TIDM83NF
RNS Number : 1749U
Natwest Markets PLC
29 July 2022
NatWest Markets Group
Interim Results 2022
NatWest Markets Plc ci.natwest.com
NatWest Markets Group (NWM Group)
Results for the half year ended 30 June 2022
Overview of the half year
In Q2 2022 we have built upon the strong start to the year with
further progress of our One Bank initiatives to grow in our target
customer segments and markets. Our focus on digital is getting
traction in the market with industry-leading pilot transactions and
innovative solutions to support customers' FX needs. The new
NatWest Group Commercial and Institutional franchise (C&I),
which includes NatWest Markets, will provide further opportunities
to deepen our customer relationships and help drive sustainable
income growth.
Against a backdrop of challenging market conditions and reduced
levels of market liquidity in Fixed Income markets, we have overall
delivered a stronger financial performance in the first half of the
year compared to H1 2021 and maintained our strong capital and
liquidity position. We continue to monitor the evolving economic
outlook including the continued rise in cost of living and are
mindful of the impact that rising inflation, higher interest rates
and supply-chain shortages are having on our customers.
Climate and sustainable funding and financing have continued to
perform well, and as at the end of H1 2022 we had delivered GBP10.9
billion towards the NatWest Group climate and sustainable funding
and financing target of GBP100 billion between 1 July 2021 and the
end of 2025.
Financial review
NWM Group reported a loss of GBP86 million for H1 2022 compared
with a loss of GBP119 million in H1 2021. Total income of GBP438
million was up by GBP142 million compared with H1 2021, largely
reflecting a stronger business performance. Operating expenses
increased by GBP60 million to GBP540 million in H1 2022, largely
due to a litigation and conduct costs credit recognised in H1 2021
which reflected progress in closing legacy matters, partially
offset by lower other operating expenses in the current period
.
Financial performance
- Total income was GBP438 million, compared with GBP296 million
in H1 2021. Income excluding asset disposals/strategic risk
reduction and own credit adjustments was GBP418 million in H1 2022,
up by GBP83 million from GBP335 million in H1 2021, largely driven
by stronger performance in Currencies, as FX volatility heightened
in the period, and in Capital Markets. Fixed Income performance was
down compared with H1 2021, largely reflecting unfavourable market
conditions following the Russian invasion of Ukraine in Q1
2022.
- Operating expenses of GBP540 million in H1 2022 were GBP60
million higher than GBP480 million in H1 2021. Litigation and
conduct costs of GBP20 million were GBP88 million higher than GBP68
million credit in H1 2021, which reflected progress in closing
legacy matters. Other operating expenses were down by GBP28 million
to GBP520 million in H1 2022, largely reflecting higher technology
investment costs recognised in the comparative period.
- NWM Group's total assets and liabilities increased by GBP24.1
billion and GBP24.4 billion to GBP227.1 billion and GBP220.0
billion respectively at 30 June 2022, compared with 31 December
2021. The increases primarily reflect higher trading assets and
liabilities, driven by customer trading activity and the management
of balance sheet within limits, and higher settlement balances.
- On 28 July 2022, the NWM Plc Board approved an interim
dividend of GBP180 million, to be declared and payable to NatWest
Group plc on 29 July 2022. A GBP180 million foreseeable dividend
deduction has been applied to the H1 2022 regulatory capital
position.
Capital and leverage
* Total NWM Plc RWAs were GBP23.5 billion at 30 June
2022, compared with GBP22.7 billion at 31 December
2021. The increase in the period reflects higher
levels of credit, counterparty credit and market risk,
partially offset by a decrease in operational risk.
The increase in market risk was largely driven by
back-testing exceptions arising from the increased
market volatility.
* NWM Plc's Common Equity Tier 1 (CET1) ratio was 16.4%
at 30 June 2022, compared with 17.9% at 31 December
2021. The decrease in the period was largely driven
by the increase in RWAs, the impact of the
foreseeable dividend deduction to regulatory capital,
and other reserve movements.
* Total MREL for NWM Plc at 30 June 2022 was GBP8.6
billion, or 36.8% of RWAs, down from GBP9.6 billion
or 42.1% of RWAs at 31 December 2021. The reduction
in the period was largely due to the redemption of a
EUR1.1 billion internal instrument issued to NatWest
Group plc.
* NWM Plc's leverage ratio at 30 June 2022 of 4.4% has
been calculated in accordance with changes to the
UK's leverage ratio framework introduced by the PRA
which came into effect from 1 January 2022. As at 31
December 2021, the UK leverage ratio was 4.8%, which
was calculated under the prior year's UK leverage
methodology.
Liquidity and funding
* NWM Plc's liquidity portfolio at 30 June 2022 was
GBP18.2 billion with an LCR of 206% (31 December 2021
- GBP16.1 billion with LCR 205%).
* NWM Plc retains full year 2022 guidance of GBP4-5
billion of public benchmark issuance. NWM Plc issued
GBP3.3 billion of public benchmark transactions in
the six months ended 30 June 2022, being a benchmark
transaction under the US MTN programme of $1.5
billion of notes, and three benchmark transactions
under the EMTN programme of EUR1.0 billion, CHF0.3
billion and EUR1.25 billion of notes respectively.
NWM Plc also raised funding in other formats
throughout the period such as private placements and
secured note transactions.
Outlook (1)
We retain the outlook guidance provided in NatWest Markets Plc
2021 Annual Report and Accounts.
Depending on market conditions in H2 2022, NWM Group intends to
continue its plans to issue GBP4-5 billion in public benchmark
issuance.
(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 179 to 200 of the NatWest Markets Plc
2021 Annual Report and Accounts, and the Summary Risk Factors set
out on pages 47 and 48 of this announcement for H1 2022. These
statements constitute forward-looking statements. Refer to
Forward-looking statements in this announcement.
Financial review
The table below presents a segmental analysis of key lines of
NWM Group's income statement for the half year ended 30 June 2022.
Commentary refers to the tables below as well as the consolidated
income statement shown on page 24.
Half year ended 30 Half year ended 30 June
June 2022 2021
Central Central
NatWest items NatWest items
& &
Markets other Total Markets other Total
Income statement GBPm GBPm GBPm GBPm GBPm GBPm
------- ------- ----- --------- -------- ------
Net interest income 29 - 29 (4) - (4)
Non-interest income 418 (9) 409 294 6 300
--------------------------------- ------- ------- ----- --------- -------- ------
Total income 447 (9) 438 290 6 296
--------------------------------- ------- ------- ----- --------- -------- ------
Litigation and conduct costs (6) (14) (20) 2 66 68
Other operating expenses (5) (505) (15) (520) (544) (4) (548)
--------------------------------- ------- ------- ----- --------- -------- ------
Operating expenses (511) (29) (540) (542) 62 (480)
Operating (loss)/profit before
impairments (64) (38) (102) (252) 68 (184)
Impairment (losses)/releases (5) - (5) 16 - 16
--------------------------------- ------- ------- ----- --------- -------- ------
Operating (loss)/profit before
tax (69) (38) (107) (236) 68 (168)
Tax credit 21 49
--------------------------------- ------- ------- ----- --------- -------- ------
Loss for the period (86) (119)
--------------------------------- ------- ------- ----- --------- -------- ------
Income (4)
--------------------------------- ------- ------- ----- --------- -------- ------
Fixed Income (1) 23 - 23 43 - 43
Currencies 280 - 280 205 - 205
Capital Markets 217 - 217 166 - 166
Capital Management Unit & other
(1,2) (6) (9) (15) 13 6 19
--------------------------------- ------- ------- ----- --------- -------- ------
Income including shared revenue,
before asset disposals and
OCA 514 (9) 505 427 6 433
Revenue shared with or paid
to fellow
NatWest Group subsidiaries (87) - (87) (98) - (98)
--------------------------------- ------- ------- ----- --------- -------- ------
Income excluding asset disposals
and OCA 427 (9) 418 329 6 335
Asset disposals/Strategic risk
reduction (3) (32) - (32) (40) - (40)
Own credit adjustments (OCA) 52 - 52 1 - 1
--------------------------------- ------- ------- ----- --------- -------- ------
Total income 447 (9) 438 290 6 296
--------------------------------- ------- ------- ----- --------- -------- ------
(1) Fixed Income for H1 2021 includes income of GBP(7) million relating
to miscellaneous balances that from Q2 2021 have been included in
Capital Management Unit & other.
(2) 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.
(3) 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.
(4) Product performance includes gross income earned on a NatWest group-wide
basis, including amounts contributed to other NatWest Group subsidiaries.
Income including shared revenue, before asset disposals and OCA
includes revenue share from other NatWest Group subsidiaries but
before revenue share is paid to or contributed to those subsidiaries.
(5) A presentational change was made in Q1 2022 whereby strategic costs
are included within Other operating expenses and not reported separately.
- Net interest income was GBP29 million in H1 2022 compared with
net expense of GBP4 million in H1 2021. Net interest income largely
represents interest income from lending activity and capital
hedges, offset by interest expense from the funding costs of the
business. The movement compared with H1 2021 primarily reflects
reduced funding costs for the business driven by the ongoing
repayment of legacy debt.
- Non-interest income of GBP409 million in H1 2022 increased by
GBP109 million compared with GBP300 million in H1 2021, largely
driven by stronger performance in Currencies, as FX volatility
heightened in the period, and in Capital Markets. Fixed Income
performance was down from H1 2021, largely reflecting unfavourable
market conditions following the Russian invasion of Ukraine in Q1
2022. Own credit adjustments of GBP52 million were up by GBP51
million from H1 2021, as credit spreads widened in the period.
- Operating expenses were GBP540 million in H1 2022, compared
with GBP480 million in H1 2021. Litigation and conduct costs of
GBP20 million were up by GBP88 million from GBP68 million credit in
H1 2021, which reflected progress in closing legacy matters. Other
operating expenses decreased to GBP520 million in H1 2022 from
GBP548 million in H1 2021, largely reflecting higher technology
investment costs recognised in the comparative period.
- NatWest Markets operating loss before tax was GBP69 million in
H1 2022, compared with GBP236 million in H1 2021. Income excluding
asset disposals and own credit adjustments of GBP427 million was
GBP98 million higher than GBP329 million in H1 2021, largely driven
by stronger performance in Currencies, as FX volatility heightened
in the period, and in Capital Markets. Operating expenses of GBP511
million were lower compared with GBP542 million in H1 2021, largely
reflecting higher technology investment costs recognised in the
comparative period.
- Central items & other operating loss before tax was GBP38
million in H1 2022, compared with a profit of GBP68 million in H1
2021. Litigation and conduct costs of GBP66 million credit in the
comparative period largely reflected progress in closing legacy
matters.
Financial review
The table below presents a segmental analysis of key lines of
NWM Group's income statement for the quarter ended 30 June 2022.
Commentary refers to the tables below as well as the consolidated
income statement shown on page 24.
Q2 2022 Q1 2022 Q2 2021
----------------------- ----------------------- -----------------------
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 15 - 15 14 - 14 3 - 3
Non-interest income 210 (6) 204 208 (3) 205 99 6 105
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Total income 225 (6) 219 222 (3) 219 102 6 108
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Litigation and conduct costs (4) (8) (12) (2) (6) (8) 2 79 81
Other operating expenses (4) (230) (7) (237) (275) (8) (283) (285) (4) (289)
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Operating expenses (234) (15) (249) (277) (14) (291) (283) 75 (208)
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Operating (loss)/profit before
impairments (9) (21) (30) (55) (17) (72) (181) 81 (100)
Impairment (losses)/releases (4) - (4) (1) - (1) 10 - 10
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Operating (loss)/profit before
tax (13) (21) (34) (56) (17) (73) (171) 81 (90)
Tax (charge)/credit (12) 33 32
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Loss for the period (46) (40) (58)
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Income (3)
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Fixed Income 38 - 38 (15) - (15) 5 - 5
Currencies 122 - 122 158 - 158 87 - 87
Capital Markets 96 - 96 121 - 121 92 - 92
Capital Management Unit & other
(1) 8 (6) 2 (14) (3) (17) 5 6 11
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Income including shared revenue,
before asset disposals and
OCA 264 (6) 258 250 (3) 247 189 6 195
Revenue shared with or paid
to fellow
NatWest Group subsidiaries (48) - (48) (39) - (39) (50) - (50)
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Income excluding Asset disposals
and OCA 216 (6) 210 211 (3) 208 139 6 145
Asset disposals/Strategic risk
reduction (2) (25) - (25) (7) - (7) (36) - (36)
Own credit adjustments (OCA) 34 - 34 18 - 18 (1) - (1)
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
Total income 225 (6) 219 222 (3) 219 102 6 108
--------------------------------- ------- ------- ----- ------- ------- ----- ------- ------- -----
(1) 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.
(2) 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.
(3) Product performance includes gross income earned on a NatWest group-wide
basis, including amounts contributed to other NatWest Group subsidiaries.
Income including shared revenue, before asset disposals and OCA
includes revenue share from other NatWest Group subsidiaries but
before revenue share is paid to or contributed to those subsidiaries.
(4) A presentational change was made in Q1 2022 whereby strategic costs
are included within Other operating expenses and not reported separately.
* Net interest income was GBP15 million in Q2 2022,
compared with GBP14 million in Q1 2022 and GBP3
million in Q2 2021. Net interest income largely
represents interest income from lending activity and
capital hedges, offset by interest expense from the
funding costs of the business. The movement compared
with Q2 2021 primarily reflects reduced funding costs
for the business driven by the ongoing repayment of
legacy debt.
* Non-interest income of GBP204 million in Q2 2022 was
comparable with Q1 2022 and up by GBP99 million
compared with GBP105 million in Q2 2021. Currencies
income decreased from Q1 2022, largely reflecting the
heightened FX volatility levels that drove higher
revenues in the prior quarter, but was up compared
with Q2 2021, when volumes were impacted by low
volatility. Capital Markets was down compared with Q1
2022, largely reflecting the impact of higher funding
costs and a one-off write-down recognised in the
current quarter. Fixed Income performance was up
compared with Q1 2022, largely reflecting the release
of valuation reserves in the current quarter, in
addition to the impact of unfavourable market
conditions in the prior quarter following the Russian
invasion of Ukraine, and up from Q2 2021, largely
reflecting a weaker performance in the comparative
period.
* Operating expenses were GBP249 million in Q2 2022,
compared with GBP291 million in Q1 2022 and GBP208
million in Q2 2021. Litigation and conduct costs of
GBP12 million were GBP93 million higher than GBP81
million credit in Q2 2021, which reflected progress
in closing legacy matters. Other operating expenses
of GBP237 million in Q2 2022 were lower compared with
GBP283 million in Q1 2022 and GBP289 million in Q2
2021, largely reflecting higher technology investment
costs recognised in the comparative periods.
* NatWest Markets operating loss before tax was GBP13
million compared with GBP56 million in Q1 2022 and
GBP171 million in Q2 2021. Income excluding asset
disposals and own credit adjustments of GBP216
million was up slightly compared with GBP211 million
in Q1 2022, with an increase in Fixed Income offset
by decreases in Currencies and Capital Markets, and
up compared with GBP139 million in Q2 2021, largely
reflecting stronger performance in Currencies and
Fixed Income. Operating expenses of GBP234 million in
Q2 2022 were lower compared with GBP277 million in Q1
2022 and GBP283 million in Q2 2021, largely
reflecting higher technology investment costs
recognised in the comparative periods.
