,209) -
---------------- -------- --------- ------------ -------- --------- ------------
Net 1,143 134 1,009 1,165 33 1,132
---------------- -------- --------- ------------ -------- --------- ------------
31 December 2020
---------------- -------- --------- ------------ -------- --------- ------------
Gross 46,169 45,806 363 44,102 42,402 1,700
IFRS offset (24,866) (24,866) - (24,866) (24,866) -
---------------- -------- --------- ------------ -------- --------- ------------
Carrying value 21,303 20,940 363 19,236 17,536 1,700
---------------- -------- --------- ------------ -------- --------- ------------
Master netting
arrangements (929) (929) - (929) (929) -
Securities
collateral (19,938) (19,938) - (16,607) (16,607) -
---------------- -------- --------- ------------ -------- --------- ------------
Potential for
offset not
recognised
under IFRS (20,867) (20,867) - (17,536) (17,536) -
---------------- -------- --------- ------------ -------- --------- ------------
Net 436 73 363 1,700 - 1,700
---------------- -------- --------- ------------ -------- --------- ------------
Key points
* Reverse repos and repos increased on both gross and
carrying value basis when compared to 2020. These
trends are consistent with seasonal lower levels of
activity.
* Reverse repo and repo transactions are primarily
backed by highly-rated sovereign, supranational and
agency collateral.
Debt securities
The table below shows debt securities held at mandatory fair value
through profit or loss by issuer as well as ratings based on the
lowest of Standard & Poor's, Moody's and Fitch.
Central and local government Financial
--------------------------------
UK US Other institutions Corporate Total
30 June 2021 GBPm GBPm GBPm GBPm GBPm GBPm
------------------- --------- --------- ---------- ------------ --------- --------
AAA - - 2,469 1,013 - 3,482
AA to AA+ - 4,088 4,829 1,010 44 9,971
A to AA- 5,121 - 1,781 397 75 7,374
BBB- to A- - - 9,235 386 518 10,139
Non-investment
grade - - 33 252 102 387
Unrated - - - 10 4 14
------------------- --------- --------- ---------- ------------ ---------
Total 5,121 4,088 18,347 3,068 743 31,367
------------------- --------- --------- ---------- ------------ --------- --------
Short positions (5,487) (2,303) (22,185) (2,030) (106) (32,111)
------------------- --------- --------- ---------- ------------ --------- --------
31 December 2020
------------------- --------- --------- ---------- ------------ --------- --------
AAA - - 3,114 1,113 - 4,227
AA to AA+ - 5,149 3,651 576 49 9,425
A to AA- 4,184 - 1,358 272 81 5,895
BBB- to A- - - 8,277 444 656 9,377
Non-investment
grade - - 36 127 53 216
Unrated - - - 150 1 151
------------------- --------- --------- ---------- ------------ --------- --------
Total 4,184 5,149 16,436 2,682 840 29,291
------------------- --------- --------- ---------- ------------ --------- --------
Short positions (5,704) (1,123) (18,135) (1,761) (56) (26,779)
------------------- --------- --------- ---------- ------------ --------- --------
Risk and capital management
Credit risk - Trading activities continued
Derivatives
The table below shows third-party derivatives by type of contract.
The master netting agreements and collateral shown do not result in
a net presentation on the balance sheet under IFRS.
30 June 2021 31 December 2020
--------------------------------------------------------- --------------------------------
Notional
----------------------------------
GBP USD Euro Other Total Assets Liabilities Notional Assets Liabilities
GBPbn GBPbn GBPbn GBPbn GBPbn GBPm GBPm GBPbn GBPm GBPm
--------------- ----- ----- ----- ----- ------ -------- ----------- -------- --------- -----------
Gross exposure 107,677 100,572 164,252 155,787
IFRS offset - - - -
--------------- ----- ----- ----- ----- ------ -------- ----------- -------- --------- -----------
Carrying value 3,580 3,782 4,891 1,410 13,663 107,677 100,572 13,697 164,252 155,787
--------------- ----- ----- ----- ----- ------ -------- ----------- -------- --------- -----------
Of which:
Interest rate
(1)
Interest rate
swaps 59,264 50,297 91,352 80,440
Options
purchased 14,663 - 20,526 -
Options written - 14,803 - 20,190
Futures and
forwards - - 1 2
--------------- ----- ----- ----- ----- ------ -------- ----------- -------- --------- -----------
Total 3,220 2,264 4,269 424 10,177 73,927 65,100 10,371 111,879 100,632
--------------- ----- ----- ----- ----- ------ -------- ----------- -------- --------- -----------
Exchange rate
Spot, forwards
and
futures 22,035 22,134 34,902 35,022
Currency swaps 6,932 8,081 10,025 12,087
Options
purchased 4,562 - 7,277 -
Options written - 4,825 - 7,662
--------------- ----- ----- ----- ----- ------ -------- ----------- -------- --------- -----------
Total 358 1,514 611 986 3,469 33,529 35,040 3,310 52,204 54,771
--------------- ----- ----- ----- ----- ------ -------- ----------- -------- --------- -----------
Credit 2 4 11 - 17 221 431 15 161 376
Equity and
commodity - - - - - - 1 1 8 8
--------------- ----- ----- ----- ----- ------ -------- ----------- -------- --------- -----------
Carrying value 13,663 107,677 100,572 13,697 164,252 155,787
--------------- ----- ----- ----- ----- ------ -------- ----------- -------- --------- -----------
Counterparty
mark-to-market
netting (85,710) (85,710) (134,913) (134,913)
Cash collateral (13,867) (10,346) (19,606) (14,778)
Securities
collateral (4,170) (1,384) (5,053) (2,487)
--------------- ----- ----- ----- ----- ------ -------- ----------- -------- --------- -----------
Net exposure 3,930 3,132 4,680 3,609
--------------- ----- ----- ----- ----- ------ -------- ----------- -------- --------- -----------
Of which
outside
netting
agreements 964 919 853 577
--------------- ----- ----- ----- ----- ------ -------- ----------- -------- --------- -----------
Banks (2) 135 682 206 532
Other financial
institutions
(3) 1,731 1,364 1,416 1,939
Corporate (4) 1,966 927 2,921 1,046
Government (5) 98 159 137 92
--------------- ----- ----- ----- ----- ------ -------- ----------- -------- --------- -----------
Net exposure 3,930 3,132 4,680 3,609
--------------- ----- ----- ----- ----- ------ -------- ----------- -------- --------- -----------
UK 2,297 750 2,833 1,516
Europe 846 1,172 1,076 1,192
US 573 945 470 644
RoW 214 265 301 257
--------------- ----- ----- ----- ----- ------ -------- ----------- -------- --------- -----------
Net exposure 3,930 3,132 4,680 3,609
--------------- ----- ----- ----- ----- ------ -------- ----------- -------- --------- -----------
Asset quality of uncollateralised
derivative assets
------------------------------------ ----- ------ -------- ----------- -------- --------- -----------
AQ1-AQ4 3,048 3,388
AQ5-AQ8 824 1,263
AQ9-AQ10 58 29
--------------- ----- ----- ----- ----- ------ -----------
Net exposure 3,930 4,680
--------------- ----- ----- ----- ----- ------ -------- ----------- -------- --------- -----------
Notes:
(1) The notional amount of interest rate derivatives includes GBP7,019
billion (31 December 2020 - GBP7,074 billion) in respect of contracts
cleared through central clearing counterparties.
(2) Transactions with certain counterparties with whom NWM Group has
netting arrangements but collateral is not posted on a daily basis;
certain transactions with specific terms that may not fall within
netting and collateral arrangements; derivative positions in certain
jurisdictions, for example China, where the collateral agreements
are not deemed to be legally enforceable.
(3) Includes transactions with securitisation vehicles and funds where
collateral posting is contingent on NWM Group's external rating.
(4) Mainly large corporates with whom NWM Group may have netting arrangements
in place, but operational capability does not support collateral posting.
(5) Sovereigns and supranational entities with no collateral arrangements,
collateral arrangements that are not considered enforceable, or one-way
collateral agreements in their favour.
Risk and capital management
Credit risk - Net credit exposures for banking and trading
activities
Asset quality
The table below shows the current and potential exposure by high level
asset class and asset quality. It represents total credit risk for
assets held in the banking book in addition to counterparty credit
risk for traded products.
Cash & Sovereign Loans Collateralised Uncollateralised
balances debt & other Other rate risk rate risk Repo & Off-balance
at debt
central securities lending securities management management reverse sheet Leasing Total
banks repo items
30 June GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
2021
---------- -------- ---------- ------- ---------- -------------- ---------------- ------- ----------- ------- ------
AQ1-AQ4 17,304 5,587 5,217 2,755 2,063 1,451 277 666 50 35,370
AQ5-AQ8 - - 618 226 338 570 - 49 - 1,801
AQ9 - - 153 - 2 51 - - - 206
AQ10 - - 17 1 - 3 - - - 21
---------- -------- ---------- ------- ---------- -------------- ---------------- ------- ----------- ------- ------
Current
exposure 17,304 5,587 6,005 2,982 2,403 2,075 277 715 50 37,398
Potential
exposure 17,304 5,587 16,522 2,982 11,166 3,780 1,997 1,843 50 61,231
---------- -------- ---------- ------- ---------- -------------- ---------------- ------- ----------- ------- ------
31
December
2020
---------- -------- ---------- ------- ---------- -------------- ---------------- ------- ----------- ------- ------
AQ1-AQ4 15,771 5,968 6,687 1,432 2,399 2,109 351 815 55 35,587
AQ5-AQ8 - - 1,183 58 479 985 - 59 - 2,764
AQ9 - - 168 - 2 3 - 1 - 174
AQ10 - - 30 1 1 8 - 1 4 45
---------- -------- ---------- ------- ---------- -------------- ---------------- ------- ----------- ------- ------
Current
exposure 15,771 5,968 8,068 1,491 2,881 3,105 351 876 59 38,570
Potential
exposure 15,771 5,968 20,119 1,491 11,969 4,764 1,306 1,811 59 63,258
---------- -------- ---------- ------- ---------- -------------- ---------------- ------- ----------- ------- ------
Key point
* Measured against NWM Group's asset quality scale, 95%
(31 December 2020 - 92%) of total current exposure
was rated in the AQ1-AQ4 bands. When considered
against external credit ratings, 95%, or GBP35.5
billion (31 December 2020 - 93%, GBP36.0 billion) of
current exposure was equivalent to an investment
grade rating (BBB- or better).
Risk and capital management
Credit risk - Economics
Economic loss drivers
Introduction
The portfolio segmentation and selection of economic loss drivers
for IFRS 9 follow closely the approach used in stress testing. To
enable robust modelling the forecasting models for each portfolio
segment (defined by product or asset class and where relevant, industry
sector and region) are based on a selected, small number of economic
factors, (typically three to four) that best explain the temporal
variations in portfolio loss rates. The process to select economic
loss drivers involves empirical analysis and expert judgement.
The most material economic loss drivers for the UK portfolios include
UK GDP, world GDP, the unemployment rate, the house price index, and
the Bank of England base rate. Similar metrics are used for other
key country exposures in NWM Group.
Economic scenarios
There was improvement in the economic outlook for the UK since 31
December 2020, which was reflected in a more optimistic base case
scenario as at 30 June 2021. The main drivers of the improvement were
as follows:
* Rapid roll-out of the COVID-19 vaccination in the UK
and in other developed countries, leading to
relaxation of restrictions.
* The success of various government support measures in
containing the fallout from lockdown.
* Faster than expected economic recovery, with GDP
having made material gains since the lifting of
restrictions, and labour and housing markets in
particular showing continued signs of resiliency.
The range of anticipated future economic conditions was defined by
a set of four internally developed scenarios and their respective
probabilities. In addition to the base case, they comprised upside,
downside and extreme downside scenarios. The scenarios primarily reflect
a range of outcomes for the path of COVID-19 as well as recovery,
and the associated effects on labour and asset markets.
The four scenarios were deemed appropriate in capturing the uncertainty
in economic forecasts and the non-linearity in outcomes under different
scenarios. The scenarios were developed to provide sufficient coverage
across potential changes in unemployment, asset price and the degree
of permanent damage to the economy, around which there are pronounced
levels of uncertainty at this stage.
The tables below provide details of the key economic parameters under
the four scenarios.
The main macroeconomic variables for each of the four scenarios used
for expected credit loss (ECL) modelling are set out in the table
below. The compound annual growth rate (CAGR) for GDP is shown. It
also shows the five-year average for unemployment and the Bank of
England base rate. The house price index and commercial real estate
figures show the total change in each asset over five years.
Main macroeconomic variables
Five-year 30 June 2021 31 December 2020
summary
--------------------------------- ---------------------------------
Extreme Extreme
Upside Base Downside downside Upside Base Downside downside
case case
UK % % % % % % % %
------ ----- -------- -------- ------ ----- -------- --------
GDP - CAGR 3.9 3.5 2.9 2.5 3.6 3.1 2.8 1.3
Unemployment -
average 4.1 4.6 5.8 8.1 4.4 5.7 7.1 9.7
House price
index - total
change 23.4 14.2 4.9 (0.8) 12.5 7.6 4.4 (19.0)
Bank of England
base rate
- average 0.9 0.4 - (0.5) 0.2 - (0.1) (0.5)
Commercial real
estate price
- total change 13.6 4.7 0.1 (8.7) 4.3 0.7 (12.0) (31.5)
World GDP - CAGR 3.8 3.5 2.7 1.8 3.5 3.4 2.9 2.8
Probability
weight 35.0 40.0 20.0 5.0 20.0 40.0 30.0 10.0
---------------- ------ ----- -------- -------- ------ ----- -------- --------
Note:
(1) The five year period starts at Q1 2021 for 30 June 2021 and Q3 2020 for 31 December 2020 .
