Strategic report
NWB Group
Annual Report and Accounts 2022
1
Presentation of information
National Westminster Bank Plc (‘NWB Plc’) is a wholly-owned
subsidiary of NatWest Holdings Limited (‘NWH Ltd’ or ‘the
intermediate holding company’). The term ‘NWB Group’ or ‘we’
refers to NWB Plc and its subsidiary and associated
undertakings. The term ‘NWH Group’ refers to NWH Ltd and its
subsidiary and associated undertakings. NatWest Group plc is
‘the ultimate holding company’. The term ‘NatWest Group’
refers to NatWest Group plc and its subsidiary and associated
undertakings.
NWB Plc publishes its financial statements in pounds sterling
(‘£’ or ‘sterling’). The abbreviations ‘£m’ and ‘£bn’ represent
millions and thousands of millions of pounds sterling (‘GBP’),
respectively, and references to ‘pence’ represent pence where
amounts are denominated in sterling. Reference to ‘dollars’ or
‘$’ are to United States of America (‘US’) dollars. The
abbreviations ‘$m’ and ‘$bn’ represent millions and thousands
of millions of dollars, respectively. The abbreviation ‘€’
represents the ‘euro’, and the abbreviations ‘€m’ and ‘€bn’
represent millions and thousands of millions of euros,
respectively.
Description of business
The principal entities under NWH Ltd are National Westminster
Bank Plc (which wholly owns Coutts & Company and Ulster
Bank Limited), The Royal Bank of Scotland plc and Ulster Bank
Ireland DAC (UBIDAC).
Principal activities and operating segments
NWB Group serves customers across the UK with a range of
retail and commercial banking products and services. A wide
range of personal products are offered including current
accounts, credit cards, personal loans, mortgages and wealth
management services. NWB Plc is the main provider of shared
services for NatWest Group.
On 27 January 2022, NatWest Group announced that a new
business segment, Commercial & Institutional, would be
created, bringing together the Commercial, NatWest Markets
and RBSI businesses to form a single
business segment, with
common management and objectives, to best support our
customers across the full non-personal customer lifecycle.
Comparatives have been re-presented. The re-presentation of
operating segments does not change the consolidated financial
results of NWB Group.
The reportable operating segments are as follows:
Retail
Banking
serves personal customers in the UK and
includes Ulster Bank customers.
Private Banking
serves UK-connected, high-net-worth,
individuals and their business interests.
Commercial & Institutional
offers SME’s, Commercial,
Corporate and Institutional clients comprehensive banking and
financing solutions throughout the UK and internationally.
Central items & other
includes corporate functions, such as
ring-fenced bank and NatWest Group treasury, finance, risk
management, compliance, legal, communications and human
resources. The services are mainly provided to NWH Group,
however, in certain instances, where permitted, services are
also provided to the wider NatWest Group including the non
ring-fenced business.
Performance overview
Strong financial performance
NWB Group profit for the year was £3,689 million compared
with £2,907 million in 2021, driven by increased income,
partially offset by additional operating expenses and net
impairment losses.
Total income increased by £2,474 million compared with 2021,
reflecting the beneficial impact of interest rate increases,
combined with higher fee income.
Operating expenses increased by £89 million compared with
2021, primarily reflecting continued investment in technology
and data capabilities, partially offset by a reduction in conduct
and litigation charges. The cost:income ratio decreased from
66.9% to 53.5%.
Net impairment losses of £341 million principally reflects the
latest macro-economics, including updated scenarios, with
more weight being placed on the downside scenarios.
Underlying book performance remains strong. Total impairment
provisions increased by £0.1 billion to £2.6 billion in the year,
which resulted in a reduction in the ECL coverage ratio from
0.85% at 31 December 2021 to 0.84%.
Robust balance sheet with strong capital levels
Total assets decreased by £25.1 billion to £409.5 billion
compared with £434.6 billion at 31 December 2021. This was
primarily driven by a net decrease of £28.1 billion in cash
balances, resulting from growth in loans to customers and
customer deposit outflows.
Loans to customers increased by £14.7 billion primarily driven
by growth in mortgage balances and an increase in
commercial lending due to increased facility utilisation, partially
offset by continued UK Government financial support scheme
repayments.
Customer deposits decreased by £6.8 billion primarily reflecting
higher outflows from savings and current account balances due
to an overall market liquidity contraction.
The CET1 ratio decreased 480 basis points over the period due
to a £1.2 billion decrease in CET1 capital and a £26.2 billion
increase in RWAs. The CET1 decrease reflects the attributable
profit in the period, offset by dividends paid, the removal of the
adjustment for the prudential amortisation on software
development costs and an increase in intangible assets.
Total RWAs increased by £26.2 billion to £112.4 billion mainly
reflecting an increase in credit risk RWAs, due to new
regulations impacting model adjustments, combined with
increased exposures, partially offset by improved credit risk
metrics.
Page
Strategic report
Presentation of information
1
Description of business
1
Principal activities and operating
1
Performance overview
1
Stakeholder engagement and s.172(1)
2
Board of directors and secretary
3
Top and emerging threats
4
Financial review
6
Risk and capital management
9
Report of the directors
80
Statement of directors’ responsibilities
87
Financial statements
88
Risk factors
172
Forward-looking statements
193
Stakeholder engagement and s.172(1) statement
NWB Group
Annual Report and Accounts 2022
2
This statement describes how the directors have had regard to
the matters set out in section 172(1) (a) to (f) of the Companies
Act 2006 (section 172) when performing their duty to promote
the success of the company.
Board engagement with stakeholders
The Board reviews and confirms its key stakeholder groups for
the purposes of section 172 annually. For 2022, they remained
customers, investors, regulators colleagues, communities, and
suppliers. Examples of how the Board has engaged with key
stakeholders, including the impact on principal decisions, can
be found in this statement and on page 81 (Corporate
governance statement)
.
Supporting effective Board discussions and
decision-making
NatWest Group’s purpose –
championing potential, helping
people, families and businesses to thrive
– continues to
influence Board discussions and decision-making.
Board and Committee terms of reference reinforce the
importance of considering both NatWest Group’s purpose and
the matters set out in section 172. The Board and Committee
paper template includes a section for authors to explain how
the proposal or update aligns with NatWest Group’s purpose
and a separate section for them to include an assessment of
the relevant stakeholder impacts for the directors to consider.
Directors are mindful that it is not always possible to achieve
an outcome which meets the expectations of all stakeholders
who may be impacted. For decisions which are particularly
challenging or complex, an optional page in the paper template
provides directors with further information to support
purposeful decision-making. This additional page uses the
Blueprint for Better Business framework as a base and is
aligned to NatWest Group’s broader purpose framework.
Principal decisions
Principal decisions are those decisions taken by the Board that
are material or of strategic importance to the company, or are
significant to the company’s key stakeholders.
This statement describes an example of a principal decision
taken by the Board during 2022. Further information on the
Board’s principal activities can be found in the Corporate
governance statement on pages 80 to 86.
Key
A – Likely long-term consequences
B – Employee interests
C – Relationships with customers, suppliers and others
D – The impact on community and environment
E – Maintaining a reputation for high standards of business
conduct
F – Acting fairly between members of the company
Case Study – Approving capital distributions
Factors considered:
A C
What was the decision-making process
?
During 2022, the Board approved two interim dividends.
The
Board received comprehensive papers from management and
its decision was informed by 2022 capital plans as well as
regular updates on NWB Plc’s financial and capital positions.
The Board Risk Committee also reviewed all capital
distributions proposals in advance of Board consideration and
recommended them to the Board for approval.
How did the directors fulfil their duties under section 172 and
how were stakeholders considered?
In taking decisions, the directors were mindful of their duties
under section 172. The dividend proposal included a
stakeholder overview which set out relevant stakeholder
impacts and considerations.
How was NatWest Group’s purpose considered as part of the
decision?
The Board is aware that in taking decisions on capital
distributions, it also needs to consider the financial implications
of those decisions in terms of continuing to support customers
and maintaining financial stability.
Actions and outcomes
The Board approved an interim dividend of £993 million which
was paid on 22 February 2022 and an interim dividend of £2.3
billion which was paid on 29 July 2022, with both interim
dividends payable to NWH Ltd as the sole shareholder.
Further details on how NatWest Group engages with its
stakeholders can be found in the NatWest Group plc 2022
Annual Report and Accounts and at natwestgroup.com.
Board of directors and secretary
NWB Group
Annual Report and Accounts 2022
3
Approval of Strategic report
The Strategic report for the year ended 31 December 2022 set out on pages 1 to 79 was approved by the Board of directors on 16
February 2023.
By order of the Board
Jan Cargill
Chief Governance Officer and Company Secretary
16 February 2023
Chairman
Howard Davies
Executive directors
Alison Rose DBE (CEO)
Katie Murray (CFO)
Non-executive directors
Francesca Barnes
Graham Beale
Ian Cormack
Roisin Donnelly
Patrick Flynn
Morten Friis
Yasmin Jetha
Mike Rogers
Mark Seligman
Lena Wilson
Board and committee membership
Nominations Committee
Howard Davies (Chair)
Graham Beale
Patrick Flynn
Morten Friis
Mark Seligman
Lena Wilson
Audit Committee
Patrick Flynn (Chair)
Graham Beale
Ian Cormack
Morten Friis
Mark Seligman
Board Risk Committee
Morten Friis (Chair)
Francesca Barnes
Graham Beale
Ian Cormack
Patrick Flynn
Lena Wilson
Performance and Remuneration Committee
Lena Wilson (Chair)
Ian Cormack
Mike Rogers
Mark Seligman
Senior independent non-executive director
Graham Beale
Chief Governance Officer and Company Secretary
Jan Cargill
Board changes in 2022
Roisin Donnelly (non-executive director) appointed on 1
October 2022.
Robert Gillespie (non-executive director) resigned on 15
December 2022.
For additional detail on the activities of the Committees above,
refer to the Report of the directors.
Auditor
Ernst & Young LLP
Chartered Accountants and Statutory Auditor
25 Churchill Place
London E14 5EY
Registered office and Head office
250 Bishopsgate
London, EC2M 4AA
Telephone: +44 (0)20 7085 5000
Other principal offices
Ulster Bank Limited
11-16 Donegall Square East, Belfast, Co Antrim, BT1 5UB,
Northern Ireland
Coutts & Company
440 Strand
London WC2R 0QS
Lombard North Central PLC
250 Bishopsgate
London EC2M 4AA
National Westminster Bank Plc
Registered in England No. 929027
Top and emerging threats
NWB Group
Annual Report and Accounts 2022
4
A continuous process is used to identify and manage NatWest Bank’s top and emerging threats. These are threats that could have
a significant negative impact on the ability to operate or meet strategic objectives.
Externally-focused top and emerging threats
Trend
Economic
and political
risks
NatWest Bank was affected by uncertain and volatile economic conditions in 2022
which created a challenging operating environment. The outlook for the UK and
global economy remains uncertain including due to falling economic activity, high
inflation, rising interest rates, elevated energy prices, and the Russian invasion of
Ukraine.
These conditions could deteriorate, depending on a number of factors including
market volatility, volatility in commodity prices, escalating geopolitical tensions or
concerns regarding sovereign debt or sovereign credit ratings. Economic conditions
could also be affected by changing demographics in the markets that NatWest Bank
serves including increasing social inequalities or the threat of new and widespread
public health crises (including any future epidemics or pandemics).
The UK experienced significant political uncertainty in 2022, which may persist into
the future. This could lead to a loss of confidence in the UK by investors, which
could in turn negatively impact NatWest Bank. NatWest Bank also faces political
uncertainty in Scotland as a result of a possible second Scottish independence
referendum.
A range of complementary approaches is used to mitigate these risks, including
targeted customer reviews, including for customer segments most vulnerable to
inflationary impacts, scenario analysis, stress tests and review of risk appetite.
Increased risk
Climate
change
Climate-related risks represent a source of systemic risk in the global financial
system. Financial and non-financial risks from climate change can arise through
physical and transition risks. In addition, physical and transition risks can trigger
further losses, stemming directly or indirectly from legal claims, litigation and
conduct liability (referred to as liability risk). As a result, NatWest Bank and its
customers, suppliers and counterparties face significant climate-related risks.
Further progress was made in 2022 in managing climate related risks including
progress with embedding climate risk into NatWest Bank’s risk framework, financial
planning and development of a transition plan.
The successful implementation of NatWest Bank’s climate change-related strategy,
ambitions and NatWest Group’s transition plan will depend to a large extent on
many factors and uncertainties beyond NatWest Bank’s control including the
macroeconomic environment, and the effectiveness of actions of governments,
regulators, businesses, investors, and customers to mitigate the impact of climate-
related risks.
Stable risk
Cyber
threats
NatWest Bank experiences a constant threat from cyberattacks across NatWest
Bank and against NatWest Bank’s supply chain. NatWest Bank and its supply chain
can be subjected to Distributed Denial of Service and ransomware attacks, which
are a pervasive and significant threat to the global financial services industry. The
focus is to manage the impact of the attacks and sustain availability of services for
NatWest Bank’s customers. As cyberattacks evolve and become more sophisticated,
NatWest Bank continues to invest in additional capability designed to defend against
emerging threats.
Increased risk
Competitive
environment
NatWest Bank operates in markets that are highly competitive and with increasing
competitive pressures and technology disruption, raising the threat of reduced
revenue and lower profitability. The risks mainly relate to changes in regulation,
developments in financial technology (including digital currency), new entrants to
the market and shifts in customer behaviour. NatWest Bank closely monitors the
competitive environment and adapts strategy as appropriate to deliver innovative
and compelling propositions for customers.
Stable risk
Regulatory,
legal and
conduct risks
NatWest Bank is subject to extensive laws and regulations and disclosure
requirements, which present ongoing compliance and conduct risks. For example, in
2022 this included increased regulatory focus on customer protection via the FCA’s
Consumer Duty policy statement and final rules and guidance. NatWest Bank
implements new regulatory requirements, where applicable, and incorporates the
implications of related changes in its strategic and financial plans. NatWest Bank
expects government and regulatory focus on the financial services industry to
remain high for the foreseeable future.
Stable risk
Top and emerging threats
NWB Group
Annual Report and Accounts 2022
5
Internally-focused top and emerging threats
Trend
Change risk
The implementation of NatWest Group’s purpose-led strategy, including the creation
of the Commercial & Institutional segment, carry significant execution and
operational risks. NatWest Bank continues to manage and implement change in line
with its strategic plans, while assessing execution risks and taking appropriate
mitigating action. In addition, NatWest Bank continues to monitor and strengthen its
control environment via robust governance and control frameworks.
Stable risk
Financial
crime
Financial crime continues to evolve, whether through fraud, scams, or other criminal
activity. NatWest Bank has made and continues to make significant, multi-year
investments to strengthen and improve its overall financial crime control framework
with prevention systems and capabilities. As part of its ongoing programme of
investment, there is current and future investment planned to further strengthen
financial crime controls, including investment in new technologies and capabilities to
further enhance customer due diligence, transaction monitoring, sanctions and anti-
bribery and corruption systems. NatWest Bank continues to work with law
enforcement agencies, industry bodies and regulators to develop intelligence and
collaborative solutions to prevent financial crime.
Decreased risk
People risk
NatWest Bank’s success depends on its ability to attract, retain and develop highly-
skilled, qualified and diverse personnel, including for technology and data-focused
roles, in a highly competitive market and under internal cost reduction pressures. A
combination of developing a strong people proposition, close monitoring of attrition
levels and colleague wellbeing including versus industry benchmarks are key
mitigants.
Stable risk
Third-party
suppliers
Operational risks arise from NatWest Bank’s reliance on third-party suppliers and
outsourcing of certain activities across a broad range of activity including the
provision of IT services and the adoption of new technology. While the ineffective
management of risks related to third-party suppliers could adversely affect NatWest
Bank, significant resources and planning have been devoted to mitigate the risks.
This includes robust due diligence, identification of strategic suppliers, appropriate
oversight and monitoring, and building close working relationships with the third
parties on which NatWest Bank relies.
Increased risk
Data
management
NatWest Bank relies on the effective use of accurate data to support, monitor,
evaluate, manage and enhance its operations and deliver its strategy. The
availability of current, complete, detailed and accurate data, together with
appropriate governance and accountability for data, is fast becoming a critical
strategic asset, which is subject to increased regulatory focus. Failure to have that
data, or the ineffective use or governance of that data, could result in a failure to
manage and report important risks and opportunities or satisfy customers’
expectations including the inability to deliver innovative products and services.
NatWest Bank continues to be focused on delivering a long-term data strategy
alongside enhancing control and policy frameworks governing data usage.
Stable risk
Financial review
NWB Group
Annual Report and Accounts 2022
6
Summary consolidated income statement for the year ended 31 December 2022
Year ended
Retail
Banking
Private
Banking
Commercial&
Institutional
Central items &
other
31 December
2022
31 December
2021
Variance
£m
£m
£m
£m
£m
£m
£m
%
Net interest income
4,494
754
2,740
(456)
7,532
6,002
1,530
25
Non-interest income
399
271
1,286
2,255
4,211
3,267
944
29
Total income
4,893
1,025
4,026
1,799
11,743
9,269
2,474
27
Operating expenses
(2,115)
(596)
(1,939)
(1,638)
(6,288)
(6,199)
(89)
1
Profit before impairment losses/releases
2,778
429
2,087
161
5,455
3,070
2,385
78
Impairment (losses)/releases
(218)
2
(126)
1
(341)
813
(1,154)
(142)
Operating profit before tax
2,560
431
1,961
162
5,114
3,883
1,231
32
Tax charge
(1,425)
(976)
(449)
46
Profit for the year
3,689
2,907
782
27
Key metrics and ratios
2022
2021
Cost:income ratio (%)
(1)
53.5
66.9
Loan impairment rate (bps)
(2)
11
(28)
CET1 ratio (%)
(3)
11.3
16.1
Leverage ratio (%)
(4)
4.4
4.8
Risk weighted assets (RWAs) (£bn)
112.4
86.2
Loan:deposit ratio (%)
(5)
90
83
(1)
Cost:income ratio is total operating expenses divided by total income.
(2)
Loan impairment rate is the loan impairment charge divided by gross customer loans.
(3)
Common Equity Tier 1 (CET1) ratio is CET1 capital divided by RWAs.
(4)
Leverage ratio is
Tier 1 capital divided by total exposure. This is
in accordance with changes to the UK’s
leverage ratio framework, refer to page 63 for further details.
(5)
Loan deposit ratio is total loans divided by total deposits.
NWB Group reported a profit of £3,689 million compared with
£2,907 million in 2021, driven by an increase in total income of
£2,474 million, partially offset by an increase in operating
expenses of £89 million and net impairment losses of £341
million compared with releases of £813 million in 2021.
Total income
increased by £2,474 million, or 27%, to £11,743
million compared with £9,269 million in 2021.
Net interest income
increased by £1,530 million, or 25%, to
£7,532 million compared with £6,002 million in 2021, reflecting
mortgage balance growth and a beneficial impact from interest
rate increases.
Non-interest income
increased by £944 million, or 29%, to
£4,211 million compared with £3,267 million in 2021.
Net fees and commissions increased by £144 million to
£1,626 million, primarily due to higher transaction-related
fee income.
Other operating income
increased by £800 million to £2,585
million compared with £1,785 million in 2021, reflecting:
£676 million higher income from hedging activities, including
gains on economic hedging derivatives, due to interest rate
rises;
non-repeat of 2021 incurred losses of £117 million upon
partial redemption of debt instruments and £44 million upon
the sale of properties;
an £80 million profit from insurance liabilities; and
additional £152 million income from the recharging of costs
to other NatWest Group entities, principally reflecting the
impact of organisational restructure activity; partially offset
by
bond disposal losses of £88 million in 2022, a reduction of
£208 million compared with gains of £120 million in 2021
and a number of other small movements.
Operating expenses
increased by £89 million to £6,288 million,
compared with £6,199 million in 2021, reflecting:
a staff costs increase of £81 million primarily due to
continued investment in key areas, including Data,
Technology and Financial Crime, as well as an increase in
costs subsequently recharged to other NatWest Group
entities;
additional increases in premises and equipment and
outsourcing costs resulting from investment in technology
and data capabilities, partially offset by
non-repeat of one-off conduct and litigation charges in 2021.
Net impairment losses
of £341 million principally reflects the
latest macro-economics, including updated scenarios, with more
weight being placed on the downside scenarios. Underlying
book performance remains strong. Total impairment provisions
increased by £0.1 billion to £2.6 billion in the year, which
resulted in a reduction in the ECL coverage ratio from 0.85% at
31 December 2021 to 0.84%.
Financial review continued
NWB Group
Annual Report and Accounts 2022
7
Segmental performance
Retail Banking
Operating profit was £2,560 million, compared with £1,992
million in 2021.
Net interest income increased by £953 million to £4,494 million
compared with £3,541 million in 2021, primarily reflecting £16.1
billion balance growth in mortgages and higher deposit income
supported by interest rate rises.
Non-interest income increased by £54 million to £399 million,
compared with £345 million in 2021, primarily reflecting higher
transaction-related fee income.
Operating expenses increased by £198 million to £2,115 million
compared with £1,917 million in 2021, primarily reflecting
continued investment in key areas, including Financial Crime
prevention and Data capabilities.
Net impairment losses of £218 million reflects additional losses
relating to good book exposures, driven by a revision of the
economic outlook scenario assumptions. Stage 3 defaults
continue to be at a low level.
Loans to customers increased by £17.0 billion to £181.5 billion,
reflecting strong mortgage growth of £16.1 billion, with gross
new mortgage lending of £40.3 billion. Personal advances
increased by £0.3 billion and credit cards balances increased
by £0.2 billion in 2022 reflecting continued strong customer
demand.
Customer deposits decreased by £0.3 billion to £151.9 billion
driven by higher outflows from savings accounts due to
increases in inflation and costs of living.
Private Banking
Operating profit was £431 million compared with £264 million
in 2021.
Net interest income increased by £293 million to £754 million in
2022, reflecting lending balance growth, combined with higher
deposit income supported by interest rate rises.
Non-interest income increased by £8 million to £271 million in
2022, primarily reflecting higher transaction-related fee income.
Operating expenses increased by £83 million to £596 million in
2022, principally due to continued investment in people and
technology to enhance AUMA growth propositions and
increased investment in financial crime prevention.
A net impairment release of £2 million in 2022 mainly reflects
ECL provision releases in non-default portfolios, partially offset
by a revision of the economic outlook scenario assumptions.
Loans to customers increased by £1.5 billion to £19.2 billion,
driven by continued strong mortgage lending growth.
Customer deposits increased by £4.1 billion to £41.2 billion,
with continued savings growth.
Commercial & Institutional
Operating profit was £1,961 million, compared with a profit of
£2,056 million in 2021.
Net interest income increased by £569 million to £2,740 million,
compared with £2,171 million in 2021, primarily driven by
lending growth and a beneficial impact from interest rate
increases.
Non-interest income increased by £246 million to £1,286 million,
primarily reflecting higher card payment fees driven by
transaction volume growth, and higher income from hedging
activities resulting from recent interest rate rises.
Operating expenses increased by £47 million to £1,939 million,
compared with £1,892 million in 2021, primarily reflecting
investment in technology and data capabilities.
Net impairment losses of £126 million was primarily driven by
the downward revision of economic outlook scenario
assumptions.
Loans to customers increased by £4.5 billion to £81.6 billion,
primarily due to increased facility utilisation, partially offset by
continued UK Government financial support scheme
repayments.
Customer deposits decreased by £6.2 billion driven by higher
outflows from savings and current accounts due to overall
market liquidity contraction in the second half of the year.
Central items & other
Operating profit was £162 million in 2022 compared with a loss
of £429 million in 2021.
Total income increased by £351 million to £1,799 million in
2022, compared with £1,448 million in 2021, reflecting higher
income from hedging activities, including gains on economic
hedging derivatives, due to interest rate rises; £80 million profit
from insurance liabilities; and non-repeat of 2021 incurred
losses of £117 million upon partial redemption of debt
instruments and £44 million upon sale of properties.
These
were partially offset by a £208 million reduction in income from
bond disposals.
Operating expenses decreased by £239 million to £1,638
million, compared with £1,877 million in 2021, principally due to
the non-repeat of 2021 litigation and conduct costs. £1,514
million of total expenses were recovered through service
charges in non-interest income.
Financial review continued
NWB Group
Annual Report and Accounts 2022
8
Summary consolidated balance sheet as at 31 December 2022
2022
2021
Variance
£m
£m
£m
%
Assets
Cash and balances at central banks
73,065
101,213
(28,148)
(28)
Derivatives
4,407
2,460
1,947
79
Loans to banks - amortised cost
3,197
4,182
(985)
(24)
Loans to customers - amortised cost
301,684
286,971
14,713
5
Amounts due from holding companies and fellow subsidiaries
4,903
3,519
1,384
39
Other financial assets
14,546
29,031
(14,485)
(50)
Other assets
7,667
7,187
480
7
Total assets
409,469
434,563
(25,094)
(6)
Liabilities
Bank deposits
16,060
22,831
(6,771)
(30)
Customer deposits
322,614
329,440
(6,826)
(2)
Amounts due to holding companies and fellow subsidiaries
38,771
45,136
(6,365)
(14)
Derivatives
2,088
4,119
(2,031)
(49)
Other financial liabilities
5,384
7,251
(1,867)
(26)
Subordinated liabilities
197
211
(14)
(7)
Notes in circulation
809
904
(95)
(11)
Other liabilities
3,470
3,934
(464)
(12)
Total liabilities
389,393
413,826
(24,433)
(6)
Total equity
20,076
20,737
(661)
(3)
Total liabilities and equity
409,469
434,563
(25,094)
(6)
Total assets
decreased by £25.1 billion to £409.5 billion at 31
December 2022, compared with £434.6 billion at 31 December
2021.
Cash and balances at central banks
decreased by £28.1 billion
to £73.1 billion, compared with £101.2 billion at 31 December
2021, driven primarily by:
£25.0 billion decrease resulting from growth in loans to
customers and customer deposit outflows;
£8.9 billion decrease in balances held at central banks; and
£3.5 billion decrease due to repo activity; partially offset by
£11.7 billion net increase in liquidity assets held.
Loans to banks – amortised cost
decreased by £1.0 billion to
£3.2 billion, compared with £4.2 billion at 31 December 2021,
mainly representing a decrease in US dollar and European
Central Bank balances as part of treasury activities.
Loans to customers
increased by £14.7 billion to £301.7 billion,
compared with £287.0 billion at 31 December 2021, driven by:
£17.6 billion mortgage growth as a result of strong gross
new lending;
£4.5 billion increase in commercial lending, primarily due to
increased facility utilisation, whilst repayments drove further
reductions in UK Government scheme balances;
£6.8 billion net decrease in relation to Treasury reverse
repo activity; and
£1.4 billion decrease due to collateral placed for net repo
trades.
Amounts due from holding companies and fellow subsidiaries
increased by £1.4 billion to £4.9 billion, compared with £3.5
billion at 31 December 2021, primarily reflecting loans and
advances provided to UBIDAC to support liquidity management
during the phased withdrawal from the Republic of Ireland.
Other financial assets
decreased by £14.5 billion to £14.5
billion, primarily driven by bond disposals and maturities of
£25.4 billion, a reduction in fair value of the remaining bond
portfolio of £1.6 billion due to changes in interest and FX rates,
partially offset by bond purchases of £11.9 billion.
Bank deposits
decreased by £6.8 billion to £16.1 billion, driven
by a £6.5 billion decrease in repo balances.
Customer deposits
decreased by £6.8 billion to £322.6 billion,
driven by:
£5.9 billion reflecting higher outflows from savings and
current account balances due to an overall market liquidity
contraction;
£5.0 billion decrease in repos facing customers; partially
offset by
£4.1 billion deposit growth in Private Banking.
Amounts due to holding companies and fellow subsidiaries
decreased by £6.4 billion to £38.8 billion, compared with £45.1
billion at 31 December 2021, primarily due to movements on
balances with NWG Plc and NWH Ltd.
Derivative liabilities
decreased by £2.0 billion to £2.1 billion,
compared with £4.1 billion at 31 December 2021, driven by
interest rate rises across all currencies and GBP spot rate
depreciation.
Other financial liabilities
decreased by £1.9 billion to £5.4 billion,
compared with £7.3 billion at 31 December 2021, driven by a
reduction in long term fixed rate investment products, as a
result of the current market environment and increasing rates
outlook.
Other liabilities
decreased by £0.5 billion to £3.5 billion,
compared with £3.9 billion at the 31 December 2021, primarily
due to a reduction in financial guarantees and accruals.
Total equity
decreased by £0.7 billion to £20.1 billion, compared
with £20.7 billion at 31 December 2021. The decrease reflects
dividends paid to NatWest Holdings and decreases in cash flow
hedging reserves due to interest rate rises, partially offset by
attributable profit of £3.7 billion.
Risk and capital management
NWB Group
Annual Report and Accounts 2022
9
Presentation of information
Where marked as audited in the section header, certain
information in the Risk and capital management section (pages
9 to 79) is within the scope of the Independent auditor’s report.
Risk and capital management is generally conducted on an
overall basis within NatWest Group such that common policies,
procedures, frameworks and models apply across NatWest
Group. Therefore, for the most part, discussion on these
qualitative aspects reflects those in NatWest Group as relevant
for the businesses and operations in NWB Group.
Risk management framework
Introduction
NWB Group operates under NatWest Group’s enterprise-wide
risk management framework, which is centred on the
embedding of a strong risk culture. The framework ensures the
governance, capabilities and methods are in place to facilitate
risk management and decision-making across the organisation.
The framework ensures that NWB Group’s principal risks –
which are detailed in this section – are appropriately controlled
and managed. It sets out the standards and objectives for risk
management as well as defining the division of roles and
responsibilities.
This seeks to ensure a consistent approach to risk management
across NWB Group. It aligns risk management with NWB
Group’s overall strategic objectives.
The framework, which is designed and maintained by NatWest
Group’s independent Risk function, is owned by the NatWest
Group Chief Risk Officer. It is reviewed and approved annually
by the NatWest Group Board. The framework incorporates risk
governance, NatWest Group’s three lines of defence operating
model and the Risk function’s mandate.
Risk appetite, supported by a robust set of principles, policies
and practices, defines the levels of tolerance for a variety of
risks and provides a structured approach to risk-taking within
agreed boundaries.
While all NWB Group colleagues are responsible for managing
risk, the Risk function provides oversight and monitoring of risk
management activities, including the implementation of the
framework and adherence to its supporting policies, standards
and operational procedures. The Chief Risk Officer plays an
integral role in providing the Board with advice on NWB
Group’s risk profile, the performance of its controls and in
providing challenge where a proposed business strategy may
exceed risk tolerance.
In addition, there is a process to identify and manage top and
emerging threats, which are those that could have a significant
negative impact on NWB Group’s ability to meet its strategic
objectives. Both top and emerging threats may incorporate
aspects of – or correlate to – a number of principal risks and
are reported alongside them to the Board on a regular basis.
Page
Presentation of information
9
Risk management framework
Introduction
9
Culture
10
Governance
11
Risk appetite
13
Identification and measurement
14
Mitigation
14
Testing and monitoring
14
Stress testing
14
Credit risk
Definition and sources of risk
18
Governance and risk appetite
18
Identification and measurement
18
Mitigation
18
Assessment and monitoring
19
Problem debt management
19
Forbearance
21
Impairment, provisioning and write-offs
21
Significant increase in credit risk and asset lifetimes
24
Economic loss drivers and UK economic uncertainty
25
Measurement uncertainty and ECL sensitivity analysis
30
Measurement uncertainty and ECL adequacy
32
Banking activities
33
Capital, liquidity and funding risk
Definition and sources
61
Capital, liquidity and funding risk management
62
Key points
63
Minimum requirements
64
Measurement
64
Non-traded market risk
69
Pension risk
73
Compliance & conduct risk
74
Financial crime risk
74
Climate risk
75
Operational risk
77
Model risk
78
Reputational risk
79
Risk and capital management continued
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Annual Report and Accounts 2022
10
Risk management framework continued
Culture
Risk culture is at the heart of NWB Group’s risk management
framework and its risk management practice. In 2022, the
approach to risk culture was refreshed under the new banner
of Intelligent Risk Taking to re-intensify focus on robust risk
management behaviours and practices. NWB Group expects
leaders to act as role models for strong risk behaviours and
practices building clarity, developing capability and motivating
employees to reach the required standards set out in the
Intelligent Risk Taking approach. Colleagues are expected to:
Consistently role-model the values and behaviours in Our
Code, based on strong ethical standards which underpin
Our Purpose.
Empower others to take risks aligned to NWB Group’s
strategy, explore issues from a fresh perspective, and tackle
challenges in new and better ways across organisational
boundaries.
Manage risk in line with appropriate risk appetite.
Ensure each decision made keeps NWB Group, colleagues,
customers, communities and shareholders safe and secure.
Understand their role in managing risk, remaining clear and
capable, grounded in knowledge of regulatory obligations.
Consider risk in all actions and decisions.
Escalate risks and issues early; taking action to mitigate
risks and learning from mistakes and near-misses, reporting
and communicating these transparently.
Challenge others’ attitudes, ideas and actions.
The target Intelligent Risk Taking behaviours are embedded in
NatWest Group’s Critical People Capabilities and are clearly
aligned to the core values of inclusive, curious, robust,
sustainable and ambitious. These aim to act as an effective
basis for a strong risk culture because the Critical People
Capabilities form the basis of all recruitment and selection
processes.
Training
Enabling employees to have the capabilities and confidence to
manage risk is core to NatWest Group’s learning strategy.
NatWest Group offers a wide range of learning, both technical
and behavioural, across the risk disciplines. This training may
be mandatory, role-specific or for personal development.
Mandatory learning for all staff is focused on keeping
employees, customers and NatWest Group safe. This is easily
accessed online and is assigned to each person according to
their role and business area. The system allows monitoring at
all levels to ensure completion.
Our Code
NatWest Group’s conduct guidance, Our Code, provides
direction on expected behaviour and sets out the standards of
conduct that support the values. The code explains the effect of
decisions that are taken and describes the principles that must
be followed.
These principles cover conduct-related issues as well as wider
business activities. They focus on desired outcomes, with
practical guidelines to align the values with commercial
strategy and actions. The embedding of these principles
facilitates sound decision-making and a clear focus on good
customer outcomes.
Where appropriate, if conduct falls short of NatWest Group’s
required standards, the accountability review process is used to
assess how this should be reflected in pay outcomes for the
individuals concerned. The NatWest Group remuneration policy
ensures that the remuneration arrangements for all employees
reflect the principles and standards prescribed by the PRA
rulebook and the FCA handbook. Any employee falling short of
the expected standards would also be subject to internal
disciplinary policies and procedures. If appropriate, the relevant
authority would be notified.
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Annual Report and Accounts 2022
11
Risk management framework continued
Governance
Committee structure
The diagram shows NWB Group’s risk committee structure in 2022 and the main purposes of each committee.
(1)
The NatWest Group Chief Executive Officer also performs the role of NWB Plc Chief Executive Officer.
(2)
The NatWest Group Chief Risk Officer also performs the role of NWB Plc Chief Risk Officer.
(3)
The NatWest Group Chief Financial Officer also performs the role of NWB Plc Chief Financial Officer.
Business and function risk committees
Supports the CEO in discharging
her individual accountabilities,
reflecting the authority delegated
to her by the NWB Plc Board.
Reviews, challenges and debates
all aspects of NWB Plc, including
strategic, financial, capital, risk
and operational issues. Supports
the CEO in forming
recommendations to the Board
and committees.
Supports the CFO in overseeing
the effective balance sheet
management of NWB Plc,
ensuring they operate within risk
appetite, policies and chosen
business strategy as well as
comply with regulatory and legal
requirements
Risk committees review and monitor all risks, providing guidance,
recommendations and decisions on risks affecting the businesses and functions
.
Asset & Liability
Management Committee
Executive Risk Committee
Supports the CEO in
discharging her risk
management accountabilities.
Reviews and challenges all
material risk and control
matters.
Executive Committee
NWB Plc Board
Reviews and considers risk appetite measures for key risks in accordance with the Risk Management Framework.
Monitors
performance against risk appetite.
Considers any materials risks and approves, as appropriate, actions recommended by the
Board Risk Committee.
Board Risk Committee
Provides oversight and advice
to the Board on current and
potential future risk exposures,
and risk appetite. Oversees the
effectiveness of the risk
management framework within
NWB Plc and (with the Audit
Committee) the system of
internal controls required to
manage risk.
Audit Committee
Assists the Board in carrying out its
accounting, internal control and
financial reporting responsibilities.
including relevant non-financial
disclosures or related controls.
Reviews the effectiveness of the
system of internal controls relating to
financial management and
compliance with financial reporting,
asset safeguarding and accounting
standards
.
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Annual Report and Accounts 2022
12
Risk management framework continued
Risk management structure
The diagram shows NWB Group’s risk management structure in 2022 and key risk management responsibilities.
(1)
Double Independent Non-Executive Directors.
(2)
The NatWest Group Chief Executive Officer also performs the role of NWB Chief Executive Officer.
(3)
The NatWest Group Chief Risk Officer also performs the role of NWB Chief Risk Officer.
(4)
The NWB Chief Risk Officer reports directly to the NWB Chief Executive Officer. There is a further secondary reporting line to the chair of the Board Risk Committee and a right of
access to the Committee, including the deputy chair.
(5)
The Risk function is independent of the customer-facing business segments and support functions. Its structure is divided into three parts (Directors of Risk, Specialist Risk Directors
and Chief Operating Officer) to facilitate effective management of the risks facing NWB. Risk committees in the customer businesses and key functional risk committees oversee risk
exposures arising from management and business activities and focus on ensuring that these are adequately monitored and controlled. The directors of Risk (Retail Banking;
Commercial & Institutional Banking; Financial & Strategic Risk; Non-Financial Risk and Compliance & Conduct) as well as the Director, Financial Crime Risk NatWest Holdings; the
Chief Risk Officer, Coutts & Company and the Chief Operating Officer report to the NWB Chief Risk Officer
NWB
Chief Executive Officer
NatWest Group
Chief Risk Officer
Director of Risk, Commercial & Institutional Banking
Design and delivery of Commercial & Institutional Banking risk strategy and service
proposition. Oversight of risk management across Commercial & Institutional Banking.
Chief Operating Officer
Centralised support for the risk management function and model
risk oversight
including framework design and development.
Head of Restructuring
Design and delivery of Restructuring strategy and service proposition.
Director of Financial & Strategic Risk
Centralised oversight of financial and strategic risks across NWB, specialist advice on
top and emerging risks and responsibility for model development.
Chief Risk Officer, Coutts & Company
Design and delivery of the Coutts & Company risk strategy and service proposition.
Oversight of risk management (including Compliance) across Coutts & Company.
NWB
Chief Risk Officer
Director of Risk, Retail Banking
Design and delivery of Retail Banking risk strategy and service proposition. Oversight of
risk management across Retail Banking. Supports the Ringfence DINEDs
(1)
through the
identification, documentation, resolution and escalation of any potential ring-fencing conflicts of
interest relating to decisions made by the Ringfence and Group Chief Risk Officer.
NatWest Group
Chief Executive Officer
Director of Non-Financial Risk
Centralised oversight of non-financial risk across NWB. Design and delivery of
compliance & conduct strategy and service proposition. Design and delivery of
financial crime strategy and service proposition, oversight of financial crime risk
management. Provides specialist technical advice to the Directors of Risk
responsible for business oversight.
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Annual Report and Accounts 2022
13
Risk management framework continued
Three lines of defence
NatWest Group uses the industry-standard three lines of
defence model to articulate accountabilities and responsibilities
for managing risk. This supports the embedding of effective risk
management throughout the organisation.
First line of defence
The first line of defence incorporates most roles in NatWest
Group, including those in the customer-facing businesses,
Technology and Services as well as support functions such as
People and Transformation, Legal and Finance.
The first line of defence is empowered to take risks within the
constraints of the risk management framework, policies, risk
appetite statements set by NatWest Group and measures set by
the NWB Group Board.
The first line of defence is responsible for managing its direct
risks, and with the support of specialist functions, it is also
responsible for managing its consequential risks, by identifying,
assessing, mitigating, monitoring and reporting risks.
Second line of defence
The second line of defence comprises the Risk function and is
independent of the first line.
The second line of defence is empowered to design and
maintain the risk management framework and its components.
It undertakes proactive risk oversight and continuous
monitoring activities to confirm that NWB Group engages in
permissible and sustainable risk-taking activities.
The second line of defence advises on, monitors, challenges,
approves and escalates where required and reports on the risk-
taking activities of the first line, ensuring that these are within
the constraints of the risk management framework, policies,
risk appetite statements set by NatWest Group and measures
set by the NWB Group Board.
Third line of defence
The third line of defence is the Internal Audit function and is
independent of the first and second lines.
The third line of defence is responsible for providing
independent assurance to the NatWest Group Board, its
subsidiary legal entity boards and executive management on
the overall design and operating effectiveness of the risk
management framework and its components. This includes the
adequacy and effectiveness of key internal controls,
governance and the risk management in place to monitor,
manage and mitigate the principal risks to NatWest Group and
its subsidiary companies achieving their objectives.
The third line of defence executes its duties freely and
objectively in accordance with the Chartered Institute of
Internal Auditors’ Code of Ethics and International Standards
on independence and objectivity.
Risk appetite
Risk appetite defines the type and aggregate level of risk NWB
Group is willing to accept in pursuit of its strategic objectives
and business plans. Risk appetite supports sound risk-taking,
the promotion of robust risk practices and risk behaviours, and
is calibrated annually.
For certain principal risks, risk capacity defines the maximum
level of risk NWB Group can assume before breaching
constraints determined by regulatory capital and liquidity
requirements, the operational environment, and from a conduct
perspective. Establishing risk capacity helps determine where
risk appetite should be set, ensuring there is a buffer between
internal risk appetite and NWB Group’s ultimate capacity to
absorb losses.
Risk appetite framework
The risk appetite framework supports effective risk
management by promoting sound risk-taking through a
structured approach, within agreed boundaries. It also ensures
emerging threats and risk-taking activities that might be out of
appetite are identified, assessed, escalated and addressed in a
timely manner.
To facilitate this, a detailed annual review of the framework is
carried out. The review includes:
Assessing the adequacy of the framework compared to
internal and external expectations.
Ensuring the framework remains effective and acts as a
strong control environment for risk appetite.
Assessing the level of embedding of risk appetite across the
organisation.
The Board reviews and approves the risk appetite framework
annually.
Establishing risk appetite
In line with the risk appetite framework, risk appetite is
maintained across NWB Group through risk appetite
statements. These are in place for all principal risks and
describe the extent and type of activities that can be
undertaken.
Risk appetite statements consist of qualitative statements of
appetite supported by risk limits and triggers that operate as a
defence against excessive risk-taking. Risk measures and their
associated limits are an integral part of the risk appetite
approach and a key part of embedding risk appetite in day-to-
day risk management decisions. A clear tolerance for each
principal risk is set in alignment with business activities.
The annual process of reviewing and updating risk appetite
statements is completed alongside the business and financial
planning process. This ensures that plans and risk appetite are
appropriately aligned.
The Board sets risk appetite for all principal risks to help ensure
NWB Group is well placed to meet its priorities and long-term
targets, even in challenging economic environments. This
supports NWB Group in remaining resilient and secure as it
pursues its strategic business objectives.
NWB Group’s risk profile is continually monitored and
frequently reviewed. Management focus is concentrated on all
principal risks as well as the top and emerging threats that may
correlate to them. Risk profile relative to risk appetite is
reported regularly to senior management and the Board.
NatWest Group policies directly support the qualitative aspects
of risk appetite. They define the qualitative expectations,
guidance and standards that stipulate the nature and extent of
permissible risk-taking and are consistently applied across
NatWest Group and its subsidiaries.
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Annual Report and Accounts 2022
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Risk management framework continued
Identification and measurement
Identification and measurement within the risk management
process comprises:
Regular assessment of the overall risk profile, incorporating
market developments and trends, as well as external and
internal factors.
Monitoring of the risks associated with lending and credit
exposures.
Assessment of trading and non-trading portfolios.
Review of potential risks in new business activities and
processes.
Analysis of potential risks in any complex and unusual
business transactions.
The financial and non-financial risks that NWB Group faces are
detailed in the NatWest Group Risk Directory. This provides a
common risk language to ensure consistent terminology is used
across NWB Group. The NatWest Group Risk Directory is
subject to annual review to ensure it continues to fully reflect
the risks that NWB Group faces.
Mitigation
Mitigation is a critical aspect of ensuring that risk profile
remains within risk appetite. Risk mitigation strategies are
discussed and agreed within NWB Group.
When evaluating possible strategies, costs and benefits, residual
risks (risks that are retained) and secondary risks (those that
arise from risk mitigation actions themselves) are also
considered. Monitoring and review processes are in place to
evaluate results. Early identification, and effective management
of changes in legislation and regulation are critical to the
successful mitigation of compliance and conduct risk. The
effects of all changes are managed to ensure the timely
achievement of compliance. Those changes assessed as having
a high or medium-high impact are managed more closely.
Emerging threats that could affect future results and
performance are also closely monitored. Action is taken to
mitigate potential risks as and when required. Further in-depth
analysis, including the stress testing of exposures, is also
carried out.
Testing and monitoring
Specific activities relating to compliance and conduct, credit
and financial crime risk are subject to testing and monitoring by
the Risk function. This confirms to both internal and external
stakeholders – including the Board, senior management, the
customer-facing businesses, Internal Audit and NWB Group’s
regulators – that risk policies and procedures are being
correctly implemented and that they are operating adequately
and effectively. Selected key controls are also reviewed for
adequacy and effectiveness. Thematic reviews and targeted
reviews are also carried out where relevant to ensure
appropriate customer outcomes.
Independent testing and monitoring is also completed on
principal risk processes and controls – including controls within
the scope of Section 404 of the Sarbanes-Oxley Act 2002.
The NatWest Group Risk Testing & Monitoring Forum assesses
and validates the annual plan as well as the ongoing
programme of reviews.
Stress testing
Stress testing – capital management
Stress testing is a key risk management tool and a fundamental
component of NatWest Group’s approach to capital
management. It is used to quantify and evaluate the potential
impact of specified changes to risk factors on the financial
strength of NatWest Group, including its capital position.
Stress testing includes:
Scenario testing, which examines the impact of a
hypothetical future state to define changes in risk factors.
Sensitivity testing, which examines the impact of an
incremental change to one or more risk factors.
The process for stress testing consists of four broad stages:
Define
scenarios
Identify macro and NatWest Group-
specific vulnerabilities and risks.
Define and calibrate scenarios to
examine risks and vulnerabilities.
Formal governance process to agree
scenarios.
Assess
impact
Translate scenarios into risk drivers.
Assess impact to current and projected
P&L and balance sheet across NatWest
Group.
Calculate
results and
assess
implications
Aggregate impacts into overall results.
Results form part of the risk
management process.
Scenario results are used to inform
NatWest Group’s business and capital
plans.
Develop and
agree
management
actions
Scenario results are analysed by subject
matter experts. Appropriate
management actions are then
developed.
Scenario results and management
actions are reviewed by the relevant
Executive Risk Committees and Board
Risk Committees, and agreed by the
relevant Boards.
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Annual Report and Accounts 2022
15
Risk management framework continued
Stress testing is used widely across NatWest Group. The
diagram below summarises key areas of focus.
Specific areas that involve capital management include:
Strategic financial and capital planning
– by assessing the
impact of sensitivities and scenarios on the capital plan and
capital ratios.
Risk appetite
– by gaining a better understanding of the
drivers of, and the underlying risks associated with, risk
appetite.
Risk monitoring
– by monitoring the risks and horizon-
scanning events that could potentially affect NatWest
Group’s financial strength and capital position.
Risk mitigation
– by identifying actions to mitigate risks, or
those that could be taken, in the event of adverse changes
to the business or economic environment. Principal risk
mitigating actions are documented in NatWest Group’s
recovery plan.
Capital sufficiency – going concern forward-looking view
Going concern capital requirements are examined on a
forward-looking basis – including as part of the annual
budgeting process – by assessing the resilience of capital
adequacy and leverage ratios under hypothetical future states.
These assessments include assumptions about regulatory and
accounting factors (such as IFRS 9). They incorporate
economic variables and key assumptions on balance sheet and
P&L drivers, such as impairments, to demonstrate that NatWest
Group and its operating subsidiaries maintain sufficient capital.
A range of future states are tested. In particular, capital
requirements are assessed:
Based on a forecast of future business performance, given
expectations of economic and market conditions over the
forecast period.
Based on a forecast of future business performance under
adverse economic and market conditions over the forecast
period. Scenarios of different severity may be examined.
The examination of capital requirements under both normal
and adverse economic and market conditions enables NatWest
Group to determine whether its projected business
performance meets internal plans and regulatory capital
requirements.
The potential impact of normal and adverse economic and
market conditions on capital requirements is assessed through
stress testing, the results of which are not only used widely
across NatWest Group but also by the regulators to set specific
capital buffers. NatWest Group takes part in stress tests run by
regulatory authorities to test industry-wide vulnerabilities under
crystallising global and domestic systemic risks.
Stress and peak-to-trough movements are used to help assess
the amount of capital NatWest Group needs to hold in stress
conditions in accordance with the capital risk appetite
framework.
Internal assessment of capital adequacy
An internal assessment of material risks is carried out annually
to enable an evaluation of the amount, type and distribution of
capital required to cover these risks. This is referred to as the
Internal Capital Adequacy Assessment Process (ICAAP). The
ICAAP consists of a point-in-time assessment of exposures and
risks at the end of the financial year together with a forward-
looking stress capital assessment. The ICAAP is approved by
the Board and submitted to the PRA.
The ICAAP is used to form a view of capital adequacy
separately to the minimum regulatory requirements. The ICAAP
is used by the PRA to assess NatWest Group’s specific capital
requirements through the Pillar 2 framework.
Capital allocation
NatWest Group has mechanisms to allocate capital across its
legal entities and businesses. These aim to optimise the use of
capital resources taking into account applicable regulatory
requirements, strategic and business objectives and risk
appetite. The framework for allocating capital is approved by
the CFO with support from the Asset & Liability Management
Committee.
Governance
Capital management is subject to substantial review and
governance. The Board approves the capital plans, including
those for key legal entities and businesses as well as the results
of the stress tests relating to those capital plans.
Stress testing – liquidity
Liquidity risk monitoring and contingency planning
A suite of tools is used to monitor, limit and stress test the
liquidity and funding risks on the balance sheet. Limit
frameworks are in place to control the level of liquidity risk,
asset and liability mismatches and funding concentrations.
Liquidity and funding risks are reviewed at significant legal
entity and business levels daily, with performance reported to
the Asset & Liability Management Committee on a regular
basis. Liquidity Condition Indicators are monitored daily. This
ensures any build-up of stress is detected early and the
response escalated appropriately through recovery planning.
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Risk management framework continued
Internal assessment of liquidity
Under the liquidity risk management framework, NatWest
Group maintains the Internal Liquidity Adequacy Assessment
Process. This includes assessment of net stressed liquidity
outflows under a range of severe but plausible stress scenarios.
Each scenario evaluates either an idiosyncratic, market-wide or
combined stress event as described in the table below.
Type
Description
Idiosyncratic
scenario
The market perceives NatWest Group to be
suffering from a severe stress event, which
results in an immediate assumption of
increased credit risk or concerns over
solvency.
Market-wide
scenario
A market stress event affecting all participants
in a market through contagion, potential
counterparty failure and other market risks.
NatWest Group is affected under this scenario
but no more severely than any other
participants with equivalent exposure.
Combined
scenario
This scenario models the combined impact of
an idiosyncratic and market stress occurring
at once, severely affecting funding markets
and the liquidity of some assets.
NatWest Group uses the most severe outcome to set the
internal stress testing scenario which underpins its internal
liquidity risk appetite. This complements the regulatory liquidity
coverage ratio requirement.
Stress testing – recovery and resolution planning
The NatWest Group recovery plan explains how NatWest Group
and its subsidiaries – as a consolidated group – would identify
and respond to a financial stress event and restore its financial
position so that it remains viable on an ongoing basis.
The recovery plan ensures risks that could delay the
implementation of a recovery strategy are highlighted and
preparations are made to minimise the impact of these risks.
Preparations include:
Developing a series of recovery indicators to provide early
warning of potential stress events.
Clarifying roles, responsibilities and escalation routes to
minimise uncertainty or delay.
Developing a recovery playbook to provide a concise
description of the actions required during recovery.
Detailing a range of options to address different stress
conditions.
Appointing dedicated option owners to reduce the risk of
delay and capacity concerns.
The plan is intended to enable NatWest Group to maintain
critical services and products it provides to its customers,
maintain its core business lines and operate within risk appetite
while restoring NatWest Group’s financial condition. It is
assessed for appropriateness on an ongoing basis and is
updated annually. The plan is reviewed and approved by the
Board prior to submission to the PRA each year. Individual
recovery plans are also prepared for NatWest Holdings Limited,
NatWest Markets Plc, RBS International Limited and NatWest
Markets N.V.. These plans detail the recovery options, recovery
indicators and escalation routes for each entity.
Fire drill simulations of possible recovery events are used to
test the effectiveness of NatWest Group and individual legal
entity recovery plans. The fire drills are designed to replicate
possible financial stress conditions and allow senior
management to rehearse the responses and decisions that may
be required in an actual stress event. The results and lessons
learnt from the fire drills are used to enhance NatWest Group’s
approach to recovery planning.
Under the resolution assessment part of the PRA rulebook,
NatWest Group is required to carry out an assessment of its
preparations for resolution, submit a report of the assessment
to the PRA and publish a summary of this report.
Resolution would be implemented if NatWest Group was
assessed by the UK authorities to have failed and the
appropriate regulator put it into resolution. The process of
resolution is owned and implemented by the Bank of England
(as the UK resolution authority). NatWest Group ensures
ongoing maintenance and enhancements of its resolution
capabilities, in line with regulatory requirements.
Stress testing – market risk
Non-traded market risk
Non-traded exposures are reported to the PRA on a quarterly
basis. This provides the regulator with an overview of NatWest
Group’s banking book interest rate exposure. The report
includes detailed product information analysed by interest rate
driver and other characteristics, including accounting
classification, currency and counterparty type.
Scenario analysis based on hypothetical adverse scenarios is
performed on non-traded exposures as part of the Bank of
England and European Banking Authority stress test exercises.
NatWest Group also produces an internal scenario analysis as
part of its financial planning cycles.
Non-traded exposures are capitalised through the ICAAP. This
covers gap risk, basis risk, credit spread risk, pipeline risk,
structural foreign exchange risk, prepayment risk, equity risk
and accounting volatility risk. The ICAAP is completed with a
combination of value and earnings measures. The total non-
traded market risk capital requirement is determined by adding
the different charges for each sub risk type. The ICAAP
methodology captures at least ten years of historical volatility,
produced with a 99% confidence level. Methodologies are
reviewed by NatWest Group Model Risk and the results are
approved by the NatWest Group Technical Asset & Liability
Management Committee.
Non-traded market risk stress results are combined with those
for other risks into the capital plan presented to the Board. The
cross-risk capital planning process is conducted once a year,
with a planning horizon of five years. The scenario narratives
cover both regulatory scenarios and macroeconomic scenarios
identified by NatWest Group.
Vulnerability-based stress testing begins with the analysis of a
portfolio and expresses its key vulnerabilities in terms of
plausible vulnerability scenarios under which the portfolio
would suffer material losses. These scenarios can be historical,
macroeconomic or forward-looking/hypothetical. Vulnerability-
based stress testing is used for internal management
information and is not subject to limits. The results for relevant
scenarios are reported to senior management.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
17
Risk management framework continued
Internal scenarios
During 2022, NatWest Group ran a number of internal
scenarios developed in the immediate aftermath of Russia’s
invasion of Ukraine.
These scenarios considered different outcomes to the conflict,
including an assumed broadening of the conflict, and how
those might manifest in terms of macroeconomic impact. This
included commodity market and associated inflationary
pressures, supply chain impacts, financial sector linkages and
broader knock-on impacts to the UK labour and asset markets.
Impacts on operational aspects to NatWest Group were also
considered.
Applying the macro-scenarios to NatWest Group’s earnings,
capital, liquidity and funding positions did not result in a breach
of any regulatory thresholds.
Regulatory stress testing
The Bank of England returned to the annual cyclical scenario
(ACS) stress test framework in 2022 and published the scenario
on 26 September 2022. This follows two years of COVID-19
crisis-related stress testing and the decision to postpone the
test in March following Russia’s invasion of Ukraine. NatWest
Group has participated in this stress test and the results will be
published in summer 2023 and, along with other relevant
information, will be used to help inform NatWest Group capital
buffers (both the UK countercyclical capital buffer rate and PRA
buffers).
The 2022 stress test aims to assess the impact of a UK and
global macroeconomic stress on UK banks, spanning a five-
year period from Q3 2022 to Q2 2027. It is a coherent ‘tail risk’
scenario designed to be severe and broad enough to assess the
resilience of UK banks to a range of adverse shocks.
The stress scenario is broadly similar to the 2019 ACS and
more severe overall than the global financial crisis, with the key
difference being elevated levels of inflation. Annual UK inflation
averages around 11% over the first three years of the scenario,
while peaking at 17% in early 2023 and does not begin to fall
until the second half of the year.
The stress is based on an end-of-June 2022 balance sheet
starting position.
Further details on the scenario and ACS Stress test can be
found at https://www.bankofengland.co.uk/stress-
testing/2022/key-elements-of-the-2022-stress-test
Following the UK’s exit from the European Union on 31
December 2020, only relevant European subsidiaries of
NatWest Group will take part in the European Banking
Authority stress tests going forward. NatWest Group itself will
not participate.
NatWest Group also took part in the Bank of England’s Climate
Biennial Exploratory Scenario conducted in late 2021 and early
2022.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
18
Credit risk
Definition
(audited)
Credit risk is the risk that customers, counterparties or issuers
fail to meet their contractual obligation to settle outstanding
amounts.
Sources of risk
(audited)
The principal sources of credit risk for NWB Group are lending
and related undrawn commitments. Derivatives and securities
financing and debt securities are also a source of credit risk,
primarily related to Treasury activities for NWB Group. NWB
Group is also exposed to settlement risk through foreign
exchange and payments activities.
Governance
(audited)
The Credit Risk function provides oversight and challenge of
frontline credit risk management activities. Governance
activities include:
Defining credit risk appetite measures for the management
of concentration risk and credit policy to establish the key
causes of risk in the process of providing credit and the
controls that must be in place to mitigate them.
Approving and monitoring operational limits for business
segments and credit limits for customers.
Oversight of the first line of defence to ensure that credit risk
remains within the appetite set by the Board and that
controls are being operated adequately and effectively.
Assessing the adequacy of expected credit loss (ECL)
provisions including approving key IFRS 9 inputs (such as
significant increase in credit risk (SICR) thresholds) and any
necessary in-model and post model adjustments through
NatWest Group and business unit provisions and model
committees.
Development and approval of credit grading models.
Risk appetite
Credit risk appetite aligns to the strategic risk appetite set by
the Board and is set and monitored through risk appetite
frameworks tailored to the Group’s Personal and Wholesale
segments.
Personal
The Personal credit risk appetite framework sets limits that
control the quality and concentration of both existing and new
business for each relevant business segment. These risk
appetite measures consider the segments’ ability to grow
sustainably and the level of losses expected under stress. Credit
risk is further controlled through operational limits specific to
customer or product characteristics.
Wholesale
For Wholesale credit, the framework has been designed to
reflect factors that influence the ability to operate within risk
appetite. Tools such as stress testing and economic capital are
used to measure credit risk volatility and develop links between
the framework and risk appetite limits.
Four formal frameworks are used, classifying, measuring and
monitoring credit risk exposure across single name, sector and
country concentrations and product and asset classes with
heightened risk characteristics.
The framework is supported by a suite of transactional
acceptance standards that set out the risk parameters within
which businesses should operate.
Credit policy standards are in place for both the Wholesale and
Personal portfolios. They are expressed as a set of mandatory
controls.
Identification and measurement
Credit stewardship
(audited)
Risks are identified through relationship management and credit
stewardship of customers and portfolios. Credit risk stewardship
takes place throughout the customer relationship, beginning
with the initial approval. It includes the application of credit
assessment standards, credit risk mitigation and collateral,
ensuring that credit documentation is complete and appropriate,
carrying out regular portfolio or customer reviews and problem
debt identification and management.
Asset quality
(audited)
All credit grades map to an asset quality (AQ) scale, used for
financial reporting. This AQ scale is based on Basel probability
of defaults. Performing loans are defined as AQ1-AQ9 (where
the probability of default (PD) is less than 100%) and defaulted
non-performing loans as AQ10 or Stage 3 under IFRS 9 (where
the PD is 100%). Loans are defined as defaulted when the
payment status becomes 90 days past due, or earlier if there is
clear evidence that the borrower is unlikely to repay, for
example bankruptcy or insolvency.
Counterparty credit risk
Counterparty credit risk arises from the obligations of customers
under derivative and securities financing transactions.
NWB Group mitigates counterparty credit risk through
collateralisation and netting agreements, which allow amounts
owed by NWB Group to a counterparty to be netted against
amounts the counterparty owes NWB Group.