* Central items & other operating loss before tax was
GBP21 million compared with a loss of GBP17 million
in Q1 2022 and a profit of GBP81 million in Q2 2021.
Litigation and conduct costs credit of GBP79 million
in Q2 2021 largely reflected progress in closing
legacy matters.
Financial review
Balance sheet profile as at 30 June 2022
NWM Group's balance sheet profile is summarised below.
Commentary refers to the table below as well as the consolidated
balance sheet on page 25.
Assets Liabilities
------------------------------------------------- -------------------------------------------------
30 June 31 December 30 June 31 December
2022 2021 2022 2021
GBPbn GBPbn GBPbn GBPbn
Cash and balances at
central banks 17.4 16.6
--------------------------- ------- ----------- ------- ----------- ---------------------------
Securities 24.2 25.0 24.8 25.0 Short positions
Reverse repos (1) 25.9 20.7 29.4 19.4 Repos (2)
Derivative cash collateral Derivative cash collateral
given (3) 14.2 12.0 18.0 17.6 received (4)
Other trading assets 1.1 1.4 1.9 2.5 Other trading liabilities
--------------------------- ------- ----------- ------- ----------- ---------------------------
Total trading assets 65.4 59.1 74.1 64.5 Total trading liabilities
Deposits - amortised
Loans - amortised cost 10.4 8.4 6.6 4.1 cost
Settlement balances 10.3 2.1 9.5 2.1 Settlement balances
Amounts due from holding Amounts due to holding
company company
and fellow subsidiaries 2.9 1.5 5.8 6.1 and fellow subsidiaries
Other financial assets 10.9 8.8 21.1 19.3 Other financial liabilities
Other assets 0.7 0.9 0.8 1.0 Other liabilities
Liabilities excluding
Funded assets 118.0 97.4 117.9 97.1 derivatives
Derivative assets 109.1 105.6 102.1 98.5 Derivative liabilities
--------------------------- ------- ----------- ------- ----------- ---------------------------
Total assets 227.1 203.0 220.0 195.6 Total liabilities
------- ----------- ------- -----------
of which:
23.2 21.1 wholesale funding (5)
short-term wholesale
9.3 9.2 funding (5)
Net derivative assets Net derivative liabilities
(6) 5.2 3.6 5.9 2.9 (6)
--------------------------- ------- ----------- ------- ----------- ---------------------------
(1) Comprises bank reverse repos of GBP10.0 billion (31 December 2021
- GBP3.9 billion) and customer reverse repos of GBP15.9 billion
(31 December 2021 - GBP16.8 billion).
(2) Comprises bank repos of GBP3.1 billion (31 December 2021 - GBP0.8
billion) and customer repos of GBP26.3 billion (31 December 2021
- GBP18.6 billion).
(3) Comprises derivative cash collateral given relating to banks of
GBP5.8 billion (31 December 2021 - GBP4.3 billion) and customers
of GBP8.4 billion (31 December 2021 - GBP7.7 billion).
(4) Comprises derivative cash collateral received relating to banks
of GBP8.0 billion (31 December 2021 - GBP8.1 billion) and customers
of GBP10.0 billion (31 December 2021 - GBP9.5 billion).
(5) Wholesale funding predominantly comprises bank deposits (excluding
repos), debt securities in issue and third party subordinated liabilities,
of which short-term wholesale
funding is the amount with contractual maturity of one year or less.
(6) Refer to page 13 for further details.
- Total assets and liabilities increased by GBP24.1 billion and
GBP24.4 billion to GBP227.1 billion and GBP220.0 billion
respectively at 30 June 2022, compared with GBP203.0 billion and
GBP195.6 billion at 31 December 2021. The increases primarily
reflect higher trading assets and liabilities and higher settlement
balances.
- Trading assets were up by GBP6.3 billion to GBP65.4 billion at
30 June 2022, largely reflecting an increase in reverse repos
driven by customer flows and the management of balance sheet within
limits, and an increase in derivative cash collateral posted,
offset partially by a decrease in securities. Trading liabilities
increased by GBP9.6 billion to GBP74.1 billion, largely driven by
an increase in repos.
- Derivative assets and derivative liabilities were up by GBP3.5
billion to GBP109.1 billion and GBP3.6 billion to GBP102.1 billion
respectively at 30 June 2022, as increases in fair values driven by
the strengthening of USD since year end 2021 were largely offset by
decreases driven by the impact of increases in interest rates
across major currencies.
- Settlement balance assets and liabilities were up by GBP8.2
billion and GBP7.4 billion to GBP10.3 billion and GBP9.5 billion
respectively, due to increased trading compared with the seasonally
lower levels of customer activity leading up to 31 December
2021.
- Loans to customers - amortised cost were up by GBP1.5 billion
to GBP9.0 billion, largely reflecting new lending in the
period.
- Other financial liabilities increased by GBP1.8 billion to
GBP21.1 billion (31 December 2021 - GBP19.3 billion), largely
driven by new issuance in the period, partially offset by
maturities. The balance at 30 June 2022 includes GBP15.5 billion of
medium-term notes issued.
- Owners' equity was down by GBP0.4 billion to GBP7.1 billion
(31 December 2021 - GBP7.5 billion), driven by the interim dividend
payment to NatWest Group plc of GBP0.25 billion on 18 February
2022, and other reserve movements in the period.
Non-IFRS measures
This document contains a number of non-IFRS measures. For
details of the basis of preparation and reconciliations, where
applicable, refer to the non-IFRS measures section on page
50.
Risk and capital management
Page
------------------------------------------------------------- -----
Market risk
------------------------------------------------------------- -----
One-day 99% traded internal VaR 6
------------------------------------------------------------- -----
Capital, liquidity and funding risk
------------------------------------------------------------- -----
Capital, RWAs and leverage 7
------------------------------------------------------------- -----
Capital resources 8
------------------------------------------------------------- -----
Leverage exposure 9
------------------------------------------------------------- -----
Liquidity portfolio 9
------------------------------------------------------------- -----
Funding sources 10
------------------------------------------------------------- -----
Senior notes and subordinated liabilities 11
------------------------------------------------------------- -----
Credit risk
------------------------------------------------------------- -----
Credit risk - Trading activities 12
------------------------------------------------------------- -----
Credit risk - Net credit exposures for banking and trading
activities 14
------------------------------------------------------------- -----
Credit risk - Economics 15
------------------------------------------------------------- -----
Credit risk - Banking activities 21
------------------------------------------------------------- -----
Certain disclosures in the Risk and capital management section
are within the scope of EY's review report and are marked as
reviewed in the section header.
Market risk (reviewed)
One-day 99% 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 2022 30 June 2021 31 December 2021
--------------------------------- --------------------------------- ---------------------------------
Period Period Period
Average Maximum Minimum end Average Maximum Minimum end Average Maximum Minimum end
Traded internal GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
VaR
(1-day 99%)
---------------- ------- ------- ------- ------ ------- ------- ------- ------ ------- ------- ------- ------
Interest rate 7.4 12.6 4.1 6.0 11.3 19.0 4.5 17.4 9.6 25.3 4.7 8.9
Credit spread 8.5 12.0 6.5 6.9 11.0 13.4 9.4 11.2 11.6 13.2 10.0 10.7
Currency 2.8 8.0 1.2 2.3 3.9 9.4 2.0 2.4 3.0 8.6 1.7 2.2
Equity 0.1 0.3 - - 0.5 0.8 0.2 0.2 0.2 0.5 - 0.2
Commodity - - - - 0.2 0.5 - - - 0.1 - -
Diversification
(1) (8.3) (6.0) (13.5) (15.5) (11.1) (10.5)
---------------- ------- ------
Total 10.5 15.1 7.2 9.2 13.4 23.9 9.5 15.7 13.3 21.1 9.3 11.5
------- ------- ------- ------ ------- ------- ------- ------ ------- ------- ------- ------
(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.
* The decrease in average interest rate VaR, compared
to both H1 2021 and H2 2021, reflected a reduction in
tenor basis risk in sterling flow trading. This
followed a regulator-approved update to the VaR model,
which was applied in Q3 2021 to address the impact of
the transition from LIBOR to alternative risk-free
rates.
* Average credit spread VaR also declined because the
heightened market volatility in March 2020, resulting
from the onset of the COVID-19 crisis, dropped out of
the rolling window for VaR calculation during H1
2022.
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
2022 2021
Capital adequacy ratios % %
------- -----------
CET1 16.4 17.9
Tier 1 19.2 21.0
Total 23.9 25.9
Total MREL 36.8 42.1
------------------------- ------- -----------
Capital (1) GBPm GBPm
CET1 3,837 4,072
Tier 1 4,514 4,755
Total 5,597 5,870
Total MREL (2) 8,638 9,555
------------------------- ------- -----------
Risk-weighted assets
------------------------- -------
Credit risk 7,603 6,878
Counterparty credit risk 7,028 6,854
Market risk 7,347 6,934
Operational risk 1,478 2,020
-----------
Total RWAs 23,456 22,686
------------------------- ------- -----------
(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%, of which
the minimum capital requirement is 4.5% and capital conservation
buffer is 2.5%.
(2) Includes senior internal debt instruments issued to NatWest
Group plc with a regulatory value of GBP3.0 billion (31 December
2021 - GBP3.7 billion).
Leverage
The leverage ratio for June 2022 has been calculated in
accordance with the Leverage Ratio (CRR) part of the PRA rulebook.
The comparatives reflect the previous CRR framework which was
applicable prior to 1 January 2022.
30 June 31 December
2022 2021
----------------------------- ------- -----------
Leverage exposure (GBPm) (3) 102,238 110,603
Tier 1 capital (GBPm) 4,514 4,755
Leverage ratio (%) (4) 4.4 4.3
----------------------------- ------- -----------
(3) 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.
(4) Following the Financial Policy Committee's planned review of
the UK's leverage ratio framework, the PRA has introduced changes
to the framework from 1 January 2022. The leverage ratio for 30
June 2022 in the above table reflects the UK leverage ratio for NWM
Plc, as per the new framework. As at 31 December 2021, the UK
leverage ratio was 4.8%, which was calculated under the prior
year's PRA UK leverage methodology.
Risk and capital management
Capital, liquidity and funding risk continued
Capital resources (reviewed)
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
2022 2021
Shareholders' equity GBPm GBPm
-----------
Shareholders' equity 7,013 7,349
Other equity instruments (904) (904)
--------------------------------------------------------------- ------- -----------
6,109 6,445
Regulatory adjustments and deductions
-----------
Own credit (15) 47
Defined benefit pension fund adjustment (205) (202)
Cash flow hedging reserve 133 (46)
Prudential valuation adjustments (229) (227)
Expected losses less impairments (6) (11)
Instruments of financial sector entities where the institution
has a significant investment (1,770) (1,685)
Adjustments under IFRS 9 transitional arrangements - 1
Foreseeable ordinary dividends (180) (250)
--------------------------------------------------------------- ------- -----------
(2,272) (2,373)
CET1 capital 3,837 4,072
--------------------------------------------------------------- ------- -----------
Additional Tier 1 (AT1) capital
-----------
Qualifying instruments and related share premium 904 904
------- -----------
Tier 1 deductions
-----------
Instruments of financial sector entities where the institution
has a significant investment (227) (221)
------- -----------
Tier 1 capital 4,514 4,755
--------------------------------------------------------------- ------- -----------
Qualifying Tier 2 capital
-----------
Qualifying instruments and related share premium 1,516 1,490
------- -----------
Tier 2 deductions
-----------
Instruments of financial sector entities where the institution
has a significant investment (434) (401)
Other regulatory adjustments 1 26
--------------------------------------------------------------- ------- -----------
(433) (375)
Tier 2 capital 1,083 1,115
--------------------------------------------------------------- ------- -----------
Total regulatory capital 5,597 5,870
--------------------------------------------------------------- ------- -----------
Risk and capital management
Capital, liquidity and funding risk continued
Leverage exposure
The leverage exposure for June 2022 has been calculated in
accordance with the Leverage Exposure (CRR) part of the PRA
rulebook. The comparatives reflect the previous CRR framework which
was applicable prior to 1 January 2022.
30 June 31 December
2022 2021
Leverage GBPm GBPm
--------------------------------------- --------------------------------- --------------------------------------
Cash and balances at central banks 13,956 12,294
Trading assets 43,966 41,222
Derivatives 105,761 103,042
Net loans to customers 27,186 21,988
Other assets 10,680 4,008
--------------------------------------- --------------------------------- --------------------------------------
Total assets 201,549 182,554
Derivatives
- netting (103,111) (106,317)
- potential future exposures 18,624 32,235
Securities financing transactions gross
up 2,382 1,298
Undrawn commitments 5,390 4,993
Regulatory deductions and other
adjustments (7,775) (3,186)
Exclusion of core UK-group exposures (895) (974)
Claims on central banks (13,926) -
--------------------------------------- --------------------------------- --------------------------------------
Leverage exposure (1) 102,238 110,603
--------------------------------------- --------------------------------- --------------------------------------
(1) Following the Financial Policy Committee's planned review of the
UK's leverage ratio framework, the PRA has introduced changes to
the framework from 1 January 2022. The leverage exposure for June
2022 in the above table reflects the UK leverage exposure for NWM
Plc, as per the new framework. As at 31 December 2021, the UK leverage
exposure was GBP98,317 million which was calculated under the prior
year's PRA UK leverage methodology.
Liquidity portfolio (reviewed)
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
2022 2021
NatWest Markets Plc GBPm GBPm
---------------------------------------------------------- ------- -----------
Cash and balances at central banks 13,933 12,277
-----------
AAA to AA- rated governments 4,026 3,457
A+ and lower rated governments 3 18
Government guaranteed issuers, public sector entities
and government sponsored entities 14 13
International organisations and multilateral development
banks 70 140
---------------------------------------------------------- ------- -----------
LCR level 1 bonds 4,113 3,628
---------------------------------------------------------- ------- -----------
LCR level 1 assets 18,046 15,905
LCR level 2 assets - -
Non-LCR eligible assets - -
---------------------------------------------------------- ------- -----------
Primary liquidity 18,046 15,905
Secondary liquidity (2) 140 190
---------------------------------------------------------- ------- -----------
Total liquidity value 18,186 16,095
---------------------------------------------------------- ------- -----------
The table below shows the liquidity value of the liquidity
portfolio by currency.
GBP USD EUR Other Total
Total liquidity portfolio GBPm GBPm GBPm GBPm GBPm
30 June 2022 8,660 3,758 5,763 5 18,186
31 December 2021 7,947 3,010 5,120 18 16,095
-------------------------- ----- ----- ----- ----- ------
(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 (reviewed)
The table below shows NWM Group's carrying values of the
principal funding sources based on contractual maturity.