Risk and capital management
Credit risk - Economics continued
Economic loss drivers
Annual figures
UK GDP - annual growth Extreme
Upside Base case Downside downside
% % % %
----- ------ --------- -------- --------
2021 10.1 7.3 2.7 0.1
2022 5.4 5.8 4.3 -
2023 1.6 1.6 4.4 7.7
2024 1.6 1.6 2.2 3.7
2025 1.6 1.6 1.5 1.7
----- ------ --------- -------- --------
UK unemployment rate - annual average Extreme
Upside Base case Downside downside
% % % %
------ --------- -------- --------
2021 4.7 5.3 5.4 5.9
2022 4.3 4.8 7.0 11.8
2023 4.0 4.5 6.5 10.4
2024 3.8 4.5 5.4 7.1
2025 3.8 4.3 4.8 5.2
----- ------ --------- -------- --------
UK house price index - four quarter growth Extreme
Upside Base case Downside downside
% % % %
------ --------- -------- --------
2021 8.0 2.0 (2.4) (5.4)
2022 1.7 0.5 (3.0) (27.0)
2023 2.8 1.9 1.3 12.2
2024 4.8 4.8 4.8 19.5
2025 4.0 4.0 4.0 6.2
----- ------ --------- -------- --------
UK commercial real estate price - four quarter growth Extreme
Upside Base case Downside downside
% % % %
------ --------- -------- --------
2021 7.0 (1.4) (8.4) (13.4)
2022 2.1 2.0 (1.3) (18.2)
2023 1.7 1.7 5.8 15.7
2024 1.3 1.3 2.3 5.4
2025 1.2 1.2 2.3 5.1
----- ------ --------- -------- --------
Worst points 30 June 2021 31 December 2020
--------------------------------- ----------------------------------
Extreme Extreme
Upside Base Downside downside Upside Base Downside downside
case case
UK % % % % % % % %
------ ----- -------- -------- ------ ------ -------- --------
GDP - - - (10.2) - (1.8) (5.1) (10.4)
Unemployment
rate (peak) 5.0 5.5 7.0 11.9 5.9 7.0 9.4 13.9
House price
index - - (6.1) (33.1) - (3.6) (11.2) (32.0)
Commercial real
estate
price - (2.1) (14.1) (33.1) (3.4) (10.1) (28.9) (40.4)
--------------- ------ ----- -------- -------- ------ ------ -------- --------
Note:
(1) For the unemployment rate, the figures show the peak levels between
2021 and 2026 for 30 June 2021, and between 2020 and 2025 for 31 December
2020. For the other parameters, the figures show falls relative to
the starting periods mentioned under the five-year summary table above.
Risk and capital management
Credit risk - Economics continued
Economic loss drivers
Probability weightings of scenarios
NWM Group's approach to IFRS 9 multiple economic scenarios (MES)
involves selecting a suitable set of discrete scenarios to characterise
the distribution of risks in the economic outlook and assigning appropriate
probability weights. The scale of the economic impact of COVID-19
and the range of recovery paths necessitates a change of approach
to assigning probability weights from that used in recent updates.
Prior to 2020, GDP paths for NWM Group's scenarios were compared
against a set of 1,000 model runs, following which a percentile in
the distribution was established that most closely corresponded to
the scenario.
Instead, NWM Group has subjectively applied probability weights,
reflecting expert views within NWM Group. The probability weight
assignment was judged to present good coverage to the central scenarios
and the potential for a robust recovery on the upside and exceptionally
challenging outcomes on the downside. A 35% weighting was applied
to the upside scenario, a 40% weighting applied to the base case
scenario, a 20% weighting applied to the downside scenario and a
5% weighting applied to the extreme downside scenario. NWM Group
assessed the downside risk posed by COVID-19 to be diminishing over
the course of 2021, with the vaccination roll-out and positive economic
data being observed since the gradual relaxing of lockdown restrictions.
NWM Group therefore judged it was appropriate to apply a higher probability
to upside-biased scenarios than at December 2020.
Use of the scenarios in lending
The lending ECL methodology is based on the concept of credit cycle
indices (CCIs). The CCIs represent all relevant economic loss drivers
for a region/industry segment aggregated into a single index value
that describes the loss rate conditions in the respective segment
relative to its long-run average. A CCI value of zero corresponds
to loss rates at long-run average levels, a positive CCI value corresponds
to loss rates below long-run average levels and a negative CCI value
corresponds to loss rates above long-run average levels.
The four economic scenarios are translated into forward-looking projections
of CCIs using a set of econometric models. Subsequently the CCI projections
for the individual scenarios are averaged into a single central CCI
projection according to the given scenario probabilities. The central
CCI projection is then overlaid with an additional mean reversion
assumption, i.e. that after one to two years into the forecast horizon
the CCIs gradually revert to their long-run average of zero.
Finally, ECL is calculated using a Monte Carlo approach by averaging
PD and LGD values arising from many CCI paths simulated around the
central CCI projection.
The rationale for the approach is the long-standing observation that
loss rates tend to follow regular cycles. This allows NWM Group to
enrich the range and depth of future economic conditions embedded
in the final ECL beyond what would be obtained from using the discrete
macro-economic scenarios alone.
UK economic uncertainty
Treatment of COVID-19 relief mechanisms
Use of COVID-19 relief mechanisms (for example, payment holidays
and Coronavirus Business Interruption Loan Scheme (CBILS) ) does
not automatically merit identification of significant increase in
credit risk (SICR) and trigger a Stage 2 classification in isolation.
NWM Group continues to provide support, where appropriate, to existing
customers. Those who are deemed either (a) to require a prolonged
timescale to return to within NWM Group's risk appetite, (b) not
to have been viable pre-COVID-19, or (c) not to be able to sustain
their debt once COVID-19 is over, will trigger a SICR and, if concessions
are sought, be categorised as forborne, in line with regulatory guidance.
Payment holiday extensions beyond an aggregate of 12 months in an
18 month period to cover continuing COVID-19 business interruption
are categorised as forbearance, including for customers where no
other SICR triggers are present.
Risk and capital management
Credit risk - Economics continued
Model monitoring and enhancement
The abrupt and prolonged interruption of a wide range of economic
activities due to COVID-19 and the subsequent government interventions
to support businesses and individuals, has resulted in patterns
in the data of key economic loss drivers and loss outcomes, that
are markedly different from those that NWM Group's models have been
built on. To account for these structural changes, model adjustments
have been applied and model changes have been implemented.
All in-model adjustments described have been applied by correcting
the PD and LGD estimates within the core ECL calculation process
and therefore consistently and systematically inform SICR identification
and ECL measurement.
UK economic uncertainty
Government support
Most notably as a result of various government support measures,
model-projected default rates have been adjusted by introducing
lags between 6 to 12 months. These lags are based partly on objective
empirical data (i.e. the absence of increases in realised default
rates by the reporting date) and partly judgmental, based on remaining
government support measures and their expected effectiveness.
Extreme GDP movements
Due to the specific nature of COVID-19, GDP year-on-year movements
in both directions are extremely sharp, many multiples of their
respective extremes observed previously.
This creates a risk of overstretched, invalid extrapolations in
statistical models. Therefore, all econometric models were updated
to make them robust against extreme GDP movements by capping projected
CCI values at levels corresponding to three times the default rates
observed at the peak of the global financial crisis and using quarterly
averages rather than spot values for CCI projections.
Governance and post model adjustments
The IFRS 9 PD, exposure at default and LGD models are subject to
NWM Group's model risk policy that stipulates periodic model monitoring,
periodic re-validation and defines approval procedures and authorities
according to model materiality. Various post model adjustments (PMAs)
were applied where management judged they were necessary to ensure
an adequate level of overall ECL provision. All PMAs were subject
to formal approval through provisioning governance, and were categorised
as follows:
* Deferred model calibrations - ECL adjustments where
PD model monitoring indicated that actual defaults
were below estimated levels but where it was judged
that an implied ECL release was not supportable, as
these were being judged to have been distorted by
government support schemes. As a consequence, any
potential ECL release was deferred and retained on
the balance sheet.
* Economic uncertainty - ECL adjustments primarily
arising from uncertainties associated with MES and
credit outcomes as a result of the effect of COVID-19
and the consequences of government interventions. In
both cases, management judged that additional ECL was
required until further credit performance data became
available on the behavioural and loss consequences of
COVID-19.
* Other adjustments - ECL adjustments where it was
judged that the modelled ECL required to be amended.
PMAs will remain a key focus area of NWM Group's ongoing ECL adequacy
assessment process. A holistic framework has been established including
reviewing a range of economic data, external benchmark information
and portfolio performance trends, particularly with more observable
outcomes from the unwinding of COVID-19 support mechanisms during
the remainder of 2021.
Risk and capital management
Credit risk - Economics continued
Measurement uncertainty and ECL sensitivity analysis
The recognition and measurement of ECL is complex and involves
the use of significant judgement and estimation, particularly
in times of economic volatility and uncertainty. This includes
the formulation and incorporation of multiple forward-looking
economic conditions into ECL to meet the measurement objective
of IFRS 9. The ECL provision is sensitive to the model inputs
and economic assumptions underlying the estimate.
The focus of the simulations is on ECL provisioning requirements
on performing exposures in Stage 1 and Stage 2. The simulations
are run on a stand-alone basis and are independent of each other;
the potential ECL impacts reflect the simulated impact as at 30
June 2021. Scenario impacts on a SICR should be considered when
evaluating the ECL movements of Stage 1 and Stage 2. In all scenarios
the total exposure was the same but exposure by stage varied in
each scenario.
Stage 3 provisions are not subject to the same level of measurement
uncertainty - default is an observed event as at the balance sheet
date. Stage 3 provisions therefore have not been considered in
this analysis.
The impact arising from the upside, downside and extreme downside
scenarios has been simulated. In the simulations, NWM Group has
assumed that the economic macro variables associated with these
scenarios replace the existing base case economic assumptions,
giving them a combined total 100% probability weighting and therefore
serving as a single economic scenario.
These scenarios have been applied to all modelled portfolios in
the analysis below, with the simulation impacting both PDs and
LGDs. Modelled PMAs present in the underlying ECL estimates are
also sensitised in line with the modelled ECL movements, but those
that were judgmental in nature, primarily those for economic uncertainty,
were not (refer to the Governance and post model adjustments section).
As expected, the scenarios create differing impacts on ECL by
portfolio and the impacts are deemed reasonable. In this simulation,
it is assumed that existing modelled relationships between key
economic variables and loss drivers hold, but in practice other
factors would also have an impact, for example, potential customer
behaviour changes and policy changes by lenders that might impact
on the wider availability of credit.
NWM Group's core criterion to identify a SICR is founded on PD
deterioration, as discussed above. Under the simulations, PDs
change and result in exposures moving between Stage 1 and Stage
2 contributing to the ECL impact.
Extreme
Base
30 June 2021 Actual case Upside Downside downside
-------------------------------------- ------ ----- ------ -------- --------
Stage 1 modelled exposure (GBPm) 6,661 6,916 6,916 6,681 6,113
Stage 1 modelled ECL (GBPm) 10 10 10 10 12
Stage 1 coverage (%) 0.15% 0.14% 0.14% 0.15% 0.20%
--------------------------------------
Stage 2 modelled exposure (GBPm) 739 485 485 719 1,287
Stage 2 modelled ECL (GBPm) 36 35 35 36 42
Stage 2 coverage (%) 4.87% 7.22% 7.22% 5.01% 3.26%
-------------------------------------- ------ ----- ------ -------- --------
Stage 1 and Stage 2 modelled exposure
(GBPm) 7,400 7,401 7,401 7,400 7,400
Stage 1 and Stage 2 modelled ECL
(GBPm) 46 45 45 46 54
Stage 1 and Stage 2 coverage (%) 0.62% 0.61% 0.61% 0.62% 0.73%
--------------------------------------
Variance - (lower)/higher to actual
total Stage 1 and Stage 2 ECL (1) (1) 0 8
-------------------------------------- ------ ----- ------ -------- --------
Notes:
(1) Variations in future undrawn exposure values across the scenarios
are modelled, however the exposure position reported is that used
to calculate modelled ECL as at 30 June 2021 and therefore does
not include variation in future undrawn exposure values.
(2) Reflects ECL for all modelled exposure in scope for IFRS 9.
The analysis excludes non-modelled portfolios and exposure relating
to bonds and cash.
(3) All simulations are run on a stand-alone basis and are independent
of each other, with the potential ECL impact reflecting the simulated
impact as at 30 June 2021. The simulations change the composition
of Stage 1 and Stage 2 exposure but total exposure is unchanged
under each scenario as the loan population is static.
(4) Refer to the Economic loss drivers section for details of
economic scenarios.
(5) Refer to the NatWest Markets Plc 2020 Annual Report and Accounts
for 31 December 2020 comparatives.
Risk and capital management
Credit risk - Economics continued
Measurement uncertainty and ECL adequacy
The improvement in the economic outlook and scenarios used in the
IFRS 9 MES framework at H1 2021 resulted in a release of modelled
ECL. Given continued uncertainty remains due to COVID-19 despite
the improved economic outlook, NWM Group utilised a framework of
quantitative and qualitative measures to support the directional
change and levels of ECL coverage, including economic data, credit
performance insights and problem debt trends. This was particularly
important for consideration of post model adjustments.
As government support mechanisms continue to conclude during 2021,
NWM Group anticipates further credit deterioration in the portfolios.
However, the income statement effect of this will be mitigated
by the forward-looking provisions retained on the balance sheet
as at 30 June 2021.
There are a number of key factors that could drive further downside
to impairments, through deteriorating economic and credit metrics
and increased stage migration as credit risk increases for more
customers. A key factor would be a more adverse deterioration in
GDP and unemployment in the economies in which NWM Group operates,
but also, among others:
* The ongoing trajectory of lockdown restriction
relaxation within the UK, and any future repeated
lockdown requirements.
* The progress of the COVID-19 vaccination roll-out and
its effectiveness against new variants.
* The efficacy of the various government support
initiatives in terms of their ability to defray
customer defaults is yet to be proven, notably over
an extended period.
* Higher unemployment if companies fail to retain jobs
after the UK furlough scheme concludes in Q3 2021.
* The level of revenues lost by corporate clients and
pace of recovery of those revenues may affect NWM
Group's clients' ability to service their borrowing,
especially in those sectors most exposed to the
effects of COVID-19.
Risk and capital management
Credit risk - Banking activities
This section details the credit risk profile of NWM Group's
banking activities.
Portfolio summary
The table below shows gross loans and related credit impairment
measures, within the scope of the IFRS 9 ECL framework.
30 June 31 December
2021 2020
GBPm GBPm
---------------------------------------------------- ------- -----------
Loans - amortised cost and fair value through other
comprehensive income (FVOCI)
Stage 1 7,034 7,799
Stage 2 721 1,566
Stage 3 108 171
Of which: individual 98 162
Of which: collective 10 9
Inter-Group (1) 726 755
---------------------------------------------------- -----------
8,589 10,291
---------------------------------------------------- ------- -----------
ECL provisions
Stage 1 10 12
Stage 2 37 49
Stage 3 87 132
Of which: individual 78 124
Of which: collective 9 8
Inter-Group 1 1
---------------------------------------------------- -----------
135 194
---------------------------------------------------- ------- -----------
ECL provisions coverage (2,3)
Stage 1 (%) 0.14 0.15
Stage 2 (%) 5.13 3.13
Stage 3 (%) 80.56 77.19
Inter-Group (%) 0.14 0.13
1.70 2.02
---------------------------------------------------- ------- -----------
Half year ended
--------------------
30 June 30 June
2021 2020
GBPm GBPm
Impairment losses
ECL (release)/charge (4)
Stage 1 (8) 14
Stage 2 (5) 43
Stage 3 (3) (13)
Of which: individual 1 (4)
Of which: collective (4) (9)
Third party (16) 44
Inter-Group - 2
----------------------------------------------------
(16) 46
---------------------------------------------------- ------- -----------
ECL loss rate - annualised (basis points) (3) (41) 69
Amounts written off 40 4
---------------------------------------------------- ------- -----------
Notes:
(1) NWM Group's intercompany assets were classified in Stage 1.