Mitigation
Mitigation techniques, as set out in the appropriate credit
policies and transactional acceptance standards, are used in the
management of credit portfolios across NWB Group. These
techniques mitigate credit concentrations in relation to an
individual customer, a borrower group or a collection of related
borrowers. Where possible, customer credit balances are netted
against obligations. Mitigation tools can include structuring a
security interest in a physical or financial asset, the use of credit
derivatives including credit default swaps, credit-linked debt
instruments and securitisation structures, and the use of
guarantees and similar instruments (for example, credit
insurance) from related and third parties. Property is used to
mitigate credit risk across a number of portfolios, in particular
residential mortgage lending and commercial real estate (CRE).
The valuation methodologies for collateral in the form of
residential mortgage property and CRE are detailed below.
Residential mortgages
– NWB Group takes collateral in the form
of residential property to mitigate the credit risk arising from
mortgages. NWB Group values residential property individually
during the loan underwriting process, either by obtaining an
appraisal by a suitably qualified appraiser (for example Royal
Institution of Chartered Surveyors (RICS)) or using a statistically
valid model.
In both cases, a sample of the valuation outputs are
periodically reviewed by an independent RICS qualified
appraiser. NWB Group updates Retail Banking UK residential
property values quarterly using country (Scotland, Wales and
Northern Ireland) or English regional specific Office for National
Statistics House Price indices.
Within the Private Banking segment, properties securing loans
greater than £2.5 million are revalued every three years.
The current indexed value of the property is a component of the
ECL provisioning calculation.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
19
Credit risk continued
Commercial real estate valuations
– NWB Group has an actively
managed panel of chartered surveying firms that cover the
spectrum of geography and property sectors in which NWB
Group takes collateral. Suitable RICS registered valuers for
particular assets are typically contracted through a service
agreement to ensure consistency of quality and advice. In the
UK, an independent third-party market indexation is applied to
update external valuations for commercial property once they
are more than a year old. For obligations in excess of £2.5
million and where the charged property has a book value in
excess of £0.5 million, a formal valuation review is
commissioned at least every three years.
Assessment and monitoring
Practices for credit stewardship – including credit assessment,
approval and monitoring as well as the identification and
management of problem debts – differ between the Personal
and Wholesale portfolios.
Personal
Personal customers are served through a lending approach that
entails offering a large number of small-value loans. To ensure
that these lending decisions are made consistently, NWB Group
analyses internal credit information as well as external data
supplied by credit reference agencies (including historical debt
servicing behaviour of customers with respect to both NWB
Group and other lenders). NWB Group then sets its lending rules
accordingly, developing different rules for different products.
The process is then largely automated, with each customer
receiving an individual credit score that reflects both internal
and external behaviours and this score is compared with the
lending rules set. For relatively high-value, complex personal
loans, including some residential mortgage lending, specialist
credit managers make the final lending decisions. These
decisions are made within specified delegated authority limits
that are issued dependent on the experience of the individual.
Underwriting standards and portfolio performance are
monitored on an ongoing basis to ensure they remain adequate
in the current market environment and are not weakened
materially to sustain growth.
The actual performance of each portfolio is tracked relative to
operational limits. The limits apply to a range of credit risk-
related measures including projected credit default rates across
products and the loan-to-value (LTV) ratio of the mortgage
portfolios. Where operational limits identify areas of concern
management action is taken to adjust credit or business
strategy.
Wholesale
Wholesale customers – including corporates, banks and other
financial institutions – are grouped by industry sectors and
geography as well as by product/asset class and are managed
on an individual basis. Customers are aggregated as a single
risk when sufficiently interconnected.
A credit assessment is carried out before credit facilities are
made available to customers. The assessment process is
dependent on the complexity of the transaction.
Credit
approvals are subject to environmental, social and governance
risk policies which restrict exposure to certain highly carbon
intensive industries as well as those with potentially heightened
reputational impacts. Customer specific climate risk
commentary is now mandatory.
In response to COVID-19, a new framework was introduced to
categorise clients in a consistent manner across the Wholesale
portfolio, based on the effect of COVID-19 on their financial
position and outlook in relation to the sector risk appetite. This
framework has been retained, updated and aligned with the
Risk of Credit Loss framework (further details below) to consider
viability impacts more generally beyond those directly related to
COVID-19 and classification via the framework is now
mandatory and must be refreshed at least annually. The
framework extends to all Wholesale borrowing customers in
assessing whether customers exhibit a SICR, if support is
considered to be granting forbearance and the time it would
take for customers to return to operating within transactional
acceptance standards.
For lower risk transactions below specific thresholds, credit
decisions can be approved through self-sanctioning within the
business. This process is facilitated through an auto-decision
making system, which utilises scorecards, strategies and policy
rules.
For all other transactions credit is only granted to customers
following joint approval by an approver from the business and
the credit risk function or by two credit officers. The joint
business and credit approvers act within a delegated approval
authority under the Wholesale Credit Authorities Framework
Policy. The level of delegated authority held by approvers is
dependent on their experience and expertise with only a small
number of senior executives holding the highest approval
authority. Both business and credit approvers are accountable
for the quality of each decision taken, although the credit risk
approver holds ultimate sanctioning authority.
Transactional acceptance standards provide detailed
transactional lending and risk acceptance metrics and
structuring guidance. As such, these standards provide a
mechanism to manage risk appetite at the customer/transaction
level and are supplementary to the established credit risk
appetite.
Credit grades and loss given default (LGD) are reviewed and if
appropriate reapproved annually. The review process assesses
borrower performance, including reconfirmation or adjustment
of risk parameter estimates; the adequacy of security;
compliance with terms and conditions; and refinancing risk.
Problem debt management
Personal
Early problem identification
Pre-emptive triggers are in place to help identify customers that
may be at risk of being in financial difficulty. These triggers are
both internal, using NWB Group’s data, and external using
information from credit reference agencies. Proactive contact is
then made with the customer to establish if they require help
with managing their finances. By adopting this approach, the
aim is to prevent a customer’s financial position deteriorating
which may then require intervention from the Collections and
Recoveries teams.
Personal customers experiencing financial difficulty are
managed by the Collections team. If the Collections team is
unable to provide appropriate support after discussing suitable
options with the customer, management of that customer
moves to the Recoveries team.
If at any point in the collections
and recoveries process, the customer is identified as being
potentially vulnerable, the customer will be separated from the
regular process and supported by a specialist team to ensure
the customer receives appropriate support for their
circumstances.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
20
Credit risk continued
Collections
When a customer exceeds an agreed limit or misses a regular
monthly payment the customer is contacted by NWB Group and
requested to remedy the position. If the situation is not
regularised then, where appropriate, the Collections team will
become more involved and the customer will be supported by
skilled debt management staff who endeavour to provide
customers with bespoke solutions. Solutions include short-term
account restructuring, refinance loans and forbearance which
can include interest suspension and ‘breathing space’. All
treatments available to customers experiencing financial
difficulties are reviewed to ensure they remain appropriate for
customers impacted by current economic conditions. In the
event that an affordable and sustainable agreement with a
customer cannot be reached, the debt will transition to the
Recoveries team. For provisioning purposes, under IFRS 9,
exposure to customers managed by the Collections team is
categorised as Stage 2 and subject to a lifetime loss assessment,
unless it is 90 days past due or has triggered any other
unlikeliness to pay indicators, in which case it is categorised as
Stage 3.
Recoveries
The Recoveries team will issue a notice of intention to default to
the customer and, if appropriate, a formal demand, while also
registering the account with credit reference agencies where
appropriate. Following this, the customer’s debt may then be
placed with a third-party debt collection agency, or alternatively
a solicitor, in order to agree an affordable repayment plan with
the customer. An option that may also be considered, is the sale
of unsecured debt. Exposures subject to formal debt recovery
are defaulted and, under IFRS 9, categorised as Stage 3.
Wholesale
Early problem identification
Each segment and sector have defined early warning indicators
to identify customers experiencing financial difficulty, and to
increase monitoring if needed. Early warning indicators may be
internal, such as a customer’s bank account activity, or
external, such as a publicly-listed customer’s share price. If
early warning indicators show a customer is experiencing
potential or actual difficulty, or if relationship managers or credit
officers identify other signs of financial difficulty, they may
decide to classify the customer within the Risk of Credit Loss
framework. Broader macro-economic trends including
commodity prices, foreign exchange rates and consumer and
government spend are also tracked, helping inform decisions on
sector risk appetite. Customer level early warning indicators are
regularly reviewed to ensure alignment with prevailing
economic conditions, ensuring both the volume and focus of
alerts is aligned to the point-in-time risk within each sector.
The aligned Risk of Credit Loss and viability framework
This framework focuses on all Wholesale customers to provide
early identification of credit deterioration, support intelligent
risk-taking, ensure fair and consistent customer outcomes and
provide key insights into Wholesale lending portfolios. Expert
judgment is applied by experienced credit risk officers to classify
cases into categories that reflect progressively deteriorating
credit risk to NWB Group. There are two classifications in the
framework that apply to non-defaulted customers who are in
financial stress – Heightened Monitoring and Risk of Credit Loss.
For the purposes of provisioning, all exposures categorised as
Heightened Monitoring or Risk of Credit Loss are categorised as
Stage 2 and subject to a lifetime loss assessment. The
framework also applies to those customers that have met NWB
Group’s default criteria (AQ10 exposures). Defaulted exposures
are categorised as Stage 3 impaired for provisioning purposes.
Heightened Monitoring customers are performing customers
that have met certain characteristics, which have led to
significant credit deterioration. Collectively, characteristics
reflect circumstances that may affect the customer’s ability to
meet repayment obligations. Characteristics include trading
issues, covenant breaches, material PD downgrades and past
due facilities. Heightened Monitoring customers require pre-
emptive actions (outside the customer’s normal trading
patterns) to return or maintain their facilities within NWB
Group’s current risk appetite.
Risk of Credit Loss customers are performing customers that
have met the criteria for Heightened Monitoring and also pose a
risk of credit loss to NWB Group in the next 12 months should
mitigating action not be taken or not be successful.
Once classified as either Heightened Monitoring or Risk of Credit
Loss, a number of mandatory actions are taken in accordance
with policies. Actions include a review of the customer’s credit
grade, facility and security documentation and the valuation of
security. Depending on the severity of the financial difficulty and
the size of the exposure, the customer relationship strategy is
reassessed by credit officers, by specialist credit risk or
relationship management units in the relevant business, or by
Restructuring.
Agreed customer management strategies are regularly
monitored by both the business and credit teams. The largest
Risk of Credit Loss exposures are regularly reviewed by a Risk
of Credit Loss forum. The forum members are experienced
credit, business and restructuring specialists. The purpose of the
forum is to review and challenge the strategies undertaken for
customers that pose the largest risk of credit loss to NWB
Group.
Appropriate corrective action is taken when circumstances
emerge that may affect the customer’s ability to service its debt
(refer to Heightened Monitoring characteristics). Corrective
actions may include granting a customer various types of
concessions. Any decision to approve a concession will be a
function of specific appetite, the credit quality of the customer,
the market environment and the loan structure and security. All
customers granted forbearance are classified Heightened
Monitoring as a minimum.
Other potential outcomes of the relationship review are to:
return the customer to a satisfactory status, offer additional
lending and continue monitoring, transfer the relationship to
Restructuring if appropriate, or exit the relationship.
The aligned Risk of Credit Loss and viability framework does not
apply to problem debt management for business banking
customers. These customers are, where necessary, managed by
specialist problem debt management teams, depending on the
size of exposure or by the business banking recoveries team
where a loan has been impaired.
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Annual Report and Accounts 2022
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Credit risk continued
Restructuring
Where customers are categorised as Risk of Credit Loss and the
lending exposure is above £1 million, relationships are supported
by the Restructuring team. The objective of Restructuring is to
protect NWB Group’s capital. Restructuring does this by working
with corporate and commercial customers in financial difficulty
to help them understand their options and how their
restructuring or repayment strategies can be delivered. Helping
viable customers return to financial health and restoring a
normal banking relationship is always the preferred outcome,
however, where this is not possible, NWB Group will work with
customers to achieve a solvent outcome. Throughout this
period, the mainstream relationship manager will remain an
integral part of the customer relationship. Insolvency is
considered as a last resort and if deemed necessary, NWB
Group will work to recover its capital in a fair and efficient
manner, while upholding the fair treatment of customers and
NWB Group’s core values.
Forbearance
(audited)
Forbearance takes place when a concession is made on the
contractual terms of a loan/debt in response to a customer’s
financial difficulties.
The aim of forbearance is to support and restore the customer
to financial health while minimising risk. To ensure that
forbearance is appropriate for the needs of the customer,
minimum standards are applied when assessing, recording,
monitoring and reporting forbearance.
A credit exposure may be forborne more than once, generally
where a temporary concession has been granted and
circumstances warrant another temporary or permanent
revision of the loan’s terms.
Loans are reported as forborne until they meet the exit criteria
as detailed in the appropriate regulatory guidance. These
include being classified as performing for two years since the
last forbearance event, making regular repayments and the
loan/debt being less than 30 days past due.
Types of forbearance
Personal
In the Personal portfolio, forbearance may involve payment
concessions and loan rescheduling (including extensions in
contractual maturity) and capitalisation of arrears. Forbearance
support is provided for both mortgages and unsecured lending.
Wholesale
In the Wholesale portfolio, forbearance may involve covenant
waivers, amendments to margins, payment concessions and
loan rescheduling (including extensions in contractual maturity),
capitalisation of arrears, and debt forgiveness or debt-for-equity
swaps.
Monitoring of forbearance
Personal
For Personal portfolios, forborne loans are separated and
regularly monitored and reported while the forbearance
strategy is implemented, until they exit forbearance.
Wholesale
In the Wholesale portfolio, customer PDs and facility LGDs are
reassessed prior to finalising any forbearance arrangement. The
ultimate outcome of a forbearance strategy is highly dependent
on the co-operation of the borrower and a viable business or
repayment outcome. Where forbearance is no longer
appropriate, NWB Group will consider other options such as the
enforcement of security, insolvency proceedings or both,
although these are options of last resort.
Provisioning requirements on forbearance are detailed in the
Provisioning for forbearance section.
Credit grading models
Credit grading models is the collective term used to describe all
models, frameworks and methodologies used to calculate PD,
exposure at default (EAD), LGD, maturity and the production of
credit grades.
Credit grading models are designed to provide:
An assessment of customer and transaction characteristics.
A meaningful differentiation of credit risk.
Accurate internal default rate, loss and exposure estimates
that are used in the capital calculation or wider risk
management purposes.
Impairment, provisioning and write-offs
(audited)
In the overall assessment of credit risk, impairment provisioning
and write-offs are used as key indicators of credit quality.
NWB Group’s IFRS 9 provisioning models, which use existing
Basel models as a starting point, incorporate term structures
and forward-looking information. Regulatory conservatism
within the Basel models has been removed as appropriate to
comply with the IFRS 9 requirement for unbiased ECL estimates.
Five key areas may materially influence the measurement of
credit impairment under IFRS 9 – two of these relate to model
build and three relate to model application:
Model build:
The determination of economic indicators that have most
influence on credit loss for each portfolio and the severity
of impact (this leverages existing stress testing models
which are reviewed annually).
The build of term structures to extend the determination of
the risk of loss beyond 12 months that will influence the
impact of lifetime loss for exposures in Stage 2.
Model application:
The assessment of the SICR and the formation of a
framework capable of consistent application.
The determination of asset lifetimes that reflect
behavioural characteristics while also representing
management actions and processes (using historical data
and experience).
The choice of forward-looking economic scenarios and
their respective probability weights.
Refer to Accounting policies 2.3 for further details.
IFRS 9 ECL model design principles
(audited)
Modelling of ECL for IFRS 9 follows the conventional approach
to divide the estimation of credit losses into its component parts
of PD, LGD and EAD.
To meet IFRS 9 requirements, the PD, LGD and EAD parameters
differ from their Pillar 1 internal ratings based (IRB) counterparts
in the following aspects:
Unbiased – material regulatory conservatism has been
removed from IFRS 9 parameters to produce unbiased
estimates.
Point-in-time – IFRS 9 parameters reflect actual economic
conditions at the reporting date instead of long-run average
or downturn conditions.
Forward-looking – IFRS 9 PD estimates and, where
appropriate, EAD and LGD estimates reflect forward-looking
economic conditions.
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Annual Report and Accounts 2022
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Credit risk continued
Lifetime measurement – IFRS 9 PD, LGD and EAD are
provided as multi-period term structures up to exposure
lifetimes instead of over a fixed one-year horizon.
IFRS 9 requires that at each reporting date, an entity shall
assess whether the credit risk on an account has increased
significantly since initial recognition. Part of this assessment
requires a comparison to be made between the current lifetime
PD (i.e. the PD over the remaining lifetime at the reporting date)
and the equivalent lifetime PD as determined at the date of
initial recognition.
For assets originated before IFRS 9 was introduced, comparable
lifetime origination PDs did not exist. These have been
retrospectively created using the relevant model inputs
applicable at initial recognition.
PD estimates
Personal models
Personal PD models follow a discrete multi-horizon survival
approach, predicting quarterly PDs up to lifetime at account
level, with a key driver being scores from related IRB PD
models. Forward-looking economic information is brought in by
economic response models, which leverage the existing stress
test model suite. The current suite of PD models was introduced
in 2022 replacing the previous, first-generation models to
remediate a range of model weaknesses.
Wholesale models
Wholesale PD models use a point-in-time/through-the-cycle
framework to convert one-year regulatory PDs into point-in-
time estimates that reflect economic conditions at the reporting
date. The framework utilises credit cycle indices (CCIs) for a
comprehensive set of region/industry segments. Further detail
on CCIs is provided in the Economic loss drivers section.
One year point-in-time PDs are extended to forward-looking
lifetime PDs using a conditional transition matrix approach and
a set of econometric forecasting models.
LGD estimates
The general approach for the IFRS 9 LGD models is to leverage
corresponding IRB LGD models with bespoke adjustments to
ensure estimates are unbiased and, where relevant, forward-
looking.
Personal
Forward-looking information has only been incorporated for the
secured portfolios, where changes in property prices can be
readily accommodated. Analysis has shown minimal impact of
economic conditions on LGDs for the other Personal portfolios.
Wholesale
Forward-looking economic information is incorporated into LGD
estimates using the existing CCI framework. For low default
portfolios, including sovereigns and banks, loss data is too
scarce to substantiate estimates that vary with economic
conditions. Consequently, for these portfolios, LGD estimates
are assumed to be constant throughout the projection horizon.
EAD estimates
Personal
The IFRS 9 Personal modelling approach for EAD is dependent
on product type.
Revolving products use the existing Basel models as a basis,
with appropriate adjustments incorporating a term structure
based on time to default.
Amortising products use an amortising schedule, where a
formula is used to calculate the expected balance based on
remaining terms and interest rates.
Analysis has indicated that there is minimal impact on EAD
arising from changes in the economy for all Personal
portfolios except mortgages. Therefore, forward-looking
information is only incorporated in the mortgage EAD model
(through forecast changes in interest rates).
Wholesale
For Wholesale, EAD values are projected using product specific
credit conversion factors (CCFs), closely following the product
segmentation and approach of the respective Basel model.
However, the CCFs are estimated over multi-year time horizons
and contain no regulatory conservatism or downturn
assumptions.
No explicit forward-looking information is incorporated, on the
basis of analysis showing the temporal variation in CCFs is
mainly attributable to changes in exposure management
practices rather than economic conditions.
Governance and post model adjustments
(audited)
The IFRS 9 PD, EAD and LGD models are subject to NWB
Group’s model risk policy that stipulates periodic model
monitoring, periodic re-validation and defines approval
procedures and authorities according to model materiality.
Various post model adjustments were applied where
management judged they were necessary to ensure an
adequate level of overall ECL provision. All post model
adjustments were subject to formal approval through
provisioning governance, and were categorised as follows
(business level commentary is provided below):
Deferred model calibrations – ECL adjustments where PD
model monitoring indicated that actual defaults were below
estimated levels but where it was judged that an implied
ECL release was not supportable due to the influence of
government support schemes on default levels in the past
two years. As a consequence, any potential ECL release was
deferred and retained on the balance sheet until modelled
ECL levels are affirmed by new model parallel runs or
similar analyses.
Economic uncertainty – ECL adjustments primarily arising
from uncertainties associated with the high inflation
environment as well as supply chain disruption, along with
the residual effect of COVID-19 and government support
schemes. In all cases, management judged that additional
ECL was required until further credit performance data
became available as the full effects of these issues matures.
Other adjustments – ECL adjustments where it was judged
that the modelled ECL required amendment.
Post model adjustments will remain a key focus area of NWB
Group’s ongoing ECL adequacy assessment process. A holistic
framework has been established including reviewing a range of
economic data, external benchmark information and portfolio
performance trends with a particular focus on segments of the
portfolio (both commercial and consumer) that are likely to be
more susceptible to the high inflation environment and supply
chain disruption.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
23
Credit risk continued
ECL post model adjustments
(audited)
The table below shows ECL post model adjustments.
Retail Banking
Mortgages
Other
Private
Banking
Commercial &
Institutional
Total
2022
£m
£m
£m
£m
£m
Deferred model calibrations
—
—
—
—
—
Economic uncertainty
91
40
6
151
288
Other adjustments
7
15
—
11
33
Total
98
55
6
162
321
Of which:
- Stage 1
58
21
3
50
132
- Stage 2
29
34
3
108
174
- Stage 3
11
—
—
4
15
2021
Deferred model calibrations
48
80
—
51
179
Economic uncertainty
46
80
5
285
416
Other adjustments
26
—
—
2
28
Total
120
160
5
338
623
Of which:
- Stage 1
8
5
—
10
23
- Stage 2
99
134
5
328
566
- Stage 3
13
21
—
—
34
Post model adjustments have reduced significantly since 31
December 2021, with notable shifts in all categories. This
reflected:
Removal of deferred model calibration post model
adjustments following the implementation of new models as
well as COVID-19 adjustments no longer being required.
Economic uncertainty adjustments significantly reduced as
many COVID-19 adjustments were no longer required, plus
the deteriorating economic outlook and improved modelling
approaches, resulted in increases in modelled ECL.
Retail Banking
– The judgemental post model adjustment for
deferred model calibrations of £128 million held at 31
December 2021 was no longer required due to the
implementation of new PD models across the Retail
portfolios implemented during the year, negating the need
for management judgement on PD calibration adjustments.
The post model adjustments for economic uncertainty were
held at a broadly consistent level to 31 December 2021,
totalling £131 million (2021 – £126 million). The primary
element of the economic uncertainty adjustment was a
£112 million ECL uplift to capture the risk on segments of
the Retail portfolio that are more susceptible to the effects
of a high inflation environment and the impacts on
affordability. This focuses on key affordability lenses,
including customers with lower incomes in fuel poverty,
over-indebted borrowers and customers vulnerable to a
potential mortgage rate shock impact on their affordability.
This adjustment superseded the previously held £22 million
for COVID-19 payment holiday high-risk customers and the
£55 million judgemental ECL release holdback at 31
December 2021. The current post model adjustment
allocates more ECL to Stage 1 given the forward-looking
nature of the risks on affordability driven by the high
inflation environment, whereas the previous COVID-19 post
model adjustments were focused on Stage 2, due to specific
customer events (for example, high-risk payment holiday
cases migrated into Stage 2).
Other judgmental overlays included a £15 million uplift to
reflect forward-looking provisions relating to credit cards
EAD and limit utilisation modelling considerations. There is
also an ECL adjustment for higher risk residential interest
only mortgages of £7 million. The £11 million post model
adjustment previously held for cladding risk was removed
due to management’s view on the positive developments in
this segment.
Commercial & Institutional
– The post model adjustment for
economic uncertainty reduced from £285 million to £151
million during the year. It included an overlay of £90 million
to cover the residual risks from COVID-19, including the risk
that government support schemes could affect future
recoveries and concerns surrounding associated debt, to
customers that have utilised government support schemes.
Inflation and supply chain issues present significant
headwinds for a number of sectors which are not fully
captured in the models. A £61 million mechanistic
adjustment, via a sector-level downgrade, was applied to
the sectors that were considered most at risk from these
headwinds.
The judgemental overlay for deferred model calibrations on
the business banking portfolio was removed as COVID-19
no longer impedes the mechanistic modelling approach.
Other adjustments consisted of an £11 million overlay to
mitigate the effect of operational timing delays in the
identification and flagging of a SICR.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
24
Credit risk continued
Exposures that are considered significantly credit deteriorated
since initial recognition are classified in Stage 2 and assessed
for lifetime ECL measurement (exposures not considered
deteriorated carry a 12 month ECL). NWB Group has adopted a
framework to identify deterioration based primarily on relative
movements in lifetime PD supported by additional qualitative
backstops. The principles applied are consistent across NWB
Group and align to credit risk management practices, where
appropriate.
The framework comprises the following elements:
IFRS 9 lifetime PD assessment (the primary driver)
– on
modelled portfolios, the assessment is based on the relative
deterioration in forward-looking lifetime PD and is assessed
monthly. To assess whether credit deterioration has
occurred, the residual lifetime PD at balance sheet date
(which PD is established at date of initial recognition (DOIR))
is compared to the current PD. If the current lifetime PD
exceeds the residual origination PD by more than a
threshold amount, deterioration is assumed to have
occurred and the exposure transferred into Stage 2 for a
lifetime loss assessment. For Wholesale, a doubling of PD
would indicate a SICR subject to a minimum PD uplift of
0.1%. For Personal portfolios, the criteria vary by risk band,
with lower risk exposures needing to deteriorate more than
higher risk exposures, as outlined in the following table:
Qualitative high-risk backstops
– the PD assessment is
complemented with the use of qualitative high-risk
backstops to further inform whether significant
deterioration in lifetime risk of default has occurred. The
qualitative high-risk backstop assessment includes the use
of the mandatory 30+ days past due backstop, as
prescribed by IFRS 9 guidance, and other features such as
forbearance support, Wholesale exposures managed within
the Risk of Credit Loss framework, and adverse credit
bureau results for Personal customers.
Persistence (Personal and business banking customers only)
– the persistence rule ensures that accounts which have met
the criteria for PD driven deterioration are still considered to
be significantly deteriorated for three months thereafter.
This additional rule enhances the timeliness of capture in
Stage 2. The persistence rule is applied to PD driven
deterioration only.
Significant increase in credit risk (SICR)
(audited)
The criteria are based on a significant amount of empirical
analysis and seek to meet three key objectives:
Criteria effectiveness – the criteria should be effective in
identifying significant credit deterioration and prospective
default population.
Stage 2 stability – the criteria should not introduce
unnecessary volatility in the Stage 2 population.
Portfolio analysis – the criteria should produce results which
are intuitive when reported as part of the wider credit
portfolio.
Monitoring the effect on relative PD deterioration when
originating new lending at times of weaker economic outlook
(therefore, higher PDs at initial recognition) is important to
ensure SICR criteria remains effective.
Provisioning for forbearance
(audited)
Personal
The methodology used for provisioning in respect of Personal
forborne loans will differ depending on whether the loans are
performing or non-performing and which business is managing
them due to local market conditions.
Granting forbearance will only change the arrears status of the
loan in specific circumstances, which can include capitalisation
of principal and interest in arrears, where the loan may be
returned to the performing book if the customer has
demonstrated an ability to meet regular payments and is likely
to continue to do so.
The loan would continue to be reported as forborne until it
meets the exit criteria set out by the appropriate regulatory
guidance.
For ECL provisioning, all forborne but performing exposures
are categorised as Stage 2 and are subject to a lifetime loss
provisioning assessment. Where the forbearance treatment
includes the cessation of interest on the customer balance (i.e.
non-accrual), this will be treated as a Stage 3 default.
For non-performing forborne loans, the Stage 3 loss
assessment process is the same as for non-forborne loans.
Wholesale
Provisions for forborne loans are assessed in accordance with
normal provisioning policies. The customer’s financial position
and prospects – as well as the likely effect of the forbearance,
including any concessions granted, and revised PD or LGD
gradings – are considered in order to establish whether an
impairment provision increase is required.
Wholesale loans granted forbearance are individually credit
assessed in most cases. Performing loans subject to
forbearance treatment are categorised as Stage 2 and subject
to a lifetime loss assessment.
Personal
risk bands
PD bandings (based
on residual lifetime
PD calculated at
DOIR)
PD deterioration
threshold criteria
Risk band A
<0.762%
PD@DOIR + 1%
Risk band B
<4.306%
PD@DOIR + 3%
Risk band C
>=4.306%
1.7 x PD@DOIR
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
25
Credit risk continued
Forbearance may result in the value of the outstanding debt
exceeding the present value of the estimated future cash flows.
This difference will lead to a customer being classified as non-
performing.
In the case of non-performing forborne loans, an individual loan
impairment provision assessment generally takes place prior to
forbearance being granted. The amount of the loan impairment
provision may change once the terms of the forbearance are
known, resulting in an additional provision charge or a release
of the provision in the period the forbearance is granted.
The transfer of Wholesale loans from impaired to performing
status follows assessment by relationship managers and credit.
When no further losses are anticipated and the customer is
expected to meet the loan’s revised terms, any provision is
written-off or released and the balance of the loan can be
returned to performing status once exit criteria, as set out by
regulatory guidance, is met.
Asset lifetimes
(audited)
The choice of initial recognition and asset duration is another
critical judgment in determining the quantum of lifetime losses
that apply.
The date of initial recognition reflects the date that a
transaction (or account) was first recognised on the balance
sheet; the PD recorded at that time provides the baseline
used for subsequent determination of SICR as detailed
above.
For asset duration, the approach applied (in line with IFRS 9
requirements) is:
Term lending – the contractual maturity date, reduced for
behavioural trends where appropriate (such as, expected
prepayment and amortisation).
Revolving facilities – for Personal portfolios (except credit
cards), asset duration is based on behavioural life and this is
normally greater than contractual life (which would typically
be overnight). For Wholesale portfolios, asset duration is
based on annual customer review schedules and will be set
to the next review date.
In the case of credit cards, the most significant judgment is to
reflect the operational practice of card reissuance and the
associated credit assessment as enabling a formal re-
origination trigger. As a consequence, a capped lifetime
approach of up to 36 months is used on credit card balances. If
the approach was uncapped the ECL impact is estimated at
approximately £62 million (2021 – £60 million). However, credit
card balances originated under the 0% balance transfer
product, and representing approximately 20% of performing
card balances, have their ECL calculated on a behavioural
lifetime approach as opposed to being capped at a maximum
of three years.
The capped approach reflects NWB Group’s practice of a
credit-based review of customers prior to credit card issuance
and complies with IFRS 9. Benchmarking information indicates
that peer UK banks use behavioural approaches in the main for
credit card portfolios with average durations between three
and ten years. Across Europe, durations are shorter and are, in
some cases, as low as one year.
Economic loss drivers
(audited)
Introduction
The portfolio segmentation and selection of economic loss
drivers for IFRS 9 follow closely the approach used in stress
testing. To enable robust modelling the forecasting models for
each portfolio segment (defined by product or asset class and
where relevant, industry sector and region) are based on a
selected, small number of economic variables, (typically three
to four) that best explain the temporal variations in portfolio
loss rates. The process to select economic loss drivers involves
empirical analysis and expert judgment.
The most material economic loss drivers are shown in the table
below.
Portfolio
Economic loss drivers
UK retail
mortgages
UK unemployment rate, sterling swap
rate, UK house price index, UK household
debt to income
UK retail
unsecured
UK unemployment rate, sterling swap
rate, UK household debt to income
UK corporates
UK stock price index, UK GDP, Bank of
England base rate
UK commercial
real estate
UK stock price index, UK commercial
property price index, UK GDP, Bank of
England base rate
(1)
This is not an exhaustive list of economic loss drivers but shows the most material
drivers for the most significant portfolios.
Economic scenarios
At 31 December 2022, the range of anticipated future
economic conditions was defined by a set of four internally
developed scenarios and their respective probabilities. In
addition to the base case, they comprised upside, downside
and extreme downside scenarios. The scenarios primarily
reflected the current risks faced by the economy, particularly
related to high inflation resulting in a fall in real household
income, economic slowdown, a rise in unemployment and asset
price declines.
For 2022, the four scenarios were deemed appropriate in
capturing the uncertainty in economic forecasts and the non-
linearity in outcomes under different scenarios. These four
scenarios were developed to provide sufficient coverage across
potential rises in unemployment, inflation, asset price declines
and the degree of permanent damage to the economy, around
which there remains pronounced levels of uncertainty.
Upside
– This scenario assumes a robust growth through 2023
as consumers dip into excess savings built up since the COVID-
19 pandemic and further helped by fiscal support and strong
business investment. The labour market remains resilient, with
the unemployment rate remaining below pre-COVID-19 levels.
Inflation retraces sharply and that does not necessitate
significantly more tightening. The housing market slows down
compared to the previous year but still remains robust.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
26
Credit risk continued
Base case
– High inflation and significant monetary policy
tightening leads to a mild recession in 2023. Fiscal support
remains key in containing the impact. Unemployment rate rises
modestly but job losses are contained. Inflation moderates over
medium-term and falls to the target levels in 2024. Housing
market experiences price decline and lower activity but the
extent of the decline is lower than that experienced during
prior stresses.
Since 31 December 2021, the outlook has deteriorated as
energy prices surged and cost of living crisis intensified. As a
result, the base case is more pessimistic. The mild recession in
2023 contrasts with last year’s assumption of a muted growth.
House price correction contrasts with previous year’s
assumptions of a modest growth. In previous scenario,
unemployment rate was expected to increase very modestly
while inflation and interest rate rises last year were also
relatively muted.
Downside
– Inflation rises on the back of further energy price
spikes. The high inflation environment leads to the economy
falling under recession. As demand dries up, inflation rapidly
declines. Policy rates are raised initially but then quickly eased
to assist in recovery. Unemployment is more than the base
case scenario while house prices experience declines
comparable to previous episodes of stress.
Extreme downside
– This scenario assumes high and persistent
inflation. Households see the highest recorded decline in real
income. Policy rate rises to levels last seen in early 2000.
Resulting economic recession is deep and leads to widespread
job losses. House prices lose approximately a third of their
value while unemployment rate rises to level above those seen
during the 2008 financial crisis.
The previous year’s extreme downside also included a deep
recession, labour market deterioration and asset price falls, but
the current scenario explores these risks in a high inflation,
high rates environment.
The tables and commentary below provide details of the key
economic loss drivers under the four scenarios.
The main macroeconomic variables for each of the four
scenarios used for ECL modelling are set out in the main
macroeconomic variables table below. The compound annual
growth rate (CAGR) for GDP is shown. It also shows the five-
year average for unemployment and the Bank of England base
rate. The house price index and commercial real estate figures
show the total change in each asset over five years.
Economic loss drivers
(audited)
Main macroeconomic variables
2022
2021
Extreme
Weighted
Extreme
Weighted
Upside
Base case
Downside
downside
average
Upside
Base case
Downside
downside
average
Five-year summary
%
%
%
%
%
%
%
%
%
%
GDP - CAGR
1.6
0.8
0.2
(0.2)
0.7
2.4
1.7
1.4
0.6
1.8
Unemployment - average
3.9
4.6
5.1
7.2
5.0
3.5
4.2
4.8
6.7
4.2
House price index - total change
21.5
(1.3)
(6.0)
(22.4)
(1.3)
22.7
12.1
4.3
(5.3)
12.8
Bank of England base rate - average
2.6
3.3
1.5
4.9
3.1
1.5
0.8
0.7
(0.5)
0.9
Commercial real estate price - total change
(0.1)
(14.4)
(17.2)
(38.3)
(16.1)
18.2
7.2
5.5
(6.4)
9.5
Consumer price index - CAGR
2.4
3.0
3.1
7.0
3.6
2.7
2.5
3.1
1.5
2.6
UK stock price index - total change
22.6
13.9
1.8
(8.5)
9.5
36.6
24.9
12.5
0.2
24.7
World GDP - CAGR
3.7
3.3
1.6
1.0
2.7
3.5
3.2
2.6
0.6
3.1
Probability weight
18.6
45.0
20.8
15.6
30.0
45.0
20.0
5.0
(1)
The five year period starts after Q3 2022 for 31 December 2022 and Q3 2021 for 31 December 2021.
(2)
CAGR and total change figures are not comparable with 31 December 2021 data, as the starting quarters are different.
Probability weightings of scenarios
A subjective approach for assigning probability weight was used
during COVID-19 due to the scale of the economic effect of
COVID-19 and the range of recovery paths. Similarly, a
subjective approach was used at 30
September 2022, to reflect
the deteriorating outlook and shifting balance of risks in the
given set of scenarios. However, NWB Group’s quantitative
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. This quantitative approach has
been reinstated and is used for 31 December 2022.
The approach involves comparing UK GDP paths for NWB
Group’s scenarios against a set of 1,000 model runs, following
which, a percentile in the distribution is established that most
closely corresponded to the scenario. Probability weight for
base case is set first based on judgement, while probability
weights for the alternate scenarios are assigned based on these
percentiles scores.
The assigned probability weights were judged to be aligned with
the subjective assessment of balance of the risks in the
economy. Since 31 December 2021, high inflation posed
significant challenge to the economy and there is considerable
uncertainty to the economic outlook, with respect to persistence
and range of outcomes on inflation and its subsequent effects
on household real income and economic activity. Given that
backdrop, NWB Group judges it appropriate to assign higher
probability weights on downside-biased scenarios than at 31
December 2021. It presents good coverage to the range of
outcomes assumed in the scenarios, including the potential for a
robust recovery on the upside and exceptionally challenging
outcomes on the downside. A 18.6% weighting was applied to
the upside scenario, a 45.0% weighting applied to the base case
scenario, a 20.8% weighting applied to the downside scenario
and a 15.6% weighting applied to the extreme downside
scenario. Compared to 30 June 2022, the probability weights
were broadly similar, but with additional modest downside skew.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
27
Credit risk continued
Economic loss drivers
UK gross domestic product (£bn)
Q1 2022
Q1 2023
Q1 2024
Q1 2025
Q1 2026
Q1 2027
2000
2100
2200
2300
2400
2500
Upside
Base case
Downside
Extreme downside
Bank of England base rate (%)
Q1 2019
Q1 2020
Q1 2021
Q1 2022
Q1 2023
Q1 2024
Q1 2025
Q1 2026
Q1 2027
0
1
2
3
4
5
6
7
Upside
Base case
Downside
Extreme downside
UK unemployment rate (%)
Q1 2019
Q1 2020
Q1 2021
Q1 2022
Q1 2023
Q1 2024
Q1 2025
Q1 2026
Q1 2027
0
1
2
3
4
5
6
7
8
9
Upside
Base case
Downside
Extreme downside
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
28
Credit risk continued
Economic loss drivers
(audited)
Annual figures
GDP - annual growth
Commercial real estate price - four quarter change
Upside
Base case
Downside
Extreme
downside
Weighted
average
Upside
Base case
Downside
Extreme
downside
Weighted
average
%
%
%
%
%
%
%
%
%
%
2022
4.4
4.4
4.4
4.4
4.4
2022
(2.6)
(2.6)
(2.6)
(2.6)
(2.6)
2023
2.2
(0.9)
(2.8)
(3.1)
(1.1)
2023
2.1
(8.4)
(19.7)
(22.4)
(11.0)
2024
1.9
0.7
(0.4)
(1.6)
0.4
2024
1.9
(0.5)
2.8
(29.1)
(3.2)
2025
1.2
1.0
1.9
1.2
1.3
2025
2.7
1.3
3.7
6.7
2.6
2026
1.2
1.4
1.2
1.2
1.3
2026
2.2
1.0
3.8
8.5
2.6
2027
1.4
1.5
1.1
1.2
1.4
2027
0.6
1.0
2.3
8.6
2.0
Unemployment rate - annual
average
Consumer price index - four quarter change
Upside
Base case
Downside
Extreme
downside
Weighted
average
Upside
Base case
Downside
Extreme
downside
Weighted
average
%
%
%
%
%
%
%
%
%
%
2022
3.8
3.8
3.8
3.8
3.8
2022
11.2
11.2
11.2
11.2
11.2
2023
3.9
4.4
5.0
6.0
4.7
2023
2.2
3.7
6.0
17.0
6.0
2024
3.9
4.9
5.7
8.4
5.4
2024
1.0
2.7
1.0
8.8
3.1
2025
4.0
4.8
5.2
8.0
5.2
2025
2.0
2.0
2.0
2.7
2.1
2026
4.0
4.6
5.0
7.4
5.0
2026
2.0
1.9
2.0
2.3
2.0
2027
4.0
4.3
5.1
6.7
4.8
2027
2.0
1.9
2.0
2.0
2.0
House price index - four quarter change
UK stock price index - four quarter change
Upside
Base case
Downside
Extreme
downside
Weighted
average
Upside
Base case
Downside
Extreme
downside
Weighted
average
%
%
%
%
%
%
%
%
%
%
2022
6.9
6.9
6.9
6.9
6.9
2022
(3.4)
(3.4)
(3.4)
(3.4)
(3.4)
2023
7.5
(7.8)
(13.7)
(10.4)
(6.6)
2023
9.1
4.1
(20.6)
(45.0)
(7.8)
2024
4.5
(0.9)
(7.7)
(15.2)
(3.2)
2024
4.0
1.9
9.7
24.9
5.9
2025
3.0
2.9
4.8
(8.3)
1.8
2025
4.5
4.0
8.8
16.7
6.4
2026
3.5
3.4
8.3
7.2
4.8
2026
4.9
4.4
7.0
11.0
5.8
2027
3.4
3.4
6.3
6.6
4.3
2027
4.0
4.3
6.6
9.9
5.4
Bank of England base rate - annual average
Upside
Base case
Downside
Extreme
downside
Weighted
average
%
%
%
%
%
2022
1.49
1.49
1.49
1.49
1.49
2023
3.27
3.94
2.94
5.38
3.83
2024
2.71
3.75
1.00
5.95
3.33
2025
2.29
3.25
1.00
5.28
2.92
2026
2.25
3.00
1.00
4.46
2.67
2027
2.06
2.75
1.00
3.64
2.40
Worst points
31 December 2022
31 December 2021
Downside
Extreme
downside
Weighted
average
Downside
Extreme
downside
Weighted
average
%
Quarter
%
Quarter
%
%
Quarter
%
Quarter
%
GDP
(3.9)
Q4 2023
(5.4)
Q4 2023
(1.5)
(1.8)
Q1 2022
(7.9)
Q1 2022
—
Unemployment rate (peak)
6.0
Q1 2024
8.5
Q3 2024
5.4
5.4
Q1 2023
9.4
Q4 2022
4.5
House price index
(21.3)
Q1 2025
(31.7)
Q3 2025
(10.6)
(3.0)
Q3 2023
(26.0)
Q2 2023
—
Bank of England base rate
4.0
Q1 2023
6.0
Q1 2024
4.1
1.5
Q4 2022
(0.5)
Q2 2022
1.2
Commercial real estate price
(26.8)
Q4 2023
(50.3)
Q3 2024
(21.8)
(2.5)
Q1 2022
(29.8)
Q3 2022
—
Consumer price index
15.7
Q1 2023
17.0
Q4 2023
11.7
7.9
Q4 2022
4.3
Q1 2022
5.5
UK stock price index
(24.0)
Q4 2023
(47.3)
Q4 2023
(11.7)
(12.2)
Q1 2022
(37.1)
Q2 2022
(1.2)
(1)
For the unemployment rate, the figures show the peak levels. For the Bank of England base rate, the figures show highest or lowest levels. For the consumer price index, the figures
show the highest annual percentage change. For other parameters, the figures show falls relative to the starting period.
The calculations are performed over five years, with a
starting point of Q3 2022 for 31 December 2022 scenarios.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
29
Credit risk continued
Use of the scenarios in Personal lending
Personal lending follows a discrete scenario approach. The PD
and LGD values for each discrete scenario are calculated using
product specific economic response models. Each account has
a PD and LGD calculated as probability weighted averages
across the suite of economic scenarios.
Use of the scenarios in Wholesale lending
The Wholesale lending ECL methodology is based on the
concept of CCIs. The CCIs represent, similar to the exogenous
component in Personal, all relevant economic loss drivers for a
region/industry segment aggregated into a single index value
that describes the loss rate conditions in the respective
segment relative to its long-run average. A CCI value of zero
corresponds to loss rates at long-run average levels, a positive
CCI value corresponds to loss rates below long-run average
levels and a negative CCI value corresponds to loss rates above
long-run average levels.
The individual economic scenarios are translated into forward-
looking projections of CCIs using a set of econometric models.
Subsequently the CCI projections for the individual scenarios
are averaged into a single central CCI projection according to
the given scenario probabilities. The central CCI projection is
then overlaid with an additional mean reversion assumption to
gradually revert to the long-run average CCI value of zero in
the outer years of the projection horizon.
Finally, ECL is calculated using a Monte Carlo approach by
averaging PD and LGD values arising from many CCI paths
simulated around the central CCI projection.
The rationale for the Wholesale approach is the long-standing
observation that loss rates in Wholesale portfolios tend to follow
regular cycles. This allows NWB Group to enrich the range and
depth of future economic conditions embedded in the final ECL
beyond what would be obtained from using the discrete macro-
economic scenarios alone.
Business banking, while part of the Wholesale segment for
reporting purposes, utilises the Personal lending rather than the
Wholesale lending methodology.
UK economic uncertainty
The high inflation environment and supply chain disruption are
presenting significant headwinds for some businesses and
sectors. These are a result of various factors and in many
cases are compounding and look set to remain a feature of the
economic environment into 2023. NWB Group has considered
where these are most likely to affect the customer base.
Furthermore, the rising cost of borrowing during 2022 for both
businesses and consumers presents an additional affordability
challenge for many borrowers.
The effects of these risks are not expected to be fully captured
by forward-looking credit modelling, particularly given the
unique high inflation environment, low unemployment base-
case outlook. Any incremental ECL effects for these risks will
be captured via post model adjustments and are detailed
further in the Governance and post model adjustments section.
Model monitoring and enhancement
Throughout 2022, default rates in the UK Personal and
Wholesale portfolios moderately increased but remained
generally at, or somewhat below, pre-COVID-19 levels. This is
based on a normalised view removing the effects of the new
definition of default, introduced from 1 January 2022, in
accordance with new prudential regulation. As in 2021, model
recalibrations to adjust for overprediction have been deferred
where applicable, based on the judgment that default rate
actuals may still be supressed as a result of government
support provided throughout COVID-19.
The suite of UK Personal PD models and some Personal LGD
models were redeveloped in 2022 removing the need for a
number of previously applied post model ECL adjustments to
account for model weaknesses.
In Wholesale lending, new economic response models were
introduced in 2022 for the UK corporate segments, that follow
an improved modelling approach and put higher weight on
stock price indices compared to previous models.
The economic response models for Personal and Wholesale do
not include direct inflation drivers, due to low inflation seen
throughout the data history available for modelling (typically
starting in early 2000s with some variation across products).
The effect of inflation is deemed to be partially reflected
through other drivers present in the models, especially in
Wholesale lending, where new models with a higher weight on
stock price indices were introduced for the most material
portfolios.
As detailed in the Governance and post model adjustments
section, ECL adjustments were applied where management
judged inflation risk was not fully reflected through the models.
The use of direct inflation drivers in the economic response
models will be reviewed considering additional credit outcome
data in 2023.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
30
Credit risk continued
Government guarantees
A number of support schemes were introduced in response to
COVID-19 with the UK government guaranteeing part of the
loan. The Bounce Back Loan Scheme is 100% guaranteed. For
the Coronavirus Business Interruption Loan Scheme and the
Coronavirus Large Business Interruption Loan Scheme the
government guarantee is 80%. NWB Group recognises lower
LGDs for these lending products as a result, with 0% applied to
the government-guaranteed part of the exposure. NWB Group
does not directly adjust the measurement of PD due to the
government guarantee and continues to move exposures into
Stage 2 and Stage 3 where a significant deterioration in credit
risk or a default is identified.
Measurement uncertainty and ECL sensitivity
analysis
(audited)
The recognition and measurement of ECL is complex and
involves the use of significant judgment and estimation,
particularly in times of economic volatility and uncertainty. This
includes the formulation and incorporation of multiple forward-
looking economic conditions into ECL to meet the measurement
objective of IFRS 9. The ECL provision is sensitive to the model
inputs and economic assumptions underlying the estimate.
The focus of the simulations is on ECL provisioning
requirements on performing exposures in Stage 1 and Stage 2.
The simulations are run on a stand-alone basis and are
independent of each other; the potential ECL impacts reflect
the simulated impact at 31 December 2022. Scenario impacts
on SICR should be considered when evaluating the ECL
movements of Stage 1 and Stage 2. In all scenarios the total
exposure was the same but exposure by stage varied in each
scenario.
Stage 3 provisions are not subject to the same level of
measurement uncertainty – default is an observed event as at
the balance sheet date. Stage 3 provisions therefore were not
considered in this analysis.
The impact arising from the base case, upside, downside and
extreme downside scenarios was simulated. These scenarios
are used in the methodology for Personal multiple economic
scenarios as described in the Economic loss drivers section. In
the simulations, NWB Group has assumed that the economic
macro variables associated with these scenarios replace the
existing base case economic assumptions, giving them a 100%
probability weighting and therefore serving as a single
economic scenario.
These scenarios were applied to all modelled portfolios in the
analysis below, with the simulation impacting both PDs and
LGDs. Post model adjustments included in the ECL estimates
that were modelled were sensitised in line with the modelled
ECL movements, but those that were judgmental in nature,
primarily those for deferred model calibrations and economic
uncertainty, were not (refer to the Governance and post model
adjustments section). As expected, the scenarios create
differing impacts on ECL by portfolio and the impacts are
deemed reasonable. In this simulation, it is assumed that
existing modelled relationships between key economic variables
and loss drivers hold, but in practice other factors would also
have an impact, for example, potential customer behaviour
changes and policy changes by lenders that might impact on
the wider availability of credit.
NWB Group’s core criterion to identify a SICR is founded on PD
deterioration, as discussed above. Under the simulations, PDs
change and result in exposures moving between Stage 1 and
Stage 2 contributing to the ECL impact
.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
31
Credit risk continued
Measurement uncertainty and ECL sensitivity analysis
(audited)
2022
Actual
Base scenario
Moderate upside
scenario
Moderate
Downside
scenario
Extreme
downside
scenario
Stage 1 modelled loans
(£m)
Retail Banking - mortgages
152,235
152,946
158,549
151,254
141,735
Retail Banking - unsecured
6,232
6,382
6,843
6,168
5,040
Wholesale - property
17,468
18,068
18,523
16,769
11,120
Wholesale - non-property
71,917
76,232
78,627
67,333
51,291
247,852
253,628
262,542
241,524
209,186
Stage 1 modelled ECL
(£m)
Retail Banking - mortgages
67
67
71
66
61
Retail Banking - unsecured
139
141
143
141
113
Wholesale - property
80
60
48
102
94
Wholesale - non-property
196
184
162
224
223
482
452
424
533
491
Stege 1 coverage
(%)
Retail Banking - mortgages
0.04%
0.04%
0.04%
0.04%
0.04%
Retail Banking - unsecured
2.23%
2.21%
2.09%
2.29%
2.24%
Wholesale - property
0.46%
0.33%
0.26%
0.61%
0.85%
Wholesale - non-property
0.27%
0.24%
0.21%
0.33%
0.43%
0.19%
0.18%
0.16%
0.22%
0.23%
Stage 2 modelled loans
(£m)
Retail Banking - mortgages
16,546
15,835
10,232
17,527
27,046
Retail Banking - unsecured
2,521
2,371
1,910
2,585
3,713
Wholesale - property
2,981
2,381
1,926
3,680
9,329
Wholesale - non-property
15,777
11,462
9,067
20,361
36,403
37,825
32,049
23,135
44,153
76,491
Stage 2 modelled ECL
(£m)
Retail Banking - mortgages
55
52
35
58
88
Retail Banking - unsecured
316
304
246
325
451
Wholesale - property
75
57
36
93
410
Wholesale - non-property
357
247
187
421
1,067
803
660
504
897
2,016
Stege 2 coverage
(%)
Retail Banking - mortgages
0.33%
0.33%
0.34%
0.33%
0.33%
Retail Banking - unsecured
12.53%
12.82%
12.88%
12.57%
12.15%
Wholesale - property
2.52%
2.39%
1.87%
2.53%
4.39%
Wholesale - non-property
2.26%
2.15%
2.06%
2.07%
2.93%
2.12%
2.06%
2.18%
2.03%
2.64%
Stage 1 and Stage 2 modelled loans
(£m)
Retail Banking - mortgages
168,781
168,781
168,781
168,781
168,781
Retail Banking - unsecured
8,753
8,753
8,753
8,753
8,753
Wholesale - property
20,449
20,449
20,449
20,449
20,449
Wholesale - non-property
87,694
87,694
87,694
87,694
87,694
285,677
285,677
285,677
285,677
285,677
Stage 1 and Stage 2 modelled ECL
(£m)
Retail Banking - mortgages
122
119
106
124
149
Retail Banking - unsecured
455
445
389
466
564
Wholesale - property
155
117
84
195
504
Wholesale - non-property
553
431
349
645
1,290
Stage 1 and Stage 2 coverage
(%)
Retail Banking - mortgages
0.07%
0.07%
0.06%
0.07%
0.09%
Retail Banking - unsecured
5.20%
5.08%
4.44%
5.32%
6.44%
Wholesale - property
0.76%
0.57%
0.41%
0.95%
2.46%
Wholesale - non-property
0.63%
0.49%
0.40%
0.74%
1.47%
Reconciliation to Stage 1 and Stage 2 ECL
(£m)
ECL on modelled exposures
1,285
1,112
928
1,430
2,507
ECL on non-modelled exposures
34
34
34
34
34
Total Stage 1 and Stage 2 ECL
(£m)
1,319
1,146
962
1,464
2,541
Variance to actual total Stage 1 and Stage 2 ECL
(£m)
(173)
(357)
145
1,222
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
32
Credit risk continued
Measurement uncertainty and ECL sensitivity analysis continued
(audited)
2022
Actual
Base scenario
Moderate upside
scenario
Moderate
Downside
scenario
Extreme
downside
scenario
Reconcilliation to Stage 1 and Stage 2 Flow Exposure (£m)
Modelled loans
285,677
285,677
285,677
285,677
285,677
Non-modelled loans
18,946
18,946
18,946
18,946
18,946
Other asset classes
93,896
93,896
93,896
93,896
93,896
(1)
Variations in future undrawn exposure values across the scenarios are modelled, however the exposure position reported is that used to calculate modelled ECL as at 31 December
2022 and therefore does not include variation in future undrawn exposure values.
(2)
Reflects ECL for all modelled exposure in scope for IFRS 9. The analysis excludes non-modelled portfolios and exposure relating to bonds and cash.
(3)
All simulations are run on a stand-alone basis and are independent of each other, with the potential ECL impact reflecting the simulated impact as at 31 December 2022. The
simulations change the composition of Stage 1 and Stage 2 exposure but total exposure is unchanged under each scenario as the loan population is static.
(4)
Refer to the Economic loss drivers section for details of economic scenarios.
(5)
Refer to the NWB Group 2021 Annual Report and Accounts for 2021 comparatives
.
During 2022, overall modelled ECL increased reflecting
portfolio growth alongside a deteriorating view on economic
outlook. Judgmental ECL post model adjustments, although
reduced in value terms since 31 December 2021, continued
to reflect economic uncertainty with the expectation of
increased defaults in 2023 and beyond, and represented 12%
of total ECL (2021 – 25%).
If the economics were as negative as observed in the
extreme downside, total Stage 1 and Stage 2 ECL was
simulated to increase by £1.2 billion (approximately 93%). In
this scenario, Stage 2 exposure increased significantly and
was the key driver of the simulated ECL rise. The movement
in Stage 2 balances in the other simulations was less
significant.
In the Wholesale portfolio, there was a significant increase in
ECL under both a moderate and extreme downside scenario.
The Wholesale property ECL increase was driven by
commercial real estate prices which show negative growth
until 2024 and significant deterioration in the stock index.
The non-property increase was mainly due to GDP
contraction and significant deterioration in the stock index.
Measurement uncertainty and ECL
adequacy
The changes in the economic outlook and scenarios used in the
IFRS 9 MES framework at 31 December 2022 resulted in an
increase in modelled ECL. Given that continued uncertainty
remains due to the high inflation environment and supply chain
disruption, NWB Group utilised a framework of quantitative and
qualitative measures to support the directional change and
levels of ECL coverage, including economic data, credit
performance insights and problem debt trends. This was
particularly important for consideration of post model
adjustments.
As the effects of the high inflation environment and supply
chain disruption evolve during 2022 and into 2023 and
government support schemes have to be serviced, there is a
risk of credit deterioration. However, the income statement
effect of this will be mitigated by the forward-looking provisions
retained on the balance sheet at 31 December 2022.
There are a number of key factors that could drive further
downside to impairments, through deteriorating economic and
credit metrics and increased stage migration as credit risk
increases for more customers. Such factors would include an
adverse deterioration in GDP and unemployment in the
economies in which NWB Group operates.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
33
Credit risk – Banking activities
Introduction
This section details the credit risk profile of NWB Group’s banking activities.
Refer to Accounting policies note 3.2 and Note 13 to the financial statements for policies and critical judgments relating to
impairment loss determination.
Financial instruments within the scope of the IFRS 9 ECL framework
(audited)
Refer to Note 9 to the financial statements for balance sheet analysis of financial assets that are classified as amortised cost or fair
value through other comprehensive income (FVOCI), the starting point for IFRS 9 ECL framework assessment.
Financial assets
31 December 2022
31 December 2021
Gross
ECL
Net
Gross
ECL
Net
£bn
£bn
£bn
£bn
£bn
£bn
Balance sheet total gross amortised cost and FVOCI
394.6
423.6
In scope of IFRS 9 ECL framework
394.4
422.4
% in scope
100%
100%
Loans to customers - in scope - amortised cost
304.5
2.6
301.9
289.2
2.4
286.8
Loans to customers - in scope - FVOCI
—
—
—
0.2
—
0.2
Loans to banks - in scope - amortised cost
3.2
—
3.2
4.2
—
4.2
Total loans - in scope
307.7
2.6
305.1
293.6
2.4
291.2
Stage 1
266.7
0.5
266.2
264.6
0.2
264.4
Stage 2
37.2
0.8
36.4
26.0
1.0
25.0
Stage 3
3.8
1.3
2.5
3.0
1.2
1.8
Other financial assets - in scope - amortised cost
77.0
—
77.0
102.9
—
102.9
Other financial assets - in scope - FVOCI
9.7
—
9.7
25.9
—
25.9
Total other financial assets - in scope
86.7
—
86.7
128.8
—
128.8
Stage 1
85.9
—
85.9
128.6
—
128.6
Stage 2
0.8
—
0.8
0.2
—
0.2
Stage 3
—
—
—
—
—
—
Out of scope of IFRS 9 ECL framework
0.2
na
0.2
1.2
na
1.2
Loans to customers - out of scope - amortised cost
(0.3)
na
(0.3)
0.1
na
0.1
Loans to banks - out of scope - amortised cost
—
na
—
—
na
—
Other financial assets - out of scope - amortised cost
0.5
na
0.5
1.1
na
1.1
Other financial assets - out of scope - FVOCI
—
na
—
—
na
—
na = not applicable
The assets outside the scope of IFRS 9 ECL framework were as
follows:
Settlement balances, items in the course of collection, cash
balances and other non-credit risk assets of £0.7 billion (2021
– £0.7 billion). These were assessed as having no ECL unless
there was evidence that they were defaulted.
Fair value adjustments on loans hedged by interest rate
swaps, where the underlying loan was within the IFRS 9 ECL
scope of £(0.5) billion (2021 – £0.1 billion).
NWB Group originated securitisations, where ECL was
captured on the underlying loans of nil (2021 – £0.4 billion).
In scope assets also include an additional £4.2 billion (2021 –
£2.6 billion) of inter-Group assets not shown in table above.
Contingent liabilities and commitments
In addition to contingent liabilities and commitments disclosed in
Note 26 to the financial statements, reputationally-committed
limits are also included in the scope of the IFRS 9 ECL
framework. Total
contingent liabilities (including financial
guarantees) and commitments within IFRS 9 ECL scope of £92.1
billion (2021 – £84.6 billion) comprised Stage 1 £79.3 billion
(2021 – £78.5 billion); Stage 2 £12.2 billion (2021 – £5.6 billion);
and Stage 3 £0.5 billion (2021 – £0.5 billion).
The ECL relating to off balance sheet exposures was £0.1 billion
(2021 – £0.1 billion). The total ECL in the remainder of the credit
risk section of £0.1 billion included ECL for both on and off-
balance sheet exposures.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
34
Credit risk – Banking activities continued
Segment analysis – portfolio summary
(audited)
The table below shows gross loans and ECL, by segment and stage, within the scope of the IFRS 9 ECL framework.