30 June 2022 31 December 2021
----------------------------- -----------------------------
Short-term Long-term Short-term Long-term
less more less than more than
than than
1 year 1 year Total 1 year 1 year Total
------------------------
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ---------- --------- ------ ---------- --------- ------
Bank deposits 1,798 555 2,353 1,244 564 1,808
of which: repos
(amortised cost) 655 - 655 522 - 522
Customer deposits 3,687 581 4,268 2,161 107 2,268
of which: repos - - - - - -
(amortised cost)
Trading liabilities (1)
---------- --------- ------
Repos (2) 29,406 - 29,406 19,389 - 19,389
Derivative cash
collateral received 17,995 - 17,995 17,619 - 17,619
Other bank and customer
deposits 429 657 1,086 832 704 1,536
Debt securities in issue 60 743 803 178 796 974
------------------------ ---------- --------- ------ ---------- --------- ------
47,890 1,400 49,290 38,018 1,500 39,518
Other financial
liabilities
---------- --------- ------
Customer deposits
(designated fair
value) 542 - 542 568 - 568
Debt securities in issue
commercial paper and
certificates
of deposits 4,330 127 4,457 5,179 115 5,294
medium term notes (MTNs) 3,413 12,065 15,478 2,693 9,737 12,430
Subordinated liabilities 228 370 598 275 688 963
------------------------ ---------- --------- ------ ---------- --------- ------
8,513 12,562 21,075 8,715 10,540 19,255
Amounts due to holding
company and
fellow subsidiaries (3)
---------- --------- ------
Internal MREL 862 2,200 3,062 939 2,919 3,858
Other bank and customer
deposits 947 - 947 623 - 623
Subordinated liabilities - 1,497 1,497 - 1,464 1,464
------------------------ ---------- --------- ------ ---------- --------- ------
1,809 3,697 5,506 1,562 4,383 5,945
Total funding 63,697 18,795 82,492 51,700 17,094 68,794
------------------------ ---------- --------- ------ ---------- --------- ------
Of which: available in
resolution
(4) 4,066 6,010
------------------------ ---------- --------- ------ ---------- --------- ------
(1) Funding sources excludes short positions of GBP24,761 million (31
December 2021 - GBP24,964 million) reflected as trading liabilities
on the balance sheet.
(2) Comprises Central and other bank repos of GBP3,147 million (31 December
2021 - GBP827 million), other financial institution repos of GBP23,407
million (31 December 2021 - GBP16,935 million) and other corporate repos
of GBP2,852 million (31 December 2021 - GBP1,627 million).
(3) Amounts due to holding company and fellow subsidiaries relating
to non-financial instruments of GBP248 million (31 December 2021 - GBP181
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 December 2021
(updating June 2018).
Risk and capital management
Capital, liquidity and funding risk continued
Senior notes and subordinated liabilities - residual maturity
profile by instrument type (reviewed)
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
2022
Less than
1 year 60 4,330 3,413 228 7,971 862 - 8,893
1-3 years 444 115 5,995 - 6,110 2,200 807 9,561
3-5 years 61 12 5,490 20 5,522 - - 5,583
More than
5 years 238 - 580 350 930 - 690 1,858
----------- ---------- ------ ------------ ------ --------
Total 803 4,457 15,478 598 20,533 3,062 1,497 25,895
----------- ---------- ------ ------------ ------ -------- ------------ ------
31
December
2021
----------- ---------- ------ ------------ ------ -------- ------------ ------
Less than
1 year 178 5,179 2,693 275 8,147 939 - 9,264
1-3 years 335 105 4,907 222 5,234 2,919 824 9,312
3-5 years 112 10 4,425 21 4,456 - - 4,568
More than
5 years 349 - 405 445 850 - 640 1,839
----------- ---------- ------ ------------ ------ -------- ------------ ------
Total 974 5,294 12,430 963 18,687 3,858 1,464 24,983
----------- ---------- ------ ------------ ------ -------- ------------ ------
The table below shows the currency breakdown of total notes in issue. GBP USD EUR Other Total
30 June 2022 GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ----- ------ ------ ----- ------
Commercial paper and CDs 430 1,135 2,892 - 4,457
MTNs 624 5,915 7,687 2,055 16,281
External subordinated liabilities 21 237 340 - 598
Internal MREL due to NatWest Group plc - 2,200 862 - 3,062
Subordinated liabilities due to NatWest
Group plc - 690 807 - 1,497
---------------------------------------- ----- ------ ------ ----- ------
Total 1,075 10,177 12,588 2,055 25,895
---------------------------------------- ----- ------ ------ ----- ------
31 December 2021 853 9,156 13,467 1,507 24,983
---------------------------------------- ----- ------ ------ ----- ------
Risk and capital management
Credit risk - Trading activities (reviewed)
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 2022 GBPm GBPm GBPm GBPm GBPm GBPm
---------------- -------- --------- ------------ -------- --------- ------------
Gross 53,427 52,677 750 57,184 55,762 1,422
IFRS offset (27,123) (27,123) - (27,123) (27,123) -
---------------- -------- --------- ------------ -------- --------- ------------
Carrying value 26,304 25,554 750 30,061 28,639 1,422
---------------- -------- --------- ------------ -------- --------- ------------
Master netting
arrangements (2,540) (2,540) - (2,540) (2,540) -
Securities
collateral (22,768) (22,768) - (26,078) (26,078) -
---------------- -------- --------- ------------ -------- --------- ------------
Potential for
offset not
recognised
under IFRS (25,308) (25,308) - (28,618) (28,618) -
-------- --------- ------------ -------- --------- ------------
Net 996 246 750 1,443 21 1,422
-------- --------- ------------ -------- --------- ------------
31 December 2021
---------------- -------- --------- ------------ -------- --------- ------------
Gross 45,511 44,861 650 44,333 43,186 1,147
IFRS offset (24,422) (24,422) - (24,422) (24,422) -
---------------- -------- --------- ------------ -------- --------- ------------
Carrying value 21,089 20,439 650 19,911 18,764 1,147
---------------- -------- --------- ------------ -------- --------- ------------
Master netting
arrangements (900) (900) - (900) (900) -
Securities
collateral (19,467) (19,467) - (17,863) (17,863) -
---------------- -------- --------- ------------ -------- --------- ------------
Potential for
offset not
recognised
under IFRS (20,367) (20,367) - (18,763) (18,763) -
-------- --------- ------------ -------- --------- ------------
Net 722 72 650 1,148 1 1,147
-------- --------- ------------ -------- --------- ------------
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 2022 GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- --------- --------- ---------- ------------ --------- --------
AAA - - 2,395 1,209 - 3,604
AA to AA+ - 3,840 3,091 1,635 16 8,582
A to AA- 7,074 - 1,445 214 66 8,799
BBB- to A- - - 2,433 302 424 3,159
Non-investment grade - - - 51 43 94
Unrated - - - 1 1 2
Total 7,074 3,840 9,364 3,412 550 24,240
--------------------- --------- --------- ---------- ------------ --------- --------
Short positions (7,363) (2,915) (12,323) (2,000) (160) (24,761)
--------------------- --------- --------- ---------- ------------ --------- --------
31 December 2021
--------------------- --------- --------- ---------- ------------ --------- --------
AAA - - 2,011 838 - 2,849
AA to AA+ - 3,329 3,145 1,401 62 7,937
A to AA- 6,919 - 1,950 308 57 9,234
BBB- to A- - - 3,792 346 513 4,651
Non-investment grade - - 31 163 82 276
Unrated - - - 3 3 6
Total 6,919 3,329 10,929 3,059 717 24,953
--------------------- --------- --------- ---------- ------------ --------- --------
Short positions (9,790) (56) (12,907) (2,074) (137) (24,964)
--------------------- --------- --------- ---------- ------------ --------- --------
Risk and capital management
Credit risk - Trading activities continued (reviewed)
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 2022 31 December 2021
--------------------------------------------------------- -------------------------------
Notional
----------------------------------
GBP USD Euro Other Total Assets Liabilities Notional Assets Liabilities
GBPbn GBPbn GBPbn GBPbn GBPbn GBPm GBPm GBPbn GBPm GBPm
----------------- ----- ----- ----- ----- ------ -------- ----------- -------- -------- -----------
Gross exposure 108,060 101,469 104,614 97,500
IFRS offset - - - -
----------------- ----- ----- ----- ----- ------ -------- ----------- -------- -------- -----------
Carrying value 2,782 4,270 5,117 1,301 13,470 108,060 101,469 11,718 104,614 97,500
----------------- ----- ----- ----- ----- ------ -------- ----------- -------- -------- -----------
Of which:
Interest rate (1) 2,449 2,716 4,517 290 9,972 53,687 47,515 8,558 66,091 57,955
Exchange rate 331 1,550 590 1,011 3,482 54,124 53,665 3,146 38,369 39,202
Credit 2 4 10 - 16 249 289 14 154 343
Equity and - - - - - - - - -
commodity -
Carrying value 13,470 108,060 101,469 11,718 104,614 97,500
------ -------- ----------- -------- -------- -----------
Counterparty
market-to-market
netting (84,139) (84,139) (83,633) (83,633)
Cash collateral (14,227) (10,537) (14,938) (9,902)
Securities and
collateral (4,468) (902) (2,428) (1,070)
----------------- ----- ----- ----- ----- ------ -------- ----------- -------- -------- -----------
Net exposure 5,226 5,891 3,615 2,895
-------- ----------- -------- -----------
Banks (2) 525 975 314 404
Other financial
institutions
(3) 3,253 2,579 1,549 1,515
Corporate (4) 1,371 2,190 1,683 905
Government (5) 77 147 69 71
----------------- ----- ----- ----- ----- ------ -------- ----------- -------- -------- -----------
Net exposure 5,226 5,891 3,615 2,895
-------- ----------- -------- -----------
UK 1,981 2,066 1,940 1,030
Europe 1,288 2,044 709 1,008
US 1,573 1,440 645 653
RoW 384 341 321 204
----------------- ----- ----- ----- ----- ------ -------- ----------- -------- -------- -----------
Net exposure 5,226 5,891 3,615 2,895
-------- ----------- -------- -----------
Asset quality of
uncollateralised
derivative assets
----------------- ----- ----- ----- ----- ------ -------- ----------- -------- -------- -----------
AQ1-AQ4 4,537 2,909
AQ5-AQ8 644 649
AQ9-AQ10 45 57
----------------- ----- ----- ----- ----- ------ -----------
Net exposure 5,226 3,615
-------- --------
(1) The notional amount of interest rate derivatives includes GBP7,304
billion (31 December 2021 - GBP5,830 billion) in respect of contracts
cleared through central clearing counterparties.
(2) Transactions with certain counterparties with which 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 (reviewed)
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 Other Collateralised Uncollateralised Repo
and and
balances debt and debt rate rate risk reverse Off-balance
at other risk
central securities lending securities management management repo sheet Leasing Total
banks items
30 June GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
2022
---------- -------- ---------- ------- ---------- -------------- ---------------- ------- ----------- ------- ------
AQ1-AQ4 17,361 5,863 8,975 4,625 3,079 2,006 1,793 665 29 44,396
AQ5-AQ8 - - 937 131 193 398 18 24 - 1,701
AQ9 - - - - 2 9 - - - 11
AQ10 - - 15 1 - 32 - - - 48
---------- -------- ---------- ------- ---------- -------------- ---------------- ------- ----------- ------- ------
Current
exposure 17,361 5,863 9,927 4,757 3,274 2,445 1,811 689 29 46,156
Potential
exposure 17,361 5,863 22,513 4,757 11,731 4,604 2,232 1,749 29 70,839
---------- -------- ---------- ------- ---------- -------------- ---------------- ------- ----------- ------- ------
31
December
2021
---------- -------- ---------- ------- ---------- -------------- ---------------- ------- ----------- ------- ------
AQ1-AQ4 16,645 5,176 6,998 3,060 2,355 1,520 510 669 49 36,982
AQ5-AQ8 - - 534 238 327 428 10 29 - 1,566
AQ9 - - 23 - 2 52 - - - 77
AQ10 - - 21 1 - 2 - - - 24
---------- -------- ---------- ------- ---------- -------------- ---------------- ------- ----------- ------- ------
Current
exposure 16,645 5,176 7,576 3,299 2,684 2,002 520 698 49 38,649
Potential
exposure 16,645 5,176 18,065 3,299 10,493 3,865 1,590 2,014 49 61,196
---------- -------- ---------- ------- ---------- -------------- ---------------- ------- ----------- ------- ------
* Measured against NWM Group's asset quality scale, 96%
(31 December 2021 - 96%) of total current exposure
was rated in the AQ1-AQ4 bands, which in the context
of external credit ratings was equivalent to an
investment grade rating of BBB- or better and a PD
range of 0-0.381%.
Risk and capital management
Credit risk - Economics (reviewed)
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 judgment.
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
At 30 June 2022, 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 reflected a range of outcomes
associated with the most prominent risks facing the economy, and
the associated effects on labour and asset markets.
The four economic scenarios are translated into forward-looking
projections of credit cycle indices (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., after reaching their worst forecast
position the CCIs start to gradually revert to their long-run
average of zero.
Upside - This scenario assumes a very strong recovery through
2022 as consumers dip into excess savings built up since amidst
COVID-19. The labour market remains resilient, with the
unemployment rate falling substantially below pre-COVID-19 levels.
Inflation is marginally higher than the base case but eventually
retreats close to the target without substantial tightening and
with no major effect on growth. The housing market shows a strong
performance.
Base case - After a strong recovery in 2021, growth moderates in
2022 as real incomes decline and consumer confidence falls. The
unemployment rate decreases initially but subsequently increases
above pre-COVID-19 levels, although remains low by historical
standards. Inflation remains elevated at close to current levels
through to early 2023 before retreating. Interest rates are raised
to 2% to control price pressures. There is a gradual cooling in the
housing market, but activity remains firm. As inflation retreats,
economic growth returns to its pre-COVID-19 pace over the course of
2023, remaining steady through the forecast period.
Downside - This scenario assumes that inflation accelerates to
15%, triggered by further escalation in geopolitical tensions and
an associated rise in energy prices. This undermines the recovery,
harming business and consumer confidence and pushing the economy
into recession. Unemployment rate rises above the levels seen
during COVID-19 and there is a modest decline in house prices.
Inflation subsequently normalises, paving the way for cuts to
interest rates and recovery.
Extreme downside - The trigger for the extreme downside is
similar to the downside scenario. However, in this scenario,
inflation remains more persistent, necessitating a significant
degree of rate tightening. This tighter policy and fall in real
income leads to a deep recession. There is widespread job shedding
in the labour market while asset prices see deep corrections, with
housing market falls higher than those seen during previous
episodes. The recovery is tepid throughout the five-year period,
meaning only a gradual decline in joblessness.
For June 2022, the four scenarios were deemed appropriate in
capturing the uncertainty in economic forecasts and the
non-linearity in outcomes under different scenarios. These four
scenarios were developed to provide sufficient coverage across
potential rises in unemployment, inflation and asset price falls
around which there are pronounced levels of uncertainty.
The tables below provide details of the key economic loss
drivers under the four scenarios.
The main macroeconomic variables for each of the four scenarios
used for expected credit loss (ECL) modelling are set out in the
main macroeconomic variables table below. The compound annual
growth rate (CAGR) for GDP is shown. It also shows the five-year
average for unemployment and the Bank of England base rate. The
house price index and commercial real estate figures show the total
change in each asset over five years.