The ECL attached to these loans was GBP0.9 million ( 31 December
2020 - GBP1.2 million). The remaining tables in the credit risk
section exclude intercompany assets and associated ECL.
(2) ECL provisions coverage is calculated as ECL provisions divided
by loans - amortised cost and FVOCI.
(3) ECL provisions coverage and ECL loss rates are calculated
on third party loans and related ECL provisions and charge respectively.
ECL loss rate is calculated as annualised third party ECL charge
divided by loans - amortised cost and FVOCI. The half year ECL
charge is annualised by multiplying by two.
(4) Includes a GBP1 million charge ( 30 June 2020 - GBP1 million
charge) related to other financial assets, of which nil ( 30 June
2020 - nil) related to assets classified as FVOCI and a GBP1 million
release ( 30 June 2020 - GBP1 million release) 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 64 for
Financial instruments within the scope of the IFRS 9 ECL framework
in the NatWest Markets Plc 2020 Annual Report and Accounts for
further details. Other financial assets within the scope of the
IFRS 9 ECL framework were cash and balances at central banks totalling
GBP17.1 billion (31 December 2020 - GBP15.8 billion) and debt
securities of GBP8.1 billion (31 December 2020 - GBP8.7 billion).
Key points
-- ECLs are calculated each month, with modelled impairment calculations
relying on month in arrears data and individually assessed
provisions based on the current month. A quarterly provision
adequacy assessment is also performed. Outputs are reviewed
by NWM Group senior management, who formally approve ECL levels
and ECL coverage as being at appropriate levels, to reflect
the current economic situation.
-- While the significant increase in defaults and losses predicted
in 2020 to occur throughout 2021 and early 2022 have not materialised
and there has been an immaterial level of Stage 3 defaults
so far, ECL coverage has been maintained at relatively stable
levels.
Risk and capital management
Credit risk - Banking activities continued
Sector analysis - COVID-19 impact
The table below shows exposures and ECL, by stage, for key sectors
of the Wholesale portfolio, that continue to be affected by COVID-19. Off-balance sheet
------------------------
Loans - amortised
cost & FVOCI Loan Contingent ECL provisions
-------------------------- --------------------------
Stage Stage Stage Stage Stage Stage
1 2 3 Total commitments liabilities 1 2 3 Total
30 June 2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------- ----- ----- ----- ----- ----------- ----------- ----- ----- ----- -----
Property 94 43 16 153 432 20 - 1 11 12
Financial
institutions 6,043 438 4 6,485 5,272 578 8 33 3 44
Sovereign 301 - 3 304 36 - 1 - 2 3
Corporate 596 240 85 921 5,373 116 1 3 71 75
Of which:
Airlines and
aerospace 21 - 8 29 216 43 - - 8 8
Automotive 11 38 - 49 653 - - - - -
Health 22 - 2 24 - - - - 1 1
Land
transport
and
logistics 43 41 - 84 227 1 - 1 - 1
Leisure 21 35 - 56 287 - - - - -
Oil and gas - 1 17 18 299 2 - - 4 4
Retail - - 9 9 388 5 - - 8 8
Total 7,034 721 108 7,863 11,113 714 10 37 87 134
------------- ----- ----- ----- ----- ----------- ----------- ----- ----- ----- -----
31 December 2020
----------------------- ----- ----- --- ----- ------ --- --- ---
Property 127 45 18 190 446 32 1 - 10 11
Financial institutions 6,933 1,272 3 8,208 5,591 613 9 43 3 55
Sovereign 110 67 3 180 37 - 1 - 2 3
Corporate 629 182 147 958 6,291 130 1 6 117 124
Of which:
Airlines and aerospace - 23 10 33 312 44 - - 9 9
Automotive 11 38 - 49 863 - - 1 - 1
Health 22 - 2 24 - - - - 1 1
Land transport
and logistics 85 1 1 87 451 6 - - - -
Leisure - 50 - 50 472 - - 1 - 1
Oil and gas 11 3 50 64 374 3 - - 35 35
Retail - - 10 10 342 5 - - 10 10
Total 7,799 1,566 171 9,536 12,365 775 12 49 132 193
----------------------- ----- ----- --- ----- ------ --- --- ---
Risk and capital management
Credit risk - Banking activities continued
Flow statement
The flow statement that follows shows the main ECL and related income
statement movements. It also shows the changes in ECL as well as
the changes in related financial assets used in determining ECL.
Due to differences in scope, exposures may differ from those reported
in other tables, principally in relation to exposures in Stage 1
and Stage 2. These differences do not have a material ECL impact.
Other points to note:
* Financial assets include treasury liquidity
portfolios, comprising balances at central banks and
debt securities, as well as loans. Both modelled and
non-modelled portfolios are included.
* Stage transfers (for example, exposures moving from
Stage 1 to Stage 2) are a key feature of the ECL
movements, with the net re-measurement cost of
transitioning to a worse stage being a primary driver
of income statement charges. Similarly, there is an
ECL benefit for accounts improving stage.
* Changes in risk parameters shows the reassessment of
the ECL within a given stage, including any ECL
overlays and residual income statement gains or
losses at the point of write-off or accounting
write-down.
* Other (P&L only items) includes any subsequent
changes in the value of written-down assets (for
example, fortuitous recoveries) along with other
direct write-off items such as direct recovery costs.
Other (P&L only items) affects the income statement
but does not affect balance sheet ECL movements.
* Amounts written-off represent the gross asset
written-down against accounts with ECL, including the
net asset write-down for any debt sale activity.
Stage 1 Stage 2 Stage 3 Total
--------------- --------------- --------------- ---------------
Financial Financial Financial Financial
assets ECL assets ECL assets ECL assets ECL
NWM Group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- --------- ---- --------- ---- --------- ---- --------- ----
At 1 January 2021 33,327 12 1,671 49 167 132 35,165 193
Currency
translation and
other
adjustments (700) - (36) - (3) (3) (739) (3)
Inter-Group
transfers (3) - - - - - (3) -
Transfers from
Stage 1
to Stage 2 (484) (1) 484 1 - - - -
Transfers from
Stage 2
to Stage 1 1,150 7 (1,150) (7) - - - -
Transfers from - - - - - - - -
Stage 3
Net
re-measurement
of ECL
on stage
transfer (5) 3 - (2)
Changes in risk
parameters
(model inputs) (3) (8) (1) (12)
Other changes in
net exposure (1,978) - (226) (1) (22) (1) (2,226) (2)
Other (P&L only
items) - 1 (1) -
----------------- --------- ---- --------- ---- --------- ---- --------- ----
Income statement
releases (8) (5) (3) (16)
Amounts
written-off - - - - (40) (40) (40) (40)
Unwinding of - - - -
discount
At 30 June 2021 31,312 10 743 37 102 87 32,157 134
----------------- --------- ---- --------- ---- --------- ---- --------- ----
Net carrying
amount 31,302 706 15 32,023
-----------------
At 1 January 2020 32,877 10 188 4 184 132 33,249 146
2020 movements 5,370 8 2,609 49 (2) 4 7,977 61
At 30 June 2020 38,247 18 2,797 53 182 136 41,226 207
----------------- --------- ---- --------- ---- --------- ---- --------- ----
Net carrying
amount 38,229 2,744 46 41,019
----------------- --------- ---- --------- ---- --------- ---- --------- ----
Key points
* The decrease in Stage 1 and Stage 2 ECL was primarily
due to the improvement in economic forecasts.
* The updated economics resulted in the migration of
assets from Stage 2 to Stage 1 with a consequential
reduction in Stage 2 lifetime ECL.
* Amounts written-off in the period largely related to
a small number of legacy defaulted exposures.
Condensed consolidated income statement for the half year ended 30 June 2021 (unaudited)
Half year ended
-----------------
30 June 30 June
2021 2020
GBPm GBPm
----------------------------------------- -------- -------
Interest receivable 179 276
Interest payable (183) (315)
----------------------------------------- -------- -------
Net interest income (4) (39)
----------------------------------------- -------- -------
Fees and commissions receivable 146 277
Fees and commissions payable (62) (202)
Income from trading activities 226 776
Other operating income (10) (3)
----------------------------------------- -------- -------
Non-interest income 300 848
----------------------------------------- -------- -------
Total income 296 809
Staff costs (252) (377)
Premises and equipment (37) (75)
Other administrative expenses (181) (348)
Depreciation and amortisation (10) (14)
----------------------------------------- -------- -------
Operating expenses (480) (814)
----------------------------------------- -------- -------
Loss before impairment releases/(losses) (184) (5)
Impairment releases/(losses) 16 (45)
Operating loss before tax (168) (50)
Tax credit/(charge) 49 (79)
----------------------------------------- -------- -------
Loss for the period (119) (129)
----------------------------------------- -------- -------
Attributable to:
Ordinary shareholders (189) (96)
Paid-in equity holders 31 34
Non-controlling interests 39 (67)
----------------------------------------- -------- -------
(119) (129)
----------------------------------------- -------- -------
Condensed consolidated statement of comprehensive income for the
half year ended 30 June 2021 (unaudited)
Half year ended
-----------------
30 June 30 June
2021 2020
GBPm GBPm
--------------------------------------------------------------- -------- -------
Loss for the period (119) (129)
--------------------------------------------------------------- -------- -------
Items that do not qualify for reclassification
Remeasurement of retirement benefit schemes (1) (3)
(Loss)/profit on fair value of credit in financial liabilities
designated at FVTPL due to own credit risk (25) 83
FVOCI financial assets (1) (176)
Tax 4 3
--------------------------------------------------------------- -------- -------
(23) (93)
--------------------------------------------------------------- -------- -------
Items that do qualify for reclassification
FVOCI financial assets (8) (18)
Cash flow hedges (103) 154
Currency translation (112) 258
Tax 7 (42)
--------------------------------------------------------------- -------- -------
(216) 352
--------------------------------------------------------------- -------- -------
Other comprehensive (loss)/income after tax (239) 259
--------------------------------------------------------------- -------- -------
Total comprehensive (loss)/income for the period (358) 130
--------------------------------------------------------------- -------- -------
Attributable to:
Ordinary shareholders (432) 149
Paid-in equity holders 31 34
Non-controlling interests 43 (53)
--------------------------------------------------------------- -------- -------
(358) 130
--------------------------------------------------------------- -------- -------
Condensed consolidated balance sheet as at 30 June 2021 (unaudited)
30 June 31 December
2021 2020
GBPm GBPm
--------------------------------------------------------- ------- -----------
Assets
Cash and balances at central banks 17,073 15,771
Trading assets 70,159 68,689
Derivatives 108,644 165,619
Settlement balances 7,537 2,296
Loans to banks - amortised cost 1,188 1,003
Loans to customers - amortised cost 6,271 8,444
Amounts due from holding company and fellow subsidiaries 1,418 1,587
Other financial assets 8,853 9,041
Other assets 715 688
--------------------------------------------------------- ------- -----------
Total assets 221,858 273,138
--------------------------------------------------------- ------- -----------
Liabilities
Bank deposits 1,694 1,808
Customer deposits 2,460 2,618
Amounts due to holding company and fellow subsidiaries 6,356 8,134
Settlement balances 7,100 2,248
Trading liabilities 75,698 72,252
Derivatives 101,769 157,332
Other financial liabilities 17,637 18,170
Other liabilities 1,003 1,234
--------------------------------------------------------- ------- -----------
Total liabilities 213,717 263,796
--------------------------------------------------------- ------- -----------
Equity
--------------------------------------------------------- ------- -----------
Owners' equity 8,144 9,388
Non-controlling interests (3) (46)
--------------------------------------------------------- ------- -----------
Total equity 8,141 9,342
--------------------------------------------------------- ------- -----------
Total liabilities and equity 221,858 273,138
--------------------------------------------------------- ------- -----------
Condensed consolidated statement of changes in equity for the
half year ended 30 June 2021 (unaudited)
Half year ended
-----------------
30 June 30 June
2021 2020
GBPm GBPm
--------------------------------------------------------- -------- -------
Called up share capital - at beginning and end of period 400 400
--------------------------------------------------------- -------- -------
Share premium account - at beginning and end of period 1,759 1,759
--------------------------------------------------------- -------- -------
Paid-in equity - at beginning and end of period 904 904
--------------------------------------------------------- -------- -------
FVOCI reserve - at beginning of period 34 (134)
Unrealised losses (10) (196)
Realised losses 2 1
Tax 1 3
At end of period 27 (326)
--------------------------------------------------------- -------- -------
Cash flow hedging reserve - at beginning of period 201 137
Amount recognised in equity (118) 110
Amount transferred from equity to earnings 15 44
Tax 12 (45)
At end of period 110 246
--------------------------------------------------------- -------- -------
Foreign exchange reserve - at beginning of period 121 77
Retranslation of net assets (131) 284
Foreign currency gains/(losses) on hedges of net assets 15 (35)
Recycled to profit or loss on disposal of businesses - (5)
Tax (6) -
At end of period (1) 321
--------------------------------------------------------- -------- -------
Retained earnings - at beginning of period 5,969 6,764
Loss attributable to ordinary shareholders and other
equity owners (158) (62)
Ordinary dividends paid (750) -
Paid-in equity dividends paid (31) (34)
Remeasurement of retirement benefit schemes
- gross (1) (3)
- tax 2 11
Realised (losses)/gains in period on FVOCI equity shares (1) 1
Changes in fair value of credit in financial liabilities
designated as fair value through profit or loss
- gross (25) 83
- tax 2 (8)
Share-based payments (62) (85)
Capital contribution - 22
Distribution - (40)
--------------------------------------------------------- -------- -------
At end of period 4,945 6,649
--------------------------------------------------------- -------- -------
Owners' equity at end of period 8,144 9,953
--------------------------------------------------------- -------- -------
Non-controlling interests - at beginning of period (46) 3
Currency translation adjustments and other movements 4 14
Profit/(loss) attributable to non-controlling interests 39 (67)
At end of period (3) (50)
--------------------------------------------------------- -------- -------
Total equity at end of period 8,141 9,903
--------------------------------------------------------- -------- -------
Attributable to:
Ordinary shareholders 7,240 9,049
Paid-in equity holders 904 904
Non-controlling interests (3) (50)
--------------------------------------------------------- -------- -------
8,141 9,903
--------------------------------------------------------- -------- -------
Condensed consolidated cash flow statement for the half year ended 30 June 2021 (unaudited)
Half year ended
-----------------
30 June 30 June
2021 2020
GBPm GBPm
-------------------------------------------------------------- -------- -------
Operating activities
Operating loss before tax (168) (50)
Adjustments for non-cash items 516 (236)
-------------------------------------------------------------- -------- -------
Net cash flows from trading activities 348 (286)
Changes in operating assets and liabilities 3,252 1,414
-------------------------------------------------------------- -------- -------
Net cash flows from operating activities before tax 3,600 1,128
Income taxes paid (26) 1
-------------------------------------------------------------- -------- -------
Net cash flows from operating activities 3,574 1,129
Net cash flows from investing activities 313 44
Net cash flows from financing activities (2,047) (201)
Effects of exchange rate changes on cash and cash equivalents (758) 1,331
-------------------------------------------------------------- -------- -------
Net increase in cash and cash equivalents 1,082 2,303
Cash and cash equivalents at beginning of period 26,380 27,043
-------------------------------------------------------------- -------- -------
Cash and cash equivalents at end of period 27,462 29,346
-------------------------------------------------------------- -------- -------
Notes
1. Basis of preparation
The condensed consolidated financial statements have been
prepared in accordance with the Disclosure and Transparency Rules
of the Financial Conduct Authority and UK adopted IAS 34 'Interim
Financial Reporting'. They should be read in conjunction with
NatWest Markets Plc 2020 Annual Report and Accounts which were
prepared in accordance with International Financial Reporting
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 NatWest Markets Plc 2021 Annual Report and
Accounts will be prepared in accordance with UK adopted
International Financial Reporting Standards.