Retail Banking
Private Banking
Commercial &
Institutional
Central items &
other
Total
2022
£m
£m
£m
£m
£m
Loans - amortised cost and FVOCI
Stage 1
161,743
18,368
64,407
22,204
266,722
Stage 2
18,768
801
17,563
84
37,216
Stage 3
1,988
241
1,554
—
3,783
Inter-Group
(1)
—
—
—
4,220
4,220
182,499
19,410
83,524
26,508
311,941
ECL provisions
(2)
Stage 1
213
22
259
12
506
Stage 2
371
14
419
9
813
Stage 3
713
25
524
—
1,262
Inter-Group
—
—
—
4
4
1,297
61
1,202
25
2,585
ECL provisions coverage
(3)
Stage 1 (%)
0.13
0.12
0.40
0.05
0.19
Stage 2 (%)
1.98
1.75
2.39
10.71
2.18
Stage 3 (%)
35.87
10.37
33.72
—
33.36
Inter-Group (%)
—
—
—
0.09
0.09
0.71
0.31
1.44
0.11
0.84
Impairment (releases)/losses
ECL (release)/charge
(4)
Stage 1
(116)
2
(119)
(10)
(243)
Stage 2
232
(7)
116
7
348
Stage 3
102
3
129
(1)
233
Inter-Group
—
—
—
3
3
218
(2)
126
(1)
341
Amounts written-off
167
15
139
—
321
For the notes to this table refer to the following page.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
35
Credit risk – Banking activities continued
Segment analysis – portfolio summary
(audited)
Retail Banking
Private Banking
Commercial &
Institutional
Central items &
other
Total
2021
£m
£m
£m
£m
£m
Loans - amortised cost and FVOCI
Stage 1
153,151
16,969
63,325
31,211
264,656
Stage 2
11,019
942
13,951
91
26,003
Stage 3
1,385
263
1,337
—
2,985
Inter-Group
(1)
—
—
—
2,555
2,555
165,555
18,174
78,613
33,857
296,199
ECL provisions
(2)
Stage 1
112
11
95
13
231
Stage 2
479
27
588
11
1,105
Stage 3
641
37
489
—
1,167
Inter-Group
—
—
—
1
1
1,232
75
1,172
25
2,504
ECL provisions coverage
(3)
Stage 1 (%)
0.07
0.06
0.15
0.04
0.09
Stage 2 (%)
4.35
2.87
4.21
12.09
4.25
Stage 3 (%)
46.28
14.07
36.57
—
39.10
Inter-Group (%)
—
—
—
0.04
0.04
0.74
0.41
1.49
0.08
0.85
Impairment (releases)/losses
ECL (release)/charge
(4)
Stage 1
(329)
(45)
(619)
(2)
(995)
Stage 2
144
(15)
(162)
3
(30)
Stage 3
162
7
44
—
213
Inter-Group
—
—
—
(1)
(1)
(23)
(53)
(737)
—
(813)
Amounts written-off
170
6
212
—
388
(1)
NWB Group's intercompany assets are classified in Stage 1.
(2)
Includes £2 million (2021 – £3 million) related to assets classified as FVOCI.
(3)
ECL provisions coverage is calculated as ECL provisions divided by loans - amortised cost and FVOCI. It is calculated on third party loans and total ECL provisions.
(4)
Includes a £0 million charge (2021 – £1 million charge) related to other financial assets, of which a £1 million release (2021 – £2 million charge) related to assets classified as FVOCI;
and a £0 million release (2021 – £13 million charge) related to contingent liabilities
(5)
The table shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to the Financial instruments within the scope of the IFRS 9 ECL
framework section for further details. Other financial assets within the scope of the IFRS 9 ECL framework were cash and balances at central banks totalling £72.5 billion (2021 –
£100.6 billion) and debt securities of £14.1 billion (2021 – £28.2 billion).
(6)
The stage allocation of the ECL charge was aligned to the stage transition approach that underpins the analysis in the Flow statement section.
(7)
Intercompany impairment charges are shown in Central items & other. In Note 4 to the financial statements - Segmental analysis - they are shown in the segments where the
charges are booked.
Stage 1 and Stage 2 modelled ECL increased due to
deterioration in forward looking economics, although the
Stage 2 growth was more than offset by reductions in post
model adjustments.
Stage 2 loans increased during 2022 in line with portfolio
growth alongside deterioration in forward-looking
economics as a result of the high inflation environment and
supply chain disruption growing throughout the second half
of the year.
Stage 3 loans increased, as write-offs and repayments were
more than offset by the effect of the new regulatory
definition of default, which in isolation led to an increase of
approximately £0.5 billion in Stage 3 balances, mostly in
mortgages.
Underlying flows into default remained subdued during
2022. However, it is expected that defaults will increase in
2023 as growing inflationary pressures on businesses,
consumers and the broader economy continue to evolve.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
36
Credit risk – Banking activities continued
Segmental loans and impairment metrics
(audited)
The table below shows gross loans and ECL provisions, by days past due, by segment and stage, within the scope of the ECL
framework.
Gross loans
ECL provisions (2)
Stage 2 (1)
Stage 2 (1)
Stage 1
Not past
due
1-30 DPD
>30 DPD
Total
Stage 3
Total
Stage 1
Not past
due
1-30
DPD
>30 DPD
Total
Stage 3
Total
2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Retail Banking
161,743
18,026
496
246
18,768
1,988
182,499
213
334
12
25
371
713
1,297
Private Banking
18,368
730
39
32
801
241
19,410
22
14
—
—
14
25
61
Personal
15,182
122
35
16
173
207
15,562
7
2
—
—
2
17
26
Wholesale
3,186
608
4
16
628
34
3,848
15
12
—
—
12
8
35
Commercial &
Institutional
64,407
16,302
762
499
17,563
1,554
83,524
259
385
21
13
419
524
1,202
Central items & other
22,204
84
—
—
84
—
22,288
12
9
—
—
9
—
21
Total loans
266,722
35,142
1,297
777
37,216
3,783
307,721
506
742
33
38
813
1,262
2,581
Of which:
Personal
176,925
18,148
531
262
18,941
2,195
198,061
220
336
12
25
373
730
1,323
Wholesale
89,797
16,994
766
515
18,275
1,588
109,660
286
406
21
13
440
532
1,258
2021
Retail Banking
153,151
9,967
691
361
11,019
1,385
165,555
112
419
31
29
479
641
1,232
Private Banking
16,969
880
26
36
942
263
18,174
11
27
—
—
27
37
75
Personal
13,753
136
23
11
170
225
14,148
5
1
—
—
1
19
25
Wholesale
3,216
744
3
25
772
38
4,026
6
26
—
—
26
18
50
Commercial &
Institutional
63,325
13,015
384
552
13,951
1,337
78,613
95
558
20
10
588
489
1,172
Central items & other
31,211
91
—
—
91
—
31,302
13
11
—
—
11
—
24
Total loans
264,656
23,953
1,101
949
26,003
2,985
293,644
231
1,015
51
39
1,105
1,167
2,503
Of which:
Personal
166,904
10,103
714
372
11,189
1,610
179,703
117
420
31
29
480
660
1,257
Wholesale
97,752
13,850
387
577
14,814
1,375
113,941
114
595
20
10
625
507
1,246
For the notes to this table refer to the following page.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
37
Credit risk – Banking activities continued
Segmental loans and impairment metrics
(audited)
The table below shows ECL and ECL provisions coverage, by days past due, by segment and stage, within the scope of the ECL
framework.
ECL provisions coverage
ECL
Stage 2 (1,2)
Stage 1
Not past
due
1-30 DPD
>30 DPD
Total
Stage 3
Total
Total
(release) /
charge
Amounts
written-off
2022
%
%
%
%
%
%
%
£m
£m
Retail Banking
0.13
1.85
2.42
10.16
1.98
35.87
0.71
218
167
Private Banking
0.12
1.92
—
—
1.75
10.37
0.31
(2)
15
Personal
0.05
1.64
—
—
1.16
8.21
0.17
(2)
—
Wholesale
0.47
1.97
—
—
1.91
23.53
0.91
—
15
Commercial & Institutional
0.40
2.36
2.76
2.61
2.39
33.72
1.44
126
139
Central items & other
0.05
10.71
—
—
10.71
—
0.09
(4)
—
Total loans
0.19
2.11
2.54
4.89
2.18
33.36
0.84
338
321
Of which:
Personal
0.12
1.85
2.26
9.54
1.97
33.26
0.67
216
167
Wholesale
0.32
2.39
2.74
2.52
2.41
33.50
1.15
122
154
2021
Retail Banking
0.07
4.20
4.49
8.03
4.35
46.28
0.74
(23)
170
Private Banking
0.06
3.07
—
—
2.87
14.07
0.41
(53)
6
Personal
0.04
0.74
—
—
0.59
8.44
0.18
2
3
Wholesale
0.19
3.49
—
—
3.37
47.37
1.24
(55)
3
Commercial & Institutional
0.15
4.29
5.21
1.81
4.21
36.57
1.49
(737)
212
Central items & other
0.04
12.09
—
—
12.09
—
0.08
1
—
Total loans
0.09
4.24
4.63
4.11
4.25
39.10
0.85
(812)
388
Of which:
Personal
0.07
4.16
4.34
7.80
4.29
40.99
0.70
(21)
173
Wholesale
0.12
4.30
5.17
1.73
4.22
36.87
1.09
(791)
215
(1)
30 DPD – 30 days past due, the mandatory 30 days past due backstop as prescribed by IFRS 9 for a SICR.
(2)
ECL provisions on contingent liabilities and commitments are included within the financial assets section so as not to distort ECL coverage ratios.
Retail Banking
– Balance sheet growth during 2022 was
primarily within mortgages with new lending a result of
strong housing demand and re-mortgage activity and
increased buy-to-let lending. Unsecured lending balances
also increased as consumer demand and spending
recovered following the easing of COVID-19 restrictions and
with selective relaxation of lending criteria. Total ECL
coverage reduced slightly during 2022, reflective of low
unemployment and stable portfolio performance, while
maintaining sufficient ECL coverage for key portfolios above
2019 levels, given increased inflationary and economic
pressures. Increasing Stage 2 size and portfolio coverage in
the second half of the year reflected the deterioration in
economic outlook, with portfolio performance remaining
broadly stable. Stage 3 ECL increased overall, mainly
because of the IFRS 9 alignment to the new regulatory
default definition, implemented on 1 January 2022. The
implementation of new mortgage IFRS 9 models resulted in
lower Stage 3 ECL coverage due to reduced loss estimates
for cases where the customer was not subject to
repossession activity and was the primary reason for the
change in overall retail Stage 3 coverage during 2022.
Commercial & Institutional
– There was growth in
Commercial & Institutional, particularly as a result of
increased exposure to larger corporate customers, primarily
within information technology, telecommunications and
power utilities. There were also continued repayments of
COVID-19 government lending schemes, and strategic
reductions in certain sectors. Sector appetite continues to be
reviewed regularly, with particular focus on sector clusters
and sub-sectors that are vulnerable to inflationary pressures
or deemed to represent a heightened risk. Stage 1 and
Stage 2 modelled ECL increased due to deterioration in
forward-looking economics, although the Stage 2 growth
was more than offset by reductions in post model
adjustments. Coverage reduced with the reduction in
COVID-19 post model adjustments, but coverage on Stage 1
and Stage 2 was significantly above 2019 levels, reflecting
current inflationary and economic pressures.
Other
– Balance sheet reduction in 2022 compared to 2021
was mainly due to a reduction in central items held in the
course of treasury related management activities.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
38
Credit risk – Banking activities continued
Sector analysis – portfolio summary
(audited)
The table below shows financial assets and off-balance sheet exposures gross of ECL and related ECL provisions, impairment and
past due by sector, asset quality and geographical region.
Personal
Wholesale
Total
Mortgages (1)
Credit
cards
Other
personal
Total
Property
Corporate
FI
Sovereign
Total
2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Loans by geography
186,650
3,509
7,902
198,061
21,684
59,613
24,436
3,927
109,660
307,721
- UK
186,650
3,509
7,902
198,061
21,050
51,383
21,550
3,117
97,100
295,161
- RoI
—
—
—
—
10
837
42
—
889
889
- Other Europe
—
—
—
—
283
3,526
537
102
4,448
4,448
- RoW
—
—
—
—
341
3,867
2,307
708
7,223
7,223
Loans by stage and asset
quality
(2)
186,650
3,509
7,902
198,061
21,684
59,613
24,436
3,927
109,660
307,721
Stage 1
168,675
2,590
5,660
176,925
18,379
43,846
23,748
3,824
89,797
266,722
- AQ1
1,383
—
198
1,581
877
515
3,247
1,674
6,313
7,894
- AQ2
1,689
—
179
1,868
2,017
787
15,943
563
19,310
21,178
- AQ3
3,494
3
190
3,687
1,990
3,868
247
1,406
7,511
11,198
- AQ4
101,451
71
420
101,942
3,605
8,475
2,480
44
14,604
116,546
- AQ5
51,653
755
481
52,889
5,666
17,033
1,029
4
23,732
76,621
- AQ6
3,981
935
2,746
7,662
2,516
7,740
572
9
10,837
18,499
- AQ7
4,571
744
1,113
6,428
1,512
4,791
218
123
6,644
13,072
- AQ8
291
78
308
677
186
607
12
1
806
1,483
- AQ9
162
4
25
191
10
30
—
—
40
231
Stage 2
16,511
834
1,596
18,941
2,874
14,669
653
79
18,275
37,216
- AQ1
6
—
—
6
54
73
—
13
140
146
- AQ2
3
—
2
5
10
130
—
—
140
145
- AQ3
96
—
2
98
58
288
—
7
353
451
- AQ4
8,009
—
105
8,114
208
2,746
375
55
3,384
11,498
- AQ5
6,074
29
80
6,183
537
2,651
110
—
3,298
9,481
- AQ6
861
146
531
1,538
943
3,668
95
—
4,706
6,244
- AQ7
525
423
336
1,284
773
3,478
46
4
4,301
5,585
- AQ8
414
209
434
1,057
216
1,362
19
—
1,597
2,654
- AQ9
523
27
106
656
75
273
8
—
356
1,012
Stage 3
1,464
85
646
2,195
431
1,098
35
24
1,588
3,783
- AQ10
1,464
85
646
2,195
431
1,098
35
24
1,588
3,783
Loans past due analysis
(3,4)
186,650
3,509
7,902
198,061
21,684
59,613
24,436
3,927
109,660
307,721
- Not past due
184,826
3,417
7,190
195,433
20,831
56,700
24,322
3,920
105,773
301,206
- Past due 1-30 days
733
24
69
826
491
2,070
86
—
2,647
3,473
- Past due 31-89 days
400
21
84
505
166
399
2
7
574
1,079
- Past due 90-180 days
294
18
65
377
27
21
23
—
71
448
- Past due >180 days
397
29
494
920
169
423
3
—
595
1,515
Loans - Stage 2
16,511
834
1,596
18,941
2,874
14,669
653
79
18,275
37,216
- Not past due
15,837
809
1,502
18,148
2,581
13,694
647
72
16,994
35,142
- Past due 1-30 days
476
13
42
531
149
613
4
—
766
1,297
- Past due 31-89 days
198
12
52
262
144
362
2
7
515
777
For the notes to this table refer to page 41.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
39
Credit risk – Banking activities continued
Sector analysis – portfolio summary
(audited)
Personal
Wholesale
Total
Credit
Other
Mortgages (1)
cards
personal
Total
Property
Corporate
FI
Sovereign
Total
2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Weighted average life*
- ECL measurement (years)
8
2
6
6
5
6
3
2
5
6
Weighted average 12 months
PDs*
- IFRS 9 (%)
0.47
2.52
4.72
0.66
2.02
2.19
0.26
0.22
1.64
1.01
- Basel (%)
0.61
2.90
3.09
0.74
1.16
1.50
0.19
0.22
1.09
0.86
ECL provisions by geography
278
197
848
1,323
275
935
38
10
1,258
2,581
- UK
278
197
848
1,323
265
778
25
9
1,077
2,400
- RoI
—
—
—
—
—
4
—
—
4
4
- Other Europe
—
—
—
—
8
63
3
1
75
75
- RoW
—
—
—
—
2
90
10
—
102
102
ECL provisions by stage
278
197
848
1,323
275
935
38
10
1,258
2,581
- Stage 1
75
48
97
220
80
182
15
9
286
506
- Stage 2
55
92
226
373
75
355
9
1
440
813
- Stage 3
148
57
525
730
120
398
14
—
532
1,262
ECL provisions coverage (%)
0.15
5.61
10.73
0.67
1.27
1.57
0.16
0.25
1.15
0.84
- Stage 1 (%)
0.04
1.85
1.71
0.12
0.44
0.42
0.06
0.24
0.32
0.19
- Stage 2 (%)
0.33
11.03
14.16
1.97
2.61
2.42
1.38
1.27
2.41
2.18
- Stage 3 (%)
10.11
67.06
81.27
33.26
27.84
36.25
40.00
—
33.50
33.36
ECL (release)/charge
- Third
party
(30)
35
211
216
102
15
7
(2)
122
338
Amounts written-off
18
50
99
167
20
94
40
—
154
321
Other financial assets
by asset quality
(2)
—
—
—
—
—
9
7,785
78,829
86,623
86,623
- AQ1-AQ4
—
—
—
—
—
9
7,556
78,829
86,394
86,394
- AQ5-AQ8
—
—
—
—
—
—
229
—
229
229
Off-balance sheet
15,894
12,287
7,030
35,211
10,207
42,637
3,596
411
56,851
92,062
Loan commitments
15,894
12,287
6,979
35,160
9,879
40,229
3,344
411
53,863
89,023
Financial guarantees
—
—
51
51
328
2,408
252
—
2,988
3,039
Off-balance sheet
by asset quality
(2)
15,894
12,287
7,030
35,211
10,207
42,637
3,596
411
56,851
92,062
- AQ1-AQ4
15,212
370
6,170
21,752
7,505
24,944
2,592
308
35,349
57,101
- AQ5-AQ8
674
11,687
839
13,200
2,684
17,456
1,003
84
21,227
34,427
- AQ9
2
3
4
9
3
16
—
—
19
28
- AQ10
6
227
17
250
15
221
1
19
256
506
*Not within audit scope.
For the notes to this table refer to page 41.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
40
Credit risk – Banking activities continued
Sector analysis – portfolio summary
(audited)
Personal
Wholesale
Total
Mortgages (1)
Credit
cards
Other
personal
Total
Property
Corporate
FI
Sovereign
Total
2021
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Loans by geography
169,181
3,016
7,506
179,703
21,074
55,148
33,302
4,417
113,941
293,644
- UK
169,181
3,016
7,506
179,703
20,479
49,974
29,056
3,446
102,955
282,658
- RoI
—
—
—
—
5
578
112
—
695
695
- Other Europe
—
—
—
—
237
2,642
1,026
479
4,384
4,384
- RoW
—
—
—
—
353
1,954
3,108
492
5,907
5,907
Loans by stage and asset
quality
(2)
169,181
3,016
7,506
179,703
21,074
55,148
33,302
4,417
113,941
293,644
Stage 1
159,228
2,215
5,461
166,904
18,645
42,018
32,710
4,379
97,752
264,656
- AQ1
3,010
—
374
3,384
764
828
2,166
2,324
6,082
9,466
- AQ2
—
—
—
—
1,789
643
25,150
401
27,983
27,983
- AQ3
2,037
—
—
2,037
2,074
2,885
631
1,506
7,096
9,133
- AQ4
80,144
37
339
80,520
2,925
8,266
3,527
36
14,754
95,274
- AQ5
67,170
664
878
68,712
4,512
12,515
635
—
17,662
86,374
- AQ6
3,151
751
2,441
6,343
4,517
10,942
430
16
15,905
22,248
- AQ7
3,260
693
1,017
4,970
1,735
5,184
112
89
7,120
12,090
- AQ8
177
66
365
608
308
686
57
7
1,058
1,666
- AQ9
279
4
47
330
21
69
2
—
92
422
Stage 2
8,921
734
1,534
11,189
2,038
12,172
567
37
14,814
26,003
- AQ1
5
—
—
5
56
46
—
—
102
107
- AQ2
—
—
—
—
113
—
—
—
113
113
- AQ3
14
—
—
14
—
94
—
—
94
108
- AQ4
2,541
1
78
2,620
31
723
14
35
803
3,423
- AQ5
3,463
54
89
3,606
247
2,143
287
—
2,677
6,283
- AQ6
977
179
667
1,823
643
3,553
163
—
4,359
6,182
- AQ7
556
375
288
1,219
583
3,590
36
1
4,210
5,429
- AQ8
941
97
299
1,337
258
1,509
65
1
1,833
3,170
- AQ9
424
28
113
565
107
514
2
—
623
1,188
Stage 3
1,032
67
511
1,610
391
958
25
1
1,375
2,985
- AQ10
1,032
67
511
1,610
391
958
25
1
1,375
2,985
Loans past due analysis
(3,4)
169,181
3,016
7,506
179,703
21,074
55,148
33,302
4,417
113,941
293,644
- Not past due
167,180
2,932
6,868
176,980
20,211
53,632
33,267
4,414
111,524
288,504
- Past due 1-30 days
877
21
96
994
427
653
32
2
1,114
2,108
- Past due 31-89 days
377
19
59
455
212
390
1
1
604
1,059
- Past due 90-180 days
245
16
51
312
67
174
—
—
241
553
- Past due >180 days
502
28
432
962
157
299
2
—
458
1,420
Loans - Stage 2
8,921
734
1,534
11,189
2,038
12,172
567
37
14,814
26,003
- Not past due
7,989
709
1,405
10,103
1,719
11,532
563
36
13,850
23,953
- Past due 1-30 days
626
12
76
714
112
272
3
—
387
1,101
- Past due 31-89 days
306
13
53
372
207
368
1
1
577
949
For the notes to this table refer to the following page.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
41
Credit risk – Banking activities continued
Sector analysis – portfolio summary
(audited)
Personal
Wholesale
Total
Credit
Other
Mortgages (1)
cards
personal
Total
Property
Corporate
FI
Sovereign
Total
2021
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Weighted average life*
- ECL measurement (years)
8
2
5
5
5
6
3
—
6
6
Weighted average 12 months
PDs*
- IFRS 9 (%)
0.11
5.14
2.77
0.30
0.88
1.91
0.16
0.15
1.13
0.64
- Basel (%)
0.70
3.28
3.29
0.85
1.34
1.81
0.14
0.16
1.16
0.97
ECL provisions by geography
311
209
737
1,257
218
973
43
12
1,246
2,503
- UK
311
209
737
1,257
201
846
38
12
1,097
2,354
- RoI
—
—
—
—
—
9
3
—
12
12
- Other Europe
—
—
—
—
17
68
1
—
86
86
- RoW
—
—
—
—
—
50
1
—
51
51
ECL provisions by stage
311
209
737
1,257
218
973
43
12
1,246
2,503
- Stage 1
22
48
47
117
17
79
6
12
114
231
- Stage 2
123
115
242
480
70
520
35
—
625
1,105
- Stage 3
166
46
448
660
131
374
2
—
507
1,167
ECL provisions coverage (%)
0.18
6.93
9.82
0.70
1.03
1.76
0.13
0.27
1.09
0.85
- Stage 1 (%)
0.01
2.17
0.86
0.07
0.09
0.19
0.02
0.27
0.12
0.09
- Stage 2 (%)
1.38
15.67
15.78
4.29
3.43
4.27
6.17
—
4.22
4.25
- Stage 3 (%)
16.09
68.66
87.67
40.99
33.50
39.04
8.00
—
36.87
39.10
ECL (release)/charge
- Third
party
(45)
(8)
32
(21)
(278)
(513)
(1)
1
(791)
(812)
Amounts written-off
5
55
113
173
111
99
5
—
215
388
Other financial assets
by asset quality
(2)
—
—
—
—
—
10
6,502
122,284
128,796
128,796
- AQ1-AQ4
—
—
—
—
—
10
6,342
122,282
128,634
128,634
- AQ5-AQ8
—
—
—
—
—
—
160
2
162
162
Off-balance sheet
13,481
11,809
6,907
32,197
10,175
38,097
3,390
734
52,396
84,593
- Loan commitments
13,481
11,809
6,851
32,141
9,888
36,326
3,310
734
50,258
82,399
- Financial guarantees
—
—
56
56
287
1,771
80
—
2,138
2,194
Off-balance sheet
by asset quality
(2)
13,481
11,809
6,907
32,197
10,175
38,097
3,390
734
52,396
84,593
- AQ1-AQ4
12,165
207
5,485
17,857
7,276
21,673
2,487
586
32,022
49,879
- AQ5-AQ8
1,313
11,366
1,411
14,090
2,882
16,180
902
148
20,112
34,202
- AQ9
—
4
3
7
4
37
1
—
42
49
- AQ10
3
232
8
243
13
207
—
—
220
463
*Not within audit scope.
(1)
Includes a portion of Private Banking lending secured against residential real estate, in line with ECL calculation methodology. Private Banking mortgages are reported in UK,
reflecting the country of lending origination.
(2)
AQ bandings are based on Basel PDs and mapping is as follows:
Internal asset quality band
Probability of default range
Indicative S&P rating
AQ1
0% - 0.034%
AAA to AA
AQ2
0.034% - 0.048%
AA to AA-
AQ3
0.048% - 0.095%
A+ to A
AQ4
0.095% - 0.381%
BBB+ to BBB-
AQ5
0.381% - 1.076%
BB+ to BB
AQ6
1.076% - 2.153%
BB- to B+
AQ7
2.153% - 6.089%
B+ to B
AQ8
6.089% - 17.222%
B- to CCC+
AQ9
17.222% - 100%
CCC to C
AQ10
100%
D
£0.2 billion (2021 – £0.2 billion) AQ10 Personal balances primarily relate to loan commitments, the drawdown of which is effectively prohibited.
(3)
30 DPD – 30 days past due, the mandatory 30 days past due backstop prescribed by IFRS 9 for a SICR.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
42
Credit risk – Banking activities continued
Sector analysis – portfolio summary
(audited)
The table below shows ECL by stage, for the Personal portfolios and key sectors of the Wholesale portfolios that continue to be
affected by COVID-19.
Loans - amortised cost and FVOCI
Off-balance sheet
ECL provisions
Stage 1
Stage 2
Stage 3
Total
Loan
commitments
Contingent
liabilities
Stage 1
Stage 2
Stage 3
Total
2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Personal
176,925
18,941
2,195
198,061
35,160
51
220
373
730
1,323
Mortgages
168,675
16,511
1,464
186,650
15,894
—
75
55
148
278
Credit cards
2,590
834
85
3,509
12,287
—
48
92
57
197
Other personal
5,660
1,596
646
7,902
6,979
51
97
226
525
848
Wholesale
89,797
18,275
1,588
109,660
53,863
2,988
286
440
532
1,258
Property*
18,379
2,874
431
21,684
9,879
328
80
75
120
275
Financial institutions
23,748
653
35
24,436
3,344
252
15
9
14
38
Sovereign
3,824
79
24
3,927
411
—
9
1
—
10
Corporate
43,846
14,669
1,098
59,613
40,229
2,408
182
355
398
935
Of which:
Agriculture*
3,065
824
67
3,956
739
17
17
25
29
71
Airlines and aerospace*
367
1,048
17
1,432
919
61
2
37
7
46
Automotive*
5,270
1,409
20
6,699
3,194
41
17
16
8
41
Chemicals*
323
113
1
437
546
11
1
2
1
4
Health
2,812
764
96
3,672
394
2
16
20
29
65
Industrials*
1,923
694
73
2,690
2,638
129
8
13
19
40
Land transport and logistics*
3,184
1,045
22
4,251
2,694
129
11
29
9
49
Leisure*
2,769
2,855
174
5,798
1,386
51
22
97
84
203
Mining and metals*
157
40
2
199
349
2
—
1
1
2
Oil and gas*
608
111
37
756
1,079
136
2
1
27
30
Power Utilities*
3,715
404
1
4,120
3,916
1,115
9
11
—
20
Retail*
4,919
1,248
126
6,293
3,475
335
17
25
56
98
Shipping*
141
129
14
284
78
14
—
6
6
12
Water and waste*
2,970
303
7
3,280
1,796
79
4
4
4
12
Total
266,722
37,216
3,783
307,721
89,023
3,039
506
813
1,262
2,581
2021
Personal
166,904
11,189
1,610
179,703
32,141
56
117
480
660
1,257
Mortgages
159,228
8,921
1,032
169,181
13,481
—
22
123
166
311
Credit cards
2,215
734
67
3,016
11,809
—
48
115
46
209
Other personal
5,461
1,534
511
7,506
6,851
56
47
242
448
737
Wholesale
97,752
14,814
1,375
113,941
50,258
2,138
114
625
507
1,246
Property*
18,645
2,038
391
21,074
9,888
287
17
70
131
218
Financial institutions
32,710
567
25
33,302
3,310
80
6
35
2
43
Sovereign
4,379
37
1
4,417
734
—
12
—
—
12
Corporate
42,018
12,172
958
55,148
36,326
1,771
79
520
374
973
Of which:
Agriculture*
2,973
942
47
3,962
737
15
9
29
18
56
Airlines and aerospace*
584
471
36
1,091
1,107
52
1
30
8
39
Automotive*
4,640
1,206
31
5,877
2,617
48
8
28
8
44
Chemicals*
290
42
1
333
551
13
—
—
—
1
Health
2,503
864
78
3,445
449
2
6
38
22
66
Industrials*
1,908
546
19
2,473
2,110
138
3
12
8
23
Land transport and logistics*
3,183
663
35
3,881
2,322
59
4
42
10
56
Leisure*
2,747
3,036
199
5,982
1,192
46
8
159
87
254
Mining and metals*
224
39
1
264
506
2
—
2
1
3
Oil and gas*
916
110
33
1,059
610
419
1
6
23
30
Power Utilities*
3,119
217
5
3,342
3,850
344
2
3
—
5
Retail*
4,562
1,057
142
5,761
3,676
297
7
23
51
81
Shipping*
458
310
14
782
69
4
1
11
6
18
Water and waste*
2,522
188
4
2,714
1,394
70
2
4
2
9
Total
264,656
26,003
2,985
293,644
82,399
2,194
231
1,105
1,167
2,503
* Wholesale sectors marked with an asterisk contain an element of exposure classified as Heightened climate-related risk. Elements of the personal mortgage portfolio are also exposed
to heightened climate-related risk This is not within the audit scope.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
43
Wholesale forbearance
(audited)
The table below shows Wholesale forbearance, Heightened Monitoring and Risk of Credit Loss by sector. Personal forbearance is
disclosed in the Personal portfolio section. This table show current exposure but reflects risk transfers where there is a guarantee
by another customer
Property
FI
Other corporate
Total
2022
£m
£m
£m
£m
Forbearance (flow)
383
105
2,108
2,596
Forbearance (stock)
500
106
3,669
4,275
Heightened Monitoring and Risk of Credit Loss
517
68
2,786
3,371
2021
Forbearance (flow)
373
25
2,816
3,214
Forbearance (stock)
562
32
4,279
4,873
Heightened Monitoring and Risk of Credit Loss
646
65
3,410
4,121
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
44
Credit risk – Banking activities continued
Sector analysis – portfolio summary
(audited)
Loans by geography and sector
– In line with NWB Group’s
strategic focus, exposures continued to be mainly in the UK.
In Personal exposure increased primarily as a result of
increased mortgage lending. In Wholesale, there was a
reduction in the balance sheet in Q4, following a period of
growth up to Q3. This was mainly due to a reduction in
central items held in the course of treasury related
management activities. There was growth in Commercial &
Institutional, particularly as a result of increased exposure to
larger corporate customers, primarily within information
technology, telecommunications and power utilities.
Repayment performance under COVID-19 government
lending schemes is closely tracked and exposure continued
to decrease due to scheduled repayment activity and
account closures. Exposures under the Bounce Bank Loan
Scheme (BBLS) that benefit from the 100% government
guarantee account for approximately 70% of remaining
government scheme exposures. BBLS missed repayment
rate and recoveries stock have increased but volumes
continue to be in line with other lenders.
Loans by stage
– In both Wholesale and Personal,
deterioration in forward-looking economics resulted in a
larger proportion of accounts exhibiting a SICR compared to
2021. There was, therefore, a migration of exposures from
Stage 1 into Stage 2 during 2022. Personal customers who
had accessed payment holiday support, and where their risk
profile was identified as relatively high, are no longer
collectively migrated into Stage 2. The relevance of this
collective SICR identification was no longer considered as
pertinent in the context of the current high inflation
environment and related uncertainty.
Loans – Past due analysis
– The implementation of the new
regulatory default definition included refinements to the days
past due calculations. This contributed to an increase in
arrears in H1 2022 in Personal, however this moderated
through the year. In Wholesale, there was an increase in
past due 1-30 days in corporates.
Weighted average 12 months PDs
– In Personal, the Basel II
point-in-time PDs improved slightly during 2022 due to a
stable credit performance in the portfolios. For IFRS 9 PDs,
there were increases across mortgages and other personal
lending as a result of new PD model implementations during
the year, coupled with the deteriorating economic outlook in
the second half of the year. For credit cards, the new IFRS 9
PD model implementation drove a net reduction in PD levels,
primarily resulting from more accurate modelling of defaults
driven by shifts in general unemployment. In Wholesale, the
Basel II PDs were based on a through-the-cycle approach
and improved reflecting positive portfolio performance. The
IFRS 9 PDs increased due the deterioration in forward
looking economics. For further details refer to the Asset
quality section.
ECL provision by geography
– In line with loans by
geography, the vast majority of ECL related to exposures in
the UK.
ECL provisions by stage
– As mentioned above, Stage 1 and
Stage 2 modelled ECL increased due to deterioration in
forward-looking economics, although the Stage 2 growth
was more than offset by reductions in post model
adjustments. Stage 3 provisions have yet to be materially
affected by the high inflation environment and supply chain
disruption, with increases relating to the introduction of the
new regulatory definition of default, largely offset by write
offs.
ECL provisions coverage
– Overall provisions coverage
reduced, due to a change in product mix and a decrease in
judgemental post model adjustments which more than
offset increases from the deteriorating economic outlook.
The ECL charge and loss rate
– ECL charge and loss rate
was low, with charges from a deterioration in forward-
looking economics countered by reductions in post model
adjustments and the continued stable portfolio performance
and low default trends.
Other financial assets by asset quality
– Consisting almost
entirely of cash and balances at central banks and debt
securities, held in the course of treasury related
management activities, these assets were mainly within the
AQ1-AQ4 bands.
Off-balance sheet exposures by asset quality
– In Personal,
undrawn exposures were reflective of available credit lines
in credit cards and current accounts. Additionally, the
mortgage portfolio had undrawn exposures, where a formal
offer had been made to a customer but had not yet drawn
down; the value increased in line with the pipeline of offers.
There was also a legacy portfolio of flexible mortgages
where a customer had the right and ability to draw down
further funds. The asset quality was aligned to the wider
portfolio. In Wholesale, growth was primarily loan
commitments to financial institutions and corporate sectors
in the AQ1-AQ4 bands.
Wholesale forbearance
– Forbearance flow and stock
decreased in 2022 compared to 2021, noting that 2021 was
adversely affected by COVID-19. Increased levels of
forbearance were observed in Q4 2022. The retail & leisure,
property and services sectors represented the largest share
of forbearance flow. Labour shortages, the high inflation
environment, rising fuel and energy costs, interest rate
impacts and supply chain issues continue to weigh on these
sectors. Payment holidays and covenant waivers were the
most common forms of forbearance granted.
Heightened Monitoring and Risk of Credit Loss
–
Economic
headwinds continue to present an uncertain outlook. Risk of
Credit Loss framework exposures and inflows decreased in
2022 compared to 2021, noting again that 2021 was
adversely affected by COVID-19. Inflows into the framework
began to increase in Q4 2022. The sector breakdown of
exposures within the framework remained consistent with
prior periods. Retail SME customers do not form part of the
Wholesale Risk of Credit Loss framework. Customers in
financial difficulty within this group are managed by
specialist problem debt management teams. The number of
customers in arrears and recoveries increased significantly
during 2022, driven by BBLS exposures. Excluding BBLS
customers, the number of customers in this population in
problem debt remains stable.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
45
Credit risk – Banking activities continued
Credit risk enhancement and mitigation
(audited)
The table below shows exposures of modelled portfolios within the scope of the ECL framework and related credit risk
enhancement and mitigation (CREM).
Maximum credit risk
CREM by type
CREM coverage
Exposure post
CREM
Gross
exposure
ECL
Total
Stage 3
Financial (1)
Property
Other (2)
Total
Stage 3
Total
Stage 3
2022
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
Financial assets
Cash and balances at central banks
72.5
—
72.5
—
—
—
—
—
—
72.5
—
Loans - amortised cost
(3)
307.8
2.5
305.3
2.6
28.3
214.2
17.8
260.4
2.2
44.9
0.4
Personal
(4)
198.1
1.3
196.8
1.5
0.9
185.9
—
186.9
1.3
9.9
0.2
Wholesale
(5)
109.7
1.2
108.5
1.1
27.4
28.3
17.8
73.5
0.9
35.0
0.2
Debt securities
14.1
—
14.1
—
—
—
—
—
—
14.1
—
Total financial assets
394.4
2.5
391.9
2.6
28.3
214.2
17.8
260.4
2.2
131.5
0.4
Contingent liabilities and
commitments
Personal
(6,7)
35.2
—
35.2
0.2
0.6
1.9
—
2.5
—
32.7
0.2
Wholesale
56.9
0.1
56.8
0.3
0.9
4.5
3.3
8.7
—
48.1
0.3
Total off-balance sheet
92.1
0.1
92.0
0.5
1.5
6.4
3.3
11.2
—
80.8
0.5
Total exposure
486.5
2.6
483.9
3.1
29.8
220.6
21.1
271.6
2.2
212.3
0.9
2021
Financial assets
Cash and balances at central banks
100.6
—
100.6
—
—
—
—
—
—
100.6
—
Loans - amortised cost
(3)
293.6
2.4
291.2
1.9
37.3
195.1
19.0
251.4
1.7
39.8
0.2
Personal
(4)
179.7
1.2
178.5
1.0
1.0
168.2
—
169.2
0.9
9.3
0.1
Wholesale
(5)
113.9
1.2
112.7
0.9
36.3
26.9
19.0
82.2
0.8
30.5
0.1
Debt securities
28.2
—
28.2
—
—
—
—
—
—
28.2
—
Total financial assets
422.4
2.4
420.0
1.9
37.3
195.1
19.0
251.4
1.7
168.6
0.2
Contingent liabilities and
commitments
Personal
(6,7)
32.2
0.1
32.1
0.2
0.5
2.1
—
2.6
—
29.5
0.2
Wholesale
52.4
—
52.4
0.3
1.3
4.7
3.1
9.1
—
43.3
0.3
Total off-balance sheet
84.6
0.1
84.5
0.5
1.8
6.8
3.1
11.7
—
72.8
0.5
Total exposure
507.0
2.5
504.5
2.4
39.1
201.9
22.1
263.1
1.7
241.4
0.7
(1)
Includes cash and securities collateral.
(2)
Includes guarantees, charges over trade debtors, other asset finance related physical collateral as well as the amount by which credit risk exposure is reduced through netting
arrangements, mainly cash management pooling, which give NWB Group a legal right to set off the financial asset against a financial liability due to the same counterparty.
(3)
NWB Group holds collateral in respect of individual loans – amortised cost to banks and customers. This collateral includes mortgages over property (both personal and
commercial); charges over business assets such as plant and equipment, inventories and trade debtors; and guarantees of lending from parties other than the borrower. NWB
Group obtains collateral in the form of securities in reverse repurchase agreements. Collateral values are capped at the value of the loan.
(4)
Stage 3 mortgage exposures have relatively limited uncovered exposure reflecting the security held. On unsecured credit cards and other personal borrowing, the residual
uncovered amount reflects historical experience of continued cash recovery post default through ongoing engagement with customers.
(5)
Stage 3 exposures post credit risk enhancement and mitigation in Wholesale mainly represent enterprise value and the impact of written down collateral values; an individual
assessment to determine ECL will consider multiple scenarios and in some instances allocate a probability weighting to a collateral value in excess of the written down value.
(6)
£0.2 billion (2021 – £0.2 billion) Personal Stage 3 balances primarily relate to loan commitments, the draw down of which is effectively prohibited.
(7)
The Personal gross exposure value includes £13.8 billion (2021 – £11.4 billion) in respect of pipeline mortgages where a committed offer has been made to a customer but where the
funds have not yet been drawn down. When drawn down, the exposure would be covered by a security over the borrower’s property
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
46
Credit risk – Banking activities continued
Personal portfolio
(audited)
Disclosures in the Personal portfolio section include drawn exposure (gross of provisions).
2022
2021
Retail Banking
Private Banking
Total
Retail Banking
Private Banking
Total
Personal lending
£m
£m
£m
£m
£m
£m
Mortgages
172,941
13,709
186,650
157,027
12,210
169,237
Of which:
Owner occupied
156,261
12,096
168,357
143,969
10,712
154,681
Buy-to-let
16,680
1,613
18,293
13,058
1,498
14,556
Interest only - variable
1,980
3,286
5,266
2,427
4,714
7,141
Interest only - fixed
16,267
8,591
24,858
12,471
5,707
18,178
Mixed
(1)
8,746
1
8,747
7,447
—
7,447
Impairment provisions
(2)
269
9
278
303
7
310
Other personal lending
(3)
9,567
1,853
11,420
8,585
1,937
10,522
Impairment provisions
(2)
1,026
15
1,041
927
18
945
Total personal lending
182,508
15,562
198,070
165,612
14,147
179,759
Mortgage LTV ratios
- Total portfolio
53%
59%
53%
55%
59%
55%
- Stage 1
53%
59%
53%
55%
59%
55%
- Stage 2
53%
61%
53%
54%
59%
54%
- Stage 3
47%
59%
48%
50%
64%
47%
- Buy-to-let
51%
59%
52%
51%
57%
53%
- Stage 1
51%
59%
52%
51%
58%
53%
- Stage 2
49%
53%
49%
52%
55%
50%
- Stage 3
47%
55%
50%
52%
53%
49%
Gross new mortgage lending
40,248
2,968
43,216
34,161
2,790
36,951
Of which:
Owner occupied
35,394
2,701
38,095
32,555
2,509
35,064
Weighted average LTV
69%
65%
69%
69%
65%
68%
Buy-to-let
4,854
267
5,121
1,606
281
1,887
Weighted average LTV
64%
66%
64%
64%
65%
64%
Interest only - variable rate
16
329
345
12
811
823
Interest only - fixed rate
5,213
2,335
7,548
2,284
1,532
3,816
Mixed
(1)
2,266
—
2,266
2,186
—
2,186
Mortgage forbearance
Forbearance flow
152
7
159
229
16
245
Forbearance stock
744
16
760
789
3
792
Current
473
8
481
495
—
495
1-3 months in arrears
108
—
108
110
2
112
>3 months in arrears
163
8
171
184
1
185
(1)
Includes accounts which have an interest only sub-account and a capital and interest sub-account to provide a more comprehensive view of interest only exposures.
(2)
Retail Banking excludes a non-material amount of provisions held on relatively small legacy portfolios.
(3)
Comprises unsecured lending except for Private Banking, which includes both secured and unsecured lending. It excludes loans that are commercial in nature.
The mortgage portfolio grew steadily during 2022, benefiting
from buoyant housing market activity and customers re-
mortgaging as interest rates rose across the market.
LTV ratios improved as house prices increased as a result of
housing market demand.
The existing mortgage stock and new business were closely
monitored against agreed risk appetite parameters. These
included loan-to-value ratios, buy-to-let concentrations,
new-build concentrations and credit quality.
Affordability assessments and assumptions were
continuously reviewed considering inflationary pressure,
interest rate rises and taxation changes during the year.
The buy-to-let portfolio grew in 2022. This growth was
expected and within risk appetite following strategy and
customer journey simplification implemented in H2 2021
Aligned to strong overall portfolio quality and low levels of
early arrears, forbearance flows have decreased compared
to the prior year.
Unsecured lending increased during 2022, with resilient
customer demand after the easing of COVID-19 restrictions.
As noted previously, ECL increased, for further detail of
movements in ECL provisions at product level refer to the
Flow statements section.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
47
Credit risk – Banking activities continued
Personal portfolio
(audited)
Mortgage LTV distribution by stage
The table below shows gross mortgage lending and related ECL by LTV band for Retail Banking. Mortgage lending not within the
scope of IFRS 9 ECL reflected portfolios carried at fair value.
Mortgages
ECL provisions
ECL provisions coverage (2)
Stage 1
Stage 2
Stage 3
Not within
IFRS 9 ECL
scope
Total
Of which:
gross new
lending
Stage 1
Stage 2
Stage 3
Total (1)
Stage 1
Stage 2
Stage 3
Total
2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
%
%
%
%
≤50%
63,446
6,809
742
50
71,047
7,187
23
17
77
117
—
0.3
10.4
0.2
>50% and ≤70%
65,419
7,118
495
5
73,037
13,790
31
27
47
105
0.1
0.4
9.5
0.1
>70% and ≤80%
17,227
1,540
52
1
18,820
10,978
7
6
7
20
—
0.4
13.5
0.1
>80% and ≤90%
7,714
889
14
1
8,618
6,950
6
4
4
14
0.1
0.5
28.6
0.2
>90% and ≤100%
1,363
17
4
—
1,384
1,341
2
—
1
3
0.2
—
25.0
0.2
>100%
34
7
9
—
50
2
2
—
4
6
5.9
—
44.4
12.0
Total with LTVs
155,203
16,380
1,316
57
172,956
40,248
71
54
140
265
0.1
0.3
10.6
0.2
Other
40
1
1
—
42
—
3
—
1
4
7.5
—
100.0
9.5
Total
155,243
16,381
1,317
57
172,998
40,248
74
54
141
269
0.1
0.3
10.7
0.2
2021
≤50%
52,817
3,390
421
—
56,628
5,521
6
42
85
133
—
1.2
20.2
0.2
>50% and ≤70%
64,362
3,919
353
—
68,634
12,024
10
49
56
115
—
1.3
15.9
0.2
>70% and ≤80%
23,260
1,167
72
—
24,499
10,716
3
17
10
30
—
1.5
13.9
0.1
>80% and ≤90%
5,822
236
18
60
6,136
4,846
—
8
3
11
—
3.4
16.7
0.2
>90% and ≤100%
1,080
55
8
—
1,143
1,053
—
5
2
7
—
9.1
25.0
0.6
>100%
13
17
5
—
35
—
—
2
2
4
—
11.8
40.0
11.4
Total with LTVs
147,354
8,784
877
60
157,075
34,160
19
123
158
300
—
1.4
18.0
0.2
Other
10
1
1
—
12
1
—
—
—
—
—
—
—
—
Total
147,364
8,785
878
60
157,087
34,161
19
123
158
300
—
1.4
18.0
0.2
(1)
Excludes a non-material amount of provisions held on relatively small legacy portfolios.
(2)
ECL provisions coverage is ECL provisions divided by mortgages
.
The reduced coverage level in the lower LTV bands for
Retail Banking, relative to 31 December 2021, reflected
the implementation of a new IFRS 9 LGD model with a
modelling approach that now captures a reduced loss
expectation from non-repossession recovery action.
Continued stable portfolio performance alongside the
new IFRS 9 PD and LGD model implementations resulted
in reduced coverage across most LTV bands in Stage 2
and Stage 3. The increased ECL across Stage 1 LTV
bands was mainly due to higher Stage 1 PDs as a result
of the new PD model implementation and also the
proportionate allocation of the economic uncertainty post
model adjustment to Stage 1.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
48
Credit risk – Banking activities continued
Personal portfolio
(audited)
Mortgage LTV distribution by region
The table below shows gross mortgage lending by LTV band for Retail Banking, by geographical region.
≤50%
50%≤80%
80%≤100%
>100%
Total
Weighted
average LTV
Other
Total
2022
£m
£m
£m
£m
£m
%
£m
£m
South East
14,606
17,383
1,388
1
33,378
51
3
33,381
Greater London
13,876
17,199
1,324
1
32,400
52
3
32,403
Scotland
2,546
4,466
952
—
7,964
58
—
7,964
North West
6,315
8,133
1,205
2
15,655
54
1
15,656
South West
7,315
7,782
621
—
15,718
51
1
15,719
West Midlands
4,948
6,815
853
1
12,617
54
1
12,618
East of England
8,484
11,304
981
2
20,771
53
2
20,773
Rest of the UK
12,907
18,769
2,677
43
34,396
55
31
34,427
Total
70,997
91,851
10,001
50
172,899
53
42
172,941
2021
South East
11,897
17,824
879
1
30,601
53
3
30,604
Greater London
11,891
16,248
1,463
1
29,603
54
3
29,606
Scotland
2,026
4,462
428
1
6,917
58
—
6,917
North West
5,215
8,408
633
2
14,258
54
1
14,259
South West
5,566
8,364
495
1
14,426
53
2
14,428
West Midlands
3,797
7,127
546
1
11,471
56
1
11,472
East of England
6,678
11,365
814
1
18,858
55
1
18,859
Rest of the UK
9,559
19,336
1,961
24
30,880
57
2
30,882
Total
56,629
93,134
7,219
32
157,014
55
13
157,027
Commercial real estate (CRE)*
The CRE portfolio comprises exposures to entities involved in the development of, or investment in, commercial and residential
properties (including house builders but excluding housing associations, construction and the building materials sub-sector). The
sector is reviewed regularly by senior executive committees. Reviews include portfolio credit quality, capital consumption and
control frameworks.
2022
2021
By sub-sector
£m
£m
Investment
Residential
(1)
3,221
2,980
Office
(2)
1,592
1,664
Retail
(3)
2,098
2,144
Industrial
(4)
2,002
1,718
Mixed/other
(5)
724
936
9,637
9,442
Development
Residential
(1)
1,266
1,295
Office
(2)
69
68
Retail
(3)
17
21
Industrial
(4)
48
35
Mixed/other
(5)
11
15
1,411
1,434
Total
(6)
11,048
10,876
*Not within audit scope
(1)
Properties including houses, flats and student accommodation.
(2)
Properties including offices in central business districts, regional headquarters and business parks.
(3)
Properties including high street retail, shopping centres, restaurants, bars and gyms.
(4)
Properties including distribution centres, manufacturing and warehouses.
(5)
Properties that do not fall within the other categories. Mixed generally relates to a mixture of retail/office with residential.
(6)
99% (2021 – 99%) of the total exposure relates to the UK
.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
49
Credit risk – Banking activities continued
Commercial real estate
(audited)
CRE LTV distribution by stage
The table below shows CRE current exposure and related ECL by LTV band.
Current exposure (gross of provisions) (1,2)
ECL provisions
ECL provisions coverage (4)
Stage 1
Stage 2
Stage 3
Not within
IFRS 9 ECL
scope (3)
Total
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
Total
2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
%
%
%
%
≤50%
4,306
276
31
—
4,613
22
8
7
37
0.5
2.9
22.6
0.8
>50% and ≤70%
2,458
424
30
—
2,912
18
8
8
34
0.7
1.9
26.7
1.2
>70% and ≤100%
205
23
30
—
258
1
1
3
5
0.5
4.4
10.0
1.9
>100%
84
6
12
—
102
1
—
8
9
1.2
—
66.7
8.8
Total with LTVs
7,053
729
103
—
7,885
42
17
26
85
0.6
2.3
25.2
1.1
Total portfolio average LTV
(%)
47%
52%
69%
—
48%
—
—
—
—
—
—
—
—
Other
(5)
1,229
484
38
—
1,751
6
12
15
33
0.5
2.5
39.5
1.9
Development
(6)
1,258
126
28
—
1,412
12
3
16
31
1.0
2.4
57.1
2.2
Total
9,540
1,339
169
—
11,048
60
32
57
149
0.6
2.4
33.7
1.4
2021
≤50%
3,955
232
13
—
4,200
1
4
3
8
—
1.7
23.1
0.2
>50% and ≤70%
2,851
108
29
—
2,988
2
1
17
20
0.1
0.9
58.6
0.7
>70% and ≤100%
266
21
25
—
312
1
—
11
12
0.4
—
44.0
3.9
>100%
205
4
19
—
228
—
1
12
13
—
25.0
63.2
5.7
Total with LTVs
7,277
365
86
—
7,728
4
6
43
53
0.1
1.6
50.0
0.7
Total portfolio average LTV
(%)
50%
49%
76%
—
50%
—
—
—
—
—
—
—
—
Other
(5)
1,485
194
35
—
1,714
3
9
13
25
0.2
4.7
37.1
1.5
Development
(6)
1,271
125
38
—
1,434
2
2
20
24
0.2
1.6
52.6
1.7
Total
10,033
684
159
—
10,876
9
17
76
102
0.1
2.5
47.8
0.9
(1)
Comprises gross lending, interest rate hedging derivatives and other assets carried at fair value that are managed as part of the overall CRE portfolio.
(2)
The exposure in Stage 3 mainly relates to legacy assets.
(3)
Includes exposures relating to non-modelled portfolios and other exposures carried at fair value, including derivatives.
(4)
ECL provisions coverage is ECL provisions divided by current exposure.
(5)
Relates mainly to business banking, rate risk management products and unsecured corporate lending.
(6)
Relates to the development of commercial and residential properties. LTV is not a meaningful measure for this type of lending activity.
Overall
– The majority of the CRE portfolio was located and
managed in the UK. Business appetite and strategy was
aligned across NWB Group.
2022 trends
– The commercial property cycle turned
around mid-year as rising interest rates started to put
upward pressure on property yields. Commercial property
values declined by an average of approximately 20% from
their mid-year peak, ending the year approximately 14%
lower. The industrial sector saw values fall fastest to date,
yet it continues to attract strong occupier demand and
may, therefore, be the first sector to see values stabilise.
Secondary offices which don’t match modern sustainability
standards appear most at risk from further value loss. The
residential sector has yet to show significant value declines,
but transaction activity has slowed materially and is
expected to remain weak until values have adjusted. The
spike in mortgage costs last year would be expected to
push prices down across the market in 2023. In contrast,
residential rents appreciated rapidly in 2022 and
professionally managed rental assets are expected to be
relatively robust in 2023.
Credit quality
– Credit quality was stable for the first nine
months of the year but the impacts from the increase in
base rate, projected capital value falls, inflationary
pressures and concerns over recession for some customers
began to materialise. Inflows into the Risk of Credit Loss
framework picked up in Q4, but remained relatively low in
volume terms, compared to previous downturns.
Risk appetite
– Lending appetite is subject to regular review
with some level of tightening undertaken in 2022. Demand
for facilities reduced significantly in Q4 as the market
reacted to the various negative news points.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
50
Credit risk – Banking activities continued
Flow statements
(audited)
The flow statements that follow show the main ECL and related
income statement movements. They also show the changes in
ECL as well as the changes in related financial assets used in
determining ECL. Due to differences in scope, exposures may
differ from
those reported in other tables, principally in relation
to exposures in Stage 1 and Stage 2. These differences do not
have a material ECL effect. Other points to note:
Financial assets include treasury liquidity portfolios,
comprising balances at central banks and debt securities, as
well as loans. Both modelled and non-modelled portfolios are
included.
Stage transfers (for example, exposures moving from Stage
1 into Stage 2) are a key feature of the ECL movements,
with the net re-measurement cost of transitioning to a worse
stage being a primary driver of income statement charges.
Similarly, there is an ECL benefit for accounts improving
stage.
Changes in risk parameters shows the reassessment of the
ECL within a given stage, including any ECL overlays and
residual income statement gains or losses at the point of
write-off or accounting write-down.
Other (P&L only items) includes any subsequent changes in
the value of written-down assets (for example, fortuitous
recoveries) along with other direct write-off items such as
direct recovery costs. Other (P&L only items) affects the
income statement but does not affect balance sheet ECL
movements.
Amounts written-off represent the gross asset written-
down against accounts with ECL, including the net asset
write-down for any debt sale activity.
There were flows from Stage 1 into Stage 3 including
transfers due to unexpected default events.
The effect of any change in post model adjustments during
the year is typically reported under changes in risk
parameters, as are any effects arising from changes to the
underlying models. Refer to the section on Governance and
post model adjustments for further details.
All movements are captured monthly and aggregated.
Interest suspended post default is included within Stage 3
ECL with the movement in the value of suspended interest
during the year reported under currency translation and
other adjustments
.
Stage 1
Stage 2
Stage 3
Total
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
NWB Group total
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2022
388,953
231
27,337
1,105
3,147
1,167
419,437
2,503
Currency translation and other adjustments
3,029
(1)
105
(0)
40
30
3,173
29
Inter-Group transfers
522
1
43
—
4
—
569
1
Transfers from Stage 1 to Stage 2
(44,102)
(183)
44,102
183
—
—
—
—
Transfers from Stage 2 to Stage 1
24,228
675
(24,228)
(675)
—
—
—
—
Transfers to Stage 3
(512)
(3)
(2,884)
(203)
3,396
206
—
—
Transfers from Stage 3
361
29
587
52
(948)
(81)
—
—
Net re-measurement of ECL on stage
transfer
(575)
892
288
605
Changes in risk parameters
224
(326)
104
2
Other changes in net exposure
(13,047)
108
(5,975)
(215)
(1,456)
(64)
(20,477)
(171)
Other (P&L only items)
—
(3)
(95)
(98)
Income statement (releases)/charges
(243)
348
233
338
Amounts written-off
—
—
—
—
(321)
(321)
(321)
(321)
Unwinding of discount
—
—
(67)
(67)
At 31 December 2022
359,432
506
39,087
813
3,862
1,262
402,381
2,581
Net carrying amount
358,926
38,274
2,600
399,800
At 1 January 2021
303,032
365
60,326
2,060
3,272
1,285
366,630
3,710
2021 movements
85,921
(134)
(32,989)
(955)
(125)
(118)
52,807
(1,207)
At 31 December 2021
388,953
231
27,337
1,105
3,147
1,167
419,437
2,503
Net carrying amount
388,722
26,232
1,980
416,934
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
51
Credit risk – Banking activities continued
Flow statements
(audited)
Stage 1
Stage 2
Stage 3
Total
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Retail Banking - mortgages
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2022
146,450
22
8,692
123
875
158
156,017
303
Currency translation and other adjustments
—
—
—
—
12
12
12
12
Transfers from Stage 1 to Stage 2
(16,744)
(8)
16,744
8
—
—
—
—
Transfers from Stage 2 to Stage 1
6,878
56
(6,878)
(56)
—
—
—
—
Transfers to Stage 3
(44)
—
(991)
(26)
1,035
26
—
—
Transfers from Stage 3
33
1
269
9
(302)
(10)
—
—
Net re-measurement of ECL on stage transfer
(54)
85
(10)
21
Changes in risk parameters
55
(76)
21
—
Other changes in net exposure
17,218
2
(1,279)
(12)
(281)
(11)
15,658
(21)
Other (P&L only items)
1
(1)
(30)
(30)
Income statement (releases)/charges
4
(4)
(30)
(30)
Amounts written-off
—
—
—
—
(18)
(18)
(18)
(18)
Unwinding of discount
—
—
(29)
(29)
At 31 December 2022
153,791
74
16,557
55
1,321
139
171,669
268
Net carrying amount
153,717
16,502
1,182
171,401
At 1 January 2021
118,490
21
24,415
181
849
143
143,754
345
2021 movements
27,960
1
(15,723)
(58)
26
15
12,263
(42)
At 31 December 2021
146,450
22
8,692
123
875
158
156,017
303
Net carrying amount
146,428
8,569
717
155,714
Despite the strong portfolio growth during 2022, ECL levels
for mortgages reduced during the year, primarily as a result
of stable portfolio performance alongside the
implementation of new IFRS 9 models in Q1 2022.
More specifically, in H1 2022, strong credit performance
resulted in the migration of assets from Stage 2 into Stage
1, with an associated decrease from lifetime ECL to a 12
month ECL. ECL levels increased in the second half of the
year as the portfolio continued to grow and the economic
outlook deteriorated, increasing IFRS 9 PDs and the level of
migrations from Stage 1 into Stage 2.
The economic uncertainty post model adjustment allocated
more ECL to Stage 1 given the forward-looking nature of
the inflation threat on customer affordability, whereas the
previous COVID-19 post model adjustment was focused on
Stage 2 (for example, high risk payment holiday cases
migrated into Stage 2). Refer to the Governance and post
model adjustments section for more information.
The Stage 3 inflow was amplified by the adoption of the
new regulatory definition of default in January 2022.
However, Stage 3 ECL levels decreased since 31 December
2021, primarily due to reduced LGD estimates as a result of
the new model implementation in Q1 2022 alongside stable
underlying default levels. The relatively small ECL cost for
net re-measurement on stage transfer included the effect of
risk targeted ECL adjustments, when previously in Stage 2.
Refer to the Governance and post model adjustments
section for further details.
Write-off typically occurs once the repossessed property
has been sold and there is a residual shortfall balance
remaining outstanding. This would typically be within five
years from default but can be longer.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
52
Credit risk – Banking activities continued
Flow statements
(audited)
Stage 1
Stage 2
Stage 3
Total
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Retail Banking - credit cards
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2022
2,096
47
751
114
69
45
2,916
206
Currency translation and other adjustments
—
—
—
—
1
1
1
1
Transfers from Stage 1 to Stage 2
(1,001)
(33)
1,001
33
—
—
—
—
Transfers from Stage 2 to Stage 1
760
84
(760)
(84)
—
—
—
—
Transfers to Stage 3
(18)
(1)
(80)
(34)
98
35
—
—
Transfers from Stage 3
2
—
6
3
(8)
(3)
—
—
Net re-measurement of ECL on stage transfer
(53)
130
22
99
Changes in risk parameters
2
(28)
12
(14)
Other changes in net exposure
581
1
(63)
(43)
(21)
—
497
(42)
Other (P&L only items)
—
—
(7)
(7)
Income statement (releases)/charges
(50)
59
27
36
Amounts written-off
—
—
—
—
(51)
(51)
(51)
(51)
Unwinding of discount
—
—
(4)
(4)
At 31 December 2022
2,420
47
855
91
88
57
3,363
195
Net carrying amount
2,373
764
31
3,168
At 1 January 2021
1,676
41
1,071
178
83
55
2,830
274
2021 movements
420
6
(320)
(64)
(14)
(10)
86
(68)
At 31 December 2021
2,096
47
751
114
69
45
2,916
206
Net carrying amount
2,049
637
24
2,710
ECL remained broadly stable during 2022 reflecting stable
portfolio performance and the unwind of ECL held for
COVID-19 related risks in the first half of the year that
resulted in reduced levels of SICR identification and ECL
requirement. In addition, a new credit card PD model
implementation resulted in a net ECL decrease of £26
million. This is included in changes in risk parameters for
Stage 1 and Stage 2.
