Source - RNS
RNS Number : 6949U
NatWest Group plc
31 July 2020
 

 

 

  Interim Results 2020

 

 

 

 

 

 

 

  www.natwestgroup.com

 

 

 

NatWest Group plc

Interim Results for the period ending 30 June 2020

 

Alison Rose, Chief Executive Officer, commented:

"Our performance in the first half of the year has been significantly impacted by the challenges and uncertainty our economy continues to face as a result of Covid-19. However, NatWest Group has a robust capital position, underpinned by a resilient, capital generative and well diversified business.

 

Throughout this crisis we have provided exceptional levels of support to our customers, colleagues and the communities we serve. I am proud that our colleagues have consistently shown they are putting our purpose at the heart of everything they do.

 

Through our strong balance sheet and prudent approach to risk, we are well placed not only to withstand Covid-19 related impacts but also to provide the right support to those who will need it most in the tough times to come.

 

O ur purposeful strategy will help our customers, colleagues and communities to recover, rebuild and, ultimately, to thrive. We are building a sustainable business that will generate lasting value for all our stakeholders, as we work together to create a greener, fairer and more inclusive economy."

 

Financial performance in a challenging environment

H1 2020 operating loss before tax of £770 million and operating profit before impairment losses of £2,088 million.

 

Net impairment losses of £2,858 million in H1 2020, or 159 basis points of gross customer loans, resulted in an expected credit loss (ECL) coverage ratio of 1.72% across the Personal and Wholesale portfolios.

 

In comparison to H1 2019, across the retail and commercial businesses income decreased by 9.0% whilst NatWest Markets income excluding asset disposals/strategic risk reduction, own credit adjustments (OCA) and notable items increased by 44.4%.

 

Bank net interest margin (NIM) of 1.67% was 22 basis points lower than Q1 2020 reflecting the contraction of the yield curve, 10 basis points, the impact of a change in the mix of lending, 5 basis points, and excess levels of central liquidity, 7 basis points.

 

Other expenses, excluding operating lease depreciation (OLD), were £41 million lower than H1 2019.

 

 

Robust balance sheet with strong capital and liquidity levels

We have maintained absolute and relative capital strength and retain significant headroom above the regulatory minimum. CET1 ratio of 17.2% was 60 basis points higher than Q1 2020, benefiting from a £3.7 billion reduction in RWAs. In addition, the attributable loss for the quarter was more than offset by a c.70 basis point increase in IFRS 9 transitional relief.

The liquidity coverage ratio (LCR) is strong at 166%, 14 percentage points higher than Q1 2020 reflecting the significant increase in customer deposits.

Across the retail and commercial businesses net lending increased by £16.0 billion during H1 2020, of which £8.4 billion  related to drawdowns against UK Government lending initiatives and £7.6 billion was due to mortgages.

Customer deposits increased by £39.1 billion in H1 2020 to £408.3 billion, as customers sought to retain liquidity and reduced spending as a result of government measures in relation to Covid-19.

 

 

Outlook (1)

 

We remain committed to achieving a £250 million cost reduction in 2020 and expect strategic costs to be within our £0.8-1.0 billion guidance after recognising property related charges in Q2 2020.

 

We believe the full year 2020 impairment charge is likely to be in the range of £3.5-4.5 billion. Impairment charges in the second half of 2020 will be driven by a combination of the developing economic outlook for the UK and Republic of Ireland, along with the effectiveness of government support schemes in delaying and reducing the level of economic distress experienced by our personal and commercial customers, and the absolute level of defaults across lending portfolios and associated ECL stage migration.

 

We expect RWAs to be in the range of £185-195 billion at the end of 2020. Changes in RWAs in the second half of 2020 will be driven by the delivery of targeted reductions in NatWest Markets, the level of procyclical inflation driven by the economic outlook, downgrades in the credit quality and assessments in the commercial book and ongoing demand for lending from our customers.

 

We continue to target a reduction in NatWest Markets RWAs to £32 billion by the end of 2020, with income disposal losses of around £0.2 billion, subject to market conditions. We are now intending to achieve the majority of the expected medium term reduction in NatWest Markets RWAs by the end of 2021, while managing the associated income disposal losses to around £0.6 billion over the two years.

 

We continue to monitor events closely and assess potential scenarios and outcomes. The multiple economic scenarios underpinning our guidance are disclosed on pages 28-35. The impacts of Covid-19 on the economy and the mitigating benefits of government support schemes remain uncertain and could result in changes to our financial results in upcoming periods, including the possible impairment of goodwill. 

 

N ote:

(1)  The guidance, 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 108 and 109 of this announcement, pages 29-31 of NatWest Group plc's (formerly The Royal Bank of Scotland Group plc) Q1 IMS and pages 281 to 295 of NatWest Group plc's 2019 Annual Report & Accounts. These statements constitute forward-looking statements. Refer to Forward-looking statements in this announcement.

 

Our Purpose in action - we champion potential, helping people, families and businesses to thrive

 

Helping our colleagues and customers through the impacts of Covid-19

 

Provided lending support to our customers with a disciplined approach to risk and value creation:

· Approved £10.1 billion through the government lending initiatives(1,2).

· Facilitated approximately £7.4 billion of Covid-19 Corporate Financing Facilities (CCFF) issuances(2).

 

Supported the financial health of our customers:

· Helped approximately 240,000 customers with an initial three month mortgage repayment holiday and provided payment holidays, of up to twelve months, on approximately 71,000 business customer accounts(2).

· Delivered approximately £2.0 million of cash to vulnerable customers' homes(2)

 

Long-term investment plan is powering our operational effectiveness:

· Increased digital adoption with over 500,000 new mobile app downloads and over 485,000 new online banking customers(2).

· Launched digital credit scoring in our mobile app with a net promoter score of +52(3).

 

Partnered to proactively respond and support UK communities:

· Supported the National Emergencies Trust by raising £10 million through matched customer donations.

· Donated £1 million to eight existing debt management not-for-profit partners.

 

Prioritised the wellbeing of our colleagues;

· Enabled over 50,000 colleagues to work from home, including over three quarters of our contact centre colleagues.

· Ensured that all colleagues continue to be paid as normal until September if they need to take some time to look after their families, are unable to work from home or if they are ill.

 

H1 2020 progress against our three chosen areas of focus

 

Enterprise - addressing barriers to enterprise and business creation:

· Migrated our twelve accelerator hubs to digital channel delivery.

· Digitised our Dream Bigger programme which supports the next generation of female entrepreneurs.

· Launched a £5 million Enterprise Relief Fund in partnership with The Prince's Trust.

 

Learning - skill building, particularly around financial confidence:

· Reached approximately two million people through financial capability interactions including live MoneySense lessons on social media platforms(2).

· Helped approximately 305,000 additional customers to start saving(2).

· Over 1 million downloads of Island Saver, the world's first financial education console and PC game.  

 

Climate - supporting the necessary transition to a low carbon economy:

· NatWest Group plc issued a green MREL bond, the first green bond issued in USD by a UK bank, with $600 million of proceeds allocated to renewable energy projects.

· NatWest Group has recently joined the UNEP FI PRB Collective Commitment on Climate Action and is the first major UK bank to join the Partnership for Carbon Accounting (PCAF), two important global initiatives that signal our level of commitment to measuring and reducing our climate impact in accordance with the 2015 Paris Agreement.

· Helped our customers through c.£4.0 billion of new sustainable financing and funding for H1 2020.

 

 

 

 

 

 

 

 

Notes:

(1)  Inclusive of Commercial Banking and Private Banking: Bounce Back Loan Scheme (BBLS) - £6.1 billion; Coronavirus Business Interruption Loan Scheme (CBILS) - £3.3 billion; Coronavirus Large Business Interruption Loan Scheme (CLBILS) - £0.7 billion.

(2)  As at 30 June 2020.

(3)  As at 3 April 2020.

 

 

Business performance summary

 

 

Half year ended

 

Quarter ended

 

30 June

30 June

 

30 June

31 March

30 June

Performance key metrics and ratios

2020

2019

 

2020

2020

2019

Profit before impairment losses

£2,088m

£3,017m

 

£767m

£1,321m

£1,918m

Operating (loss)/profit before tax

(£770m)

£2,694m

 

(£1,289m)

£519m

£1,681m

(Loss)/profit attributable to ordinary shareholders

(£705m)

£2,038m

 

(£993m)

£288m

£1,331m

Bank net interest margin (NatWest Group NIM

 

 

 

 

 

 

  excluding NWM) (1)

1.78%

2.04%

 

1.67%

1.89%

2.02%

Bank average interest earning assets (NatWest Group

 

 

 

 

 

 

  excluding NWM) (1)

£440bn

£407bn

 

£458bn

£422bn

£410bn

Cost:income ratio (1)

63.8%

57.2%

 

70.9%

57.7%

52.6%

Loan impairment rate (1)

159bps

21bps

 

229bps

90bps

30bps

Earnings per share

 

 

 

 

 

 

  - basic

(5.8p)

16.9p

 

(8.2p)

2.4p

11.0p

  - basic fully diluted

(5.8p)

16.8p

 

(8.2p)

2.4p

11.0p

Return on tangible equity (1)

(4.4%)

12.1%

 

(12.4%)

3.6%

15.8%

Average tangible equity

£32bn

£34bn

 

£32bn

£32bn

£34bn

Average number of ordinary shares

 

 

 

 

 

 

  outstanding during the period (millions)

 

 

 

 

 

 

  - basic

12,079

12,058

 

12,085

12,074

12,069

  - basic fully diluted (2)

12,101

12,096

 

12,107

12,100

12,104

 

 

 

 

 

 

 

 

 

 

 

30 June

31 March

31 December

Balance sheet related key metrics and ratios

 

 

 

2020

2020

2019

Total assets

 

 

 

£806.9bn

£817.6bn

£723.0bn

Funded assets (1)

 

 

 

£623.5bn

£608.9bn

£573.0bn

Loans to customers - amortised cost

 

 

 

£352.3bn

£351.3bn

£326.9bn

Impairment provisions

 

 

 

£6.1bn

£4.2bn

£3.7bn

Customer deposits

 

 

 

£408.3bn

£384.8bn

£369.2bn

 

 

 

 

 

 

 

Liquidity coverage ratio (LCR)

 

 

 

166%

152%

152%

Liquidity portfolio

 

 

 

£243bn

£201bn

£199bn

Net stable funding ratio (NSFR) (3)

 

 

 

144%

138%

141%

Loan:deposit ratio (1)

 

 

 

86%

91%

89%

Total wholesale funding

 

 

 

£86bn

£86bn

£75bn

Short-term wholesale funding

 

 

 

£22bn

£32bn

£19bn

 

 

 

 

 

 

 

Common equity tier (CET1) ratio (4)

 

 

 

17.2%

16.6%

16.2%

Total capital ratio

 

 

 

22.5%

21.4%

21.2%

Pro forma CET1 ratio, pre dividend accrual (5)

 

 

 

17.2%

16.6%

17.0%

Risk-weighted assets (RWAs)

 

 

 

£181.5bn

£185.2bn

£179.2bn

CRR leverage ratio

 

 

 

5.1%

5.1%

5.1%

UK leverage ratio

 

 

 

6.0%

5.8%

5.8%

 

 

 

 

 

 

 

Tangible net asset value (TNAV) per ordinary share

 

 

 

264p

273p

268p

Tangible net asset value (TNAV) per ordinary share - fully diluted (1,2)

 

 

263p

272p

267p

Tangible equity

 

 

 

£32,006m

£32,990m

£32,371m

Number of ordinary shares in issue (millions)

 

 

 

12,125

12,094

12,094

Number of ordinary shares in issue (millions) - fully diluted (2,6)

 

 

12,147

12,116

12,138

 

 

Notes:

(1)  Refer to the Appendix for details of basis of preparation and reconciliation of non-IFRS financial and performance measures where relevant.

(2)  Includes the effect of dilutive share options and convertible securities. Dilutive shares on an average basis for H1 2020 were 22 million shares and for Q2 2020 were 22 million shares; (Q1 2020 - 26 million shares, H1 2019 - 38 million shares; Q2 2019 - 35 million shares), and as at 30 June 2020 were 22 million shares (31 March 2020 - 22 million shares; 31 December 2019 - 44 million shares).

(3)  NSFR reported in line with CRR2 regulations finalised in June 2019.

(4)  Based on CRR end point including the IFRS 9 transitional adjustment of £1.6 billion. Excluding this adjustment, the CET 1 ratio would be 16.3%.

(5)  At June 2020 and March 2020 there was no charge in CET1 for foreseeable dividends or charges. The pro forma CET 1 ratio at 31 December 2019 excludes foreseeable charges of £968 million for ordinary dividends (3p per share final dividend and 5p per share special dividend) and £365 million pension contribution.

(6)  Includes 16 million shares held by the Employee Benefit Trust (31 March 2020 -18 million shares; 31 December 2019 - 15 million shares).

 

 

 

Summary consolidated income statement for the period ended 30 June 2020

 

 

Half year ended

 

Quarter ended

 

30 June

30 June

 

30 June

31 March

30 June

 

2020

2019

 

2020

2020

2019

Net interest income

3,852

4,004

 

1,910

1,942

1,971

 

 

 

 

 

 

 

Own credit adjustments

53

(46)

 

(102)

155

(3)

Strategic disposals

-

1,035

 

-

-

1,035

Other non-interest income

1,933

2,124

 

868

1,065

1,077

 

 

 

 

 

 

 

Non-interest income

1,986

3,113

 

766

1,220

2,109

 

 

 

 

 

 

 

Total income

5,838

7,117

 

2,676

3,162

4,080

 

 

 

 

 

 

 

Litigation and conduct costs

89

(60)

 

85

4

(55)

Strategic costs

(464)

(629)

 

(333)

(131)

(434)

Other expenses

(3,375)

(3,411)

 

(1,661)

(1,714)

(1,673)

 

 

 

 

 

 

 

Operating expenses

(3,750)

(4,100)

 

(1,909)

(1,841)

(2,162)

 

 

 

 

 

 

 

Profit before impairment losses

2,088

3,017

 

767

1,321

1,918

Impairment losses

(2,858)

(323)

 

(2,056)

(802)

(237)

 

 

 

 

 

 

 

Operating (loss)/profit before tax

(770)

2,694

 

(1,289)

519

1,681

Tax credit/(charge)

208

(194)

 

396

(188)

22

 

 

 

 

 

 

 

(Loss)/profit for the period

(562)

2,500

 

(893)

331

1,703

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

Ordinary shareholders

(705)

2,038

 

(993)

288

1,331

Preference shareholders

16

20

 

8

8

10

Paid-in equity shareholders

192

182

 

95

97

92

Non-controlling interests

(65)

260

 

(3)

(62)

270

 

 

 

 

 

 

 

Notable items within total income

 

 

 

 

 

 

Alawwal bank merger gain in NatWest Markets

-

444

 

-

-

444

FX recycling (loss)/gain in Central items & other

(103)

290

 

(39)

(64)

290

Legacy liability release in Central items & other

-

256

 

-

-

256

Liquidity Asset Bond sale gain

110

11

 

17

93

1

IFRS volatility in Central items & other

(11)

17

 

55

(66)

21

NatWest Markets asset disposals/strategic risk reduction (1)

(63)

(27)

 

(63)

-

(23)

 

Note:

(1)

Asset disposals/strategic risk reduction in 2020 relates to the cost of exiting positions and the impact of risk reduction transactions entered into, in respect of the strategic announcement on 14 February 2020. Prior period comparatives refer to the previously disclosed NatWest Markets legacy business disposal losses.