Going concern
Having reviewed NWM Group's forecasts, projections, the
potential impact of COVID-19 and other relevant evidence, the
directors have a reasonable expectation that NWM Group will
continue in operational existence for a period of not less than
twelve months. Accordingly, the results for the period ended 30
June 2021 have been prepared on a going concern basis.
2. Accounting policies
NWM Group's principal accounting policies are as set out on
pages 93 to 97 of NatWest Markets Plc 2020 Annual Report and
Accounts. Changes to accounting policies from 1 January 2021 had no
material effect on NatWest Markets Plc accounts.
Critical accounting policies and key sources of estimation
uncertainty
The judgements and assumptions that are considered to be the
most important to the portrayal of NWM Group's financial condition
are those relating to deferred tax, fair value of financial
instruments, loan impairment provisions and provisions for
liabilities and charges. These critical accounting policies and
judgements are referenced on page 97 of NWM Plc 2020 Annual Report
and Accounts. Estimation uncertainty has been affected by the
COVID-19 pandemic. Management's consideration of this source of
uncertainty is outlined in the relevant sections of NatWest Markets
Plc 2020 Annual Report and Accounts, including the ECL estimate for
the period in the Risk and capital management section contained in
the NatWest Markets Plc 2020 Annual Report and Accounts.
Information used for significant estimates
The COVID-19 pandemic has continued to cause significant
economic and social disruption. Key financial estimates are based
on a range of anticipated future economic conditions described by
internally developed scenarios. Measurement of valuation reserves
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. Refer to NatWest Markets Plc Risk factors in the 2020
Annual Report and Accounts.
3. Operating expenses
Half year ended
-----------------
30 June 30 June
2021 2020
GBPm GBPm
-------------------------------------- -------- -------
Wages, salaries and other staff costs 180 257
Temporary and contract costs 7 12
Social security costs 18 31
Bonus awards 36 58
Pension costs 11 19
- defined benefit schemes 4 7
- defined contribution schemes 7 12
-------------------------------------- -------- -------
Staff costs 252 377
-------------------------------------- -------- -------
Premises and equipment 37 75
Depreciation and amortisation 10 14
Other administrative expenses (1,2) 181 348
-------------------------------------- -------- -------
Administrative expenses 228 437
-------- -------
Operating expenses 480 814
-------------------------------------- -------- -------
Notes:
(1) Includes recharges from other NatWest Group entities, mainly
NWB Plc which provides the majority of shared services (including
technology) and operational processes.
(2) Includes litigation and regulatory costs.
Notes
4. Segmental analysis
The business is organised into the following reportable
segments:
-- NatWest Markets; and
-- Central items & other, which comprises corporate functions and other
activity not managed in the NatWest Markets segment during the period.
H1 2021 and H1 2020 are substantially comprised of litigation and
conduct costs.
Analysis of operating (loss)/profit before tax
The following table provides a segmental analysis of operating
(loss)/profit before tax by main income statement captions.
Half year ended 30 June Half year ended 30 June
2021 2020
--------------------------- ---------------------------
Central Central
NatWest items NatWest items
Markets & other Total Markets & other Total
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- --------- --------- ----- --------- --------- -----
Interest receivable 179 - 179 276 - 276
Interest payable (183) - (183) (315) - (315)
Net fees and commissions 84 - 84 75 - 75
Other non-interest income 210 6 216 773 - 773
Total income 290 6 296 809 - 809
----------------------------- --------- --------- ----- --------- --------- -----
Operating expenses (542) 62 (480) (717) (97) (814)
Impairment releases/(losses) 16 - 16 (40) (5) (45)
----------------------------- --------- --------- ----- --------- --------- -----
Operating (loss)/profit (236) 68 (168) 52 (102) (50)
----------------------------- --------- --------- ----- --------- --------- -----
Half year ended 30 June Half year ended 30 June
2021 2020
--------------------------- ---------------------------
Central Central
NatWest items NatWest items
Markets & other Total Markets & other Total
Total revenue (1) GBPm GBPm GBPm GBPm GBPm GBPm
------------------ --------- -------- ------ --------- -------- ------
Total revenue 535 6 541 1,326 - 1,326
------------------ --------- -------- ------ --------- -------- ------
Note:
(1) Total revenue comprises interest receivable, fees and commissions
receivable, income from trading activities and other operating income.
Half year ended
-----------------
30 June 30 June
2021 2020
Analysis of net fees and commissions GBPm GBPm
------------------------------------- -------- -------
Fees and commissions receivable
- Lending and financing 34 46
- Brokerage 25 61
- Underwriting fees 77 124
- Other 10 46
------------------------------------- -------- -------
Total 146 277
------------------------------------- -------- -------
Fees and commissions payable (62) (202)
------------------------------------- -------- -------
Net fees and commissions 84 75
------------------------------------- -------- -------
As at 30 June 2021 As at 31 December 2020
------------------------- --------------------------
Central Central
NatWest items NatWest items
Markets & other Total Markets & other Total
Total assets and liabilities GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- ------- ------- ------- -------- ------- -------
Assets 221,857 1 221,858 273,124 14 273,138
Liabilities 213,717 - 213,717 263,773 23 263,796
----------------------------- ------- ------- ------- -------- ------- -------
Notes
5. Tax
The actual tax credit differs from the expected tax credit
computed by applying the standard rate of UK corporation tax of 19%
(2020 - 19%) as analysed below:
Half year ended
-----------------
30 June 30 June
2021 2020
GBPm GBPm
------------------------------------------------------------- -------- -------
Loss before tax (168) (50)
------------------------------------------------------------- -------- -------
Expected tax credit 32 10
Losses and temporary differences in period where no deferred
tax asset recognised (5) (8)
Foreign profits taxed at other rates (1) (11)
Items not allowed for tax:
- losses on disposals and write-downs - (1)
- UK bank levy (2) (2)
- regulatory and legal actions 8 (19)
- other disallowable items (3) (7)
Taxable foreign exchange movements - (1)
Losses brought forward and utilised 6 20
Decrease in the carrying value of deferred tax assets
in respect of UK losses (5) (16)
Banking surcharge 19 (2)
Tax on paid-in equity 7 8
UK tax rate change impact (17) (23)
Adjustments in respect of prior periods 10 (27)
------------------------------------------------------------- -------- -------
Actual tax credit/(charge) 49 (79)
------------------------------------------------------------- -------- -------
At 30 June 2021, NWM Group has recognised a deferred tax
liability of GBP381 million (31 December 2020 - GBP417 million).
These amounts include a deferred tax asset recognised in respect of
UK trading losses of GBP64 million (31 December 2020 - GBP62
million). Under UK tax legislation, these UK losses can be carried
forward indefinitely. NWM Group has considered the carrying value
of this asset as at 30 June 2021 and concluded that it is supported
by way of future reversing temporary timing differences on which
deferred tax liabilities are recognised at 30 June 2021.
It was announced in the UK Government's Budget on 3 March 2021
that the main UK corporation tax rate will increase from 19% to 25%
from 1 April 2023. This legislative change was enacted on 10 June
2021. NWM Group's closing deferred tax assets and liabilities have
therefore been recalculated taking into account this change of rate
and the applicable period the deferred tax assets and liabilities
are expected to crystallise. As a result, the net deferred tax
liability position in NWM Group has increased by GBP31 million,
with a GBP17 million charge included in the income statement (refer
to reconciling item above), and a GBP14 million charge included in
other comprehensive income. There is an ongoing HM Treasury review
of the bank surcharge rate to ensure that the combined rate of
corporation tax applicable to banking entities remains
competitive.
6. Trading assets and liabilities
Trading assets and liabilities comprise assets and liabilities
held at fair value in trading portfolios.
30 June 31 December
2021 2020
Assets GBPm GBPm
-------------------------------------- ------- -----------
Loans
- Reverse repos 24,718 19,404
- Collateral given 12,919 18,459
- Other loans 1,154 1,611
-------------------------------------- ------- -----------
Total loans 38,791 39,474
-------------------------------------- ------- -----------
Securities
Central and local government
- UK 5,121 4,184
- US 4,088 5,149
- other 18,347 16,436
Financial institutions and corporate 3,812 3,446
-------------------------------------- ------- -----------
Total securities 31,368 29,215
-------------------------------------- ------- -----------
Total 70,159 68,689
-------------------------------------- ------- -----------
Liabilities
-------------------------------------- ------- -----------
Deposits
- Repos 23,720 19,036
- Collateral received 17,017 23,226
- Other deposits 1,645 1,803
-------------------------------------- ------- -----------
Total deposits 42,382 44,065
-------------------------------------- ------- -----------
Debt securities in issue 1,205 1,408
Short positions 32,111 26,779
-------------------------------------- ------- -----------
Total 75,698 72,252
-------------------------------------- ------- -----------
Notes
7. Financial instruments
Financial instruments: classification
The following tables analyse NWM Group's financial assets and
liabilities in accordance with the categories of financial
instruments in IFRS 9. Assets and liabilities outside the scope of
IFRS 9 are shown within other assets and other liabilities.
Amortised Other
MFVTPL FVOCI cost assets Total
Assets GBPm GBPm GBPm GBPm GBPm
------------------------------------ ------- ----- --------- ------ -------
Cash and balances at central banks 17,073 17,073
Trading assets 70,159 70,159
Derivatives (1) 108,644 108,644
Settlement balances 7,537 7,537
Loans to banks - amortised cost
(2) 1,188 1,188
Loans to customers - amortised cost
(3) 6,271 6,271
Amounts due from holding company
and fellow subsidiaries 608 756 54 1,418
Other financial assets 83 6,381 2,389 8,853
Other assets 715 715
------------------------------------ ------ -------
30 June 2021 179,494 6,381 35,214 769 221,858
------------------------------------ ------- ----- --------- ------ -------
Cash and balances at central banks 15,771 15,771
Trading assets 68,689 68,689
Derivatives (1) 165,619 165,619
Settlement balances 2,296 2,296
Loans to banks - amortised cost
(2) 1,003 1,003
Loans to customers - amortised cost
(3) 8,444 8,444
Amounts due from holding company
and fellow subsidiaries 766 754 67 1,587
Other financial assets 166 6,300 2,575 9,041
Other assets 688 688
------------------------------------ ------ -------
31 December 2020 235,240 6,300 30,843 755 273,138
------------------------------------ ------- ----- --------- ------ -------
Held-for- Amortised Other
trading DFV cost liabilities Total
Liabilities GBPm GBPm GBPm GBPm GBPm
----------------------------------- --------- ----- --------- ----------- -------
Bank deposits (4) 1,694 1,694
Customer deposits 2,460 2,460
Amounts due to holding company and
fellow subsidiaries 428 5,786 142 6,356
Settlement balances 7,100 7,100
Trading liabilities 75,698 75,698
Derivatives (1) 101,769 101,769
Other financial liabilities 2,705 14,932 17,637
Other liabilities (5) 66 937 1,003
----------------------------------- --------- ----- --------- ----------- -------
30 June 2021 177,895 2,705 32,038 1,079 213,717
----------------------------------- --------- ----- --------- ----------- -------
Bank deposits (4) 1,808 1,808
Customer deposits 2,618 2,618
Amounts due to holding company and
fellow subsidiaries 636 7,240 258 8,134
Settlement balances 2,248 2,248
Trading liabilities 72,252 72,252
Derivatives (1) 157,332 157,332
Other financial liabilities 3,196 14,974 18,170
Other liabilities (5) 81 1,153 1,234
----------------------------------- --------- ----- --------- ----------- -------
31 December 2020 230,220 3,196 28,969 1,411 263,796
----------------------------------- --------- ----- --------- ----------- -------
Notes:
(1) Includes net hedging derivative assets of GBP158 million (31 December
2020 - GBP267 million) and net hedging derivative liabilities of
GBP126 million (31 December 2020 - GBP107 million).
(2) Includes items in the course of collection from other banks of GBP175
million (31 December 2020 - GBP119 million).
(3) Includes finance lease receivables of GBP63 million (31 December
2020 - GBP66 million).
(4) Includes items in the course of transmission to other banks of GBP91
million (31 December 2020 - GBP10 million).
(5) Includes lease liabilities of GBP60 million (31 December 2020 - GBP71
million) held at amortised cost.