Similar to mortgages, ECL levels increased in the second
half of the year as the economic outlook deteriorated,
increasing IFRS 9 PDs and the level of migrations from
Stage 1 into Stage 2.
Credit card balances grew since 31 December 2021, in line
with industry trends in the UK, as unsecured borrowing
demand increased.
Reflecting the strong credit performance observed during
2022, Stage 3 inflows remained subdued and the effect of
the adoption of the new regulatory definition of default was
minimal for credit cards.
Charge-off (analogous to partial write-off) typically occurs
after 12 missed payments.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
53
Credit risk – Banking activities continued
Flow statements
(audited)
Stage 1
Stage 2
Stage 3
Total
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Retail Banking - other personal unsecured
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2022
3,636
43
1,574
242
510
438
5,720
723
Currency translation and other adjustments
—
—
—
—
8
8
8
8
Transfers from Stage 1 to Stage 2
(2,309)
(72)
2,309
72
—
—
—
—
Transfers from Stage 2 to Stage 1
1,575
188
(1,575)
(188)
—
—
—
—
Transfers to Stage 3
(33)
(1)
(295)
(93)
328
94
—
—
Transfers from Stage 3
4
3
33
16
(37)
(19)
—
—
Net re-measurement of ECL on stage transfer
(148)
250
93
195
Changes in risk parameters
30
(27)
30
33
Other changes in net exposure
940
49
(380)
(47)
(73)
(21)
487
(19)
Other (P&L only items)
—
—
3
3
Income statement (releases)/charges
(69)
176
105
212
Amounts written-off
—
—
—
—
(98)
(98)
(98)
(98)
Unwinding of discount
—
—
(9)
(9)
At 31 December 2022
3,813
92
1,666
225
638
516
6,117
833
Net carrying amount
3,721
1,441
122
5,284
At 1 January 2021
2,668
49
2,802
372
479
398
5,949
819
2021 movements
968
(6)
(1,228)
(130)
31
40
(229)
(96)
At 31 December 2021
3,636
43
1,574
242
510
438
5,720
723
Net carrying amount
3,593
1,332
72
4,997
Overall, there was a modest ECL increase, mainly due to
portfolio growth in the personal loan portfolio during 2022
and Stage 3 ECL, linked to the adoption of the new
regulatory definition of default in January 2022, with
underlying Stage 3 inflows remaining stable.
Similar to the other personal portfolios, after reductions in
the first half of the year, Stage 2 ECL levels increased in the
second half of the year as the economic outlook
deteriorated, increasing IFRS 9 PDs and the level of
migrations from Stage 1 into Stage 2.
Unsecured retail lending balances grew since 31 December
2021, in line with industry trends in the UK, as unsecured
borrowing demand increased.
Write-off occurs once recovery activity with the customer
has been concluded or there are no further recoveries
expected, but no later than six years after default.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
54
Credit risk – Banking activities continued
Flow statements
(audited)
Stage 1
Stage 2
Stage 3
Total
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Commercial & Institutional total
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2022
61,223
96
15,055
588
1,422
486
77,700
1,170
Currency translation and other adjustments
570
(2)
113
—
17
8
700
6
Inter-group transfers
(65)
—
—
—
—
—
(65)
—
Transfers from Stage 1 to Stage 2
(21,430)
(63)
21,430
63
—
—
—
—
Transfers from Stage 2 to Stage 1
13,357
322
(13,357)
(322)
—
—
—
—
Transfers to Stage 3
(186)
(1)
(1,306)
(50)
1,492
51
—
—
Transfers from Stage 3
136
25
122
21
(258)
(46)
—
—
Net re-measurement of ECL on stage transfer
(302)
406
177
281
Changes in risk parameters (model inputs)
131
(187)
39
(17)
Other changes in net exposure
10,239
53
(3,697)
(100)
(967)
(31)
5,575
(78)
Other (P&L only items)
(1)
(3)
(56)
(60)
Income statement (releases)/charges
(119)
116
129
126
Amounts written-off
—
—
—
—
(139)
(139)
(139)
(139)
Unwinding of discount
—
—
(21)
(21)
At 31 December 2022
63,844
259
18,360
419
1,567
524
83,771
1,202
Net carrying amount
63,585
17,941
1,043
82,569
Exposure growth was mainly due to increased exposure to
larger corporate customers, notably information
technology, telecommunications and power utilities.
Stage 1 and Stage 2 ECL levels increased in the second half
of the year as the economic outlook deteriorated,
increasing IFRS 9 PDs and the level of migrations from
Stage 1 into Stage 2.
Stage 2 ECL increases were more than offset by reductions
in post model adjustments.
There were significant flows into Stage 3 due to defaults on
government scheme lending, with exposure reductions
where payments on guarantees have been received.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
55
Credit risk – Banking activities continued
Flow statements
(audited)
Stage 1
Stage 2
Stage 3
Total
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Commercial & Institutional - corporate
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2022
39,009
74
12,141
492
1,014
361
52,164
927
Currency translation and other adjustments
429
(2)
109
—
13
16
551
14
Inter-group transfers
(56)
1
—
(4)
—
—
(56)
(3)
Transfers from Stage 1 to Stage 2
(16,439)
(49)
16,439
49
—
—
—
—
Transfers from Stage 2 to Stage 1
10,718
247
(10,718)
(247)
—
—
—
—
Transfers to Stage 3
(149)
(1)
(932)
(38)
1,081
39
—
—
Transfers from Stage 3
98
20
89
16
(187)
(36)
—
—
Net re-measurement of ECL on stage transfer
(230)
317
134
221
Changes in risk parameters (model inputs)
79
(161)
(9)
(91)
Other changes in net exposure
6,759
36
(2,466)
(80)
(746)
(26)
3,547
(70)
Other (P&L only items)
(1)
(3)
(56)
(60)
Income statement (releases)/charges
(116)
73
43
—
Amounts written-off
—
—
—
—
(82)
(82)
(82)
(82)
Unwinding of discount
—
—
(12)
(12)
At 31 December 2022
40,369
175
14,662
344
1,093
385
56,124
904
Net carrying amount
40,194
14,318
708
55,220
Exposure growth was driven by increased exposure to
larger corporate customers, notably information
technology, telecommunications and power utilities.
Stage 1 and Stage 2 ECL levels increased in the second half
of the year as the economic outlook deteriorated,
increasing IFRS 9 PDs and the level of migrations from
Stage 1 into Stage 2.
Stage 2 ECL increases were more than offset by reductions
in post model adjustments.
There were significant flows into Stage 3 due to defaults on
government scheme lending, with exposure reductions
where payments on guarantees have been received.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
56
Credit risk – Banking activities continued
Flow statements
(audited)
Stage 1
Stage 2
Stage 3
Total
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Commercial & Institutional - property
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2022
16,804
17
1,993
59
381
124
19,178
199
Currency translation and other adjustments
17
—
—
—
1
(10)
18
(10)
Inter-group transfers
(9)
—
—
—
—
—
(9)
—
Transfers from Stage 1 to Stage 2
(3,823)
(12)
3,823
12
—
—
—
—
Transfers from Stage 2 to Stage 1
1,857
35
(1,857)
(35)
—
—
—
—
Transfers to Stage 3
(37)
—
(303)
(11)
340
11
—
—
Transfers from Stage 3
33
4
34
5
(67)
(9)
—
—
Net re-measurement of ECL on stage transfer
(35)
73
33
71
Changes in risk parameters
50
(21)
14
43
Other changes in net exposure
1,964
14
(819)
(16)
(259)
(8)
886
(10)
Other (P&L only items)
—
—
—
—
Income statement (releases)/charges
29
36
39
104
Amounts written-off
—
—
—
—
(18)
(18)
(18)
(18)
Of which: Portfolio debt sales
—
—
—
—
Unwinding of discount
—
—
(10)
(10)
At 31 December 2022
16,806
73
2,871
66
378
126
20,055
265
Net carrying amount
16,733
2,805
252
19,790
Stage 1 and Stage 2 ECL levels increased in the second half
of the year as the economic outlook deteriorated,
increasing IFRS 9 PDs and the level of migrations from
Stage 1 into Stage 2.
Stage 2 ECL increases were partially offset by reductions in
post model adjustments.
There were significant flows into Stage 3 due to defaults on
government scheme lending, with exposure reductions
where payments on guarantees have been received.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
57
Credit risk – Banking activities continued
Flow statements
(audited)
Stage 1
Stage 2
Stage 3
Total
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Commercial & Institutional - other
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2022
5,410
5
921
37
27
2
6,358
44
Currency translation and other adjustments
125
—
3
—
3
2
131
2
Inter-group transfers
—
—
—
4
—
—
—
4
Transfers from Stage 1 to Stage 2
(1,168)
(2)
1,168
2
—
—
—
—
Transfers from Stage 2 to Stage 1
781
40
(781)
(40)
—
—
—
—
Transfers to Stage 3
—
—
(72)
(1)
72
1
—
—
Transfers from Stage 3
4
—
—
—
(4)
—
—
—
Net re-measurement of ECL on stage transfer
(37)
15
11
(11)
Changes in risk parameters
2
(5)
34
31
Other changes in net exposure
1,517
3
(412)
(3)
37
2
1,142
2
Other (P&L only items)
—
—
—
—
Income statement (releases)/charges
(32)
7
47
22
Amounts written-off
—
—
—
—
(39)
(39)
(39)
(39)
Of which: Portfolio debt sales
—
—
—
—
Unwinding of discount
—
—
—
—
At 31 December 2022
6,669
11
827
9
96
13
7,592
33
Net carrying amount
6,658
818
83
7,559
Stage 1 and Stage 2 ECL levels increased in the second half
of the year as the economic outlook deteriorated,
increasing IFRS 9 PDs and the level of migrations from
Stage 1 into Stage 2.
Stage 2 ECL increases were more than offset by reductions
in post model adjustments.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
58
Credit risk – Banking activities continued
Stage 2 decomposition – arrears status and contributing factors
The tables below show Stage 2 decomposition for the Personal and Wholesale portfolios.
UK mortgages
Credit cards
Other
Total
Loans
ECL
Loans
ECL
Loans
ECL
Loans
ECL
2022
£m
£m
£m
£m
£m
£m
£m
£m
Personal
Currently >30 DPD
156
1
7
4
41
15
204
20
Currently <=30 DPD
16,355
54
827
88
1,555
211
18,737
353
- PD deterioration
14,484
50
620
72
845
114
15,949
236
- PD persistence
767
2
160
11
150
13
1,077
26
- Other driver (adverse credit, forbearance etc)
1,104
2
47
5
560
84
1,711
91
Total Stage 2
16,511
55
834
92
1,596
226
18,941
373
2021
Personal
Currently >30 DPD
298
7
8
4
39
12
345
23
Currently <=30 DPD
8,623
116
726
111
1,495
230
10,844
457
- PD deterioration
1,760
41
433
80
765
137
2,958
258
- PD persistence
2,476
30
214
18
605
75
3,295
123
- Other driver (adverse credit, forbearance etc)
4,387
45
79
13
125
18
4,591
76
Total Stage 2
8,921
123
734
115
1,534
242
11,189
480
The deterioration in economic outlook during the second half
of the year resulted in increased account level IFRS 9 PDs at
the year end. Consequently, compared to 2021, a larger
proportion of accounts exhibited significant PD deterioration
causing Stage 2 exposures to increase significantly since 30
June 2022.
Personal customers who had accessed COVID-19 payment
holiday support, and where their risk profile was identified
as relatively high risk are no longer collectively migrated into
Stage 2, given the lack of default emergence from these
segments and with the focus of high risk segment
monitoring now shifting to the effects of a high inflation
environment on customers.
Accounts that are less than 30 days past due continue to
represent the vast majority of the Stage 2 population. As
expected, ECL coverage was higher in accounts that were
more than 30 days past due than those in Stage 2 for other
reasons.
Property
Corporate
Other
Total
Loans
ECL
Loans
ECL
Loans
ECL
Loans
ECL
Loans
ECL
2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Wholesale
Currently >30 DPD
139
2
355
9
2
—
7
—
503
11
Currently <=30 DPD
2,735
73
14,314
346
651
9
72
1
17,772
429
- PD deterioration
1,806
51
11,695
280
581
6
1
—
14,083
337
- PD persistence
70
2
212
8
4
—
—
—
286
10
- Other driver (forbearance, RoCL etc)
859
20
2,407
58
66
3
71
1
3,403
82
Total Stage 2
2,874
75
14,669
355
653
9
79
1
18,275
440
2021
Wholesale
Currently >30 DPD
198
2
346
7
1
—
1
—
546
9
Currently <=30 DPD
1,840
68
11,826
513
566
35
36
—
14,268
616
- PD deterioration
585
38
8,421
412
489
33
1
—
9,496
483
- PD persistence
107
7
426
28
5
—
1
—
539
35
- Other driver (forbearance, RoCL etc)
1,148
23
2,979
73
72
2
34
—
4,233
98
Total Stage 2
2,038
70
12,172
520
567
35
37
—
14,814
625
The deteriorating economic outlook, including lower growth
in GDP and the stock index as well as a reduction in
commercial real estate prices, resulted in a significant
increase in IFRS 9 PDs. Consequently, compared to 2021, a
larger proportion of exposure exhibited a SICR and
migrated into Stage 2, resulting in an increase in Stage 2
exposure.
PD deterioration remained the primary trigger for
identifying a SICR and Stage 2 treatment, proportionally
increasing due to the deteriorating economic outlook.
There was a decrease in Risk of Credit Loss partially due to
PD deterioration being the primary trigger. Overall, there
was a decrease in flows on to the Risk of Credit Loss
framework, although inflows into the framework began to
increase in Q4 2022.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
59
Credit risk – Banking activities continued
Stage 2 decomposition by a significant increase in credit risk trigger
UK mortgages
Credit cards
Other
Total
2022
£m
%
£m
%
£m
%
£m
%
Personal trigger
(1)
PD movement
14,598
88.4
626
75.1
873
54.7
16,097
85.0
PD persistence
767
4.6
161
19.3
150
9.4
1,078
5.7
Adverse credit bureau recorded with credit reference agency
725
4.4
39
4.7
79
4.9
843
4.5
Forbearance support provided
75
0.5
1
0.1
14
0.9
90
0.5
Customers in collections
133
0.8
1
0.1
3
0.2
137
0.7
Collective SICR and other reasons
(2)
171
1.0
6
0.7
466
29.2
643
3.3
Days past due >30
42
0.3
—
—
11
0.7
53
0.3
16,511
100
834
100
1,596
100
18,941
100
2021
Personal trigger
(1)
PD movement
2,010
22.5
440
59.9
796
51.9
3,246
29.0
PD persistence
2,486
27.9
214
29.2
606
39.5
3,306
29.5
Adverse credit bureau recorded with credit reference agency
3,124
35.0
45
6.1
58
3.8
3,227
29.0
Forbearance support provided
134
1.5
2
0.3
22
1.4
158
1.4
Customers in collections
67
0.8
2
0.3
12
0.8
81
0.7
Collective SICR and other reasons
(2)
1,065
11.9
31
4.2
36
2.3
1,132
10.1
Days past due >30
35
0.4
—
—
4
0.3
39
0.3
8,921
100
734
100
1,534
100
11,189
100
During the first half of the year, the stable credit
performance of the portfolio resulted in either decreased or
stable account level IFRS 9 PDs for most products. UK
mortgages was the exception, where the implementation of
a new IFRS 9 PD model in Q1 2022 increased the proportion
of accounts exhibiting significant PD deterioration.
However, in the second half of the year, the economic
uncertainty and high inflation environment, which is
reflected in the recent updates to the IFRS 9 MES scenarios,
resulted in PDs increasing again. This is reflected both in an
increase in Stage 2 across all products compared to 31
December 2021 and an increased proportion of Stage 2
driven by PD deterioration.
Personal customers who had accessed COVID-19 payment
holiday support, and where their risk profile was identified
as relatively high risk are no longer collectively migrated into
Stage 2, given the lack of default emergence from these
segments and with the focus of high risk segment
monitoring now shifting to the effects of a high inflation
environment on customers.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
60
Credit risk – Banking activities continued
Stage 2 decomposition by a significant increase in credit risk trigger
Property
Corporate
FI
Other
Total
2022
£m
%
£m
%
£m
%
£m
%
£m
%
Wholesale trigger
(1)
PD movement
1,865
65.0
11,903
81.1
584
89.4
1
1.3
14,353
78.5
PD persistence
70
2.4
212
1.4
4
0.6
—
—
286
1.6
Risk of Credit Loss
343
11.9
1,343
9.2
29
4.4
55
69.6
1,770
9.7
Forbearance support provided
26
0.9
334
2.3
19
2.9
—
—
379
2.1
Customers in collections
9
0.3
32
0.2
—
—
—
—
41
0.2
Collective SICR and other reasons
(2)
487
16.9
716
4.9
17
2.7
16
20.2
1,236
6.8
Days past due >30
74
2.6
129
0.9
—
—
7
8.9
210
1.1
2,874
100
14,669
100
653
100
79
100
18,275
100
2021
Wholesale trigger
(1)
PD movement
622
30.6
8,548
70.3
491
86.6
1
2.7
9,662
65.3
PD persistence
107
5.3
426
3.5
5
0.9
1
2.7
539
3.6
Risk of Credit Loss
544
26.7
1,920
15.8
53
9.3
34
91.9
2,551
17.2
Forbearance support provided
68
3.3
346
2.8
4
0.7
—
—
418
2.8
Customers in collections
21
1.0
66
0.5
—
—
—
—
87
0.6
Collective SICR and other reasons
(2)
539
26.4
767
6.3
14
2.5
1
2.7
1,321
8.9
Days past due >30
137
6.7
99
0.8
—
—
—
—
236
1.6
2,038
100
12,172
100
567
100
37
100
14,814
100
(1)
The table is prepared on a hierarchical basis from top to bottom, for example, accounts with PD deterioration may also trigger backstop(s) but are only reported under PD
deterioration.
(2)
Includes customers where a PD assessment cannot be undertaken due to missing PDs.
PD deterioration continued to be the primary trigger of
migration of exposures from Stage 1 into Stage 2. There
was an increase in cases triggering PD deterioration
reflecting the deteriorating economic outlook.
Moving exposures on to the Risk of Credit Loss framework
remained an important backstop indicator of a SICR. The
exposures classified under the Stage 2 Risk of Credit Loss
framework decreased over the period due to the increase in
PD deterioration.
PD persistence related to the Business Banking portfolio
only. A reduction in PDs in 2021 meant that some Business
Banking customers returned to Stage 1 in early 2022,
although a number of these customers returned through PD
movement in the second half of the year due to the
deteriorating economic outlook.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
61
Capital, liquidity and funding risk
NWH Group continually ensures a comprehensive approach is
taken to the management of capital, liquidity and funding,
underpinned by frameworks, risk appetite and policies, to
manage and mitigate capital, liquidity and funding risks. The
framework ensures the tools and capability are in place to
facilitate the management and mitigation of risk ensuring the
Group operates within its regulatory requirements and risk
appetite.
Definitions
(audited)
Regulatory capital consists of reserves and instruments issued
that are available, have a degree of permanency and are
capable of absorbing losses. A number of strict conditions set by
regulators must be satisfied to be eligible as capital.
Capital risk is the risk that there is or will be insufficient capital
and other loss absorbing
debt
instruments to operate effectively
including meeting minimum regulatory requirements, operating
within Board approved risk appetite and supporting its strategic
goals.
Liquidity consists of assets that can be readily converted to cash
within a short timeframe at a reliable value. Liquidity risk is the
risk of being unable to meet financial obligations as and when
they fall due.
Funding consists of on-balance sheet liabilities that are used to
provide cash to finance assets. Funding risk is the risk of not
maintaining a diversified, stable and cost-effective funding base.
Liquidity and funding risks arise in a number of ways, including
through the maturity transformation role that banks perform.
The risks are dependent on factors such as:
Maturity profile;
Composition of sources and uses of funding;
The quality and size of the liquidity portfolio;
Wholesale market conditions; and
Depositor and investor behaviour.
Sources of risk
(audited)
Capital
The eligibility of instruments and financial resources as
regulatory capital is laid down by applicable regulation. Capital
is categorised by applicable regulation under two tiers (Tier 1
and Tier 2) according to the ability to absorb losses on either a
going or gone concern basis, degree of permanency and the
ranking of absorbing losses. There are three broad categories of
capital across these two tiers:
CET1 capital - CET1 capital must be perpetual and capable
of unrestricted and immediate use to cover risks or losses as
soon as these occur. This includes ordinary shares issued
and retained earnings.
Additional Tier 1 (AT1) capital - This is the second type of
loss absorbing capital and must be capable of absorbing
losses on a going concern basis. These instruments are
either written down or converted into CET1 capital when the
CET1 ratio falls below a pre-specified level.
Tier 2 capital - Tier 2 capital is the bank entities’
supplementary capital and provides loss absorption on a
gone concern basis. Tier 2 capital absorbs losses after Tier
capital. It typically consists of subordinated debt securities
with a minimum maturity of five years at the point of
issuance.
Minimum requirement for own funds and eligible liabilities
(MREL)
In addition to capital, other specific loss absorbing instruments,
including senior notes issued by NWB Plc, may be used to cover
certain gone concern capital requirements which, is referred to
as MREL. Gone concern refers to the situation in which
resources must be available to enable an orderly resolution, in
the event that the Bank of England (BoE) deems that NWB
Group has failed or is likely to fail.
Liquidity
Liquidity risk within NWB Plc is managed as part of the UK
Domestic Liquidity Sub-Group (UK DoLSub), which is regulated
by the PRA and comprises NWH Group’s three licensed deposit
taking UK banks: National Westminster Bank Plc, The Royal
Bank of Scotland plc and Coutts & Company. On 3 May 2021,
the Ulster Bank Limited business transferred to National
Westminster Bank Plc. Ulster Bank Limited was removed from
the UK DoLSub effective 1 January 2022 and its banking license
was revoked following regulatory approval on 29 December
2022.
NWH Group maintains a prudent approach to the definition of
liquidity resources. NWH Group manages its liquidity to ensure it
is always available when and where required, taking into
account regulatory, legal and other constraints.
Liquidity resources are divided into primary and secondary
liquidity as follows:
Primary liquid assets include cash and balances at central
banks, Treasury bills and other high quality government and
US agency bonds.
Secondary liquid assets are eligible as collateral for local
central bank liquidity facilities. These assets include own-
issued securitisations or whole loans that are retained on
balance sheet and pre-positioned with a central bank so that
they may be converted into additional sources of liquidity at
very short notice.
Funding
NWB Plc maintains a diversified set of funding sources, including
customer deposits, wholesale deposits and term debt issuance.
NWB Plc also retains access to central bank funding facilities.
For further details on capital constituents and the regulatory
framework covering capital, liquidity and funding requirements,
please refer to the NatWest Holdings Group and NWB Plc Pillar
3 Reports 2022.
Managing capital requirements: regulated entities
In line with paragraph 135 of IAS 1 ‘Presentation of Financial
Statements’, NWB Group manages capital having regard to
regulatory requirements. Regulatory capital is monitored and
reported on an individual regulated bank legal entity basis
(‘bank entities’), as relevant in the jurisdiction for large
subsidiaries of NatWest Group. NatWest Group itself is
monitored and reported on a consolidated basis.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
62
Capital, liquidity and funding risk continued
Capital management
Capital management is the process by which the bank entities
ensure that they have sufficient capital and other loss-absorbing
instruments to operate effectively including meeting minimum
regulatory requirements, operating within Board-approved risk
appetite, maintaining credit ratings and supporting strategic
goals.
Capital management is critical in supporting the bank entities’
businesses and is also considered at Group level. It is enacted
through a NatWest Group-wide end to end framework.
Capital planning is integrated into NWB Group’s wider annual
budgeting process and is assessed and updated at least
monthly. This is summarised below. Other elements of capital
management, including risk appetite and stress testing, are set
out on pages 13 and 14.
Capital planning is one of the tools that NWB Group uses to
monitor and manage capital risk on a going and gone concern
basis, including the risk of excessive leverage.
Liquidity risk management
NWH Group manages its liquidity risk taking into account
regulatory, legal and other constraints to ensure sufficient
liquidity is available where required to cover liquidity stresses.
The size of the liquidity portfolio held in the UK DoLSub is
determined by referencing NWH Group’s liquidity risk appetite.
NWH Group retains a prudent approach to setting the
composition of the liquidity portfolio, which is subject to internal
policies and limits over quality of counterparty, maturity mix and
currency mix.
NWB Plc manages the majority of the UK DoLSub’s liquidity
portfolio under the responsibility of the NatWest Group
Treasurer.
Funding risk management
NWB Group manages funding risk through a comprehensive
framework which measures and monitors the funding risk on
the balance sheet.
The asset and liability types broadly match. Customer deposits
provide more funding than customer loans utilise.
Produce
capital plans
Capital plans are produced for NWB
Group, its key operating entities and its
businesses over a five year planning
horizon under expected and stress
conditions. Stressed capital plans are
produced to support internal stress testing
in the ICAAP for regulatory purposes.
Shorter term forecasts are developed
frequently in response to actual
performance, changes in internal and
external business environment and to
manage risks and opportunities.
Assess
capital
Adequacy
Capital plans are developed to maintain
capital of sufficient quantity and quality to
support NWB Group’s business, its
subsidiaries and strategic plans over the
planning horizon within approved risk
appetite, as determined via stress testing,
and minimum regulatory requirements.
Capital resources and capital
requirements are assessed across a
defined planning horizon.
Impact assessment captures input from
across NWB Group including from
businesses.
Inform capital
actions
Capital planning informs potential capital
actions including buybacks, redemptions,
dividends and new issuance to external
investors or via internal transactions.
Decisions on capital actions will be
influenced by strategic and regulatory
requirements, risk appetite, costs and
prevailing market conditions.
As part of capital planning, NatWest
Group will monitor its portfolio of issued
capital securities and assess the optimal
blend and most cost effective means of
financing.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
63
Capital, liquidity and funding risk continued
Key points
CET1 ratio
The CET1 ratio decreased 480 basis points over the period due to
a £1.2 billion decrease in CET1 capital and a £26.2 billion
increase in RWAs.
The CET1 decrease reflects the attributable
profit in the period of £3.3 billion, offset by the items:
dividends paid of £2.3 billion;
foreseeable dividend of £0.9 billion;
adjustment for pension trusts of £0.4 billion;
the removal of the adjustment for the prudential amortisation
on software development costs £0.4 billion and an increase in
intangible assets capital deduction £0.4billion.
RWA
Total RWAs increased by £26.2 billion to £112.4 billion mainly
reflecting an increase in credit risk RWAs. This was primarily due
to model adjustments applied as a result of new regulation
applicable to IRB models from 1 January 2022, in addition to
increased exposures within Commercial & Institutional and Retail
Banking. This was partially offset by improved credit risk metrics
within Commercial & Institutional.
Leverage
The leverage ratio at 31 December 2022 is 4.4% and has been
calculated in accordance with changes to the UK’s leverage ratio
framework. As at 31 December 2021, the UK leverage ratio was
4.8%, which was calculated under the prior year’s UK leverage
methodology. The key driver of the decrease is a £1.1 billion
decrease in Tier 1 capital.
Liquidity portfolio
The liquidity portfolio decreased by £51.8 billion YTD as of 31
December 2022 to £140.8 billion with primary liquidity decreasing
by £40.2 billion to £83.5 billion. The decrease in primary liquidity
is driven by an increase in lending, a decrease in deposits, net
repo positions, shareholder distributions (share buyback and
dividends), redemptions of senior debt and maturing commercial
paper and certificates of deposit. The reduction in secondary
liquidity is due to a reduction in the pre-positioned collateral at
the Bank of England.
Liquidity coverage ratio
The UK DoLSub Liquidity Coverage Ratio (LCR) decreased during
the year to 131% driven by a decrease in the liquidity portfolio
and a lower than proportionate reduction in net outflows. The
decrease in liquidity portfolio was primarily driven by growth in
customer lending and reduced customer deposits.
NSFR
The UK DoLSub net stable funding ratio (NSFR) for FY 2022 was
137% compared to 151% in prior year. The decrease is due to
lower deposits combined with higher lending.
4.8%
4.4%
2021
2022
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
64
Capital, liquidity and funding risk continued
Minimum requirements
Capital adequacy ratios
The bank entities are subject to minimum capital requirements relative to RWAs. The table below summarises the minimum ratios
of capital to RWAs that the UK bank entities are expected to have to meet.
(1)
The Financial Policy Committee increased UK CCyB rate from 0% to 1% effective from 13 December 2022. A further increase from 1% to 2% is anticipated from 5 July 2023.
(2)
In June 2022, the Central Bank of Ireland announced that the CCyB on Irish exposures will increase from 0% to 0.5%, applicable from 15 June 2023. This is the first step towards a
gradual increase which, conditional on macro-financial developments, would see a CCyB of 1.5% announced by mid-2023, which is expected to be applicable from June 2024
(3)
The minimum requirements do not include any capital that the bank entities may be required to hold as a result of the Pillar 2 assessment.
Leverage ratio
Following the publication of the new UK leverage ratio framework on 8 October 2021, NWB Plc is expected to manage its leverage
ratio at the same level as firms in scope from and will be subject to the minimum requirement from 1 January 2023.
There is also
an expectation that non-scope firms, which includes NWB Plc, should manage their leverage ratio in line with the minimum
requirement from 1 January 2022.
Liquidity and funding ratios
The table below summarises the minimum requirements for key liquidity and funding metrics under the PRA framework.
The
binding NSFR requirement became effective as of 1 January 2022.
NWB Plc is a member of the UK DoLSub which is presented
below.
Measurement
Capital, RWAs and leverage
The table below sets out the key capital and leverage ratios on a PRA transitional basis.
2022
2021
Capital adequacy ratios
%
%
CET1
(1)
11.3
16.1
Tier 1
13.3
18.6
Total
15.9
22.0
Capital
£m
£m
CET1
(1)
12,713
13,924
Tier 1
14,956
16,039
Total
17,877
18,945
Risk-weighted assets
Credit risk
98,913
72,716
Counterparty credit risk
497
574
Market risk
26
53
Operational risk
12,992
12,874
Total RWAs
112,428
86,217
Leverage
Tier 1 capital
(£m)
14,956
16,039
Leverage exposure (£m)
(2)
341,308
426,681
Leverage ratio (%)
(1) (3)
4.4
3.8
(1)
Includes an IFRS 9 transitional adjustment of £0.3 billion (2021 - £0.4 billion). Excluding this adjustment, the CET1 ratio would be 11.1% (2021 – 15.7%) and the leverage ratio would
be 4.3% (2021 – 3.7%).
(2)
Leverage exposure is broadly aligned to the accounting value of on and off-balance sheet exposures albeit subject to specific adjustments for derivatives, securities financing
positions and off-balance sheet exposures
.
(3)
The leverage ratio for December 2022 has been calculated in accordance with current PRA rules. The comparatives reflect the previous CRR framework which was applicable to
NWB Plc prior to 1 January 2022. As at 31 December 2021, the UK leverage ratio for NWB Plc would have been 4.8%, reflecting PRA’s UK leverage methodology in 2021.
Type
CET1
Total Tier 1
Total capital
Minimum capital requirements
4.5%
6.0%
8.0%
Capital conservation buffer
2.5%
2.5%
2.5%
Countercyclical capital buffer
(1) (2)
0.9%
0.9%
0.9%
Total
(3)
7.9%
9.4%
11.4%
Type
Liquidity coverage ratio (LCR)
100%
Net stable funding ratio (NSFR)
100%
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
65
Capital, liquidity and funding risk continued
Liquidity key metrics
Liquidity within NWB Plc is managed and regulated as part of the UK DoLSub. The table below sets out the key liquidity and related
metrics for the UK DoLSub.
2022
UK DoLSub
Liquidity coverage ratio
131%
Stressed outflow coverage
(1)
131%
Net stable funding ratio
137%
2021
Liquidity coverage ratio
169%
Stressed outflow coverage
(1)
195%
Net stable funding ratio
151%
(1)
NatWest Group’s stressed outflow coverage (SOC) is an internal measure calculated by reference to liquid assets as a percentage of net stressed contractual and behavioural
outflows over three months under the worst of three severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination of both as per ILAAP. This
assessment is performed in accordance with PRA guidance.
Leverage exposure
From 1 January 2022, the leverage metrics for UK entities are calculated in accordance with the Leverage ratio (CRR) part of the
PRA Rulebook.
The comparatives reflect the previous CRR framework which was applicable prior to 1 January 2022.
2022
2021
Leverage
£m
£m
Cash and balances at central banks
73,062
101,210
Derivatives
4,430
2,547
Financial assets
316,584
314,852
Other assets
7,671
7,502
Total assets
401,747
426,111
Derivatives
- netting and variation margin
(3,313)
(2,782)
- potential future exposures
1,692
1,405
Securities financing transactions gross up
2,391
146
Undrawn commitments
29,593
25,448
Regulatory deductions and other adjustments
(2,023)
(1,769)
Exclusion of core UK-group exposure
(22,080)
(21,878)
Claims on central banks
(62,228)
—
Exclusion of bounce back loans
(4,471)
—
Leverage exposure
341,308
426,681
Liquidity portfolio
(audited)
The table below shows the liquidity portfolio by product, with primary liquidity aligned to internal stressed outflow coverage and
regulatory Liquidity coverage ratio (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.
31 December 2022
31 December 2021
UK DoLSub
NWB Plc
UK DoLSub (1)
NWB Plc
£m
£m
£m
£m
Cash and balances at central banks
103,708
72,524
136,154
100,934
AAA to AA- rated governments
9,843
9,843
21,123
21,123
A+ and lower rated governments
—
—
—
—
Government guaranteed issuers, public sector entities and government
sponsored entities
100
100
174
174
International organisations and multilateral development banks
1,021
1,021
1,466
1,466
Level 1 bonds
10,964
10,964
22,763
22,763
LCR level 1 eligible assets
114,672
83,488
158,917
123,697
LCR level 2 eligible assets
—
—
—
—
Non-LCR eligible assets
—
—
—
—
Primary liquidity
114,672
83,488
158,917
123,697
Secondary liquidity
(1)
63,849
57,308
76,573
68,939
Total liquidity value
178,521
140,796
235,490
192,636
(1)
Comprises assets eligible for discounting at the Bank of England and other central banks.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
66
Funding sources
(audited)
2022
2021
Short-term less
than 1 year
Long-term
more than 1
year
Total
Short-term less
than 1 year
Long-term more
than 1 year
Total
£m
£m
£m
£m
£m
£m
Bank deposits
Repos
595
—
595
7,132
—
7,132
Other bank deposits
3,465
12,000
15,465
3,699
12,000
15,699
4,060
12,000
16,060
10,831
12,000
22,831
Customer deposits
Repos
9,575
—
9,575
14,541
—
14,541
Personal
178,865
1,009
179,874
176,510
674
177,184
Corporate
114,157
16
114,173
116,983
18
117,001
Non-bank financial institutions
18,987
5
18,992
20,714
—
20,714
321,584
1,030
322,614
328,748
692
329,440
Other financial liabilities
(1)
Debt securities in issue
Commercial papers and certificates of deposit
1,664
—
1,664
3,399
—
3,399
Covered bonds
804
2,038
2,842
53
2,833
2,886
Securitisations
—
859
859
—
867
867
2,468
2,897
5,365
3,452
3,700
7,152
Subordinated liabilities
74
123
197
88
123
211
Amounts due to holding company and fellow
subsidiaries
(2)
Bank and customer deposits
29,333
—
29,333
35,749
525
36,274
MREL
221
6,118
6,339
33
5,654
5,687
Subordinated liabilities
714
2,227
2,941
13
3,060
3,073
30,268
8,345
38,613
35,795
9,239
45,034
Total funding
358,454
24,395
382,849
378,914
25,754
404,668
Of which: available in resolution
(3)
9,297
8,761
(1)
Excludes settlement balances of £2 million (2021 – Nil) and derivative cash collateral of £17 million (2021 – £99 million).
(2)
Amounts due to holding companies and fellow subsidiaries relating to non-financial instruments of £156 million (2021 - £102 million) and intercompany settlement balances of £2
million (2021- Nil) have been excluded from the table.
(3)
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 December 2021 (updating June 2018).
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
67
Capital, liquidity and funding risk continued
Contractual maturity
(audited)
The table shows the residual maturity of third party financial instruments, based on contractual date of maturity of NWB Group’s
banking activities, including third party and intercompany hedging derivatives. Mandatory fair value through profit or loss
(MFVTPL) assets and held-for-trading (HFT) liabilities have been excluded from the maturity analysis and are shown in total in the
table below.
Banking activities
Less than 1
month
1-3
months
3-6
months
6 months -
1 year
Subtotal
1-3 years
3-5 years
More than
5 years
Total
MFVTPL
and HFT
Total
2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Cash and balances at central banks
73,065
—
—
—
73,065
—
—
—
73,065
—
73,065
Derivatives
—
39
59
145
243
380
90
30
743
3,664
4,407
Loans to banks - amortised cost
1,606
—
1,341
—
2,947
—
250
—
3,197
—
3,197
Loans to customers - amortised
cost
(1)
26,926
13,094
9,946
13,178
63,144
45,898
34,680
160,472
304,194
—
304,194
Personal
3,709
1,991
2,771
5,509
13,980
20,567
19,344
143,812
197,703
—
197,703
Corporate
15,474
2,796
3,109
6,838
28,217
24,019
14,744
16,600
83,580
—
83,580
Non-bank financial institutions
7,743
8,307
4,066
831
20,947
1,312
592
60
22,911
—
22,911
Other financial assets
149
79
63
529
820
3,873
5,182
4,254
14,129
417
14,546
Total financial assets
101,746
13,212
11,409
13,852
140,219
50,151
40,202
164,756
395,328
4,081
399,409
2021
Total financial assets
140,416
18,891
15,008
16,315
190,630
42,679
35,274
155,126
423,709
2,573
426,282
2022
Bank deposits excluding repos
3,465
—
—
—
3,465
3,800
8,200
—
15,465
—
15,465
Bank repos
436
159
—
—
595
—
—
—
595
—
595
Customer repos
9,559
6
10
—
9,575
—
—
—
9,575
—
9,575
Customer deposits excluding repos
298,543
6,301
4,408
2,757
312,009
1,019
—
11
313,039
—
313,039
Personal
172,795
2,343
2,295
1,432
178,865
1,009
—
—
179,874
—
179,874
Corporate
107,571
3,356
1,977
1,253
114,157
5
—
11
114,173
—
114,173
Non-bank financial institutions
18,177
602
136
72
18,987
5
—
—
18,992
—
18,992
Derivatives
3
9
14
53
79
67
56
56
258
1,830
2,088
Other financial liabilities
735
1,560
150
23
2,468
2,334
375
188
5,365
19
5,384
CPs and CDs
685
810
146
23
1,664
—
—
—
1,664
—
1,664
Covered bonds
50
750
4
—
804
2,038
—
—
2,842
—
2,842
Securitisations
—
—
—
—
—
296
375
188
859
—
859
Bank deposits
—
—
—
—
—
—
—
—
—
7
7
Customer deposits
—
—
—
—
—
—
—
—
—
10
10
Settlement balances
—
—
—
—
—
—
—
—
—
2
2
Subordinated liabilities
72
—
2
—
74
—
—
123
197
—
197
Notes in circulation
809
—
—
—
809
—
—
—
809
—
809
Lease liabilities
12
19
28
53
112
184
148
457
901
—
901
Total financial liabilities
313,634
8,054
4,612
2,886
329,186
7,404
8,779
835
346,204
1,849
348,053
2021
Total financial liabilities
321,685
18,211
2,695
1,645
344,236
3,708
12,435
1,238
361,617
4,147
365,764
(1) Loans to customers excludes £2,510 million (2021 - £2,425 million) of impairment provisions.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
68
Capital, liquidity and funding risk continued
Encumbrance
(audited)
NWB Group evaluates the extent to which assets can be
financed in a secured form (encumbrance), but certain asset
types lend themselves more readily to encumbrance. The
typical characteristics that support encumbrance are an ability
to pledge those assets to another counterparty or entity
through operation of law without necessarily requiring prior
notification, homogeneity, predictable and measurable cash
flows, and a consistent and uniform underwriting and collection
process. Retail assets including residential mortgages and
credit card receivables display many of these features.
NWB Group categorises its assets into four broad groups, those
that are:
Already encumbered and used to support funding currently
in place through own-asset securitisations, covered bonds
and securities repurchase agreements.
Pre-positioned with central banks as part of funding
schemes and those encumbered under such schemes.
Ring-fenced to meet regulatory requirements, where NWB
Group has in place an operational continuity in resolution
(OCIR) investment mandate wherein the PRA requires
critical service providers to hold segregated liquidity buffers
covering at least 50% of their annual fixed overheads.
Not currently encumbered. In this category, NWB Group
has in place an enablement programme which seeks to
identify assets capable of being encumbered and to identify
the actions to facilitate such encumbrance whilst not
affecting customer relationships or servicing.
Balance sheet encumbrance - third party
Encumbered as a result of transactions
with counterparties other than central
banks
Unencumbered
assets not pre-positioned
with central banks
Covered bonds
and
securitisations
SFT,
Derivatives &
similar
Total
Pre-positioned &
encumbered
assets held at
central bank
Collateral ring-
fenced to meet
reg
requirement
Readily
available
Other
available
Cannot
be used
Total
third
party
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Total
(9)
2022
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
Cash and balances at central banks
—
2.6
2.6
—
—
70.5
—
—
70.5
73.1
Derivatives
—
—
—
—
—
—
—
4.4
4.4
4.4
Loans to banks - amortised cost
—
0.1
0.1
—
—
2.6
0.2
0.3
3.1
3.2
Loans to customers - amortised cost
7.0
0.4
7.4
91.3
—
84.6
82.7
35.7
203.0
301.7
- residential mortgages
7.0
—
7.0
91.3
—
74.5
12.7
—
87.2
185.5
- credit cards
—
—
—
—
—
3.3
0.1
—
3.4
3.4
- personal loans
—
—
—
—
—
4.2
2.1
1.2
7.5
7.5
- other
—
0.4
0.4
—
—
2.6
67.8
34.5
104.9
105.3
Other financial assets
—
2.9
2.9
—
1.8
8.8
—
1.0
9.8
14.5
Intangible assets
—
—
—
—
—
—
—
1.6
1.6
1.6
Other assets
—
—
—
—
—
—
2.5
3.6
6.1
6.1
Total assets
7.0
6.0
13.0
91.3
1.8
166.5
85.4
46.6
298.5
404.6
Amounts due from holding companies and fellow
subsidiaries
4.9
409.5
2021
Total assets
8.3
17.7
26.0
109.6
2.0
163.5
78.6
51.4
293.5
431.1
Amounts due from holding companies and fellow
subsidiaries
3.5
434.6
(1)
Covered bonds and securitisations include securitisations, conduits and covered bonds.
(2)
Repos and other secured deposits, cash, coin and nostro balance held with the Bank of England as collateral against deposits and notes in circulation are included here rather than
within those positioned at the central bank as they are part of normal banking operations. Securities financing transactions (SFT) include collateral given to secure derivative
liabilities.
(3)
Total assets encumbered as a result of transactions with counterparties other than central banks are those that have been pledged to provide security and are therefore not
available to secure funding or to meet other collateral needs.
(4)
Assets pre-positioned at the central banks include loans provided as security as part of funding schemes and those encumbered under such schemes.
(5)
Ring-fenced to meet regulatory requirement includes assets ring fenced to meet operational continuity in resolution (OCIR) investment mandate.
(6)
Readily available for encumbrance: including assets that have been enabled for use with central banks but not pre-positioned; cash and high quality debt securities that form part of
NWB Group’s liquidity portfolio and unencumbered debt securities.
(7)
Other assets that are capable of being encumbered are those assets on the balance sheet that are available for funding and collateral purposes but are not readily realisable in their
current form. These assets include loans that could be prepositioned with central banks but have not been subject to internal and external documentation review and diligence
work.
(8)
Cannot be used includes:
a.
Derivatives, reverse repurchase agreements and trading related settlement balances.
b.
Non-financial assets such as intangibles, prepayments and deferred tax.
c.
Loans that cannot be pre-positioned with central banks based on criteria set by the central banks, including those relating to date of origination and level of documentation.
d.
Non-recourse invoice financing balances and certain shipping loans whose terms and structure prohibit their use as collateral
(9)
In accordance with market practice, NWB Group employs securities recognised on the balance sheet, and securities received under reverse repo transactions as collateral for repos.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
69
Non-traded market risk
Definition
(audited)
Non-traded market risk is the risk to the value of assets or
liabilities outside the trading book, or the risk to income, that
arises from changes in market prices such as interest rates,
foreign exchange rates and equity prices, or from changes in
managed rates.
Sources of risk
(audited)
The key sources of NWB Group’s non-traded market risk are
interest rate risk, credit spread risk and foreign exchange risk.
Key developments in 2022
Interest rates in the UK increased sharply in 2022, to levels
higher than expected at the end of 2021. The Bank of
England base rate rose from 0.25% at 31 December 2021 to
3.5% at 31 December 2022. The five-year sterling overnight
index interest rate swap rate rose from 1.05% at 31
December 2021 to 4.10% at 31 December 2022. The
corresponding ten-year rate rose from 0.95% to 3.75%.
Overall, non-traded VaR decreased over the year, driven by
a decrease in credit spread VaR. This reflected reduced
holdings of bonds in the liquidity portfolio. Interest rate VaR
rose, reflecting higher interest rate volatility, particularly in
sterling. By year-end, interest rate risk had displaced credit
spread risk as the main driver of non-traded VaR.
NWB Group’s structural hedge notional increased to £173
billion at 31 December 2022 from £152 billion at 31
December 2021.
Overall, the sensitivity of net interest earnings fell year on
year, mainly driven by lower deposit volumes and increased
structural hedging.
Governance
(audited)
Responsibility for identifying, measuring, monitoring and
controlling market risk arising from non-trading activities lies
with the relevant business. Oversight is provided by the
independent Risk function.
Risk positions are reported regularly to the NatWest Holdings
Executive Risk Committee and the NatWest Holdings Board Risk
Committee, as well as to the NatWest Holdings Asset & Liability
Management Committee. Market risk policy statements set out
the governance and risk management framework.
Risk appetite
NWB Group’s qualitative appetite is set out in the non-traded
market risk appetite statement.
Its quantitative appetite is expressed in terms of exposure
limits. NWB Group’s limit framework comprises value-at-risk
(VaR), stressed value-at-risk (SVaR), sensitivities and earnings-
at-risk limits. The limits are reviewed to reflect changes in risk
appetite, business plans, portfolio composition and the market
and economic environments.
To ensure approved limits are not breached and that NWB
Group remains within its risk appetite, triggers have been set
such that if exposures exceed a specified level, action plans are
developed and implemented.
For further information on risk appetite and risk controls, refer
to pages 13 and 14.
Measurement
(audited)
Non-traded internal VaR (1-day 99%)
The following table presents one-day internal banking book VaR at a 99% confidence level, split by risk type. VaR values for each
year are calculated based on one-day values for each of the 12 month-end reporting dates.
VaR metrics are explained on page 70. Each of the key risk types are discussed in greater detail in their individual sub-sections
following this table.
2022
2021
Average
Maximum
Minimum
Period end
Average
Maximum
Minimum
Period end
£m
£m
£m
£m
£m
£m
£m
£m
Interest rate
28.7
57.5
11.8
32.1
11.2
16.6
4.1
11.9
Credit spread
31.2
73.1
17.2
17.7
80.6
89.4
74.2
79.5
Structural foreign exchange risk
19.4
24.6
16.4
24.6
25.7
26.4
24.4
24.4
Equity
0.1
0.2
0.1
0.1
0.9
1.0
0.4
1.0
Pipeline risk
(1)
1.5
4.8
0.5
2.6
0.5
1.1
0.3
1.1
Diversification
(2)
(32.0)
(30.6)
(35.6)
(38.3)
Total
48.9
75.1
36.6
46.5
83.3
93.8
75.5
79.6
(1)
Pipeline risk is the risk of loss arising from personal customers owning an option to draw down a loan – typically a mortgage – at a committed rate, where interest rate changes
may result in greater or fewer customers than anticipated taking up the committed offer.
(2)
NWB Group benefits from diversification across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation
between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.
Overall, non-traded VaR decreased over the year, driven by
a decrease in credit spread VaR. This reflected reduced
holdings of bonds in the liquidity portfolio.
Interest rate VaR increased, reflecting higher interest rate
volatility, particularly in sterling. By year-end, interest rate
risk had displaced credit spread risk as the main driver of
non-traded VaR.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
70
Non-traded market risk continued
Interest rate risk
Non-traded interest rate risk (NTIRR) arises from the provision
to customers of a range of banking products with differing
interest rate characteristics. When aggregated, these products
form portfolios of assets and liabilities with varying degrees of
sensitivity to changes in market interest rates. Mismatches can
give rise to volatility in net interest income as interest rates vary.
NTIRR comprises the following three primary risk types:
Gap risk – arises from the timing of rate changes in non-
trading book instruments. The extent of gap risk depends on
whether changes to the term structure of interest rates
occur consistently across the yield curve (parallel risk) or
differentially by period (non-parallel risk).
Basis risk – captures the impact of relative changes in
interest rates for financial instruments that have similar
tenors but are priced using different interest rate indices, or
on the same interest rate indices but with different tenors.
Option risk – arises from option derivative positions or from
optional elements embedded in assets, liabilities and/or off-
balance sheet items, where NWB Group or its customer can
alter the level and timing of their cash flows. Option risk also
includes pipeline risk.
To manage exposures within its risk appetite, NWB Group
aggregates its interest rate positions and hedges its residual
exposure, primarily with interest rate swaps.
Structural hedging aims to reduce gap risk and the sensitivity of
earnings to interest rate shocks. It also provides some protection
against prolonged periods of falling rates. Structural hedging is
explained in greater detail below, followed by information on
how NWB Group measures NTIRR from both an economic value-
based and an earnings-based perspective.
Structural hedging
NWB Group has a significant pool of stable, non and low
interest-bearing liabilities, principally comprising current
accounts and savings, in addition to its equity and reserves.
NatWest Group has a policy of hedging these balances, either by
investing directly in longer-term fixed-rate assets (primarily
fixed-rate mortgages) or by using interest rate swaps, in order
to provide a consistent and predictable revenue stream from
these balances.
At 31 December 2022, NWB Group’s structural hedge had a
notional of £173 billion (compared to £152 billion at 31
December 2021) with an average life of approximately three
years.
Interest rate risk measurement
NTIRR can be measured from either an economic value-based
or earnings-based perspective, or a combination of the two.
Value-based approaches measure the change in value of the
balance sheet assets and liabilities including all cash flows.
Earnings-based approaches measure the potential impact on
the income statement of changes in interest rates over a defined
horizon, generally one to three years.
NWB Group uses VaR as its value-based approach and
sensitivity of net interest earnings as its earnings-based
approach.
These two approaches provide complementary views of the
impact of interest rate risk on the balance sheet at a point in
time. The scenarios employed in the net interest earnings
sensitivity approach may incorporate assumptions about how
NWB Group and its customers will respond to a change in the
level of interest rates. In contrast, the VaR approach measures
the sensitivity of the balance sheet at a point in time. Capturing
all cash flows, VaR also highlights the impact of duration and
repricing risks beyond the one-to-three-year period shown in
earnings sensitivity calculations.
Value-at-risk
VaR is a statistical estimate of the potential change in the
market value of a portfolio (and, thus, the impact on the income
statement) over a specified time horizon at a given confidence
level. NWB Group’s standard VaR metrics – which assume a
time horizon of one trading day and a confidence level of 99% –
are based on interest rate repricing gaps at the reporting date.
Daily rate moves are modelled using observations from the last
500 business days. These incorporate customer products plus
associated funding and hedging transactions as well as non-
financial assets and liabilities. Behavioural assumptions are
applied as appropriate.
The non-traded interest rate risk VaR metrics for NWB Group’s
retail and commercial banking activities are included in the
banking book VaR table above. The VaR captures the risk
resulting from mismatches in the repricing dates of assets and
liabilities.
It also includes any mismatch between the maturity profile of
external hedges and NWB Group’s target maturity profile for the
hedge.
Sensitivity of net interest earnings
Net interest earnings are sensitive to changes in the level of
interest rates, mainly because maturing structural hedges are
replaced at higher or lower rates and changes to coupons on
managed rate customer products do not match changes in
market rates of interest or central bank policy rates.
Earnings sensitivity is derived from a market-implied forward
rate curve, which will incorporate expected changes in central
bank policy rates such as the Bank of England base rate. A
simple scenario is shown that projects forward earnings over a
12-month period based on the 31 December 2022 balance
sheet. An earnings projection is derived from the market-implied
rate curve, which is then subject to interest rate shocks. The
difference between the market-implied projection and the shock
gives an indication of underlying sensitivity to interest rate
movements.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
71
Non-traded market risk continued
The sensitivity of net interest earnings table below shows the
expected impact of an immediate upward or downward change
of 25 basis points and an upward change of 100 basis points to
all interest rates. The sensitivity to a downward 100-basis-point
shift in the yield curve has been introduced for 2022. This shift
was not presented for 2021, when yield curves were already
close to zero (or were negative in euros).
Reported sensitivities should not be considered a forecast of
future performance in these rate scenarios. Actions that could
reduce interest earnings sensitivity include changes in pricing
strategies on customer loans and deposits as well as hedging.
Management action may also be taken to stabilise total income
also taking into account non-interest income.
2022
2021
+25 basis points
-25 basis points
with no floor
+100 basis
points
-100 basis points
+25 basis points
-25 basis points
with no floor
+100 basis points
Shifts in yield curve
£m
£m
£m
£m
£m
£m
£m
12-month interest earnings sensitivity
145
(160)
580
(654)
207
(196)
767
(1)
Earnings sensitivity in 2022 considers only the main drivers, namely structural hedging and margin management.
The overall sensitivity to shifts in the yield curve decreased
year on year, mainly driven by increased structural hedge
volumes and lower managed margin deposit volumes.
The sensitivity of the structural hedge increased because of
the rise in hedged volumes, which increased the sensitivity
to hedges maturing through the projection.
The increased volume of hedges reduces managed margin
sensitivity because a significant part of the managed
margin component is the residual sensitivity of unhedged
deposit volumes.
Managed margin sensitivity further reduced due to lower
deposit volumes at 31 December 2022 compared to 31
December 2021.
Sensitivity of fair value through other comprehensive income (FVOCI) to interest rate movements.
NWB Group holds most of the bonds in its liquidity portfolio at fair value. Valuation changes that are not hedged (or not in effective
hedge accounting relationships) are recognised in FVOCI reserves.
Interest rate swaps are used to implement the structural hedging programme and to hedge some personal and commercial lending
portfolios, primarily fixed-rate mortgages. Changes in the valuation of swaps that are in effective cash flow hedge accounting
relationships are recognised in cash flow hedge reserves.
The table below shows the sensitivity of FVOCI reserves and cash flow hedge reserves to a parallel shift in all rates. In this analysis,
interest rates have not been floored at zero. Cash flow hedges are assumed to be fully effective and interest rate hedges of bonds
in the liquidity portfolio are also assumed to be subject to fully effective hedge accounting. Hedge accounting ineffectiveness would
result in some deviation from the results below, with some gains or losses recognised in P&L instead of reserves. Hedge
ineffectiveness P&L is monitored, and the effectiveness of cash flow and fair value hedge relationships is regularly tested in
accordance with IFRS requirements. Note that a movement in the FVOCI reserve would have an impact on CET1 capital but a
movement in the cash flow hedge reserve would not be expected to do so. Volatility in both reserves affects tangible net asset
value.
2022
2021
+25
-25
+100
-100
+25
-25
+100
-100
basis
basis
basis
basis
basis
basis
basis
basis
points
points
points
points
points
points
points
points
Parallel shifts in yield curve
£m
£m
£m
£m
£m
£m
£m
£m
FVOCI reserves
3
(3)
9
(17)
(28)
27
(116)
102
Cash flow hedge reserves
(11)
11
(42)
46
(10)
11
(33)
53
Total
(8)
8
(33)
29
(38)
38
(149)
155
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
72
Non-traded market risk continued
Credit spread risk
Credit spread risk arises from the potential adverse economic
impact of a change in the spread between bond yields and
swap rates, where the bond portfolios are accounted at fair
value through other comprehensive income.
NWB Group’s bond portfolios primarily comprise high-quality
securities maintained as a liquidity buffer to ensure it can
continue to meet its obligations in the event that access to
wholesale funding markets is restricted. Additionally, other high-
quality bond portfolios are held for collateral purposes and to
support payment systems.
Credit spread risk is monitored daily through sensitivities and
VaR measures. The dealing authorities in place for the bond
portfolios further mitigate the risk by imposing constraints by
duration, asset class and credit rating. Exposures and limit
utilisations are reported to senior management on a regular
basis.
Foreign exchange risk
Non-traded foreign exchange risk arises from three main
sources:
Structural foreign exchange rate risk – arises from the
capital deployed in foreign subsidiaries, branches and joint
arrangements and related currency funding where it differs
from sterling.
Non-trading book foreign exchange rate risk – arises from
customer transactions and profits and losses that are in a
currency other than the functional currency.
Forecast earnings or costs in foreign currencies – NWB
Group hedges forward some foreign currency forecast
expenses.
Structural foreign exchange exposures arise from investments
in foreign subsidiaries, branches and associates and their
related currency funding. These exposures are assessed and
managed to predefined risk appetite levels under delegated
authority agreed by the CFO with support from the Asset &
Liability Management Committee. NatWest Group seeks to limit
the potential volatility impact on its CET1 ratio from exchange
rate movements by maintaining a structural open currency
position. Gains or losses arising from the retranslation of net
investments in overseas operations are recognised in equity
reserves and reduce the sensitivity of capital ratios to foreign
exchange rate movements primarily arising from the
retranslation of non-sterling denominated RWAs. Sensitivity is
minimised where, for a given currency, the ratio of the
structural open position to RWAs equals the CET1 ratio.
The sensitivity of the NatWest Group ratio to exchange rates is
monitored monthly and reported to the Asset & Liability
Management Committee at least quarterly. NWB Plc also
monitors the sensitivity of its CET1 ratio to exchange rate
movements against a risk limit monthly.
Foreign exchange exposures arising from customer transactions
are sold down by businesses on a regular basis in line with
NatWest Group policy.
Foreign exchange risk
(audited)
The table below shows structural foreign currency exposures.
2022
2021
Net investments
in foreign
operations
Net investment
hedges
Structural foreign
currency
exposures
Net investments in
foreign operations
Net investment
hedges
Structural foreign
currency
exposures
£m
£m
£m
£m
£m
£m
Euro
738
(720)
18
473
(470)
3
Other non-sterling
456
(148)
308
449
(159)
290
Total
1,194
(868)
326
922
(629)
293
The increase in net investments in foreign operations was
driven by increased investment in NWB Group’s German
branch.
The increase in net investment hedges reflects increased
hedging of the German branch.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
73
Pension risk
Definition
Pension risk is defined in a consistent manner to the regulatory
definition as the inability to meet contractual obligations and
other liabilities to the established employee or related company
pension scheme.
Sources of risk
NWB Group has exposure to pension risk through its defined
benefit schemes worldwide. The Main section of The NatWest
Group Pension Fund (the Main section) is the largest source of
pension risk as NatWest Bank Plc is the principal employer to
the Main section with £34.0 billion of assets and £24.7 billion of
liabilities at 31 December 2022 (2021 – £52.0 billion of assets
and £42.0 billion of liabilities). Refer to Note 5 to the financial
statements, for further details on NWB Group’s pension
obligations, including sensitivities to the main risk factors.
Pension scheme liabilities vary with changes in long-term
interest rates and inflation as well as with pensionable salaries,
the longevity of scheme members and legislation. Pension
scheme assets vary with changes in interest rates, inflation
expectations, credit spreads, exchange rates, and equity and
property prices. NWB Group is exposed to the risk that the
schemes’ assets, together with future returns and additional
future contributions, are estimated to be insufficient to meet
liabilities as they fall due. In such circumstances, NWB Group
could be obliged (or might choose) to make additional
contributions to the schemes or be required to hold additional
capital to mitigate this risk.
Key developments in 2022
There were no material changes to NWB Group’s exposure
to pension risk during the year. Despite market volatility, the
Main section remained resilient, primarily due to its interest
rate and inflation hedging strategy, as well as its limited
exposure to equities. Furthermore, the Main section held
sufficient collateral in relation to its liability hedging portfolio,
without the need to sell assets to meet collateral
requirements. One of NWB Group’s smaller schemes faced
more challenging dynamics, with a reduction in funding level,
but continued to be able to raise collateral as required. The
impact was not material at NWB Group level.
In line with the Memorandum of Understanding signed with
the Trustee of the Main section in April 2018, a £500 million
lump sum contribution was paid into the Main section,
following the share buyback in Q1 2022.