 

 

 

 

 

Income statement overview

H1 2020 compared with H1 2019

Income across the retail and commercial businesses decreased by 9.0% reflecting the contraction of the yield curve, mortgage margin dilution, lower business activity and lower consumer spending, resulting from government measures in response to Covid-19. Partially offsetting, we have seen strong gross new mortgage lending in UK Personal Banking with drawdowns against UK Government lending initiatives and increased utilisation of revolving credit facilities (RCFs) in Commercial Banking, whilst maintaining a disciplined approach to risk.

NatWest Markets income excluding asset disposals/strategic risk reduction, OCA and notable items increased by 44.4% reflecting increased customer activity as the market reacted to the spread of the Covid-19 virus, partially offset by the impact of credit market write-downs.

Litigation and conduct costs included a £250 million PPI release reflecting lower than predicted valid complaints volumes, partially offset by other charges.

Strategic costs of £464 million in H1 2020 included an £83 million charge related to technology spend, £155 million related to property charges and a £120 million direct charge in NatWest Markets primarily related to restructuring activity.

Other expenses, excluding OLD, decreased by £41 million, or 1.2%, and headcount reduced by c.3,900, or 5.9%. We have maintained a focus on driving underlying cost reductions and efficiencies across the business through the continued shift from physical to digital, process improvements and property savings.

The net impairment loss of £2,858 million, 159 basis points of gross customer loans, reflected the deterioration of the economic outlook. As a result the ECL coverage ratio across the Personal and Wholesale portfolios increased from 1.02% to 1.72%.

 

 

Q2 2020 compared with Q1 2020

Income across the retail and commercial businesses decreased by £176 million reflecting the contraction of the yield curve, reduced business activity and lower consumer spending, resulting from government measures in response to Covid-19. Partially offsetting, we have seen strong balance growth in Commercial Banking, largely relating to drawdowns against UK Government lending initiatives.

NatWest Markets income excluding asset disposals/strategic risk reduction and OCA increased by £50 million. Income from Financing increased as credit markets stabilised, supported by central bank actions, whilst Rates and Currencies decreased as the volatility seen towards the end of Q1 2020 eased.

Strategic costs of £333 million in Q2 2020 included a £44 million charge related to technology spend, £148 million related to property charges and an £86 million direct charge in NatWest Markets primarily related to restructuring activity.

Other expenses, excluding OLD, decreased by £54 million reflecting reduced investment spend and other cost saving initiatives. Headcount decreased by c.500.

The net impairment loss of £2,056 million, 229 basis points of gross customer loans, reflected the deterioration of the economic outlook. As a result the ECL coverage ratio across the Personal and Wholesale portfolios increased from 1.18% to 1.72%.

 

 

Q2 2020 compared with Q2 2019

Income across the retail and commercial businesses decreased by 11.4% whilst NatWest Markets income excluding asset disposals/strategic risk reduction, OCA and notable items increased by 62.2%.

Other expenses, excluding OLD, decreased by £15 million, or 0.9%.

 

 

 

 

 

 

 

Business performance summary

UK Personal Banking

 

Half year ended

 

Quarter ended

 

30 June

30 June

 

30 June

31 March

30 June

 

2020

2019

 

2020

2020

2019

 

£m

£m

 

£m

£m

£m

Total income

2,185

2,447

 

1,035

1,150

1,202

Operating expenses

(1,075)

(1,229)

 

(546)

(529)

(594)

Impairment losses

(657)

(181)

 

(360)

(297)

(69)

Operating profit

453

1,037

 

129

324

539

Return on equity

10.7%

25.6%

 

5.7%

15.5%

26.5%

Net interest margin

2.23%

2.57%

 

2.18%

2.28%

2.51%

Cost:income ratio

49.2%

50.2%

 

52.8%

46.0%

49.4%

 

 

 

 

 

 

 

 

 

 

 

As at

 

 

 

 

30 June

31 March

31 December

 

 

 

 

2020

2020

2019

 

 

 

 

£bn

£bn

£bn

Net loans to customers (amortised cost)

 

 

 

164.5

163.7

158.9

Customer deposits

 

 

 

161.0

152.8

150.3

RWAs

 

 

 

36.7

38.2

37.8

Loan impairment rate

 

 

 

87bps

72bps

20bps

 

Note:

(1)

 

Comparisons with prior periods are impacted by the transfer of the Private Client Advice business to Private Banking from 1 January 2020. The net impact on H1 2019 operating profit would have been to decrease total income by £22 million and operating expenses by £4 million. The net impact on the H1 2019 balance sheet would have been to decrease customer deposits by £0.3 billion. The net impact on Q2 2019 operating profit would have been to decrease total income by £11 million and operating expenses by £2 million. The net impact on the Q4 2019 balance sheet would have been to decrease customer deposits by £0.2 billion.

 

 

UK Personal Banking continues to support customers whose income has been impacted by Covid-19. We had 240,000 mortgage customers request an initial three month mortgage repayment holiday, representing 20% of the book by volume. To support mortgage customers who continue to be impacted, we are offering a range of options from a full payment holiday to part payments for a further three months; of those who have rolled off their initial repayment holiday, and who have reviewed their options and taken action, approximately one third have requested a further extension. Additionally, we offered the option of three month payment deferrals on loans, with 72,000, or 7%, of loan customers taking up the offer.

 

 

H1 2020 compared with H1 2019

Total income decreased by £262 million, or 10.7%, due to lower deposit hedge income, mortgage margin dilution and lower fee income on overdrafts, partially offset by strong balance growth.

Excluding strategic, litigation and conduct costs, operating expenses increased by £17 million, or 1.5%, due to one-off releases in Q2 2019 partially offset by a reduction in staff costs associated with a 9.3% reduction in headcount.

Litigation and conduct costs include a £250 million PPI release reflecting lower than predicted valid complaints volumes.

Impairment losses of £657 million increased by £476 million primarily reflecting stage two charges linked to a forecast rise in unemployment and decline in HPI under a deteriorating economic outlook.

Net loans to customers increased by £12.6 billion, or 8.3%, as a result of strong gross new mortgage lending and lower redemptions. Gross new mortgage lending was £16.5 billion with market flow share of approximately 14%, supporting a stock share of approximately 10.5%. Personal advances and cards reduced by £0.2 billion and £0.3 billion respectively, reflecting lower spend and higher repayments as a result of Covid-19.

Customer deposits increased by £13.5 billion, or 9.2%, with stronger than normal growth as government backed initiatives for Covid-19, combined with lockdown restrictions, resulted in lower customer spend and increased savings.

RWAs remained broadly stable as mortgage lending growth was largely offset by lower unsecured balances, with no pro-cyclicality evident to date.

Q2 2020 compared with Q1 2020

Total income decreased by £115 million due to lower overdraft fees, Covid-19 support measures, significantly reduced card spend, which resulted in lower fees and lower unsecured balances, and the non-repeat of the annual insurance profit share. Net interest margin decreased by 10 basis points reflecting lower personal advances and cards balances and continued structural pressure in the mortgage business, as blended front book margins of around 124 basis points remain lower than the back book margin of approximately 138 basis points, partially offset by lower customer deposit rates payable. In the latter part of June 2020 blended front book application margins were around 130 basis points as spreads in the market continued to widen.

Impairment losses of £360 million increased by £63 million, primarily reflecting stage two charges linked to a forecast rise in unemployment and decline in HPI under a deteriorating economic outlook.

Net loans to customers increased by £0.8 billion due to mortgage growth of £1.9 billion, with lower consumer demand and increased repayments impacting unsecured. Personal advances and cards reduced by £0.4 billion respectively, as customers spent less and made repayments.

Customer deposits increased by £8.2 billion as customer spend reduced and savings increased as a result of Covid-19.

Q2 2020 compared with Q2 2019

Total income decreased by £167 million, or 13.9%, primarily reflecting lower overdraft fees, lower deposit hedge income and mortgage margin dilution.

 

 

Business performance summary

Ulster Bank RoI

 

Half year ended

 

Quarter ended

 

30 June

30 June

 

30 June

31 March

30 June

 

2020

2019

 

2020

2020

2019

 

€m

€m

 

€m

€m

€m

Total income

285

324

 

135

150

158

Operating expenses

(283)

(322)

 

(140)

(143)

(166)

Impairment losses/releases

(278)

24

 

(246)

(32)

11

Operating (loss)/profit

(276)

26

 

(251)

(25)

3

Return on equity

(24.2%)

2.1%

 

(44.5%)

(4.2%)

0.6%

Net interest margin

1.52%

1.63%

 

1.48%

1.56%

1.62%

Cost:income ratio

98.4%

99.3%

 

101.7%

95.3%

105.1%

 

 

 

 

 

 

 

 

 

 

 

As at

 

 

 

 

30 June

31 March

31 December

 

 

 

 

2020

2020

2019

 

 

 

 

€bn

€bn

€bn

Net loans to customers (amortised cost)

 

 

 

20.5

21.2

21.4

Customer deposits

 

 

 

22.0

21.9

21.7

RWAs

 

 

 

14.1

14.4

15.3

Loan impairment rate

 

 

 

460bps

58bps

9bps

 

Ulster Bank RoI continues to support all customers, including those who have been impacted by Covid-19. We have launched our digital Home Buying Platform, supporting customers to complete a mortgage application online, temporarily reduced our overdraft charges and we continue to support our vulnerable and elderly customers through our Companion card, dedicated helpline, priority banking hours and proactive outbound care calls. We have also provided mortgage payment breaks for approximately 12,000 customers, with over 4,000 extensions approved as at 30 June 2020. In our commercial business, we have provided payment breaks for approximately 3,000 customers and we continue to work closely with the Irish Government in providing customers with assistance through existing support schemes and the Credit Guarantee Scheme launched in July 2020.

 

H1 2020 compared with H1 2019

Total income decreased by €39 million, or 12.0%, reflecting lower business activity resulting from the impact of Covid-19 on our customers and our business, the non-repeat of €11 million income relating to the restructure of interest rate swaps on free funds, and interest rate and foreign exchange movements.

Excluding strategic, litigation and conduct costs, operating expenses decreased by €6 million, or 2.2%, reflecting a 9.7% headcount reduction, including the scale down of our services and other functional teams, and lower project costs, which in H1 2019 included costs related to the improvement of the Ulster Bank RoI risk management framework.

Impairment losses of €278 million increased by €302 million due to the impact across all portfolios from the deterioration in the economic outlook caused by Covid-19.

Net loans to customers decreased by €0.7 billion, or 3.3%, which included the net de-recognition of €0.2 billion of non-performing loans (NPL) from a sale agreed in Q4 2019, and an increase in loan provisions against the remaining loans. Gross new lending of €1.1 billion was 29.0% lower, with Q2 2020 impacted by lower demand primarily related to Covid-19 factors.

Customer deposits increased by €0.7 billion, or 3.3%, supporting a reduction in the loan:deposit ratio to 93% from 100%.

RWAs decreased by €1.7 billion, or 10.8%, largely due to model recalibrations and the de-recognition of NPLs in H1 2020.

 

Q2 2020 compared with Q1 2020

Total income decreased by €15 million mainly due to lower personal and commercial fees. Net interest margin decreased by 8 basis points reflecting the impact of negative rates on increased liquid assets.

Excluding strategic, litigation and conduct costs, operating expenses were €3 million lower due to reduced marketing and administration costs and foreign exchange movements.

Impairment losses increased by €214 million due to the deterioration in the economic outlook.

Net loans to customers decreased by €0.7 billion due to an increase in provisions together with loan repayments outweighing gross new lending, which was adversely impacted by lower demand largely as a result of Covid-19. Gross new lending was €0.4 billion, €0.3 billion lower than Q1 2020.

RWAs decreased by €0.3 billion due to model recalibrations and the impact of the NPL sale.

 

Q2 2020 compared with Q2 2019

Total income decreased by €23 million reflecting the impact of Covid-19, particularly on fee income due to lower transaction levels and implementation of waivers on both personal and commercial products.

 

 

Business performance summary

Commercial Banking

 

Half year ended

 

Quarter ended

 

30 June

30 June

 

30 June

31 March

30 June

 

2020

2019

 

2020

2020

2019

 

£m

£m

 

£m

£m

£m

Total income

2,003

2,165

 

995

1,008

1,083

Operating expenses

(1,221)

(1,262)

 

(611)

(610)

(622)

Impairment losses

(1,790)

(202)

 

(1,355)

(435)

(197)

Operating (loss)/profit

(1,008)

701

 

(971)

(37)

264

Return on equity

(17.9%)

8.8%

 

(32.5%)

(2.5%)

6.2%

Net interest margin

1.76%

1.98%

 

1.70%

1.83%

1.97%

Cost:income ratio

59.5%

56.9%

 

59.9%

59.1%

56.1%

 

 

 

 

 

 

 

 

 

 

 

As at

 

 

 

 

30 June

31 March

31 December

 

 

 

 

2020

2020

2019

 

 

 

 

£bn

£bn

£bn

Net loans to customers (amortised cost)

 

 

 

112.0

109.2

101.2

Customer deposits

 

 

 

159.6

143.9

135.0

RWAs

 

 

 

78.3

76.9

72.5

Loan impairment rate

 

 

 

472bps

157bps

32bps

 

Commercial Banking continues to support customers through a comprehensive package of initiatives including participation in the UK Government's financial support schemes. As at H1 2020, £6.1 billion BBLS loans, £3.2 billion of CBILS loans and £0.7 billion of CLBILS loans had been approved and payment holidays, for up to twelve months, provided on c.71,000 customer accounts, representing c.12% of the lending book by value.

 

H1 2020 compared with H1 2019

Total income decreased by £162 million, or 7.5%, reflecting £108 million lower non interest income due to reduced business activity and £54 million lower net interest income as a result of the contraction of the yield curve, partially offset by balance sheet growth.

Excluding strategic, litigation and conduct costs, operating expenses increased by £41 million, or 3.7%, reflecting a number of one-off releases in Q2 2019, higher innovation spend and a £5 million increase in OLD, partially offset by a 1.9% reduction in headcount following operating model efficiencies in H2 2019 and lower non staff costs.

Impairment losses of £1,790 million primarily from stage one and two charges reflecting the deterioration in the economic outlook, with total stage three charges of £236 million, including a small number of single name charges.