Risk and capital management
Credit risk - Economics continued ( reviewed )
Economic loss drivers
Main macroeconomic variables
30 June 2022 31 December 2021
--------------------------------- ---------------------------------
Extreme Extreme
Upside Base Downside downside Upside Base Downside downside
case case
Five-year summary % % % % % % % %
----------------------------- ------ ----- -------- -------- ------ ----- -------- --------
GDP - CAGR 1.7 1.1 0.8 (0.1) 2.4 1.7 1.4 0.6
Unemployment - average 3.3 4.0 4.5 6.3 3.5 4.2 4.8 6.7
House price index - total
change 24.4 13.7 (0.9) (10.5) 22.7 12.1 4.3 (5.3)
Commercial real estate price
- total change 7.5 (2.6) (6.8) (14.5) 18.2 7.2 5.5 (6.4)
Bank of England base rate
- average 1.5 1.8 0.6 2.7 1.5 0.8 0.7 (0.5)
Consumer price index - CAGR 2.7 2.9 3.9 7.2 2.7 2.5 3.1 1.5
World GDP - CAGR 3.8 3.4 2.0 1.0 3.5 3.2 2.6 0.6
Probability weight 21.0 45.0 20.0 14.0 30.0 45.0 20.0 5.0
----------------------------- ------ ----- -------- -------- ------ ----- -------- --------
(1) The five year period starts after Q1 2022 for 30 June 2022 and
Q3 2021 for 31 December 2021.
(2) CAGR and total change figures are not comparable with 31 December
2021 data, as the starting quarters are different.
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 effect of COVID-19 and the range of recovery paths had
necessitated subjective assignment of probability weights. However,
for June 2022, NWM Group resurrected the quantitative approach used
pre-COVID-19. The approach involves comparing UK GDP paths for NWM
Group's scenarios against a set of 1,000 model runs, following
which, a percentile in the distribution is established that most
closely corresponded to the scenario. The probability weight for
the base case is set based on judgement while probability weights
for the alternate scenarios are assigned based on these percentiles
scores.
A 21% weighting was applied to the upside scenario (compared to
30% at 31 December 2021), a 45% weighting applied to the base case
scenario (unchanged from 31 December 2021), a 20% weighting applied
to the downside scenario (unchanged from 31 December 2021) and a
14% weighting applied to the extreme downside scenario (compared to
5% at 31 December 2021).
The assigned probability weights reflect the outputs of NWM
Group's quantitative approach and were judged to be aligned with
subjective assessment of balance of the risks in the economy,
presenting good coverage to the range of outcomes assumed in the
central scenarios, including the potential for a robust recovery on
the upside and exceptionally challenging outcomes on the downside.
The current geopolitical tensions pose considerable uncertainty to
the economic outlook, with respect to their persistence, range of
outcomes and subsequent impacts on inflation and economic activity.
Given that backdrop, and the higher possibility of a more
challenging economic backdrop than assumed in the base case, NWM
Group judged it appropriate to apply a lower probability weight to
the upside scenario and a higher probability to downside-biased
scenarios, than at 31 December 2021 .
Risk and capital management
Credit risk - Economics continued ( reviewed )
Economic loss drivers
Annual figures
Extreme
Upside Base Downside downside
case
GDP - annual growth % % % %
------ ----- -------- --------
2022 4.8 3.5 2.7 2.7
2023 2.9 0.8 (2.4) (5.1)
2024 1.7 1.4 2.1 0.3
2025 1.3 1.1 2.1 2.4
2026 1.1 1.3 2.0 2.2
-------------------- ------ ----- -------- --------
Extreme
Upside Base Downside downside
case
Unemployment rate - annual average % % % %
------ ----- -------- --------
2022 3.4 3.6 3.8 3.8
2023 3.0 3.8 4.9 5.9
2024 3.3 4.0 4.8 8.7
2025 3.4 4.2 4.5 7.5
2026 3.5 4.3 4.4 5.5
----------------------------------- ------ ----- -------- --------
Extreme
Upside Base Downside downside
case
House price index - four quarter growth % % % %
------ ----- -------- --------
2022 9.7 5.1 2.4 2.4
2023 5.5 2.0 (11.7) (20.4)
2024 2.9 1.9 0.4 (4.6)
2025 3.0 2.7 5.0 12.3
2026 3.5 3.2 6.0 4.4
---------------------------------------- ------ ----- -------- --------
Extreme
Upside Base Downside downside
case
Commercial real estate price - four quarter growth % % % %
------ ----- -------- --------
2022 9.5 6.8 (3.3) (3.2)
2023 3.9 0.2 (10.8) (27.6)
2024 1.4 (0.1) 4.5 8.5
2025 - (1.5) 4.6 13.1
2026 (1.4) (2.1) 4.6 5.3
--------------------------------------------------- ------ ----- -------- --------
Extreme
Upside Base Downside downside
case
Bank of England base rate - annual average % % % %
------ ----- -------- --------
2022 1.05 1.28 1.05 1.05
2023 1.63 2.00 1.12 2.31
2024 1.69 2.00 0.10 4.00
2025 1.50 1.75 0.18 3.38
2026 1.44 1.73 0.44 2.25
------------------------------------------- ------ ----- -------- --------
Extreme
Upside Base Downside downside
case
Consumer price index - four quarter growth % % % %
------ ----- -------- --------
2022 9.5 8.4 9.3 9.3
2023 (0.9) 1.1 8.1 13.7
2024 2.0 2.0 0.4 6.4
2025 2.0 2.0 1.4 4.2
2026 2.0 2.0 1.7 3.6
------------------------------------------- ------ ----- -------- --------
Worst points 30 June 2022 31 December 2021
------------------------------------ ------------------------------------
Extreme Extreme
Downside downside Downside downside
% Quarter % Quarter % Quarter % Quarter
-------- ------- -------- ------- -------- ------- -------- -------
GDP (3.6) Q1 2023 (7.4) Q3 2023 (1.8) Q1 2022 (7.9) Q1 2022
Unemployment rate (peak) 5.1 Q3 2023 9.0 Q2 2024 5.4 Q1 2023 9.4 Q4 2022
House price index (12.9) Q2 2024 (28.0) Q2 2024 (3.0) Q3 2023 (26.0) Q2 2023
Commercial real estate
price (20.7) Q2 2023 (34.7) Q1 2024 (2.5) Q1 2022 (29.8) Q3 2022
Bank of England base
rate 1.5 Q4 2022 4.0 Q1 2024 1.5 Q4 2022 (0.5) Q2 2022
Consumer price index 14.8 Q2 2023 14.8 Q2 2023 7.9 Q4 2022 4.3 Q4 2021
------------------------- -------- ------- -------- ------- -------- ------- -------- -------
(1) For the unemployment rate, the figures show the peak levels. For the
Bank of England base rate, the figures show highest or lowest levels.
For other parameters, the figures show falls relative to the starting
period. The calculations are performed over five years, with a starting
point of Q1 2022 for 30 June 2022 scenarios.
Risk and capital management
Credit risk - Economics continued ( reviewed )
Economic loss drivers
Use of the scenarios in lending
The lending ECL methodology is based on the concept of 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.
Finally, ECL is calculated using a Monte Carlo approach by
averaging probability of default (PD) and loss given default (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
Businesses are still trying to recover fully from the effects of
COVID-19 and to service additional debt which was accessed during
the period. New headwinds on inflation, cost of living and supply
chain have arisen.
Inflation and supply chain issues are presenting significant
headwinds for some businesses and sectors. These are a result of
various factors and in many cases are compounding and look set to
remain a feature of the economic environment into 2023. NWM Group
has considered where these are most likely to affect the customer
base including assessing which businesses that NWM Group do not
believe will fully pass the costs onto the consumer and those that
can, driving further cost of living risks. In addition, while a
direct impact from the Russian invasion of Ukraine is limited, the
contagion events of supply chain disruption is still anticipated
with European economies being dependent on Russia, Ukraine and
Belarus for a number of commodities.
The effects of these risks are not expected to be fully captured
by forward-looking credit modelling, particularly given the unique
high inflation, low unemployment base case outlook. Any incremental
ECL effects for these risks will be captured via post model
adjustments and are detailed further in the Governance and post
model adjustments section.
UK economic uncertainty
Model monitoring and enhancement
As of January 2022, a new definition of default for internal
ratings based models was introduced in line with PRA and EBA
guidance. This definition of default was also adopted for IFRS 9.
Underlying observed one year default rates (after isolating one-off
effects from the new definition of default) across all portfolios
still trend at or below pre-COVID-19 levels. As a result, most
recent back-testing of forward-looking IFRS 9 PDs continues to show
some overprediction in some portfolios. As in previous quarters,
model recalibrations to adjust for this overprediction have been
deferred based on the judgment that low default rate actuals during
COVID-19 were distorted, due to government support.
Going forward, NWM Group expects potential increases in default
emergence to come primarily from forward-looking risks like high
inflation and rising interest rates, rather than from delayed
COVID-19 effects. Therefore, previously applied lags to the
projections from the economic forecasting models of up to 12 months
have been discontinued.
Governance and post model adjustments
The IFRS 9 PD, EAD 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 were applied where management judged they were
necessary to ensure an adequate level of overall ECL provision. All
post model adjustments 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 due to the influence of government support schemes on
default levels in the past two years. As a consequence, any
potential ECL release was deferred and retained on the balance
sheet until modelled ECL levels are affirmed by new model parallel
runs or similar analyses .
- Economic uncertainty - ECL adjustments primarily arising from
uncertainties associated with increased inflation and cost of
living risks as well as supply chain disruption, along with the
residual effect of COVID-19 and government support schemes. In all
cases, management judged that additional ECL was required until
further credit performance data became available as the full
effects of these issues matures.
- Other adjustments - ECL adjustments where it was judged that
the modelled ECL required to be amended.
Post model adjustments 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 with a particular focus on segments of the
portfolio that are likely to be more susceptible to inflation, cost
of living and supply chain risks.
Risk and capital management
Credit risk - Economics continued ( reviewed )
Measurement uncertainty and ECL sensitivity analysis
The recognition and measurement of ECL is complex and involves
the use of significant judgment and estimation, particularly in
times of economic volatility and uncertainty. This includes the
formulation and incorporation of multiple forward-looking economic
scenarios 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 at 30 June 2022.
Scenario impacts on a significant increase in credit risk (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 base case, upside, downside and
extreme downside scenarios has been simulated. NWM Group has
assumed that the economic macro variables associated with these
scenarios replace the existing base case economic assumptions,
giving them a 100% probability weighting and 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 post model adjustments 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 deferred model calibrations and economic uncertainty, are
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 2022 Actual case Upside Downside downside
---------------------------------------- ------ ------ ------ -------- --------
Stage 1 modelled exposure (GBPm) 10,112 10,226 10,230 10,044 9,579
Stage 1 modelled ECL (GBPm) 11 10 8 15 16
Stage 1 coverage (%) 0.11% 0.10% 0.08% 0.15% 0.17%
---------------------------------------- ------ ------ ------ -------- --------
Stage 2 modelled exposure (GBPm) 267 153 149 335 800
Stage 2 modelled ECL (GBPm) 3 2 2 4 28
Stage 2 coverage (%) 1.12% 1.31% 1.34% 1.19% 3.50%
---------------------------------------- ------ ------ ------ -------- --------
Stage 1 and Stage 2 modelled exposure
(GBPm) 10,379 10,379 10,379 10,379 10,379
Stage 1 and Stage 2 modelled ECL (GBPm) 14 12 10 19 44
Stage 1 and Stage 2 coverage (%) 0.13% 0.12% 0.10% 0.18% 0.42%
----------------------------------------
Variance - (lower)/higher to actual
total Stage 1 & Stage 2 ECL (3) (4) 4 29
---------------------------------------- ------ ------ ------ -------- --------
(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 2022 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 2022. 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 2021 Annual Report and Accounts
for 31 December 2021 comparatives.
Risk and capital management
Credit risk - Economics continued ( reviewed )
Measurement uncertainty and ECL adequacy
- During the first half of 2022, both the Stage 2 size and
overall modelled ECL reduced in line with stable portfolio
performance and underlying ECL driver trends. Judgmental ECL post
model adjustments, although reduced in value terms from 31 December
2021, continue to reflect economic uncertainty with the expectation
of increased defaults later in 2022 and beyond.
- If the economics were as negative as observed in the extreme
downside, total Stage 1 and Stage 2 ECL was simulated to increase.
In this scenario, Stage 2 exposure increased significantly and was
the key driver of the simulated ECL rise. The movement in Stage 2
balances in the other simulations was less significant.
- In the Wholesale portfolio, there was a significant increase
to ECL under both the moderate and extreme downsides.
The changes in the economic outlook and scenarios used in the
IFRS 9 MES framework at 30 June 2022 to capture the increased risks
of inflation, cost of living and supply chain had a minimal effect
on modelled ECL. Given that uncertainty has increased due to these
risks, 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 on higher risk portfolio segments and problem debt trends.
This was particularly important for consideration of post model
adjustments.
As the effects of inflation, cost of living and supply chain
risks evolve during 2022 and into 2023 and government support
schemes have to be serviced, there is a risk of credit
deterioration. However, the income statement effect of this will be
mitigated by the forward-looking provisions retained on the balance
sheet at 30 June 2022.
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. Such factors would include an adverse deterioration
in GDP and unemployment in the economies in which NWM Group
operates.
Risk and capital management
Credit risk - Banking activities ( reviewed )
This section details the credit risk profile of NWM Group's
banking activities .
Portfolio summary
The table below shows gross loans and ECL, by stage, within the
scope of the IFRS 9 ECL framework .
30 June 31 December
2022 2021
GBPm GBPm
------------------------------------------------------- -------- -----------
Loans - amortised cost and fair value through other
comprehensive income (FVOCI)
Stage 1 10,014 8,301
Stage 2 254 147
Stage 3 62 99
Of which: individual 45 91
Of which: collective 17 8
Inter-Group (1) 660 731
------------------------------------------------------- -----------
Total 10,990 9,278
------------------------------------------------------- -------- -----------
ECL provisions
Stage 1 12 6
Stage 2 3 3
Stage 3 37 75
Of which: individual 27 68
Of which: collective 10 7
Inter-Group - -
------------------------------------------------------- -----------
Total 52 84
------------------------------------------------------- -------- -----------
ECL provisions coverage (2)
Stage 1 (%) 0.12 0.07
Stage 2 (%) 1.18 2.04
Stage 3 (%) 59.68 75.76
Inter-Group (%) - -
Total 0.50 0.98
------------------------------------------------------- -------- -----------
Half year ended
---------------------
30 June 30 June
2022 2021
GBPm GBPm
------------------------------------------------------- -------- -----------
Impairment losses
ECL (release)/charge (3)
Stage 1 2 (8)
Stage 2 4 (5)
Stage 3 (1) (3)
Of which: individual - 1
Of which: collective (1) (4)
Third party 5 (16)
Inter-Group - -
-------------------------------------------------------
Total 5 (16)
------------------------------------------------------- -------- -----------
Amounts written off 43 40
------------------------------------------------------- -------- -----------
(1) NWM Group's intercompany assets were classified in Stage 1. The
ECL for these loans was GBP0.3 million ( 31 December 2021 - GBP0.2
million).
(2) ECL provisions coverage is calculated as ECL provisions divided
by loans - amortised cost and FVOCI. It is calculated on third party
loans and total ECL provisions.
(3) The table shows gross loans only and excludes amounts that are
outside the scope of the ECL framework. For further details, refer
to Financial instruments within the scope of the IFRS 9 ECL framework
on page 76 of the NatWest Markets Plc 2021 Annual Report and Accounts.
Other financial assets within the scope of the IFRS 9 ECL framework
were cash and balances at central banks totalling GBP17.4 billion
(31 December 2021 - GBP16.6 billion) and debt securities of GBP10.7
billion (31 December 2021 - GBP8.4 billion).