Since 31 December 2022, it has been agreed with the
Trustee of the Main section, that remaining contributions of
£471 million previously due to the Main section under the
Memorandum of Understanding signed in April 2018, will
instead be paid into a new legal structure.
For further details,
refer to Note 5 to the financial statements.
Governance
Chaired by the Chief Financial Officer, the NatWest Group Asset
& Liability Management Committee is a key component of
NatWest Group’s approach to managing pension risk. It
considers the pension impact of the capital plan for NatWest
Group and reviews the performance of NatWest Group’s
material pension funds (including those sponsored by NWB
Group) and other issues material to NatWest Group’s pension
strategy. It also considers investment strategy proposals from
the Trustee of the Main section.
For further information on governance, refer to page 11.
Risk appetite
NWB Group maintains an independent view of the risk inherent
in its pension funds. NWB Group has an annually reviewed
pension risk appetite statement incorporating defined metrics
against which risk is measured.
Policies and standards are in place to provide formal controls
for pension risk reporting, modelling, governance and stress
testing. A pension risk policy, which sits within the NatWest
Group enterprise-wide risk management framework, is also in
place and is subject to associated framework controls.
Monitoring and measurement
Pension risk is monitored by the NWH Group Executive Risk
Committee and the NatWest Group Board Risk Committee,
whilst the NatWest Group Asset & Liability Management
Committee receives updates on the performance of NatWest
Group’s material pension funds.
NatWest Group also undertakes stress tests on its material
defined benefit pension schemes each year. These tests are also
used to satisfy the requests of regulatory bodies such as the
Bank of England.
The stress testing framework includes pension risk capital
calculations for the purposes of the Internal Capital Adequacy
Assessment Process as well as additional stress tests for a
number of internal management purposes. The results of the
stress tests and their consequential impact on NWB Group’s
balance sheet, income statement and capital position are
incorporated into NWB Group’s and overall NatWest Group
stress test results.
NatWest Bank Plc is the principal employer of the Main section
and could be required to fund any deficit that arises.
Mitigation
Following risk mitigation measures taken by the Trustee in
recent years, the Main section is now well protected against
interest rate and inflation risks and is being run on a low
investment risk basis with relatively small equity risk
exposure.
The Main section also uses derivatives to manage the
allocation of the portfolio to different asset classes and to
manage risk within asset classes.
The potential impact of climate change is one of the factors
considered in managing the assets of the Main section. The
Trustee monitors the risk to its investments from changes in the
global economy and invests, where return justifies the risk, in
sectors that reduce the world’s reliance on fossil fuels, or that
may otherwise promote environmental benefits. Further details
regarding the Main section Trustee’s approach to managing
climate change risk can be found in its Responsible Ownership
Policy and its net zero commitment. During the year, the
Trustee also produced its first climate disclosures as required by
The Occupational Pension Schemes (Climate Change
Governance and Reporting) Regulations 2021.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
74
Compliance and conduct risk
Definition
Compliance risk is the risk that NWB Group fails to observe the
letter and spirit of all relevant laws, codes, rules, regulations and
standards of good market practice.
Conduct risk is the risk of inappropriate behaviour towards
customers, or in the markets in which NWB Group operates,
which leads to unfair or inappropriate customer outcomes.
The consequences of failing to meet compliance and/or conduct
responsibilities can be significant and could result, for example,
in legal action, regulatory enforcement, material financial loss
and/or reputational damage.
Sources of risk
Compliance and conduct risks exist across all stages of NWB
Group’s relationships with its customers and arise from a variety
of activities including product design, marketing and sales,
complaint handling, staff training, and handling of confidential
inside information.
As set out in Note 26 to the financial statements, members of
NatWest Group are party to legal proceedings and are subject
to investigation and other regulatory action in the UK, the US
and other jurisdictions.
Key developments in 2022
Further progress was made on the compliance agenda
during 2022. The first line of defence ring-fencing hub –
established to provide an aggregated view of ring-fencing
compliance and risk management continues to work across
business segments, functions and legal entities.
From a conduct risk perspective, the focus on consumer
protection increased significantly during 2022, given the cost-
of-living challenges and their impact on customers in
vulnerable situations. The FCA’s increased expectations
under its Consumer Duty initiative was also a key
development, and the establishment of the consumer duty
‘One Bank’ programme will ensure continued focus upon the
required ‘paradigm shift’ in the levels of consumer protection.
More generally, work is also ongoing to further enhance the
conduct and compliance risk framework so that it is aligned
to a wider programme of work on the overall risk
management framework.
Governance
NWB Group defines appropriate standards of compliance and
conduct and ensures adherence to those standards through its
risk management framework. Relevant compliance and conduct
matters are escalated through Executive Risk Committee and
Board Risk Committee.
Risk appetite
Risk appetite for compliance and conduct risks is set at Board
level. Risk appetite statements articulate the levels of risk that
legal entities, businesses and functions work within when
pursuing their strategic objectives and business plans.
A range of controls are operated to ensure the business delivers
good customer outcomes and are conducted in accordance with
legal and regulatory requirements. A suite of policies addressing
compliance and conduct risks set appropriate standards across
NWB Group. Examples include policies relating to customers in
vulnerable situations, complaints management, cross-border
activities and market abuse. Continuous monitoring and
targeted assurance are carried out as appropriate.
Monitoring and measurement
Compliance and conduct risks are measured and managed
through continuous assessment and reporting to NWB Group’s
senior risk committees and at Board level. The compliance and
conduct risk framework facilitates the consistent monitoring and
measurement of compliance with laws and regulations and the
delivery of consistently good customer outcomes. The first line
of defence is responsible for effective risk identification,
reporting and monitoring, with oversight, challenge and review
by the second line. Compliance and conduct risk management is
also integrated into NWB Group’s strategic planning cycle.
Mitigation
Activity to mitigate the most material compliance and conduct
risks is carried out across NWB Group with specific areas of
focus in the customer-facing businesses and legal entities.
Examples of mitigation include consideration of customer needs
in business and product planning, targeted training, conflicts of
interest management, market conduct surveillance,
complaints
management, mapping of priority regulatory requirements and
independent monitoring activity. Internal policies help support a
strong customer focus across NatWest Group.
Financial crime risk
Definition
Financial crime risk is the risk that NWB
Group's products and
services are intentionally or unintentionally used to facilitate
financial crime in the form of money laundering, terrorist
financing, bribery and corruption, sanctions and tax evasion, as
well as external or internal fraud.
Sources of risk
Financial crime risk may be present if NWB Group’s customers,
employees or third parties undertake or facilitate financial
crime, or if NWB Group’s products or services are used
intentionally or unintentionally
to facilitate such crime. Financial
crime risk is an inherent risk across all lines of business.
Key developments in 2022
Significant investment continued to be made to support
delivery of the multi-year transformation plan across
financial crime risk management.
Enhancements were made to technology and data analytics
to improve the effectiveness of systems used to monitor
customers and transactions.
A financial crime and fraud goal was rolled out to
approximately 55,000 colleagues across NatWest Group.
Financial crime roadshows were held throughout the year to
further embed financial crime risk management culture and
behaviours.
Systematic Anti-Money Laundering Programme assessment.
In January 2022, NatWest Group, of which NWB Group is a
part of, received the Skilled Person’s final report in
connection with governance arrangements for two financial
crime change programmes in respect of which the Skilled
Person had been appointed under section 166 of the
Financial Services and Markets Act 2000 to provide
assurance. The FCA confirmed in March 2022 that the
section 166 review had been concluded.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
75
Financial crime risk continued
Governance
The Financial Crime Executive Steering Group, which is jointly
chaired by the NatWest Group Chief Risk Officer and the Group
Chief Information Officer (previously the Chief Administration
Officer), is the core governance committee for financial crime
risk (excluding fraud). It oversees financial crime risk
management, operational performance, and transformation
matters including decision-making and escalations to the
Executive Risk Committee, Board Risk Committee and NatWest
Group Executive Committee.
The Fraud Executive Steering Group, which is chaired by the
Chief Information Officer, is the core governance committee for
fraud. It oversees fraud risk management, operational
performance, and investment matters including decision-making
and escalations to relevant senior committees.
Risk appetite
There is no appetite to operate in an environment where
systems and controls do not enable the effective identification,
assessment, monitoring, management and mitigation of financial
crime risk. NWB Group’s systems and controls must be
comprehensive and proportionate to the nature, scale and
complexity of its businesses
NWB Group operates a framework with preventative and
detective controls designed to mitigate the risk that it could
facilitate financial crime. These controls are supported by a
suite of policies, procedures and guidance to ensure they
operate effectively.
Monitoring and measurement
Financial crime risks are identified and reported through
continuous risk management and regular reporting to NWB
Group’s senior risk committees and the NWB Group Board.
Quantitative and qualitative data is reviewed and assessed to
measure whether financial crime risk is within risk appetite.
Mitigation
Through the financial crime framework, relevant policies,
systems, processes and controls are used to mitigate and
manage financial crime risk. This includes the use of dedicated
screening and monitoring systems and controls to identify
people, organisations, transactions and behaviours that may
require further investigation or other actions. Centralised
expertise is available to detect and disrupt threats to NWB
Group and its customers.
Intelligence is shared with law enforcement, regulators and
government bodies to strengthen national and international
defences against those who would misuse the financial system
for criminal motives.
Climate risk
Definition
Climate risk is the threat of financial loss or adverse non-
financial impacts associated with climate change and the
political, economic and environmental responses to it.
Sources of risk
Physical risks may arise from climate and weather-related
events such as heatwaves, droughts, floods, storms and sea
level rises. They can potentially result in financial losses,
impairing asset values and the creditworthiness of borrowers.
NWB Group could be exposed to physical risks directly by the
effects on its property portfolio and, indirectly, by the impacts
on the wider economy as well as on the property and business
interests of its customers.
Transition risks may arise from the process of adjustment
towards a low-carbon economy. Changes in policy, technology
and sentiment could prompt reassessment of customers’
financial risk and may lead to falls in the value of a large range
of assets. NWB Group could be exposed to transition risks
directly through the costs of adaptation within economic sectors
and markets as well as supply chain disruption leading to
financial impacts on it and its customers. Potential indirect
effects include the erosion of NWB Group’s competitiveness,
profitability, reputational damage and liability risk.
Key developments in 2022
The enhancement of scenario generation capability, building
on our internal scenario analysis capability developed over
2021 that supported risk management and participation in
the PRA Climate Biennial Exploratory Scenario (CBES).
To support the management of credit risk, the application of
first generation qualitative climate risk scorecards within
customer conversations, and initiation of testing of enhanced
scorecards including quantitative elements.
Improved oversight of management of climate-related risk
through regular reporting and review of climate risk appetite
measures and key risk indicator trends informing monthly
risk committee updates.
The assessment of potential greenwashing risks driven by a
hypothetical risk scenario where increased competition in
the green finance market leads to less efficient product
designs and diminished robustness of governance.
The preparation of an initial iteration of the NatWest Group
Climate Transition plan including identification and analysis
of potential impacts associated with proposed actions.
Governance
The NatWest Group Board is responsible for monitoring and
overseeing climate-related risk within NatWest Group’s overall
business strategy and risk appetite. The potential impact,
likelihood and preparedness of climate-related risk are reported
regularly to the NatWest Group Board Risk Committee and the
NatWest Group Board.
The NatWest Group Chief Risk Officer shares accountability with
the NatWest Group CEO under the Senior Managers and
Certification Regime for identifying and managing the financial
risks arising from climate change. This includes ensuring that
the financial risks from climate change are adequately reflected
in risk management frameworks, and that NatWest Group can
identify, measure, monitor, manage and report on its exposure
to these risks.
The Climate Change Executive Steering Group is responsible for
overseeing the direction of and progress against NatWest
Group’s climate-related commitments. During 2022, the
Executive Steering Group focused on overseeing the
preparation of the initial iteration of NatWest Group’s Climate
Transition Plan, progression in establishing partnerships and
opportunities including oversight of progress against the
NatWest Group climate and sustainable funding and financing
target, and ensuring the effective management of climate-
related risks. The Executive Steering Group will continue to
supervise strategic implementation and delivery, supported by
the Climate Centre of Excellence.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
76
Climate risk continued
Risk appetite
NatWest Group’s ambition is to be a leading bank in the UK in
helping to address climate change. This ambition is underpinned
by activity to reduce the climate impact of financing activity by
at least 50% by 2030 and to achieve net zero by 2050.
Work continued in 2022 to mature NatWest Group’s climate-
related risk capabilities in accordance with the risk management
framework. In December 2022, the NatWest Group Board
approved the adoption of enhanced climate risk appetite
measures into the enterprise-wide risk management framework,
which are designed to provide a heightened focus on balance
sheet exposure to financed emissions.
Combined with segment-specific risk measures, this suite of
metrics will enable reporting of climate risk appetite to senior
risk management forums and links risk management to NatWest
Group’s strategic goals and priorities.
Monitoring and measurement
NatWest Group focused on developing the capabilities to use
scenario analysis to identify the most material climate risks and
opportunities for its customers, seeking to harness insights to
inform risk management practices and maximise the
opportunities arising from a transition to a low-carbon economy.
Scenario analysis allows NatWest Group to test a range of
possible future climate pathways and understand the nature
and magnitude of the risks they present. The purpose of
scenario analysis is not to forecast the future but to understand
and prepare to manage risks that could arise.
Key priorities in 2022 have included enhancing our climate
scenario analysis capabilities to both address ongoing
regulatory expectations and building on the infrastructure
required by NatWest Group to meet current and future climate
scenario analysis objectives. NatWest Group made significant
investment in developing a variety of internal scenario analysis
tools which support the development of commercial strategy,
products and services and help manage risks, including
managing exposures efficiently and removing unmitigated risks
from future climate impacts.
NatWest Group recognises a number of key use cases for
climate scenario analysis, including, but not restricted to, the
following:
Regulatory stress testing requirements.
Heightened climate risk sector classifications.
Sector/sub-sector risk appetite.
Lending pricing.
Portfolio management.
Strategic decision-making.
NatWest Group made material progress in developing internal
climate modelling capabilities, building on the learnings from our
internal scenario analysis carried out in 2021 and participation
in the CBES. NatWest Group has enhanced its scenario
generation capabilities to support future integration of climate
risk into strategic planning, Internal Capital Adequacy
Assessment Processes (ICAAP) and IFRS 9. Modelling
infrastructure to execute scenarios matured in 2022, giving
increased flexibility for scenario analysis capability for short,
medium and long-term scenarios. Incorporation into the
NatWest Group strategic plan and ICAAP ensures that NatWest
Group factors climate into strategic planning and appropriately
capitalises for the most material source of climate risk over the
capital planning horizon. Developing internal methodologies also
enhances the capacity to integrate scenario analysis with
customer journeys. This builds on NatWest Group’s ability not
only to effectively develop tools for risk management but also to
develop products and processes that support NatWest Group’s
customers’ transition.
NatWest Group also focused on developing an internal
methodology for forecasting its counterparties’ corporate
transition risk via counterparty level modelling infrastructure
and climate risk customer scorecards. NatWest Group is actively
targeting the minimisation of reliance on third party models,
whilst recognising there is likely to be some reliance on them
over the medium-to-long term given the specialist and evolving
nature of climate financial risk management. Enhancement of
this infrastructure links very closely with the scenario analysis
noted above. Further information on this can be found in
NatWest Group’s 2022 Climate-related Disclosures Report.
Internal scenario analysis, carried out to support participation in
the CBES, focused on the application of three climate scenarios
(early policy action, late policy action
and no additional action
and a counterfactual scenario) to quantify climate risk across
NatWest Group’s lending portfolio.
This showed that NatWest
Group was most exposed to a late transition scenario with a
concentrated period of losses between 2030 and 2035, the point
at which disruptive transition policy is implemented, resulting in
an economic recession. The early action scenario resulted in
more gradual losses through the stress horizon, with the earlier
onset of transition curtailing impairments in comparison to the
sharp onset in the late action scenario. A key conclusion for
transition risk is that supporting customers’ transition to net
zero is critical to manage NatWest Group’s exposures to
transition risk.
The effects of physical risk were explored through the no
additional action scenario which produced lower total
cumulative impairments compared to the early action and late
action scenarios. This comparatively lower level of impairments
is reflective of NatWest Group’s diversified book and geographic
exposure. NatWest Group’s results broadly aligned with the key
findings and aggregate outcome for banks (across both physical
and transition risk).
However, NatWest Group recognises the industry data and
methodology limitations for physical risk and therefore
recognises that the no additional action scenario does not
capture the severe long-term effects of irreversible climate
change. Further information on results, limitations and
conclusions can be found in NatWest Group’s 2022 Climate-
related Disclosures Report.
There are a number of challenges with climate scenario
analysis, for example in relation to climate data. NatWest Group
continues to participate in a number of industry forums
including the United Nations Principles for Responsible Banking,
which provides a unique framework for banks to align strategy
and practice with the Sustainable Development Goals and Paris
Climate Agreement. In addition, NatWest Group is also
represented on the Climate Financial Risk Forum established by
the PRA and FCA to shape the financial services industry’s
response to the challenges posed by climate risk and continues
to work with a number of UK and international bodies to
develop climate scenario analysis best practices.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
77
Climate risk continued
NatWest Group is continuing to make progress in embedding
climate risk analytics as appropriate across customer journeys
and in supporting decision-making at customer and strategic
portfolio levels. Leveraging qualitative and quantitative outputs
from scenario analysis, will enable NatWest Group to integrate
outcomes into risk appetite measures and customer origination
processes. Developing the ability to incorporate these outcomes
enables NatWest Group to manage and mitigate both the risks
but also the opportunities that are presented by climate risk.
Operational risk
Definition
Operational risk is the risk of loss resulting from inadequate or
failed internal processes, people and systems, or external
events. It arises from day-to-day operations and is relevant to
every aspect of the business.
Sources of risk
Operational risk may arise from a failure to manage operations,
systems, transactions and assets appropriately. This can take
the form of human error, an inability to deliver change
adequately or on time, the non-availability of technology
services, or the loss of customer data. Systems failure, theft of
NWB Group property, information loss and the impact of
natural, or man-made, disasters – as well as the threat of cyber-
attacks are sources of operational risk. Operational risk can also
arise from a failure to account for changes in law or regulations
or to take appropriate measures to protect assets.
Key developments in 2022
A review of the NatWest Group Risk Directory was
completed, allowing greater risk visibility and improved risk
reporting.
The NatWest Group Impact Classification Matrix was
updated to align to industry materiality, ensuring focus on
the most material risks.
An Early Event Escalation Process was implemented to
ensure material events are escalated in a timely manner.
A Risk & Control Self Assessment approach was developed
to identify risks across end-to-end processes, refocusing
existing risk assessment, towards materiality.
A payments review has been initiated by NatWest Group in
late 2022 to assess control enhancements in response to
manual payment risk.
Governance
The risk governance arrangements in place for operational risk
are aligned to the requirements set out in the NatWest Board
approved enterprise-wide risk management framework and are
consistent with achieving safety, soundness and sustainable risk
outcomes.
Aligned to this, a strong operational risk management function
is vital to support NWB Group’s ambitions to serve its customers
better. Improved management of operational risk against
defined appetite is vital for stability and reputational integrity.
Risk appetite
Operational risk appetite supports effective management of all
operational risks. It expresses the level and types of operational
risk NatWest Group is willing to accept to achieve its strategic
objectives and business plans. NatWest Group’s operational risk
appetite statement encompasses the full range of operational
risks faced by its legal entities, businesses and functions.
Mitigation
The Control Environment Certification (CEC) process is a half-
yearly self-assessment by the CEOs of NatWest Group’s
customer-facing business areas, as well as the heads of the
bank’s support functions. It provides a consistent and
comparable view on the adequacy and effectiveness of the
internal control environment.
CEC covers material risks and the underlying key controls,
including financial, operational and compliance controls, as well
as supporting risk management frameworks. The CEC
outcomes, including forward-looking assessments for the next
two half-yearly cycles and progress on control environment
improvements, are reported to the NatWest Group Audit
Committee and Board Risk Committee. They are also shared
with external auditors.
The CEC process helps to ensure compliance with the NatWest
Group Policy Framework, Sarbanes-Oxley 404 requirements
concerning internal control over financial reporting, and certain
requirements of the UK Corporate Governance Code.
Risks are mitigated by applying key preventative and detective
controls, an integral step in the risk self-assessment
methodology which determines residual risk exposure. Control
owners are accountable for the design, execution, performance
and maintenance of key controls. Key controls are regularly
assessed for adequacy and tested for effectiveness. The results
are monitored and, where a material change in performance is
identified, the associated risk is re-evaluated.
Monitoring and measurement
Risk and control self assessments are used across all business
areas and support functions to identify and assess material
operational risks, conduct risks and key controls. All risks and
controls are mapped to NatWest Group’s Risk Directory. Risk
assessments are refreshed at least annually to ensure they
remain relevant and capture any emerging risks and also
ensure risks are reassessed.
The process is designed to confirm that risks are effectively
managed in line with risk appetite. Controls are tested at the
appropriate frequency to verify that they remain fit-for-purpose
and operate effectively to reduce identified risks.
NWB Group uses the standardised approach to calculate its
Pillar 1 operational risk capital requirement. This is based on
multiplying three years’ average historical gross income by
coefficients set by the regulator based on business line.
As part of the wider Internal Capital Adequacy Assessment
Process an operational risk economic capital model is used to
assess Pillar 2A, which is a risk-sensitive add-on to Pillar 1. The
model uses historical loss data (internal and external) and
forward-looking scenario analysis to provide a risk-sensitive
view of NWB Group’s Pillar 2A capital requirement.
Scenario analysis is used to assess how severe but plausible
operational risks will affect NWB Group. It provides a forward-
looking basis for evaluating and managing operational risk
exposures.
Refer to the Capital, liquidity and funding risk section for
operational risk capital requirement figures.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
78
Operational risk continued
Operational resilience
NWB Group manages and monitors operational resilience
through its risk and control self-assessment methodology. This is
underpinned by setting and monitoring of risk indicators and
performance metrics for the operational resilience of key
business services. Progress continues on embedding regulator
expectations for operational resilience, with involvement in a
number of industry-wide operational resilience forums. This
enables a cross-sector view of the operational resilience risk
profile and the pace of ongoing innovation and change, both
internally and externally.
NatWest Group operates layered security controls and its
network architecture is designed to provide inherent protection
against threats.
This approach avoids reliance on any one type
or method of security control.
Minimum security control
requirements are set out in Key Risk policies, standards,
processes and procedures.
Through 2023 NatWest Group will
monitor and manage the threat landscape focusing on:
Attack Surface Vulnerabilities – such as the rising number of
zero-days and code vulnerabilities impacting organisations
Initial Access Brokers and Nation States – increasingly
sophisticated attacks from ransomware gangs and ongoing
challenges following Russia’s invasion of Ukraine which has
raised international tensions increasing the likelihood of
disruptive cyber-attacks.
As cyberattacks evolve and become more sophisticated,
NatWest Group continues to invest in additional capability
designed to defend against emerging threats.
Event and loss data management
The operational risk event and loss data management process
ensures NWB Group captures and records operational risk
financial and non-financial events that meet defined criteria.
Loss data is used for regulatory and industry reporting and is
included in capital modelling when calculating economic capital
for operational risk. The most serious events are escalated in a
simple, standardised process to all senior management, by way
of an Early Event Escalation Process.
All financial impacts associated with an operational risk event
are reported against the date they were recorded in NWB
Group’s financial accounts.
A single event can result in multiple losses (or recoveries) that
may take time to crystallise. Losses and recoveries with a
financial accounting date in 2022 may relate to events that
occurred, or were identified in, prior years.
Model risk
Definition
Model risk is the potential for adverse consequences from model
errors and/or the inappropriate use of modelled outputs to
inform business decisions. A model is defined as a quantitative
method, system, or approach that applies statistical, economic,
financial, accounting, mathematical or data science theories,
techniques and assumptions to process input data into
quantitative estimates.
Sources of risk
NWB Group uses a variety of models in the course of its
business activities. Examples include the use of model outputs to
support customer decisioning, measuring and assessing risk
exposures (including credit, market, and climate risk), as well as
calculating regulatory capital and liquidity requirements.
Model applications may give rise to different risks depending on
the business segment in which they are used. Model risk is
therefore assessed separately for each business segment in
addition to the overall assessment made for NWB Group.
Key developments in 2022
Model risk management practices continued to evolve,
driven through a dedicated Model Management Programme.
This delivered an enhanced model management committee
structure, a new model risk governance team operating
model and an improved model inventory.
Aligned to the implementation of the enterprise-wide risk
management framework, new model risk procedures were
approved to support the identification, assessment and
monitoring of model risk.
NatWest Group provided a comprehensive response to the
PRA’s Consultation Paper on Model Risk Management
(CP6/22). A self-assessment of NatWest Group’s current
Model Risk Policy compared to the PRA’s draft Supervisory
Statement was completed and gaps identified. A programme
of work will be established in 2023 to continue to evolve the
bank’s model risk management framework in line with
regulatory expectations and industry best practice.
Governance
A governance framework is in place to ensure policies and
processes relating to models are appropriate and effective. Two
roles are key to this – model risk owners and model risk officers.
Model risk owners are responsible for model approval and
ongoing performance monitoring. Model risk officers, in the
second line, are responsible for oversight, including ensuring
that models are independently validated prior to use and on an
ongoing basis aligned to the model’s risk rating.
A new NatWest Group Model Risk Oversight Committee will
further enhance model risk governance by providing a direct
escalation route to the NatWest Group Executive Risk
Committee and, where applicable, onwards to the NatWest
Group Board Risk Committee.
Risk appetite
Model risk appetite is set in order to limit the level of model risk
that NWB Group is willing to accept in the course of its business
activities. It is approved by the NatWest Holdings Group Board.
Business areas are responsible for monitoring performance
against appetite and remediating models outside appetite.
Monitoring and measurement
Policies and procedures related to the development, validation,
approval, implementation and use and ongoing monitoring of
models are in place to ensure adequate control across the
lifecycle of an individual model.
Validation of material models is conducted by an independent
risk function comprising of skilled, well-informed subject matter
experts. This is completed for new models or amendments to
existing models and as part of an ongoing periodic programme
to assess model performance. The frequency of periodic
validation is aligned to the risk rating of the model. The
independent validation focuses on a variety of model features,
including modelling approach, the nature of the assumptions
used, the model’s predictive ability and complexity, the data
used in the model, its implementation and its compliance with
regulation.
The level of risk relating to an individual model is assessed
through a model risk rating. A quantitative approach is used to
determine the risk rating of each model, based on the model’s
materiality and validation rating. This approach provides the
basis for model risk appetite measures and enables model risk
to be robustly monitored and managed across NWB Group.
Ongoing performance monitoring is conducted by model owners
and overseen by the model validators to ensure parameter
estimates and model constructs remain fit for purpose, model
assumptions remain valid and that models are being used
consistently with their intended purpose. This allows timely
action to be taken to remediate poor model performance and/or
any control gaps or weaknesses.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2022
79
Model risk continued
If a model risk issue arises due to an operational control
weakness (and the residual risk meets the operational risk
thresholds, then an operational risk issue would be raised.
Mitigation
By their nature – as approximations of reality – model risk is
inherent in the use of models. It is managed by refining or
redeveloping models where appropriate – due to changes in
market conditions, business assumptions or processes – and by
applying adjustments to model outputs (either quantitative or
based on expert opinion). Enhancements may also be made to
the process within which the model output is used in order to
further limit risk levels.
Reputational risk
Definition
Reputational risk is the risk of damage to stakeholder trust due
to negative consequences arising from internal actions or
external events.
Sources of risk
Reputational risks can originate from internal actions and
external events. The three primary drivers of reputational risk
have been identified as: failure in internal execution; a conflict
between NWB Group’s values and the public agenda; and
contagion (when NWB Group’s reputation is damaged by
failures in the wider financial sector).
Key developments in 2022
New reputational risk policy was implemented to manage
reputational risk at an organisational level.
Enhanced data-led reporting of reputational risk in the
monthly Risk Report to the ERC and BRC.
The NatWest Group Reputational Risk Register was further
embedded into the organisation, the results of which are
reported to the NatWest Group Reputational Risk
Committee.
All Environmental, Social & Ethical (ESE) risk acceptance criteria
have undergone review to align with our Purpose.
Governance
A reputational risk policy supports reputational risk
management across NatWest Group. The NWB reputational risk
committee reviews relevant issues at an individual business or
entity level, while the NatWest Group Reputational Risk
Committee – opines on issues, cases, sectors and themes that
represent material reputational risks. The NatWest Board Risk
Committee oversees the identification and reporting of
reputational risk.
Risk appetite
NatWest Group manages and articulates its appetite for
reputational risk through a qualitative reputational risk appetite
statement and quantitative measures. NWB Group seeks to
identify, measure and manage risk aligned to stakeholder trust.
However, reputational risk is inherent in NatWest Group’s
operating environment and public trust is a specific factor in
setting reputational risk appetite.
Monitoring and measurement
Relevant internal and external factors are monitored through
regular reporting to the NWB Group reputational risk committee
and escalated, where appropriate, to the NatWest Group
Reputational Risk Committee or the NatWest Board Risk
Committee.
Mitigation
Standards of conduct are in place across NatWest Group
requiring strict adherence to policies, procedures and ways of
working to ensure business is transacted in a way that meets –
or exceeds – stakeholder expectations.
External events that could cause reputational damage are
identified and mitigated through NWB Group’s Top and
Emerging Threats process (where sufficiently material) as well
as through the NWB Group and business segment-level risk
registers.
NatWest Group has in recent years been the subject of
investigations and reviews by a number of regulators and
governmental authorities, some of which have resulted in past
fines, settlements and public censure
.
Refer to the Litigation and
regulatory matters section
Note 26 to the financial statements
for details of material matters currently affecting NWB Group.
Report of the directors
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Annual Report and Accounts 2022
80
The directors present their report together with the audited
accounts for the year ended 31 December 2022.
Other information incorporated into this report by reference
can be found at:
Page/Note
Stakeholder engagement and s.172(1) statement
2
Board of directors and secretary
3
Financial review
6
Segmental analysis
Note 4
Share capital and reserves
Note 22
Post balance sheet events
Note 34
NWB Group structure
National Westminster Bank Plc (‘NWB Plc’) is a wholly-owned
subsidiary of NatWest Holdings Limited (‘NWH Ltd’ or ‘the
intermediate holding company’). NatWest Bank Group (‘NWB
Group’) comprises NWB Plc and its subsidiary and associated
undertakings. NatWest Holdings Group (‘NWH Group’)
comprises NWH Ltd and its subsidiary and associated
undertakings. NatWest Group plc is ‘the ultimate holding
company’. The term ‘NatWest Group’ comprises NatWest
Group plc and its subsidiary and associated undertakings.
NatWest Group plc is incorporated in the United Kingdom and
has its registered office at 36 St Andrew Square, Edinburgh,
EH2 2YB.
Details of NWB Plc’s principal subsidiary undertakings and their
activities are shown in Note 14 on the accounts. A full list of
NWB Plc’s related undertakings is shown in Note 35 on the
accounts.
The financial statements of NatWest Group plc can be obtained
from Legal, Governance & Regulatory Affairs, Gogarburn,
Edinburgh, EH12 1HQ, the Registrar of Companies or at
natwestgroup.com.
Activities
Results and dividends
The profit attributable to the ordinary shareholders of NWB Plc
for the year ended 31 December 2022 was £3,564 million
compared with a profit of £2,793 million for the year ended 31
December 2021, as set out in the consolidated income
statement on page 100.
No ordinary shares were issued during 2022 or 2021.
In 2022, NWB Plc paid an ordinary dividend of £3.3 billion to
NWH Ltd (2021 – £1.6 billion).
Employees
At 31 December 2022, NWB Group employed 55,200 people
(excluding temporary staff). Details of related costs are
included in Note 3 on the consolidated accounts. NWB Plc
employs the majority of NWB Group UK customer-facing staff,
with costs recharged. NWB Plc also provides the majority of
shared services (including technology) and operational
processes under Intra-Group Agreements.
References to ‘colleagues’ in this report mean all members of
the workforce (for example, contractors, agency workers).
Corporate governance statement
For the financial year ended 31 December 2022 NWB Plc has
again chosen to report against the Wates Corporate
Governance Principles for Large Private Companies (the Wates
Principles), published by the Financial Reporting Council (FRC)
in December 2018 and available on the FRC website. The
disclosures below explain how NWB Plc has applied the Wates
Principles in the context of its corporate governance
arrangements.
1. Purpose and leadership
Purpose
NatWest Group’s purpose is established by the NatWest Group
plc Board, promoted across NatWest Group and cascaded to
subsidiaries including NWB Plc. NatWest Group’s strategy is
also set and approved by the NatWest Group plc Board.
In February 2020 following an extensive period of stakeholder
engagement, the NatWest Group plc Board approved NatWest
Group’s purpose and strategy.
NatWest Group’s purpose is ‘we champion potential, helping
people, families and businesses to thrive’. The focus on purpose
has strengthened the Board’s consideration of the interests of
all stakeholders and papers presented to the Board set out how
it supports NatWest Group’s purpose. An example of how
purpose has guided Board decisions and discussions can be
found in the section 172 statement on page 2.
In April 2022 the Board received an assessment of progress on
embedding purpose and updates on each of the focus areas of
enterprise, climate and financial capability/learning. Directors
considered the outputs of a colleague opinion survey which had
demonstrated good progress on embedding NatWest Group’s
purpose and values.
The Board received a further purpose update in December
2022. This included an overview of NatWest Group’s evolution
to becoming a purpose-led bank, an assessment of progress on
embedding purpose, achievements to date, external
perceptions of progress and future priorities. The directors
received a further update on the three focus areas and
considered a broader stakeholder overview aligned to the
Blueprint for Better Business framework.
Strategy
The Board of directors of NWH Ltd reviews and sets the
strategic direction of the NWH Group and, as appropriate, the
strategies for each of its businesses, within the parameters set
by the NatWest Group plc Board. The Board also oversees the
execution of NWH Group strategy and holds executive
management to account for its delivery.
Further information on NatWest Group’s progress against its
purpose and strategy can be found in the NatWest Group plc
2022 Annual Report and Accounts.
Values and culture
In December 2021 the Board approved NatWest Group’s
refreshed values (Inclusive, Curious, Robust, Sustainable and
Ambitious), ahead of their launch in February 2022.
The Board
received regular updates on how the values were embedding
within the organisation through One Bank Transformation
spotlights, Our View colleague survey results and culture
measurement reports.
Further information on NatWest Group’s values can be found in
the NatWest Group plc 2022 Annual Report and Accounts on
page 47.
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The Board assesses and monitors culture in several ways.
During 2022 it received:
Colleague Advisory Panel reports which provided feedback
following the Panel’s meetings. Topics included
remuneration (executive pay and the wider workforce),
NatWest Group’s values, customers in vulnerable situations
and future skills;
One Bank Transformation spotlights on organisation, skills
and culture which included updates on the transition
towards a simpler organisational design and creating and
embedding a One Bank culture;
2022 Our View colleague survey results. Key measures
included culture, purpose, building capability, inclusion,
engagement and leadership;
Culture measurement reports which used an integrated
suite of qualitative, quantitative, internal and external data
sources to support NatWest Group in assessing the
effectiveness and impact of its culture journey; and
Board business insights packs which included metrics on
culture, purpose and inclusion.
The activities described above have supported the Board in
meeting the Wates Principle 1 requirement to ensure that
purpose, values, strategy and culture are aligned, within the
wider NatWest Group governance structure.
2. Board composition
The Board has 13 directors comprising the Chairman, two
executive directors and 10 independent non-executive
directors, one of whom is the Senior Independent Director.
The names of the current directors and secretary are shown on
page 3. Their biographies are available at natwestgroup.com
(NatWest Holdings Limited section).
Chairman
The role of the Chairman is to lead the Board and ensure its
overall effectiveness. This is distinct and separate from that of
the CEO who manages the business day-to-day.
The Board considers that the Chairman was independent on
appointment and that all the non-executive directors are
independent. Non-executive director independence and
individual directors’ continuing contribution to NWB Plc are
considered at least annually.
Balance and diversity
The Board operates a boardroom inclusion policy which aims to
promote diversity and inclusion in the composition of the
Boards of directors of NatWest Group plc, NWH Ltd, NWB Plc
and RBS plc and in the nominations and appointments process.
This policy reflects NatWest Group’s values its inclusion
guidelines and relevant legal or voluntary code requirements.
The policy includes measurable objectives which exist to ensure
that the Boards, and any Committees they delegate
nominations responsibilities to, follow an inclusive process when
making decisions on nominations and appointments. The policy
includes targets which aspire to meet those set out in the UK
Listing Rules along with the recommendations of the FTSE
Women Leaders Review and the Parker Review. The policy also
acknowledges NatWest Group’s ambition to have gender
balance in our global top three levels (CEO-3 and above) by
2030.
Throughout 2022 the Board met the recommendation of the
Parker Review with at least one member of the Board being
from an ethnic minority background and it intends to continue
to meet that recommendation.
As at 31 December 2022:-
the Board of NWB Plc exceeded the recommendation of the
FTSE Women Leaders Review of 40% female representation
on the board by 2025, with 46% of the Board being female;
and
with a female CEO and CFO, NWB Plc met the FTSE
Women Leaders Review recommendation that companies
should have at least one woman in the Chair or Senior
Independent Director roles on the Board and/or one woman
in the Chief Executive Officer or Finance Director role by
the end of 2025.
A copy of the boardroom inclusion policy is available at
natwestgroup.com.
Size and structure
NWH Ltd is the holding company for NatWest Group’s ring-
fenced operations, which include the Retail and Private Banking
businesses and certain aspects of the Commercial &
Institutional businesses. A common board structure is operated
such that directors of NWH Ltd are also directors of RBS plc
and NWB Plc. Known collectively as the NWH Sub Group, the
boards of these three entities meet concurrently.
An integral part of NatWest Group’s governance arrangements
is the appointment of three double independent non-executive
directors (DINEDs) to the Boards and Board Committees, of the
NWH Sub Group. They are Francesca Barnes, Graham Beale
and Ian Cormack.
The DINEDs are independent in two respects: (i) independent of
management as non-executives; and (ii) independent of the rest
of NatWest Group by virtue of their NWH Sub Group only
directorships.
The DINEDs play a critical role in NatWest Group’s ring-fencing
governance structure, and are responsible for exercising
appropriate oversight of the independence and effectiveness of
the NWH Sub Group’s governance arrangements, including the
ability of each board to take decisions independently. When the
Commercial & Institutional business was stood up during 2022,
the DINEDs considered and provided input on the changes
proposed specifically from a ring-fenced bank perspective,
ahead of NatWest Group plc and NWH Ltd Board discussions.
The DINEDs also have an enhanced role in managing any
conflicts which may arise between the interests of NWB Plc and
other members of NatWest Group.
All NWH Sub Group directors who are not DINEDs are directors
of NatWest Group plc. All DINEDs attend NatWest Group plc
Board and relevant Board Committee meetings as observers.
The governance arrangements for the Boards and Board
Committees of NatWest Group plc and the NWH Sub Group
have been designed to enable NatWest Group plc to exercise
appropriate oversight and to ensure that, as far as is
reasonably practicable, the NWH Sub Group
is able to take
decisions independently of the wider Group.
The Board is structured to ensure that the directors provide
NWB Plc with the appropriate balance of skills, experience,
knowledge and diversity, as well as independence. Given the
nature of NWH Group’s businesses, experience of banking and
financial services is clearly of benefit and the Board has a
number of directors with substantial experience in those areas.
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Annual Report and Accounts 2022
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In December the Nominations Committee, in conjunction with
the NWG Nominations & Governance Committee, reviewed,
and the Boards approved, an updated version of the NatWest
Group plc and NWH Sub Group Board skills matrix. A summary
view of the NatWest Group plc Board skills matrix is available
on page 93 of the NatWest Group plc 2022 Annual Report and
Accounts.
The Board skills matrix reflects directors’ self-assessment of the
skills and experience they bring to Board discussions, in line
with pre-determined criteria aligned to current and future
strategic priorities.
Board Committees also comprise directors with a variety of
skills and experience so that no undue reliance is placed on any
one individual.
The Senior Independent Director acts as a sounding board for
the Chairman and as an intermediary for other directors when
necessary.
Along with the Chairman and executive directors, the non-
executive directors are responsible for ensuring the Board fulfils
its responsibilities under its terms of reference.
The independent non-executive directors combine broad
business and commercial experience with independent and
objective judgment. They provide constructive challenge,
strategic guidance and specialist advice to the executive
directors and the executive management team and hold
management to account.
The balance between non-executive and executive directors
enables the Board to provide clear and effective leadership
across NWH Group’s business activities and ensures no one
individual or small group of individuals dominates the Board’s
decision-making.
The Board monitors the commitments of the Chairman and
directors and is satisfied that they are able to allocate sufficient
time to enable them to discharge their duties and
responsibilities effectively. Any additional external appointments
require prior Board approval.
Each new director receives a formal induction programme on
joining the Board, which is co-ordinated by the Chief
Governance Officer and Company Secretary and tailored to
suit the requirements of the individual concerned. This includes
visits to NatWest Group’s major businesses and functions and
meetings with directors and senior management. Meetings with
external auditors, counsel and stakeholders are also arranged
as appropriate.
Roisin Donnelly joined the Board on 1 October 2022 and the
Chief Governance Officer and Company Secretary worked
closely with Ms Donnelly to devise a comprehensive induction
programme which was tailored to her needs and flexible to
respond to areas of focus which emerged as the programme
progressed. Priorities included early engagement with key
stakeholders, upskilling on the financial services industry and
regulation, and developing an understanding of NatWest
Group’s structure and business operations, and its strategic
priorities.
All new directors receive a copy of the non-executive director
handbook. The handbook operates as a consolidated
governance support manual for directors of NatWest Group plc
and the NWH Sub Group, providing both new and current
directors with a single source of information relevant to their
role. It covers a range of topics including NatWest Group’s
corporate structure; the Board and Board Committee operating
model; Board policies and processes and a range of technical
guidance on relevant matters including directors’ duties,
conflicts of interest, and the UK Senior Managers and
Certification Regime.
The handbook forms part of a wider
library of reference materials available via an online resources
portal.
The Board is supported in its succession planning activities,
including the recruitment of non-executive directors, by the
Nominations Committee, which is responsible for considering
and making recommendations to the Board in respect of Board
appointments.
The Nominations Committee reviews the structure, size and
composition of the Board, and makes recommendations to the
Board in relation to any necessary changes, having regard to
the overall balance of skills, knowledge, experience and
diversity on the Board, the length of service of the Board as a
whole; and the requirement to keep membership regularly
refreshed. The Nominations Committee considers Board
composition and succession planning at least annually. The
NatWest Group plc Group Nominations and Governance
Committee also approves all appointments to the Board,
reflecting NWB Plc’s position as a subsidiary within NatWest
Group.
Evaluation
A review of the effectiveness of the Board, including the
Chairman, individual directors and Board Committees, is
conducted annually.
Progress following the 2021 evaluation
A number of actions were progressed during 2022 in response
to the findings of the 2021 external evaluation.
In December 2022 the directors noted the progress made
against the 2021 evaluation actions, which were consistent
across the NatWest Group plc and NWH Sub Group Boards and
are described in more detail on page 104 of the NatWest Group
plc 2022 Annual Report and Accounts.
2022 Performance evaluation
In 2022, the Board and Committee evaluation was internally
facilitated by the Chief Governance Officer and Company
Secretary.
Key findings, recommendations and actions were aligned
across NatWest Group plc and the NWH Sub Group and a
summary of the outcomes and actions arising from the 2022
evaluation can be found on page 104 to 105 of the NatWest
Group plc 2022 Annual Report and Accounts.
In December 2022, the Board agreed an action plan in
response to the evaluation recommendations and
implementation of the actions will be overseen by the
Nominations Committee during 2023.
The Chairman met each director individually to discuss their
own performance and continuing professional development and
establish whether each director continues to contribute
effectively to the company’s long-term sustainable success. The
Chairman also shared peer feedback provided by directors as
part of the evaluation process.
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Annual Report and Accounts 2022
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Separately, the Senior Independent Director, together with the
NatWest Group plc Senior Independent Director, sought
feedback on the Chairman’s performance from the non-
executive directors, executive directors and other key internal
and external stakeholders and discussed it with the Chairman.
This included peer feedback provided by directors as part of
the evaluation process.
Directors’ training and development is co-ordinated by the
Chief Governance Officer and Company Secretary.
Directors have access to a wide range of briefing and training
sessions and other professional development opportunities.
Internal training relevant to the business of NatWest Group is
also provided. Directors undertake the training they consider
necessary to assist them in carrying out their duties and
responsibilities. The non-executive directors discuss
professional development with the Chairman at least annually.
During 2022 the Board training programme covered supply
chain diversity, digital currencies, regulatory updates, the
Takeover Code, capital, financial crime, inside information,
climate, ring-fencing rules and a cyber risk ‘war game’.
In addition, directors broadened their knowledge and
understanding of the risks facing NatWest Group by
participating in a Board dinner discussion with executive
management on top and emerging risks. A number of directors
also accepted an invitation to the full Board to join meetings of
the Technology and Innovation Committee which covered
areas of broader interest, including a session on data strategy.
3. Director responsibilities
Accountability
All directors receive guidance on their statutory duties under
the Companies Act 2006 and are supported in the discharge of
their duties by the Chief Governance Officer and Company
Secretary.
Each director has a role profile which clearly articulates their
responsibilities and accountabilities and any additional
regulatory responsibilities and accountabilities are set out in
their statement of responsibilities. In 2022 the Chairman’s and
non-executive directors’ role profiles were refreshed and
updated to ensure they continue to accurately reflect their role
and responsibilities and are in line with best practice.
NatWest Group also produces and maintains a document called
‘Our Governance’ which sets out the governance, systems and
controls applicable to NatWest Group plc and the NWH Sub
Group. Our Governance is made available to all directors and is
reviewed and approved by the Board at least annually.
The directors’ conflicts of interest policy sets out procedures to
ensure that the Board’s management of conflicts of interest
and its powers for authorising certain conflicts are operating
effectively. This includes the management of conflicts that may
arise during Board decisions where the interests of NWB Plc
conflict with the interests of other members of NatWest Group.
Each director is required to notify the Board of any actual or
potential situational or transactional conflict of interest and to
update the Board with any changes to the facts and
circumstances surrounding such conflicts.
Situational conflicts can be authorised by the Board in
accordance with the Companies Act 2006 and the company’s
Articles of Association. The Board considers each request for
authorisation on a case by case basis and has the power to
impose conditions or limitations on any authorisation granted
as part of the process.
NWB Plc maintains a register of directors’ interests and
appointments, which is reviewed annually by the Board, and
there is discussion of directors’ conflicts in Board meetings, as
required.
The Board
The Board is the main decision-making forum for NWB Plc. The
Board is collectively responsible for the long-term success of
NWB Plc and the delivery of sustainable value to its
shareholders. The Board’s role is to provide leadership of NWB
Plc. It monitors and maintains the consistency of NWB Plc’s
activities within the strategic direction of NatWest Group and,
as appropriate, the strategies approved by NWH Ltd for each of
the businesses within the NWH Group. It reviews and approves
risk appetite for key risks in accordance with the NatWest
Group risk appetite framework (being a component part of the
NWH Ltd risk management framework); and it monitors
performance against risk appetite for NWB Plc. It approves
NWB Plc’s key financial objectives and keeps the capital and
liquidity positions of NWB Plc under review.
The Board’s terms of reference include a formal schedule of
matters specifically reserved for the Board’s decision and are
reviewed at least annually. An internal review confirmed the
Board had fulfilled its remit as set out in its terms of reference
during 2022.
The Board held eight scheduled meetings and three strategy
sessions with executive management during 2022.
At each scheduled Board meeting the directors receive reports
from the Chairman, Board Committee Chairs, CEO, CFO, Chief
Risk Officer and other members of the executive management
team, as appropriate. Business reviews from the CEOs of the
Retail Banking, Private Banking and Commercial & Institutional
businesses included updates on progress against strategy and
spotlights on current topics including the cost of living, Ukraine,
climate, unsecured lending growth in retail, and mortgages. In
addition to the business CEOs, a number of other senior
executives attended Board meetings throughout the year to
present reports to the Board. This provided the Board with an
opportunity to engage directly with management on key issues
and supported succession planning. The Board also welcomed
external presenters and advisers to Board meetings, who
provided useful insights and perspectives.
Board Committees
The Board has established a number of Board Committees with
particular responsibilities. The Audit, Risk, Performance &
Remuneration, and Nominations Committees of NWH Ltd
operate as committees of each of NWH Ltd, NWB Plc and RBS
plc, with meetings running concurrently.
The Audit Committee
comprises at least three independent
non-executive directors, two of whom are DINEDs. The
Committee assists the Board in discharging its responsibilities in
relation to the disclosure of financial affairs. It also reviews
accounting and financial reporting and regulatory compliance
practices of NWB Plc, NWB Plc’s system of standards of internal
controls, and monitors NWB Plc’s processes for internal audit
and external audit.
The Board Risk Committee
comprises at least four
independent non-executive directors, one of whom is the
Chairman of the Audit Committee and two of whom are
DINEDs. It provides oversight and advice to the Board in
relation to current and potential future risk exposures, future
risk profile, and the approval and effectiveness of the risk
management framework and (in conjunction with the Audit
Committee) internal controls required to manage risk.
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The Performance and Remuneration Committee (RemCo
)
comprises at least four independent non-executive directors,
one of whom is a DINED. It assists the NatWest Group plc
Performance and Remuneration Committee with the oversight
and implementation of NatWest Group’s remuneration policy
and also considers and makes recommendations on
remuneration arrangements for senior executives of NWB Plc.
The Nominations Committee
comprises the Chairman, Senior
Independent Director and at least three further independent
non-executive directors. It is responsible for assisting the Board
in the formal selection and appointment of directors. It reviews
the structure, size and composition of the Board, and
membership and chairmanship of Board Committees.
Executive Committee
The Executive Committee
comprises NWB Plc’s most senior
executives and supports the CEO to discharge her individual
accountabilities including matters relating to strategy,
financials, risk, customer and operational issues, and culture
and values.
Integrity of information
All directors receive accurate, timely and clear information on
all relevant matters and have access to the advice and services
of the Chief Governance Officer and Company Secretary. In
addition, all directors are able, if necessary, to obtain
independent professional advice at NWB Plc’s expense.
The Board and Committee paper template includes a section
for authors to explain how the proposal or update aligns with
NatWest Group’s purpose and a separate section for them to
include an assessment of the relevant stakeholder impacts for
the directors to consider. This aligns with the directors’ duties
under section 172(1) of the Companies Act 2006 and further
details on how the directors have complied with their section
172(1) duties can be found on page 3 of the Strategic report.
Directors are mindful that it is not always possible to achieve
an outcome which meets the expectations of all stakeholders
who may be impacted. For decisions which are particularly
challenging or complex, an optional page in the Board and
Committee paper template provides directors with further
information to support purposeful decision-making. This
additional page uses the Blueprint for Better Business
framework as a base and is aligned to NatWest Group’s
broader purpose framework.
4. Opportunity and risk
The role of the Board is to promote the long-term sustainable
success of NWB Plc.
The Board held three strategy sessions with the executive
management team in 2022. Within the context of a wider
discussion at NatWest Group level, this provided an opportunity
for the Board to assess opportunities and risks to the future
success of the business, the sustainability of the business model
and how its governance contributes to the delivery of its
strategy.
The Board reviews the effectiveness of the risk management
and internal control systems – including the nature and extent
of the risks taken in pursuit of strategic objectives. The Board
also reviews and approves risk appetite for NWB Plc’s principal
risks in accordance with the NatWest Group risk appetite
framework; monitors performance against risk appetite for
NWB Plc; and considers any material risks and approves, as
appropriate, recommended actions escalated by the Board Risk
Committee.
NWB Plc’s risk strategy is informed and shaped by an
understanding of the risk landscape including the principal risks
it takes in carrying out business activities as well as the risks
and uncertainties arising from the external economic, political
and regulatory environments.
NWB Plc operates within NatWest Group’s integrated
enterprise-wide risk management framework. This is centred
around the embedding of a strong risk culture and is designed
to ensure the tools and capability are in place to facilitate
sound risk management and decision-making. As part of the
enterprise-wide framework, NWB Plc complies with NatWest
Group’s risk appetite framework, which is approved annually
by the NatWest Group plc Board. NatWest Group’s risk appetite
is set in line with overall strategy. NWB Plc also complies with
the NatWest Group policy framework. The purpose of the policy
framework is to ensure that NatWest Group establishes and
maintains policies that adequately address the risks inherent in
its business activities.
Further information on NatWest Group’s integrated enterprise-
wide risk management framework including risk culture, risk
appetite, risk identification, risk measurement and risk
mitigation, as well as NWB Plc risk governance, can be found in
the risk and capital management section of this report (pages 9
to 79).
5. Remuneration
The NatWest Group remuneration policy provides a consistent
policy across all NatWest Group companies and ensures
compliance with regulatory requirements. The remuneration
policy is aligned with the business strategy, objectives, values
and long-term interests of NWB Plc. The policy supports a
culture where individuals are rewarded for delivering sustained
performance in line with risk appetite and for demonstrating
the right conduct and behaviours.
The RemCo reviews remuneration for executives of NWB Plc
and considers reports on the wider workforce including annual
pay outcomes and diversity information. The RemCo helps to
ensure that the remuneration policies, procedures and
practices being applied are appropriate for NWB Plc.
Executive remuneration structures incentivise individuals to
deliver sustainable performance based on strategic objectives
for NatWest Group and the relevant business area.
Performance is assessed against a balanced scorecard of
financial and non-financial measures and variable pay is
subject to deferral as well as malus and clawback provisions to
ensure rewards are justified in the long-term.
The approach to performance management provides clarity for
colleagues on how their contribution links to NatWest Group’s
purpose and colleagues are set goals across a balanced
scorecard of measures. NatWest Group continues to pay
colleagues fairly for the work they do, supported by simple and
transparent pay structures in line with industry best practices.
NatWest Group keeps policies and processes under review to
ensure it does so.
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This clarity and certainty on how pay is delivered helps to
improve colleagues’ financial wellbeing, which is a core priority
in NatWest Group’s wellbeing plans. In 2022 NatWest Group
made a number of interventions to support colleagues in
response to the cost of living crisis. In the UK, NatWest Group’s
rates of pay continue to exceed the Living Wage Foundation
benchmarks and it takes a similar approach across the major
hubs outside of the UK.
NatWest Group helps colleagues to have an awareness of the
financial and economic factors affecting its performance
through quarterly ‘Results Explained’ communications and
Workplace Live events with the Group CEO and Group CFO.
Further information on the remuneration policy, pay ratios and
employee share plans can be found in the Directors’
remuneration report of the NatWest Group plc 2022 Annual
Report and Accounts. Gender and Ethnicity Pay Gap
information can be found in the Strategic report section of the
NatWest Group plc 2022 Annual Report and Accounts and at
natwestgroup.com, along with the steps being taken to build an
inclusive and engaged workforce.
6. Stakeholder relationships and engagement
In February 2022 the Board approved its annual objectives and
confirmed the Board’s key stakeholder groups – customers,
investors, regulators, colleagues, communities and suppliers.
The Board’s agenda and engagement plans were structured to
enhance the Board’s understanding of these stakeholders’
views and interests. This in turn has informed Board discussions
and decision-making.
For further information on stakeholder engagement activities
undertaken within NatWest Group which impacted NWB Group,
see page 2 and pages 36 to 39 of the NatWest Group plc 2022
Annual Report and Accounts, and below under Additional
colleague-related disclosures (workforce engagement including
the Colleague Advisory Panel).
Engagement with Colleagues, Suppliers, Customers and
Others
For further details on the Board’s engagement with colleagues,
customers, suppliers and others, and how these stakeholders’
interests have influenced Board discussions and principal
decisions, see page 2 of the Strategic report which includes a
section 172(1) statement and signposts to further information
contained in the NatWest Group 2021 Annual Report and
Accounts.
Additional colleague-related disclosures
Informing and consulting colleagues
NatWest Group listens to colleagues and uses this insight to
attract, engage and retain the talent it needs for the future.
The colleague listening strategy contributes to a deeper
understanding of colleague sentiment and includes colleague
opinion surveys; a Colleague Advisory Panel (CAP) that
connects colleagues directly with the Board; the Colleague
Experience Squad, a group of colleagues who volunteer to
provide feedback on colleague products and services; and
Workplace, NatWest Group’s social media platform. NatWest
Group also tracks metrics and key performance indicators
which can be benchmarked with sector and high-performing
comparisons.
Over 48,000 colleagues (82%) participated in the September
2022 Our View survey. The 82% response rate was one of the
highest seen by NatWest Group in the last 10 years. In the face
of an unprecedented external environment, the results
remained strong and showed overall resilience. However lead
measures in culture, wellbeing and purpose, fell marginally,
with inclusion measures remaining stable and, despite the
challenging backdrop, the measure on building capability
improved. Across all categories, NatWest Group sits an average
of six percentage points above the Global Financial Services
Norm (GFSN) and two percentage points above the Global High
Performance Norm (GHPN).
Regular interactions with employee representatives such as
trade unions, elected employee bodies and works councils are
a vital means of transparency and engagement for NatWest
Group. These sessions are frequently used to discuss
developments and updates on the progress of strategic
priorities. NatWest Group is also committed to respecting
employees’ rights of freedom of association across all of its
business.
In addition, through the CAP established in 2018, colleagues
can engage directly with senior management and the Board on
topics which are important to them, thereby strengthening the
voice of colleagues in the Boardroom.
The CAP is made up of 28 colleagues who are self-nominated
or part of an employee representative body. In September 2022
Mike Rogers succeeded Lena Wilson as CAP Chair, and the
panel’s membership was refreshed. New members received
training on the role of the CAP and their responsibilities as
members. Although members were randomly selected, the
membership was cross-checked to ensure the panel was in the
main reflective of the bank’s population covering a variety of
business areas, organisational levels and locations, working
patterns and employee-led networks.
The CAP met with representatives from the Board twice in
2022 to discuss issues such as wellbeing, remuneration
(including executives and the wider workforce), NatWest Group
values, customers in vulnerable situations and future skills. The
CAP continues to be highly regarded by those who attend and
has proven to be an effective way of establishing two-way
dialogue between colleagues and Board members. The Board
discusses colleague feedback received from the CAP and the
CAP Chair provides feedback on this discussion to the Panel to
ensure a continuous feedback loop.
Disability Smart
NatWest Group makes workplace adjustments to support
colleagues with disabilities to succeed.
If a colleague becomes
disabled NatWest Group will, wherever possible, make
adjustments to support them in their existing role or re-deploy
them to a more suitable alternative role.
The NatWest Group Careers site gives comprehensive insights
into NatWest Group jobs, culture, locations and application
processes. It also hosts a variety of blog content to portray
stories of what it is like to work at NatWest Group. The
company also makes sure that candidates can easily request
adjustments or help to complete their application or
assessment.
Report of the directors continued
NWB Group
Annual Report and Accounts 2022
86
Internal control over financial reporting
The internal controls over financial reporting for NWB Group
are consistent with those at NatWest Group level. NWB Group
has designed and assessed the effectiveness of its internal
control over financial reporting as of 31 December 2022 based
on the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in the 2013
publication of ‘Internal Control – Integrated Framework’. Any
deficiencies identified are reported to NWB Plc’s Audit
Committee along with management’s remediation plans.
NatWest Group's auditors have audited the effectiveness of
NatWest Group's internal control over financial reporting and
have given an unqualified opinion.
Directors’ interests
Where directors of NWB Plc are also directors of NatWest
Group plc, their interests in the shares of the ultimate holding
company at 31 December 2022 are shown in the Corporate
governance, Annual report on remuneration section of the
NatWest Group plc 2022 Annual Report and Accounts. None of
the directors held an interest in the loan capital of the ultimate
holding company or in the shares or loan capital of NWB Plc or
any of its subsidiaries, during the period from 1 January 2021
to 17 February 2022.
Directors' indemnities
In terms of section 236 of the Companies Act 2006 (the
‘Companies Act’), Qualifying Third Party Indemnity Provisions
have been issued by the ultimate holding company to its
directors, members of NWB Plc’s Executive Committee,
individuals authorised by the PRA/FCA and certain directors
and/or officers of NatWest Group’s subsidiaries and trustees of
NatWest Group’s pension scheme.
Going concern
NWB Group’s business activities and financial position, the
factors likely to affect its future development and performance
and its objectives and policies in managing the financial risks to
which it is exposed, and its capital are discussed in the
Business review. NWB Group’s regulatory capital resources and
significant developments in 2022, and anticipated future
developments are detailed in the Capital, liquidity and funding
section on pages 61 to 68. This section also describes NWB
Group’s funding and liquidity profile, including changes in key
metrics and the build up of liquidity reserves.
The directors have prepared the financial statements on a
going concern basis after assessing the principal risks,
forecasts, projections and other relevant evidence over the
twelve months from the date the financial statements are
approved.
Political donations
During 2022, no political donations were made in the UK or EU,
nor any political expenditure incurred in the UK or EU.
Directors’ disclosure to auditors
Each of the directors at the date of approval of this report
confirms that:
(a) so far as the director is aware, there is no relevant audit
information of which NWB Plc’s auditors are unaware; and
(b) the director has taken all the steps that he/she ought to
have taken as a director to make himself/herself aware of any
relevant audit information and to establish that NWB Plc’s
auditors are aware of that information.