Net loans to customers increased by £10.6 billion, or 10.5%, with a £10.8 billion increase in H1 2020 reflecting drawdowns against UK Government lending schemes and £4.1 billion increased RCF utilisation.

Customer deposits increased by £26.2 billion, or 19.6%, principally due to a £24.6 billion increase in H1 2020 as customers sought to retain liquidity in light of Covid-19 uncertainty.

RWAs increased by £0.5 billion, or 0.6%, due to increased lending volumes and risk parameter changes, partially offset by a £4.5 billion reduction related to model improvements and active capital management, with limited procyclicality evident to date

 

Q2 2020 compared with Q1 2020

Total income decreased by £13 million as lower deposit funding benefits and reduced business activity offset balance sheet growth. Net interest margin decreased by 13 basis points mainly reflecting lower deposit funding benefits and higher liquidity portfolio costs.

Excluding strategic, litigation and conduct costs, operating expenses remained broadly stable as higher back office operations costs and a £1 million increase in OLD were partially offset by lower non-staff costs.

Impairment losses of £1,355 million primarily from stage one and two charges reflecting the deterioration in the economic outlook, with total stage three charges of £169 million, including a small number of single name charges.

Net loans to customers increased by £2.8 billion reflecting drawdowns against UK Government lending schemes, including £5.8 billion related to BBLS, £2.3 billion related to CBILS and £0.2 billion related to CLBILS, partially offset by £2.3 billion net RCF repayments, lower specialised business lending and increased loan provisions. RCF utilisation decreased to c.32% of committed facilities following increased drawdowns in March and April 2020, but remained above pre-Covid-19 levels.

Customer deposits increased by £15.7 billion as customers sought to retain liquidity in light of Covid-19 uncertainty, including the retention of UK Government lending scheme drawdowns.

RWAs increased by £1.4 billion due to increased lending volumes, risk parameter changes and business transfers of £0.4 billion from NatWest Markets.

 

Q2 2020 compared with Q2 2019

Total income decreased by £88 million, or 8.1%, reflecting reduced business activity and the contraction of the yield curve, partially offset by balance sheet growth and an £8 million fair value and disposal gain in Q2 2020, compared with a £15 million loss in Q2 2019.

Excluding strategic, litigation and conduct costs, operating expenses increased by £47 million, or 9.0%, reflecting a number of one-off releases in Q2 2019, higher innovation spend and £3 million higher OLD, partially offset by a 1.9% reduction in headcount following operating model efficiencies in H2 2019 and lower non-staff costs.

 

 

Business performance summary

Private Banking (commentary adjusted for transfers)

 

Half year ended

 

Quarter ended

 

30 June

30 June

 

30 June

31 March

30 June

 

2020

2019

 

2020

2020

2019

 

£m

£m

 

£m

£m

£m

Total income

392

384

 

191

201

191

Operating expenses

(252)

(232)

 

(129)

(123)

(115)

Impairment (losses)/releases

(56)

3

 

(27)

(29)

(1)

Operating profit

84

155

 

35

49

75

Return on equity

8.2%

16.6%

 

6.6%

9.8%

15.9%

Net interest margin

2.20%

2.48%

 

2.14%

2.25%

2.44%

Cost:income ratio

64.3%

60.4%

 

67.5%

61.2%

60.2%

 

 

 

 

 

 

 

 

 

 

 

As at

 

 

 

 

30 June

31 March

31 December

 

 

 

 

2020

2020

2019

 

 

 

 

£bn

£bn

£bn

Net loans to customers (amortised cost)

 

 

 

16.0

15.8

15.5

Customer deposits

 

 

 

29.8

29.0

28.4

RWAs

 

 

 

10.4

10.3

10.1

Assets Under Management (AUMs)

 

 

 

27.1

24.3

23.2

Assets Under Administration (AUAs) (1)

 

 

 

2.7

2.4

7.2

Total Assets Under Management and Administration (AUMA)

 

 

 

29.8

26.7

30.4

Loan impairment rate

 

 

 

67bps

73bps

(3)bps

 

Notes:

(1)  Private Banking manages assets under management portfolios on behalf of UK Personal Banking and RBSI and receives a management fee in respect of providing this service.

(2)  Comparisons with prior periods are impacted by the transfer of the Private Client Advice business to Private Banking from 1 January 2020. The net impact on H1 2019 operating profit would have been to increase total income by £22 million and operating expenses by £4 million. The net impact on the H1 2019 balance sheet would have been to increase AUMs by £4.5 billion and customer deposits by £0.3 billion. The net impact on Q2 2019 operating profit would have been to increase total income by £11 million and operating expenses by £2 million. The net impact on the Q4 2019 balance sheet would have been to increase AUMs by £4.6 billion and customer deposits by £0.2 billion. Variances in the commentary below have been adjusted for the impact of this transfer.

 

Private Banking remains committed to supporting clients through a range of initiatives during this period of significant uncertainty, including the provision of mortgage and loan repayment breaks and via participation in the UK Government's CBILS financial support scheme, with £146 million approved as at H1 2020.

 

H1 2020 compared with H1 2019

Total income decreased by £14 million, or 3.4%, primarily reflecting £11 million lower net interest income due to lower deposit income and asset margin compression, partially offset by balance sheet growth.

Excluding strategic, litigation and conduct costs, operating expenses increased by £24 million, or 11.1%, reflecting higher investment spend and a number of one-off items.

Impairment losses of £56 million, mainly reflected stage one and two charges linked to the deterioration of the economic outlook.

Net loans to customers increased by £1.3 billion, or 8.8%, reflecting mortgage lending and other loans growth. RWAs increased by £0.7 billion, or 7.2%, primarily reflecting increased lending volumes.

Customer deposits increased by £1.5 billion, or 5.3%, principally due to a £1.2 billion increase in H1 2020 reflecting an increase in instant access savings and current accounts.

Total AUMAs overseen by Private Banking increased by £0.9 billion, or 3.1%, reflecting net new business inflows of £1.2 billion partially offset by adverse market movements of £0.3 billion.

 

Q2 2020 compared with Q1 2020

Total income decreased by £10 million, primarily reflecting asset margin compression and a reduction in fee income, partially offset by balance sheet growth. Net interest margin decreased by 11 basis points mainly due to asset margin compression, lower deposit income and higher liquidity portfolio costs.

Excluding strategic, litigation and conduct costs, operating expenses increased by £5 million reflecting higher investment spend and a number of one-off items.

Impairment losses of £27 million, mainly reflected stage one and two charges linked to the deterioration of the economic outlook, partially offset by a single name release.

Customer deposits increased by £0.8 billion reflecting an increase in instant access savings and current accounts.

Total AUMAs overseen by Private Banking increased by £3.1 billion, reflecting positive investment performance of £2.9 billion and net new business inflows of £0.2 billion.

 

Q2 2020 compared with Q2 2019

Total income decreased by £11 million, or 5.4%, primarily reflecting lower deposit income, asset margin compression and a reduction in fee income, partially offset by balance sheet growth.

Excluding strategic, litigation and conduct costs, operating expenses increased by £18 million, or 17.1%, primarily reflecting higher investment spend and a number of one-off items.

 

 

Business performance summary

RBS International

 

Half year ended

 

Quarter ended

 

30 June

30 June

 

30 June

31 March

30 June

 

2020

2019

 

2020

2020

2019

 

£m

£m

 

£m

£m

£m

Total income

259

310

 

115

144

159

Operating expenses

(126)

(119)

 

(65)

(61)

(60)

Impairment (losses)/releases

(46)

3

 

(31)

(15)

2

Operating profit

87

194

 

19

68

101

Return on equity

11.8%

29.7%

 

4.3%

19.4%

30.8%

Net interest margin

1.30%

1.69%

 

1.15%

1.45%

1.68%

Cost:income ratio

48.6%

38.4%

 

56.5%

42.4%

37.7%

 

 

 

 

 

 

 

 

 

 

 

As at

 

 

 

 

30 June

31 March

31 December

 

 

 

 

2020

2020

2019

 

 

 

 

£bn

£bn

£bn

Net loans to customers (amortised cost)

 

 

 

12.7

13.6

14.1

Customer deposits

 

 

 

29.5

32.3

30.1

RWAs

 

 

 

6.8

6.8

6.5

Loan impairment rate

 

 

 

97bps

44bps

14bps

 

During H1 2020, RBS International supported 1,282 personal customers with mortgage repayment breaks, reflecting a mortgage value of £275 million, and 418 business customers with working capital facilities, reflecting a value of £452 million, while continuing to suspend a range of fees and charges for its personal and business customers.

 

H1 2020 compared with H1 2019

Total income decreased by £51 million, or 16.5%, primarily due to the impact of interest rate reductions on deposit income as well as £2 million lower payments income with the waiving of personal and commercial banking fees in Q2 2020 to support customers during Covid-19. 

Excluding strategic, litigation and conduct costs, operating expenses increased by £12 million, or 11.0%, mainly due to £6 million higher investment spend to enhance the digital proposition, £2 million Covid-19 incident costs and £3 million higher technology costs.

Impairment losses of £46 million included £25 million stage one and stage two charges reflecting the deterioration in the economic outlook and a £19 million charge related to a single client.

Net loans to customers decreased by £0.9 billion, or 6.6%, as Institutional Banking customers repaid facilities to position themselves in the uncertain environment.

Customer deposits increased by £1.4 billion, or 5.0%, as Institutional Banking customers sought to build liquidity in response to Covid-19 uncertainty.

 

Q2 2020 compared with Q1 2020

Total income decreased £29 million primarily due to £23 million lower deposit income resulting from the full quarter impact of the central bank rate reductions and £4 million lower lending income. Net interest margin decreased by 30 basis points due to lower deposit funding benefits as a result of interest rate changes by central banks.

Impairment losses of £31 million included £17 million stage one and two charges reflecting the deterioration in the economic outlook and a £13 million charge related to a single client.

Net loans to customers decreased by £0.9 billion as Institutional Banking customers responded to the uncertain economic outlook by repaying facilities.

Customer deposits decreased £2.8 billion due to lower call balances in the Institutional Banking sector as significant Q1 2020 inflows were used to fund loan repayments. Deposits in Local Banking increased by £0.4 billion, most notably in Local Corporate and Everyday Banking.

 

Q2 2020 compared with Q2 2019

Total income decreased by £44 million, or 27.7%, due to lower deposit funding benefits, and lower fee income reflecting the economic response to Covid-19 with central bank rate reductions and fee waivers.

Excluding strategic, litigation and conduct costs, operating expenses increased by £7 million, or 13.0%, reflecting higher investment spend and Covid-19 incident costs.

 

 

 

 

Business performance summary

NatWest Markets(1)

 

Half year ended

 

Quarter ended

 

30 June

30 June

 

30 June

31 March

30 June

 

2020

2019

 

2020

2020

2019

 

£m

£m

 

£m

£m

£m

Total income

816

942

 

273

543

686

of which:

 

 

 

 

 

 

  - Income excluding asset disposals/strategic risk

 

 

 

 

 

 

  reduction and own credit adjustments

826

989

 

438

388

691

  - Asset disposals/strategic risk reduction (2)

(63)

-

 

(63)

-

-

  - Own credit adjustments

53

(47)

 

(102)

155

(5)

Operating expenses

(707)

(678)

 

(365)

(342)

(344)

Impairment (losses)/releases

(40)

36

 

(45)

5

20

Operating profit/(loss)

69

300

 

(137)

206

362

Return on equity

0.8%

1.0%

 

(7.1%)

8.7%

4.4%

Cost:income ratio

86.6%

72.0%

 

133.7%

63.0%

50.1%

 

 

 

 

 

 

 

 

 

 

 

As at

 

 

 

 

30 June

31 March

31 December

 

 

 

 

2020

2020

2019

 

 

 

 

£bn

£bn

£bn

Funded Assets

 

 

 

122.9

129.6

116.2

RWAs

 

 

 

35.1

38.9

37.9

 

Notes:

(1)  The NatWest Markets operating segment is not the same as the NatWest Markets Plc legal entity (NWM Plc) or group (NWM or NWM Group). For 2019, NWM Group includes NatWest Markets N.V. (NWM N.V.) from 29 November 2019 only. For periods prior to Q4 2019, NWM N.V. was excluded from the NWM Group. In both 2019 and 2020 the NatWest Markets segment excludes the Central items & other segment.

(2)  Asset disposals/strategic risk reduction in 2020 relates to the cost of exiting positions and the impact of risk reduction transactions entered into, in respect of the strategic announcement on 14 February 2020.

Progress on strategic change

NatWest Markets continues to progress its strategy to refocus towards NatWest Group's corporate and institutional customers and reduce RWAs. During H1 2020, further refinements have been made to simplify the customer product suite, including exiting the Custom Index Trading business and the reduction of the third party market making offering in flow asset backed securities (ABS), residential mortgage backed securities (RMBS) and collateralised loan obligations (CLO). Additionally, NatWest Markets selected BNP Paribas as a strategic partner for the provision of execution and clearing of listed derivatives, following the decision to no longer offer these services for certain exchange traded derivatives, as announced in Q1 2020.

NatWest Markets continues to identify efficiency improvements. During Q2 2020 changes were made to the regional operating models in the US and APAC and actions were taken to drive closer alignment with NatWest Group, such as leveraging NatWest Group Technology infrastructure.

NatWest Markets has also actively identified and progressed RWA reduction, with a number of asset exits completed during Q2 2020. NatWest Markets continues to target an RWA reduction to £32 billion at the end of 2020.

 

H1 2020 compared with H1 2019

Total income decreased by £126 million, or 13.4%, reflecting a £444 million gain from the merger of Alawwal bank with Saudi British Bank (SABB) in H1 2019, partially offset by heightened customer activity and OCA movements. An OCA credit of £53 million compared with a £47 million charge in H1 2019 reflected the significant widening of credit spreads.

Income excluding asset disposals/strategic risk reduction, OCA and notable items increased by £254 million, or 44.4%, reflecting increased customer activity as the market reacted to the spread of the Covid-19 virus, resulting in higher levels of primary issuance from governments and increased secondary market activity in both the Rates and Currencies businesses, partially offset by the impact of credit market write-downs.

Excluding strategic, litigation and conduct costs, operating expenses decreased by £31 million, or 5.2%, primarily reflecting lower back office operational costs and initial reductions following the strategic announcement in February 2020.

RWAs decreased by £6.3 billion, or 15.2%, reflecting lower levels of counterparty and market risk which, despite recent turbulence, have trended downwards as the business seeks to reduce its RWAs.

 

Q2 2020 compared with Q1 2020

Income excluding asset disposals/strategic risk reduction and OCA increased by £50 million. Income from Financing increased as credit markets stabilised, supported by central bank actions, whilst Rates and Currencies decreased as the volatility seen towards the end of Q1 2020 eased. Asset disposal/strategic risk reduction losses of £63 million included a £40 million loss related to a single significant transaction.

Excluding strategic, litigation and conduct costs, operating expenses decreased by £27 million reflecting initial reductions following the strategic announcement in February 2020.