* 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.
* The significant increase in defaults and losses
predicted in 2020 to occur throughout 2021 and early
2022 has not materialised and there has been an
immaterial level of Stage 3 defaults so far. The
reduction in ECL provisions coverage was due
primarily to the write-off of a single legacy asset
that defaulted in 2008 and was fully provided for.
Risk and capital management
Credit risk - Banking activities continued ( reviewed )
Sector analysis - portfolio summary
The table below shows exposures and ECL by stage, for key
sectors .
Off-balance
sheet
------------------------
Loans - amortised
cost and FVOCI Loan Contingent ECL provisions
---------------------------- --------------------------
Stage Stage Stage Stage Stage Stage
1 2 3 Total commitments liabilities 1 2 3 Total
30 June 2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------- ------ ----- ----- ------ ----------- ----------- ----- ----- ----- -----
Property 79 22 19 120 281 15 1 - 9 10
Financial
institutions 9,042 8 - 9,050 6,304 582 7 - - 7
Sovereign 373 - 3 376 41 - 1 - 2 3
Corporate 520 224 40 784 6,255 98 3 3 26 32
Of which:
Agriculture 2 - 7 9 1 - - - 7 7
Airlines and
aerospace 12 - 1 13 167 49 - - 1 1
Automotive 16 43 - 59 712 - - - - -
Health 40 - 1 41 - - - - 1 1
Land
transport
and
logistics 13 52 - 65 281 1 - 1 - 1
Leisure - 12 - 12 303 - - - - -
Oil and gas 3 - 19 22 453 1 - - 5 5
Retail 7 - - 7 296 4 - - - -
------------- ------ ----- ----- ------ ----------- ----------- ----- ----- ----- -----
Total 10,014 254 62 10,330 12,881 695 12 3 37 52
------ ----- ----- ------ ----------- ----------- ----- ----- ----- -----
31 December 2021
----------------------- ----- --- ----- ------ ---
Property 107 - 15 122 251 19 -- 9 9
Financial institutions 7,284 66 3 7,353 5,864 589 52 - 7
Sovereign 296 - 3 299 37 - 1- 2 3
Corporate 614 81 78 773 4,857 97 -164 65
Of which:
Agriculture - - 40 40 1 - --40 40
Airlines and aerospace - - 7 7 163 44 -- 6 6
Automotive 10 39 - 49 686 - -1 - 1
Health 27 - 2 29 150 - -- 1 1
Land transport and
logistics 74 1 - 75 230 1 -- - -
Leisure - 3 - 3 304 - -- - -
Oil and gas 252 - 17 269 39 1 -- 4 4
Retail - - - - 289 4 -- - -
----------------------- ----- --- ----- ------ ---
Total 8,301 147 99 8,547 11,009 705 6375 84
----- --- ----- ------ ---
Risk and capital management
Credit risk - Banking activities continued ( reviewed )
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
into 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 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 2022 33,383 6 197 3 95 75 33,675 84
Currency
translation and
other
adjustments 1,151 - 13 - 2 5 1,166 5
Inter-Group
transfers 65 - - - - - 65 -
Transfers from
Stage 1
to Stage 2 (764) - 764 - - - - -
Transfers from
Stage 2
to Stage 1 710 4 (710) (4) - - - -
Transfers from - - - - - - - -
Stage 3
Net (3) 4 - 1
re-measurement of
ECL
on stage transfer
Changes in risk 1 - - 1
parameters
(model inputs)
Other changes in
net exposure 4,524 4 3 - 14 - 4,541 4
Other (P&L only
items) - - (1) (1)
----------------- --------- ---- --------- ---- --------- ---- --------- ----
Income statement 2 4 (1) 5
releases
Amounts
written-off - - - - (43) (43) (43) (43)
Unwinding of - - - -
discount
At 30 June 2022 39,069 12 267 3 68 37 39,404 52
----------------- --------- ---- --------- ---- --------- ---- --------- ----
Net carrying
amount 39,057 - 264 - 31 - 39,352 -
-----------------
At 1 January 2021 33,327 12 1,671 49 167 132 35,165 193
2021 movements (2,015) (2) (928) (12) (65) (45) (3,008) (59)
At 30 June 2021 31,312 10 743 37 102 87 32,157 134
----------------- --------- ---- --------- ---- --------- ---- --------- ----
Net carrying
amount 31,302 706 15 32,023
----------------- --------- ---- --------- ---- --------- ---- --------- ----
* The net increase in Stage 2 of GBP70 million was
primarily PD deterioration in two large corporates.
* The write-off in Stage 3 was mainly a result of a
single legacy asset that defaulted in 2008 and was
fully provided for.
Condensed consolidated income statement for the half year ended
30 June 2022 (unaudited)
Half year ended
-----------------
30 June 30 June
2022 2021
GBPm GBPm
----------------------------------------- -------- -------
Interest receivable 243 179
Interest payable (214) (183)
----------------------------------------- -------- -------
Net interest income 29 (4)
----------------------------------------- -------- -------
Fees and commissions receivable 180 146
Fees and commissions payable (77) (62)
Income from trading activities 296 226
Other operating income 10 (10)
----------------------------------------- -------- -------
Non-interest income 409 300
----------------------------------------- -------- -------
Total income 438 296
Staff costs (213) (252)
Premises and equipment (25) (37)
Other administrative expenses (291) (181)
Depreciation and amortisation (11) (10)
----------------------------------------- -------- -------
Operating expenses (540) (480)
----------------------------------------- -------- -------
Loss before impairment (losses)/releases (102) (184)
Impairment (losses)/releases (5) 16
Operating loss before tax (107) (168)
Tax credit 21 49
----------------------------------------- -------- -------
Loss for the period (86) (119)
----------------------------------------- -------- -------
Attributable to:
Ordinary shareholders (120) (189)
Paid-in equity holders 33 31
Non-controlling interests 1 39
----------------------------------------- -------- -------
(86) (119)
----------------------------------------- -------- -------
Condensed consolidated statement of comprehensive income for the
half year ended 30 June 2022 (unaudited)
Half year ended
-----------------
30 June 30 June
2022 2021
GBPm GBPm
--------------------------------------------------------- -------- -------
Loss for the period (86) (119)
--------------------------------------------------------- -------- -------
Items that do not qualify for reclassification
Remeasurement of retirement benefit schemes (1) (1)
Changes in fair value of credit in financial liabilities
designated at fair value through profit or loss
(FVTPL) due to own credit risk 91 (25)
Fair value through other comprehensive income (FVOCI)
financial assets 1 (1)
Tax (9) 4
--------------------------------------------------------- -------- -------
82 (23)
--------------------------------------------------------- -------- -------
Items that do qualify for reclassification
FVOCI financial assets (17) (8)
Cash flow hedges (254) (103)
Currency translation 170 (112)
Tax 78 7
--------------------------------------------------------- -------- -------
(23) (216)
--------------------------------------------------------- -------- -------
Other comprehensive income/(loss) after tax 59 (239)
--------------------------------------------------------- -------- -------
Total comprehensive loss for the period (27) (358)
--------------------------------------------------------- -------- -------
Attributable to:
Ordinary shareholders (60) (432)
Paid-in equity holders 33 31
Non-controlling interests - 43
--------------------------------------------------------- -------- -------
(27) (358)
--------------------------------------------------------- -------- -------
Condensed consolidated balance sheet as at 30 June 2022
(unaudited)
30 June 31 December
2022 2021
GBPm GBPm
--------------------------------------------------------- ------- -----------
Assets
Cash and balances at central banks 17,361 16,645
Trading assets 65,375 59,101
Derivatives 109,138 105,550
Settlement balances 10,289 2,139
Loans to banks - amortised cost 1,452 962
Loans to customers - amortised cost 8,950 7,471
Amounts due from holding company and fellow subsidiaries 2,885 1,479
Other financial assets 10,852 8,786
Other assets 831 878
--------------------------------------------------------- ------- -----------
Total assets 227,133 203,011
--------------------------------------------------------- ------- -----------
Liabilities
Bank deposits 2,353 1,808
Customer deposits 4,268 2,268
Amounts due to holding company and fellow subsidiaries 5,754 6,126
Settlement balances 9,540 2,068
Trading liabilities 74,051 64,482
Derivatives 102,111 98,497
Other financial liabilities 21,075 19,255
Other liabilities 866 1,055
--------------------------------------------------------- ------- -----------
Total liabilities 220,018 195,559
--------------------------------------------------------- ------- -----------
Equity
--------------------------------------------------------- ------- -----------
Owners' equity 7,118 7,455
Non-controlling interests (3) (3)
--------------------------------------------------------- ------- -----------
Total equity 7,115 7,452
--------------------------------------------------------- ------- -----------
Total liabilities and equity 227,133 203,011
--------------------------------------------------------- ------- -----------
Condensed consolidated statement of changes in equity for the
half year ended 30 June 2022 (unaudited)
Half year ended
-----------------
30 June 30 June
2022 2021
GBPm GBPm
--------------------------------------------------------- -------- -------
Called up share capital - at beginning and end of period 400 400
Share premium account - at beginning and end of period 1,946 1,759
--------------------------------------------------------- -------- -------
Paid-in equity - at beginning and end of period 904 904
--------------------------------------------------------- -------- -------
FVOCI reserve - at beginning of period 33 34
Unrealised losses (23) (10)
Realised losses 1 2
Tax 4 1
At end of period 15 27
--------------------------------------------------------- -------- -------
Cash flow hedging reserve - at beginning of period 47 201
Amount recognised in equity (238) (118)
Amount transferred from equity to earnings (16) 15
Tax 74 12
At end of period (133) 110
--------------------------------------------------------- -------- -------
Foreign exchange reserve - at beginning of period (13) 121
Retranslation of net assets 213 (131)
Foreign currency (losses)/gain on hedges of net assets (42) 15
Tax - (6)
At end of period 158 (1)
--------------------------------------------------------- -------- -------
Retained earnings - at beginning of period 4,138 5,969
Loss attributable to ordinary shareholders and other
equity owners (87) (158)
Ordinary dividends paid (250) (750)
Paid-in equity dividends paid (33) (31)
Remeasurement of retirement benefit schemes
- gross (1) (1)
- tax - 2
Realised gains/(losses) in period on FVOCI equity shares 6 (1)
Changes in fair value of credit in financial liabilities
designated as fair value through profit or loss
- gross 91 (25)
- tax (9) 2
Share-based payments (27) (62)
At end of period 3,828 4,945
--------------------------------------------------------- -------- -------
Owners' equity at end of period 7,118 8,144
--------------------------------------------------------- -------- -------
Non-controlling interests - at beginning of period (3) (46)
Currency translation adjustments and other movements (1) 4
Profit attributable to non-controlling interests 1 39
At end of period (3) (3)
--------------------------------------------------------- -------- -------
Total equity at end of period 7,115 8,141
--------------------------------------------------------- -------- -------
Attributable to:
Ordinary shareholders 6,214 7,240
Paid-in equity holders 904 904
Non-controlling interests (3) (3)
--------------------------------------------------------- -------- -------
7,115 8,141
--------------------------------------------------------- -------- -------
Condensed consolidated cash flow statement for the half year
ended 30 June 2022 (unaudited)
Half year ended
-----------------
30 June 30 June
2022 2021
GBPm GBPm
-------------------------------------------------------------- -------- -------
Operating activities
Operating loss before tax (107) (168)
Adjustments for non-cash items (634) 516
-------------------------------------------------------------- -------- -------
Net cash flows from trading activities (741) 348
Changes in operating assets and liabilities 13,593 3,252
-------------------------------------------------------------- -------- -------
Net cash flows from operating activities before tax 12,852 3,600
Income taxes paid (36) (26)
-------------------------------------------------------------- -------- -------
Net cash flows from operating activities 12,816 3,574
Net cash flows from investing activities (2,106) 313
Net cash flows from financing activities (1,572) (2,047)
Effects of exchange rate changes on cash and cash equivalents 1,040 (758)
-------------------------------------------------------------- -------- -------
Net increase in cash and cash equivalents 10,178 1,082
Cash and cash equivalents at beginning of period 25,250 26,380
-------------------------------------------------------------- -------- -------
Cash and cash equivalents at end of period 35,428 27,462
-------------------------------------------------------------- -------- -------
Notes
1. Presentation of condensed consolidated financial
statements
The condensed consolidated financial statements are set out on
pages 24 to 45 and the reviewed sections of Risk and capital
management on pages 6 to 23. The directors have prepared these on a
going concern basis after assessing the principal risks, forecasts,
projections and other relevant evidence over the twelve months from
the date they are approved and in accordance with IAS 34 'Interim
Financial Reporting', as adopted by the UK and as issued by the
International Accounting Standards Board (IASB), and the Disclosure
Guidance and Transparency Rules sourcebook of the UK's Financial
Conduct Authority. They should be read in conjunction with NatWest
Markets Plc's 2021 Annual Report and Accounts.
2. Accounting policies
NWM Group's principal accounting policies are as set out on
pages 110 to 114 of NatWest Markets Plc's 2021 Annual Report and
Accounts. Amendments to IFRS effective from 1 January 2022 had no
material effect on the condensed consolidated financial
statements.
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
noted on pages 113 and 114 of NatWest Markets Plc's 2021 Annual
Report and Accounts.
Information used for significant estimates
Key financial estimates are based on management's latest
five-year revenue and cost forecasts. Measurement of deferred tax
and expected credit losses are highly sensitive to reasonably
possible changes in those anticipated conditions. Changes in
judgments and assumptions could result in a material adjustment to
those estimates in future reporting periods. (Refer to the Summary
Risk Factors on page 47 which should be read in conjunction with
the Risk Factors included in the NatWest Markets Plc's 2021 Annual
Report and Accounts).
3. Operating expenses
Half year ended
-----------------
30 June 30 June
2022 2021
GBPm GBPm
-------------------------------------- -------- -------
Wages, salaries and other staff costs 121 180
Temporary and contract costs 2 7
Social security costs 22 18
Bonus awards 57 36
Pension costs 11 11
- defined benefit schemes 3 4
- defined contribution schemes 8 7
-------------------------------------- -------- -------
Staff costs 213 252
-------------------------------------- -------- -------
Premises and equipment 25 37
Other administrative expenses (1) 291 181
Depreciation and amortisation 11 10
-------------------------------------- -------- -------
Administrative expenses 327 228
-------- -------
Operating expenses 540 480
-------------------------------------- -------- -------
(1) Includes recharges from other NatWest Group entities, mainly
NWB Plc which provides majority of shared services (including
technology) and operational processes.
Notes
4. Segmental analysis
The business is organised into the following reportable
segments:
- NatWest Markets; and
- Central items & other, which includes corporate functions
and other activity not managed in the NatWest Markets segment. In
H1 2022 and H1 2021, this substantially comprised of litigation and
conduct costs.