Notes
7. Financial instruments continued
NWM Group's financial assets and liabilities include:
30 June 31 December
2021 2020
GBPm GBPm
------------------------------------ ------- -----------
Reverse repos
Trading assets 24,718 19,404
Loans to bank - amortised cost 221 6
Loans to customers - amortised cost 344 1,893
Repos
Bank deposits 526 200
Customer deposits 128 -
Trading liabilities 23,720 19,036
------------------------------------ ------- -----------
NWM Group's financial assets and liabilities include amounts due
from/to holding company and fellow subsidiaries as below:
30 June 2021 31 December 2020
---------------------------- ----------------------------
Holding Fellow Holding Fellow
company subsidiaries Total company subsidiaries Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- ------- ------------ ----- ------- ------------ -----
Assets
Trading assets 369 239 608 542 224 766
Settlement balances - 31 31 - - -
Loans to banks - amortised
cost - 597 597 - 624 624
Loans to customers - amortised
cost 110 18 128 112 18 130
Other assets - 54 54 - 67 67
Amounts due from holding
company and
fellow subsidiaries 479 939 1,418 654 933 1,587
------------------------------- ------- ------------ ----- ------- ------------ -----
Derivatives (1) 436 531 967 594 774 1,368
------------------------------- ------- ------------ ----- ------- ------------ -----
Liabilities
Bank deposits - 113 113 - 145 145
Customer deposits - 110 110 144 144
MREL instruments issued to
NatWest Group plc 3,872 - 3,872 5,181 - 5,181
Trading liabilities - 428 428 - 636 636
Other financial liabilities
- Subordinated liabilities 1,678 - 1,678 1,753 - 1,753
Other liabilities - 155 155 - 275 275
Amounts due to holding company
and
fellow subsidiaries 5,550 806 6,356 6,934 1,200 8,134
------------------------------- ------- ------------ ----- ------- ------------ -----
Derivatives (1) 806 391 1,197 1,120 425 1,545
------------------------------- ------- ------------ ----- ------- ------------ -----
Note:
(1) Intercompany derivatives are included within derivative classification on the balance sheet.
Notes
7 . Financial instruments continued
Interest rate benchmark reform
NatWest Group continues to implement its entity-wide IBOR reform
programme with the aim of being ready for the various transition
events which are expected to occur prior to the cessation of the
vast majority of the IBOR benchmark rates at the end of 2021 and of
the USD IBOR in 2023.
NatWest Group continues to develop new products across its
different segments that reference the new alternative risk-free
rates and continues to work with customers to assess their
readiness and ability to adopt new products, transition existing
products or take the necessary steps to ensure that products can
transition at IBOR cessation. A comprehensive review of the effect
of IBOR reform on funding, liquidity and risk management has also
been conducted and 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 fully implemented
over the course of 2021 and by June 2023 for USD IBOR.
NatWest Group expects that the vast majority of non-derivative
instruments will transition in H2 2021 or the first reset date of
the interest rate after cessation via renegotiation with clients or
fallback provisions. Derivatives that are subject to clearing
are expected to transition in line with the relevant clearing
house transition approaches while other derivatives are expected
to
transition using the ISDA fallback protocol.
NatWest Group also remains engaged with regulators, standard
setters and other market participants on key matters related to the
IBOR reform. It is expected that the programme will meet all
timelines set by the regulators.
Financial instruments: valuation hierarchy
Disclosures relating to the control environment, valuation
techniques and related aspects pertaining to financial instruments
measured at fair value are included in the NatWest Markets Plc 2020
Annual Report and Accounts. Valuation, sensitivity methodologies
and inputs at 30 June 2021 are consistent with those described in
Note 12 to the NatWest Markets Plc 2020 Annual Report and
Accounts.
The tables below show financial instruments carried at fair
value on NWM Group's balance sheet by valuation hierarchy - level
1, level 2 and level 3, level 3 movements and related level 3
sensitivities.
30 June 2021 31 December 2020
------------------------------- -------------------------------
Level Level Level Total Level Level Level Total
1 2 3 1 2 3
Assets GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- ------ ------- ----- ------- ------ ------- ----- -------
Trading assets
Loans - 38,628 163 38,791 - 39,249 225 39,474
Securities 22,048 9,205 115 31,368 21,535 7,599 81 29,215
Derivatives - 107,536 1,108 108,644 - 164,296 1,323 165,619
Amount due from holding company
and fellow subsidiaries - 608 - 608 - 766 - 766
Other financial assets
Loans - 18 497 515 - 21 71 92
Securities 4,931 985 33 5,949 5,107 1,247 20 6,374
-------------------------------- ------ ------- ----- ------- ------ ------- -----
Total financial assets held
at fair value 26,979 156,980 1,916 185,875 26,642 213,178 1,720 241,540
-------------------------------- ------ ------- ----- ------- ------ ------- ----- -------
Liabilities
-------------------------------- ------ ------- ----- ------- ------ ------- -----
Amount due to holding company
and fellow subsidiaries - 428 - 428 - 636 - 636
Trading liabilities
Deposits - 42,379 3 42,382 - 44,058 7 44,065
Debt securities in issue - 1,205 - 1,205 - 1,408 - 1,408
Short positions 23,659 8,451 1 32,111 19,045 7,734 - 26,779
Derivatives - 101,078 691 101,769 - 156,384 948 157,332
Other financial liabilities
Deposits - 718 - 718 - 796 - 796
Debt securities in issue - 1,243 - 1,243 - 1,607 - 1,607
Subordinated liabilities - 744 - 744 - 793 - 793
-------------------------------- ------ ------- ----- ------- ------ ------- -----
Total financial liabilities
held at fair value 23,659 156,246 695 180,600 19,045 213,416 955 233,416
-------------------------------- ------ ------- ----- ------- ------ ------- ----- -------
Notes:
(1) Level 1 - Instruments valued using unadjusted quoted prices in active
and liquid markets, for identical financial instruments. Examples
include government bonds, listed equity shares and certain exchange-traded
derivatives.
Level 2 - Instruments valued using valuation techniques that have
observable inputs. Examples include most government agency securities,
investment-grade corporate bonds, certain mortgage products, including
CLOs, most bank loans, repos and reverse repos, less liquid listed
equities, state and municipal obligations, most notes issued, and
certain money market securities and loan commitments and most OTC
derivatives.
Level 3 - Instruments valued using a valuation technique where at
least one input which could have a significant effect on the instrument's
valuation is not based on observable market data. Examples include
cash instruments which trade infrequently, certain syndicated and
commercial mortgage loans, certain emerging markets and derivatives
with unobservable model inputs.
(2) Transfers between levels are deemed to have occurred at the beginning
of the quarter in which the instruments were transferred. There were
no significant transfers between level 1 and level 2.
(3) For an analysis of debt securities held at mandatorily fair value
through profit or loss by issuer as well as ratings and derivatives,
by type and contract, refer to Risk and capital management - Credit
risk.
(4) 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.
Notes
7 . Financial instruments continued
Financial instruments: movement in level 3 portfolios
Half year ended 30 June Half year ended 30 June
2021 2020
--------------------------------------- ---------------------------------------
Other Other
Trading financial Total Total Trading financial Total Total
assets assets assets liabilities assets assets assets liabilities
(1) (2) (1) (2)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ------- --------- ------ ----------- ------- --------- ------ -----------
At 1 January 1,629 91 1,720 955 2,415 88 2,503 1,389
Amount recorded in the
income statement (3) (191) 3 (188) (124) 358 2 360 104
Amount recorded in the
statement of
comprehensive income - 6 6 - - (1) (1) -
Level 3 transfers in 42 428 470 15 133 161 294 6
Level 3 transfers out (68) - (68) (116) (101) (3) (104) (337)
Purchases 169 8 177 114 366 5 371 100
Settlements (36) (4) (40) (15) (113) - (113) (14)
Sales (158) (1) (159) (132) (933) - (933) (167)
Foreign exchange and other
adjustments (1) (1) (2) (2) 5 6 11 3
---------------------------- ------- --------- ------ ----------- ------- --------- ------ -----------
At 30 June 1,386 530 1,916 695 2,130 258 2,388 1,084
---------------------------- ------- --------- ------ ----------- ------- --------- ------ -----------
Amounts recorded in the
income statement in
respect of balances held
at period end
- unrealised (191) 3 (188) (124) 358 2 360 104
---------------------------- ------- --------- ------ ----------- ------- --------- ------ -----------
Notes:
(1) Trading assets comprise assets held at fair value in trading portfolios.
(2) Other financial assets comprise fair value through other comprehensive
income, designated as at fair value through profit or loss and other
fair value through profit or loss. Movement in the period primarily
reflects increase in loan positions classified as HTC&S under IFRS
9 and fair valued through other comprehensive income.
(3) Net losses on trading assets and liabilities of GBP67 million (30
June 2020 - GBP254 million) were recorded in income from trading
activities. Net gains on other instruments of GBP3 million (30 June
2020 - GBP2 million) were recorded in other operating income and
interest income as appropriate.
Financial instruments: sensitivity analysis
30 June 2021 31 December 2020
------------------------------- -------------------------------
Level Favourable Unfavourable Level Favourable Unfavourable
3 3
Assets GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ----- ---------- ------------ ----- ---------- ------------
Trading assets
Loans 163 10 - 225 10 -
Securities 115 10 - 81 - -
Derivatives 1,108 80 (100) 1,323 120 (100)
Other financial assets
Loans 497 20 (40) 71 10 (10)
Securities 33 - - 20 - -
---------------------------- ----- ---------- ------------ ----- ---------- ------------
Total financial assets held
at fair value 1,916 120 (140) 1,720 140 (110)
---------------------------- ----- ---------- ------------ ----- ---------- ------------
Liabilities
---------------------------- ----- ---------- ------------ ----- ---------- ------------
Trading liabilities
Deposits 3 - - 7 - -
Short Positions 1 - - - - -
Derivatives 691 40 (40) 948 50 (40)
Total financial liabilities
held at fair value 695 40 (40) 955 50 (40)
---------------------------- ----- ---------- ------------ ----- ---------- ------------
Notes
7. Financial instruments continued
Valuation reserves
When valuing financial instruments in the trading book,
adjustments are made to mid-market valuations to cover bid-offer
spread, funding and credit risk. These adjustments are presented in
the table below. For further information refer to the descriptions
of valuation adjustments within 'Financial instruments - valuation'
on page 123 of the NatWest Markets Plc 2020 Annual Report and
Accounts.
30 June 31 December
2021 2020
--------------------------
GBPm GBPm
-------------------------- ------- -----------
Funding - FVA 47 121
Credit - CVA 384 388
Bid - Offer 84 122
Product and deal specific 163 172
-------------------------- ------- -----------
678 803
-------------------------- ------- -----------
* Valuation reserves comprising of credit valuation
adjustments (CVA), funding valuation adjustment (FVA),
bid-offer and product and deal specific reserves,
decreased to GBP678 million at 30 June 2021 (31
December 2020 - GBP803 million).
* There was a reallocation of FVA to CVA during the
period following an update to the risk management of
certain exposures.
* The net decrease across CVA, FVA and bid-offer
reserves was driven by reduced exposures, due to
increases in interest rates and trade exit activity,
and reduced risk.
Fair value of financial instruments measured at amortised
cost
The following table shows the carrying value and fair value of
financial instruments carried at amortised cost on the balance
sheet.
Items where
fair value
approximates Carrying Fair value hierarchy
level
----------------------
carrying value Fair value Level Level
value 2 3
30 June 2021 GBPbn GBPbn GBPbn GBPbn GBPbn
------------------------------------ ------------ -------- ---------- ---------- ----------
Financial assets
Cash and balances at central banks 17.1
Settlement balances 7.5
Loans to banks 0.2 1.0 1.0 0.4 0.6
Loans to customers 6.3 6.2 0.5 5.7
Amounts due from holding company
and fellow subsidiaries 0.8 0.8 - 0.8
Other financial assets - Securities 2.4 2.4 - 2.4
------------ -------- ---------- ---------- ----------
Financial liabilities
Bank deposits 0.1 1.6 1.6 - 1.6
Customer deposits 2.5 2.4 - 2.4
Amounts due to holding company
and fellow subsidiaries 5.8 5.9 5.7 0.2
Settlement balances 7.1
Other financial liabilities
Debt securities in issue 14.6 14.9 8.6 6.3
Subordinated liabilities 0.3 0.4 0.4 -
------------------------------------ ------------ -------- ---------- ---------- ----------
31 December 2020
------------------------------------ ------------ -------- ---------- ---------- ----------
Financial assets
Cash and balances at central banks 15.8
Settlement balances 2.3
Loans to banks 0.1 0.9 0.9 0.3 0.6
Loans to customers 8.4 8.4 1.9 6.5
Amounts due from holding company
and fellow subsidiaries 0.8 0.8 - 0.8
Other financial assets - Securities 2.6 2.6 - 2.6
------------------------------------ ------------ -------- ---------- ---------- ----------
Financial liabilities
Bank deposits 1.8 1.8 - 1.8
Customer deposits 0.1 2.5 2.6 - 2.6
Amounts due to holding company
and fellow subsidiaries 0.1 7.1 7.2 7.1 0.1
Settlement balances 2.2
Other financial liabilities
Debt securities in issue 14.7 15.0 9.4 5.6
Subordinated liabilities 0.3 0.4 0.4 -
------------------------------------ ------------ -------- ---------- ---------- ----------
The fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Quoted market
values are used where available; otherwise, fair values have been
estimated based on discounted expected future cash flows and other
valuation techniques. These techniques involve uncertainties and
require assumptions and judgements covering prepayments, credit
risk and discount rates. Furthermore, there is a wide range of
potential valuation techniques. Changes in these assumptions would
significantly affect estimated fair values. The fair values
reported would not necessarily be realised in an immediate sale or
settlement.
Notes
8. Provisions for liabilities and charges
Litigation
and other
regulatory Other Total
(1)
GBPm GBPm GBPm
--------------------------------------------- ---------- ----- -----
At 1 January 334 114 448
Currency translation and other movements (2) (4) (13) (17)
Charge to income statement 9 17 26
Release to income statement (67) (5) (72)
Provisions utilised (30) (31) (61)
--------------------------------------------- ---------- -----
At 30 June 242 82 324
--------------------------------------------- ---------- ----- -----
Notes:
(1) Materially comprises provisions relating to restructuring costs.
(2) Includes GBP4 million release in relation to expected credit losses.
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.
9. Dividends
Interim ordinary dividends totalling GBP750 million were paid to
NWM Plc's parent company NatWest Group plc during H1 2021 (H1 2020
- nil).
Notes
10. Loan impairment provision
Portfolio summary
The table below shows gross loans and ECL, by segment and stage,
within the scope of ECL framework.