RWAs decreased by £3.8 billion as the business works towards its full year RWA target. Counterparty credit risk decreased by £1.5 billion reflecting the exit of specific positions and market risk decreased by £1.5 billion, as markets normalised. A reduction in credit risk of £0.8 billion included £0.4 billion of business transfers to Commercial Banking.

Q2 2020 compared with Q2 2019

Income excluding asset disposals/strategic risk reduction, OCA and notable items increased by £168 million, or 62.2%, reflecting heightened levels of customer activity in Q2 2020, as markets reacted to the Covid-19 pandemic.

 

Business performance summary

Central items & other

 

Half year ended

 

Quarter ended

 

30 June

30 June

 

30 June

31 March

30 June

 

2020

2019

 

2020

2020

2019

 

£m

£m

 

£m

£m

£m

Central items not allocated

(216)

284

 

(146)

(70)

337

 

Central items not allocated represented a £216 million operating loss in H1 2020 principally due to property related strategic costs, litigation and conduct charges and other treasury income. This compares with a £284 million gain in H1 2019 which primarily reflected FX recycling gains of £290 million and a legacy liability release of £256 million, both relating to the Alawwal bank merger.

 

 

 

Segment performance

 

 

Half year ended 30 June 2020

 

 

 

 

 

 

 

Central

Total

 

 

UK Personal

Ulster

 

Commercial

Private

RBS

 

NatWest

 items &

NatWest

 

 

Banking

Bank RoI

 

Banking

Banking

International

 

Markets

other (1)

Group

 

 

£m

£m

 

£m

£m

£m

 

£m

£m

£m

Income statement

 

 

 

 

 

 

 

 

 

 

Net interest income

1,982

194

 

1,370

251

201

 

(34)

(112)

3,852

Other non-interest income

203

55

 

633

141

58

 

797

46

1,933

Own credit adjustments

-

-

 

-

-

-

 

53

-

53

Total income

2,185

249

 

2,003

392

259

 

816

(66)

5,838

Direct expenses

- staff costs

(280)

(100)

 

(360)

(93)

(65)

 

(326)

(572)

(1,796)

 

- other costs

(104)

(42)

 

(149)

(47)

(27)

 

(94)

(1,116)

(1,579)

Indirect expenses

(785)

(92)

 

(630)

(101)

(29)

 

(149)

1,786

-

Strategic costs

- direct

(1)

(4)

 

(5)

-

(3)

 

(120)

(331)

(464)

 

- indirect

(103)

(8)

 

(70)

(10)

(5)

 

(16)

212

-

Litigation and conduct costs

198

1

 

(7)

(1)

3

 

(2)

(103)

89

Operating expenses

(1,075)

(245)

 

(1,221)

(252)

(126)

 

(707)

(124)

(3,750)

Operating profit/(loss) before impairment losses

1,110

4

 

782

140

133

 

109

(190)

2,088

Impairment losses

(657)

(243)

 

(1,790)

(56)

(46)

 

(40)

(26)

(2,858)

Operating profit/(loss)

453

(239)

 

(1,008)

84

87

 

69

(216)

(770)

Additional information

 

 

 

 

 

 

 

 

 

 

Return on equity  (2)

10.7%

(24.2%)

 

(17.9%)

8.2%

11.8%

 

0.8%

nm

(4.4%)

Cost:income ratio  (2)

49.2%

98.4%

 

59.5%

64.3%

48.6%

 

86.6%

nm

63.8%

Total assets (£bn)

187.1

27.6

 

186.0

23.9

31.5

 

303.8

47.0

806.9

Funded assets (£bn)

187.1

27.6

 

186.0

23.9

31.5

 

122.9

44.5

623.5

Net loans to customers - amortised cost (£bn)

164.5

18.7

 

112.0

16.0

12.7

 

11.4

17.0

352.3

Loan impairment rate (2)

79bps

248bps

 

311bps

70bps

72bps

 

nm

nm

159bps

Impairment provisions (£bn)

(1.9)

(0.9)

 

(3.0)

(0.1)

-

 

(0.2)

-

(6.1)

Impairment provisions - Stage 3 (£bn)

(0.9)

(0.6)

 

(1.2)

-

-

 

(0.1)

-

(2.8)

Customer deposits (£bn)

161.0

20.0

 

159.6

29.8

29.5

 

5.5

2.9

408.3

Risk-weighted assets (RWAs) (£bn)

36.7

12.8

 

78.3

10.4

6.8

 

35.1

1.4

181.5

RWA equivalent (RWAe) (£bn)

36.7

12.8

 

78.4

10.4

6.9

 

37.2

1.5

183.9

Employee numbers (FTEs - thousands)

17.5

2.8

 

10.2

2.0

1.8

 

5.0

23.4

62.7

Average interest earning assets (£bn)

178.6

25.7

 

156.5

23.0

31.2

 

38.0

nm

477.9

Net interest margin

2.23%

1.52%

 

1.76%

2.20%

1.30%

 

(0.18%)

nm

1.62%

Third party customer asset rate (3)

2.96%

2.27%

 

2.86%

2.65%

2.65%

 

nm

nm

nm

Third party customer funding rate (3)

(0.28%)

(0.12%)

 

(0.37%)

(0.25%)

(0.06%)

 

nm

nm

nm

 

For the notes to this table, refer to page 18.

 

 

Segment performance

 

 

Half year ended 30 June 2019

 

 

 

 

 

 

 

Central

Total

 

 

UK Personal

Ulster

 

Commercial

Private

RBS

 

NatWest

 items &

NatWest

 

 

Banking

Bank RoI

 

Banking

Banking

International

 

Markets

other (1)

Group

 

 

£m

£m

 

£m

£m

£m

 

£m

£m

£m

Income statement

 

 

 

 

 

 

 

 

 

 

Net interest income

2,084

200

 

1,424

261

242

 

(122)

(85)

4,004

Other non-interest income

363

82

 

741

123

68

 

667

80

2,124

Own credit adjustments

-

1

 

-

-

-

 

(47)

-

(46)

Strategic disposals

-

-

 

-

-

-

 

444

591

1,035

Total income

2,447

283

 

2,165

384

310

 

942

586

7,117

Direct expenses

- staff costs

(300)

(104)

 

(356)

(82)

(59)

 

(349)

(591)

(1,841)

 

- other costs

(136)

(48)

 

(155)

(35)

(23)

 

(86)

(1,087)

(1,570)

Indirect expenses

(716)

(90)

 

(587)

(96)

(27)

 

(165)

1,681

-

Strategic costs

- direct

4

(9)

 

(32)

-

(5)

 

(49)

(538)

(629)

 

- indirect

(75)

(10)

 

(86)

(17)

(5)

 

(30)

223

-

Litigation and conduct costs

(6)

(20)

 

(46)

(2)

-

 

1

13

(60)

Operating expenses

(1,229)

(281)

 

(1,262)

(232)

(119)

 

(678)

(299)

(4,100)

Operating profit before impairment (losses)/releases

1,218

2

 

903

152

191

 

264

287

3,017

Impairment (losses)/releases

(181)

21

 

(202)

3

3

 

36

(3)

(323)

Operating profit

1,037

23

 

701

155

194

 

300

284

2,694

Additional information

 

 

 

 

 

 

 

 

 

 

Return on equity (2)

25.6%

2.1%

 

8.8%

16.6%

29.7%

 

1.0%

nm

12.1%

Cost:income ratio (2)

50.2%

99.3%

 

56.9%

60.4%

38.4%

 

72.0%

nm

57.2%

Total assets (£bn)

173.9

26.4

 

165.6

21.9

30.4

 

278.9

32.8

729.9

Funded assets (£bn)

173.9

26.4

 

165.6

21.9

30.4

 

133.4

32.7

584.3

Net loans to customers - amortised cost (£bn)

151.9

19.0

 

101.4

14.7

13.6

 

9.3

0.7

310.6

Loan impairment rate (2)

24bps

(21)bps

 

39bps

(4)bps

(4)bps

 

nm

nm

21bps

Impairment provisions (£bn)

(1.3)

(0.9)

 

(1.3)

-

-

 

(0.2)

-

(3.7)

Impairment provisions - Stage 3 (£bn)

(0.8)

(0.8)

 

(1.0)

-

-

 

(0.2)

-

(2.8)

Customer deposits (£bn)

147.5

19.0

 

133.4

28.0

28.1

 

2.8

2.8

361.6

Risk-weighted assets (RWAs) (£bn)

37.0

14.2

 

77.8

9.7

6.9

 

41.4

1.5

188.5

RWA equivalent (RWAe) (£bn)

38.1

14.5

 

79.3

9.7

7.0

 

46.1

1.8

196.5

Employee numbers (FTEs - thousands)

19.3

3.1

 

10.4

1.9

1.8

 

5.0

25.1

66.6

Average interest earning assets (£bn)

163.8

24.7

 

145.3

21.2

28.8

 

33.3

nm

440.3

Net interest margin

2.57%

1.63%

 

1.98%

2.48%

1.69%

 

(0.73%)

nm

1.83%

Third party customer asset rate (3)

3.28%

2.30%

 

3.20%

2.95%

1.75%

 

nm

nm

nm

Third party customer funding rate (3)

(0.37%)

(0.17%)

 

(0.43%)

(0.44%)

(0.14%)

 

nm

nm

nm

 

For the notes to this table, refer to page 18.

 

 

 

 

Segment performance

 

 

Quarter ended 30 June 2020

 

 

 

 

 

 

 

Central

Total

 

 

UK Personal

Ulster

 

Commercial

Private

RBS

 

NatWest

 items &

NatWest

 

 

Banking

Bank RoI

 

Banking

Banking

International

 

Markets

other (1)

Group

 

 

£m

£m

 

£m

£m

£m

 

£m

£m

£m

Income statement

 

 

 

 

 

 

 

 

 

 

Net interest income

975

97

 

696

124

90

 

6

(78)

1,910

Other non-interest income

60

23

 

299

67

25

 

369

25

868

Own credit adjustments

-

-

 

-

-

-

 

(102)

-

(102)

Total income

1,035

120

 

995

191

115

 

273

(53)

2,676

Direct expenses

- staff costs

(139)

(52)

 

(176)

(46)

(33)

 

(159)

(272)

(877)

 

- other costs

(45)

(18)

 

(71)

(23)

(13)

 

(37)

(577)

(784)

Indirect expenses

(393)

(46)

 

(324)

(54)

(15)

 

(75)

907

-

Strategic costs

- direct

(1)

(3)

 

-

-

(2)

 

(86)

(241)

(333)

 

- indirect

(69)

(4)

 

(34)

(5)

(2)

 

(8)

122

-

Litigation and conduct costs

101

1

 

(6)

(1)

-

 

-

(10)

85

Operating expenses

(546)

(122)

 

(611)

(129)

(65)

 

(365)

(71)

(1,909)

Operating profit/(loss) before impairment losses

489

(2)

 

384

62

50

 

(92)

(124)

767

Impairment losses

(360)

(216)

 

(1,355)

(27)

(31)

 

(45)

(22)

(2,056)

Operating profit/(loss)

129

(218)

 

(971)

35

19

 

(137)

(146)

(1,289)

Additional information

 

 

 

 

 

 

 

 

 

 

Return on equity (2)

5.7%

(44.5%)

 

(32.5%)

6.6%

4.3%

 

(7.1%)

nm

(12.4%)

Cost:income ratio (2)

52.8%

101.7%

 

59.9%

67.5%

56.5%

 

133.7%

nm

70.9%

Total assets (£bn)

187.1

27.6

 

186.0

23.9

31.5

 

303.8

47.0

806.9

Funded assets (£bn)

187.1

27.6

 

186.0

23.9

31.5

 

122.9

44.5

623.5

Net loans to customers - amortised cost (£bn)

164.5

18.7

 

112.0

16.0

12.7

 

11.4

17.0

352.3

Loan impairment rate (2)

87bps

441bps

 

472bps

67bps

97bps

 

nm

nm

229bps

Impairment provisions (£bn)

(1.9)

(0.9)

 

(3.0)

(0.1)

-

 

(0.2)

-

(6.1)

Impairment provisions - Stage 3 (£bn)

(0.9)

(0.6)

 

(1.2)

-

-

 

(0.1)

-

(2.8)

Customer deposits (£bn)

161.0

20.0

 

159.6

29.8

29.5

 

5.5

2.9

408.3

Risk-weighted assets (RWAs) (£bn)

36.7

12.8

 

78.3

10.4

6.8

 

35.1

1.4

181.5

RWA equivalent (RWAe) (£bn)

36.7

12.8

 

78.4

10.4

6.9

 

37.2

1.5

183.9

Employee numbers (FTEs - thousands)

17.5

2.8

 

10.2

2.0

1.8

 

5.0

23.4

62.7

Average interest earning assets (£bn)

179.8

26.4

 

164.6

23.3

31.5

 

39.9

nm

497.4

Net interest margin

2.18%

1.48%

 

1.70%

2.14%

1.15%

 

0.06%

nm

1.54%

Third party customer asset rate (3)

2.86%

2.27%

 

2.70%

2.52%

2.58%

 

nm

nm

nm

Third party customer funding rate (3)

(0.20%)

(0.12%)

 

(0.33%)

(0.13%)

(0.01%)

 

nm

nm

nm

 

For the notes to this table, refer to page 18.