Analysis of operating (loss)/profit before tax
Half year ended 30 Half year ended 30 June
June 2022 2021
------------------------ ---------------------------
Central Central
NatWest items NatWest items
Markets & other Total Markets & other Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------ ------- -------- ----- --------- --------- -----
Interest receivable 243 - 243 179 - 179
Interest payable (214) - (214) (183) - (183)
Net fees and commissions 103 - 103 84 - 84
Other non-interest income 315 (9) 306 210 6 216
Total income 447 (9) 438 290 6 296
------------------------------ ------- -------- ----- --------- --------- -----
Depreciation and amortisation (11) - (11) (10) - (10)
Other operating expenses (500) (29) (529) (532) 62 (470)
Impairment (losses)/releases (5) - (5) 16 - 16
------------------------------ ------- -------- ----- --------- --------- -----
Operating (loss)/profit (69) (38) (107) (236) 68 (168)
------------------------------ ------- -------- ----- --------- --------- -----
Half year ended 30 Half year ended 30 June
June 2022 2021
----------------------------------------- ---------------------------------------
Central Central
NatWest items NatWest items
Markets & other Total Markets & other Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------- -------------- -------------- --------- ------------- ------------- ---------
Total revenue (1) 738 (9) 729 535 6 541
------------------- -------------- -------------- --------- ------------- ------------- ---------
(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
2022 2021
Analysis of net fees and commissions - NatWest Markets GBPm GBPm
------------------------------------------------------- -------- -------
Fees and commissions receivable
- Lending and financing 46 34
- Brokerage 21 25
- Underwriting fees 64 77
- Other 49 10
------------------------------------------------------- -------- -------
Total 180 146
------------------------------------------------------- -------- -------
Fees and commissions payable (77) (62)
------------------------------------------------------- -------- -------
Net fees and commissions 103 84
------------------------------------------------------- -------- -------
As at 30 June 2022 As at 31 December 2021
------------------------- --------------------------
Central Central
NatWest items NatWest items
Markets & other Total Markets & other Total
Total assets and liabilities GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- ------- ------- ------- -------- ------- -------
Assets 227,132 1 227,133 203,010 1 203,011
Liabilities 220,005 13 220,018 195,560 (1) 195,559
----------------------------- ------- ------- ------- -------- ------- -------
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%
(2021 - 19%) as analysed below:
Half year ended
-----------------
30 June 30 June
2022 2021
GBPm GBPm
------------------------------------------------------------- -------- -------
Loss before tax (107) (168)
------------------------------------------------------------- -------- -------
Expected tax credit 20 32
Losses and temporary differences in period where no deferred
tax asset recognised (12) (5)
Foreign profits taxed at other rates 2 (1)
Items not allowed for tax:
- losses on disposals and write-downs (1) -
- UK bank levy (1) (2)
- regulatory and legal actions (2) 8
- other disallowable items - (3)
Non-taxable items 1 -
Losses brought forward and utilised - 6
Decrease in the carrying value of deferred tax assets
in respect of UK losses (21) (5)
Banking surcharge 6 19
Tax on paid-in equity 7 7
UK tax rate change impact 22 (17)
Adjustments in respect of prior periods - 10
------------------------------------------------------------- -------- -------
Actual tax credit 21 49
------------------------------------------------------------- -------- -------
At 30 June 2022, NWM Group has recognised a deferred tax asset
of GBP46 million (31 December 2021 - GBP48 million) and a deferred
tax liability of GBP234 million (31 December 2021 - GBP374
million). These amounts include deferred tax assets recognised in
respect of trading losses of GBP74 million (31 December 2021 -
GBP104 million). NWM Group has considered the carrying value of
these assets as at 30 June 2022 and concluded that they are
recoverable.
It was announced in the UK Government's Budget on 27 October
2021 that the UK banking surcharge will decrease from 8% to 3% from
1 April 2023. This legislative change was substantively enacted on
2 February 2022. 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.
Notes
6. Financial instruments - classification
The following tables analyse financial assets and liabilities in
accordance with the categories of financial instruments in IFRS
9.
Amortised Other
MFVTPL FVOCI cost assets Total
GBPm GBPm GBPm GBPm GBPm
------------------------------------ ------- ----- --------- ------ -------
Assets
Cash and balances at central banks 17,361 17,361
Trading assets 65,375 65,375
Derivatives (1) 109,138 109,138
Settlement balances 10,289 10,289
Loans to banks - amortised cost 1,452 1,452
Loans to customers - amortised cost 8,950 8,950
Amounts due from holding company
and fellow subsidiaries 2,108 - 661 116 2,885
Other financial assets 48 6,186 4,618 10,852
Other assets 831 831
------------------------------------ ------ -------
30 June 2022 176,669 6,186 43,331 947 227,133
------- ----- --------- ------ -------
Cash and balances at central banks 16,645 16,645
Trading assets 59,101 59,101
Derivatives (1) 105,550 105,550
Settlement balances 2,139 2,139
Loans to banks - amortised cost 962 962
Loans to customers - amortised cost 7,471 7,471
Amounts due from holding company
and fellow subsidiaries 649 - 731 99 1,479
Other financial assets 80 5,590 3,116 8,786
Other assets 878 878
------------------------------------ ------ -------
31 December 2021 165,380 5,590 31,064 977 203,011
------- ----- --------- ------ -------
Held-for- Amortised Other
trading DFV cost liabilities Total
GBPm GBPm GBPm GBPm GBPm
----------------------------------- --------- ----- --------- ----------- -------
Liabilities
Bank deposits 2,353 2,353
Customer deposits 4,268 4,268
Amounts due to holding company and
fellow subsidiaries 508 - 5,061 185 5,754
Settlement balances 9,540 9,540
Trading liabilities 74,051 74,051
Derivatives (1) 102,111 102,111
Other financial liabilities 2,119 18,956 21,075
Other liabilities 58 808 866
----------------------------------- --------- ----- --------- ----------- -------
30 June 2022 176,670 2,119 40,236 993 220,018
--------- ----- --------- ----------- -------
Bank deposits 1,808 1,808
Customer deposits 2,268 2,268
Amounts due to holding company and
fellow subsidiaries 348 - 5,607 171 6,126
Settlement balances 2,068 2,068
Trading liabilities 64,482 64,482
Derivatives (1) 98,497 98,497
Other financial liabilities 2,374 16,881 19,255
Other liabilities 57 998 1,055
----------------------------------- --------- ----- --------- ----------- -------
31 December 2021 163,327 2,374 28,689 1,169 195,559
--------- ----- --------- ----------- -------
(1) Includes net hedging derivative assets of GBP79 million Includes net hedging derivative assets of GBPxx
(31 December million (31 December
2021 - GBP132 million) and net hedging derivative 2021 - GBP132 million) and net hedging derivative
liabilities of liabilities of
GBP143 million (31 December 2021 - GBP119 million). GBPxx million (31 December 2021 - GBP119 million).
Includes items in the course of collection from other
banks of GBPxx
million (31 December 2021 - GBP38 million).
Includes finance lease receivables of GBPxx million
(31 December
2021 - GBPxx million).
Includes items in the course of transmission to other
banks of GBPxx
million (31 December 2021 - GBP28 million).
Includes lease liabilities of GBPxx million (31
December 2021 - GBPxx
million) held at amortised cost.
Notes
6. Financial instruments - classification continued
Amounts due from/to holding company and fellow subsidiaries are
as below:
30 June 2022 31 December 2021
---------------------------- ----------------------------
Holding Fellow Holding Fellow
company subsidiaries Total company subsidiaries Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- ------- ------------ ----- ------- ------------ -----
Assets
Trading assets - 2,108 2,108 252 397 649
Loans to banks - amortised
cost - 515 515 - 612 612
Loans to customers - amortised
cost 126 20 146 113 6 119
Other assets - 116 116 - 99 99
Amounts due from holding
company and
fellow subsidiaries 126 2,759 2,885 365 1,114 1,479
------- ------------ ----- ------- ------------ -----
Derivatives (1) 615 463 1,078 407 529 936
------------------------------- ------- ------------ ----- ------- ------------ -----
Liabilities
Bank deposits - amortised
cost - 373 373 - 120 120
Customer deposits - amortised
cost - 67 67 - 155 155
Trading liabilities 444 64 508 - 348 348
Settlement balances - 56 56 - - -
Other financial liabilities
- subordinated liabilities 1,497 - 1,497 1,464 - 1,464
MREL instruments issued to
NatWest Group plc 3,062 - 3,062 3,858 - 3,858
Other liabilities - 191 191 - 181 181
Amounts due to holding company
and
fellow subsidiaries 5,003 751 5,754 5,322 804 6,126
------- ------------ ----- ------- ------------ -----
Derivatives (1) 213 429 642 658 339 997
------------------------------- ------- ------------ ----- ------- ------------ -----
(1) Intercompany derivatives are included within derivatives
classification on the balance sheet.
Notes
6 . Financial instruments - valuation
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 2021
Annual Report and Accounts. Valuation, sensitivity methodologies
and inputs at 30 June 2022 are consistent with those described in
Note 10 to the NatWest Markets Plc 2021 Annual Report and
Accounts.
Fair value hierarchy
The table below shows the assets and liabilities held by NWM
Group split by fair value hierarchy level. Level 1 are considered
the most liquid instruments, and level 3 the most illiquid, valued
using expert judgment and hence carry the most significant price
uncertainty .
30 June 2022 31 December 2021
------------------------------- -------------------------------
Level Level Level Total Level Level Level Total
1 2 3 1 2 3
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------------- ------ ------- ----- ------- ------ ------- ----- -------
Assets
Trading assets
Loans - 40,493 642 41,135 - 33,425 721 34,146
Securities 20,032 4,206 2 24,240 19,563 5,371 21 24,955
Derivatives - 108,102 1,036 109,138 - 104,484 1,066 105,550
Amount due from holding company
and fellow subsidiaries - 2,108 - 2,108 - 649 - 649
Other financial assets
Loans - - 150 150 - 19 118 137
Securities 5,041 1,003 40 6,084 4,507 988 38 5,533
--------------------------------------- ------ ------- ----- ------- ------ ------- -----
Total financial assets held at
fair value 25,073 155,912 1,870 182,855 24,070 144,936 1,964 170,970
As a % of total fair value assets 14% 85% 1% 14% 85% 1%
------ ------- ----- ------- ------ ------- ----- -------
Liabilities
Amount due to holding company
and fellow subsidiaries - 508 - 508 - 348 - 348
Trading liabilities
Deposits - 48,486 1 48,487 - 38,542 2 38,544
Debt securities in issue - 801 2 803 - 974 - 974
Short positions 22,022 2,738 1 24,761 20,508 4,455 1 24,964
Derivatives - 101,349 762 102,111 - 97,883 614 98,497
Other financial liabilities
Deposits - 542 - 542 - 568 - 568
Debt securities in issue - 1,237 - 1,237 - 1,103 - 1,103
Subordinated liabilities - 340 - 340 - 703 - 703
--------------------------------------- ------ ------- ----- ------- ------ ------- ----- -------
Total financial liabilities held
at fair value 22,022 156,001 766 178,789 20,508 144,576 617 165,701
As a % of total fair value liabilities 12% 88% 0% 12% 88% 0%
------ ------- ----- ------- ------ ------- ----- -------
(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. Observable inputs are those that are readily available
with limited adjustments required. Examples include most government
agency securities, investment-grade corporate bonds, certain mortgage
products - including CLOs, most bank loans, repos and reverse repos,
state and municipal obligations, most notes issued, certain money
market securities, 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
non-derivative instruments which trade infrequently, certain syndicated
and commercial mortgage loans, private equity, 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.
(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.
Notes
6 . Financial instruments - valuation continued
Valuation adjustments
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 140 of the NatWest Markets Plc 2021 Annual Report and
Accounts.
30 June 31 December
2022 2021
--------------------------
GBPm GBPm
-------------------------- ------- -----------
Funding - FVA 29 59
Credit - CVA 364 389
Bid - Offer 96 81
Product and deal specific 128 120
-------------------------- ------- -----------
617 649
-------------------------- ------- -----------
- Valuation reserves comprising credit valuation adjustments
(CVA), funding valuation adjustment (FVA), bid-offer and product
and deal specific reserves, decreased to GBP617 million at 30 June
2022 (31 December 2021 - GBP649 million).
- The decreases in CVA and FVA were driven by a reduction in
underlying derivative exposures, primarily due to increases in
interest rates and trade exit activity, partially offset by the net
impact of credit spreads widening and specific counterparty
activity. The increase in bid-offer was driven by an increase in
risk and wider bid-offer spreads.
Level 3 sensitivities
The table below shows the high and low range of fair value of
the level 3 assets and liabilities.
30 June 2022 31 December 2021
------------------------------- -------------------------------
Level Favourable Unfavourable Level Favourable Unfavourable
3 3
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ----- ---------- ------------ ----- ---------- ------------
Assets
Trading assets
Loans 642 10 (10) 721 10 (10)
Securities 2 - - 21 - -
Derivatives 1,036 60 (70) 1,066 90 (110)
Other financial assets
Loans 150 - - 118 10 (10)
Securities 40 - - 38 - -
----- ---------- ------------ ----- ---------- ------------
Total financial assets held
at fair value 1,870 70 (80) 1,964 110 (130)
----- ---------- ------------ ----- ---------- ------------
Liabilities
Trading liabilities
Deposits 1 - - 2 - -
Debt securities in issue 2 - - - - -
Short positions 1 - - 1 - -
Derivatives 762 30 (30) 614 30 (30)
Total financial liabilities
held at fair value 766 30 (30) 617 30 (30)
----- ---------- ------------ ----- ---------- ------------
Alternative assumptions
Reasonably plausible alternative assumptions of unobservable
inputs are determined based on a specified target level of
certainty of 90%. Alternative assumptions are determined with
reference to all available evidence including consideration of the
following: quality of independent pricing information considering
consistency between different sources, variation over time,
perceived tradability or otherwise of available quotes; consensus
service dispersion ranges; volume of trading activity and market
bias (e.g. one-way inventory); day 1 profit or loss arising on new
trades; number and nature of market participants; market
conditions; modelling consistency in the market; size and nature of
risk; length of holding of position; and market intelligence.
Notes
6 . Financial instruments - valuation continued
Movement in level 3 assets and liabilities
The following table shows the movement in level 3 assets and
liabilities.
Half year ended 30 June Half year ended 30 June
2022 2021
--------------------------------------- ---------------------------------------
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 1,808 156 1,964 617 1,629 91 1,720 955
Amount recorded in the income
statement (3) 33 (10) 23 148 (191) 3 (188) (124)
Amount recorded in the statement
of
comprehensive income - (22) (22) - - 6 6 -
Level 3 transfers in 143 - 143 31 42 428 470 15
Level 3 transfers out (101) (1) (102) (36) (68) - (68) (116)
Purchases/originations 352 67 419 158 169 8 177 114
Settlements/other decreases (28) - (28) (15) (36) (4) (40) (15)
Sales (530) - (530) (139) (158) (1) (159) (132)
Foreign exchange and other 3 - 3 2 (1) (1) (2) (2)
--------------------------------- ------- --------- ------ ----------- ------- --------- ------ -----------
At 30 June 1,680 190 1,870 766 1,386 530 1,916 695
--------------------------------- ------- --------- ------ ----------- ------- --------- ------ -----------
Amounts recorded in the
income statement
in respect of balances
held at period end
- unrealised 33 (10) 23 148 (191) 3 (188) (124)
--------------------------------- ------- --------- ------ ----------- ------- --------- ------ -----------
(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.
(3) Net losses of GBP115 million on trading assets and
liabilities (30 June 2021 - GBP67 million net losses) were recorded
in income from trading activities. Net losses on other instruments
of GBP10 million (30 June 2021 - gain GBP3 million) were recorded
in other operating income and interest income as appropriate.