30 June 31 December
2021 2020
GBPm GBPm
---------------------------------------------------- ------- -----------
Loans - amortised cost and fair value through other
comprehensive income (FVOCI)
Stage 1 7,034 7,799
Stage 2 721 1,566
Stage 3 108 171
Of which: individual 98 162
Of which: collective 10 9
Inter-Group (1) 726 755
---------------------------------------------------- -----------
8,589 10,291
---------------------------------------------------- ------- -----------
ECL provisions
Stage 1 10 12
Stage 2 37 49
Stage 3 87 132
Of which: individual 78 124
Of which: collective 9 8
Inter-Group 1 1
---------------------------------------------------- -----------
135 194
---------------------------------------------------- ------- -----------
ECL provisions coverage (2,3)
Stage 1 (%) 0.14 0.15
Stage 2 (%) 5.13 3.13
Stage 3 (%) 80.56 77.19
Inter-Group (%) 0.14 0.13
1.70 2.02
---------------------------------------------------- ------- -----------
Half year ended
--------------------
30 June 30 June
2021 2020
GBPm GBPm
Impairment losses
ECL (release)/charge (4)
Stage 1 (8) 14
Stage 2 (5) 43
Stage 3 (3) (13)
Of which: individual 1 (4)
Of which: collective (4) (9)
Third party (16) 44
Inter-Group - 2
----------------------------------------------------
(16) 46
---------------------------------------------------- ------- -----------
ECL loss rate - annualised (basis points) (3) (41) 69
Amounts written off 40 4
---------------------------------------------------- ------- -----------
Notes:
(1) NWM Group's intercompany assets were classified in Stage 1. The ECL
attached to these loans was GBP0.9 million ( 31 December 2020 - GBP1.2
million). The remaining tables in the credit risk section exclude
intercompany assets and associated ECL.
(2) ECL provisions coverage is calculated as ECL provisions divided by
loans - amortised cost and FVOCI.
(3) ECL provisions coverage and ECL loss rates are calculated on third
party loans and related ECL provisions and charge respectively. ECL
loss rate is calculated as annualised third party ECL charge divided
by loans - amortised cost and FVOCI. The half year ECL charge is annualised
by multiplying by two.
(4) Includes a GBP1 million charge ( 30 June 2020 - GBP1 million charge)
related to other financial assets, of which nil ( 30 June 2020 - nil)
related to assets classified as FVOCI and a GBP1 million release (
30 June 2020 - GBP1 million release) 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 64 for Financial instruments
within the scope of the IFRS 9 ECL framework in the NatWest Markets
Plc 2020 Annual Report and Accounts for further details. Other financial
assets within the scope of the IFRS 9 ECL framework were cash and
balances at central banks totalling GBP17.1 billion (31 December 2020
- GBP15.8 billion) and debt securities of GBP8.1 billion (31 December
2020 - GBP8.7 billion).
Notes
11. Contingent liabilities, commitments and guarantees
30 June 31 December
2021 2020
GBPm GBPm
------------------------------------------------------- ------- -----------
Guarantees 611 638
Other contingent liabilities 113 137
Standby facilities, credit lines and other commitments 10,986 12,292
------------------------------------------------------- ------- -----------
Contingent liabilities and commitments 11,710 13,067
------------------------------------------------------- ------- -----------
Contingent liabilities arise in the normal course of NWM Group's
business; credit exposure is subject to NWM Plc's normal controls.
The amounts shown do not, and are not intended to, provide any
indication of NWM Group's expectation of future losses.
Risk sharing arrangements
NWM Plc and NWM N.V. have limited risk-sharing arrangements in
place to facilitate the smooth provision of services to NatWest
Markets' customers. The arrangements include:
-- The provision of a funded guarantee of up to GBP2.6 billion by NWM
Plc to NWM N.V. that limits NWM N.V.'s exposure to large individual
customer credits to 10% of NWM N.V.'s capital. Funding is provided
by NWM Plc deposits placed with NWM N.V. of not less than the guaranteed
amount. At 30 June 2021 the deposits amounted to GBP0.7 billion and
the guarantee fees in the period were GBP3.3 million.
-- The provision of a funded and an unfunded guarantee by NWM Plc in
respect of NWM N.V.'s legacy portfolio. At 30 June 2021 the exposure
at default covered by the guarantees was approximately GBP0.2 billion
(of which GBP0.1 billion was cash collateralised). Fees of GBP5.8
million in relation to the guarantees were recognised in the period.
Indemnity deed
In addition to the numbers above, NWM Plc and NWB Plc also have
a cross indemnity agreement in place for losses incurred within the
entities in relation to business transferred to or from the
ring-fenced bank under the NatWest Group's structural
re-organisation. Under the agreement, NWM Plc is indemnified by NWB
Plc against losses relating to NWB Plc transferring businesses and
ring-fenced bank obligations and NWB Plc is indemnified by NWM Plc
against losses relating to NWM Plc transferring businesses and non
ring-fenced bank obligations with effect from the relevant transfer
date.
Notes
12. Litigation and regulatory matters
NWM Plc and its subsidiary and associated undertakings (NWM
Group) are party to legal proceedings and involved in regulatory
matters, including as the subject of investigations and other
regulatory and governmental action ('Matters') in the United
Kingdom (UK), the United States (US), the European Union (EU) and
other jurisdictions.
NWM 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 NWM 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. NWM 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.
There are situations where NWM Group may pursue an approach that
in some instances leads to a settlement agreement. This may occur
in order to avoid the expense, management distraction or
reputational implications of continuing to contest liability, or in
order to take account of the risks inherent in defending claims or
regulatory matters, even for those Matters for which NWM Group
believes it has credible defences and should prevail on the merits.
The uncertainties inherent in all such Matters affect the amount
and timing of any potential outflows for both Matters with respect
to which provisions have been established and other contingent
liabilities.
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 NWM Group has recognised. Where (and as
far as) liability cannot be reasonably estimated, no provision has
been recognised. NWM 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 NWM Group's
litigation and regulatory matters, including investigations, see
the Risk Factor relating to legal, regulatory and governmental
actions and investigations set out on page 171 of the NatWest
Markets Plc 2020 Annual Report and Accounts.
Litigation
Residential mortgage-backed securities (RMBS) litigation in the
US
NatWest Markets Securities Inc. (NWMSI) and certain affiliates
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 NWM 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.
Notes
12. Litigation and regulatory matters continued
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 the NWM Group defendants 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 co-ordinated proceeding in the SDNY. In December 2016, the SDNY
held that it lacks personal jurisdiction over NWM Group defendants
with respect to certain claims. As a result of that and other
decisions, all NWM Group defendants 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 NWM Group defendants. The dismissal of NWM Group defendants
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, NWM Group defendants finalised a settlement
resolving the class action on behalf of bondholder plaintiffs
(those who held bonds issued by non-defendants 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.
Among the non-class claims dismissed by the SDNY in December
2016 were claims that the Federal Deposit Insurance Corporation
(FDIC) had asserted on behalf of certain failed US banks. In July
2017, the FDIC, on behalf of 39 failed US banks, commenced
substantially similar claims against NWM Plc, NatWest Group plc and
others in the High Court of Justice of England and Wales. The
action alleges that the defendants breached English and European
competition law, as well as asserting common law claims of fraud
under US law.
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.
In addition to the above, five other class action complaints
were filed against NWM Group defendants 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 also dismissed,
for various reasons, the case relating to Pound Sterling LIBOR in
August 2019, the case relating to Swiss Franc LIBOR in September
2019, and the case relating to the Singapore Interbank Offered Rate
and Singapore Swap Offer Rate ('SIBOR / SOR') in July 2019.
Plaintiffs appealed each of these four dismissals to the United
States Court of Appeals for the Second Circuit. The appeals in the
Euribor, Pound Sterling LIBOR and Swiss Franc LIBOR cases remain
pending, but in June 2021, NWM Plc and the plaintiffs in the Swiss
Franc LIBOR class action finalised a settlement resolving that
case. The amount of the settlement (which was covered by an
existing provision) has been paid into escrow pending court
approval of the settlement. The appeal in the SIBOR / SOR case was
decided on 17 March 2021, when the United States Court of Appeals
for the Second Circuit reversed the SDNY's prior dismissal, such
that the case will now return to the SDNY. 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 NWM 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.
Notes
12. Litigation and regulatory matters continued
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 defendants include NatWest Group plc,
NWM Plc, NWMSI and NatWest Bank 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 August 2020, a complaint was filed in the United States
District Court for the Northern District of California by several
United States consumer borrowers against the USD ICE LIBOR panel
banks and their affiliates, alleging that the normal process of
setting USD ICE LIBOR amounts to illegal price-fixing, and also
that banks in the United States have illegally agreed to use LIBOR
as a component of price in variable consumer loans. The NatWest
Group defendants are NatWest Group plc, NWM Plc, NWMSI and NatWest
Bank Plc. The plaintiffs seek damages and to prevent the
enforcement of LIBOR-based instruments through injunction.
Defendants intend to seek dismissal.
FX litigation
NWM Plc, NWMSI and / or NatWest Group plc are defendants in
several cases relating to NWM Plc's foreign exchange (FX) business.
In 2015, NWM Plc paid US$255 million to settle the consolidated
antitrust class action filed in the SDNY on behalf of persons who
entered into over-the-counter FX transactions with defendants or
who traded FX instruments on exchanges. In 2018, some members of
the settlement class who opted out of that class action settlement
filed their own non-class complaint in the SDNY asserting antitrust
claims against NWM Plc, NWMSI and other banks. Those opt-out claims
are proceeding in discovery.
In April 2019, some of the same claimants in the opt-out case
described above, as well as others, served proceedings (which are
ongoing) in the High Court of Justice of England and Wales,
asserting competition claims against NWM Plc and several other
banks.
An FX-related class action, on behalf of 'consumers and end-user
businesses', is proceeding in the SDNY against NWM Plc and others.
Plaintiffs have filed a motion for class certification, which
defendants are opposing.
In May 2019, a cartel class action was filed in the Federal
Court of Australia against NWM Plc and four other banks on behalf
of persons who bought or sold currency through FX spots or forwards
between 1 January 2008 and 15 October 2013 with a total transaction
value exceeding AUD $0.5 million. The claimant has alleged that the
banks, including NWM Plc, contravened Australian competition law by
sharing information, coordinating conduct, widening spreads and
manipulating FX rates for certain currency pairs during this
period. NatWest Group plc has been named in the action as an 'other
cartel participant', but is not a respondent. The claim was served
in June 2019. The claimant sought permission to amend its claim to
strengthen its claim of alleged breaches of competition law, but
this was refused by the court in the form sought by the claimant.
The claimant is now seeking a further opportunity to amend its
claim, which is being opposed by NWM Plc and the other
respondents.
In July and December 2019, two separate applications seeking
opt-out collective proceedings orders were filed in the UK
Competition Appeal Tribunal against NatWest Group plc, NWM Plc and
other banks. Both applications have been brought on behalf of
persons who, between 18 December 2007 and 31 January 2013, entered
into a relevant FX spot or outright forward transaction in the EEA
with a relevant financial institution or on an electronic
communications network. A hearing to determine class certification
and which of the applications should be permitted to represent the
class took place in July 2021 and judgment is awaited.
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 and/or damages in respect of alleged
historical FX trading misconduct. The claimant has also issued
similar proceedings against a number of other banks. The claim
against NWM Plc makes allegations of breaches of contract,
fiduciary duties, duties of confidence and other matters. The claim
was served on NWM Plc in March 2021.
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 outside the
jurisdiction, which remains pending.
Certain other foreign exchange transaction related claims have
been or may be threatened. NWM Group cannot predict whether all or
any of these claims will be pursued.
Notes
12. Litigation and regulatory matters continued
Government securities antitrust litigation
NWMSI and certain other US broker-dealers are defendants in a
consolidated antitrust class action pending in the SDNY on behalf
of persons who transacted in US Treasury securities or derivatives
based on such instruments, including futures and options. The
plaintiffs allege that defendants rigged the US Treasury securities
auction bidding process to deflate prices at which they bought such
securities and colluded to increase the prices at which they sold
such securities to plaintiffs. The complaint was dismissed in March
2021. Plaintiffs have filed an amended complaint, which defendants
will again seek to have dismissed.
Class action antitrust claims commenced in March 2019 are
pending in the SDNY against NWM Plc, NWMSI and other banks in
respect of Euro-denominated bonds issued by European central banks
(EGBs). The complaint alleges a conspiracy among dealers of EGBs to
widen the bid-ask spreads they quoted to customers, thereby
increasing the prices customers paid for the EGBs or decreasing the
prices at which customers sold the bonds. The class consists of
those who purchased or sold EGBs in the US between 2007 and 2012.
The defendants filed a motion to dismiss this matter, which was
granted by the court in respect of NWM Plc and NWMSI in July 2020.
Plaintiffs have filed an amended complaint which defendants are
seeking to have dismissed.
Swaps antitrust litigation
NWM Plc, NWMSI and 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.
In addition, in June 2017, TeraExchange filed a complaint
against NWM Plc, NWMSI and NatWest Group plc, as well as a number
of other credit default swap dealers, in the SDNY. TeraExchange
alleges it would have established exchange-like trading of credit
default swaps if the defendant dealers had not engaged in an
unlawful antitrust conspiracy. In October 2018, the court dismissed
all claims against NWM Plc, NWMSI and NatWest Group plc.
On 30 June 2021, a class action antitrust complaint was filed
against a number of credit default swap dealers in New Mexico
federal court on behalf of persons who, from 2005 onwards, settled
credit default swaps in the United States by reference to the ISDA
credit default swap auction protocol. The complaint alleges that
the defendants conspired to manipulate that benchmark through
various means in violation of the antitrust laws and the Commodity
Exchange Act. The defendants include several NatWest Group
companies, including NatWest Group plc.
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.
Madoff
NWM N.V. is a defendant in two actions filed by Irving Picard,
as trustee for the bankruptcy estates of Bernard L. Madoff and
Bernard L. Madoff Investment Securities LLC, in bankruptcy court in
New York. In both cases, the trustee alleges that certain transfers
received by NWM N.V. amounted to fraudulent conveyances that should
be clawed back for the benefit of the Madoff estate.
In the primary action, filed in December 2010, the trustee is
seeking to clawback a total of US$276.3 million in redemptions that
NWM N.V. allegedly received from certain Madoff feeder funds and
certain swap counterparties. In March 2020, the bankruptcy court
denied the trustee's request for leave to amend its complaint to
include additional allegations against NWM N.V., holding that, even
with the proposed amendments, the complaint would fail as a matter
of law to state a valid claim against NWM N.V. The trustee has
commenced an appeal of the bankruptcy court's decision, which has
been stayed pending the result of appeals in different proceedings,
against different defendants, that involve similar issues. In the
second action, filed in October 2011, the trustee seeks to recover
an additional US$21.8 million. This action has been stayed pending
the result of the appeal in the primary action.