 

 

 

Segment performance

 

 

Quarter ended 31 March 2020

 

 

 

 

 

 

 

Central

Total

 

 

UK Personal

Ulster

 

Commercial

Private

RBS

 

NatWest

 items &

NatWest

 

 

Banking

Bank RoI

 

Banking

Banking

International

 

Markets

other (1)

Group

 

 

£m

£m

 

£m

£m

£m

 

£m

£m

£m

Income statement

 

 

 

 

 

 

 

 

 

 

Net interest income

1,007

97

 

674

127

111

 

(40)

(34)

1,942

Other non-interest income

143

32

 

334

74

33

 

428

21

1,065

Own credit adjustments

-

-

 

-

-

-

 

155

-

155

Total income

1,150

129

 

1,008

201

144

 

543

(13)

3,162

Direct expenses

- staff costs

(141)

(48)

 

(184)

(47)

(32)

 

(167)

(300)

(919)

 

- other costs

(59)

(24)

 

(78)

(24)

(14)

 

(57)

(539)

(795)

Indirect expenses

(392)

(46)

 

(306)

(47)

(14)

 

(74)

879

-

Strategic costs

- direct

-

(1)

 

(5)

-

(1)

 

(34)

(90)

(131)

 

- indirect

(34)

(4)

 

(36)

(5)

(3)

 

(8)

90

-

Litigation and conduct costs

97

-

 

(1)

-

3

 

(2)

(93)

4

Operating expenses

(529)

(123)

 

(610)

(123)

(61)

 

(342)

(53)

(1,841)

Operating profit/(loss) before impairment (losses)/releases

621

6

 

398

78

83

 

201

(66)

1,321

Impairment (losses)/releases

(297)

(27)

 

(435)

(29)

(15)

 

5

(4)

(802)

Operating profit/(loss)

324

(21)

 

(37)

49

68

 

206

(70)

519

Additional information

 

 

 

 

 

 

 

 

 

 

Return on equity (2)

15.5%

(4.2%)

 

(2.5%)

9.8%

19.4%

 

8.7%

nm

3.6%

Cost:income ratio (2)

46.0%

95.3%

 

59.1%

61.2%

42.4%

 

63.0%

nm

57.7%

Total assets (£bn)

186.3

26.3

 

178.3

23.4

33.2

 

335.7

34.4

817.6

Funded assets (£bn)

186.3

26.3

 

178.3

23.4

33.2

 

129.6

31.8

608.9

Net loans to customers - amortised cost (£bn)

163.7

18.7

 

109.2

15.8

13.6

 

12.2

18.1

351.3

Loan impairment rate (2)

72bps

56bps

 

157bps

73bps

44bps

 

nm

nm

90bps

Impairment provisions (£bn)

(1.6)

(0.7)

 

(1.7)

(0.1)

-

 

(0.1)

-

(4.2)

Impairment provisions - Stage 3 (£bn)

(0.9)

(0.6)

 

(1.0)

-

-

 

(0.1)

-

(2.6)

Customer deposits (£bn)

152.8

19.3

 

143.9

29.0

32.3

 

5.7

1.8

384.8

Risk-weighted assets (RWAs) (£bn)

38.2

12.7

 

76.9

10.3

6.8

 

38.9

1.4

185.2

RWA equivalent (RWAe) (£bn)

38.2

12.7

 

77.0

10.3

7.1

 

42.2

1.7

189.2

Employee numbers (FTEs - thousands)

17.8

2.9

 

10.0

2.0

1.8

 

5.1

23.6

63.2

Average interest earning assets (£bn)

177.4

24.9

 

148.4

22.7

30.9

 

36.1

nm

458.5

Net interest margin

2.28%

1.56%

 

1.83%

2.25%

1.45%

 

(0.45%)

nm

1.70%

Third party customer asset rate (3)

3.06%

2.28%

 

3.03%

2.77%

2.79%

 

nm

nm

nm

Third party customer funding rate (3)

(0.37%)

(0.13%)

 

(0.42%)

(0.38%)

(0.11%)

 

nm

nm

nm

 

For the notes to this table, refer to page 18.

 

 

 

Segment performance

 

 

Quarter ended 30 June 2019

 

 

 

 

 

 

 

Central

Total

 

 

UK Personal

Ulster

 

Commercial

Private

RBS

 

NatWest

 items &

NatWest

 

 

Banking

Bank RoI

 

Banking

Banking

International

 

Markets

other (1)

Group

 

 

£m

£m

 

£m

£m

£m

 

£m

£m

£m

Income statement

 

 

 

 

 

 

 

 

 

 

Net interest income

1,032

102

 

716

129

125

 

(91)

(42)

1,971

Other non-interest income

170

35

 

367

62

34

 

338

71

1,077

Own credit adjustments

-

1

 

-

-

-

 

(5)

1

(3)

Strategic disposals

-

-

 

-

-

-

 

444

591

1,035

Total income

1,202

138

 

1,083

191

159

 

686

621

4,080

Direct expenses

- staff costs

(148)

(53)

 

(175)

(41)

(31)

 

(176)

(281)

(905)

 

- other costs

(77)

(22)

 

(80)

(17)

(10)

 

(38)

(524)

(768)

Indirect expenses

(317)

(42)

 

(269)

(45)

(13)

 

(76)

762

-

Strategic costs

- direct

4

(4)

 

(12)

-

(3)

 

(31)

(388)

(434)

 

- indirect

(49)

(5)

 

(50)

(10)

(3)

 

(17)

134

-

Litigation and conduct costs

(7)

(19)

 

(36)

(2)

-

 

(6)

15

(55)

Operating expenses

(594)

(145)

 

(622)

(115)

(60)

 

(344)

(282)

(2,162)

Operating profit/(loss) before impairment (losses)/releases

608

(7)

 

461

76

99

 

342

339

1,918

Impairment (losses)/releases

(69)

10

 

(197)

(1)

2

 

20

(2)

(237)

Operating profit

539

3

 

264

75

101

 

362

337

1681

Additional information

 

 

 

 

 

 

 

 

 

 

Return on equity (2)

26.5%

0.6%

 

6.2%

15.9%

30.8%

 

4.4%

nm

15.8%

Cost:income ratio (2)

49.4%

105.1%

 

56.1%

60.2%

37.7%

 

50.1%

nm

52.6%

Total assets (£bn)

173.9

26.4

 

165.6

21.9

30.4

 

278.9

32.8

729.9

Funded assets (£bn)

173.9

26.4

 

165.6

21.9

30.4

 

133.4

32.7

584.3

Net loans to customers - amortised cost (£bn)

151.9

19.0

 

101.4

14.7

13.6

 

9.3

0.7

310.6

Loan impairment rate (2)

18bps

(20)bps

 

77bps

3bps

(6)bps

 

nm

nm

30bps

Impairment provisions (£bn)

(1.3)

(0.9)

 

(1.3)

-

-

 

(0.2)

-

(3.7)

Impairment provisions - Stage 3 (£bn)

(0.8)

(0.8)

 

(1.0)

-

-

 

(0.2)

-

(2.8)

Customer deposits (£bn)

147.5

19.0

 

133.4

28.0

28.1

 

2.8

2.8

361.6

Risk-weighted assets (RWAs) (£bn)

37.0

14.2

 

77.8

9.7

6.9

 

41.4

1.5

188.5

RWA equivalent (RWAe) (£bn)

38.1

14.5

 

79.3

9.7

7.0

 

46.1

1.8

196.5

Employee numbers (FTEs - thousands)

19.3

3.1

 

10.4

1.9

1.8

 

5.0

25.1

66.6

Average interest earning assets (£bn)

164.8

25.3

 

146.1

21.2

29.8

 

34.4

nm

444.8

Net interest margin

2.51%

1.62%

 

1.97%

2.44%

1.68%

 

(1.05%)

nm

1.78%

Third party customer asset rate (3)

3.25%

2.29%

 

3.18%

2.89%

1.79%

 

nm

nm

nm

Third party customer funding rate (3)

(0.38%)

(0.15%)

 

(0.42%)

(0.45%)

(0.13%)

 

nm

nm

nm

 

Notes:

(1)  Central items & other includes unallocated transactions, including volatile items under IFRS, items related to the Alawwal bank merger (2019 only) and RMBS related items.

(2)  Refer to the Appendix for details of basis of preparation and reconciliation of non-IFRS performance measures where relevant.

(3)  Ulster Bank Ireland DAC(UBI DAC) and RBS International manage their funding and liquidity requirements locally. Their liquidity asset portfolios and non-customer related funding sources are included within their net interest margin, but excluded from their third party asset and liability rates.

 

 

 

Capital and risk management

 

Page

Capital, liquidity and funding risk

19

Credit risk

 

  Economic loss drivers

28

Credit risk - Banking activities

 

  Segmental exposure

37

  Sector analysis

42

  Personal portfolio

49

  CRE

52

  Flow statements

54

  Asset quality

66

Credit risk - Trading activities

70

Market risk

 

  Non-traded

73

  Traded

76

Other risks

77

 

Certain disclosures in this section are within the scope of EY's review report and are marked accordingly by a bracket in the right hand margin.

 

Capital, liquidity and funding risk  

Introduction

The economic impact of the Covid-19 pandemic was significant. While liquidity, capital and funding were closely monitored throughout, NatWest Group benefited from its strong positions - particularly in relation to CET1 - going into the crisis. Prudent risk management continues to be important as the full economic effects of the global pandemic unfold.

 

Key developments

The CET1 ratio increased by 100 basis points to 17.2% primarily due to the release of £1.3 billion following the cancellation of the proposed 2019 dividend payments and associated pension contribution in Q1 2020, as announced by the Board in response to Covid-19. The attributable loss in the period was £705 million however the IFRS 9 transitional arrangements on expected credit losses provided relief of £1,578 million.

RWAs increased by £2.3 billion in H1 2020. Credit Risk RWAs increased by £4.7 billion largely due to increased utilisation of existing facilities, new lending under the Government lending initiatives and revision of risk parameters in Commercial Banking. There were offsetting credit risk reductions in UK Personal Banking and NatWest Markets segments. Market Risk RWAs decreased by £1.5 billion, primarily reflecting movements in risks-not-in-VaR (RNIV) and Incremental Risk Charge (IRC) as well as a reduction in non-modelled market risk during the period.

The CRR leverage ratio remained as 5.1% due to an increase in Tier 1 capital being offset by increases in balance sheet exposures.

The total loss absorbing capital ratio of 36.8% is above the Bank of England (BOE) requirement of 21.9% at 1 January 2020, including CRDIV combined buffer requirements.

In the first half of 2020, NatWest Group plc issued $1.6 billion (£1.3 billion) new MREL eligible senior debt, $1.5 billion (£1.2 billion) of AT1 and £1.0 billion Tier 2 securities. NatWest Group plc made a redemption announcement on $2 billion (£1.3 billion) AT1 in June 2020 which have been excluded from capital and will be redeemed in August 2020. CET1 reduced by £345 million due to the FX impact on the redemption announcement. In subsidiaries, a £1.25 billion covered bond from National Westminster Bank Plc matured and NatWest Markets Plc issued two benchmark transactions, in the form of a €1.0 billion five - year fixed rate EMTN and a $1.0 billion three -  year fixed rate US Rule 144A programme issuance.

NatWest Group participation in the BOE Term Funding Scheme (TFS) reduced by £5 billion and the Group drew down £5 billion under the BOE Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises (TFSME) during H1 2020.

UBI DAC borrowed €3.1 billion from the European Central Bank (ECB) Targeted longer-term refinancing operation (TLTRO 3) and repaid €2.0 billion of TLTRO 2.

H1 2020 published LCR ratio of 166% is 14% higher than FY 2019 driven by increased deposits in NatWest Holdings Limited and Treasury issuance including AT1, Tier 2 and MREL, partially offset by NatWest Holdings Limited lending growth driven by mortgages and government schemes lending.

The net stable funding ratio was at 144% compared to 141% for FY 2019. The increase is mainly due to deposits growth.

 

 

 

Capital and risk management

Capital, liquidity and funding risk continued

In response to the Covid-19 pandemic, a number of relief measures to alleviate the financial stability impact have been announced and recommended by regulatory and supervisory bodies. One significant announcement was on 26 June when the European Parliament passed an amended regulation to the CRR in response to the Covid-19 pandemic ("the CRR Covid-19 amendment"); NatWest Group has applied a number of the CRR amendments for H1 2020 reporting. The impact on capital and leverage of the CRR amendment and other relief measures are set out below.

 

IFRS 9 Transition - NatWest Group has elected to take advantage of the transitional regulatory capital rules in respect of expected credit losses following the adoption of IFRS 9; it had previously had a negligible impact up to Q4 2019. The CRR Covid-19 amendment now requires a full CET1 addback for the movement in stage 1 and stage 2 ECL from 1 January 2020 for the next two years. The IFRS 9 transitional arrangement impact on NatWest Group CET1 regulatory capital at 30 June 2020 is £1.6 billion. 

 

UK Leverage exposure - The Prudential Regulation Authority (PRA) announced the ability for firms to apply for a modification by consent to permit the netting of regular-way purchase and sales settlement balances. The PRA also offered a further modification that gave an exclusion from the UK Leverage Exposure for Bounce Back Loans (BBL) and other 100% guaranteed government Covid-19 lending schemes.  The NatWest Group has received permission to apply these and it has reduced the UK leverage exposure by approximately £6.9 billion and £5.2 billion respectively.

 

CRR Leverage exposure - The CRR Covid-19 amendment accelerated a change in CRR2 to allow the netting of regular-way purchase and sales settlement balances. The NatWest Group has applied this and it has reduced the CRR leverage exposure by approximately £6.9 billion.

 

Infrastructure and SME RWA supporting factors - The CRR Covid-19 amendment allowed an acceleration of the planned changes to the SME supporting factor and the introduction of an Infrastructure supporting factor, with these now being applicable with immediate effect. NatWest Group intends to implement these beneficial changes which will reduce RWAs but has not yet concluded the required operational change project to implement.

 

Prudential Valuation Adjustment (PVA) - The European Commission amended the prudent valuation Regulatory Technical Standard such that, due to the exceptional levels of market volatility, the aggregation factor was increased from 50% to 66% until 31 December 2020. This has reduced NatWest Group's PVA deduction by approximately £100 million.

 

Market Risk Value-at-risk (VaR) model capital multiplier - The PRA and De Nederlandsche Bank (DNB) have announced temporary approaches in relation to the exceptional levels of market volatility which has resulted in an increase in VaR model back testing exceptions in NatWest Markets Plc and NatWest Markets N.V.. Under the PRA temporary approach, capital multiplier increases due to new back testing exceptions which have resulted in an increase in capital requirements can be offset through a commensurate reduction in RNIV capital requirements. Under the DNB approach, back testing exceptions have been allowed to be excluded from the capital multiplier. The PRA approach resulted in approximately £2,300 million benefit and the DNB approach a benefit of approximately €100 million.

Capital buffers - Many countries have recently announced reductions in their countercyclical capital buffer rates in response to Covid-19. Most notably for NatWest Group, the Financial Policy Committee reduced the UK rate from 1% to 0% effective from 11 March 2020. The CBI also announced a reduction of the Republic of Ireland rate from 1% to 0% effective from 1 April 2020.

 

 

 

 

 

Capital and risk management

Capital, liquidity and funding risk continued

Maximum Distributable Amount (MDA) and Minimum Capital Requirements

NatWest Group is subject to minimum capital requirements relative to RWAs. The table below summarises the minimum capital requirements (the sum of Pillar 1 and Pillar 2A), and the additional capital buffers which are held in excess of the regulatory minimum requirements and are usable in stress.

 

Where the CET 1 ratio falls below the sum of the minimum capital and the combined buffer requirement, there is a subsequent automatic restriction on the amount available to service discretionary payments, known as the MDA. Note that different capital requirements apply to individual legal entities or sub-groups and that the table shown does not reflect any incremental PRA buffer requirements, which are not disclosable.

 

The current capital position provides significant headroom above both our minimum requirements and our MDA threshold requirements.

Type

CET1

Total Tier 1

Total capital

Pillar 1 requirements

4.5%

6.0%

8.0%

Pillar 2A requirements

1.9%

2.6%

3.4%

Minimum Capital Requirements

6.4%

8.6%

11.4%

Capital conservation buffer

2.5%

2.5%

2.5%

Countercyclical capital buffer (1) 

0.0%

0.0%

0.0%

G-SIB buffer (2)

 

  -

  -

MDA Threshold

8.9%

 

  na

 

  na

Subtotal (3)

8.9%

11.1%

13.9%

Capital ratios at 30 June 2020

17.2%

19.4%

22.5%

Headroom (4)

8.3%

8.3%

8.6%

 

 

 

 

 

 

 

 

        

Notes:

(1)

Many countries have recently announced reductions in their countercyclical capital buffer rates in response to Covid-19. Most notably for NatWest Group, the Financial Policy Committee reduced the UK rate from 1% to 0% effective from 11 March 2020. The CBI also announced a reduction of the Republic of Ireland rate from 1% to 0% effective from 1 April 2020.