Notes
6. Financial instruments - valuation continued
Fair value of financial instruments measured at amortised cost
on the balance sheet
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 2022 GBPbn GBPbn GBPbn GBPbn GBPbn
------------------------------------ ------------ -------- ---------- ---------- ----------
Financial assets
Cash and balances at central banks 17.4
Settlement balances 10.3
Loans to banks 0.3 1.2 1.2 0.5 0.7
Loans to customers 9.0 9.0 0.5 8.5
Amounts due from holding company
and fellow subsidiaries 0.1 0.6 0.6 - 0.6
Other financial assets - securities 4.6 4.6 - 4.6
------------------------------------ ------------ -------- ---------- ---------- ----------
31 December 2021
------------------------------------ ------------ -------- ---------- ---------- ----------
Financial assets
Cash and balances at central banks 16.6
Settlement balances 2.1
Loans to banks 0.1 0.9 0.9 0.4 0.5
Loans to customers 7.5 7.5 0.4 7.1
Amounts due from holding company
and fellow subsidiaries 0.7 0.7 - 0.7
Other financial assets - securities 3.1 3.1 - 3.1
------------------------------------ ------------ -------- ---------- ---------- ----------
30 June 2022
------------------------------------ ------------ -------- ---------- ---------- ----------
Financial liabilities
Bank deposits 0.3 2.1 2.1 ` 2.1
Customer deposits 0.2 4.1 4.1 0.1 4.0
Amounts due to holding company
and fellow subsidiaries 0.2 4.9 4.9 4.5 0.4
Settlement balances 9.5
Other financial liabilities
Debt securities in issue 18.7 18.7 14.5 4.2
Subordinated liabilities 0.3 0.3 0.3 -
------------------------------------ ------------ -------- ---------- ---------- ----------
31 December 2021
------------------------------------ ------------ -------- ---------- ---------- ----------
Financial liabilities
Bank deposits 1.8 1.8 - 1.8
Customer deposits 2.2 2.2 - 2.2
Amounts due to holding company
and fellow subsidiaries 5.6 5.7 5.4 0.3
Settlement balances 2.1
Other financial liabilities
Debt securities in issue 16.6 16.8 13.9 2.9
Subordinated liabilities 0.3 0.4 0.4 -
------------------------------------ ------------ -------- ---------- ---------- ----------
Short-term financial instruments
For certain short-term financial instruments: cash and balances
at central banks, items in the course of collection from other
banks, settlement balances, items in the course of transmission to
other banks, and customer demand deposits, carrying value is deemed
a reasonable approximation of fair value.
Loans to banks and customers
In estimating the fair value of net loans to customers and banks
measured at amortised cost, NWM Group's loans are segregated into
appropriate portfolios reflecting the characteristics of the
constituent loans. Two principal methods are used to estimate fair
value; contractual cash flows and expected cash flows.
Debt securities and subordinated liabilities
Most debt securities are valued using quoted prices in active
markets or from quoted prices of similar financial instruments in
active markets. For the remaining population, fair values are
determined using market standard valuation techniques, such as
discounted cash flows.
Bank and customer deposits
Fair values of deposits are estimated using discounted cash flow
valuation techniques.
Notes
7. Trading assets and liabilities
Trading assets and liabilities comprise assets and liabilities
held at fair value in trading portfolios.
30 June 31 December
2022 2021
Assets GBPm GBPm
-------------------------------------- ------- -----------
Loans
Reverse repos 25,893 20,742
Collateral given 14,150 11,990
Other loans 1,092 1,414
-------------------------------------- ------- -----------
Total loans 41,135 34,146
-------------------------------------- ------- -----------
Securities
Central and local government
- UK 7,075 6,919
- US 3,840 3,329
- other 9,364 10,929
Financial institutions and corporate 3,961 3,778
-------------------------------------- ------- -----------
Total securities 24,240 24,955
--------------------------------------
Total 65,375 59,101
-------------------------------------- ------- -----------
Liabilities
-------------------------------------- ------- -----------
Deposits
Repos 29,406 19,389
Collateral received 17,995 17,619
Other deposits 1,086 1,536
-------------------------------------- ------- -----------
Total deposits 48,487 38,544
-------------------------------------- ------- -----------
Debt securities in issue 803 974
Short positions 24,761 24,964
-------------------------------------- ------- -----------
Total 74,051 64,482
-------------------------------------- ------- -----------
Notes
8. Loan impairment provisions
Portfolio summary
The table below shows gross loans and ECL, by segment and stage,
within the scope of ECL framework .
30 June 31 December
2022 2021
GBPm GBPm
---------------------------------------------------- ------- -----------
Loans - amortised cost and fair value through other
comprehensive income (FVOCI)
Stage 1 10,014 8,301
Stage 2 254 147
Stage 3 62 99
Of which: individual 45 91
Of which: collective 17 8
Inter-Group (1) 660 731
---------------------------------------------------- -----------
Total 10,990 9,278
---------------------------------------------------- ------- -----------
ECL provisions
Stage 1 12 6
Stage 2 3 3
Stage 3 37 75
Of which: individual 27 68
Of which: collective 10 7
Inter-Group - -
---------------------------------------------------- -----------
Total 52 84
---------------------------------------------------- ------- -----------
ECL provisions coverage (2)
Stage 1 (%) 0.12 0.07
Stage 2 (%) 1.18 2.04
Stage 3 (%) 59.68 75.76
Inter-Group (%) - -
Total 0.50 0.98
---------------------------------------------------- ------- -----------
Half year ended
--------------------
30 June 30 June
2022 2021
GBPm GBPm
---------------------------------------------------- ------- -----------
Impairment losses
ECL charge/(release) (3)
Stage 1 2 (8)
Stage 2 4 (5)
Stage 3 (1) (3)
Of which: individual - 1
Of which: collective (1) (4)
Third party 5 (16)
Inter-Group - -
----------------------------------------------------
Total 5 (16)
---------------------------------------------------- ------- -----------
Amounts written off 43 40
---------------------------------------------------- ------- -----------
(1) NWM Group's intercompany assets were classified in Stage 1. The ECL
for these loans was GBP0.3 million ( 31 December 2021 - GBP0.2 million).
(2) ECL provisions coverage is calculated as ECL provisions divided by
loans - amortised cost and FVOCI. It is calculated on third party
loans and total ECL provisions.
(3) The table shows gross loans only and excludes amounts that are outside
the scope of the ECL framework. For further details, refer to Financial
instruments within the scope of the IFRS 9 ECL framework on page
76 of the NatWest Markets Plc 2021 Annual Report and Accounts. Other
financial assets within the scope of the IFRS 9 ECL framework were
cash and balances at central banks totalling GBP17.4 billion (31
December 2021 - GBP16.6 billion) and debt securities of GBP10.7 billion
(31 December 2021 - GBP8.4 billion).
Notes
9. Provisions for liabilities and charges
Litigation
and other
regulatory Other (1) Total
GBPm GBPm GBPm
----------------------------------------- ---------- --------- -----
At 1 January 2022 262 80 342
Currency translation and other movements 18 3 21
Charge to income statement 3 - 3
Release to income statement (5) (1) (6)
Provisions utilised (69) (15) (84)
----------------------------------------- ---------- --------- -----
At 30 June 2022 209 67 276
----------------------------------------- ---------- --------- -----
(1) Materially comprises provisions relating to restructuring costs.
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.
10. Dividends
Interim ordinary dividends totalling GBP250 million were paid to
NWM Plc's parent company NatWest Group plc during H1 2022 (H1 2021
- GBP750 million).
11. Contingent liabilities, commitments and guarantees
30 June 31 December
2022 2021
GBPm GBPm
------------------------------------------------------- ------- -----------
Contingent liabilities and commitments
Guarantees and assets pledged as collateral security 589 595
Other contingent liabilities 107 110
Standby facilities, credit lines and other commitments 13,560 11,245
------------------------------------------------------- ------- -----------
14,256 11,950
------- -----------
Commitments and contingent obligations are subject to NWM Plc's
normal credit approval processes. 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 GBP1.0 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 2022 the deposits amounted
to GBP0.8 billion and the guarantee fees in the period were GBP2.1
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 2022 the
exposure at default covered by the guarantees was approximately
GBP0.2 billion (of which GBP34 million was cash collateralised).
Fees of GBP0.7 million in relation to the guarantees were
recognised in the period.
Indemnity deed
In April 2019 NWM Plc and NWB Plc entered into a cross indemnity
agreement 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.
It is not practicable to provide an aggregate estimate of
potential liability for our legal proceedings and regulatory
matters as a class of 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. Please refer to Note 9 for
information on material provisions.
Material Matters in which NWM Group is currently involved are
set out below. We have provided information on the procedural
history of certain Matters, where we believe appropriate, to aid
the understanding of the Matter.
For a discussion of certain risks associated with NWM Group's
litigation and regulatory matters, see the Risk factor relating to
legal, regulatory and governmental actions and investigations set
out on page 198 of the NatWest Markets Plc 2021 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 the
plaintiff, the Federal Deposit Insurance Corporation (FDIC),
alleges 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.
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.
Notes
12. Litigation and regulatory matters continued
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 2021, the United
States Court of Appeals for the Second Circuit (US Court of
Appeals) affirmed the SDNY's prior decision that plaintiffs who
purchased LIBOR-based instruments from third parties (as opposed to
the defendants) lack antitrust standing to pursue such claims. In
addition, the appellate court, reversing a December 2016 decision
of the SDNY, held that plaintiffs in these cases have adequately
asserted the court's personal jurisdiction over NWM Plc and other
non-US banks, including with respect to antitrust class action
claims on behalf of over-the-counter plaintiffs and exchange-based
purchaser plaintiffs. In February 2022, the US Court of Appeals, on
similar grounds, reversed the SDNY's prior dismissal of a fraud
class action on behalf of lender plaintiffs. The appellate court
remanded these matters to the SDNY for further proceedings in light
of its rulings. 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.
The non-class claims filed in the SDNY include claims that the
FDIC is asserting on behalf of certain failed US banks. In July
2017, the FDIC, on behalf of 39 of those 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 collusion with regard to the setting of USD LIBOR
and that the defendants breached UK and European competition law,
as well as asserting common law claims of fraud under US law. The
defendant banks consented to a request by the FDIC for
discontinuance of the claim in respect of 20 failed US banks,
leaving 19 failed US banks as claimants. The UK proceedings are at
the disclosure stage but have been stayed until 31 July 2022.
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 jurisdictional and other grounds, and the plaintiffs have
commenced an appeal to the US Court of Appeals. The second class
action, which relates to other derivatives allegedly tied to JPY
LIBOR and Euroyen TIBOR, was dismissed by the SDNY in relation to
NWM Plc and other NWM Group companies in September 2021. That
dismissal may be the subject of a future appeal.
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. In February 2017, the SDNY dismissed
the case relating to Euribor for lack of personal jurisdiction and
in August 2019, the SDNY dismissed the case relating to Pound
Sterling for various reasons. Plaintiffs' appeals in those two
cases remain pending.
In May 2022, NatWest Group companies and the plaintiffs in the
class action relating to the Singapore Interbank Offered Rate and
Singapore Swap Offer Rate ('SIBOR / SOR') finalised a settlement
resolving that case. In April 2022, NatWest Group companies and the
plaintiffs in the class action relating to the Australian Bank Bill
Swap Reference Rate finalised a settlement resolving that case. In
June 2021, NWM Plc and the plaintiffs in the Swiss Franc LIBOR
class action finalised a settlement resolving that case. The
amounts of the three settlements have been paid into escrow pending
final court approval of the settlements.
NWM Plc is 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 outside
the jurisdiction, 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 an appeal to
Israel's Supreme Court in respect of dismissal of the substantive
case against banks that had a presence in Israel.
In August 2020, a complaint was filed in the United States
District Court for the Northern District of California by several
United States consumer borrowers against the USD ICE LIBOR panel
banks and their affiliates, alleging that the normal process of
setting USD ICE LIBOR amounts to illegal price-fixing, and also
that banks in the United States have illegally agreed to use LIBOR
as a component of price in variable consumer loans. The NatWest
Group defendants are NatWest Group plc, NWM Plc, NWMSI and NWB Plc.
The plaintiffs seek damages and to prevent the enforcement of
LIBOR-based instruments through injunction. Defendants have filed a
motion to dismiss, which remains pending.
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.
Notes
12. Litigation and regulatory matters continued
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. The claim was transferred from the High Court of Justice of
England and Wales in December 2021 and registered in the UK
Competition Appeal Tribunal (CAT) in January 2022.
An FX-related class action, on behalf of 'consumers and end-user
businesses', is proceeding in the SDNY against NWM Plc and others.
In March 2022, the SDNY denied the plaintiffs' motion for class
certification. Plaintiffs are seeking to appeal the decision.
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 and NWMSI have been named in the action
as 'other cartel participants', but are not respondents. The claim
was served in June 2019 and, after a number of interlocutory
pleading disputes, NWM Plc filed its defence in March 2022.
In July and December 2019, two separate applications seeking
opt-out collective proceedings orders were filed in the CAT against
NatWest Group plc, NWM Plc and other banks. Both applications were
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 took place in July 2021. In March 2022, the CAT
declined to certify as collective proceedings either of the
applications, ruling that the opt-out basis on which they were
brought was inappropriate. The CAT granted each applicant three
months to revise their application for certification on an opt-in
basis, if they wished to proceed. Neither applicant did so. The
applicants have served judicial review proceedings, which are
currently stayed. Separately, the applicants have applied for
permission to appeal the CAT's judgment.
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 to certify, which names The Royal Bank of
Scotland plc (now NWM Plc) and several other banks as defendants,
was served on NWM Plc in May 2020. NWM Plc has filed a motion
challenging the permission to serve the consolidated motion outside
the Israeli jurisdiction, which remains pending.
In December 2021, a claim was issued in the Netherlands against
NatWest Group plc, NWM Plc and NWM N.V. by Stichting FX Claims,
seeking a declaration from the court that anti-competitive FX
market conduct described in decisions of the European Commission
(EC) of 16 May 2019 is unlawful, along with unspecified damages.
The claimant has requested the court's permission to amend its
claim to also refer to a December 2021 decision by the EC, which
also described anti-competitive FX market conduct.
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.
Government securities antitrust litigation
NWMSI and certain other US broker-dealers are defendants in a
consolidated antitrust class action 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. In March 2022, the SDNY dismissed
the operative complaint, without leave to re-plead. The dismissal
is subject to appeal.
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.
In March 2022, the SDNY dismissed the claims against NWM Plc and
NWMSI in the operative complaint on the ground that the complaint's
conspiracy allegations are insufficient. The plaintiffs have
indicated that they intend to file an amended complaint.
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.
Notes
12. Litigation and regulatory matters continued
In 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. Defendants are seeking
dismissal.
Odd lot corporate bond trading antitrust litigation
In October 2021, the SDNY granted defendants' motion to dismiss
the class action antitrust complaint alleging that, from August
2006 onwards various securities dealers, including NWMSI, 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. Plaintiffs have
commenced an appeal of the dismissal.
Spoofing litigation
In December 2021, three substantially similar class actions
complaints were filed in federal court in the United States against
NWM Plc and NWMSI alleging Commodity Exchange Act and common law
unjust enrichment claims arising from manipulative trading known as
spoofing. The complaints refer to NWM Plc's December 2021
spoofing-related guilty plea (described below under "US
investigations relating to fixed-income securities") and purport to
assert claims on behalf of those who transacted in US Treasury
securities and futures and options on US Treasury securities
between 2008 and 2018 . In July 2022, defendants filed a motion to
dismiss these claims, which have been consolidated into one matter
in the United States District Court for the Northern District of
Illinois.