This confirmation is given and should be interpreted in
accordance with the provisions of section 418 of the
Companies Act.
Auditors
Ernst & Young LLP (EY LLP) are NWB Plc’s auditors and have
indicated their willingness to continue in office. A resolution to
re-appoint EY LLP as NWB Plc’s auditors will be proposed at
the forthcoming Annual General Meeting.
By order of the Board
Jan Cargill
Chief Governance Officer and Company Secretary
16 February 2023
National Westminster Bank Plc
Is registered in England No. 929027
Statement of directors’ responsibilities
NWB Group
Annual Report and Accounts 2022
87
This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 89 to 99.
The directors are responsible for the preparation of the Annual Report and Accounts. The directors are required to prepare Group
financial statements, and as permitted by the Companies Act 2006 have elected to prepare company financial statements, for each
financial year in accordance with UK adopted International Accounting Standards. They are responsible for preparing financial
statements that present fairly the financial position, financial performance and cash flows of NWB Group and NWB Plc. In
preparing those financial statements, the directors are required to:
select suitable accounting policies and then apply them consistently;
make judgments and estimates that are reasonable, relevant and reliable; and
state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained
in the financial statements.
prepare the financial statements on a going concern basis unless it is inappropriate to presume that the company and Group
will continue in business.
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the
financial position of NWB Group and to enable them to ensure that the Annual Report and Accounts complies with the Companies
Act 2006. They are also responsible for safeguarding the assets of NWB Plc and NWB Group and hence for taking reasonable steps
for the prevention and detection of fraud and other irregularities.
Under applicable law and regulations, the directors are also responsible for preparing a Strategic report and Directors’ report, that
comply with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and
financial information included on the company’s website.
The directors confirm that to the best of their knowledge:
the financial statements, prepared in accordance with UK adopted International Accounting Standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss of the Bank and the undertakings included in the consolidation taken
as a whole; and
the Strategic report and Directors’ report (incorporating the Financial review) includes a fair review of the development and
performance of the business and the position of the Bank and the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties that they face.
By order of the Board
Howard Davies
Alison Rose-Slade DBE
Katie Murray
Chairman
Chief Executive Officer
Chief Financial Officer
16 February 2023
Board of directors
Chairman
Executive directors
Non-executive directors
Howard Davies
Alison Rose-Slade DBE
Katie Murray
Francesca Barnes
Graham Beale
Ian Cormack
Roisin Donnelly
Patrick Flynn
Morten Friis
Yasmin Jetha
Mike Rogers
Mark Seligman
Lena Wilson
Financial statements
NWB Group
Annual Report and Accounts 2022
88
Page
Independent auditor’s report
89
Consolidated income statement
100
Consolidated statement of comprehensive income
100
Balance sheet
101
Statement of changes in equity
102
Cash flow statement
104
Accounting policies
105
Notes to the financial statements
1
Net interest income
112
2
Non-interest income
112
3
Operating expenses
113
4
Segmental analysis
115
5
Pensions
118
6
Auditor’s remuneration
123
7
Tax
123
8
Profit/(loss) dealt with in the accounts of the Bank
125
9
Financial instruments - classification
126
10
Financial instruments - valuation
132
11
Financial instruments - maturity analysis
139
12
Derivatives
142
13
Loan impairment provisions
149
14
Investment in Group undertakings
150
15
Other financial assets
151
16
Other assets
151
17
Intangible assets
152
18
Property, plant and equipment
153
19
Other financial liabilities
155
20
Subordinated liabilities
156
21
Other liabilities
157
22
Share capital and reserves
158
23
Structured entities
159
24
Asset transfers
160
25
Capital resources
161
26
Memorandum items
162
27
Analysis of the net investment in business interests and intangible assets
165
28
Analysis of changes in financing during the year
165
29
Analysis of cash and cash equivalents
165
30
Directors’ and key management remuneration
166
31
Transactions with directors and key management
166
32
Related parties
167
33
Ultimate holding company
167
34
Post balance sheet events
168
35
Related undertakings
168
Independent auditors’ report to the members of
National Westminster Bank Plc
NatWest Group
Annual Report and Accounts 2022
89
Opinion
In our opinion:
the financial statements of National Westminster Bank Plc’s (the ‘Bank’) and its subsidiaries (together the ‘Group’) give a true
and fair view of the state of the Group’s and of the Bank’s affairs as at 31 December 2022 and of the Group’s profit for the year
then ended;
the Group financial statements have been properly prepared in accordance with UK adopted international accounting
standards;
the Bank financial statements have been properly prepared in accordance with UK adopted international accounting standards
as applied in accordance with section 408 of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements (see table below) of the Bank and the Group for the year ended 31 December 2022
which comprise:
Group
Bank
Consolidated balance sheet as at 31 December 2022;
Consolidated income statement for the year then ended;
Consolidated statement of comprehensive income for the year
then ended;
Consolidated statement of changes in equity for the year then
ended;
Consolidated cash flow statement for the year then ended;
Accounting policies;
Related Notes 1 to 35 to the financial statements; and
Risk and capital management section of the Strategic report
identified as ‘audited’.
Balance sheet as at 31 December 2022;
Statement of changes in equity for the year then
ended;
Cash flow statement for the year then ended; and
Related Notes 1 to 11 to the financial statements
including a summary of the significant accounting
policies.
The financial reporting framework that has been applied in their preparation is applicable law and UK adopted international
accounting standards, and as regards to the group financial statements, as applied in accordance with section 408 of the
Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements
section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Group and Parent Company in accordance with the ethical requirements that are relevant to our audit
of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have
fulfilled our other ethical responsibilities in accordance with these requirements.
The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Parent Company and we
remain independent of the Group and the Parent Company in conducting the audit.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the
preparation of the financial statements is appropriate. Our evaluation of the directors’ assessment of the Group and Bank’s ability
to continue to adopt the going concern basis of accounting included:
In conjunction with our walkthrough of the Group’s financial close process, we confirmed our understanding of management’s
Going Concern assessment process and also engaged with management early to ensure all key factors were considered in
their assessment;
We evaluated management’s going concern assessment which included reviewing their evaluation of long-term business and
strategic plans, capital adequacy, liquidity and funding positions. It also assessed these positions considering internal stress
tests which included consideration of principal and emerging risks. The Group’s risk profile and risk management practices
were considered including credit risk, market risk, compliance and conduct risk, and operational risk;
We evaluated management’s assessment by considering the Group’s ability to continue in operation and meets its liabilities
in
different scenarios including the impact of the Group’s strategic plans, and the current uncertain geopolitical and economic
outlook. We used economic specialists in assessing the macroeconomic assumptions in the forecast through benchmarking to
institutional forecasts, HMT consensus and peer comparative economic forecasts;
Considered the results of the Bank’s stress testing and Bank of England 2022 solvency stress test
;
and
We reviewed the Group’s going concern disclosures included in the annual report in order to assess that the disclosures were
appropriate and in conformity with the reporting standards.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the Group and Bank’s ability to continue as a going concern over the
twelve months from the date when the financial statements are authorised for issue.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of
this report. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the
Group’s ability to continue as a going concern.
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2022
90
An overview of the scope of the Bank and group audits
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope
for each company within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements.
We take into account the size and risk profile of the component and its activities, the organisation of the Group and effectiveness of
group wide controls, changes in the business environment and other factors such as recent internal audit results when assessing
the level of work to be performed at each component. The scoping below is consistent with the prior year.
In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative
coverage of significant accounts in the financial statements, of the five reporting components of the Group, we selected four
components based on size and risk, which represent the principal business units within the Group.
Component
Scope
Key locations
Retail Banking
Full
United Kingdom
Commercial Banking
Full
United Kingdom
Private Banking
Specific
United Kingdom
Central items and other*
Full
United Kingdom, India
*including Services, and Treasury
The table below illustrates the coverage obtained from the work performed by our audit teams. We considered total assets, total
equity and total income to verify we had appropriate overall coverage.
Full scope
(1)
Specific scope
(2)
Other procedures
(3)
Total
Total assets
87%
13%
0%
100%
Total equity
87%
13%
0%
100%
Total income
93%
7%
0%
100%
(1)
Full scope: audit procedures on all significant accounts.
(2)
Specific scope: audit procedures on selected accounts.
(3)
Other procedures: considered in analytical procedures and specified procedures, as appropriate.
The audit scope of the specific scope component may not have included testing of all significant accounts within the component,
however, the testing will have contributed to the total coverage of significant accounts tested for the overall Group.
Involvement with component teams
In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of
the components by us, as the primary audit engagement team, or by component auditors from other EY global network firms
operating under our instruction.
The primary audit engagement team interacted regularly with the component audit teams where appropriate throughout the
course of the audit, which included holding planning meetings, maintaining regular communications on the status of the audits,
reviewing key working papers and taking responsibility for the scope and direction of the audit process. The primary audit team
continued to follow a programme of oversight visits that has been designed to ensure that the Senior Statutory Auditor, or another
Group audit partner, has ongoing interaction with all full scope and specific scope locations outside the United Kingdom. The
primary team interacted regularly with the component teams and maintained a continuous and open dialogue with component
teams, as well as holding formal closing meetings quarterly, to ensure that the primary team were fully aware of their progress
and results of their procedures. The primary team also reviewed key working papers and were responsible for the scope and
direction of the audit process. This, together with the additional procedures at Group level, gave us appropriate evidence for our
opinion on the Group financial statements.
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2022
91
Climate change
Stakeholders are increasingly interested in how climate change will impact the Group. The Group has determined that the most
significant future impacts from climate change on its operations will be from credit risk, operational risk, reputational risk, conduct
risk and regulatory compliance risk. These are explained in the required Task Force for Climate related Financial Disclosures in the
Strategic Report, and in the Climate Risk section within the Risk and capital management section. The Group has also explained
their climate commitments in the Strategic Report. All of these disclosures form part of the “Other information”, rather than the
audited financial statements. Our procedures on these unaudited disclosures therefore consisted solely of considering whether they
are materially inconsistent with the financial statements or our knowledge obtained in the course of the audit or otherwise appear
to be materially misstated, in line with our responsibilities on “Other information”.
The Group has explained in the Accounting Policy note how they have reflected the impact of climate change in their financial
statements, and the significant judgements and estimates relating to climate change. These disclosures also explain the uncertainty
regarding policy response, including the effect of wider geo-political uncertainty on governmental ambitions regarding climate
transition and the effect of decarbonisation on wider economic growth and customer behaviours. Many of the impacts arising will
be longer term in nature, with an inherent level of uncertainty, and have limited effect on accounting judgments and estimates for
the current period under the requirements of UK adopted international accounting standards. The Group has also explained within
the Accounting Policies, their approach to quantifying the impact of
climate transition policy on macroeconomic factors in the
future years, and the limitations on the ability to make a reliable estimate for 2022 reporting.
Our audit effort in considering the impact of climate change on the financial statements was focused on evaluating the Group’s
assessment of the impact of climate risk, their climate commitments and the significant judgements and estimates disclosed in the
Accounting Policies, and whether these have been appropriately reflected in the asset values where these are impacted by future
cash flows, and in the timing and nature of liabilities recognised following the requirements of UK adopted international accounting
standards. As part of this evaluation, we performed our own risk assessment, supported by our climate change specialists, to
determine the risk of material misstatement in the financial statements from climate change which needed to be considered in our
audit. We also evaluated the Directors’ considerations of climate change risks in their assessment of going concern and viability
and associated disclosures. Where considerations of climate change were relevant to our assessment of going concern, these are
described above.
Based on our work we have considered the impact of climate change on the financial statements to impact certain key audit
matters. Details of our procedures and findings are included in our explanation of key audit matters below.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of
resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit
of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2022
92
Risk
Our response to the risk
Expected Credit Loss Provisions
At 31 December 2022 the Group
reported total gross loans of £311.9
billion (2021: £296 billion) and £2.6
billion of expected credit losses (ECL)
(2021: £2.5 billion).
Management’s judgments and estimates
are especially subjective due to
significant uncertainty associated with
the assumptions used. These include the
current uncertain geopolitical and
macroeconomic outlook and the impact
of climate change which were both
considered in our risk assessment.
Aspects with increased complexity in
respect of the timing and measurement
of ECL include:
Staging -
Allocation of assets to stage
1, 2, or 3 on a timely basis using
criteria in accordance with IFRS 9;
Model estimations -
Accounting
interpretations, modelling
assumptions and data used to build
and run the Probability of Default
(‘PD’), Loss Given Default (‘LGD’)
and Exposure at Default (‘EAD’)
models that calculate the ECL;
Economic scenarios -
Inputs,
assumptions and weightings used to
estimate the impact of multiple
economic scenarios particularly
those influenced by the current
geopolitical and economic outlook
including any changes to scenarios
required through 31 December 2022;
Adjustments -
Appropriateness,
completeness and valuation of model
adjustments which represent
approximately 12% of total ECL
including adjustments due to the
ongoing geopolitical and economic
uncertainty, and the identification of
vulnerable customers which
increases the risk of management
override; and
Individual provisions -
Measurement
of individual provisions including the
assessment of multiple scenarios
considering the impact of the current
geopolitical and economic outlook on
exit strategies, collateral valuations
and time to collect.
Controls testing
- We evaluated the design and operating effectiveness of controls
across the processes relevant to ECL, including the judgments and estimates noted.
These controls, among others, included those over:
the allocation of assets into stages including management’s monitoring of stage
effectiveness;
model governance including monitoring and model validation;
data accuracy and completeness;
credit monitoring;
multiple economic scenarios;
the governance and review of post-model adjustments;
individual provisions; and
production of journal entries and disclosures.
In evaluating the governance process, we observed the executive finance and risk
committee meetings where the inputs, assumptions and adjustments to the ECL
were discussed and approved, among other procedures.
Overall assessment
- We performed an overall assessment of the ECL provision
levels by stage to determine if they were reasonable by considering the overall
credit quality of the Group’s portfolios, risk profile, impact of the current geopolitical
and economic outlook, and climate change on the Group’s customers We
performed peer benchmarking where available to assess overall staging and
provision coverage levels. We also performed sensitivity analysis to assess the
impact of changing assumptions on the ECL provision.
Based on our assessment of the key judgments we used EY specialists to support
the audit team in the areas of economics, modelling and collateral and business
valuations.
Staging
- We evaluated the criteria used to allocate a financial asset to stage 1, 2 or
3 in accordance with IFRS 9; this included peer benchmarking to assess staging
levels. We recalculated the assets in stage 1, 2 and 3 to assess if they were
allocated to the appropriate stage and performed sensitivity analysis to assess the
impact of different criteria on the ECL and also considered the impact of performing
collective staging downgrades to industries and geographic regions particularly
impacted by climate change.
To test credit monitoring which drives the probability of default estimates used in
the staging calculation, we recalculated the risk ratings for a sample of performing
loans and focused our testing on high risk industries, such as commercial real
estate and leisure. We also assessed the timing of the annual review performed by
management on each wholesale loan exposure in our sample to evaluate whether it
appropriately considered risk factors by considering independent publicly available
information.
Model estimations
- We performed a risk assessment on all models involved in the
ECL calculation to select a sample of models to test, which included new models
implemented in the year. We involved EY modelling specialists to assist us to test
this sample of ECL models by testing the assumptions, inputs and formulae used.
This included a combination of assessing the appropriateness of model design and
formulae, alternative modelling techniques, recalculating the PD, LGD and EAD, and
model implementation. We also considered the results of the Group’s internal model
validation results. We performed an assessment of the extent to which model
methodologies developed using historic experience were able to respond to the
current economic conditions, including Consumer Price Index and Bank of England
base rates. Where we identified model limitations, we tested the extent to which
these effects have been appropriately captured in Post Model Adjustments.
To evaluate data quality, we agreed a sample of ECL calculation data points to
source systems, including balance sheet date data used to run the models and
historic loss data to monitor models. We also tested the ECL data points from the
calculation engine through to the general ledger and disclosures.
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2022
93
Risk
Our response to the risk
Expected Credit Loss Provisions continued
Economic scenarios
- We involved EY economic specialists to assist us in evaluating
the base case and alternative economic scenarios, including evaluating probability
weights and considering contrary evidence by comparing these to other scenarios
from a variety of external sources. This assessment included the latest
developments related to the current geopolitical and economic outlook at 31
December 2022.
We assessed whether forecasted macroeconomic variables, such
as GDP, unemployment rate, Consumer Price Index, Bank of England base rates
and the House Price Index were complete and appropriate. With the support of our
modelling specialists we evaluated the correlation and translation of the
macroeconomic factors to the ECL.
Post Model Adjustments (PMAs)
- We evaluated and tested the appropriateness,
adequacy and completeness of PMAs held at year end, including those applied in
response to the current geopolitical and economic outlook and the impact of certain
economic factors. This included challenging the identification of retail customers
vulnerable to price and rate increases and the identification of commercial sub-
sectors more susceptible to inflation and supply chain issues as well as the method
by which those PMAs were measured. We have also challenged those PMAs which
continued to be applied as a result of COVID-19 related to recovery periods and the
associated debt issued to borrowers that obtained government supported loans
during Covid-19. With our modelling specialists, we assessed the risk of bias and the
completeness of these adjustments by considering the data, judgments,
methodology, sensitivities, and governance of these adjustments as well as
considering model shortcomings.
Individual provisions
- We recalculated and challenged the scenarios, assumptions
and cash flows for a sample of individual provisions including the alternative
scenarios and evaluating probability weights assigned, involving EY valuation
specialists where appropriate.
The sample was based on a number of factors,
including higher risk sectors identified with reference to external sources, such as
commercial real estate, agriculture, oil and gas, mining, retail, leisure, and
materiality. We considered the impact of the current geopolitical and economic
outlook and climate change had on collateral valuations and time to collect as well
as whether planned exit strategies remained viable.
Disclosure
- We tested the data flows used to populate the disclosures and
assessed the adequacy of disclosures for compliance with the accounting
standards and regulatory considerations.
Key observations communicated to the NatWest Holdings (NWH) Group Audit Committee (1)
We are satisfied that provisions for the impairment of loans were reasonable and recognised in accordance with IFRS 9. We
highlighted the following matters to the NWH Group Audit Committee:
Overall provision levels were reasonable which also considered available peer information and our understanding of the
credit environment;
Control deficiencies were identified in the processes used to calculate the ECL for which compensating controls were
identified to mitigate a risk of material misstatement;
Our testing of models and model assumptions identified some instances of over and under estimation. We aggregated these
differences and were satisfied that the overall estimate recorded was reasonable;
The post-model adjustments recorded were within a reasonable range to reflect risk in the portfolios;
We recalculated the staging of retail and wholesale exposures in material portfolios and noted no material differences. We
also performed sensitivity analysis on the staging criteria and noted that substantial changes would be needed to the criteria
to result in a material difference; and
For individually assessed impairments, in a few instances we identified judgmental differences in respect of the extent of the
impairment identified, however, none of these differences, individually or in aggregate, were considered material.
Relevant references in the Annual Report and Accounts
Credit Risk section of the Risk and capital management section
Accounting policies
Note 13 to the financial statements
(1)
NWH Audit Committee covers the ring-fenced bank legal entities of NatWest Group, including the Group.
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2022
94
Risk
Our response to the risk
Impairment of investments in group undertakings and recognition of deferred tax assets in the Bank’s financial statements
At 31 December 2022, the Bank has
reported deferred tax assets of £1.0
billion (2021: £1.1 billion) and
investments in group undertakings of
£2.0 billion (2021: £2.3 billion).
The recognition and carrying value of
investments in group undertakings in the
Bank’s financial statements are based
on estimates of future profitability, which
require significant management
judgment and include the risk of
management bias. The recognition of
deferred tax also considers the future
profit forecasts of the legal entities as
well as interpretation of recent changes
to tax rates and laws.
The judgments and assumptions used
are especially complex and subjective
due to their forward-looking nature and
inherent uncertainties. These include:
Revenue forecasts
which are
inherently challenging due to the
current uncertain geopolitical and
economic outlook including the
impacts of climate change which are
driven by delivery of the Group’s
Strategy;
Cost forecasts
given the strategic
ambitions of the bank and potential
headwinds from inflation and supply
chain issues;
Macroeconomic and model
assumptions
used in the forecasting
and valuation assessments (discount
rates, growth rates, macroeconomic
assumptions, etc.) including the
uncertain geopolitical and economic
outlook and the impact of climate
change over an extended period; and
Disclosure
adequacy including key
assumptions, the sensitivity of
changes to these assumptions as
well as an explanation of the
impairment testing performed.
Controls testing
: We evaluated the design and operating effectiveness of controls
over the preparation and review of the forecasts, and the significant assumptions
(such as discount rate and long-term growth rate) inputs, calculations,
methodologies and judgments used in the value-in-use model. This included testing
controls over the selection of macroeconomic assumptions in addition to controls
over the preparation and review of the revenue and cost projections. In evaluating
the governance processes we reviewed the Board meeting materials and minutes
where forecasts were discussed and approved, and we observed the committee
meetings where the value-in-use model and outcomes were discussed and
approved.
Macroeconomic and model assumptions
: With the support of our internal economic
specialists, we tested whether macroeconomic assumptions, used in the Group’s
forecasts were reasonable by comparing these to other scenarios from a variety of
external sources.
We evaluated how the discount rates and long-term growth rates
used by management compared to our ranges which were developed using peer
practice, external market data and calculations performed by our valuation
specialists. We also assessed changes to valuation methodology and benchmarked
this against industry practice with the assistance of our valuation specialists.
Revenue forecasts
: We evaluated the underlying business strategies, comparing to
expected market trends and considering anticipated balance sheet growth. We
obtained an understanding of the Group’s strategy including their consideration of
the impact of climate change, and considered its expected impact on the
forecasts
and
the extent to which decisions had been factored
into
the
forecasts,
where appropriate,
in accordance with the relevant accounting
standards.
We
also
inspected the findings from the review
performed by
management including their own sensitivity analysis of the forecasts.
Cost forecasts
: We tested how previous management forecasts, including the impact
of cost reduction programmes, compared to actual results to evaluate the accuracy
of the forecasting process. We also tested the reasonableness of key performance
indicators against peers with the help of our valuation specialists to assess the
reasonableness of the Group’s cost forecast.
Deferred Tax Model: With the support of our taxation specialists, we reviewed the
deferred tax model including an assessment of the time horizon used for the
recoverability of losses and other temporary differences.
Sensitivity analysis
: We evaluated how management considered alternative
assumptions and performed our own sensitivity and scenario analyses on certain
assumptions such as cost and revenue forecasts, discount rate, long-term growth
rate and other key performance indicators on both the detailed forecasts and on an
overall basis.
Disclosure
: We evaluated the adequacy of disclosures in the financial statements
including the appropriateness of assumptions and sensitivities disclosed. We tested
the data and calculations included in the disclosures.
Key observations communicated to the NWH Group Audit Committee
We are satisfied that management methodologies, judgments and assumptions supporting the carrying value of deferred tax
assets and investments in group undertakings
in the Bank’s financial statements, were reasonable and in accordance with IFRS.
We highlighted the following matters to the NWH Group Audit Committee:
There is inherent uncertainty in predicting revenue and costs over the five-year forecast period, particularly with respect to
the impact of the current macro-economic environment on the ability of the bank to achieve strategic objectives, the impact
of regulatory and climate change developments, and the impact of competition and disruption in banking business models
over an extended period.
Control deficiencies were identified in the determination of the value in use for which compensating controls were identified
to mitigate the risk of material misstatement;
Management impaired the Bank’s investment in Ulster Bank Limited. The sensitivity analyses we reviewed, and our
independent procedures supported these assessments.
We are satisfied that management has exercised appropriate judgement in assessing the extent to which it is probable that
there will be future taxable profits to recover deferred tax assets.
Relevant references in the Annual Report and Accounts
Accounting policies
Note 7 and Note 8 to the financial statements and parent company financial statements.
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2022
95
Risk
Our response to the risk
Provisions for customer redress, litigation and other regulatory matters
At 31 December 2022, the Group has
reported £0.6 billion (2021: £0.6 billion) of
provisions for liabilities and charges,
including £0.3 billion (2021: £0.3 billion) for
customer redress, litigation and other
regulatory matters as detailed in Note 20 of
the financial statements.
Regulatory scrutiny and the continued
litigious environment give rise to a high level
of management judgment in determining
appropriate provisions and disclosures for
specific customer redress, litigation and other
regulatory matters. Management judgment is
needed to determine whether a present
obligation exists and a provision should be
recorded at 31 December 2022 in
accordance with the accounting criteria set
out under IAS 37.
The most significant areas of judgment are:
Judgment and risk of management bias
-
Auditing the adequacy of these provisions
is complex because judgment is involved
in the selection and use of assumptions in
the estimation of specific customer
redress, litigation and other regulatory
matters. There is also a risk of
management bias in the determination of
whether an outflow in respect of
identified material customer redress,
litigation and other regulatory matters is
probable and can be estimated reliably;
and
Disclosure
- Judgment is required to
assess the adequacy of disclosures of
provision and contingent liabilities given
the underlying estimation uncertainty in
the provisions, and other uncertainties
and assumptions.
Controls testing
: We evaluated the design and operating effectiveness of
controls over the identification, estimation, monitoring and disclosure of
provisions and other uncertainties and assumptions related to customer
redress, litigation and other regulatory matters considering the potential for
management override of controls. The controls tested, among others, included
those to identify and monitor claims, determine when a provision is required
and to ensure the completeness and accuracy of data used to estimate
provisions.
Examination of regulatory correspondence
: We examined the relevant
regulatory and legal correspondence to assess developments in certain cases.
We also considered regulatory developments to identify actual or possible non-
compliance with laws and regulations that might have a material effect on the
financial statements.
For cases which were settled during the period, we
compared the actual outflows with the provision that had been recorded,
considered whether further risk existed, and evaluated the level of disclosures
provided.
Inquiry of legal counsel
: For significant legal matters, we received confirmations
from the Group’s external legal counsel to evaluate the likelihood of the
obligation and management’s estimate of the outflow at year-end. We also
conducted inquiries with internal legal counsel over the existence of the legal
obligations and related provision. We performed a test for unrecorded
provisions to assess if there were cases not considered in the provision estimate
by assessing against external legal confirmations and discussing with internal
counsel.
Testing of assumptions
: Where appropriate, we involved our conduct risk and
forensics specialists to assist us in evaluating the provision for specific customer
redress, litigation and other regulatory matters. We tested the underlying data
and assumptions used in the determination of the provisions recorded, including
expected claim rates, legal costs, and the timing of settlement. We evaluated
the accuracy of management’s historical estimates by comparing the actual
settlement to the provision and considered peer bank settlement in similar
cases. We assessed the reasonableness of the assumptions used by
management by comparing to the results of our independently performed
benchmarking and sensitivity analysis. We also developed our own range of
reasonable alternative estimates and compared them to management’s
provision. We tested utilisations of remaining provisions during the year and
assessed the sufficiency of the remaining provisions yet to be paid for specific
customer redress, litigation and other regulatory matters.
Disclosure
: We evaluated the disclosures provided on customer redress,
litigation and other regulatory matters to assess whether they complied with
accounting standards.
Key observations communicated to the NWH Group Audit Committee
We are satisfied that provisions for customer redress, litigation and other regulatory matters are reasonable and recognised in
accordance with IFRS. We concurred with the recognition, measurement and level of disclosures of provisions and contingent
liabilities relating to customer redress, litigation and other regulatory matters. We did not identify any material unrecorded
provisions. We highlighted the following matters to the NWH Group Audit Committee:
The level of provisions by their nature incorporates significant judgments to be made and may change as a result of future
developments; and
Continued vigilance in assessing conduct risks from the impact of cost-of-living crisis and Consumer Duty Act, which may not
manifest until after current economic conditions take effect or implementation deadline, respectively.
Relevant references in the Annual Report and Accounts
Accounting policies
Note 20 and 25 to the financial statements
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2022
96
Risk
Our response to the risk
Pension valuation and net pension balance
The Group operates a number of defined
benefit schemes which in aggregate are
significant in the context of the overall
balance sheet. At 31 December 2022, the
Group reported a net pension liability of £28
million (2021: £41 million) comprising £7
million of schemes in surplus and £35 million
of schemes in deficit (2021: £7 million and
£48 million respectively). The net pension
balance is sensitive to changes in the key
judgments and estimates, including the
effects of the current uncertain geopolitical
and economic outlook and associated
market volatility, which include:
Assumptions
-
Actuarial assumptions and
inputs including discount rate, inflation,
pension payment and longevity to
determine the valuation of retirement
benefit liabilities;
Valuations
-
Pricing inputs and
calibrations for illiquid or complex model-
dependent valuations of certain
investments held by the schemes;
Funding
– the pension schemes have
adequate liquidity to cover for any
shortfall in derivative asset prices as a
result of current economic conditions;
and
Augmentation cap
-
Quantification of
trustee’s rights to unilaterally augment
benefits (Augmentation cap) to determine
the recognition of surplus.
Controls testing
-
We evaluated the design and operating effectiveness of
controls over the actuarial assumptions setting process, the data inputs used in
the actuarial calculation and the measurement of the fair value of the schemes’
assets.
Assumptions
-
We involved our actuarial specialists to evaluate the actuarial
assumptions by comparing them to independently obtained third party sources
and market practice. We assessed the impact on pension liabilities due to
changes in financial, demographic and longevity assumptions over the year and
whether these were supported by objective external evidence and rationales,
including the effects of current uncertain geopolitical and economic outlook,
including market volatility.
Valuations
- We tested the fair value of scheme assets by independently
calculating the fair value for a sample of the assets held. Our sample included
cash, equity and debt instruments, derivative financial instruments and illiquid
assets. We involved our valuation specialists to assess the appropriateness of
management’s valuation methodology including the judgments made in
determining significant assumptions used in the valuation of complex and illiquid
pension assets, including the effects of current uncertain geopolitical and
economic outlook, including market volatility. We independently re-priced illiquid
and complex assets that had been valued using unobservable market inputs,
using alternative pricing sources where available, to evaluate management’s
valuations.
Funding –
in the performance of our procedures we consider whether the
pension schemes have adequate funding to cover for any shortfall in derivative
asset prices.
Augmentation cap and equalisation adjustments
- We involved our actuarial
specialists to test the estimation of the augmentation cap including the inputs
used in the calculation. We also assessed the methodology and judgments made
in calculating these estimates and the associated accounting treatment in
accordance with IAS 19 and IFRIC 14.
Disclosure
-
We assessed the adequacy of the disclosures made in the financial
statements, including the appropriateness of the assumptions, sensitivities and
disclosures over investment strategy and risk management.
Key observations communicated to the NWH Group Audit Committee
We are satisfied that the valuation and disclosure of the net pension balance are reasonable and in accordance with IFRS. We
highlighted the following matters to the NWH Group Audit Committee:
Our benchmarking of key actuarial assumptions including the discount rate, inflation, longevity and pension payments
concluded that assumptions were within a reasonable range;
No material differences were identified through our independent valuation testing for a sample of pension assets; and
Management’s estimate of the impact of the augmentation cap was materially consistent with our independent estimate
using our own model.
Relevant references in the Annual Report and Accounts
Accounting policies
Note 5 to the financial statements
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2022
97
Risk
Our response to the risk
IT access management
The IT environment is complex and
pervasive to the operations of the Group
due to the large volume of transactions
processed in numerous locations on a daily
basis with extensive reliance on automated
controls.
Appropriate IT controls are
required to ensure that applications process
data as expected and that changes are
made in an appropriate manner. This risk is
also impacted by the greater dependency
on third parties, increasing use of cloud
platforms, decommissioning of legacy
systems, and migration to new systems.
Such controls contribute to mitigating the
risk of potential fraud or errors as a result
of changes to applications and data.
The Group has implemented user access
management controls across IT applications,
databases and operating systems. We have
identified user access-related deficiencies in
the past and whilst the number of
deficiencies has reduced year over year, the
risk of inappropriate access remains.
We evaluated the design and operating effectiveness of IT general controls over
the applications, operating systems and databases that are relevant to financial
reporting.
Controls testing
We tested user access by assessing the controls in place for in-scope
applications, in particular testing the addition and periodic recertification of
users’ access. We continue to focus on key controls enforced by the Group’s
user access management tools, including the completeness of user data,
automated identification of movers and leavers and the adequacy of the overall
control environment. During the current audit period, the Identity and Access
Management tool used in NatWest Markets was decommissioned and replaced
with the Group’s strategic tool.
We tested the governance process around the
migration and onboarding of users to the Identity and Access Management tool
and noted no deficiencies, with the suite of access management controls
supported by the two tools remaining consistent throughout the year.
A number of systems are outsourced to third party service providers. For these
systems, we tested IT general controls through evaluating the relevant Service
Organisation Controls (“SOC”) reports (where available). This included
assessing the timing of the reporting, the controls tested by the service auditor
and whether they address relevant IT risks. We also tested required
complementary user entity controls performed by management.
Where a SOC
report was not available we identified and reviewed compensating business
controls to address risks to financial reporting. Several systems have been
migrated to a cloud-hosted infrastructure model, however access management
processes and controls remained in-house and they
formed part of our testing.
Where control deficiencies were identified, we tested remediation activities
performed by management and compensating controls in place and assessed
what additional testing procedures were necessary to mitigate any residual risk.
We also performed a further analysis of access management deficiencies
identified by EY, Management and Internal Audit to revalidate our overall
approach to access management testing.
Key observations communicated to the NWH Group Audit Committee
We are satisfied that IT controls impacting financial reporting are designed and operating effectively. The following matters were
reported to the NWH Group Audit Committee:
We have seen an overall reduction in the number of discrete IT control deficiencies identified compared to prior year;
Improvements were made to further standardise access management processes and controls across the Group, which was
one of the drivers for the reduced number of deficiencies; and
Particular attention should continue to be paid to controls over user access management including ensuring the
completeness and accuracy of the data used to perform access controls. Where issues were noted in relation to access
management, these were remediated by year end or mitigated by compensating controls. We performed additional testing in
response to deficiencies identified, where required.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the
audit and in forming our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the
economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of
our audit procedures.
We determined materiality for the Group to be £267 million (2021: £136 million), which is 5% (2021: 5%) of profit before tax of the
Group of £5,114 million (2021: £3,883 million) adjusted for non-recurring conduct and litigation costs. We believe removing these
non-recurring charges reflects the most useful measure for users of the financial statements and is consistent with the prior
year.
The 5% basis used for Group materiality is consistent with the wider industry and is the standard for listed and regulated
entities.
We determined materiality for the Bank to be £182 million (2021: £136 million) which is 1% (2021: 0.7%) of equity of the Bank.
We
believe this reflects the most useful measure for users of the financial statements as the Bank’s primary purpose is to act as a
holding company with investments in the Group’s subsidiaries, not to generate operating profits and therefore a profit based
measure is not relevant.
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2022
98
Performance materiality
The application of materiality at the individual account or balance level.
It is set at an amount to reduce to an appropriately low
level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgment was
that performance materiality was 75% (2021: 75%) of our planning materiality, namely £200 million (2021: £102 million). Audit work
at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken
based on a percentage of total performance materiality. The performance materiality set for each component is based on the
relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that
component.
In the current year, the range of performance materiality allocated to components was £46million to £133 million
(2021: £30 million to £91 million).
Reporting threshold
An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the NWH Group Audit Committee that we would report to them all uncorrected audit differences in excess of £13
million (2021: £7 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view,
warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of
other relevant qualitative considerations in forming our opinion.
Other information
The other information comprises the information included in the Annual Report and Accounts, including the Strategic report,
Report of the directors, Statement of directors’ responsibilities, Risk Factors, and Forward-looking statements, other than the
financial statements and our auditor’s report thereon.
The directors are responsible for the other information contained within the
annual report.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise
explicitly stated in this report, we do not express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge obtained in the course of the audit or otherwise appears to be
materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine
whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have
performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
the information given in the Strategic report and the Report of the directors for the financial year for which the financial
statements are prepared is consistent with the financial statements; and
the Strategic report and Report of the directors have been prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the Group and the Bank and its environment obtained in the course of the audit,
we have not identified material misstatements in the Strategic report or the Report of the directors.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to
you if, in our opinion:
adequate accounting records have not been kept by the Bank, or returns adequate for our audit have not been received from
branches not visited by us; or
the Bank financial statements are not in agreement with the accounting records and returns; or
certain disclosures of directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.
Responsibilities of directors
As explained more fully in the Statement of directors’ responsibilities, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors
determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group and Bank’s ability to continue as a
going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless
the directors either intend to liquidate the Group or the Bank or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a
high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial
statements.
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2022
99
Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our
responsibilities, outlined below, to detect irregularities, including fraud.
The risk of not detecting a material misstatement due to
fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for
example, forgery or intentional misrepresentations, or through collusion. The extent to which our procedures are capable of
detecting irregularities, including fraud is detailed below.
However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the
company and management.
We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that
the most significant are the regulations, licence conditions and supervisory requirements of the Prudential Regulation Authority
(PRA) and the Financial Conduct Authority (FCA); and Companies Act 2006.
We understood how the Group is complying with those frameworks by making inquiries of management, internal audit and
those responsible for legal and compliance matters. We also reviewed correspondence between the Group and regulatory
bodies; reviewed minutes of the Board and Risk Committees; and gained an understanding of the Group’s governance
framework.
Conducted a review of correspondence with and reports from the regulators, including the Prudential Regulation Authority
(‘PRA’) and Financial Conduct Authority (‘FCA’).
Carried out an assessment of matters reported on the group’s whistleblowing programmes where these related to the financial
statements.
We assessed the susceptibility of the Group’s financial statements to material misstatement, including how fraud might occur by
considering the controls established to address risks identified to prevent or detect fraud. We also identified the risks of fraud in
our key audit matters as described above and identified areas that we considered when performing our fraud procedures, such
as cybersecurity, segregation of duties testing, user access testing and the appropriateness of sources used when performing
confirmation testing on accounts such as cash, loans and securities. Our procedures over our key audit matters and other
significant accounting estimates included challenging management on the assumptions and judgements made in determining
these estimates.
We designed our audit procedures to identify non-compliance with laws and regulations. Our procedures involved inquiries of
legal counsel, executive management, and internal audit. We also tested controls and performed procedures to respond to the
fraud risks as identified in our key audit matters. These procedures were performed by both the primary team and component
teams with oversight from the primary team.
Identified and tested journal entries, including those posted with certain descriptions or unusual characteristics, backdated
journals or posted by infrequent and unexpected users.
The Group operates in the banking industry which is a highly regulated environment. As such, the Senior Statutory Auditor
considered the experience and expertise of the engagement team to ensure that the team had the appropriate competence
and capabilities, involving specialists where appropriate.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s
website at https://www.frc.org.uk/auditorsresponsibilities.
This description forms part of our auditor’s report.
Other matters we are required to address
Following the recommendation from the NWH Group Audit Committee we were appointed by the Group at its annual general
meeting on 4 May 2016 to audit the financial statements of the Group for the year ending 31 December 2016 and subsequent
financial periods.
The period of total uninterrupted engagement including previous renewals and reappointments is 7 years, covering periods
from our appointment through 31 December 2022.
The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Bank and we remain
independent of the Group and the Bank in conducting the audit.
The audit opinion is consistent with the additional report to the NWH Group Audit Committee.
Use of our report
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act
2006.
Our audit work has been undertaken so that we might state to the company’s members those matters we are required to
state to them in an auditor’s report and for no other purpose.
To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for
the opinions we have formed.
Simon Michaelson (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London, United Kingdom
16 February 2023
Consolidated income statement for the year ended
31 December 2022
NWB Group
Annual Report and Accounts 2022
100
2022
2021
Note
£m
£m
Interest receivable
Interest payable
(1,627 )
(719 )
Net interest income
1
Fees and commissions receivable
Fees and commissions payable
(493 )
(380 )
Other operating income
Non-interest income
2
Total income
Staff costs
(2,896 )
(2,815 )
Premises and equipment
(994 )
(948 )
Other administrative expenses
(1,630 )
(1,660 )
Depreciation and amortisation
(768 )
(776 )
Operating expenses
3
(6,288 )
(6,199 )
Profit before impairment losses/releases
Impairment (losses)/releases
13
(341 )
Operating profit before tax
Tax charge
7
(1,425 )
(976 )
Profit for the year
Attributable to:
Ordinary shareholders
Paid-in equity holders
Non-controlling interests
Consolidated statement of comprehensive income
for the year ended 31 December 2022
2022
2021
£m
£m
Profit for the year
Items that do not qualify for reclassification
Remeasurement of retirement benefit schemes
(1)
(556 )
(531 )
Tax
(410 )
(373 )
Items that do qualify for reclassification
FVOCI financial assets
(392 )
(96 )
Cash flow hedges
(2)
(542 )
Currency translation
(2 )
(22 )
Tax
(40 )
(660 )
Other comprehensive loss after tax
(1,070 )
(351 )
Total comprehensive income for the year
Attributable to:
Ordinary shareholders
Paid-in equity holders
Non-controlling interests
(1)
Following the purchase of ordinary shares from UKGI in Q1 2022, NatWest Group contributed £500 million to its main pension scheme in line with the memorandum of
understanding announced on 17 April 2018. After tax relief, this contribution reduced total equity by £365 million. Other material movements came from asset underperformance
relative to movements in the schemes’ liabilities over the year. In line with our policy, the present value of defined benefit obligations and the fair value of plan assets at the end of
the reporting period, are assessed to identify significant market fluctuations and one-off events since the end of the prior financial year.
(2)
The unrealised losses on cash flow hedge reserves is mainly driven by deferment of losses on GBP net received fixed swaps as interest rates have increased.
The accompanying notes on pages 112 to 172, the accounting policies on pages 105 to 111 and the audited sections of the
Financial review and Risk and capital management on pages 6 to 79 form an integral part of these financial statements
.
Balance sheet as at 31 December 2022
NWB Group
Annual Report and Accounts 2022
101
NWB Group
NWB Plc
2022
2021
2022
2021
Note
£m
£m
£m
£m
Assets
Cash and balances at central banks
9
73,062
101,210
Derivatives
12
4,430
2,547
Loans to banks - amortised cost
9
2,870
3,638
Loans to customers - amortised cost
9
267,401
255,443
Amounts due from holding companies and fellow subsidiaries
9
32,133
27,122
Securities subject to repurchase agreements
2,140
10,813
Other financial assets excluding securities subject to repurchase agreements
12,040
17,836
Other financial assets
15
14,180
28,649
Investment in group undertakings
14
2,030
2,319
Other assets
16
5,641
5,183
Total assets
401,747
426,111
Liabilities
Bank deposits
9
16,059
22,829
Customer deposits
9
281,558
292,470
Amounts due to holding companies and fellow subsidiaries
9
75,037
76,722
Derivatives
12
2,582
4,336
Other financial liabilities
19
4,525
6,384
Subordinated liabilities
20
191
205
Notes in circulation
809
904
Other liabilities
21
2,743
3,095
Total liabilities
383,504
406,945
Owners' equity
22
18,243
19,166
Non-controlling interests
—
—
Total equity
18,243
19,166
Total liabilities and equity
401,747
426,111
Owners’ equity of NWB Plc as at 31 December 2022 includes the profit for the year of £3,457 million (2021- £2,752 million).
The accompanying notes on pages 112 to 172, the accounting policies on pages 105 to 111 and the audited sections of the
Financial review and Risk and capital management on pages 6 to 79 form an integral part of these financial statements
.
The accounts were approved by the Board of directors on 16 February 2023 and signed on its behalf by:
Howard Davies
Alison Rose-Slade DBE
Katie Murray
National Westminster Bank Plc
Chairman
Chief Executive Officer
Chief Financial Officer
Registration No. 929027
Statement of changes in equity for the year ended
31 December 2022
NWB Group
Annual Report and Accounts 2022
102
NWB Group
NWB Plc
2022
2021
2022
2021
£m
£m
£m
£m
Called-up share capital - at 1 January and 31 December
1,678
1,678
Share premium - at 1 January and 31 December
2,225
2,225
Paid-in equity - at 1 January
2,377
2,370
Redeemed
(359 )
(934 )
(359)
(934)
Issued
500
941
At 31 December
2,518
2,377
Merger reserve - at 1 January
(89)
(140)
Additions
—
—
Amortisation
87
51
At 31 December
(2)
(89)
FVOCI reserve - at 1 January
193
279
Unrealised (losses)/gains
(3)
(485 )
(486)
28
Realised losses/(gains)
(122 )
93
(122)
Tax
124
8
At 31 December
(76 )
(76)
193
Cash flow hedging reserve - at 1 January
(1 )
(133 )
(2)
(133)
Amount recognised in equity
(4)
(283 )
(288)
100
Amount transferred from equity to earnings
(259 )
(255)
79
Tax
(48 )
152
(48)
At 31 December
(391 )
(1 )
(393)
(2)
Foreign exchange reserve - at 1 January
(85 )
(63 )
(16)
(13)
Retranslation of net assets
(44 )
31
(18)
Foreign currency (losses)/gains on hedges of net assets
(31 )
(33)
15
At 31 December
(87 )
(85 )
(18)
(16)
Capital redemption reserve - at 1 January
820
796
Redemption of preference shares
—
24
At 31 December
820
820
Retained earnings - at 1 January
11,980
11,402
Profit attributable to ordinary shareholders and other equity owners
3,457
2,752
Ordinary dividends paid
(3,293 )
(1,600 )
(3,293)
(1,600)
Paid-in equity dividends paid
(120 )
(109 )
(120)
(109)
Remeasurement of retirement benefit schemes
(2)
- gross
(556 )
(531 )
(565)
(545)
- tax
146
159
Amortisation of merger reserve
(39 )
(5 )
(87)
(51)
Redemption of preference shares
(24 )
—
(24)
Redemption/reclassification of paid-in equity
- gross
(29 )
(23 )
(29)
(23)
- tax
(6 )
(6)
5
Share-based payments
- gross
(3 )
—
(3)
- tax
2
7
Employee share schemes
6
10
At 31 December
11,491
11,980
Owners' equity at 31 December
18,243
19,166
For the notes to this table refer to the following page.
Statement of changes in equity for the year ended 31 December 2022 continued
NWB Group
Annual Report and Accounts 2022
103
NWB Group
NWB Plc
2022
2021
2022
2021
£m
£m
£m
£m
Non-controlling interests - at 1 January
—
—
Profit attributable to non-controlling interests
—
—
Dividends paid
(5 )
(5 )
—
—
At 31 December
—
—
Total equity at 31 December
18,243
19,166
Attributable to:
Ordinary shareholders
15,725
16,789
Paid-in equity holders
2,518
2,377
Non-controlling interests
—
—
18,243
19,166
(1)
The total distributable reserves for NWB Plc is £11,002 million (2021 – £11,873 million).
(2)
Following the purchase of ordinary shares from UKGI in Q1 2022, NatWest Group contributed £500 million to its main pension scheme in line with the memorandum of
understanding announced on 17 April 2018. After tax relief, this contribution reduced total equity by £365 million. Other material movements came from asset underperformance
relative to movements in the schemes’ liabilities over the year. In line with our policy, the present value of defined benefit obligations and the fair value of plan assets at the end of
the reporting period, are assessed to identify significant market fluctuations and one-off events since the end of the prior financial year.
(3)
Certain assets within this category have been hedged with derivatives which are not in an accounting hedge relationship. The effect of this creates a temporary difference between
other comprehensive income and the income statement due to the difference in recognition criteria. This temporary difference is expected to reverse through the income statement
over the duration of the hedge.
(4)
The unrealised losses on cash flow hedge reserves is mainly driven by deferment of losses on GBP net received fixed swaps as interest rates have increased.
The accompanying notes on pages 112 to 172, the accounting policies on pages 105 to 111 and the audited sections of the
Financial review and Risk and capital management on pages 6 to 79 form an integral part of these financial statements
.
Cash flow statement for the year ended
31 December 2022
NWB Group
Annual Report and Accounts 2022
104
NWB Group
NWB Plc
2022
2021
2022
2021
Note
£m
£m
£m
£m
Cash flows from operating activities
Operating profit before tax
4,687
3,542
Adjustments for:
Impairment losses/(releases)
(813 )
389
(732)
Amortisation of discounts and premiums of other financial assets
—
181
Depreciation and amortisation
598
594
Net impairment charges of investments in Group undertakings
336
61
Change in fair value taken to profit or loss on other financial assets
1,177
1,595
Change in fair value taken to profit or loss on other financial liabilities and
subordinated liabilities
(912 )
(420 )
(924)
(418)
Elimination of foreign exchange differences
(47 )
(3)
1,118
Other non-cash items
(195 )
(215)
58
Income receivable on other financial assets
(303 )
(412 )
(303)
(412)
Loss/(profit) on sale of other financial assets
(120 )
93
(120)
Dividends receivable from subsidiaries
(1,010)
(424)
Loss on sale of other assets and net assets/liabilities
6
34
Loss on redemption of own debt
—
117
Interest payable on MRELs and subordinated liabilities
358
310
Charges and releases on provisions
122
388
Defined benefit pension schemes
132
146
Net cash flows from trading activities
5,443
6,038
(Increase)/decrease in derivative assets
(2,230 )
(2,171)
991
Increase in loans to banks
(198 )
(89 )
(164)
(155)
Increase in loans to customers
(14,448 )
(14,511 )
(12,313)
(12,741)
(Increase)/decrease in amounts due from holding companies and fellow subsidiaries
(355 )
(443 )
(6,204)
5,288
Decrease/(increase) in other financial assets
(116 )
239
(116)
(Increase)/decrease in other assets
(34 )
(19 )
14
(16)
(Decrease)/increase in bank deposits
(6,771 )
(6,770)
7,963
(Decrease)/increase in customer deposits
(9,065 )
(10,912)
28,707
(Decrease)/increase in amounts due to holding companies and fellow subsidiaries
(7,218 )
(2,191)
5,426
Decrease in derivative liabilities
(2,031 )
(2,433 )
(1,754)
(2,437)
Decrease in other financial liabilities
(1,867 )
(5 )
(1,859)
(100)
Decrease in notes in circulation
(95 )
(108 )
(95)
(362)
Decrease in other liabilities
(1,197 )
(1,199 )
(1,194)
(1,121)
Changes in operating assets and liabilities
(45,270 )
(45,374)
31,327
Income taxes paid
(1,161 )
(923 )
(998)
(791)
Net cash flows from operating activities
(1)
(39,743 )
(40,929)
36,574
Cash flows from investing activities
Sale and maturity of other financial assets
25,339
9,884
Purchase of other financial assets
(13,388 )
(3,193 )
(13,022)
(2,811)
Income received on other financial assets
371
412
Net movement
in business interests and intangible assets
27
(992 )
(3,701 )
(719)
(3,093)
Dividends received from subsidiaries
1,010
424
Sale of property, plant and equipment
82
17
Purchase of property, plant and equipment
(618 )
(876 )
(316)
(617)
Net cash flows from investing activities
12,745
4,216
Cash flows from financing activities
Movement in MRELs
509
1,515
Movement in subordinated liabilities
(200 )
(1,267 )
(199)
(1,267)
Dividends paid
(3,418 )
(1,714 )
(3,413)
(1,709)
Issue of paid-in equity
500
941
Redemption of paid-in equity
(388 )
(934 )
(388)
(934)
Net cash flows from financing activities
28
(2,958 )
(1,212 )
(2,991)
(1,454)
Effects of exchange rate changes on cash and cash equivalents
(979 )
1,101
(984)
Net (decrease)/increase in cash and cash equivalents
(30,327 )
(30,074)
38,352
Cash and cash equivalents at 1 January
105,546
67,194
Cash and cash equivalents at 31 December
29
75,472
105,546
(1)
NWB Group includes interest received of £9,167 million (2021 - £6,623 million) and interest paid of £1,412 million (2021 - £693 million), and NWB Plc includes interest received of
£8,421 million (2021 – £5,937 million) and interest paid of £1,623 million (2021 - £779 million).
(2)
The total cash outflow for leases for NWB Group was £130 million (2021: £149 million) and for NWB Plc £119 million (2021: £138 million). This included payment of principal for NWB
Group of £111 million (2021: £126 million) and NWB Plc of £99 million (2021: £114 million). These amounts are included in the operating activities in cash flow statement.
The accompanying notes on pages 112 to 172, the accounting policies on pages 105 to 111 and the audited sections of the
Financial review and Risk and capital management on pages 6 to 79 form an integral part of these financial statements.
NWB Group
Annual Report and Accounts 2022
statements are presented in the functional currency, pounds
sterling.
The audited financial statements include audited sections of the
Risk and capital management section. The directors have
prepared the financial statements on a going concern basis
after assessing the principal risks, forecasts, projections and
other relevant evidence over the twelve months from the date
the financial statements are approved (see the Report of the
directors) and in accordance with UK adopted International
Accounting Standards (IAS). The critical and significant
accounting policies and related judgments are set out below.
The financial statements are presented on a historical cost
basis except for certain financial instruments and investment
properties which are stated at fair value.
The effect of the amendments to IFRS effective from 1 January
2022 on our financial statements was immaterial.
Our consolidated financial statements incorporate the results of
NWB Plc and the entities it controls. Control arises when we
have the power to direct the activities of an entity so as to
affect the return from the entity. Control is assessed by
reference to our ability to enforce our will on the other entity,
typically through voting rights. The consolidated financial
statements are prepared under consistent accounting policies.
On the acquisition of a business from a NatWest Group
company, the assets, liabilities and IFRS reserves, such as the
cash flow hedging reserve, are recognised at their inherited
values taken from the consolidated financial statements of
NatWest Group plc and include the accounting history since
initial recognition. The acquirer recognises, in merger reserve,
any difference between the consideration paid and the net
items recognised at inherited values.
We apply accounting for associates and joint arrangements
(including joint ventures) to entities where we have significant
influence, but not control, over the operating and financial
policies. We assess significant influence by reference to a
presumption of voting rights of more than 20%, but less than
50%, supplemented by a qualitative assessment of substantive
rights which include representation at the Board of Directors,
significant exchange of managerial personnel or technology
amongst others. Joint ventures are arrangements where we
have joint control and rights to the net assets of the entity.
Investments in associates and joint ventures are recorded upon
initial recognition at cost, increased (or decreased) each period
by the share of the subsequent levels of profit or loss, other
changes in equity are consider in line with their nature.
Transactions and balances between Group companies are
eliminated in the consolidated financial statements to show only
How Climate risk affects our accounting judgments and
estimates
We make use of reasonable and supportable information to
make accounting judgments and estimates. This includes
information about the observable effects of the physical and
transition risks of climate change on the current
creditworthiness of borrowers, asset values and market
indicators. It also includes the effect on our competitiveness
and profitability. Many of the effects arising from climate
change will be longer term in nature, with an inherent level of
uncertainty
,
and
have limited
effect on accounting judgments
and estimates
for the current period
.
Some physical and
transition risks can manifest in the shorter term. The following
items represent the most significant effects:
The classification of financial instruments linked to climate,
or other sustainability indicators: consideration is given to
whether the effect of climate related terms prevent the
instrument cashflows being solely payments of principal and
interest.
The measurement of expected credit loss considers the
ability of borrowers to make payments as they fall due.
Future cashflows are discounted, so long dated cashflows
are less likely to affect current expectations on credit loss.
Our assessment of sector specific risks, and whether
additional adjustments are required, include expectations of
the ability of those sectors to meet their financing needs in
the market. Changes in credit stewardship and credit risk
appetite that stem from climate considerations, such as oil
and gas, will directly affect our positions.
The assessment of asset impairment and deferred tax are
based upon value in use. This represents the value of future
cashflows and uses our five-year revenue and cost
forecasts and the expectation of long term economic
growth beyond this period. The five-year forecast takes
account of management’s current expectations on
competitiveness and profitability. The long term growth rate
reflects external indicators which will include market
expectations of climate risk. We do not consider any
additional adjustments to this indicator.
The use of market indicators as inputs to fair value is
assumed to include current information and knowledge
NWB Group
Annual Report and Accounts 2022
2. Critical accounting policies
The judgments and assumptions involved in our accounting
policies that are considered by the Board to be the most
important to the portrayal of our financial condition are noted
below. The use of estimates, assumptions or models that differ
from those adopted by us would affect our reported results.
Management’s consideration of uncertainty is outlined in the
relevant sections of this document, including the ECL estimate
in the Risk and capital management section.
Information used for significant estimate
Key financial estimates are based on management's latest five-
year revenue and cost forecasts. Changes in judgments and
assumptions could result in a material adjustment to those
estimates in future reporting periods. Consideration of this
source of estimate uncertainty has been set out in the notes
below (as applicable).
Policy
Judgment
Estimate
Further
information
Deferred tax
Determination of whether sufficient taxable
profits will be generated in future years to
recover DTA.
Our estimates are based on the five-year
revenue and cost forecasts (which include
inherent uncertainties).
Note 7
Fair value –
financial
instruments
Classification of a fair value instrument as level
3, where the valuation is driven by
unobservable inputs.
Estimation of the fair value, where it is
reasonably possible to have alternative
assumptions in determining the FV.
Note 10
Loan
impairment
provisions
Definition of default against which to apply PD,
LGD and EAD models.
Criteria for a significant increase in credit risk.
Identification of risks not captured by the
models.
ECL estimates contain a number of
measurement uncertainties (such as the
selection of multiple economic scenarios) and
disclosures include sensitivities to show impact
on other reasonably possible scenarios.
Note 13
Provisions
for liabilities
and charges
Determination of whether a present obligation
exists in respect of customer redress, litigation
and other regulatory, property and other
provisions.
Legal proceedings often require a high degree
of judgment and these are likely to change as
the matter progresses.
Provisions remain sensitive to the assumptions
used in the estimate. We consider a wide range
of possible outcomes. It is often not practically
to meaningfully quantify ranges of possible
outcomes, given the uncertainties involved.
Note 21
Investment
in Group
undertakings
(parent
company
only)
Our estimates are based on the five-year
revenue and cost forecasts (which include
inherent uncertainties).
Long term growth rate and discount rate are
subject to uncertain factors.
Note 14
2.1. Deferred tax
Deferred tax is the tax expected to be payable or recoverable in
respect of temporary differences between the carrying amount
of an asset or liability for accounting purposes and the carrying
amount for tax purposes. Deferred tax liabilities are generally
recognised for all taxable temporary differences and deferred
tax assets are recognised to the extent their recovery is
probable.
Deferred tax is not recognised on temporary differences that
arise from initial recognition of an asset or a liability in a
transaction (other than a business combination) that at the time
of the transaction affects neither accounting nor taxable profit
or loss. Deferred tax is calculated using tax rates expected to
apply in the periods when the assets will be realised or the
liabilities settled, based on tax rates and laws enacted, or
substantively enacted, at the balance sheet date.
Deferred tax assets and liabilities are offset where we have a
legally enforceable right to offset and where they relate to
income taxes levied by the same taxation authority either on an
individual NWB Group company or on NWB Group companies in
the same tax group that intend, in future periods, to settle
current tax liabilities and assets on a net basis or on a gross
basis simultaneously.
Deferred tax asset recoverability is based on the level of
supporting offsetable deferred tax liabilities we have and of our
future taxable profits. These future taxable profits are based on
our five-year revenue and cost forecasts and the expectation of
long term economic growth beyond this period. The five-year
forecast takes account of management’s current expectations
on competitiveness and profitability. The long term growth rate
reflects external indicators which will include market
expectations on climate risk. We do not consider any additional
adjustments to this indicator.
2.2 Fair value – financial instruments
Financial instruments classified as mandatory fair value through
profit or loss; held-for-trading; designated fair value through
profit or loss and fair value through other comprehensive
income are recognised in the financial statements at fair value.
All derivatives are measured at fair value.
Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. A fair value
measurement considers the characteristics of the asset or
liability and the assumptions that a market participant would
consider when pricing the asset or liability.
We manage some portfolios of financial assets and financial
liabilities based on our net exposure to either market or credit
risk. In these cases, the fair value is derived from the net risk
exposure of that portfolio with portfolio level adjustments
applied to incorporate bid-offer spreads, counterparty credit
risk, and funding costs (see ‘Valuation Adjustments’).
Where the market for a financial instrument is not active, fair
value is established using a valuation technique. These valuation
techniques involve a degree of estimation, the extent of which
depends on the instrument’s complexity and the availability of
market-based data. The complexity and uncertainty in the
financial instrument’s fair value is categorised using the fair
value hierarchy.
The use of market indicators as inputs to fair value is assumed
to include current information and knowledge regarding the
effect of climate risk.
NWB Group
Annual Report and Accounts 2022
2.3. Loan impairment provisions: expected credit losses
(ECL)
At each balance sheet date each financial asset or portfolio of
financial assets measured at amortised cost or at fair value
through other comprehensive income, issued financial
guarantee and loan commitment (other than those classified as
held for trading) is assessed for impairment. Any change in
impairment is reported in the income statement.
Loss allowances are forward-looking, based on 12-month ECL
where there has not been a significant increase in credit risk
rating, otherwise allowances are based on lifetime expected
losses.
ECL are a probability-weighted estimate of credit losses. The
probability is determined by the risk of default which is applied
to the cash flow estimates. In the absence of a change in credit
rating, allowances are recognised when there is a reduction in
the net present value of expected cash flows. Following a
significant increase in credit risk, ECL are adjusted from 12
months to lifetime. This will lead to a higher impairment charge.