(2)

 

(3)

 

(4)

In November 2018 the Financial Stability Board announced that NatWest Group is no longer a G-SIB. From 1 January 2020, NatWest Group was released from this global buffer requirement.

The prevailing combined buffer requirements for NatWest Group equate to the aggregate of the capital conservation buffer and countercyclical buffer. 8.9% CET1 represents the MDA threshold for NatWest Group.

The headroom does not reflect excess distributable capital and may vary over time.

 

 

Capital and risk management

Capital, liquidity and funding risk continued

Capital and leverage ratios

The table below sets out the key capital and leverage ratios.

 

CRR basis (1)

 

30 June

31 December

Capital adequacy ratios

2020

2019

CET1 (%)

17.2

16.2

Tier 1 (%)

19.4

18.5

Total (%)

22.5

21.2

 

 

 

Capital

£m

£m

Tangible equity

32,006

32,371

 

 

 

Expected loss less impairment provisions

-

(167)

Prudential valuation adjustment

(370)

(431)

Deferred tax assets

(844)

(757)

Own credit adjustments

(244)

(118)

Pension fund assets

(588)

(474)

Cash flow hedging reserve

(341)

(35)

Foreseeable ordinary and special dividends

-

(968)

Foreseeable charges

-

(365)

Adjustments under IFRS 9 transitional arrangements

1,578

-

Other deductions

-

(2)

Total deductions

(809)

(3,317)

 

 

 

CET1 capital

31,197

29,054

AT1 capital

3,990

4,051

Tier 1 capital

35,187

33,105

Tier 2 capital

5,596

4,900

 

 

 

Total regulatory capital

40,783

38,005

 

 

 

Risk-weighted assets

 

 

Credit risk

135,700

131,000

Counterparty credit risk

12,400

12,600

Market risk

11,500

13,000

Operational risk

21,900

22,600

Total RWAs

181,500

179,200

 

 

 

Leverage

 

 

Cash and balances at central banks

100,300

77,900

Trading assets

72,400

76,700

Derivatives

183,400

150,000

Financial assets

428,100

399,100

Other assets

22,700

19,300

Total assets

806,900

723,000

 

 

 

Derivatives

 

 

  - netting and variation margin

(194,400)

(157,800)

  - potential future exposures

44,000

43,000

Securities financing transactions gross up

1,300

2,200

Other off balance sheet items

43,500

42,500

Regulatory deductions and other adjustments

(14,600)

(9,000)

CRR leverage exposure

686,700

643,900

 

 

 

CRR leverage ratio % (2)

5.1

5.1

 

 

 

UK leverage exposure

585,100

570,300

UK leverage ratio % (3)

6.0

5.8

 

 

 

Notes:

(1)  Based on CRR end point including the IFRS 9 transitional adjustment of £1.6 billion. Excluding this adjustment, the CET 1 ratio would be 16.3%.

(2)  Presented on CRR end point Tier 1 capital (including IFRS 9 transitional adjustment) and leverage exposure under the CRR Delegated Act. Excluding the IFRS 9 transitional adjustment, the leverage ratio would be 4.9%.

(3)  Presented on CRR end point Tier 1 capital (including IFRS 9 transitional adjustment). The UK leverage ratio excludes central bank claims from the leverage exposure where deposits held are denominated in the same currency and of contractual maturity that is equal or longer than that of the central bank claims. Excluding the IFRS 9 transitional adjustment, the UK leverage ratio would be 5.8%.

 

 

 

Capital and risk management

Capital, liquidity and funding risk continued

Capital flow statement

The table below analyses the movement in CET1, AT1 and Tier 2 capital for the half year ended 30 June 2020.

 

CET1

AT1

Tier 2

Total

 

£m

£m

£m

£m

At 1 January 2020

29,054

4,051

4,900

38,005

Attributable loss for the period

(705)

-

-

(705)

Own credit

(126)

-

-

(126)

Share capital and reserve movements in respect of employee share schemes

(46)

-

-

(46)

Foreign exchange reserve

466

-

-

466

FVOCI reserves

(218)

-

-

(218)

Goodwill and intangibles deduction

20

-

-

20

Deferred tax assets

(87)

-

-

(87)

Prudential valuation adjustments

61

-

-

61

Expected loss less impairment

167

-

-

167

New issues of capital instruments

-

1,216

1,000

2,216

Redemption of capital instruments

-

(1,277)

-

(1,277)

Net dated subordinated debt/grandfathered instruments

-

-

(756)

(756)

Foreign exchange movements

(355)

-

452

97

Foreseeable ordinary and special dividends

968

-

-

968

Foreseeable charges

365

-

-

365

Adjustment under IFRS 9 transitional arrangements

1,578

-

-

1,578

Other movements

55

-

-

55

At 30 June 2020

31,197

3,990

5,596

40,783

 

Key points

·

NatWest Group has elected to take advantage of the transitional regulatory capital rules in respect of expected credit losses following the adoption of IFRS 9, it had previously had a negligible impact up to Q4 2019. The CRR Covid-19 amendment now requires a full CET1 addback for the movement in stage 1 and stage 2 ECL from 1 January 2020 for the next two years. The IFRS9 transitional arrangement impact on NatWest Group CET1 regulatory capital at 30 June 2020 is £1.6 billion.

·

Foreign exchange movements include a £345 million charge, in relation to a $2 billion AT1 redemption announcement on 28 June 2020.

Risk-weighted assets

The table below analyses the movement in RWAs during the half year, by key drivers.

 

 

Counterparty

 

Operational

 

 

Credit risk

credit risk

Market risk

risk

Total

 

£bn

£bn

£bn

£bn

£bn

At 1 January 2020

131.0

12.6

13.0

22.6

179.2

Foreign exchange movement

2.1

0.4

-

-

2.5

Business movement

2.8

(0.6)

1.0

(0.7)

2.5

Risk parameter changes (1)

(0.6)

-

-

-

(0.6)

Methodology changes (2)

0.3

-

(0.1)

-

0.2

Model updates

0.1

-

-

-

0.1

Other movements (3)

-

-

(2.4)

-

(2.4)

At 30 June 2020

135.7

12.4

11.5

21.9

181.5

 

The table below analyses segmental RWAs.

 

 

UK Personal

Ulster

Commercial

Private

 

NatWest

Central

 

 

Banking

Bank RoI

Banking

Banking

RBSI

Markets

items & other

Total

Total RWAs

£bn

£bn

£bn

£bn

£bn

£bn

£bn

£bn

At 1 January 2020

37.8

13.0

72.5

10.1

6.5

37.9

1.4

179.2

Foreign exchange movement

-

0.7

0.8

-

0.1

0.9

-

2.5

Business movement

(0.3)

(0.5)

4.5

0.3

0.2

(1.4)

(0.3)

2.5

Risk parameter changes (1)

(0.8)

(0.6)

0.6

-

-

0.2

-

(0.6)

Methodology changes (2)

-

-

(0.3)

-

-

0.2

0.3

0.2

Model updates

-

0.2

(0.1)

-

-

-

-

0.1

Other movements (3)

-

-

0.3

-

-

(2.7)

-

(2.4)

At 30 June 2020

36.7

12.8

78.3

10.4

6.8

35.1

1.4

181.5

 

 

 

 

 

 

 

 

 

Credit risk

29.1

11.7

69.5

9.1

5.8

9.1

1.4

135.7

Counterparty credit risk

0.1

-

0.2

0.1

-

12.0

-

12.4

Market risk

0.1

0.1

0.1

-

-

11.2

-

11.5

Operational risk

7.4

1.0

8.5

1.2

1.0

2.8

-

21.9

Total RWAs

36.7

12.8

78.3

10.4

6.8

35.1

1.4

181.5

 

Notes:

(1)

Risk parameter changes relate to changes in credit quality metrics of customers and counterparties (such as probability of default and loss given default) as well as internal ratings based model changes relating to counterparty credit risk in line with European Banking Authority Pillar 3 Guidelines.

(2)

The new securitisation framework has been fully implemented from 1 January 2020 and all positions have moved to the new framework.

(3)

The decrease in Other movements reflects the temporary reduction permitted by the PRA to offset the impact of multiplier increases (included in Business

movement). The offset covers all metrics affected by the multiplier increase, including CVAs. Other movements also reflect transfers between segments, primarily reflecting a transfer of Insurance related assets from NatWest Markets to Commercial Banking. 

 

Capital and risk management

Capital, liquidity and funding risk continued

Key point

· RWAs increased by £2.3 billion in H1 2020, mainly reflecting increases in credit risk of £4.7 billion. There were offsetting decreases in market risk by £1.5 billion, operational risk by £0.7 billion and counterparty credit risk by £0.2 billion. The increase in credit risk RWAs primarily reflected increases in Commercial Banking due to drawdowns on existing facilities, new lending under the Government lending initiatives and deterioration of risk parameters. There were offsetting credit risk reductions in Personal Banking mainly due to revision of risk parameters as well as in the NatWest Markets segment in line with business strategy. Market Risk RWAs decreased by £1.5 billion, primarily reflecting movements in RNIVs and IRC as well as a reduction in non-modelled market risk during the period.

 

Credit risk exposure at default (EAD) and risk-weighted assets (RWAs)

The table below analyses credit risk RWAs and EADs, by on and off balance sheet.

 

 

 

UK Personal

Ulster

Commercial

Private

RBS

NatWest

Central items

 

 

 

Banking

Bank RoI

Banking

Banking

International

Markets

& other

Total

30 June 2020

£bn

£bn

£bn

£bn

£bn

£bn

£bn

£bn

EAD

On balance sheet

235.6

28.3

152.6

21.4

31.1

40.7

0.7

510.4

Off balance sheet

27.2

2.2

29.9

0.3

4.8

6.2

0.4

71.0

Total

262.8

30.5

182.5

21.7

35.9

46.9

1.1

581.4

 

 

 

 

 

 

 

 

 

 

RWAs

On balance sheet

26.4

10.6

56.3

8.9

4.5

7.0

1.3

115.0

Off balance sheet

2.7

1.1

13.2

0.2

1.3

2.1

0.1

20.7

Total

29.1

11.7

69.5

9.1

5.8

9.1

1.4

135.7

 

 

 

 

 

 

 

 

 

 

31 December 2019

 

 

 

 

 

 

 

 

EAD

On balance sheet

221.8

26.0

131.4

20.3

31.7

35.4

0.7

467.3

Off balance sheet

30.2

2.2

27.2

0.3

3.3

7.5

0.4

71.1

Total

252.0

28.2

158.6

20.6

35.0

42.9

1.1

538.4

 

 

 

 

 

 

 

 

 

 

RWAs

On balance sheet

27.1

10.8

50.8

8.7

4.7

6.4

1.3

109.8

Off balance sheet

3.1

1.1

12.5

0.2

1.0

3.2

0.1

21.2

Total

30.2

11.9

63.3

8.9

5.7

9.6

1.4

131.0

 

Capital resources

 

PRA transitional basis

 

30 June

31 December

 

2020

2019

 

£m

£m

Shareholders' equity (excluding non-controlling interests)

 

 

Shareholders' equity

43,103

43,547

Preference shares - equity

(494)

(496)

Other equity instruments

(4,001)

(4,058)

 

38,608

38,993

Regulatory adjustments and deductions

 

 

Own credit

(244)

(118)

Defined benefit pension fund adjustment

(588)

(474)

Cash flow hedging reserve

(341)

(35)

Deferred tax assets

(844)

(757)

Prudential valuation adjustments

(370)

(431)

Goodwill and other intangible assets

(6,602)

(6,622)

Expected losses less impairments

-

(167)

Foreseeable ordinary and special dividends

-

(968)

Foreseeable charges

-

(365)

Adjustment under IFRS9 transition arrangements

1,578

-

Other regulatory adjustments

-

(2)

 

(7,411)

(9,939)

CET1 capital

31,197

29,054

 

 

 

Additional Tier (AT1) capital

 

 

Qualifying instruments and related share premium

3,990

4,051

Qualifying instruments and related share premium to phase out

1,424

1,366

Qualifying instruments issued by subsidiaries and held by third parties subject to phase out

140

140

AT1 capital

5,554

5,557

Tier 1 capital

36,751

34,611

 

 

 

Qualifying Tier 2 capital

 

 

Qualifying instruments and related share premium

5,588

4,867

Qualifying instruments issued by subsidiaries and held by third parties

1,348

1,345

 

 

 

Tier 2 capital

6,936

6,212

Total regulatory capital

43,687

40,823

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital and risk management 

Capital, liquidity and funding risk continued

Loss absorbing capital 

The following table illustrates the components of estimated loss absorbing capital (LAC) in NatWest Group plc and operating subsidiaries and includes external issuances only. The table is prepared on a transitional basis, including the benefit of regulatory capital instruments issued from operating companies, to the extent they meet the current MREL criteria.

 

 

30 June 2020

 

31 December 2019

 

 

Balance

 

 

 

 

Balance

 

 

 

Par

sheet

Regulatory

LAC

 

Par

sheet

Regulatory

LAC

 

 value (1)

value

value(2)

value (3)

 

value (1)

value

value (2)

value (3)

 

£bn

£bn

£bn

£bn

 

£bn

£bn

£bn

£bn

CET1 capital (4)

31.2

31.2

31.2

31.2

 

29.1

29.1

29.1

29.1

 

 

 

 

 

 

 

 

 

 

Tier 1 capital: end-point CRR compliant AT1

 

 

 

 

 

 

 

 

 

  of which: NatWest Group (holdco)

4.0

4.0

4.0

4.0

 

4.0

4.0

4.0

4.0

  of which: NatWest Group operating

 

 

 

 

 

 

 

 

 

  subsidiaries (opcos)

-

-

-

-

 

-

-

-

-

 

4.0

4.0

4.0

4.0

 

4.0

4.0

4.0

4.0

Tier 1 capital: end-point CRR non compliant

 

 

 

 

 

 

 

 

 

  of which: holdco

1.5

1.7

1.5

0.5

 

1.4

1.6

1.4

0.5

  of which: opcos

0.1

0.1

0.1

0.1

 

0.1

0.1

0.1

0.1

 

1.6

1.8

1.6

0.6

 

1.5

1.7

1.5

0.6

Tier 2 capital: end-point CRR compliant

 

 

 

 

 

 

 

 

 

  of which: holdco

9.3

9.7

5.5

6.2

 

6.2

6.4

4,8

4.7

  of which: opcos

0.5

0.5

0.1

0.4

 

0.5

0.5

0.1

0.4

 

9.8

10.2

5.6

6.6

 

6.7

6.9

4.9

5.1

Tier 2 capital: end-point CRR non compliant

 

 

 

 

 

 

 

 

 

  of which: holdco

0.1

0.1

0.1

0.1

 

0.1

0.1

0.1

0.1

  of which: opcos

1.6

1.9

1.2

1.7

 

1.6

1.8

1.2

1.6

 

1.7

2.0

1.3

1.8

 

1.7

1.9

1.3

1.7

Senior unsecured debt securities issued by:

 

 

 

 

 

 

 

 

 

  NatWest Group holdco

21.0

22.5

-

22.5

 

18.6

19.2

-

19.2

  NatWest Group opcos

22.5

23.0

-

-

 

21.1

20.7

-

-

 

43.5

45.5

-

22.5

 

39.7

39.9

-

19.2

Total

91.8

94.7

43.7

66.7

 

82.7

83.5

40.8

59.7

 

 

 

 

 

 

 

 

 

 

RWAs

 

 

 

181.5

 

 

 

 

179.2

UK leverage exposure

 

 

 

585.1

 

 

 

 

570.3

 

 

 

 

 

 

 

 

 

 

LAC as a ratio of RWAs

 

 

 

36.8%

 

 

 

 

33.3%

LAC as a ratio of UK leverage exposure

 

 

 

11.4%

 

 

 

 

10.5%

 

Notes:

(1)

Par value reflects the nominal value of securities issued.