Madoff
NWM N.V. was named as a defendant in two actions filed by the
trustee for the bankruptcy estates of Bernard L. Madoff and Bernard
L. Madoff Investment Securities LLC, in bankruptcy court in New
York, which together seek to clawback more than US$298 million that
NWM N.V. allegedly received from certain Madoff feeder funds and
certain swap counterparties. The claims were previously dismissed,
but as a result of an August 2021 decision by the US Court of
Appeals, they will now proceed in the bankruptcy court, where they
have now been consolidated into one action, subject to NWM N.V.'s
legal and factual defences. In May 2022, NWM N.V. filed a motion to
dismiss the amended complaint in the consolidated action.
EUA trading litigation
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 European Union Allowances
(EUAs) in 2009 and were alleged to be VAT defaulting traders within
(or otherwise connected to) EUA supply chains of which NWM Plc was
a party. 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 total damages against
NWM Plc and Mercuria at GBP45 million plus interest and costs, and
permitted the defendants to appeal to the Court of Appeal. In 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 been denied permission by the Supreme
Court to appeal that decision and the retrial will therefore
proceed on a date to be scheduled. Mercuria has also been denied
permission by the Supreme Court to appeal the High Court's finding
that NWM Plc and Mercuria were both vicariously liable.
US Anti-Terrorism Act litigation
NWM N.V. and certain other financial institutions are defendants
in several actions 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.
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 that
committed the attacks, 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 US Court of Appeals. Another action, filed in the SDNY in
2017, was dismissed in March 2019 on similar grounds, but remains
subject to appeal to the US Court of Appeals. Other follow-on
actions that are substantially similar to the two that have now
been dismissed are pending in the same courts.
Notes
12. Litigation and regulatory matters continued
Securities underwriting litigation
NWMSI is an underwriter defendant in securities class actions in
the US in which plaintiffs generally allege that an issuer of
public 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.
1MDB litigation
A claim for a material sum was issued, but not served, in
Malaysia in 2021 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 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 December 2021, NWM Plc pled guilty in the United States
District Court for the District of Connecticut to one count of wire
fraud and one count of securities fraud in connection with
historical spoofing conduct by former employees in US Treasuries
markets between January 2008 and May 2014 and, separately, during
approximately three months in 2018. The 2018 trading occurred
during the term of a non-prosecution agreement (NPA) between NWMSI
and the United States Attorney's Office for the District of
Connecticut (USAO CT), under which non-prosecution was conditioned
on NWMSI and affiliated companies not engaging in criminal conduct
during the term of the NPA. The relevant trading in 2018 was
conducted by two NWM traders in Singapore and breached that NPA.
The plea agreement reached with the US Department of Justice and
the USAO CT resolves both the spoofing conduct and the breach of
the NPA.
As required by the resolution and sentence imposed by the court,
NWM Plc is subject to a three-year period of probation and has paid
a US$25.2 million criminal fine, approximately US$2.8 million in
criminal forfeiture and approximately US$6.8 million in restitution
out of existing provisions. The plea agreement also imposes an
independent corporate monitor. In addition, NWM Plc has committed
to compliance programme reviews and improvements and agreed to
reporting and co-operation obligations.
Other material adverse collateral consequences may occur as a
result of this matter, as further described in the Risk factor
relating to legal, regulatory and governmental actions and
investigations set out on page 198 of the NatWest Markets Plc 2021
Annual Report & Accounts.
Notes
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
- 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.
- NWM Group is recharged from other NatWest Group entities,
mainly NWB Plc which provides the majority of shared services
(including technology) and operational processes.
NWM N.V. loan purchases via NWM Plc
In H1 2022 NWM N.V. continued purchasing loans from market
participants via NWM Plc onto the banking book as part of a larger
initiative to increase the size and diversity of its banking book
portfolio. As at 30 June 2022, the balance of these loans purchased
from market participants with assistance from NWM Plc amounted to
EUR230 million (31 December 2021 - EUR24 million).
Full details of NWM Group's related party transactions for the
year ended 31 December 2021 are included in the NatWest Markets Plc
2021 Annual Report and Accounts.
14. Post balance sheet events
On 28 July 2022, the NWM Plc Board approved an interim dividend
of GBP180 million, or GBP0.45 per share, to be declared and
payable to NatWest Group plc on 29 July 2022. There has been no
adjustment to the 30 June 2022 condensed consolidated financial
statements. For regulatory reporting purposes, a GBP180 million
foreseeable dividend deduction has been applied
to the H1 2022 regulatory capital position.
Other than as disclosed there have been no other significant
events between 30 June 2022 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 28
July 2022.
Independent review report to NatWest Markets Plc
Conclusion
We have been engaged by NatWest Markets plc ("the Group") to
review the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 June 2022 which
comprises 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 set of financial statements.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2022 is 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) "Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity" issued by the Financial Reporting Council. 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 are prepared in accordance with UK adopted International
Accounting Standards. The condensed set of financial statements
included in this half-yearly financial report have been prepared in
accordance with UK adopted International Accounting Standard 34,
"Interim Financial Reporting".
Conclusions relating to Going Concern
Based on our review procedures, which are less extensive than
those performed in an audit as described in the Basis for
conclusion section of this report, nothing has come to our
attention to suggest that management have inappropriately adopted
the going concern basis of accounting or that management have
identified material uncertainties relating to going concern that
are not appropriately disclosed.
This conclusion is based on the review procedures performed in
accordance with this International Standard on Review Engagements
2410 (UK) , however future events or conditions may cause the
entity to cease to continue as a going concern.
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.
In preparing the half-yearly financial report, the directors are
responsible for assessing the Group's ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the
directors either intend to liquidate the Group or to cease
operations, or have no realistic alternative but to do so.
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 set of
financial statements in the half-yearly financial report. Our
conclusion, including our Conclusions relating to Going Concern,
are based on procedures that are less extensive than audit
procedures, as 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) "Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Financial
Reporting Council. To the fullest extent permitted by law, we do
not accept or assume responsibility to anyone other than the
company, for our work, for this report, or for the conclusions we
have formed.
Ernst & Young LLP
London, United Kingdom
28 July 2022
NatWest Markets Plc 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 179 to 200 of the NatWest Markets
Plc 2021 Annual Report and Accounts and pages 16 to 49 of the NWM
Plc Registration Document dated 16 March 2022 (as supplemented and
amended from time to time). Any of the risks identified may have a
material adverse effect on NWM Group's business, operations,
financial condition or prospects.
Economic and political risk
- NWM Group faces continued economic and political risks and
uncertainty in the UK and global markets, including as a result of
high inflation, rising interest rates, supply chain disruption and
the Russian invasion of Ukraine.
- The impact of the COVID-19 pandemic and related uncertainties
continue to affect the UK, global economies and financial markets
and NWM Group's customers, as well as its competitive environment,
which may continue to have an adverse effect on NWM Group.
- Continuing uncertainty regarding the effects and extent of the
UK's post Brexit divergence from EU laws and regulation, and NWM
Group's post Brexit EU operating model 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.
Strategic risk
- NWM Group has been in a period of significant structural and
other change, including as a result of NatWest Group's purpose-led
strategy (including the NWM Refocusing and NatWest Group's recent
creation of its Commercial & Institutional franchise, of which
NWM Group forms part) and may continue to be subject to significant
structural and other change. There is no certainty that the
intended benefits of any such change for NWM Group will be realised
within the timeline or in the manner currently contemplated, or
that NWM Group will meet its targets and expectations as a result
of such changes.
- Trends relating to the COVID-19 pandemic may adversely affect
NWM Group's strategy and impair its ability to meet its targets and
strategic objectives.
Financial resilience risk
- NWM Group may not meet the targets it communicates, generate
returns or implement its strategy effectively.
- NWM Plc and/or its regulated subsidiaries may not meet the
prudential regulatory requirements for capital.
- NWM Group is reliant on access to the capital markets to meet
its funding requirements, both directly through wholesale markets,
and indirectly through its parent (NatWest Group) for the
subscription to its internal capital and MREL. The inability to do
so may adversely affect NWM Group.
- NWM Group 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 may be adversely affected if NatWest Group fails to
meet the requirements of regulatory stress tests.
- 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.
- The impact of the COVID-19 pandemic on the credit quality of
NWM Group's counterparties may negatively impact NWM Group.
- 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.
- 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 and PRA oversight
in respect of resolution. Following submission of a biennial
assessment of NatWest Group's preparations for resolution to the
PRA, the Bank of England has not identified any shortcomings,
deficiencies or substantive impediments associated with NatWest
Group's ability to achieve resolvability outcomes, but has
highlighted two areas as requiring further enhancements. NatWest
Group, including NWM Group, could be adversely affected should
future Bank of England assessments deem NatWest Group's
preparations to be inadequate.
NatWest Markets Plc Summary Risk Factors
Summary of Principal Risks and Uncertainties continued
Climate and sustainability-related risks
- NWM Group and its customers, suppliers and counterparties face
significant climate-related risks, including in transitioning to a
net zero economy, which may adversely impact NWM Group.
- NatWest Group's purpose-led strategy includes climate change
as one of its three areas of focus and, following the passing of a
'Say on Climate' resolution by NatWest Group's shareholders in
April 2022, NatWest Group is required to publish an initial climate
transition plan in 2023. NatWest Group's climate strategy and
transition plan entails significant execution and reputational risk
and is unlikely to be achieved without internal and external
actions including significant government policy, technology and
customer changes.
- Any failure by NWM Group to prepare or execute a credible
transition plan or implement effective and compliant climate change
resilient systems, controls and procedures could adversely affect
NWM Group's reputation or its ability to manage climate-related
risks.
- There are significant challenges in relation to
climate-related data due to quality and other limitations, lack of
standardisation, consistency and incompleteness which amongst other
factors contribute to the 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, its reputation, business, results of
operations and outlook.
- Any reduction in the ESG ratings of NatWest Group (including
NWM Group) or NWM Group could have a negative impact on NatWest
Group's (including NWM Group) or NWM Group's reputation and on
investors' risk appetite and customers' willingness to deal with
NatWest Group (including NWM Group) or NWM Group.
- 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 diverse 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.
- Remote working may adversely affect NWM Group's ability to
maintain effective internal controls.
- 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 exposed to the risk of 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 IAS 34 'Interim Financial Reporting', as adopted by
the UK and as issued by the International Accounting Standards
Board (IASB);
- 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
Chairman Chief Executive Officer
28 July 2022
Board of directors
Chairman Executive directors Non-executive directors
Frank Dangeard Robert Begbie Anne Simpson
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 operating expenses shows litigation and
conduct costs on a separate line on pages 3 and 4. These amounts
are included within staff costs and other administrative expenses
in the statutory analysis. Other operating expenses excludes
litigation and conduct costs which are more volatile and may
distort comparisons with prior periods.
- Funded assets defined as total assets less derivative assets.
This measure allows review of balance sheet trends exclusive of the
volatility associated with derivative fair values.
- Management view of income by business including shared revenue
and before asset disposals/strategic risk reduction and own credit
adjustments. This measure is used to show underlying income
generation in NatWest Markets excluding the impact of disposal
losses and own credit adjustments.
- Revenue share refers to income generated by NatWest Markets
products from customers that have their primary relationship with
other NatWest Group subsidiaries, a proportion of which is shared
between NatWest Markets and those subsidiaries.
- 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
Half year ended
------------------------------------------------------------------
30 June 2022 30 June 2021
-------------------------------- --------------------------------
Litigation Litigation
and Other Statutory and Other Statutory
conduct operating operating conduct operating operating
costs expenses expenses costs expenses expenses
Operating expenses GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------ ---------- --------- --------- ---------- --------- ---------
Staff costs 2 211 213 - 252 252
Premises and equipment - 25 25 - 37 37
Other administrative expenses 18 273 291 (68) 249 181
Depreciation and amortisation - 11 11 - 10 10
Total 20 520 540 (68) 548 480
------------------------------ ---------- --------- --------- ---------- --------- ---------
Quarter ended
--------------------------------
30 June 2022
--------------------------------
Litigation
and Other Statutory
conduct operating operating
costs expenses expenses
Operating expenses GBPm GBPm GBPm
------------------------------ ---------- --------- --------- ---------- --------- ---------
Staff costs 2 78 80
Premises and equipment - 1 1
Other administrative expenses 10 151 161
Depreciation and amortisation - 7 7
------------------------------ ---------- --------- ---------
Total 12 237 249
------------------------------ ---------- --------- --------- ---------- --------- ---------
Quarter ended
--------------------------------
31 March 2022
--------------------------------
Litigation
and Other Statutory
conduct operating operating
costs expenses expenses
Operating expenses GBPm GBPm GBPm
------------------------------ ---------- --------- --------- ---------- --------- ---------
Staff costs - 133 133
Premises and equipment - 24 24
Other administrative expenses 8 122 130
Depreciation and amortisation - 4 4
------------------------------ ---------- --------- --------- ----------
Total 8 283 291
------------------------------ ---------- --------- --------- ---------- --------- ---------
Quarter ended
--------------------------------
30 June 2021
--------------------------------
Litigation
and Other Statutory
conduct operating operating
costs expenses expenses
Operating expenses GBPm GBPm GBPm
------------------------------ ---------- --------- --------- ---------- --------- ---------
Staff costs - 118 118
Premises and equipment - 18 18
Other administrative expenses (81) 148 67
Depreciation and amortisation - 5 5
------------------------------ ---------- --------- ---------
Total (81) 289 208
------------------------------ ---------- --------- --------- ---------- --------- ---------
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' or 'p' represent pence in the United
Kingdom
('UK'). References 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. The
abbreviation 'EUR' represents the 'euro', and the abbreviations
'EURm' and
'EURbn' represent millions and thousands of millions of euros,
respectively.
Statutory accounts
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 2021 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.
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.
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
strategies. In particular, this document may include
forward-looking statements relating to NWM Group in respect of, but
not limited to: its economic and political risks, its regulatory
capital position and related requirements, its financial position,
profitability and financial performance (including financial,
capital, cost savings and operational targets), NWM Group's
strategic and structural change 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, the
impact of the COVID-19 pandemic, its exposure to third party risks,
its ongoing compliance with the UK ring-fencing regime and ensuring
operational continuity in resolution, its impairment losses and
credit exposures under certain specified scenarios, substantial
regulation and oversight, ongoing legal, regulatory and
governmental actions and investigations, the transition of LIBOR
and IBOR rates to alternative risk free rates and NWM Group's
exposure to operational risk, conduct risk, cyber, data and IT
risk, financial crime 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 outcome of legal,
regulatory and governmental actions and investigations, the level
and extent of future impairments and write-downs, legislative,
political, fiscal and regulatory developments, accounting
standards, competitive conditions, technological developments,
interest and exchange rate fluctuations, general economic and
political conditions, the impact of climate related risks and the
transitioning to a net zero economy and the impact of the COVID-19
pandemic. 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 2021 Annual Report and Accounts (ARA),
NWM Plc's Registration Document, NWM Plc's Interim Results for Q1
2022 and H1 2022 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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END
IR BKFBQNBKBQOB
(END) Dow Jones Newswires
July 29, 2022 02:00 ET (06:00 GMT)
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