The measurement of expected credit loss considers the ability of
borrowers to make payments as they fall due. Future cashflows
are discounted, so long dated cashflows are less likely to affect
current expectations on credit loss. Our assessment of sector
specific risks, and whether additional adjustments are required,
include expectations of the ability of those sectors to meet their
financing needs in the market. Changes in credit stewardship
and credit risk appetite that stem from climate considerations,
such as oil and gas, will directly affect our positions.
Judgment is exercised as follows:
Models
–
in certain low default portfolios, Basel parameter
estimates are also applied for IFRS 9.
Non-modelled portfolios
–
use a standardised capital
requirement under Basel II. Under IFRS 9, they have bespoke
treatments for the identification of significant increase in
credit risk. Benchmark PDs, EADs and LGDs are reviewed
annually for appropriateness. The ECL calculation is based
on expected future cash flows, which is typically applied at a
portfolio level.
Multiple economic scenarios (MES)
– the central, or base,
scenario is most critical to the ECL calculation, independent
of the method used to generate a range of alternative
outcomes and their probabilities.
Significant increase in credit risk
-
IFRS 9 requires that at
each reporting date, an entity shall assess whether the
credit risk on an account has increased significantly since
initial recognition. Part of this assessment requires a
comparison to be made between the current lifetime PD (i.e.
the current probability of default over the remaining lifetime)
with the equivalent lifetime PD as determined at the date of
initial recognition.
On restructuring where a financial asset is not derecognised,
the revised cash flows are used in re-estimating the credit loss.
Where restructuring causes derecognition of the original
financial asset, the fair value of the replacement asset is used as
the closing cash flow of the original asset.
Where, in the course of the orderly realisation of a loan, it is
exchanged for equity shares or property, the exchange is
accounted for as the sale of the loan and the acquisition of
equity securities or investment property. Where our acquired
interest is in equity shares, relevant polices for control,
associates and joint ventures apply.
Impaired financial assets are written off and therefore
derecognised from the balance sheet when we conclude that
there is no longer any realistic prospect of recovery of part, or
all, of the loan. For financial assets that are individually assessed
for impairment, the timing of the write-off is determined on a
case-by-case basis. Such financial assets are reviewed regularly
and write-off will be prompted by bankruptcy, insolvency, re-
negotiation, and similar events.
The typical time frames from initial impairment to write-off for
our collectively assessed portfolios are:
Retail mortgages: write-off usually occurs within five years,
or earlier, when an account is closed, but can be longer
where the customer engages constructively,
Credit cards: the irrecoverable amount is typically written off
after twelve arrears cycles or at four years post default any
remaining amounts outstanding are written off,
Overdrafts and other unsecured loans: write-off occurs
within six years,
Commercial loans: write-offs are determined in the light of
individual circumstances; and Business loans are generally
written off within five years.
We recognise a provision for a present obligation resulting from
a past event when it is more likely than not that we will be
required to pay to settle the obligation and the amount of the
obligation can be estimated reliably.
Provision is made for restructuring costs, including the costs of
redundancy, when we have a constructive obligation. An
obligation exists when we have a detailed formal plan for the
restructuring and have raised a valid expectation in those
affected either by starting to implement the plan or by
announcing its main features.
We recognise any onerous cost of the present obligation under a
contract as a provision. An onerous cost is the unavoidable cost
of meeting our contractual obligations that exceed the expected
economic benefits. When we intend to vacate a leasehold
property or right of use asset, the asset would be tested for
impairment and a provision may be recognised for the ancillary
contractual occupancy costs.
Contingent liabilities are possible obligations arising from past
events, whose existence will be confirmed only by uncertain
future events, or present obligations arising from past events
that are not recognised because either an outflow of economic
benefits is not probable, or the amount of the obligation cannot
be reliably measured. Contingent liabilities are not recognised
but information about them is disclosed unless the possibility of
any outflow of economic benefits in settlement is remote.
Our investments in Group undertakings (subsidiaries) are stated
3. Significant accounting polices
Interest receivable and payable are recognised in the income
statement using the effective interest rate method: for all
financial instruments measured at amortised cost, debt
instruments measured as fair value through other
comprehensive income and the effective part of any related
accounting hedging instruments. Finance lease income is
recognised at a constant periodic rate of return before tax on
the net investment on the lease.
Other interest relating to financial instruments measured at fair
value is recognised as part of the movement in fair value and is
reported in other operating income. Fees in respect of services
are recognised as the right to consideration accrues through the
performance of each distinct service obligation to the customer.
The arrangements are generally contractual and the cost of
providing the service is incurred as the service is rendered. The
NWB Group
Annual Report and Accounts 2022
Employee costs, such as salaries, paid absences, and other
benefits are recognised over the period in which the employees
provide the related services to us. Employees may receive
variable compensation in cash, in deferred cash or debt
instruments of NWB Group or in ordinary shares of NatWest
Group plc subject to deferral, clawback and forfeiture criteria.
We operate a number of share-based compensation schemes
under which we grant awards of NatWest Group plc shares and
share options to our employees. Such awards are subject to
vesting conditions.
Variable compensation that is settled in cash or debt
instruments is charged to the income statement on a straight-
line basis over the period during which services are provided,
taking account of forfeiture and clawback criteria. The value of
employee services received in exchange for NatWest Group plc
shares and share options is recognised as an expense over the
vesting period, subject to deferral, clawback, cancelation and
forfeiture criteria with a corresponding increase in equity.
The fair value of shares granted is the market price adjusted for
the expected effect of dividends as employees are not entitled to
dividends until shares are vested.
The fair value of options granted is determined using option
pricing models to estimate the numbers of shares likely to vest.
These consider the exercise price of the option, the current
share price, the risk-free interest rate, the expected volatility of
the share price over the life of the option and other relevant
A scheme where we pay fixed contributions and; there is no
legal or constructive obligation to pay further contributions or
benefits. Contributions are recognised in the income statement
as employee service costs accrue.
Defined benefit pension scheme
A scheme that defines the benefit an employee will receive on
retirement and is dependent on one or more factors such as
age, salary, and years of service. The net of the recognisable
scheme assets and obligations is reported on the balance sheet
in other assets or other liabilities. The defined benefit obligation
is measured on an actuarial basis. The charge to the income
statement for pension costs (mainly the service cost and the net
interest on the net defined benefit asset or liability) is recognised
in operating expenses.
Actuarial gains and losses (i.e. gains and/or losses on re-
measuring the net defined benefit asset or liability) due to
changes in actuarial measurement assumptions are recognised
in other comprehensive income in full in the period in which
they arise and not subject to recycling to the income statement.
The difference between scheme assets and scheme liabilities,
the net defined benefit asset or liability, is recognised on the
balance sheet if the criteria of the asset ceiling test are met.
This requires the net defined benefit surplus to be limited to the
present value of any economic benefits available to NatWest
Group in the form of refunds from the plan or reduced
contributions to it.
We will recognise a liability where a minimum funding
requirement exists for any of our defined benefit pension
schemes. This reflects agreed minimum funding and the
availability of a net surplus as determined as described above.
When estimating the liability for minimum funding requirements
we only include contributions that are substantively or
contractually agreed and do not include contingent and
discretionary features, including dividend-linked contributions or
contributions subject to contingent events requiring future
verification.
We will recognise a net defined benefit asset when the net
defined benefit surplus can generate a benefit in the form of a
refund or reduction in future contributions to the plan. The net
benefit pension asset is recognised at the present value of the
benefits that will be available to us excluding interest and the
effect of the asset ceiling (if any, excluding interest). Changes in
the present value of the net benefit pension asset are
recognised immediately in other comprehensive income.
In instances where Trustees have the ability to declare
augmented benefits to participants, we do not recognise a
defined benefit pension asset and write-off the surplus
Intangible assets are identifiable non-monetary assets without
physical substance acquired by us, and are stated at cost less
accumulated amortisation and impairment losses. Amortisation
is a method to spread the cost of such assets over time in the
income statement. This is charged to the income statement over
the assets' estimated useful economic lives using methods that
best reflect the pattern of economic benefits. The estimated
useful economic lives are:
Computer software
3 to 12 years
Other acquired intangibles
5 to 10 years
Expenditure on brands is charged to the income statement as
incurred.
Direct costs relating to the development of internal-use
computer software are reported on the balance sheet after
technical feasibility and economic viability have been
established. These direct costs include payroll, the costs of
materials and services, and directly attributable overheads.
Capitalisation of costs ceases when the software can operate as
intended.
During and after development, accumulated costs are reviewed
for impairment against the benefits that the software is
expected to generate.
Costs incurred prior to the establishment of technical feasibility
and economic viability are expensed to the income statement as
incurred, as are all training costs and general overheads. The
costs of licences to use computer software that are expected to
generate economic benefits beyond one year are also reported
At each balance sheet date, we assess whether there is any
indication that its intangible assets or property, plant and
equipment are impaired. If any such indication exists, we
estimate the recoverable amount of the asset and compares it
to its balance sheet value to calculate if an impairment loss
should be charged to the income statement. The balance sheet
value of the asset is reduced by the amount of the impairment
loss. A reversal of an impairment loss on intangible assets or
property, plant and equipment is recognised in the income
statement provided the increased carrying value is not greater
than it would have been had no impairment loss been
recognised.
The recoverable amount of an asset that does not generate
cash flows that are independent from those of other assets or
groups of assets, is determined as part of the cash-generating
unit to which the asset belongs. A cash-generating unit is the
smallest identifiable group of assets that generates cash inflows
that are largely independent of the cash inflows from other
NWB Group
Annual Report and Accounts 2022
Items of property, plant and equipment except investment
property are stated at cost less accumulated depreciation and
impairment losses. Where an item of property, plant and
equipment comprises major components having different useful
lives, these are accounted for separately.
so as to write-off the depreciable amount of property, plant and
equipment (including assets owned and let on operating leases)
over their estimated useful lives. The depreciable amount is the
cost of an asset less its residual value. Freehold land is not
The estimated useful lives of our property, plant and equipment
are:
Freehold buildings
50 years
Long leasehold property (leases
with more than 50 years to run)
50 years
Short leaseholds
unexpired period of lease
Property adaptation costs
10 to 15 years
Computer equipment
up to 5 years
Other equipment
4 to 15 years
The residual value and useful life of property, plant and
equipment are reviewed at each balance sheet date and
updated for any changes to previous estimates.
properties that are held to earn rentals or for capital
appreciation or both. Investment property is not depreciated but
is stated at fair value. Fair value is based on current prices for
similar properties in the same location and condition. Any gain
or loss arising from a change in fair value is recognised in profit
or loss. Rental income from investment property is recognised
on a straight-line basis over the term of the lease in Other
operating income. Lease incentives granted are recognised as
Foreign exchange differences arising on the settlement of
foreign currency transactions and from the translation of
monetary assets and liabilities are reported in income from
trading activities except for differences arising on cash flow
hedges and hedges of net investments in foreign operations.
Non-monetary items denominated in foreign currencies that are
stated at fair value are translated into the functional currency at
the foreign exchange rates ruling at the dates the values are
determined. Translation differences are recognised in the
income statement except for differences arising on non-
monetary financial assets classified as fair value through other
comprehensive income.
Income and expenses of foreign subsidiaries and branches are
translated into sterling at average exchange rates unless these
do not approximate the foreign exchange rates ruling at the
dates of the transactions. Foreign exchange differences arising
on the translation of a foreign operation are recognised in other
comprehensive income. The amount accumulated in equity is
reclassified from equity to the income statement on disposal of a
3.7. Tax
Tax encompassing current tax and deferred tax is recognised
the income statement except when taxable items
are
recognised in other comprehensive income or equity . Tax
consequences arising from servicing financial instruments
classified as equity are recognised in the income statement.
Current tax is tax payable or recoverable in respect of the
taxable profit or loss for the year arising in the income
statement, other comprehensive income or equity. Provision is
made for current tax at rates enacted, or substantively enacted,
at the balance sheet date.
Accounting for taxes is judgmental and carries a degree of
uncertainty because tax law is subject to interpretation, which
might be questioned by the relevant tax authority. We recognise
the most likely current and deferred tax liability or asset,
assessed for uncertainty using consistent judgments and
estimates. Current and deferred tax assets are only recognised
where their recovery is deemed probable, and current and
deferred tax liabilities are recognised at the amount that
represents the best estimate of the probable outcome having
regard to their acceptance by the tax authorities.
3.8. Financial instruments
Financial instruments are measured at fair value on initial
recognition on the balance sheet. Monetary financial assets are
classified into one of
the following subsequent measurement
categories (subject to business model assessment and review of
contractual cash flow for the purposes of sole payments of
principal and interest where applicable):
amortised cost
measured at cost using the effective interest
rate method, less any impairment allowance;
fair value through other comprehensive income (FVOCI)
measured at fair value, using the
effective interest rate
method and changes in fair value through other
comprehensive income;
mandatory fair value through profit or loss (MFVTPL)
measured at fair value and changes in fair value reported in
the income statement; or
designated at fair value through profit or loss (DFV)
measured at fair value and changes in fair value reported in
the income statement.
Classification by business model reflects how we manage our
financial assets to generate cash flows. A business model
assessment helps
to ascertain
the measurement approach
depending on whether cash flows result from holding financial
assets to collect the contractual cash flows, from selling those
financial assets, or both
Business model assessment of assets is made at portfolio level,
being the level at which they are managed to achieve a
predefined business objective. This is expected to result in the
most consistent classification of assets because it aligns with the
stated objectives for the portfolio, its risk management,
manager’s remuneration and the ability to monitor sales of
assets from a portfolio. When a significant change to our
business is communicated to external parties, we reassess our
business model for managing those financial assets. We
reclassify financial assets if we have a significant change to the
business model. A reclassification is applied prospectively from
the reclassification date.
The contractual terms of a financial asset; any leverage
features; prepayment and extension terms; and discounts or
penalties to interest rates that are part of meeting
environmental, social and governance targets as well as other
contingent and leverage features, non-recourse arrangements
and features that could modify the timing and/or amount of the
contractual cash flows that might reset the effective rate of
interest; are considered in determining whether cash flows are
solely payments of principal and interest.
Certain financial assets may be designated at fair value through
profit or loss (DFV) upon initial recognition if such designation
eliminates, or significantly reduces, accounting mismatch
.
Equity shares are measured at fair value through profit or loss
unless specifically elected as at fair value through other
comprehensive income (FVOCI).
NWB Group
Annual Report and Accounts 2022
Upon disposal, the cumulative gains or losses in fair value
through other comprehensive income reserve are recycled to
the income statement for monetary assets and for non-
monetary assets (equity shares) the cumulative
gains or losses
are transferred directly to retained earnings.
Regular way purchases and sales of financial assets classified as
amortised cost are recognised on the settlement date; all other
regular way transactions in financial assets are recognised on
the trade date.
Financial liabilities are classified into one of following
measurement categories:
amortised cost
measured at cost using the effective interest
rate method;
held for trading (HFT)
measured at fair value and changes
in fair
value reported in income statement; or
designated at fair value through profit or loss (DFV)
measured at fair value and changes in fair value reported in
the income statement except changes in fair value
attributable to the credit risk component recognised in other
comprehensive income when no accounting mismatch
occurs. These are not subject to recycling in the income
statement.
A financial asset is derecognised (removed from the balance
sheet) when the contractual right to receive cash flows from the
asset has expired or when it has been transferred and the
transfer qualifies for derecognition. Conversely, an asset is not
derecognised in a contract under which we retain substantially
all the risks and rewards of ownership.
A financial liability is removed from the balance sheet when the
obligation is paid, or is cancelled, or expires. Cancellation
includes the issuance of a substitute instrument on substantially
Financial assets and financial liabilities are offset, and the net
amount presented on the balance sheet when, and only when,
we currently have a legally enforceable right to set off the
recognised amounts and we intend either to settle on a net
basis or to realise the asset and settle the liability
simultaneously. We are party to a number of arrangements,
including master netting agreements, that give us the right to
offset financial assets and financial liabilities, but where we do
not intend to settle the amounts net or simultaneously, the
assets and liabilities concerned are presented separately on the
We classify a financial instrument that it issues as a liability if it
is a contractual obligation to deliver cash or another financial
asset, or to exchange financial assets or financial liabilities on
potentially unfavourable terms and as equity if we evidence a
residual interest in our assets after the deduction of liabilities.
Incremental costs and related tax that are directly attributable
3.12. Derivatives and hedging
Derivatives are reported on the balance sheet at fair value. We
use derivatives to manage its own risk such as interest rate,
foreign exchange, or credit risk or in certain customer
transactions. Not all derivatives used to manage risk are in
hedge accounting relationships (an IFRS method to reduce
accounting mismatch from changes in fair value of the
derivatives reported in the income statement).
Gains and losses arising from changes in the fair value of
derivatives that are not in hedge relationships and derivatives
that are managed together with financial instruments
designated at fair value are included in Other operating income.
Hedge accounting
We enter into three types of hedge accounting relationships (see
later). Hedge accounting relationships are designated and
documented at inception in line with the requirements of IAS 39
Financial instruments – Recognition and Measurement. The
documentation identifies the hedged item, the hedging
instrument and details of the risk that is being hedged and the
way in which effectiveness will be assessed at inception and
during the period of the hedge. When designating a hedging
relationship, we consider: the economic relationship between
the hedged item (including the risk being hedged) and the
hedging instrument; the nature of the risk; the risk management
objective and strategy for undertaking the hedge; and the
appropriateness of the method that will be used to assess hedge
effectiveness.
Designated hedging relationships must be expected to be highly
effective both on a prospective and retrospective basis.
Effectiveness is assessed by reference to the degree of
offsetting between the changes in fair value or cash flows
attributable to the hedged risk and the changes in fair value of
the designated hedging derivatives.
Fair value hedge
- the gain or loss on the hedging instrument
and the hedged item attributable to the hedged risk is
recognised in the income statement. Where the hedged item is
measured at amortised cost, the balance sheet amount of the
hedged item is also adjusted.
Cash flow hedge
- the effective portion of the designated hedge
relationship is recognised in other comprehensive income and
the ineffective portion in the income statement. When the
hedged item (forecasted cash flows) results in the recognition of
a financial asset or financial liability, the cumulative gain or loss
is reclassified from equity to the income statement in the same
periods in which the hedged forecasted cash flows affect the
income statement.
Hedge of net investment in a foreign operation
-
in the hedge
of a net investment in a foreign operation, the effective portion
of the designated hedge relationship is recognised in other
comprehensive income. Any ineffective portion is recognised in
profit or loss. Non-derivative financial liabilities as well as
derivatives may be designated as a hedging instrument in a net
investment hedge.
Discontinuation of hedge accounting
Hedge accounting is discontinued if the hedge no longer meets
the criteria for hedge accounting i.e. the hedge is not highly
effective in offsetting changes in fair value or cash flows
attributable to the hedged risk, consistent with the documented
risk management strategy; the hedging instrument expires or is
sold, terminated or exercised; or if hedge designation is
revoked.
For fair value hedging
any cumulative adjustment is amortised
to the
income statement over the life of the hedged item.
Where the hedge item is no longer on the balance sheet the
adjustment to the hedged item is reported in the income
statement.
For cash flow hedging the cumulative unrealised gain or loss is
reclassified from equity to the income statement when the
hedged cash flows occur or, if the forecast transaction results in
the recognition of a financial asset or financial liability, when the
hedged forecast cash flows affect the income statement. Where
a forecast transaction is no longer expected to occur, the
cumulative unrealised gain or loss is reclassified from equity to
the income statement immediately.
NWB Group
Annual Report and Accounts 2022
For net investment hedging on disposal or partial disposal of a
foreign operation, the amount accumulated in equity is
reclassified from equity to the income statement.
International Financial Reporting Standards
Effective 1 January 2023
IFRS 17 Insurance Contracts (Amendments to IFRS 17
Insurance Contracts);
Deferred Tax related to Assets and Liabilities arising from a
Single Transaction (Amendments to IAS 12);
Definition of Accounting Estimates (Amendments to IAS 8);
and
Disclosure of Accounting Policies (Amendments to IAS 1 and
IFRS Practice Statement 2).
Effective 1 January 2024
Classification of Liabilities as Current or Non-current
(Amendments to IAS 1);
Non-current Liabilities with Covenants (Amendments to IAS
1)
Lease Liability in a sale and Leaseback (Amendments to
IFRS 16).
We are assessing the effect of adopting these standards and
amendments on our financial statements but do not expect the
Notes to the financial statements
NWB Group
Annual Report and Accounts 2022
1 Net interest income
2022
2021
£m
£m
Balances at central banks and loans to banks - amortised cost
981
119
Loans to customers - amortised cost
7,883
6,448
Amounts due from holding companies and fellow subsidiaries
41
33
Other financial assets
254
121
Interest receivable
9,159
6,721
Bank deposits
267
82
Customer deposits
335
247
Amounts due to holding companies and fellow subsidiaries
777
220
Other financial liabilities
189
137
Subordinated liabilities
59
33
Interest payable
1,627
719
Net interest income
7,532
6,002
Interest income on financial instruments measured at amortised cost and debt instruments classified as FVOCI is measured using
the effective interest rate which allocates the interest income or interest expense over the expected life of the asset or liability at
the rate that exactly discounts all estimated future cash flows to equal the instrument's initial carrying amount. Calculation of the
effective interest rate takes into account fees payable or receivable that are an integral part of the instrument's yield, premiums or
discounts on acquisition or issue, early redemption fees and transaction costs. All contractual terms of a financial instrument are
considered when estimating future cash flows. Included in interest receivable is finance lease income which is recognised at a
constant periodic rate of return before tax on the net investment.
For accounting policy information see Accounting policies note 3.1.
2 Non-interest income
2022
2021
£m
£m
Net fees and commissions
(1)
1,626
1,482
Other operating income
Loss on redemption of own debt
—
(117)
Operating leases and other rental income
233
230
Changes in fair value of other financial assets held at mandatory fair value through profit or loss
(2)
(12)
5
Hedge ineffectiveness
20
45
Net income from economic hedging
(3)
777
76
Loss on disposal of amortised cost assets
(17)
(27)
(Loss)/profit on disposal of fair value through other comprehensive income assets
(92)
120
Loss on sale of property, plant and equipment
(4)
(5)
(36)
Share of loss on associated entities
(6)
(6)
Legal entity recharges
(5)
1,616
1,463
Other income
71
32
2,585
1,785
4,211
3,267
(1)
Refer to Note 4 for further analysis.
(2)
Includes instruments that have failed solely payment of principal and interest testing under IFRS 9.
(3)
Includes fair value changes on derivatives which have not been designated in a hedge accounting relationship and gains and losses from the management of the NWB Group’s
funding requirements involving the use of derivatives including FX. These are aimed at managing the interest rate and foreign exchange risk that NWB Group is exposed to.
(4)
2021 includes £44 million loss on the purchase of freeholds for properties where the Group was the primary leaseholder.
(5)
Relates to income from recharging shared services to other NatWest Group subsidiaries.
For accounting policy information see Accounting policies note 3.1 and 3.6.
NWB Group
Annual Report and Accounts 2022
2021
£m
£m
Wages, salaries and other staff costs
2,138
2,079
Temporary and contract costs
207
206
Social security costs
263
241
Pension costs
288
289
- defined benefit schemes (see Note 5)
154
173
- defined contribution schemes
134
116
Staff costs
2,896
2,815
Premises and equipment
994
948
Depreciation and amortisation
768
776
Other administrative expenses
(1)
1,630
1,660
Administrative expenses
3,392
3,384
6,288
(1)
Includes redress and litigation costs. Further details are provided in Note 21.
NWB Group provides shared services to NatWest Group. Direct costs incurred are recovered through legal entity recharging and
recorded in Other operating income.
For accounting policy information see Accounting policies note 3.2, 3.3, 3.4 and 3.5.
The average number of persons employed, rounded to the nearest hundred, during the year, excluding temporary staff, was
53,600 (2021 – 52,000). The number of persons employed at 31 December 2022, excluding temporary staff was as follows
:
2022
2021
Retail Banking
13,800
15,100
Commercial & Institutional
8,800
8,100
Private Banking
2,100
1,600
Central items & other
30,500
27,100
Total
55,200
51,900
UK
37,600
36,700
India
15,700
13,500
Poland
1,500
1,400
Rest of the World
400
300
Total
55,200
51,900
NWB Group
Annual Report and Accounts 2022
NWB Group grants share-based awards to employees principally on the following bases:
Award plan
Eligible employees
Nature of award
Vesting conditions (1)
Settlement
Sharesave
UK, Channel Islands,
Gibraltar, Isle of Man,
Poland and India.
Option to buy shares
under employee savings
plan
Continuing employment or
leavers in certain circumstances
2023 to 2027
Deferred performance
awards
All
Awards of ordinary
shares and conditional
shares
Continuing employment or
leavers in certain circumstances
2023 to 2030
Long-term incentives
(2) (3)
Senior employees
Awards of ordinary
shares and conditional
shares
Continuing employment or
leavers in certain circumstances
and/or satisfaction of the pre-
vest assessment and underpins
2023 to 2029
(1)
All awards have vesting conditions which may not be met.
(2)
Long-term incentives include buy-out awards offered to compensate certain new hires for the loss of forfeited awards from their previous employment.
All awards are granted
under the Employee Share Plan.
(3)
Existing Long-term incentive scheme has been closed to new awards and members as at 31 December 2022. The scheme will be replaced by
a
new Restricted share plan scheme
with similar granting and vesting conditions. No awards have been granted at the end of the reporting period.
The fair value of Sharesave options granted in 2022 was determined using a pricing model that included: expected volatility of
shares determined at the grant date based on historical volatility over a period of up to five years; expected option lives that equal
the vesting period; estimated dividend yield on equity shares; and risk-free interest rates determined from UK gilts with terms
matching the expected lives of the options.
The exercise price of options and the fair value on granting awards of fully paid shares is the average market price over the five
trading days (three trading days for Sharesave) preceding grant date.
When estimating the fair value of the award, the number of
shares granted, and the prevailing share price (as defined in the NatWest Group ARA on page 149) are used.
The fair value of the
award is recognised as services are provided over the vesting period.
Bonus awards
The following tables analyse NWB Group's bonus awards.
2022
2021
Change
£m
£m
%
Non-deferred cash awards
(1)
36
32
13%
Deferred cash awards
182
150
21%
Deferred share awards
30
24
25%
Total deferred bonus awards
212
174
22%
Total bonus rewards
(2)
248
206
20%
Reconciliation of bonus awards to income statement charge
2022
2021
£m
£m
Bonus awarded
248
206
Less: deferral of charge for amounts awarded for current year
(80)
(63)
Income statement charge for amounts awarded in current year
168
143
Add: current year charge for amounts deferred from prior years
56
40
Less: forfeiture of amounts deferred from prior years
—
(4)
Income statement charge for amounts deferred from prior years
56
36
Income statement charge for bonus awards
(2)
224
179
(1)
Non-deferred cash awards are limited to £2,000 for all employees.
(2)
NWB Group
Annual Report and Accounts 2022
Reportable operating segments
On 27 January 2022, NatWest Group announced that a new
business segment, Commercial & Institutional, would be
created, bringing together the Commercial, NatWest Markets
and RBSI businesses to form a single business segment, with
common management and objectives, to best support our
customers across the full non-personal customer lifecycle.
Comparatives have been re-presented. The re-presentation of
operating segments does not change the consolidated financial
results of NatWest Group.
NWB Plc is organised into the following reportable segments:
Retail Banking, Private Banking, Commercial & Institutional and
Central items & other.
Retail Banking
serves personal customers in the UK and
includes Ulster Bank customers.
Private Banking
serves UK-connected high-net-worth
individuals and their business interests.
Commercial & Institutional
offers SME’s and Corporate and
Institutional clients comprehensive banking and financing
solutions throughout the UK and internationally.
Central items & other
includes corporate functions, such as
NatWest Group treasury, finance, risk management,
compliance, legal, communications and human resources. NWB
Plc is the main provider of shared services and treasury
activities for NatWest Group. The services are mainly provided
to NWH Group, however, in certain instances, where permitted,
services are also provided to the wider NatWest Group
including the non-ring fenced business.
Retail Banking
Private Banking
Commercial &
Institutional
Central items &
other
Total
2022
£m
£m
£m
£m
£m
Net interest income
4,494
754
2,740
(456)
7,532
Net fees and commissions
334
243
1,038
11
1,626
Other operating income
65
28
248
2,244
2,585
Total income
4,893
1,025
4,026
1,799
11,743
Depreciation and amortisation
—
—
(135)
(633)
(768)
Other operating expenses
(2,115)
(596)
(1,804)
(1,005)
(5,520)
Impairment (losses)/releases
(218)
2
(126)
1
(341)
Operating profit
2,560
431
1,961
162
5,114
2021
Net interest income
3,541
461
2,171
(171)
6,002
Net fees and commissions
303
239
947
(7)
1,482
Other operating income
42
24
93
1,626
1,785
Total income
3,886
724
3,211
1,448
9,269
Depreciation and amortisation
—
—
(146)
(630)
(776)
Other operating expenses
(1,917)
(513)
(1,746)
(1,247)
(5,423)
Impairment releases
23
53
737
—
813
Operating profit/(loss)
1,992
264
2,056
(429)
3,883
Total revenue
(1)
Retail Banking
Private
Banking
Commercial &
Institutional
Central items &
other
Total
2022
£m
£m
£m
£m
£m
External
5,039
856
3,660
4,308
13,863
Intersegment
29
416
118
(563)
—
Total
5,068
1,272
3,778
3,745
13,863
2021
External
4,660
703
3,030
1,975
10,368
Intersegment
97
161
147
(405)
—
Total
4,757
864
3,177
1,570
10,368
(1)
Total revenue comprises interest receivable, fees and commissions receivable and other operating income.
Total income
Retail Banking
Private
Banking
Commercial &
Institutional
Central items &
other
Total
2022
£m
£m
£m
£m
£m
External
4,865
721
4,112
2,045
11,743
Intersegment
28
304
(86)
(246)
—
Total
4,893
1,025
4,026
1,799
11,743
2021
External
3,791
668
3,191
1,619
9,269
Intersegment
95
56
20
(171)
—
Total
3,886
724
3,211
1,448
9,269
NWB Group
Annual Report and Accounts 2022
Analysis of net fees and commissions
Retail Banking
Private Banking
Commercial
&Institutional
Central items &
other
Total
2022
£m
£m
£m
£m
£m
Fees and commissions receivable
- Payment services
254
25
489
—
768
- Credit and debit card fees
323
14
170
—
507
- Lending and financing
15
8
446
—
469
- Brokerage
34
6
—
—
40
- Investment management, trustee and fiduciary services
4
213
—
—
217
- Underwriting fees
—
—
3
—
3
- Other
—
3
113
(1)
115
Total
630
269
1,221
(1)
2,119
Fees and commissions payable
(296)
(26)
(183)
12
(493)
Net fees and commissions
334
243
1,038
11
1,626
2021
Fees and commissions receivable
- Payment services
248
33
415
—
696
- Credit and debit card fees
276
10
111
—
397
- Lending and financing
11
10
416
—
437
- Brokerage
38
5
—
—
43
- Investment management, trustee and fiduciary services
3
214
—
—
217
- Underwriting fees
—
—
—
—
—
- Other
—
35
128
(91)
72
Total
576
307
1,070
(91)
1,862
Fees and commissions payable
(273)
(68)
(123)
84
(380)
Net fees and commissions
303
239
947
(7)
1,482
Retail
Banking
Private Banking
Commercial &
Institutional
Central items &
other
Total
2022
£m
£m
£m
£m
£m
Assets
184,140
19,734
86,406
119,189
409,469
Liabilities
153,304
41,489
127,301
67,299
389,393
2021
Assets
168,228
18,509
83,347
164,479
434,563
Liabilities
153,653
37,219
133,156
89,798
413,826
NWB Group
Annual Report and Accounts 2022
The geographical analysis in the tables below has been compiled on the basis of location of office where the transactions are
recorded.
UK
RoW
Total
2022
£m
£m
£m
Total revenue
13,134
729
13,863
Interest receivable
9,104
55
9,159
Interest payable
(1,567)
(60)
(1,627)
Net fees and commissions
1,610
16
1,626
Other operating income
1,955
630
2,585
Total income
11,102
641
11,743
Operating profit before tax
5,017
97
5,114
Total assets
394,504
14,965
409,469
Total liabilities
388,996
397
389,393
Contingent liabilities and commitments
89,931
215
90,146
Cost to acquire property, plant and equipment and intangible assets
1,254
158
1,412
2021
Total revenue
10,250
118
10,368
Interest receivable
6,650
71
6,721
Interest payable
(642)
(77)
(719)
Net fees and commissions
1,482
—
1,482
Other operating income
1,738
47
1,785
Total income
9,228
41
9,269
Operating profit before tax
3,825
58
3,883
Total assets
419,978
14,585
434,563
Total liabilities
413,527
299
413,826
Contingent liabilities and commitments
81,721
94
81,815
Cost to acquire property, plant and equipment and intangible assets
1,308
166
NWB Group
Annual Report and Accounts 2022
5 Pensions
Defined contribution schemes
NWB Group sponsors a number of defined contribution pension
schemes in different territories, which new employees are
offered the opportunity to join.
Defined benefit schemes
NWB Group sponsors a number of pension schemes in the UK
and overseas, including the Main section of the NatWest Group
Pension Fund (the “Main section”) which operates under UK
trust law and is managed and administered on behalf of its
members in accordance with the terms of the trust deed, the
scheme rules and UK legislation.
Pension fund trustees are appointed to operate each fund and
ensure benefits are paid in accordance with the scheme rules
and national law. The trustees are the legal owner of a
scheme’s assets, and have a duty to act in the best interests of
all scheme members.
The schemes generally provide a pension of one-sixtieth of final
pensionable salary for each year of service prior to retirement
up to a maximum of 40 years and are contributory for current
members. These have been closed to new entrants for over ten
years, although active members continue to build up additional
pension benefits, currently subject to 2% maximum annual
salary inflation, while they remain employed by NWB Group.
The Main section corporate trustee is NatWest Pension Trustee
Limited (the Trustee), a wholly owned subsidiary of NWB Plc,
Principal Employer of the Main section. The Board of the
Trustee comprises four member trustee directors selected from
eligible active staff, deferred and pensioner members who
apply and six appointed by NatWest Group. Under UK
legislation, a defined benefit pension scheme is required to
meet the statutory funding objective of having sufficient and
appropriate assets to cover its liabilities (the pensions that have
been promised to members). Similar governance principles
apply to NWB Group’s other pension schemes.
For accounting policy information see Accounting policies note
3.3.
Investment strategy
The assets of the Main section, which is typical of other group
schemes, represent 97% of all plan assets at 31 December 2022
(2021 - 97%) and are invested as shown below.
The Main section employs physical, derivative and non-
derivatives instruments to achieve a desired asset class
exposure and to reduce the section’s interest rate, inflation and
currency risk. This means that the net funding position is
considerably less sensitive to changes in market conditions than
the value of the assets or liabilities in isolation. In particular,
movements in interest rates and inflation are substantially
hedged by the Trustee.
Over the year, increases in bond yields resulted in many
pension schemes in the UK having to raise additional collateral
to support Liability-driven investment positions held as part of
their hedging strategies. Liability-driven investments (LDI) refer
to assets that are expected to move broadly in line with
liabilities on a specific basis. All the Group’s schemes affected
by this were able to raise the collateral needed from existing
assets, with no additional support from the Group. The Trustee
of the Group Pension Fund takes a prudent approach to
liquidity and collateral and holds sufficient collateral to
withstand substantial rises in gilt yields. The level of collateral
held by some of the Group’s smaller schemes was increased
over the year, so as to ensure they could withstand further
large rises in gilt yields if required.
2022
2021
Major classes of plan assets as a percentage of
Quoted
Unquoted
Total
Quoted
Unquoted
Total
total plan assets of the Main section
%
%
%
%
%
%
Equities
0.1
7.7
7.8
3.7
4.7
8.4
Index linked bonds
37.7
—
37.7
46.7
—
46.7
Government bonds
18.4
—
18.4
9.8
—
9.8
Corporate and other bonds
15.3
6.7
22.0
10.7
4.4
15.1
Real estate
—
6.0
6.0
—
4.4
4.4
Derivatives
—
8.2
8.2
—
8.8
8.8
Cash and other assets
—
(0.1)
(0.1)
—
6.8
6.8
71.5
28.5
100.0
70.9
29.1
100.0
The Main section's holdings of derivative instruments are summarised in the table below:
2022
2021
Fair value
Fair value
Notional
amounts
Assets
Liabilities
Notional
amounts
Assets
Liabilities
£bn
£m
£m
£bn
£m
£m
Inflation rate swaps
21
1,873
990
20
1,408
796
Interest rate swaps
103
14,317
12,546
172
8,385
4,421
Currency forwards
12
310
113
12
61
98
Equity and bond call options
—
—
—
—
1
—
Equity and bond put options
—
2
70
—
1
3
Other
1
14
19
1
9
10
NWB Group
Annual Report and Accounts 2022
Swaps have been executed at prevailing market rates and
within standard market bid/offer spreads with a number of
counterparties, including NWB Plc.
At 31 December 2022, the gross notional value of the swaps
was £124 billion (2021 - £192 billion) and had a net positive fair
value of £2,642 million (2021 - £4,573 million) against which the
counterparties had posted approximately 112% collateral.
The schemes do not invest directly in NWB Group but may
have exposure to NWB Group through indirect holdings. The
trustees of the respective UK schemes are responsible for
ensuring that indirect investments in NWB Group do not exceed
the regulatory limit of 5% of plan assets.
NWB Group
NWB Plc
Fair value of
plan assets
Present value
of
defined
benefit
obligation
(
1)
Asset
ceiling/
minimum
funding
(2
)
Net
pension
asset/
(liability)
Fair value of
plan assets
Present value
of
defined
benefit
obligation
(
1)
Asset
ceiling/
minimum
funding
(2
)
Net pension
asset/
(liability)
Changes in value of net pension asset/(liability)
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2021
52,819
(45,214)
(7,660)
(55)
51,323
(43,883)
(7,453)
(13)
Currency translation and other adjustments
2
1
(1)
2
—
1
(1)
—
Income statement - operating expenses
735
(801)
(107)
(173)
727
(766)
(107)
(146)
Other comprehensive income
857
1,090
(2,478)
(531)
852
1,081
(2,478)
(545)
Contributions by employer
716
—
—
716
696
—
—
696
Contributions by plan participants and other scheme
members
20
(20)
—
—
28
(28)
—
—
Benefits paid
(1,618)
1,618
—
—
(1,611)
1,611
—
—
Transfer to/from fellow subsidiaries
—
—
—
—
1,366
(1,163)
(207)
(4)
At 1 January 2022
53,531
(43,326)
(10,246)
(41)
53,381
(43,147)
(10,246)
(12)
Currency translation and other adjustments
8
(8)
—
—
—
—
—
—
Income statement - other expenses
Net interest expense
960
(769)
(184)
7
956
(764)
(184)
8
Current service cost
—
(164)
—
(164)
—
(153)
—
(153)
Less, direct contributions from other scheme members
—
8
—
8
—
18
—
18
Past service cost
—
(5)
—
(5)
—
(5)
—
(5)
960
(930)
(184)
(154)
956
(904)
(184)
(132)
Other comprehensive income
Return on plan assets excluding recognised interest
income
(3)
(18,757)
—
—
(18,757)
(18,736)
—
—
(18,736)
Experience gains and losses
—
(2,042)
—
(2,042)
—
(2,041)
—
(2,041)
Effect of changes in actuarial financial assumptions
(3)
—
19,257
—
19,257
—
19,226
—
19,226
Effect of changes in actuarial demographic assumptions
—
23
—
23
—
23
—
23
Asset ceiling adjustments
—
—
963
963
—
—
963
963
(18,757)
17,238
963
(556)
(18,736)
17,208
963
(565)
Contributions by employer
723
—
—
723
700
—
—
700
Contributions by plan participants and other scheme
members
19
(19)
—
—
26
(26)
—
—
Benefits paid
(1,527)
1,527
—
—
(1,512)
1,512
—
—
At 31 December 2022
34,957
(25,518)
(9,467)
(28)
34,815
(25,357)
(9,467)
(9)
(1)
Defined benefit obligations are subject to annual valuation by independent actuaries.
(2)
NWB Group recognises the net pension scheme surplus or deficit as a net asset or liability. In doing so, the funded status is adjusted to reflect any schemes with a surplus that NWB
Group may not be able to access, as well as any minimum funding requirement to pay in additional contributions. This is most relevant to the Main section, where the current
surplus is not recognised as the trustees may have control over the use of the surplus.
Other NWB Group schemes that this applies to include the Ulster Bank Pension Scheme (NI).
(3)
Changes in market conditions during 2022 resulted in a particularly large increase in discount rate, which is the key driver of the effect of changes in actuarial financial assumptions.
Given the level of hedging in place, there was a corresponding reduction in the value of plan assets over the period. The experience losses shown are mainly as a result of inflation
over the year being higher than expected.
(4)
NWB Group expects to make contributions to the Main section of £196m million in 2023. In 2022 NWB Group made contributions of £722m, including a £500m contribution paid in
two instalments in January and March 2022 as required by the ring fencing agreement with the Trustee.
NWB Group
Annual Report and Accounts 2022
All schemes
2022
2021
Amounts recognised on the balance sheet
£m
£m
Fund asset at fair value
34,957
53,531
Present value of fund liabilities
(25,518)
(43,326)
Funded status
9,439
10,205
Assets ceiling/minimum funding
(9,467)
(10,246)
(28)
(41)
NWB Group
NWB Plc
2022
2021
2022
2021
Net pension asset/(liability) comprises
£m
£m
£m
£m
Net assets of schemes in surplus (included in Other assets, Note 16)
7
7
—
—
Net liabilities of schemes in deficit (included in Other liabilities, Note 21)
(35)
(48)
(9)
(12)
(28)
(41)
(9)
(12)
Funding and contributions by NWB Group
In the UK, the trustees of defined benefit pension schemes are
required to perform funding valuations every three years. The
trustees and the sponsor, with the support of the Scheme
Actuary, agree the assumptions used to value the liabilities and
to determine future contribution requirements. The funding
assumptions incorporate a margin for prudence over and above
the expected cost of providing the benefits promised to
members, taking into account the sponsor’s covenant and the
investment strategy of the scheme. Similar arrangements apply
in the other territories where NWB Group sponsors defined
benefit pension schemes.
A full triennial funding valuation of the Main section, effective 31
December 2020, was completed during financial year 2021.
This triennial funding valuation determined the funding level to
be 104%, pension liabilities to be £49 billion and the surplus to
be £2 billion, all assessed on the agreed funding basis. The
average cost of the future service of current members is 49% of
salary before contributions from those members.
In addition,
the sponsor has agreed to meet administrative expenses.
Following the ring-fencing agreement with the Trustee reached
in 2018, additional contributions of up to £500 million p.a. are
payable to the Main section should the Group make distributions
to shareholders of an equal amount.
These contributions are capped at £1.5 billion in total; £500
million was paid in 2022 (2021 – £500 million). The remaining
distribution linked contribution to the Main section would have
fallen due in 2023, but NatWest Bank has agreed with the
Trustee that assets to the value of the contributions falling due
will instead be paid to a new legal structure. These assets will
be restricted and are reserved to ensure they are available
should they be needed by the Trustee according to agreed
criteria in the future. The assets under this arrangement would
be available to the Group to the extent that they are not needed
under the defined trigger events.
The key assumptions used to determine the funding liabilities
were the discount rate, which is determined based on fixed
interest swap and gilt yields plus 0.64% per annum, and
mortality assumptions, which result in life expectancies of
27.7/29.4 years for males/females who are currently age 60 and
28.9/30.7 years from age 60 for males/females who are
currently aged 40.
The 2020 triennial valuation of the Group Pension Fund included
an allowance for the estimated impact of guaranteed minimum
pension equalisation, which is reflected in the IAS 19 valuation
at 31 December 2022.
Accounting Assumptions
Placing a value on NWB Group’s defined benefit pension
schemes’ liabilities requires NWB Group’s management to make
a number of assumptions, with the support of independent
actuaries. The ultimate cost of the defined benefit obligations
depends upon actual future events and the assumptions made
are unlikely to be exactly borne out in practice, meaning the
final cost may be higher or lower than expected.
NWB Group
Annual Report and Accounts 2022
The most significant assumptions used for the Main section are shown below:
Principal IAS 19 actuarial assumptions
2022
2021
%
%
Discount rate
5.0
1.8
Inflation assumption (RPI)
3.2
3.3
Rate of increase in salaries
1.8
1.8
Rate of increase in deferred pensions
3.2
3.7
Rate of increase in pensions in payment
2.5
2.5
Lump sum conversion rate at retirement
18
18
Longevity at age 60:
Current pensioners
years
years
Males
27.3
27.3
Females
29.1
29.0
Future pensioners, currently aged 40
Males
28.3
28.2
Females
30.1
30.1
The above financial assumptions are long term assumptions set with reference to the period over which the obligations are expected to be settled.
Discount rate
The IAS 19 valuation uses a single discount rate set by reference to the yield on a basket of ‘high quality’ sterling corporate bonds.
Significant judgment is required when setting the criteria for bonds to be included in the basket of bonds that is used to determine
the discount rate used in the IAS 19 valuations. The criteria include issue size, quality of pricing and the exclusion of outliers.
Judgment is also required in determining the shape of the yield curve at long durations: a constant credit spread relative to gilts is
assumed. Sensitivity to the main assumptions is presented below.
The weighted average duration of the Main section’s defined benefit obligation at 31 December 2022 is 15.3 years (2021 - 20
years). The chart below shows the projected benefit payment pattern for the Main section in nominal terms. These cashflows are
based on the most recent formal actuarial valuation, effective 31 December 2020
.
The larger outflow in 2023 represents an assumption in the actuarial valuation of the level of transfers out to 31 December 2023.
0
500
1000
1500
2000
2500
2023
2025
2027
2029
2031
2033
2035
2037
2039
2041
2043
2045
2047
2049
2051
2053
2055
2057
2059
2061
2063
2065
2067
2069
2071
2073
2075
2077
2079
2081
2083
2085
2087
2089
2091
2093
2095
Pensioner
Non pensioner
Expected Cashflows (£m)
Year
NWB Group
Annual Report and Accounts 2022
The table below shows how the net pension asset of the Main section would change if the key assumptions used were changed
independently. In practice the variables have a degree of correlation and do not move completely in isolation.
(Decrease)/
increase in value
of assets
(Decrease)/
increase in value
of liabilities
Increase in net
pension
(obligations)/
assets
2022
£m
£m
£m
0.25% increase in interest rates/discount rate
(2)
(1,389)
(907)
(482)
0.25% increase in inflation
963
632
331
0.25% increase in credit spreads
(3)
(907)
904
Longevity increase of one year
—
767
(767)
0.25% additional rate of increase in pensions in payment
—
679
(679)
Increase in equity values of 10%
(1)
267
—
267
2021
0.25% increase in interest rates/discount rate
(2,917)
(1,926)
(991)
0.25% increase in inflation
1,883
1,329
554
0.25% increase in credit spreads
(3)
(1,926)
1,923
Longevity increase of one year
—
1,790
(1,790)
0.25% additional rate of increase in pensions in payment
—
1,485
(1,485)
Increase in equity values of 10%
(1)
442
—
442
(1) Includes both quoted and private equity.
(2) A 0.5% increase in the interest rates/discount rate would lead to a decrease of £2,689m in the value of assets and a £1,766m decrease in the value of liabilities at 31 December 2022.
The funded status is most sensitive to movements in credit spreads and longevity.
Note the longevity sensitivities quoted above
reflect the impact of a one year increase to single life annuities. The table below shows the combined change in the funded status
of the Main section as a result of larger movements in these assumptions, assuming no changes in other assumptions.
Change in life expectancies
- 2 years
- 1 years
No change
+ 1 year
+ 2 years
2022
£bn
£bn
£bn
£bn
£bn
+50 bps
3.2
2.5
1.8
1.1
0.4
No change
1.6
0.8
—
(0.8)
(1.5)
Change in credit spreads
-50 bps
(0.3)
(1.2)
(2.0)
(2.8)
(3.6)
Change in life expectancies
- 2 years
- 1 years
No change
+ 1 year
+ 2 years
2021
£bn
£bn
£bn
£bn
£bn
+50 bps
6.9
5.3
3.8
2.3
0.8
No change
3.6
1.8
—
(1.8)
(3.6)
Change in credit spreads
-50 bps
(0.3)
(2.4)
(4.5)
(6.6)
(8.7)
The defined benefit obligation of the Main section is attributable to the different classes of scheme members in the following
proportions:
2022
2021
Membership category
%
%
Active members
8.4
10.7
Deferred members
41.0
47.6
Pensioners and dependants
50.6
41.7
100.0
100.0
The experience history of NWB Group schemes is shown below:
NWB Group
NWB Plc
2022
2021
2020
2019
2018
2022
2021
2020
2019
2018
History of defined benefit schemes
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Fair value of plan assets
34,957
53,531
52,819
47,953
45,061
34,815
53,381
51,323
46,555
43,807
Present value of defined benefit
obligations
(25,518)
(43,326)
(45,214)
(40,822)
(36,435)
(25,357)
(43,147)
(43,883)
(39,683)
(35,466)
Net surplus/(deficit)
9,439
10,205
7,605
7,131
8,626
9,458
10,234
7,440
6,872
8,341
Experience gains/(losses) on plan
liabilities
(2,042)
244
431
264
(124)
(2,041)
245
427
275
(122)
Experience gains/(losses) on plan assets
(18,757)
857
5,586
3,156
(1,937)
(18,736)
852
5,486
3,021
(1,892)
Actual return on plan assets
(17,797)
1,592
6,549
4,437
(782)
(17,780)
1,579
6,422
4,266
(769)
Actual return on plan assets %
(33.2%)
3.0%
13.7%
9.8%
(1.7%)
(33.3%)
3.1%
13.8%
9.7%
(1.7%)
NWB Group
Annual Report and Accounts 2022
Amounts payable to NWB Group’s auditors for statutory audit and other services are set out below:
2022
2021
£m
£m
Fees payable for:
- the audit of NWB Group’s annual accounts
12.4
11.6
- the audit of NWB Plc’s subsidiaries
3.1
2.1
Total audit and audit-related assurance service fees
15.5
13.7
7 Tax
2022
2021
£m
£m
Current tax
Charge for the year
(1,187)
(998)
Over provision in respect of prior years
63
38
(1,124)
(960)
Deferred tax
Charge for the year
(151)
(195)
UK tax rate change impact
(1)
(82)
161
(Decrease)/increase in the carrying value of deferred tax assets in respect of UK losses
(6)
14
(Under)/over provision in respect of prior years
(2)
(62)
4
Tax charge for the year
(1,425)
(976)
(1)
It was announced in the UK Government’s budget on 27 October 2021 that the main UK banking surcharge will decrease from 8% to 3% from 1 April 2023. This legislative change
was enacted on 24 February 2022.
(2)
Prior year tax adjustments incorporate refinements to tax computations made on submission and agreement with the tax authorities and adjustments to provisions in respect of
uncertain tax positions.
The actual tax charge differs from the expected tax charge, computed by applying the standard rate of UK corporation tax of 19%
(2021 – 19%), as follows:
2022
2021
£m
£m
Expected tax charge
(972)
(738)
Losses and temporary differences in period where no deferred tax asset recognised
—
1
Foreign profits taxed at other rates
(8)
(6)
Items not allowed for tax:
- losses on disposals and write-downs
(8)
(50)
- UK bank levy
(12)
(12)
- regulatory and legal actions
6
(73)
- other disallowable items
(13)
(15)
Non-taxable items
18
9
Taxable foreign exchange movements
2
1
Unrecognised losses brought forward and utilised
—
2
(Decrease)/increase in the carrying value of deferred tax assets in respect of:
- UK losses
(6)
14
Banking surcharge
(373)
(328)
Tax on paid in equity dividends
22
16
UK tax rate change impact
(82)
161
Adjustments in respect of prior years
1
42
Actual tax charge
(1,425)
(976)
Judgment: Tax contingencies
NWB Group’s corporate income tax charge and its provisions for corporate income taxes necessarily involve a significant degree of
estimation and judgment. The tax treatment of some transactions is uncertain and tax computations are yet to be agreed with the
tax authorities in a number of jurisdictions. NWB Group recognises anticipated tax liabilities based on all available evidence and,
where appropriate, in the light of external advice. Any difference between the final outcome and the amounts provided will affect
current and deferred income tax assets and charges in the period when the matter is resolved.
For accounting policy information see Accounting policies note 3.7.
NWB Group
Annual Report and Accounts 2022
Deferred tax
NWB Group
NWB Plc
2022
2021
2022
2021
£m
£m
£m
£m
Deferred tax liability
130
209
—
—
Deferred tax asset
(1,117)
(1,268)
(1,104)
(1,244)
Net deferred tax asset
(987)
(1,059)
(1,104)
(1,244)
Net deferred tax asset comprised:
NWB Group
Pension
Accelerated capital
allowances
Expense
provisions
Financial
instruments (1)
Tax losses
carried
forward
Other
Total
£m
£m
£m
£m
£m
£m
£m
At 1 January 2021
(136)
(282)
(60)
(16)
(600)
(29)
(1,123)
Charge/(credit) to income statement
15
12
2
1
(8)
(6)
16
Charge/(credit) to other comprehensive
income
14
—
(3)
40
—
(3)
48
Currency translation and other adjustments
1
(2)
—
—
—
1
—
At 31 December 2021
(106)
(272)
(61)
25
(608)
(37)
(1,059)
Charge to income statement
—
100
4
23
163
11
301
Charge/(credit) to other comprehensive
income
39
—
1
(275)
—
(3)
(238)
Currency translation and other adjustments
—
10
—
—
—
(1)
9
At 31 December 2022
(67)
(162)
(56)
(227)
(445)
(30)
(987)
NWB Plc
Pension
Accelerated capital
allowances
Expense
provisions
Financial
instruments (1)
Tax losses
carried
forward
Other
Total
£m
£m
£m
£m
£m
£m
£m
At 1 January 2021
(130)
(438)
(48)
(13)
(592)
(27)
(1,248)
Charge/(credit) to income statement
13
(29)
—
—
(9)
(7)
(32)
Charge/(credit) to other comprehensive
income
14
—
(3)
40
—
(3)
48
Amounts transferred from Ulster Bank
Limited
—
(2)
(2)
—
(7)
(1)
(12)
At 31 December 2021
(103)
(469)
(53)
27
(608)
(38)
(1,244)
Charge to income statement
—
186
2
18
163
11
380
Charge/(credit) to other comprehensive
income
38
—
1
(276)
—
(3)
(240)
At 31 December 2022
(65)
(283)
(50)
(231)
(445)
(30)
(1,104)
(1)
The in-year movement predominantly relates to cash flow hedges.
Deferred tax assets in respect of unused tax losses are recognised if the losses can be used to offset probable future taxable profits
after taking into account the expected reversal of other temporary differences. Recognised deferred tax assets in respect of tax
losses are analysed further below.
2022
2021
£m
£m
UK tax losses carried forward
- NWB Plc
445
608
445
608
NWB Group
Annual Report and Accounts 2022
Critical accounting policy: Deferred tax
The deferred tax assets of £1,117 million as at 31 December
2022 (2021 - £1,268 million) principally comprises losses which
arose in the UK, and temporary differences. These deferred tax
assets are recognised to the extent that it is probable that there
will be future taxable profits to recover them.
It was announced in the UK Government’s budget on 27
October 2021 that the UK banking surcharge will decrease from
8% to 3% from 1 April 2023. This legislative change was enacted
on 24 February 2022. NWB Group’s closing deferred tax assets
and liabilities have therefore been recalculated taking into
account this change of rate and the applicable period the
deferred tax assets and liabilities are expected to crystallise.
Judgment
- NWB Group has considered the carrying value of
deferred tax assets and concluded that, based on
management’s estimates, sufficient taxable profits will be
generated in future years to recover recognised deferred tax
assets.
Estimate
-
These estimates are based on forecast performance
for management’s detailed plans. They have regard to inherent
uncertainties, such as climate change.
UK tax losses
- Under UK tax rules, tax losses can be carried
forward indefinitely. As the recognised tax losses in the Group
arose prior to 1 April 2015, credit in future periods is given
against 25% of profits at the main rate of UK corporation tax,
excluding the Banking Surcharge rate introduced by The
Finance (No. 2) Act 2015.
National Westminster Bank Plc
– A deferred tax asset of £445
million (2021 - £608 million) has been recognised in respect of
losses of £1,847 million of total losses of £2,718 million carried
forward at 31 December 2022. The losses arose principally as a
result of significant impairment and conduct charges between
2009 and 2012 during challenging economic conditions in the
UK banking sector. NWB Plc expects the deferred tax asset to
be utilised against future taxable profits by the end of 2027.
Unrecognised deferred tax
Deferred tax assets of £223 million (2021 - £237 million) have
not been recognised in respect of tax losses and other
deductible temporary differences carried forward of £892 million
(2021 - £949 million) in jurisdictions where doubt exists over the
availability of future taxable profits.
The tax losses and other
deductible temporary differences carried forward have no
expiry date.
Deferred tax liabilities of £105 million (2021 - £123 million) on
aggregate underlying temporary differences of £468 million
(2021 - £490 million) have not been recognised in respect of
retained earnings of overseas subsidiaries and held-over gains
on the incorporation of certain overseas branches. Retained
earnings of overseas subsidiaries are expected to be reinvested
indefinitely or remitted to the UK free from further taxation. No
taxation is expected to arise in the foreseeable future in respect
of held-over gains on which deferred tax is not recognised.
Changes to UK tax legislation largely exempts from UK tax
overseas dividends received on or after 1 July 2009.
8 Profit/(loss) dealt with in the accounts of the NWB Plc
As permitted by section 408(3) of the Companies Act 2006, no income statement for the Bank has been presented as a primary
financial statement.
NWB Group
Annual Report and Accounts 2022
Judgment: classification of financial assets
Classification of financial assets between amortised cost and fair value through other comprehensive income requires a degree of
judgment in respect of business models and contractual cashflows.
-
The business model criteria is assessed at a portfolio level to determine whether assets are classified as held to collect or held
to collect and sell. Information that is considered in determining the applicable business model includes the portfolio’s policies
and objectives; how the performance and risks of the portfolio are managed, evaluated and reported to management; and the
frequency, volume and timing of sales in prior periods, sales expectation for future periods, and the reasons for sales.
-
The contractual cash flow characteristics of financial assets are assessed with reference to whether the cash flows represent
solely payments of principal and interest. A level of judgment is made in assessing terms that could change the contractual
cash flows so that it would not meet the condition for solely payments of principal and interest, including contingent and
leverage features, non-recourse arrangements and features that could modify the time value of money.
We originate loans that include features that change the contractual cash flows based on the borrower meeting certain
contractually specified environmental, social and governance (ESG) targets. These are known as ESG-linked (or sustainability-
linked) loans. As part of the terms of these loans, the contractual interest rate is reduced or increased if the borrower meets (fails
to meet) specific targets linked to the activity of the borrower for example reducing carbon emissions, increase the level of
diversity at Board level, sustainable supply chain, etc. ESG features are first assessed to ascertain whether the adjustment to the
contractual cash flows results in a de minimis exposure to risks or volatility in those contractual cash flows. If this is the case the
classification of the loan is not affected. If the effect of the ESG feature is assessed as being more than de minimis, we apply
judgement to ensure that the ESG features do not generate compensation for risks that are not in line with a basic lending
arrangement. This includes amongst other aspects a review of the consistency of the ESG targets with the asset or activity of the
borrower, consideration of the targets within our risk appetite etc. Some of these loans are an integral part of NatWest Group’s
climate and sustainable funding and financing target.
For accounting policy information see Accounting policies notes 3.8, 3.9, 3.10 and 3.12.
The following tables analyse NWB Group’s financial assets and liabilities in accordance with the categories of financial instruments
in IFRS 9.
NWB Group
MFVTPL
FVOCI
Amortised cost
Other assets
Total
Assets
£m
£m
£m
£m
£m
Cash and balances at central banks
73,065
73,065
Derivatives
(1)
4,407
4,407
Loans to banks - amortised cost
(2)
3,197
3,197
Loans to customers - amortised cost
(3)
301,684
301,684
Amounts due from holding companies and fellow subsidiaries
5
—
4,173
725
4,903
Other financial assets
417
9,713
4,416
14,546
Other assets
7,667
7,667
31 December 2022
4,829
9,713
386,535
8,392
409,469
Cash and balances at central banks
101,213
101,213
Derivatives
(1)
2,460
2,460
Loans to banks - amortised cost
(2)
4,182
4,182
Loans to customers - amortised cost
(3)
286,971
286,971
Amounts due from holding companies and fellow subsidiaries
348
—
2,554
617
3,519
Other financial assets
226
26,148
2,657
29,031
Other assets
7,187
7,187
31 December 2021
3,034
26,148
397,577
7,804
434,563
NWB Group
Annual Report and Accounts 2022
Held-for- trading
Amortised cost
Other liabilities
Total
Liabilities
£m
£m
£m
£m
Bank deposits
(4)
16,060
16,060
Customer deposits
322,614
322,614
Amounts due to holding companies and fellow subsidiaries
104
38,511
156
38,771
Derivatives
(1)
2,088
2,088
Other financial liabilities
17
5,367
5,384
Subordinated liabilities
197
197
Notes in circulation
809
809
Other liabilities
(5)
960
2,510
3,470
31 December 2022
2,209
384,518
2,666
389,393
Bank deposits
(4)
22,831
22,831
Customer deposits
329,440
329,440
Amounts due to holding companies and fellow subsidiaries
—
45,034
102
45,136
Derivatives
(1)
4,119
4,119
Other financial liabilities
99
7,152
7,251
Subordinated liabilities
211
211
Notes in circulation
904
904
Other liabilities
(5)
1,071
2,863
3,934
31 December 2021
4,218
406,643
2,965
413,826
(1)
Includes net hedging derivative assets of £743 million (2021 – £113 million) and net hedging derivative liabilities of £258 million (2021 - £71 million).