(2)

Regulatory capital instruments issued from operating companies are included in the transitional LAC calculation, to the extent they meet the current MREL criteria.

(3)

LAC value reflects NatWest Group's interpretation of the Bank of England's approach to setting a minimum requirement for own funds and eligible liabilities (MREL), published in June 2018. MREL policy and requirements remain subject to further potential development, as such NatWest Group estimated position remains subject to potential change. Liabilities excluded from LAC include instruments with less than one year remaining to maturity, structured debt, operating company senior debt, and other instruments that do not meet the MREL criteria. The LAC calculation includes eligible Tier 1 and Tier 2 securities before the application of any regulatory caps or adjustments.

(4)

Corresponding shareholders' equity was £43.1 billion (2019 - £43.5 billion).

(5)

Regulatory amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR.

(6)

NatWest Group is no longer recognised as a G-SII from 1 January 2020 and is therefore not subject to the CRR MREL requirement as of this date which references CRR2 leverage exposure. To aid comparison the leverage exposure, and resulting ratio, is disclosed according to the BoE leverage framework for all time periods.

 

 

 

Capital and risk management

Capital, liquidity and funding risk   continued

Loss   absorbing capital  

The following table illustrates the components of the stock of outstanding issuance in NatWest Group and its operating subsidiaries including external and Internal issuances.

 

 

 

NatWest

 

 

 

 

NatWest

NWM

 

 

 

NatWest

Holdings

NWB

RBS

UBI

NWM

Markets

Securities

RBSI

 

 

Group plc

Limited

Plc

plc

DAC

Plc

N.V.

Inc.

Limited

 

 

£bn

£bn

£bn

£bn

£bn

£bn

£bn

£bn

£bn

Tier 1 (Inclusive of AT1)

Externally issued

5.8

-

0.1

-

-

-

-

-

-

Tier 1 (Inclusive of AT1)

Internally issued

-

3.7

2.4

1.0

-

1.1

0.2

-

0.3

 

 

5.8

3.7

2.5

1.0

-

1.1

0.2

-

0.3

Tier 2

Externally issued

9.8

-

1.2

-

0.1

0.6

0.6

-

-

Tier 2

Internally issued

0.0

5.4

3.5

1.6

0.5

2.0

0.1

0.3

-

 

 

9.8

5.4

4.7

1.6

0.6

2.6

0.7

0.3

-

Senior unsecured

Externally issued

22.5

-

-

-

-

-

-

-

-

Senior unsecured

Internally issued

-

9.8

4.4

0.4

0.5

5.6

-

-

-

 

 

22.5

9.8

4.4

0.4

0.5

5.6

-

-

-

Total outstanding issuance

38.1

18.9

11.6

3.0

1.1

9.3

0.9

0.3

0.3

 

Notes:

(1)  The balances are the IFRS balance sheet carrying amounts, which may differ from the amount which the instrument contributes to regulatory capital. Regulatory balances exclude, for example, issuance costs and fair value movements, while dated capital is required to be amortised on a straight-line basis over the final five years of maturity.

(2)  Balance sheet amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR.

(3)  Internal issuance for NWB Plc, RBS plc and UBI DAC represents AT1, Tier 2 or Senior unsecured issuance to NatWest Holdings Limited and for NWM N.V. and NWM SI to NWM Plc.

(4)  Senior unsecured debt category does not include CP, CD and short term/medium notes issued from NatWest Group operating subsidiaries. 

(5)  Tier 1 (inclusive of AT1) category does not include CET 1 numbers.

 

Funding sources

The table below shows the carrying values of the principal funding sources based on contractual maturity. Balance sheet captions include balances held at all classifications under IFRS 9.

 

30 June 2020

 

31 December 2019

 

 

Short-term

Long-term

 

 

Short-term

Long-term

 

 

 

less than

more than

 

 

less than

more than

 

 

 

1 year

1 year

Total

 

1 year

1 year

Total

 

 

£m

£m

£m

 

£m

£m

£m

 

Bank deposits

 

 

 

 

 

 

 

 

Repos

627

-

627

 

2,598

-

2,598

 

Other bank deposits (1)

6,706

13,786

20,492

 

6,688

11,207

17,895

 

 

7,333

13,786

21,119

 

9,286

11,207

20,493

 

Customer deposits

 

 

 

 

 

 

 

 

Repos

1,337

-

1,337

 

1,765

-

1,765

 

Non-bank financial institutions

54,015

146

54,161

 

48,759

352

49,111

 

Personal

196,312

904

197,216

 

183,124

1,210

184,334

 

Corporate

155,460

94

155,554

 

133,450

587

134,037

 

 

407,124

1,144

408,268

 

367,098

2,149

369,247

 

Trading liabilities (2)

 

 

 

 

 

 

 

 

Repos (3)

23,767

-

23,767

 

27,885

-

27,885

 

Derivative collateral

27,139

-

27,139

 

21,509

-

21,509

 

Other bank customer deposits

1,111

981

2,092

 

710

896

1,606

 

Debt securities in issue - Medium term notes

829

1,255

2,084

 

659

1,103

1,762

 

 

52,846

2,236

55,082

 

50,763

1,999

52,762

 

Other financial liabilities

 

 

 

 

 

 

 

 

Customer deposits

168

182

350

 

-

-

-

 

Debt securities in issue:

 

 

 

 

 

 

 

 

  Commercial papers and certificates of deposit

6,656

97

6,753

 

4,272

6

4,278

 

  Medium term notes

4,072

32,585

36,657

 

4,592

29,262

33,854

 

  Covered bonds

1,907

2,991

4,898

 

3,051

2,897

5,948

 

  Securitisation

-

1,023

1,023

 

-

1,140

1,140

 

 

12,803

36,878

49,681

 

11,915

33,305

45,220

 

Subordinated liabilities

1,798

11,760

13,558

 

160

9,819

9,979

 

Total funding

481,904

65,804

547,708

 

439,222

58,479

497,701

 

Of which: available in resolution (4)

-

31,063

31,063

 

-

26,168

26,168

                       

Notes:

(1)  Includes £5.0 billion (31 December 2019 - £10.0 billion) relating to Term Funding Scheme participation, £5.0 billion (31 December 2019 - nil) relating to Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises participation and £2.8 billion (31 December 2019 - £1.7 billion) relating to NatWest Group's participation in central bank financing operations under the European Central Bank's targeted Long-term financing operations.

(2)  Excludes short positions of £20.5 billion (31 December 2019 - £21.2 billion).

(3)  Comprises central & other bank repos of £2.1 billion (31 December 2019 - £6.6 billion), other financial institution repos of £19.4 billion (31 December 2019 - £19.0 billion) and other corporate repos of £2.3 billion (31 December 2019 - £2.3 billion).

(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 by the Bank of England in June 2018. The balance consists of £22.6 billion (31 December 2019 - £19.2 billion) under debt securities in issue (senior MREL) and £8.5 billion (31 December 2019 - £6.9 billion) under subordinated liabilities.

 

 

 

Capital and risk management

Capital, liquidity and funding risk continued

Liquidity portfolio

The table below shows the liquidity portfolio by product, with primary liquidity aligned to internal stressed outflow coverage and regulatory LCR categorisation. Secondary liquidity comprises assets eligible for discount at central banks, which do not form part of the liquid asset portfolio for LCR or internal stressed outflow purposes.

 

Liquidity value

 

30 June 2020

 

31 December 2019

 

NatWest

NWH

UK Dol

 

NatWest

NWH

UK Dol

 

Group (1)

Group (2)

Sub (3)

 

Group (1)

Group (2)

Sub (3)

 

£m

£m

£m

 

£m

£m

£m

Cash and balances at central banks

97,201

67,783

67,783

 

74,289

51,080

51,080

  AAA to AA- rated governments

56,234

44,738

43,334

 

46,622

35,960

34,585

  A+ and lower rated governments

1,040

-

-

 

1,277

-

-

  Government guaranteed issuers, Public sector entities and

 

 

 

 

 

 

 

  Government sponsored entities

261

261

96

 

251

251

90

  International Organisations and Multilateral development

 

 

 

 

 

 

 

  banks

2,799

2,458

1,994

 

2,393

2,149

1,717

LCR level 1 bonds

60,334

47,457

45,424

 

50,543

38,360

36,392

LCR level 1 Assets

157,535

115,240

113,207

 

124,832

89,440

87,472

LCR level 2 Assets

127

-

-

 

-

-

-

Non-LCR Eligible Assets

-

-

-

 

88

-

-

Primary liquidity

157,662

115,240

113,207

 

124,920

89,440

87,472

Secondary liquidity (4)

84,910

84,427

81,835

 

74,431

74,187

73,332

Total liquidity value

242,572

199,667

195,042

 

199,351

163,627

160,804

 

Notes:

(1)

NatWest Group includes UK DoLSub, NatWest Markets Plc and other significant operating subsidiaries that hold liquidity portfolios. These include The Royal Bank of Scotland International Limited, NWM N.V. and Ulster Bank Ireland DAC who hold managed portfolios that comply with local regulations that may differ from PRA rules.

(2)

NWH Group comprises UK DoLSub & Ulster Bank Ireland DAC who hold managed portfolios that comply with local regulations that may differ from PRA rules.

(3)

UK DoLSub comprises NatWest Group's four licensed deposit-taking UK banks within the ring-fenced bank: NWB Plc, RBS plc, Coutts & Company and

Ulster Bank Limited.

(4)

Comprises assets eligible for discounting at the Bank of England and other central banks.

(5)

Liquidity portfolio table approach has been aligned to the ILAAP methodology with effect from December 2019.

(6)

NatWest Markets Plc liquidity portfolio is reported in the NatWest Markets Plc Company Announcement.

 

 

 

 

 

 

Capital and risk management

Credit risk

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 asset class and where relevant, industry sector and region) are based on a selected, small number of economic factors, (typically two to four) that best explain the temporal variations in portfolio loss rates. The process to select economic loss drivers involves empirical analysis and expert judgement.

 

The most material economic loss drivers for the Personal portfolio include the unemployment rate, house price indices as well as the Bank of England and the European Central Bank base rates. For the Wholesale portfolio, in addition to interest and unemployment rates, national gross domestic product (GDP), stock price indices and world GDP are primary loss drivers.

 

Economic scenarios

The range of anticipated future economic conditions is described by a set of four internally developed scenarios and their respective probabilities. In a change from previous quarters, two scenarios are used instead of a single base case to describe the central outlook. This reflects increased uncertainty as a result of Covid-19 and the difficulty in identifying a consensus among economic forecasters. Those two central scenarios are complemented by an upside and a downside scenario.

 

As at 31 December 2019, NatWest Group used five discrete scenarios to characterise the distribution of risks in the economic outlook. In contrast, the four scenarios set out below 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, asset price falls and degree of permanent damage to the economy, around which there are pronounced levels of uncertainty at this stage.

 

The tables and commentary below provide details of the key economic loss drivers under the four scenarios. The average over the five-year horizon (2020 to 2024) for the two central scenarios and upside and downside scenarios used for expected credit loss (ECL) modelling, are set out below. It is compared with the five-year average (2020 to 2024) of the 2019 scenarios.

 

The scenarios are specified on a quarterly frequency. The extreme points refer to worst four-quarter rate of change for GDP and house price inflation and worst quarterly figures for unemployment.

 

Five-year average

30 June 2020

 

31 December 2019

 

Upside

Central 1

Central 2

Downside

 

Upside 2

Upside 1

Base case

Downside 1

Downside 2

 

 %

 %

 %

 %

 

%

%

%

%

%

UK

 

 

 

 

 

 

 

 

 

 

GDP - change

1.4

1.5

0.6

(0.4)

 

2.4

2.2

1.6

1.3

0.9

Unemployment

5.1

5.5

7.4

9.9

 

3.6

3.9

4.4

4.7

5.2

House Price Inflation - change

2.0

1.4

0.5

(4.5)

 

4.1

3.3

1.6

0.8

(1.0)

Bank of England base rate

0.2

0.2

0.1

(0.2)

 

1.0

0.7

0.3

-

-

Commercial real estate price

 

 

 

 

 

 

 

 

 

 

  - change

(0.5)

(1.2)

(2.3)

(8.6)

 

2.7

1.7

(0.1)

(1.0)

(3.0)

 

 

 

 

 

 

 

 

 

 

 

Republic of Ireland

 

 

 

 

 

 

 

 

 

 

GDP - change

2.9

2.6

1.8

0.2

 

3.9

3.6

2.8

2.4

1.9

Unemployment

5.8

6.9

9.3

11.8

 

3.9

4.3

4.8

5.7

6.9

House Price Inflation - change

2.3

2.2

1.1

(0.9)

 

5.3

4.7

2.9

2.2

1.0

European Central Bank base rate

-

-

-

-

 

1.6

0.9

-

-

-

 

 

 

 

 

 

 

 

 

 

 

World GDP - change

2.8

2.9

2.0

1.3

 

3.8

3.3

2.8

2.5

2.1

 

 

 

 

 

 

 

 

 

 

 

Probability weight

20.0

35.0

35.0

10.0

 

12.7

14.8

30.0

29.7

12.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note:

(1)  Probability weights for the Republic of Ireland were symmetrical with 15% on the upside and downside. Weightings for Ulster Bank RoI reflect the relative severity of scenarios in a Republic of Ireland context.