Notes
12. Litigation and regulatory matters continued
Interest rate hedging products and similar litigation
NWM Plc continues to deal with a small number of active
litigation claims in the UK relating to the alleged mis-selling of
interest rate hedging products.
Separately, NWM Plc is defending claims filed in France by two
French local authorities relating to structured interest rate
swaps. The plaintiffs allege, among other things, that the swaps
are void for being illegal transactions, that they were mis-sold,
and that information / advisory duties were breached. One of the
claims has been appealed to the Supreme Court and judgment is
awaited. The other has been remitted from the Supreme Court to the
Court of Appeal for reconsideration of one aspect. NWM N.V. was a
defendant in the latter case but has been dismissed from the
proceedings.
EUA trading litigation
HMRC issued a tax assessment in 2012 against NatWest Group plc
for approximately GBP86 million regarding a value-added-tax (VAT)
matter in relation to the trading of European Union Allowances
(EUAs) by the subsidiary of a joint venture partnership in 2009.
NatWest Group plc lodged an appeal challenging the assessment
before the First-tier Tribunal (Tax), a specialist tax tribunal,
(the 'Tax Dispute'). The matter was resolved in July 2021.
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 GBP71.4 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 ('Mercuria') 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 GBP45
million plus interest and costs, and permitted it to appeal to the
Court of Appeal. On 10 May 2021 the Court of Appeal set aside the
High Court's judgment and ordered that a retrial take place before
a different High Court judge. The claimants have sought permission
from the Supreme Court to appeal. The Court of Appeal also
dismissed an appeal by Mercuria against the finding by the High
Court that NWM Plc and Mercuria were both vicariously liable.
Mercuria has sought permission from the Supreme Court to appeal
that decision.
US Anti-Terrorism Act litigation
NWM N.V. and certain other financial institutions are defendants
in several actions pending in the United States District Courts for
the Eastern and Southern Districts of New York, filed by a number
of US nationals (or their estates, survivors, or heirs), most of
whom are or were US military personnel, who were killed or injured
in attacks in Iraq between 2003 and 2011. NWM Plc is also a
defendant in some of these cases.
The attacks at issue in the cases were allegedly perpetrated by
Hezbollah and certain Iraqi terror cells allegedly funded by the
Islamic Republic of Iran. According to the plaintiffs' allegations,
the defendants are liable for damages arising from the attacks
because they allegedly conspired with Iran and certain Iranian
banks to assist Iran in transferring money to Hezbollah and the
Iraqi terror cells, in violation of the US Anti-Terrorism Act, by
agreeing to engage in 'stripping' of transactions initiated by the
Iranian banks so that the Iranian nexus to the transactions would
not be detected.
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.
Securities underwriting litigation
NWMSI is an underwriter defendant in several securities class
actions in the US in which plaintiffs generally allege that an
issuer of public debt or equity securities, as well as the
underwriters of the securities (including NWMSI), are liable to
purchasers for misrepresentations and omissions made in connection
with the offering of such securities.
Notes
12. Litigation and regulatory matters continued
1MDB litigation
Recent media reports suggest that a claim for a material sum has
recently been issued in Malaysia by 1MDB against Coutts & Co
Ltd for alleged losses in connection with the 1MDB fund. Coutts
& Co Ltd is a company registered in Switzerland and is in
wind-down following the announced sale of its business assets in
2015.
Regulatory matters (including investigations)
NWM Group's financial condition can be affected by the actions
of various governmental and regulatory authorities in the UK, the
US, the EU and elsewhere. NWM Group companies have 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.
NWM Group companies have been providing, and continue 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 NWM
Group, remediation of systems and controls, public or private
censure, restriction of NWM 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 NWM
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.
NWM Group is co-operating fully with the matters described
below.
US investigations relating to fixed-income securities
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
asset-backed 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.
The NatWest Markets business is currently responding to a
separate criminal investigation by the USAO and the US Department
of Justice (DoJ) concerning unrelated trading by certain NatWest
Markets former traders involving alleged spoofing. The NPA
(referred to above) has been extended as the criminal investigation
has progressed and related discussions with the USAO and the DoJ,
including relating to the impact of such alleged conduct on the
status of the NPA and the potential consequences thereof, have been
ongoing. The duration and outcome of these matters remain
uncertain, including in respect of whether settlement may be
reached. Material adverse collateral consequences, in addition to
further substantial costs and the recognition of further
provisions, may occur depending on the outcome of the
investigations, as further described in the Risk Factor relating to
legal, regulatory and governmental actions and investigations set
out on page 171 of the NatWest Markets Plc 2020 Annual Report and
Accounts.
Foreign exchange related investigations
In recent years, NWM Plc paid significant penalties to resolve
investigations into its FX business by the FCA, the Commodity
Futures Trading Commission, the DoJ, the Board of Governors of the
Federal Reserve System, the European Commission (EC) and others.
NWM Plc continues to co-operate with ongoing investigations from
competition authorities on similar issues relating to past FX
trading. The exact timing and amount of future financial penalties,
related risks and collateral consequences remain uncertain and may
be material.
Notes
12. Litigation and regulatory matters continued
EGB investigation
On 20 May 2021, the EC announced that it had adopted a decision
in relation to an investigation into potential competition law
violations in the primary and secondary market trading of EGBs
between 2007 and 2011 which involved the NatWest Markets business
and six other banks. NatWest Group revealed the conduct to the EC
and co-operated throughout the EC's investigation. NatWest Group
was granted immunity by the EC and was not fined.
FCA investigation into NatWest Group's compliance with the Money
Laundering Regulations 2007
In July 2017, the FCA notified NatWest Group that it was
undertaking an investigation into NatWest Group's compliance with
the UK Money Laundering Regulations 2007 ('MLR 2007') in relation
to certain money service businesses and related parties. The
investigation is assessing both criminal and civil culpability.
NatWest Group is co-operating with the investigation, including
responding to information requests from the FCA.
On 15 March 2021, the FCA notified NatWest Group that it had
commenced criminal proceedings against NWB Plc for offences under
regulation 45(1) of the MLR 2007 for alleged failures to comply
with regulations 8(1), 8(3) and 14(1) of the MLR 2007 between 11
November 2011 and 19 October 2016, arising from the handling of the
accounts of a UK incorporated customer. These regulations require
the firm to determine, conduct and demonstrate risk sensitive due
diligence and ongoing monitoring of its relationships with its
customers for the purposes of preventing money laundering. NWB Plc
will be required to attend an initial hearing at Westminster
Magistrates' Court on 15 September 2021. Material adverse
collateral consequences, in addition to further substantial costs
and the recognition of provisions, may occur as a result of any
conviction and may affect members of NWM Group.
Systematic Anti-Money Laundering Programme assessment
In December 2018, the FCA commenced a Systematic Anti-Money
Laundering Programme assessment of NatWest Group. In 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
co-operating with the Skilled Person's review, which is
ongoing.
13. Related party transactions
UK Government
The UK Government and bodies controlled or jointly controlled by
the UK Government and bodies over which it has significant
influence are related parties of NWM Group. NWM Group's
transactions with the UK Government include the payment of taxes,
principally UK corporation tax and value added tax; national
insurance contributions; local authority rates; and regulatory fees
and levies.
Bank of England facilities
In the ordinary course of business, NWM Group may from time to
time access market-wide facilities provided by the Bank of
England.
Other related parties
(a) In their roles as providers of finance, NWM Group companies
provide development and other types of capital support to
businesses. In some instances, the investment may extend to
ownership or control over 20% or more of the voting rights of the
investee company. However, these investments are not considered to
give rise to transactions of a materiality requiring disclosure
under IAS 24.
(b) NWM Group is recharged from other NatWest Group entities,
mainly NWB Plc which provides the majority of shared services
(including technology) and operational processes.
Full details of NWM Group's related party transactions for the
year ended 31 December 2020 are included in the NatWest Markets Plc
2020 Annual Report and Accounts.
14. Post balance sheet events
Other than as disclosed there have been no other significant
events between 30 June 2021 and the date of approval of these
accounts which would require a change to or additional
disclosure in the condensed consolidated financial statements.
15. Date of approval
This announcement was approved by the Board of Directors on 29
July 2021.
Independent review report to NatWest Markets Plc
Conclusion
We have been engaged by NatWest Markets Plc ("the Group") to
review the condensed consolidated financial statements in the
half-yearly financial report for the six months ended 30 June 2021
which comprise the condensed consolidated income statement, the
condensed consolidated statement of comprehensive income, the
condensed consolidated balance sheet, the condensed consolidated
statement of changes in equity, the condensed consolidated cash
flow statement, and related Notes 1 to 15 and the Risk and capital
management disclosures for those identified as within the scope of
our review (together "the condensed consolidated financial
statements"). We have read the other information contained in the
half yearly financial report and considered whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed consolidated financial statements.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed consolidated financial
statements in the half-yearly financial report for the six months
ended 30 June 2021 are not prepared, in all material respects, in
accordance with UK adopted International Accounting Standard 34 and
the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International
Standard on Review Engagements 2410 (UK and Ireland) "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Auditing Practices Board. A review of
interim financial information consists of making enquiries,
primarily of persons responsible for financial and accounting
matters, and applying analytical and other review procedures. A
review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
As disclosed in Note 1, the annual financial statements of the
Group will be prepared in accordance with UK adopted IFRSs. The
condensed consolidated financial statements included in this
half-yearly financial report have been prepared in accordance with
UK adopted International Accounting Standard 34, "Interim Financial
Reporting".
Responsibilities of the directors
The directors are responsible for preparing the half-yearly
financial report in accordance with the Disclosure Guidance and
Transparency Rules of the United Kingdom's Financial Conduct
Authority
Auditor's Responsibilities for the review of the financial
information
In reviewing the half-yearly report, we are responsible for
expressing to the Group a conclusion on the condensed consolidated
financial statements in the half-yearly financial report. Our
conclusion, based on procedures that are less extensive than audit
procedures, is described in the Basis for Conclusion paragraph of
this report.
Use of our report
This report is made solely to the Group in accordance with
guidance contained in International Standard on Review Engagements
2410 (UK and Ireland) "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the
Auditing Practices Board. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the
Group, for our work, for this report, or for the conclusions we
have formed.
Ernst & Young LLP
London, United Kingdom
29 July 2021
NWM Summary Risk Factors
Summary of principal risks and uncertainties
Set out below is a summary of the principal risks and
uncertainties for the remaining six months of the financial year
which could adversely affect NWM Group. This summary should not be
regarded as a complete and comprehensive statement of all potential
risks and uncertainties; a fuller description of these and other
risk factors is included on pages 156 to 172 of the NatWest Markets
Plc 2020 Annual Report and Accounts and pages 15 to 45 of the
NatWest Markets Plc 2021 Registration Document. Any of the risks
identified may have a material adverse effect on NWM Group's
business, operations, financial condition or prospects. The current
COVID-19 pandemic may exacerbate any of the risks described
below.
Risks relating to the COVID-19 pandemic
-- The effects of the COVID-19 pandemic on the UK, global
economies and financial markets and NWM Group's customers, as well
as its competitive environment may continue to have a material
adverse effect on NWM Group's business, results of operations and
outlook.
-- The adverse impact of the COVID-19 pandemic on the credit
quality of NWM Group's counterparties has increased NWM Group's
exposure to counterparty risk, which may adversely affect its
business, results of operations and outlook.
-- The COVID-19 pandemic may adversely affect NWM Group's
strategy and impair its ability to meet its targets and to achieve
its strategic objectives.
-- The COVID-19 pandemic has heightened NWM Group's operational
risks as many of its employees are working remotely which may also
adversely affect NWM Group's ability to maintain effective internal
controls.
-- The effects of the COVID-19 pandemic could affect NWM 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.
Strategic risk
-- NatWest Group is in the process of implementing its
Purpose-led Strategy, which requires changes in NWM Group's
business and strategy, and entails material execution, commercial
and operational risks for NWM Group.
-- NWM Group may not be able to successfully implement the
ongoing refocusing of NWM and it may not achieve its targets and
NWM Group may not ultimately result in a viable, competitive
business.
Economic and political risk
-- NWM Group faces market risk as a result of political and
economic risks and uncertainty in the UK and global markets.
-- Continuing uncertainty regarding the effects of the UK's
withdrawal from the European Union may continue to adversely affect
NWM Group and its operating environment.
-- Changes in interest rates have affected and will continue to
affect NWM Group's business and results.
-- Changes in foreign currency exchange rates may affect NWM
Group's results and financial position.
-- HM Treasury (or UKGI on its behalf) could exercise a
significant degree of influence over NatWest Group and NWM Group is
controlled by NatWest Group.
Financial resilience risk
-- NWM Group may not meet the targets it communicates to the
market, generate returns or implement its strategy effectively.
-- NWM Group has undergone significant structural and other
change, including as a result of the UK ring-fencing regime,
acquisition of NatWest Markets N.V. and the implementation of
NatWest Group's Purpose-led strategy (including the ongoing NWM
Refocusing) and may continue to be subject to significant
structural and other change, including as a result of asset or
other transfers within or between NatWest Group entities.
-- NWM Plc and/or its regulated subsidiaries may not meet the
prudential regulatory requirements for capital.
-- NWM Plc may not be able to adequately access sources of liquidity and funding.
-- NWM Plc and/or its regulated subsidiaries may not manage
their capital, liquidity or funding effectively which could trigger
the execution of certain management actions or recovery
options.
-- Any reduction in the credit rating and/or outlooks assigned
to NatWest Group plc, any of its subsidiaries (including NWM Plc or
NWM Group subsidiaries) or any of their respective debt securities
could adversely affect the availability of funding for NWM Group,
reduce NWM Group's liquidity position and increase the cost of
funding.
-- NWM Group operates in markets that are highly competitive,
with increasing competitive pressures and technology
disruption.
-- NWM Group is reliant on access to the capital markets to meet
its funding requirements, both directly and indirectly through its
parent for the subscription to its internal MREL. The inability to
do so may adversely affect NWM Group.
-- NWM Group may be adversely affected if NatWest Group fails to
meet the requirements of regulatory stress tests.
-- NWM Group has significant exposure to counterparty and borrower risk.
-- NWM Group could incur losses or be required to maintain
higher levels of capital as a result of limitations or failure of
various models.
-- NWM Group's financial statements are sensitive to underlying
accounting policies, judgments, estimates and assumptions.
-- Changes in accounting standards may materially impact NWM Group's financial results.