 

 

 

 

Capital and risk management

Credit risk continued

Five-year average

GDP - annual growth

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Upside

Central 1

Central 2

Downside

 

 

Upside

Central 1

Central 2

Downside

UK

%

%

%

%

 

Republic of Ireland

%

%

%

%

2020

(8.9)

(14.3)

(14.1)

(16.9)

 

2020

(8.9)

(10.5)

(16.3)

(20.3)

2021

10.1

15.4

11.2

5.3

 

2021

14.2

9.9

16.4

5.5

2022

2.7

3.4

2.3

6.4

 

2022

4.1

6.3

3.6

8.1

2023

1.6

1.6

2.0

1.7

 

2023

2.6

4.9

3.1

5.3

2024

1.6

1.6

1.6

1.6

 

2024

2.4

2.4

2.4

2.4

 

 

 

 

 

 

 

 

 

 

 

Unemployment rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Upside

Central 1

Central 2

Downside

 

 

Upside

Central 1

Central 2

Downside

UK

%

%

%

%

 

Republic of Ireland

%

%

%

%

Q4 2020

7.4

9.2

9.8

14.4

 

Q4 2020

8.2

9.7

13.2

16.6

Q4 2021

4.8

5.0

7.8

10.9

 

Q4 2021

5.5

7.3

10.0

13.7

Q4 2022

4.1

4.0

6.7

9.1

 

Q4 2022

4.7

5.6

8.3

11.0

Q4 2023

4.1

4.0

6.0

7.6

 

Q4 2023

4.8

5.0

6.9

8.7

Q4 2024

4.1

4.0

5.9

6.9

 

Q4 2024

4.9

5.1

6.8

8.5

 

 

 

 

 

 

 

 

 

 

 

House Price Inflation - annual growth

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Upside

Central 1

Central 2

Downside

 

 

Upside

Central 1

Central 2

Downside

UK

%

%

%

%

 

Republic of Ireland

%

%

%

%

2020

(0.1)

(8.9)

(9.3)

(11.5)

 

2020

(3.4)

(6.0)

(10.1)

(13.6)

2021

0.6

3.6

(5.1)

(14.9)

 

2021

(1.6)

(6.8)

(9.8)

(17.3)

2022

2.4

6.4

7.1

0.7

 

2022

7.2

11.8

11.1

9.7

2023

3.5

3.2

6.4

1.5

 

2023

5.8

7.9

7.9

9.8

2024

3.8

2.6

3.5

1.6

 

2024

3.7

4.0

6.5

7.2

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate price - annual change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Upside

Central 1

Central 2

Downside

 

 

 

 

 

 

UK

%

%

%

%

 

 

 

 

 

 

2020

(7.5)

(16.0)

(22.1)

(20.9)

 

 

 

 

 

 

2021

2.2

1.9

(0.7)

(20.3)

 

 

 

 

 

 

2022

1.3

6.3

7.3

(8.1)

 

 

 

 

 

 

2023

0.4

1.5

2.2

3.2

 

 

 

 

 

 

2024

1.0

0.6

1.6

3.2

 

 

 

 

 

 

 

Extreme points

Worst points

 

H1 2020

 

H2 2019

 

Upside

Central 1

Central 2

Downside

 

Downside 1

Downside 2

UK

%

%

%

%

 

%

%

GDP (year-on-year)

(17.1)

(27.7)

(26.6)

(28.0)

 

(0.2)

(1.8)

Unemployment

7.6

9.5

12.0

15.1

 

4.9

5.5

House Price Inflation (year-on-year)

(0.7)

(13.7)

(14.9)

(20.4)

 

(3.5)

(8.4)

Commercial real estate price (year-on-year)

(10.2)

(21.2)

(27.2)

(31.0)

 

(8.2)

(12.6)

 

 

 

 

 

 

 

 

 

Worst points

 

H1 2020

 

H2 2019

 

Upside

Central 1

Central 2

Downside

 

Downside 1

Downside 2

Republic of Ireland

%

%

%

%

 

%

%

GDP (year-on-year)

(19.0)

(20.6)

(32.7)

(34.7)

 

0.5

(2.1)

Unemployment

9.0

14.8

16.9

17.7

 

5.8

7.3

House Price Inflation (year-on-year)

(8.0)

(15.1)

(22.3)

(30.8)

 

(2.6)

(8.4)

 

Probability weightings of scenarios

NatWest Group's approach to IFRS 9 multiple economic scenarios (MES) involves selecting a suitable set of discrete scenarios to characterise the distribution of risks in the economic outlook and assigning appropriate probability weights.

 

The scale of the economic impact of Covid-19 and the range of recovery paths necessitates a change of approach to assigning probability weights from that used in recent updates. Previously GDP paths for NatWest Group's scenarios were compared against a set of 1,000 model runs, following which a percentile in the distribution was established that most closely corresponded to the scenario. This approach does not produce meaningful outcomes in the current circumstances because GDP is highly volatile and highly uncertain.

 

 

 

 

Capital and risk management

Credit risk continued

Instead, NatWest Group has subjectively applied probability weights, reflecting expert views within NatWest Group. The probability weight assignment was judged to present good coverage to the central scenarios and the potential for a far more robust recovery on the upside and exceptionally challenging outcome on the downside. A 20% weighting was applied to the upside scenario, a 35% weighting on each central scenario and a 10% weighting on the downside scenario. NatWest Group judged a downside-biased weighting as placing too much weight on negative outcomes.

 

Use of the scenarios in Personal Banking

Personal Banking follows a discrete scenario approach which means that ECL is calculated based on the probability of default (PD) and loss given default (LGD) values that arise directly from the probability weighted averages across all four economic scenarios.

 

Use of the scenarios in Wholesale Lending

The Wholesale Lending methodology is based on the concept of credit cycle indices (CCI). The CCI represents all relevant economic loss drivers for a region/industry segment aggregated into a single index value describing the loss rate conditions in the respective segment relative to its long run average. That means a CCI value of zero corresponds to loss rates at long-run average levels, a positive CCI value corresponds to loss rates below long-run average levels and a negative CCI value corresponds to loss rates above long-run average levels.

 

The four economic scenarios outlined above are translated into individual projections of CCIs for each region/industry segment which are then subsequently aggregated into a single central CCI projection by calculating a weighted average according to the given scenario probabilities. The CCI projection for each economic scenario, and by extension the weighted central CCI projection, are overlaid with an additional assumption that after one to two years into the forecast period credit cycle conditions gradually revert to long-run average conditions, i.e. CCI values mean revert to zero.

 

Finally, ECL is calculated using a Monte Carlo approach by averaging PD and LGD values arising from a large number of CCI paths simulated around the central CCI projection calculated as above.

 

The rationale for the Wholesale approach, is the long-standing observation that loss rates in Wholesale portfolios tend to follow regular cycles. This allows NatWest Group to enrich the range and depth of future economic conditions embedded in the final ECL beyond what would be obtained from the discrete macro-economic scenarios alone.

 

Business Banking, while part of the Wholesale segment, for reporting purposes, utilises the Personal Banking rather than the Wholesale Lending methodology.

 

Covid-19 - estimating ECL in uncertain times

Almost all areas of the global economy, in terms of both individuals and businesses, have been adversely affected by the unprecedented economic and social disruption resulting from Covid-19. The impact of the virus has led to the creation of significant government and central bank mechanisms to support businesses and individuals. Uncertainty remained elevated during H1 2020 and the severity of the economic impact becomes increasingly observable in key economic data such as GDP and unemployment. This crisis has created an unprecedented challenge for IFRS 9 ECL modelling, given the severity of economic shock and associated uncertainty for the future economic path coupled with the scale of government and central bank intervention and Covid-19 relief mechanisms that have altered the relationships between economic drivers and default. 

 

The NatWest Group approach to dealing with this challenge is to leverage stress test modelling insights to inform IFRS 9 model refinements to enable modelled ECL estimates. Management review of modelling approaches and outcomes continues to inform any necessary adjustments to the ECL estimates through the form of in-model adjustments or overlays/underlays, based on expert judgement including the use of available information. Management considerations included the potential severity and duration of the economic shock, including the mitigating effects of government support actions, as well the potential trajectory of the subsequent recovery. NatWest Group also considered differential impacts on portfolio and sector classes, including pronouncements from regulatory bodies regarding IFRS 9 application in the context of Covid-19, notably on significant increase in credit risk (SICR) identification.

 

The modelling interventions described above and the severity of the MES scenarios underpinning the ECL estimate have alleviated the need for a dedicated economic uncertainty overlay. Consequently, the existing overlay for economic uncertainty at Q1 2020 of £798 million was absorbed through the H1 2020 modelled ECL estimate.

 

Treatment of Covid-19 relief mechanisms

Use of Covid-19 relief mechanisms (for example, payment holidays, CBILS and BBLS) will not automatically merit identification of SICR and trigger a Stage 2 classification in isolation. For Personal products, where detailed information surrounding the customer situation may not be readily available, movements in account PD - which includes the effect of customer account behaviour as well as forward-looking economics - continued to be the key determinant of a SICR. This assessment was supplemented by an analysis of high-risk identifiers.

 

 

 

Capital and risk management

Credit risk continued

For Wholesale customers, at H1 2020, lifetime PD deterioration remains the primary driver of SICR identification, amplified by the forward-looking economics. NatWest Group continues to provide support, where appropriate, to existing customers. Those who are deemed either to require a) a prolonged timescale to return within NatWest Group's risk appetite or b) not to be viable pre-crisis or c) not to be able to sustain their debt once the crisis is over will trigger a SICR and, if concessions are sought, be categorised as forborne, in line with regulatory guidance.

 

As some of the government support mechanisms conclude, NatWest Group anticipates further credit deterioration in the portfolios. There are a number of key factors that could drive further downside to impairments, through deteriorating economic and credit metrics and increased stage migration as credit risk increases for more customers. A key factor would be a more adverse deterioration in GDP and unemployment in the economies in which NatWest Group operates, but also, among others:

· The timing and nature of governmental exit plans from lockdown, notably in UK and the Republic of Ireland, and any future repeated lockdown requirements.

· The progress of the pandemic, with potential for changes in worker/consumer behaviour and sickness levels.

· The efficacy of the various government support initiatives in terms of their ability to defray customer defaults is yet to be proven, notably over an extended period.

· Any further damage to certain supply chains, most notably in the case of any re-tightening of lockdown rules but also delays caused by social distancing measures and possible export/import controls.

· The level of revenues lost by corporate clients and pace of recovery of those revenues may affect NatWest Group's clients' ability to service their borrowing, especially in those sectors most exposed to the impacts of Covid-19.

· Higher unemployment if companies fail to restart jobs after periods of staff furlough.

 

This could potentially lead to further ECL increases. However, the income statement impact of this will be mitigated to some extent by the forward-looking provisions taken at H1 2020.

 

Model performance

To date, model performance monitoring has not identified any noticeable increases in default or loss rates in Wholesale Lending or Personal Banking. This is not unexpected given the recent impact of Covid-19 and the implementation of government interventions aiming to delay and/or mitigate its impact on the economy. As a result, it is too early to meaningfully assess model performance against the actual impact.

 

Nonetheless, Covid-19 has already had a significant impact on the forward-looking economic information used by the IFRS 9 models in calculating ECL. While the central scenario used previously implied largely a continuation of current conditions, the central scenarios assumed now forecast a dramatic deterioration in conditions on a magnitude typically observed for severe stresses but with the deterioration and subsequent recovery compressed into a much shorter time frame than typical economic cycles. This extreme and unusual nature of the scenarios considered has highlighted several limitations in the components of the Wholesale methodology that translate projected economic loss drivers into aggregate default and loss rate conditions at portfolio level. To account for these limitations, a number of refinements and changes have been applied to the respective model components to ensure that the ECL outcome is reasonable, not only in aggregate, but at industry sector level and with regard to the timing in which deteriorating economics translate into default and loss outcomes. More specifically, the following key adjustments have been applied to the modelled forward-looking economic conditions for the Wholesale portfolios:

· Scenario profile - The previously unseen, extreme movements and quarterly variations in some economic loss drivers (most notably year-on-year change in UK GDP) are extrapolated by some Wholesale models into unrealistically high default rate outcomes. Where necessary, judgement was applied to adjust model outcomes to more appropriate levels based on peak default rates observed in previous crises and other existing stress scenario analysis, including the 2019 Bank of England annual cyclical scenario.

· Government support - The temporal profile of projected default and loss conditions was further adjusted to account for the expected impact of government interventions where those are not already reflected in the scenario's economic loss drivers. These adjustments result in both a delay and a reduction in the peak level of default and loss rates that would have been expected under the projected economic loss drivers without government intervention. The specification of the parameters of the adjustments - while guided by the level and characteristics of loans extended under the various government guarantee schemes - involve a considerable level of expert judgement.

· Industry sector detail - The current suite of models for the Wholesale portfolios provides limited differentiation by industry sector. This approach is based on the data from the global financial crisis which exhibited a very high correlation across industry sectors. In contrast, the impact from Covid-19 is highly differentiated by industry sector and accordingly adjustments have been applied to implement an appropriate differentiation in the severity of projected default rate conditions for different sectors. The categorisation of industry sectors and scale of adjustments have been informed by a combination of expert judgement and external market data.

 

 

 

 

Capital and risk management

Credit risk continued

For the UK Personal Banking portfolio, the forward-looking components of the IFRS 9 PD models were also modified leveraging existing stress testing models to ensure that PDs appropriately reflect the forecasts for unemployment and house prices in particular. Additionally, post model ECL adjustments were made to ensure that the ECL was adjusted for known model over and under-predictions pending the systematic calibration of the underlying models.

 

The in-model adjustments have been applied in order to weight the PD and LGD estimates within the core ECL calculation process and therefore consistently and systematically inform stage allocation and ECL quantification.

 

Government guarantees

During March and April 2020, the UK government launched a series of temporary schemes designed to support businesses deal with the impact of Covid-19. The BBLS, CBILS and CLBILS lending products are originated by NatWest Group but are covered by government guarantees. These are to be set against the outstanding balance of a defaulted facility after the proceeds of the business assets have been applied. The government guarantee is 80% for CBILS and CLBILS and 100% for BBLS. NatWest Group recognises lower LGDs for these lending products as a result, with 0% applied to the government-guaranteed part of the exposure.

 

Notwithstanding the government guarantees, NatWest Group's measurements of PD are unaffected and NatWest Group continues to move exposures to Stage 2 and Stage 3 where a significant deterioration in credit risk or a default is identified.

 

 

 

Wholesale support schemes

The table below shows the uptake of BBLS, CBILS and CLBILS in Wholesale, by sector.

 

BBL

 

CBIL

 

CLBIL

 

 

Drawdown

% of BBIL to

 

 

Drawdown

% of CBIL to

 

 

Drawdown

% of CLBIL to

30 June 2020

Volume

amount (£m)

Sector loans

 

Volume

amount (£m)

Sector loans

 

Volume

amount (£m)

Sector loans

Wholesale lending by sector

 

 

 

 

 

 

 

 

 

 

 

  Airlines and aerospace

175

5

0.21%

 

17

4

0.17%

 

-

-

-

  Automotive

9,267

309

4.07%

 

495

111