NWM Summary Risk Factors
Financial resilience risk continued
-- NatWest Group (including NWM Group) may become subject to the
application of UK statutory stabilisation or resolution powers
which may result in, among other actions, the write-down or
conversion of NWM Group entities' Eligible Liabilities.
-- NatWest Group is subject to Bank of England oversight in
respect of resolution, and NatWest Group could be adversely
affected should the Bank of England deem NatWest Group's
preparations to be inadequate.
Climate and sustainability-related risks
-- NWM Group and its customers may face significant
climate-related risks, including in transitioning to a low-carbon
economy, which may adversely impact NWM Group.
-- NatWest Group's Purpose-led Strategy includes one area of
focus on climate change that is likely to require material changes
to the business and operating model of NWM Group and entails
significant execution risk.
-- Any failure by NWM Group to implement effective and compliant
climate change resilient systems, controls and procedures could
adversely affect NWM Group's ability to manage climate-related
risks.
-- There are significant uncertainties inherent in accurately
modelling the impact of climate-related risks.
-- A failure to adapt NWM Group's business strategy, governance,
procedures, systems and controls to manage emerging
sustainability-related risks and opportunities may have a material
adverse effect on NWM Group's reputation, business, results of
operations and outlook.
-- Any reduction in the ESG ratings of NatWest Group (including
NWM Group) could have a negative impact on NatWest Group's
(including NWM Group) reputation and on investors' risk
appetite.
-- Increasing levels of climate, environmental and
sustainability-related laws, regulation and oversight may adversely
affect NWM Group's business and expose NWM Group to increased costs
of compliance, regulatory sanction and reputational damage.
-- NWM Group may be subject to potential climate, environmental
and other sustainability-related litigation, enforcement
proceedings, investigations and conduct risk.
Operational and IT resilience risk
-- Operational risks (including reliance on third party
suppliers and outsourcing of certain activities) are inherent in
NWM Group's businesses.
-- NWM Group is subject to increasingly sophisticated and frequent cyberattacks.
-- NWM Group operations and strategy are highly dependent on the
accuracy and effective use of data.
-- NWM Group relies on attracting, retaining, developing and
remunerating senior management and skilled personnel (such as
market trading specialists), and is required to maintain good
employee relations.
-- NWM Group's operations are highly dependent on its complex IT
systems (including those that enable remote working) and any IT
failure could adversely affect NWM Group.
-- A failure in NWM Group's risk management framework could
adversely affect NWM Group, including its ability to achieve its
strategic objectives.
-- NWM Group's operations are subject to inherent reputational risk.
Legal, regulatory and conduct risk
-- NWM Group's businesses are subject to substantial regulation
and oversight, which are constantly evolving and may adversely
affect NWM Group.
-- NWM Group is subject to various litigation matters, regulatory and governmental actions and investigations as well as remedial undertakings, the outcomes of which are inherently difficult to predict, and which could have an adverse effect on NWM Group.
-- NWM Group may not effectively manage the transition of LIBOR
and other IBOR rates to alternative risk-free rates.
-- Changes in tax legislation or failure to generate future
taxable profits may impact the recoverability of certain deferred
tax assets recognised by NWM Group.
Statement of directors' responsibilities
We, the directors listed below, confirm that to the best of our
knowledge:
-- the condensed financial statements have been prepared in accordance
with UK adopted IAS 34 'Interim Financial Reporting';
-- the interim management report includes a fair review of the information
required by DTR 4.2.7R (indication of important events during the
first six months and description of principal risks and uncertainties
for the remaining six months of the year); and
-- the interim management report includes a fair review of the information
required by DTR 4.2.8R (disclosure of related parties' transactions
and changes therein).
By order of the Board
Frank Dangeard Robert Begbie David King
Chairman Chief Executive Officer Chief Financial Officer
29 July 2021
Board of directors
Chairman Executive directors Non-executive directors
Frank Dangeard Robert Begbie Anne Simpson
David King Brendan Nelson (resigned
30 June 2021)
Sarah Wilkinson
Tamsin Rowe
Vivek Ahuja
Non-IFRS financial measures
NWM Group prepares its financial statements in accordance with
IFRS as issued by the IASB 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 financial 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. These non-IFRS financial
measures are not measures within the scope of IFRS and are not a
substitute for IFRS measures. These measures include:
-- Management analysis of the operating expenses shows strategic
costs and litigation and conduct costs in separate lines on pages 4
and 5. These amounts are included in staff, premises and equipment
and other administrative expenses in the statutory analysis.
-- Funded assets defined as total assets less derivative assets.
-- Management view of income by business, including separate
itemisation of own credit adjustments, asset disposals/strategic
risk reduction and income excluding asset disposals and own credit
adjustments. Asset disposals/strategic risk reduction includes the
costs of exiting positions, which includes changes in carrying
value to align to the expected exit valuation, and the impact of
risk reduction transactions entered into as part of the
optimisation of the entity's capital usage, following the strategic
announcements of 14 February 2020. Own credit adjustments are
applied to positions where it is believed that the counterparties
would consider NWM Group's creditworthiness when pricing trades.
The fair value of certain issued debt securities, including
structured notes, is adjusted to reflect the changes in own credit
spreads and the resulting gain or loss recognised in income.
Non-IFRS financial measures
Operating expenses
Statutory analysis (1,2)
Half year ended Quarter ended
----------------- --------------------------
30 June 30 June 30 June 31 March 30 June
2021 2020 2021 2021 2020
Operating expenses GBPm GBPm GBPm GBPm GBPm
------------------------------ -------- ------- ------- -------- -------
Staff costs 252 377 118 134 187
Premises and equipment 37 75 18 19 45
Other administrative expenses 181 348 67 114 120
Depreciation and amortisation 10 14 5 5 7
Total operating expenses 480 814 208 272 359
------------------------------ -------- ------- ------- -------- -------
Non-statutory analysis
Half year ended
--------------------------------------------------------------------------------------
30 June 2021 30 June 2020
------------------------------------------ ------------------------------------------
Litigation Litigation
and Statutory and Statutory
Strategic conduct Other operating Strategic conduct Other operating
costs costs expenses expenses costs costs expenses expenses
Operating expenses GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- --------- ---------- -------- --------- --------- ---------- -------- ---------
Staff costs 65 - 187 252 59 - 318 377
Premises and equipment 3 - 34 37 22 - 53 75
Other administrative
expenses 27 (68) 222 181 31 113 204 348
Depreciation and
amortisation - - 10 10 - - 14 14
Total 95 (68) 453 480 112 113 589 814
---------------------------- --------- ---------- -------- --------- --------- ---------- -------- ---------
Quarter ended
--------------------------------------------------------------------------------------
30 June 2021 31 March 2021
------------------------------------------ ------------------------------------------
Litigation Litigation
and Statutory and Statutory
Strategic conduct Other operating Strategic conduct Other operating
costs costs expenses expenses costs costs expenses expenses
Operating expenses GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- --------- ---------- -------- --------- --------- ---------- -------- ---------
Staff costs 40 - 78 118 25 - 109 134
Premises and equipment 2 - 16 18 1 - 18 19
Other administrative
expenses 21 (81) 127 67 6 13 95 114
Depreciation and
amortisation - - 5 5 - - 5 5
Total 63 (81) 226 208 32 13 227 272
---------------------------- --------- ---------- -------- --------- --------- ---------- -------- ---------
Quarter ended
------------------------------------------
30 June 2020
------------------------------------------
Litigation
and Statutory
Strategic conduct Other operating
costs costs expenses expenses
Operating expenses GBPm GBPm GBPm GBPm
---------------------------- --------- ---------- -------- ---------
Staff costs 38 - 149 187
Premises and equipment 22 - 23 45
Other administrative
expenses 20 9 91 120
Depreciation and
amortisation - - 7 7
Total 80 9 270 359
---------------------------- --------- ---------- -------- ---------
Notes:
(1) On a statutory or GAAP basis, strategic costs are included
within staff, premises and equipment and other administrative
expenses. Strategic costs relate to restructuring provisions,
related costs and projects that are transformational in nature.
(2) On a statutory or GAAP basis, litigation and conduct costs
are included within other administrative expenses.
Additional information
Presentation of information
NatWest Markets Plc ('NWM Plc') is a wholly-owned subsidiary of
NatWest Group plc or 'the ultimate holding company'. The
NatWest Markets Group ('NWM Group') comprises NWM Plc and its
subsidiary and associated undertakings. The term
'NatWest Group' comprises NatWest Group plc and its subsidiary
and associated undertakings. The term 'NWH Group' refers to
NatWest Holdings Limited ('NWH') and its subsidiary and
associated undertakings. The term 'NatWest Bank Plc' or 'NWB
Plc'
refers to National Westminster Bank Plc.
NWM Plc publishes its financial statements in pounds sterling
('GBP' or 'sterling'). The abbreviations 'GBPm' and 'GBPbn'
represent
millions and thousands of millions of pounds sterling,
respectively, and references to 'pence' represent pence in the
United
Kingdom ('UK'). Reference to 'dollars' or '$' are to United
States of America ('US') dollars. The abbreviations '$m' and
'$bn'
represent millions and thousands of millions of dollars,
respectively, and references to 'cents' represent cents in the US.
The
abbreviation 'EUR' represents the 'euro', and the abbreviations
'EURm' and 'EURbn' represent millions and thousands of millions of
euros,
respectively, and references to 'cents' represent cents in the
European Union ('EU').
To aid readability, this document retains references to EU
legislative and regulatory provisions in effect in the UK before
1
January 2021 that have now been implemented in UK domestic law.
These references should be read and construed as
including references to the applicable UK implementation
measures with effect from 1 January 2021.
Western European corporate portfolio
In order to best serve customers in an efficient manner, NatWest
Group and NWM Group are evaluating whether NatWest
Group's Western European corporate portfolio, principally
including term funding and revolving credit facilities, will remain
in the
ring-fenced subgroup of NatWest Group or be transferred to NWM
Group. Some or all of the portfolio already held in NWM
Group may be transferred to the ring-fenced subgroup of NatWest
Group. The timing and quantum of such transfers, if any, is
uncertain.
NatWest Markets Group legal entity disclosures
There is a distinction between the disclosure of the NatWest
Markets operating segment performance in the NatWest Group's H1
2021 interim results and the NatWest Markets Group's results
presented in this document, with differences primarily as
follows:
-- NatWest Markets Group's results include its part of the Central items & other segment.
-- NatWest Group's H1 2021 results reports the NatWest Markets
segment excluding Central items & other.
MAR - Inside Information
This announcement contains information that qualified or may
have qualified as inside information for NatWest Markets Plc,
for
the purposes of Article 7 of the Market Abuse Regulation (EU)
596/2014 (MAR) as it forms part of domestic law by virtue of
the
European Union (Withdrawal) Act 2018 for NatWest Markets Plc.
This announcement is made by Paul Pybus, Head of Debt Investor
Relations for NatWest Markets Plc.
Condensed consolidated financial statements
The unaudited condensed consolidated financial statements for
the half year ended 30 June 2021 comprise the following sections of
this document:
-- Statutory results on pages 25 to 46 comprising the condensed consolidated
income statement, condensed consolidated statement of comprehensive
income, condensed consolidated balance sheet, condensed consolidated
statement of changes in equity, condensed consolidated cash flow statement
and the related Notes 1 to 15.
-- Risk and capital management section on pages 7 to 24 as indicated
within the scope of the independent review. Refer to the Independent
review report to NatWest Markets Plc on page 47 for further information.
Statutory results
Financial information contained in this document does not
constitute statutory accounts within the meaning of section 434 of
the Companies Act 2006 ("the Act"). The statutory accounts for the
year ended 31 December 2020 have been filed with the Registrar of
Companies. The report of the auditor on those statutory accounts
was unqualified, did not draw attention to any matters by way of
emphasis and did not contain a statement under section 498(2) or
(3) of the Act.
Contact
Paul Pybus Investor Relations +44 (0) 7769 161183
----------- ------------------- -------------------
Forward-looking statements
This document contains forward-looking statements within the
meaning of the United States Private Securities Litigation Reform
Act of 1995, such as statements that include, without limitation,
the words 'expect', 'estimate', 'project', 'anticipate', 'commit',
'believe', 'should', 'intend', 'will', 'plan', 'could',
'probability', 'risk', 'Value-at-Risk (VaR)', 'target', 'goal',
'objective', 'may', 'endeavour', 'outlook', 'optimistic',
'prospects' and similar expressions or variations on these
expressions. These statements concern or may affect future matters,
such as NWM Group's future economic results, business plans and
current strategies. In particular, this document may include
forward-looking statements relating to NWM Group in respect of, but
not limited to: the impact of the COVID-19 pandemic, NWM Plc's
regulatory capital position and related requirements, its financial
position, profitability and financial performance (including
financial, capital, cost savings and operational targets), the NWM
Group refocusing and implementation of NatWest Group's Purpose-led
strategy, its ESG and climate-related targets, its access to
adequate sources of liquidity and funding, increasing competition
from new incumbents and disruptive technologies, its exposure to
third party risks, its ongoing compliance with the UK ring-fencing
regime and ensuring operational continuity in resolution, its
credit exposures under certain specified scenarios, substantial
regulation and oversight, ongoing legal, regulatory and
governmental actions and investigations, the transition of LIBOR
and other IBOR rates to alternative risk free rates and NWM Group's
exposure to economic and political risks (including with respect to
Brexit and climate change), operational risk, conduct risk, cyber
and IT risk, key person risk and credit rating risk.
Forward-looking statements are subject to a number of risks and
uncertainties that might cause actual results and performance to
differ materially from any expected future results or
performance expressed or implied by the forward-looking
statements. Factors that could cause or contribute to differences
in current expectations include, but are not limited to, the impact
of the COVID-19 pandemic, the outcome of legal, regulatory and
governmental actions and investigation, legislative, political,
fiscal and regulatory developments, accounting standards,
competitive conditions, technological developments, interest and
exchange rate fluctuations, general economic and political
conditions and the impact of climate-related risks and the
transitioning to a low-carbon economy. These and other factors,
risks and uncertainties that may impact any forward-looking
statement or NWM Group's actual results are discussed in NWM Plc's
2020 Annual Report and Accounts (ARA), NWM Plc's 2021 Registration
Document, NWM Plc's Interim Results for H1 2021 and other public
filings. The forward-looking statements contained in this document
speak only as of the date of this document and NWM Group does not
assume or undertake any obligation or responsibility to update any
of the forward-looking statements contained in this document,
whether as a result of new information, future events or otherwise,
except to the extent legally required.
Legal Entity Identifier: RR3QWICWWIPCS8A4S074
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