(2)
Includes items in the course of collection from other third party banks of £2 million (2021 - £3 million).
(3)
Includes finance lease receivables of £8,324 million (2021 - £8,434 million).
(4)
Includes items in the course of transmission to other banks is nil (2021 - £19 million).
(5)
Includes lease liabilities of £901 million (2021 - £1,008 million), held at amortised cost.
Additional information on finance lease receivables
The following table shows the reconciliation of undiscounted finance lease receivables to net investment in finance leases:
NWB Group
NWB Plc
2022
2021
2022
2021
Amount receivable under finance leases
£m
£m
£m
£m
Within 1 year
3,212
3,252
137
271
1 to 2
years
2,247
2,019
55
138
2 to 3 years
1,381
1,433
21
55
3 to 4 years
825
748
20
21
4 to 5 years
404
420
15
20
After 5 years
1,089
1,356
38
54
Lease payments total
9,158
9,228
286
559
Unguaranteed residual values
171
225
—
—
Future drawdowns
(13)
(21)
—
—
Unearned income
(879)
(856)
(8)
(15)
Present value of lease payments
8,437
8,576
278
544
Impairments
(113)
(142)
(11)
(13)
Net investment in finance leases
8,324
8,434
267
531
NWB Group
Annual Report and Accounts 2022
The following tables analyse NWB Plc’s financial assets and liabilities in accordance with the categories of financial instruments in
IFRS 9.
NWB Plc
MFVTPL
FVOCI
Amortised cost
Other assets
Total
£m
£m
£m
£m
£m
Assets
Cash and balances at central banks
73,062
73,062
Derivatives
(1)
4,430
4,430
Loans to banks - amortised cost
(2)
2,870
2,870
Loans to customers - amortised cost
(3)
267,401
267,401
Amounts due from holding companies and fellow subsidiaries
608
—
30,585
940
32,133
Other financial assets
417
9,713
4,050
14,180
Investment in group undertakings
2,030
2,030
Other assets
5,641
5,641
31 December 2022
5,455
9,713
377,968
8,611
401,747
Cash and balances at central banks
101,210
101,210
Derivatives
(1)
2,547
2,547
Loans to banks - amortised cost
(2)
3,638
3,638
Loans to customers - amortised cost
(3)
255,443
255,443
Amounts due from holding companies and fellow subsidiaries
1,012
—
25,354
756
27,122
Other financial assets
226
26,148
2,275
28,649
Investment in group undertakings
2,319
2,319
Other assets
5,183
5,183
31 December 2021
3,785
26,148
387,920
8,258
426,111
NWB Plc
Held-for-
trading
DFV
Amortised cost
Other
liabilities
Total
£m
£m
£m
£m
£m
Liabilities
Bank deposits
(4)
16,059
16,059
Customer deposits
281,558
281,558
Amounts due to holding companies and fellow subsidiaries
104
248
74,502
183
75,037
Derivatives
(1)
2,582
2,582
Other financial liabilities
17
—
4,508
4,525
Subordinated liabilities
191
191
Notes in circulation
809
809
Other liabilities
(5)
858
1,885
2,743
31 December 2022
2,703
248
378,485
2,068
383,504
Bank deposits
(4)
22,829
22,829
Customer deposits
292,470
292,470
Amounts due to holding companies and fellow subsidiaries
—
242
76,344
136
76,722
Derivatives
(1)
4,336
4,336
Other financial liabilities
99
—
6,285
6,384
Subordinated liabilities
205
205
Notes in circulation
904
904
Other liabilities
(5)
958
2,137
3,095
31 December 2021
4,435
242
399,995
2,273
406,945
(1)
Includes net hedging derivative assets of £738 million (2021 - £108 million) and net hedging derivative liabilities of £251 million (2021 - £55 million).
(2)
Includes items in the course of collection from other banks of £2 million (2021 - £3 million).
(3)
Includes finance lease receivables of £267 million (2021 - £531 million).
(4)
Includes items in the course of transmission to other banks of nil (2021 - £19 million).
(5)
Includes lease liabilities of £802 million (2021 - £898 million), held at amortised cost.
NWB Group
Annual Report and Accounts 2022
The following tables include amounts due from/to holding companies and fellow subsidiaries:
NWB Group
2022
2021
Holding
companies
Fellow
subsidiaries
Total
Holding
companies
Fellow
subsidiaries
Total
£m
£m
£m
£m
£m
£m
Assets
Loans to banks - amortised cost
—
4,100
4,100
—
2,542
2,542
Loans to customers - amortised cost
—
73
73
—
12
12
Other financial assets
—
5
5
—
348
348
Other assets
15
710
725
14
603
617
Amounts due from holding companies and fellow
subsidiaries
15
4,888
4,903
14
3,505
3,519
Derivatives
(1)
405
2,977
3,382
47
910
957
Liabilities
Bank deposits
—
22,919
22,919
—
25,216
25,216
Customer deposits
6,264
46
6,310
11,029
28
11,057
Subordinated liabilities
2,941
—
2,941
3,074
—
3,074
MREL instruments issued to NatWest Holdings Ltd
6,339
—
6,339
5,687
—
5,687
Other financial liabilities
—
106
106
—
—
—
Other liabilities
33
123
156
—
102
102
Amounts due to holding companies and fellow
subsidiaries
15,577
23,194
38,771
19,790
25,346
45,136
Derivatives
(1)
403
667
1,070
127
695
822
NWB Plc
2022
2021
Holding
companies
Fellow
subsidiaries
Subsidiaries
Total
Holding
companies
Fellow
subsidiaries
Subsidiaries
Total
£m
£m
£m
£m
£m
£m
£m
£m
Assets
Loans to banks - amortised cost
—
3,585
10,547
14,132
—
2,042
7,595
9,637
Loans to customers - amortised cost
—
85
16,368
16,453
—
11
15,706
15,717
Other financial assets
—
4
604
608
—
352
660
1,012
Other assets
16
678
246
940
14
529
213
756
Amounts due from holding companies
and fellow subsidiaries
16
4,352
27,765
32,133
14
2,934
24,174
27,122
Derivatives
(1)
405
2,977
25
3,407
47
910
97
1,054
Liabilities
Bank deposits
—
19,816
34,549
54,365
—
22,746
28,840
51,586
Customer deposits
6,263
75
4,776
11,114
11,029
10
5,200
16,239
Subordinated liabilities
2,941
—
—
2,941
3,074
—
—
3,074
MREL instruments issued to NatWest Holdings
Ltd
6,328
—
—
6,328
5,687
—
—
5,687
Other financial liabilities
—
106
—
106
—
—
—
—
Other liabilities
33
94
56
183
—
99
37
136
Amounts due to holding companies
and fellow subsidiaries
15,565
20,091
39,381
75,037
19,790
22,855
34,077
76,722
Derivatives
(1)
403
666
527
1,596
127
695
222
1,044
(1)
Intercompany derivatives are included within derivative classification on the balance sheet.
NWB Group
Annual Report and Accounts 2022
Interest rate benchmark reform
NWB Group continues to work on the transition of USD IBOR exposures to risk free rates in advance of the cessation date of 30
June 2023. Derivatives are expected to transition during April and May 2023 and other exposures in line with fallback provisions or
deferred switches using widely accepted methodologies. The instruments yet to transition reflect an insignificant element of NWB
Group’s exposures. Instruments with exposures to other rates transitioned at the end of 2021, or at the first contractual reset date,
or at a date agreed with the counterparty.
The level of exposures without explicit or agreed conversion provisions as of the preceding year were as follows:
NWB Group
Rates subject to IBOR reform
GBP LIBOR
USD IBOR
Other IBOR
Total
2021
£m
£m
£m
£m
Loans to customers - amortised cost
2,129
2,659
4
4,792
Other financial assets
744
37
—
781
Other financial liabilities
1,070
—
—
1,070
Amounts due to holding company and fellow subsidiaries
—
3,058
—
3,058
Loan commitments
(1)
790
3,785
55
4,630
Derivatives notional (£bn)
0.1
27.4
—
27.5
NWB Plc
Rates subject to IBOR reform
GBP LIBOR
USD IBOR
Other IBOR
Total
2021
£m
£m
£m
£m
Loans to customers - amortised cost
1,946
2,113
—
4,059
Other financial assets
744
37
—
781
Other financial liabilities
1,070
—
—
1,070
Amounts due to holding company and fellow subsidiaries
—
3,058
—
3,058
Loan commitments
(1)
754
3,785
55
4,594
Derivatives notional (£bn)
0.1
27.4
—
27.5
1)
Certain loan commitments are multi-currency facilities. Where these are fully undrawn, they are allocated to the principal currency of the facility. Where the facilities are partly
drawn, the remaining loan commitment is allocated to the currency with the largest drawn amount.
At 31 December 2021 NWB Group held certain currency swaps with both legs subject to IBOR reform, for which only the GBP
LIBOR leg has an explicit or agreed conversion provisions as of 31 December 2021, but not the entire contract. These include
currency swaps of GBP LIBOR of £0.4 billion with USD IBOR; and currency swaps of USD IBOR of £0.4 billion with GBP LIBOR.
AT1 issuances
NWB Plc has issued certain capital instruments (AT1), under which reset clauses are linked to IBOR rates subject to reform. Where
under the contractual terms of the instrument the coupon resets to a rate which has IBOR as a specified component of its pricing
structure these are subject to IBOR reform and are shown in Note 22. As part of its capital management activities the NWB Plc has
acquired certain equity instruments issued by its subsidiaries which contain coupons or reset clauses linked to IBOR rates subject to
reform.
31 December 2021
£m
£167 million 6%
167
£35 million 6.09%
35
£60 million 7.335%
60
NWB Group
Annual Report and Accounts 2022
Financial instruments – financial assets and liabilities that can be offset
The tables below present information on financial assets and liabilities that are offset on the balance sheet under IFRS or subject to
enforceable master netting agreements together with financial collateral received or given
.
NWB Group
Instruments which can be offset
Potential for offset not recognised by IFRS
Gross
IFRS
offset
Balance
sheet
Effect of
master netting
and similar
agreements
Cash
collateral
Securities
collateral
Net amount
after the
effect of
netting
agreements
and related
collateral
Instruments
outside netting
agreements
Balance sheet
total
2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
Derivative assets
20,617
(16,221)
4,396
(1,523)
(116)
(361)
2,396
11
4,407
Derivative liabilities
21,652
(19,602)
2,050
(1,523)
(280)
—
247
38
2,088
Net position
(1)
(1,035)
3,381
2,346
—
164
(361)
2,149
(27)
2,319
Non trading reverse repos
23,255
(4,090)
19,165
—
—
(19,165)
—
—
19,165
Non trading repos
14,260
(4,090)
10,170
—
—
(10,170)
—
—
10,170
Net position
8,995
—
8,995
—
—
(8,995)
—
—
8,995
2021
Derivative assets
10,399
(7,961)
2,438
(1,644)
(96)
—
698
22
2,460
Derivative liabilities
12,676
(8,568)
4,108
(1,644)
(355)
(1,842)
267
11
4,119
Net position
(1)
(2,277)
607
(1,670)
—
259
1,842
431
11
(1,659)
Non trading reverse repos
33,397
(7,594)
25,803
—
—
(25,803)
—
—
25,803
Non trading repos
29,267
(7,594)
21,673
—
—
(21,673)
—
—
21,673
Net position
4,130
—
4,130
—
—
(4,130)
—
—
4,130
NWB Plc
Instruments which can be offset
Potential for offset not recognised by IFRS
Gross
IFRS offset
Balance
sheet
Effect of
master netting
and similar
agreements
Cash
collateral
Securities
collateral
Net amount
after the
effect of
netting
agreements
and related
collateral
Instruments
outside netting
agreements
Balance sheet
total
2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
Derivatives assets
20,632
(16,221)
4,411
(1,526)
(116)
(361)
2,408
19
4,430
Derivative liabilities
21,688
(19,602)
2,086
(1,526)
(280)
—
280
496
2,582
Net position
(1)
(1,056)
3,381
2,325
—
164
(361)
2,128
(477)
1,848
Non trading reverse repos
23,255
(4,090)
19,165
—
—
(19,165)
—
—
19,165
Non trading repos
14,260
(4,090)
10,170
—
—
(10,170)
—
—
10,170
Net position
(1)
8,995
—
8,995
—
—
(8,995)
—
—
8,995
2021
Derivatives assets
10,476
(7,961)
2,515
(1,649)
(96)
—
770
32
2,547
Derivative liabilities
12,682
(8,568)
4,114
(1,649)
(355)
(1,842)
268
222
4,336
Net position
(1)
(2,206)
607
(1,599)
—
259
1,842
502
(190)
(1,789)
Non trading reverse repos
33,397
(7,594)
25,803
—
—
(25,803)
—
—
25,803
Non trading repos
29,267
(7,594)
21,673
—
—
(21,673)
—
—
21,673
Net position
4,130
—
4,130
—
—
(4,130)
—
—
4,130
(1)
Within NWB Group and NWB Plc, the net IFRS offset balance of £3,381 million (2021 - £607 million) relates to variation margin netting reflected on other balance sheet lines.
NWB Group
Annual Report and Accounts 2022
Critical accounting policy: Fair value -
financial instruments
Financial instruments classified as mandatory fair value
through profit or loss; held-for-trading; designated fair value
through profit or loss and fair value through other
comprehensive income are recognised in the financial
statements at fair value. All derivatives are measured at fair
value.
Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. A fair value
measurement considers the characteristics of the asset or
liability and the assumptions that a market participant would
consider when pricing the asset or liability.
NWB Group manages some portfolios of financial assets and
financial liabilities based on its net exposure to either market or
credit risk. In these cases, the fair value is derived from the net
risk exposure of that portfolio with portfolio level adjustments
applied to incorporate bid-offer spreads, counterparty credit
risk, and funding costs (see ‘Valuation Adjustments’).
Where the market for a financial instrument is not active, fair
value is established using a valuation technique. These
valuation techniques involve a degree of estimation, the extent
of which depends on the instrument’s complexity and the
availability of market-based data. The complexity and
uncertainty in the financial instrument’s fair value is
categorised using the fair value hierarchy.
For accounting policy information see Accounting policies
notes 3.8 and 3.12.
Valuation
Fair value hierarchy
Financial instruments carried at fair value have been classified
under the fair value hierarchy. The classification ranges from
level 1 to level 3, with more expert judgment and price
uncertainty for those classified at level 3.
The determination of an instrument’s level cannot be made at
a global product level as a single product type can be in more
than one level. For example, a single name corporate credit
default swap could be in level 2 or level 3 depending on the
level of market activity for the referenced entity
.
Level 1 – instruments valued using unadjusted quoted prices in
active and liquid markets, for identical financial instruments.
Examples include government bonds, listed equity shares and
certain exchange-traded derivatives.
Level 2 - instruments valued using valuation techniques that
have observable inputs. Observable inputs are those that are
readily available with limited adjustments required. Examples
include most government agency securities, investment-grade
corporate bonds, certain mortgage products - including CLOs,
most bank loans, repos and reverse repos, state and municipal
obligations, most notes issued, certain money market securities,
loan commitments and most OTC derivatives.
Level 3 - instruments valued using a valuation technique where
at least one input which could have a significant effect on the
instrument’s valuation, is not based on observable market data.
Examples include non-derivative instruments which trade
infrequently, certain syndicated and commercial mortgage
loans, private equity, and derivatives with unobservable model
inputs.
Page
Financial instruments
Critical accounting policy: Fair value
132
Valuation
Fair value hierarchy
(D)
132
Valuation techniques
(D)
133
Inputs to valuation models
(D)
133
Valuation control
(D)
133
Key areas of judgment
(D)
134
Table of assets and liabilities split by fair value
hierarchy level
(T)
134
Valuation adjustments
Table of fair value adjustments made
(T)
135
Funding valuation adjustments (FVA)
(D)
135
Credit valuation adjustments (CVA)
(D)
135
Bid-offer
(D)
135
Product and deal specific
(D)
135
Level 3 additional information
Level 3 ranges of unobservable inputs
(D)
135
Alternative assumptions
(D)
136
Other considerations
(D)
136
Table of high and low range of fair value of
level 3 assets and liabilities
(T)
136
Movement in level 3 assets and liabilities
over the reporting period
(D)
136
Table of the movement in level 3 assets and liabilities
(T)
136
Fair value of financial instruments measured
at amortised cost
Table showing the fair value of financial instruments
measured at amortised cost on the balance sheet
(T)
137
(D) = Descriptive; (T) = Table
NWB Group
Annual Report and Accounts 2022
10 Financial instruments – valuation
continued
Valuation techniques
NWB Group derives the fair value of its instruments differently
depending on whether the instrument is a non-modelled or a
modelled product.
Non-modelled products
are valued directly from a price input,
typically on a position-by-position basis. Examples include
equities and most debt securities.
Non-modelled products can fall into any fair value levelling
hierarchy depending on the observable market activity,
liquidity, and assessment of valuation uncertainty of the
instruments. The assessment of fair value and the classification
of the instrument to a fair value level is subject to the valuation
controls discussed in the “Valuation control” section.
Modelled products
valued using a pricing model range in
complexity from comparatively vanilla products such as interest
rate swaps and options (e.g., interest rate caps and floors)
through to more complex derivatives (e.g., balance guarantee
swaps).
For modelled products, the fair value is derived using the model
and the appropriate model inputs or parameters, as opposed to
from a cash price equivalent. Model inputs are taken either
directly or indirectly from available data, where some inputs
are also modelled.
Fair value classification of modelled instruments is either level 2
or level 3, depending on the product/model combination, the
observability and quality of input parameters and other factors.
All these must be assessed to classify a position. The modelled
product is assigned to the lowest fair value hierarchy level of
any significant input used in that valuation.
Most derivative instruments, for example vanilla interest rate
swaps, foreign exchange swaps and liquid single name credit
derivatives, are classified as level 2. This is because they are
vanilla products valued using standard market models and with
observable inputs. Level 2 products range from vanilla to more
complex products, where more complex products remain
classified as Level 2 due to the materiality of any unobservable
inputs.
Inputs to valuation models
When using valuation techniques, the fair value can be
significantly affected by the choice of valuation model and
underlying assumptions. Factors considered include the
cashflow amounts and timing of those cash flows, and
application of appropriate discount rates, incorporating both
funding and credit risk. Values between and beyond available
data points are obtained by interpolation and extrapolation.
The principal inputs to these valuation techniques are as
follows:
Bond prices - quoted prices are generally available for
government bonds, certain corporate securities, and some
mortgage-related products.
Credit spreads - these express the return required over a
benchmark rate or index to compensate for the referenced
credit risk. Where available, these are derived from the price of
credit default swaps or other credit-based instruments, such as
debt securities. When direct prices are not available, credit
spreads are determined with reference to available prices of
entities with similar characteristics.
Interest rates - these are principally based on interest rate
swap prices referencing benchmark interest rates. Benchmark
rates include Interbank Offered Rates (IBOR) and the Overnight
Index Swap (OIS) rate, including SONIA (Sterling Overnight
Interbank Average Rate). Other quoted interest rates may also
be used from both the bond and futures markets.
Foreign currency exchange rates - there are observable prices
both for spot and forward contracts and futures in the world's
major currencies.
Equity and equity index prices - quoted prices are generally
readily available for equity shares listed on the world's major
stock exchanges and for major indices on such shares.
Price volatilities and correlations - volatility is a measure of the
tendency of a price to change with time. Correlation measures
the degree which two or more prices or variables are observed
to move together. Variables that move in the same direction
show positive correlation; those that move in opposite
directions are negatively correlated.
Prepayment rates - rates used to reflect how fast a pool of
assets prepay. The fair value of a financial instrument that can
be prepaid by the issuer or borrower differs from that of an
instrument that cannot be prepaid. When valuing prepayable
instruments, the value of this prepayment option is considered.
Recovery rates/loss given default - these are used as an input
to valuation models and reserves for asset-backed securities
and other credit products as an indicator of severity of losses
on default. Recovery rates are primarily sourced from market
data providers, the value of the underlying collateral, or
inferred from observable credit spreads.
Valuation control
NWB Group's control environment for the determination of the
fair value of financial instruments includes formalised
procedures for the review and validation of fair values. This
review is performed by an independent price verification (IPV)
team.
IPV is a key element of the control environment. Valuations are
first performed by the business which entered into the
transaction. These valuations are then reviewed by the IPV
team, independent of those trading the financial instruments, in
light of available pricing evidence.
Independent pricing data is collated from a range of sources.
Each source is reviewed for quality and the independent data
applied in the IPV processes using a formalised input quality
hierarchy. Consensus services are one source of independent
data and encompass interest rate, currency, credit, and bond
markets, providing comprehensive coverage of vanilla products
and a wide selection of exotic products.
Where measurement differences are identified through the IPV
process these are grouped by the quality hierarchy of the
independent data. If the size of the difference exceeds defined
thresholds, an adjustment is made to bring the valuation to
within the independently calculated fair value range.
NWB Group
Annual Report and Accounts 2022
10 Financial instruments – valuation
continued
IPV takes place at least monthly, for all fair value financial
instruments. The IPV control includes formalised reporting and
escalation of any valuation differences in breach of established
thresholds.
The quality and completeness of the information gathered in
the IPV process gives an indication as to the liquidity and
valuation uncertainty of an instrument and forms part of the
information considered when determining fair value hierarchy
classifications.
Initial fair value level classification of a financial instrument is
carried out by the IPV team. These initial classifications are
subject to senior management review. Particular attention is
paid to instruments transferring from one level to another, new
instrument classes or products, instruments where the
transaction price is significantly different from the fair value
and instruments where valuation uncertainty is high.
Valuation Committees are made up of valuation specialists and
senior business representatives from various functions and
oversee pricing, reserving and valuations issues. These
committees meet monthly to review and ratify any
methodology changes. The Executive Valuation Committee
meets quarterly to address key material and subjective
valuation issues, to review items escalated by Valuation
Committees and to discuss other relevant industry matters.
The Group model risk policy sets the policy for model
documentation, testing and review. Governance of the model
risk policy is carried out by the Group model risk oversight
committee, which comprises model risk owners and
independent model experts. All models are required to be
independently validated in accordance with the Model Risk
Policy
.
Key areas of judgment
Over the years the business has simplified, with most products
classified as level 1 or 2 of the fair value hierarchy. However,
the diverse range of products historically traded by NWB Group
means some products remain classified as level 3. Level 3
indicates a significant level of pricing uncertainty, where expert
judgment is used. As such, extra disclosures are required in
respect of level 3 instruments
.
In general, the degree of expert judgment used and hence
valuation uncertainty depends on the degree of liquidity of an
instrument or input.
Where markets are liquid, little judgment is required. However,
when the information regarding the liquidity in a particular
market is not clear, a judgment may need to be made. For
example, for an equity traded on an exchange, daily volumes of
trading can be seen, but for an over the counter (OTC)
derivative, assessing the liquidity of the market with no central
exchange is more challenging.
A key related matter is where a market moves from liquid to
illiquid or vice versa. Where this movement is considered
temporary, the fair value level is not changed. For example, if
there is little market trading in a product on a reporting date
but at the previous reporting date and during the intervening
period the market has been liquid. In this case, the instrument
will continue to be classified at the same level in the hierarchy.
This is to provide consistency so that transfers between levels
are driven by genuine changes in market liquidity and do not
reflect short term or seasonal effects. Material movements
between levels are reviewed quarterly by the Business and IPV.
The breadth and depth of the IPV data allows for a rules-based
quality assessment to be made of market activity, liquidity, and
pricing uncertainty, which assists with the process of allocation
to an appropriate level. Where suitable independent pricing
information is not readily available, the quality assessment will
result in the instrument being assessed as level 3.
The table below shows the assets and liabilities held by NWB Group split by fair value hierarchy level. Level 1 are considered the
most liquid instruments, and level 3 the most illiquid, valued using expert judgment and hence carrying the most significant price
uncertainty.
2022
2021
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
£m
£m
£m
£m
£m
£m
£m
£m
Assets
Derivatives
—
4,387
20
4,407
—
2,459
1
2,460
Amounts due from holding
companies and fellow subsidiaries
—
5
—
5
—
348
—
348
Other financial assets
Securities
5,105
4,606
2
9,713
20,229
5,718
2
25,949
Loans - MFVTPL
—
369
48
417
—
165
50
215
Loans - FVOCI
—
—
—
—
—
210
—
210
Total financial assets held at fair
value
5,105
9,367
70
14,542
20,229
8,900
53
29,182
As % of total fair value assets
35%
65%
0%
69%
31%
0%
Liabilities
Derivatives
—
2,081
7
2,088
—
3,980
139
4,119
Amounts due to holding companies
and fellow subsidiaries
—
104
—
104
—
—
—
—
Other financial liabilities
Deposits - HFT
—
17
—
17
—
99
—
99
Total financial liabilities held at fair
value
—
2,202
7
2,209
—
4,079
139
4,218
As % of total fair value liabilities
—
100%
0%
—
97%
3%
(1)
Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instrument was transferred.
NWB Group
Annual Report and Accounts 2022
10 Financial instruments – valuation
continued
Valuation adjustments
When valuing financial instruments in the trading book,
adjustments are made to mid-market valuations to cover bid-
offer spread, funding and credit risk. These adjustments are
presented in the table below:
Adjustment
2022
£m
2021
£m
Funding – FVA
166
31
Credit – CVA
—
1
Bid – Offer
22
27
188
59
Funding valuation adjustments on the group defined benefit
pension plan increased during the year, primarily driven by
increases in GBP interest rates.
Funding valuation adjustments (FVA)
FVA represents an estimate of the adjustment that a market
participant would make to incorporate funding costs and
benefits that arise in relation to derivative exposures. FVA is
calculated as a portfolio level adjustment and can result in
either a funding charge (positive) or funding benefit (negative).
Funding levels are applied to estimated potential future
exposures. For uncollateralised derivatives, the exposure
reflects the future valuation of the derivative. For collateralised
derivatives, the exposure reflects the difference between the
future valuation of the derivative and the level of collateral
posted.
Credit valuation adjustments (CVA)
CVA represents an estimate of the adjustment to fair value that
is made to incorporate the counterparty credit risk inherent in
derivative exposures. CVA is actively managed by a credit and
market risk hedging process, and therefore movements in CVA
are partially offset by trading revenue on the hedges.
The CVA is calculated on a portfolio basis reflecting an
estimate of the amount a third party would charge to assume
the credit risk.
Collateral held under a credit support agreement is factored
into the CVA calculation. In such cases where NWB Group
holds collateral against counterparty exposures, CVA is held to
the extent that residual risk remains.
Bid-offer
Fair value positions are required to be marked to exit,
represented by bid (long positions) or offer (short positions)
levels. Non-derivative positions are typically marked directly to
bid or offer prices. However derivative exposures are adjusted
to exit levels by taking bid-offer reserves calculated on a
portfolio basis. The bid-offer approach is based on current
market spreads and standard market bucketing of risk.
Bid-offer spreads vary by maturity and risk type to reflect
different spreads in the market. For positions where there is no
observable quote, the bid-offer spreads are widened in
comparison to proxies to reflect reduced liquidity or
observability.
Netting is applied on a portfolio basis to reflect the value at
which NWB Group believes it could exit the net risk of the
portfolio, rather than the sum of exit costs for each of the
portfolio’s individual trades. This is applied where the asset and
liability positions are managed as a portfolio for risk and
reporting purposes.
Product and deal specific
On initial recognition of financial assets and liabilities valued
using valuation techniques which have a significant
dependence on information other than observable market data,
any difference between the transaction price and that derived
from the valuation technique is deferred. Such amounts are
recognised in the income statement over the life of the
transaction, when market data becomes observable, or when
the transaction matures or is closed out as appropriate.
Where system generated valuations do not accurately reflect
market prices, manual valuation adjustments are applied either
at a position or portfolio level. Manual adjustments are subject
to the scrutiny of independent control teams and are subject to
monthly review by senior management.
For illiquid assets and liabilities, classified as level 3, additional information is provided on the valuation techniques used and price
sensitivity of the products to those inputs. This is to enable the reader to gauge the level of uncertainty that arises from positions
with significant unobservable inputs or modelling parameters.
Level 3 ranges of unobservable inputs
The table below provides additional information on level 3 instruments and inputs. This shows the valuation technique used for the
fair value calculation, the unobservable input or inputs and input range.
2022
2021
Financial instrument
Valuation technique
Unobservable inputs
Units
Low
High
Low
High
Other financial assets
Loans
Discount cash flow
Discount margin
bps
174
222
113
169
Derivative assets and liabilities
Interest rate & FX
derivatives
Discount cash flow
Conditional prepayment
risk
%
2
4
4
6
(1)
NWB Group does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement.
NWB Group
Annual Report and Accounts 2022
The level 3 sensitivities presented below are calculated at a
trade or low-level portfolio basis rather than an overall portfolio
basis. As individual sensitivities are aggregated with no
reflection of the correlated nature between instruments, the
overall portfolio sensitivity may not be accurately reflected. For
example, some portfolios may be negatively correlated to
others, where a downwards movement in one asset would
produce an upwards movement in another. However, due to the
additive presentation of the above figures this correlation impact
cannot be displayed. As such, the actual potential downside
sensitivity of the total portfolio may be less than the non-
correlated sum of the additive figures as shown in the below
table.
Alternative assumptions
Reasonably plausible alternative assumptions of unobservable
inputs are determined based on a specified target level of
certainty of 90%.
Alternative assumptions are determined with reference to all
available evidence including consideration of the following:
quality of independent pricing information considering
consistency between different sources, variation over time,
perceived tradability or otherwise of available quotes; consensus
service dispersion ranges; volume of trading activity and market
bias (e.g. one-way inventory); day 1 profit or loss arising on new
trades; number and nature of market participants; market
conditions; modelling consistency in the market; size and nature
of risk; length of holding of position; and market intelligence.
Other considerations
Whilst certain inputs used to calculate CVA and FVA are not
based on observable market data, the uncertainty of these
inputs is not considered to have a significant effect on the net
valuation of the related derivative portfolios.
As such, the fair value levelling of the derivative portfolios is not
determined by CVA or FVA inputs. In addition, any fair value
sensitivity driven by these inputs is not included in the level 3
sensitivities presented.
The table below shows the high and low range of fair value of
the level 3 assets and liabilities. This range incorporates the
range of fair value inputs as described in the previous table.
2022
2021
Level 3
Favourable
Unfavourable
Level 3
Favourable
Unfavourable
£m
£m
£m
£m
£m
£m
Assets
Derivatives
20
—
—
1
—
—
Other financial assets
Loans - MFVTPL
48
—
—
50
—
—
Securities
2
—
—
2
—
—
70
—
—
53
—
—
Liabilities
Derivatives
7
—
—
139
10
(10)
7
—
—
139
10
(10)
Movement in level 3 assets and liabilities over the reporting period
The following table shows the movement in level 3 assets and liabilities in the year.
2022
2021
Trading
assets (2)
Other
financial
assets (3)
Total assets
Total
liabilities
Trading
assets (2)
Other financial
assets (3)
Total assets
Total
liabilities
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January
1
52
53
139
5
50
55
228
Amounts recorded in the income statement
(1)
19
(2)
17
(127)
(1)
3
2
(70)
Level 3 transfers out
—
—
—
—
—
(3)
(3)
—
Purchases/originations
—
—
—
—
—
2
2
—
Settlements/other decreases
—
—
—
(5)
(3)
—
(3)
(19)
At 31 December
20
50
70
7
1
52
53
139
Amounts recorded in the income statement in
respect of balances held at year end:
- unrealised
19
(4)
15
(132)
(3)
—
(3)
(89)
- realised
—
—
—
5
3
—
3
19
(1)
Net gains on trading assets and liabilities of £146 million (2021 – net gains £69 million) were recorded in income from trading activities.
(2)
Trading assets comprise assets held at fair value in trading portfolios.
Other financial assets comprise fair value through other comprehensive income, designated as at fair value through profit or loss and other fair value through profit or loss
NWB Group
Annual Report and Accounts 2022
Fair value of financial instruments measured at amortised cost on the balance sheet
The following table shows the carrying value and fair value of financial instruments measured at amortised cost on the balance
sheet
.
NWB Group
NWB Plc
Fair value hierarchy level
Fair value hierarchy level
Items where fair
value
approximates
carrying value
Carrying
value
Fair
va
lue
Level 1
Level 2
Level 3
Items where
fair value
approximates
carrying value
Carrying
value
Fair
val
ue
Level 1
Level 2
Level 3
2022
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
Financial assets
Cash and balances at central
banks
73.1
73.1
Loans to banks
3.2
3.2
—
2.7
0.5
2.9
2.9
—
2.8
0.1
Loans to customers
301.7
290.8
—
19.4
271.4
267.4
257.2
—
19.3
237.9
Amounts due from holding
companies
and fellow subsidiaries
4.2
4.1
—
—
4.1
30.6
29.4
—
19.0
10.4
Other financial assets - securities
4.4
4.3
0.8
3.1
0.4
4.1
3.9
0.8
3.1
—
2021
Financial assets
Cash and balances at central
banks
101.2
101.2
Loans to banks
4.1
4.0
—
3.5
0.5
3.6
3.6
—
3.5
0.1
Loans to customers
287.0
283.0
—
27.6
255.4
255.4
251.3
—
27.5
223.8
Amounts due from holding
companies
and fellow subsidiaries
2.5
2.5
—
0.3
2.2
25.3
25.5
—
17.6
7.9
Other financial assets - securities
2.7
2.7
1.6
0.7
0.4
2.3
2.3
1.6
0.7
—
2022
Financial liabilities
Bank deposits
3.4
12.7
12.3
—
12.3
—
3.4
12.7
12.3
—
12.3
—
Customer deposits
294.9
27.7
27.7
—
11.9
15.8
261.7
19.9
19.9
—
11.9
8.0
Amounts due to holding companies
and fellow subsidiaries
0.8
37.7
37.2
—
8.9
28.3
1.9
72.6
71.1
—
25.8
45.3
Other financial liabilities
Debt securities in issue
5.4
5.4
—
2.9
2.5
4.5
4.5
—
2.9
1.6
Subordinated liabilities
0.2
0.2
—
0.2
—
0.2
0.2
—
0.2
—
Notes in circulation
0.8
0.8
2021
Financial liabilities
Bank deposits
3.7
19.1
18.8
—
18.8
—
3.7
19.1
18.8
—
18.8
—
Customer deposits
305.4
24.1
24.3
—
17.5
6.9
270.4
22.1
22.4
—
17.5
4.9
Amounts due to holding companies
and fellow subsidiaries
2.8
42.2
42.3
—
9.8
32.5
1.8
74.6
74.6
—
22.5
52.1
Other financial liabilities
Debt securities in issue
7.2
7.2
—
3.0
4.2
6.3
6.4
—
3.0
3.4
Subordinated liabilities
0.2
0.3
—
0.3
—
0.2
0.3
—
0.3
—
Notes in circulation
0.9
0.9
NWB Group
Annual Report and Accounts 2022
The assumptions and methodologies underlying the calculation
of fair values of financial instruments at the balance sheet date
are as follows
:
Short-term financial instruments
For certain short-term financial instruments: cash and balances
at central banks, items in the course of collection from other
banks, settlement balances, items in the course of transmission
to other banks, customer demand deposits and notes in
circulation, carrying value is deemed a reasonable
approximation of fair value.
Loans to banks and customers
In estimating the fair value of net loans to customers and banks
measured at amortised cost, NWB Group’s loans are segregated
into appropriate portfolios reflecting the characteristics of the
constituent loans. Two principal methods are used to estimate
fair value:
(a)
Contractual cash flows are discounted using a market
discount rate that incorporates the current spread for the
borrower or where this is not observable, the spread for
borrowers of a similar credit standing. This method is used
for portfolios where counterparties have external ratings.
(b)
Expected cash flows (unadjusted for credit losses) are
discounted at the current offer rate for the same or similar
products. The current methodology caps all loan values at
par rather than modelling clients’ option to repay loans
early. This approach is adopted for lending portfolios in
Retail Banking, Commercial & Institutional (SME loans) and
Private Banking in order to reflect the homogeneous nature
of these portfolios.
Debt securities and subordinated liabilities
Most debt securities are valued using quoted prices in active
markets or from quoted prices of similar financial instruments in
active markets. Fair values of the remaining population are
determined using market standard valuation techniques, such as
discounted cash flows, adjusting for own credit spreads where
appropriate.
Bank and customer deposits
Fair values of deposits are estimated using discounted cash flow
valuation techniques. Where required, methodologies can be
revised as additional information and valuation inputs become
available.
NWB Group
Annual Report and Accounts 2022
11 Financial instruments - maturity analysis
Remaining maturity
The following table shows the residual maturity of financial instruments, based on contractual date of maturity
.
NWB Group
2022
2021
Less than
12
months
More than
12
months
Total
Less than
12
months
More than
12
months
Total
£m
£m
£m
£m
£m
£m
Assets
Cash and balances at central banks
73,065
—
73,065
101,213
—
101,213
Derivatives
307
4,100
4,407
159
2,301
2,460
Loans to banks - amortised cost
2,947
250
3,197
4,173
9
4,182
Loans to customers - amortised cost
60,712
240,972
301,684
78,287
208,684
286,971
Amounts due from holding companies and fellow subsidiaries
(1)
4,159
19
4,178
2,635
267
2,902
Other financial assets
1,161
13,385
14,546
4,642
24,389
29,031
Liabilities
Bank deposits
4,060
12,000
16,060
10,831
12,000
22,831
Customer deposits
321,584
1,030
322,614
328,748
692
329,440
Derivatives
521
1,567
2,088
123
3,996
4,119
Amounts due to holding companies and fellow subsidiaries
(2)
30,271
8,344
38,615
35,795
9,239
45,034
Other financial liabilities
2,486
2,898
5,384
3,551
3,700
7,251
Subordinated liabilities
74
123
197
88
123
211
Notes in circulation
809
—
809
904
—
904
Lease liabilities
112
789
901
203
805
1,008
NWB Plc
2022
2021
Less than
12
months
More than
12
months
Total
Less than
12
months
More than
12
months
Total
£m
£m
£m
£m
£m
£m
Assets
Cash and balances at central banks
73,062
—
73,062
101,210
—
101,210
Derivatives
308
4,122
4,430
156
2,391
2,547
Loans to banks - amortised cost
2,620
250
2,870
3,638
—
3,638
Loans to customers - amortised cost
48,498
218,903
267,401
67,008
188,435
255,443
Amounts due from holding companies and fellow subsidiaries
(1)
14,046
17,147
31,193
10,633
15,733
26,366
Other financial assets
1,161
13,019
14,180
4,260
24,389
28,649
Liabilities
Bank deposits
4,059
12,000
16,059
10,829
12,000
22,829
Customer deposits
280,778
780
281,558
291,780
690
292,470
Amounts due to holding companies and fellow subsidiaries
(2)
48,016
26,838
74,854
52,883
23,703
76,586
Derivatives
521
2,061
2,582
120
4,216
4,336
Other financial liabilities
2,486
2,039
4,525
3,551
2,833
6,384
Subordinated liabilities
74
117
191
88
117
205
Notes in circulation
809
—
809
904
—
904
Lease liabilities
100
702
802
194
704
898
(1)
Amounts due from holding companies and fellow subsidiaries relating to non-financial instruments of £725 million (2021 - £617 million) for NWB Group and £940 million (2021 – £756
million) for NWB Plc have been excluded from the tables.
(2)
Amounts due to holding companies and fellow subsidiaries relating to non-financial instruments of £156 million (2021 - £102 million) for NWB Group and £183 million (2021 – £136
million) for NWB Plc have been excluded from the tables.
NWB Group
Annual Report and Accounts 2022
Liabilities by contractual cash flows up to 20 years
The tables below show the timing of cash outflows to settle
financial liabilities, prepared on the following basis:
Financial liabilities are included at the earliest date on which
the counterparty can require repayment regardless of whether
or not such early repayment results in a penalty. If repayment
is triggered by, or is subject to, specific criteria such as market
price hurdles being reached, the liability is included at the
earliest possible date that conditions could be fulfilled without
considering the probability of the conditions being met. For
example, if a structured note automatically prepays hen an
equity index exceeds a certain level, the cash outflow will be
included in the less than three months period whatever the
level of the index at year end.
The settlement date of debt securities issued by certain
securitisation vehicles consolidated by the Group depends on
when cash flows are received from the securitised assets.
Where these assets are prepayable, the timing of cash outflow
relating to securities assumes that each asset will be prepaid at
the earliest possible date.
The principal amounts of financial liabilities that are repayable
after 20 years or where the counterparty has no right to
repayment of the principal are excluded from the table along
with interest payments after 20 years.
The maturity of guarantees and commitments is based on the
earliest possible date they would be drawn in order to evaluate
NWB Group’s liquidity position.
Held-for-trading liabilities amounting to £2.0 billion (2021 - £4.1
billion) for the NWB Group and £2.5 billion (2021 - £4.4 billion)
for the bank have been excluded from the tables.
NWB Group
0-3 months
3-12 months
1-3 years
3-5 years
5-10 years
10-20 years
2022
£m
£m
£m
£m
£m
£m
Liabilities by contractual maturity up to 20 years
Bank deposits
4,165
311
5,019
8,503
—
—
Customer deposits
314,550
7,106
1,028
1
12
—
Amounts due to holding companies and fellow
subsidiaries
(1)
26,150
4,328
2,855
3,778
3,526
—
Derivatives held for hedging
36
131
357
96
79
11
Other financial liabilities
2,312
175
2,461
375
109
79
Subordinated liabilities
76
10
21
21
59
104
Notes in circulation
809
—
—
—
—
—
Lease liabilities
34
91
211
167
254
206
348,132
12,152
11,952
12,941
4,039
400
Guarantees and commitments notional amount
Guarantees
(2)
1,728
—
—
—
—
—
Commitments
(3)
86,022
—
—
—
—
—
87,750
—
—
—
—
—
2021
Liabilities by contractual maturity up to 20 years
Bank deposits
10,828
—
—
12,003
—
—
Customer deposits
325,645
2,864
913
4
—
—
Amounts due to holding companies and fellow
subsidiaries
(1)
24,079
10,096
4,117
3,149
4,112
110
Derivatives held for hedging
5
5
53
32
24
13
Other financial liabilities
2,285
1,177
2,915
289
499
79
Subordinated liabilities
—
103
21
21
58
200
Notes in circulation
904
—
—
—
—
—
Lease liabilities
64
136
170
129
219
205
363,810
14,381
8,189
15,627
4,912
607
Guarantees and commitments notional amount
Guarantees
(2)
796
—
—
—
—
—
Commitments
(3)
78,742
—
—
—
—
—
79,538
—
—
—
—
—
NWB Group
Annual Report and Accounts 2022
NWB Plc
0-3 months
3-12 months
1-3 years
3-5 years
5-10 years
10-20 years
2022
£m
£m
£m
£m
£m
£m
Liabilities by contractual maturity up to 20 years
Bank deposits
4,165
311
5,019
8,503
—
—
Customer deposits
276,773
4,035
770
1
12
—
Amounts due to holding companies and fellow
subsidiaries
(1)
39,068
9,478
14,078
11,004
4,139
—
Derivatives held for hedging
33
130
355
94
76
11
Other financial liabilities
2,312
175
2,165
—
—
—
Subordinated liabilities
76
10
21
21
52
104
Notes in circulation
809
Lease liabilities
29
84
196
160
245
188
323,265
14,223
22,604
19,783
4,524
303
Guarantees and commitments notional amount
Guarantees
(2)
1,664
—
—
—
—
—
Commitments
(3)
82,135
—
—
—
—
—
83,799
—
—
—
—
—
2021
Liabilities by contractual maturity up to 20 years
Bank deposits
10,826
—
—
12,003
—
—
Customer deposits
289,509
2,033
911
4
—
—
Amounts due to holding companies and fellow
subsidiaries
(1)
31,445
17,388
6,134
9,988
11,883
377
Derivatives held for hedging
3
3
49
29
19
13
Other financial liabilities
2,285
1,177
2,915
—
—
—
Subordinated liabilities
—
103
21
21
52
200
Notes in circulation
904
—
—
—
—
—
Lease liabilities
62
129
153
123
216
199
335,034
20,833
10,183
22,168
12,170
789
Guarantees and commitments notional amount
Guarantees
(2)
742
—
—
—
—
—
Commitments
(3)
74,875
—
—
—
—
—
75,617
—
—
—
—
—
(1)
Amounts due to holding companies and fellow subsidiaries relating to non-financial instruments have been excluded from the tables.
(2)
NWB Group is only called upon to satisfy a guarantee when the guaranteed party fails to meet its obligations. NWB Group expects most guarantees it provides to expire unused.
(3)
NWB Group has given commitments to provide funds to customers under undrawn formal facilities, credit lines and other commitments to lend subject to certain conditions being
met by the counterparty. NWB does not expect all facilities to be drawn, and some may lapse before drawdown.
NWB Group
Annual Report and Accounts 2022
12 Derivatives
NWB Group uses derivatives to manage its own risk such as interest rate, foreign exchange, or credit risk or in certain customer
transactions.
NWB Group
2022
2021
Notional
Assets
Liabilities
Notional
Assets
Liabilities
£bn
£m
£m
£bn
£m
£m
Exchange rate contracts
34
158
416
26
180
218
Interest rate contracts
490
4,249
1,672
428
2,280
3,901
4,407
2,088
2,460
4,119
NWB Plc
2022
2021
Notional
Assets
Liabilities
Notional
Assets
Liabilities
£bn
£m
£m
£bn
£m
£m
Exchange rate contracts
35
159
434
27
184
231
Interest rate contracts
498
4,271
2,148
437
2,363
4,105
4,430
2,582
2,547
4,336
For accounting policy information see Accounting policies notes 3.8 and 3.12.
Refer to Note 9 for amounts due from/to fellow NatWest Group subsidiaries.
NWB Group applies hedge accounting to reduce the accounting
mismatch caused in the income statement by using derivatives
to hedge the following risks: interest rate, foreign exchange and
the foreign exchange risk associated with net investment in
foreign operations.
NWB Group’s interest rate hedging relates to the management
of NWB Group’s non-trading structural interest rate risk, caused
by the mismatch between fixed interest rates and floating
interest rates on its financial instruments. NWB Group manages
this risk within approved limits. Residual risk positions are
hedged with derivatives, principally interest rate swaps.
Suitable larger fixed rate financial instruments are subject to fair
value hedging in line with documented risk management
strategies.
Cash flow hedges of interest rate risk relate to exposures to the
variability in future interest payments and receipts due to the
movement of benchmark interest rates on forecast transactions
and on financial assets and financial liabilities. This variability in
cash flows is hedged by interest rate swaps, which convert
variable cash flows into fixed. For these cash flow hedge
relationships, the hedged items are actual and forecast variable
interest rate cash flows arising from financial assets and
financial liabilities with interest rates linked to the relevant
benchmark rates, most notably USD LIBOR, SOFR, EURIBOR,
SONIA and the Bank of England Official Bank Rate. The
variability in cash flows due to movements in the relevant
benchmark rate is hedged; this risk component is identified
using the risk management systems of NWB Group and
encompasses the majority of cash flow variability risk.
Fair value hedges of interest rate risk involve interest rate
swaps transforming the fixed interest rate risk in financial assets
and financial liabilities to floating. The hedged risk is the risk of
changes in the hedged item’s fair value attributable to changes
in the benchmark interest rate risk component of the hedged
item. The significant benchmarks identified as risk components
are USD LIBOR, SOFR, EURIBOR and SONIA. These risk
components are identified using the risk management systems
of NWB Group and encompass the majority of the hedged item’s
fair value risk.
NWB Group hedges the exchange rate risk of its net investment
in foreign currency denominated operations with currency
borrowings and forward foreign exchange contracts. NWB
Group reviews the value of the investments’ net assets,
executing hedges where appropriate to reduce the sensitivity of
capital ratios to foreign exchange rate movement. Hedge
accounting relationships will be designated where required.
Exchange rate risk also arises in NWB Group where payments
are denominated in currencies other than the functional
currency. Residual risk positions are hedged with forward
foreign exchange contracts, fixing the exchange rate the
payments will be settled in. The derivatives are documented as
cash flow hedges.
For all cash flow hedging and fair value hedge relationships
NWB Group determines that there is an adequate level of
offsetting between the hedged item and hedging instrument at
inception and on an ongoing basis. This is achieved by
comparing movements in the fair value of the expected highly
probable forecast cash flows/fair value of the hedged item
attributable to the hedged risk with movements in the fair value
of the expected changes in cash flows from the hedging
instruments. and the determination of effectiveness is in line
with the requirements of IAS39.
NWB Group uses either the actual ratio between the hedged
item and hedging instrument(s) or one that minimises hedge
ineffectiveness to establish the hedge ratio for hedge
accounting. Hedge ineffectiveness is measured in line with the
requirements of IAS39 and recognised in the income statement
as it arises.
NWB Group
Annual Report and Accounts 2022
Included in the tables above are derivatives held for hedging purposes as follows
:
NWB Group
2022
2021
Notional
Assets
Liabilities
Change in fair
value used for
hedge
ineffectiveness (1)
Notional
Assets
Liabilities
Change in fair
value used for
hedge
ineffectiveness (1)
£bn
£m
£m
£m
£bn
£m
£m
£m
Fair value hedging - interest rate contracts
23.7
981
1,022
1,563
32.7
462
1,273
1,200
Cash flow hedging - interest rate contracts
117.9
3,045
3,491
(552)
86.5
538
550
183
Cash flow hedging - exchange rate contracts
0.2
4
3
(5)
0.2
6
—
26
Net investment hedging - exchange rate
contracts
0.1
—
4
1
0.2
4
1
7
141.9
4,030
4,520
1,007
119.6
1,010
1,824
1,416
IFRS netting
(3,289)
(4,262)
(897)
(1,753)
741
258
113
71
NWB Plc
2022
2021
Notional
Assets
Liabilities
Change in fair
value used for
hedge
ineffectiveness (1)
Notional
Assets
Liabilities
Change in fair
value used for
hedge
ineffectiveness (1)
£bn
£m
£m
£m
£bn
£m
£m
£m
Fair value hedging - interest rate contracts
23.4
980
968
1,595
32.4
462
1,255
1,198
Cash flow hedging - interest rate contracts
117.9
3,045
3,491
(552)
86.5
538
550
183
Cash flow hedging - exchange rate contracts
0.1
2
3
(5)
0.1
5
—
25
141.4
4,027
4,462
1,038
119.0
1,005
1,805
1,406
IFRS netting
(3,289)
(4,211)
(897)
(1,750)
738
251
108
55
(1)
The change in fair value used for hedge ineffectiveness includes instruments that were derecognised in the year.
NWB Group
Annual Report and Accounts 2022
The following table shows the period in which the notional of hedging contract ends:
NWB Group
0-3 months
3-12 months
1-3 years
3-5 years
5-10 years
10-20 years
20+ years
Total
2022
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
Fair value hedging
Hedging assets - interest rate risk
0.2
0.2
3.0
3.5
3.2
1.6
0.5
12.2
Hedging liabilities - interest rate risk
—
0.2
4.5
3.4
3.4
—
—
11.5
Cash flow hedging
Hedging assets - interest rate risk
4.7
6.7
24.8
11.7
5.0
—
—
52.9
Average fixed interest rate
(%)
1.47
1.39
1.51
2.64
0.69
—
—
1.67
Hedging liabilities - interest rate risk
8.5
21.5
19.1
8.0
7.9
—
—
65.0
Average fixed interest rate
(%)
0.10
0.70
2.47
1.63
2.54
—
—
1.48
Hedging liabilities - exchange rate
risk
—
0.2
—
—
—
—
—
0.2
Net investment hedging
Exchange rate risk
0.1
—
—
—
—
—
—
0.1
NWB Group
0-3 months
3-12 months
1-3 years
3-5 years
5-10 years
10-20 years
20+ years
Total
2021
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
Fair value hedging
Hedging assets - interest rate risk
0.7
1.6
3.0
4.8
5.3
3.6
3.2
22.2
Hedging liabilities - interest rate risk
0.5
—
3.9
2.6
3.5
—
—
10.5
Cash flow hedging
Hedging assets - interest rate risk
0.3
—
5.5
16.0
4.5
—
—
26.3
Average fixed interest rate
(%)
2.09
—
0.53
0.48
0.53
—
—
0.52
Hedging liabilities - interest rate risk
8.3
15.2
30.0
4.4
2.3
—
—
60.2
Average fixed interest rate
(%)
0.45
0.21
0.30
0.40
0.74
—
—
0.32
Hedging liabilities - exchange rate
risk
0.1
0.1
—
—
—
—
—
0.2
Net investment hedging
Exchange rate risk
0.2
—
—
—
—
—
—
0.2
NWB Group
Annual Report and Accounts 2022
The table below analyses assets and liabilities, including intercompany, subject to hedging derivatives:
NWB Group
Carrying value of hedged
assets and liabilities
Impact on hedged items
included in carrying
value
Change in fair value used
as a basis to determine
ineffectiveness (1)
Impact of hedged items
ceased to be adjusted for
hedging gains or losses
2022
£m
£m
£m
£m
Fair value hedging - interest rate
Loans to customers – amortised cost
2,347
(490)
(592)
26
Other financial assets - securities
8,600
(666)
(2,008)
(2)
Total
10,947
(1,156)
(2,600)
24
Other financial liabilities - debt securities in issue
8,430
(696)
835
—
Subordinated liabilities
2,241
(261)
217
—
Total
10,671
(957)
1,052
—
Cash flow hedge - interest rate
Loans to banks and customers – amortised cost
(2)
52,540
2,593
Other financial assets - securities
261
12
Total
52,801
2,605
Customer deposits
65,034
(2,046)
Other financial liabilities - debt securities in issue
80
(2)
Total
65,114
(2,048)
Cash flow hedge - exchange rate
Other
204
5
Total
204
5
2021
£m
£m
£m
£m
Fair value hedging - interest rate
Loans to customers – amortised cost
2,270
58
(186)
27
Other financial assets - securities
25,936
506
(1,396)
—
Total
28,206
564
(1,582)
27
Other financial liabilities - debt securities in issue
7,828
144
288
—
Subordinated liabilities
2,374
(41)
107
—
Total
10,202
103
395
—
Cash flow hedging - interest rate
Loans to banks and customers – amortised cost
26,329
623
Other financial assets - securities
28
1
Total
26,357
624
Customer deposits
59,605
(770)
Other financial liabilities - debt securities in issue
560
(6)
Total
60,165
(776)
Cash flow hedge - exchange rate
Subordinated liabilities
—
(15)
Other
200
(10)
Total
200
(25)
For the note to this table refer to the following page.
NWB Group
Annual Report and Accounts 2022
NWB Plc
Carrying value of
hedged assets and
liabilities
Impact on hedged items
included in carrying
value
Change in fair value used
as a basis to determine
ineffectiveness (1)
Impact of hedged items
ceased to be adjusted for
hedging gains or losses
2022
£m
£m
£m
£m
Fair value hedging - interest rate
Loans to customers – amortised cost
2,274
(491)
(579)
—
Other financial assets - securities
8,600
(666)
(2,008)
(2)
Total
10,874
(1,157)
(2,587)
(2)
Other financial liabilities - debt securities in issue
8,172
(644)
790
—
Subordinated liabilities
2,241
(261)
217
—
Total
10,413
(905)
1,007
—
Cash flow hedge - interest rate
Loans to banks and customers – amortised cost
(2)
52,540
2,593
Other financial assets - securities
261
12
Total
52,801
2,605
Customer deposits
65,034
(2,046)
Other financial liabilities - debt securities in issue
80
(2)
Total
65,114
(2,048)
Cash flow hedge - exchange rate
Other
149
6
Total
149
6
2021
Fair value hedging - interest rate
Loans to customers – amortised cost
2,178
42
(179)
—
Other financial assets - securities
25,936
506
(1,397)
—
Total
28,114
548
(1,576)
—
Other financial liabilities - debt securities in issue
7,588
148
283
—
Subordinated liabilities
2,374
(41)
107
—
Total
9,962
107
390
—
Cash flow hedge - interest rate
Loans to banks and customers – amortised cost
26,329
623
Other financial assets - securities
28
1
Total
26,357
624
Customer deposits
59,605
(770)
Other financial liabilities - debt securities in issue
560
(6)
Total
60,165
(776)
Cash flow hedge - exchange rate
Subordinated liabilities
—
(15)
Other
150
(9)
Total
150
(24)
(1)
The change in fair value used for ineffectiveness includes instruments that were derecognised in the year.
(2)
Includes cash and balances at central banks.
NWB Group
Annual Report and Accounts 2022
The following shows analysis of the pre-tax cash flow hedge reserve and foreign exchange hedge reserve:
NWB Group
2022
2021
Cash flow hedge
reserve
Foreign exchange
hedge reserve
Cash flow hedge
reserve
Foreign exchange
hedge reserve
£m
£m
£m
£m
Continuing
Interest rate risk
(544)
—
(2)
—
Foreign exchange risk
2
(16)
6
20
De-designated
Interest rate
(1)
—
(6)
—
Foreign exchange risk
—
13
—
7
Total
(543)
(3)
(2)
27
NWB Plc
2022
2021
Cash flow hedge
reserve
Foreign exchange
hedge reserve
Cash flow hedge
reserve
Foreign exchange
hedge reserve
£m
£m
£m
£m
Continuing
Interest rate risk
(544)
—
(2)
—
Foreign exchange risk
(1)
(15)
5
17
De-designated
Interest rate
(1)
—
(6)
—
Total
(546)
(15)
(3)
17
For the note to these tables refer to the following page.
NWB Group
Annual Report and Accounts 2022
NWB Group
2022
2021
Cash flow hedge
reserve
Foreign exchange
hedge reserve
Cash flow hedge
reserve
Foreign exchange
hedge reserve
£m
£m
£m
£m
Amount recognised in equity
Interest rate risk
(288)
—
99
—
Foreign exchange risk
5
(31)
3
22
Total
(283)
(31)
102
22
Amount transferred from equity to earnings
Interest rate risk to net interest income
(258)
—
57
—
Interest rate risk to non-interest income
(1)
16
—
(2)
—
Interest rate risk to operating expenses
(14)
—
—
—
Foreign exchange risk to net interest income
—
—
3
—
Foreign exchange risk to non-interest income
—
—
17
—
Foreign exchange risk to operating expenses
(3)
—
3
—
Total
(259)
—
78
—
NWB Plc
2022
2021
Cash flow hedge
reserve
Foreign exchange
hedge reserve
Cash flow hedge
reserve
Foreign exchange
hedge reserve
£m
£m
£m
£m
Amount recognised in equity
Interest rate risk
(288)
—
99
—
Foreign exchange risk
—
(33)
1
15
Total
(288)
(33)
100
15
Amount transferred from equity to earnings
Interest rate risk to net interest income
(257)
—
58
—
Interest rate risk to non-interest income
(1)
16
—
(2)
—
Foreign exchange risk to net interest income
(14)
—
3
—
Foreign exchange risk to non-interest income
—
—
17
—
Foreign exchange risk to operating expenses
—
—
3
—
Total
(255)
—
79
—
(1)
There was £16 million (2021 - £2 million) reclassified with the cash flow reserve to earnings due to forecasted cash flows that are no longer expected to occur.
Hedge ineffectiveness recognised in other operating income comprised:
NWB Group
2022
2021
£m
£m
Fair value hedging
Loss on the hedged items attributable to the hedged risk
(1,548)
(1,187)
Gain on the hedging instruments
1,563
1,200
Fair value hedging ineffectiveness
15
13
Cash flow hedging
- Interest rate risk
5
32
Cash flow hedging ineffectiveness
5
32
Total
20
45
The main sources of ineffectiveness for interest rate risk hedge accounting relationships are:
the effect of the counterparty credit risk on the fair value of the interest rate swap, which is not reflected in the fair value of the
hedged item attributable to the change in interest rate; and
upfront present values on the hedging derivatives where hedge accounting relationships have been designated after the trade
date.
NWB Group
Annual Report and Accounts 2022
13 Loan impairment provisions
Loan exposure and impairment metrics
The table below summarises loans and related credit impairment measures within the scope of ECL framework.
NWB Group
NWB Plc
31 December
2022
31 December 2021
31 December
2022
31 December 2021
£m
£m
£m
£m
Loans - amortised cost
Stage 1
266,722
264,656
236,809
236,255
Stage 2
37,216
26,003
32,765
22,492
Stage 3
3,783
2,985
3,383
2,548
Inter-Group
(1)
4,220
2,555
30,633
25,362
Total
311,941
296,199
303,590
286,657
ECL provisions
(2)
Stage 1
506
231
459
207
Stage 2
813
1,105
765
1,026
Stage 3
1,262
1,167
1,170
1,037
Inter-Group
4
1
48
8
2,585
2,504
2,442
2,278
ECL provision coverage
(3)
Stage 1
(%)
0.19
0.09
0.19
0.09
Stage 2
(%)
2.18
4.25
2.33
4.56
Stage 3
(%)
33.36
39.10
34.58
40.70
Inter-Group
(%)
0.09
0.04
0.16
0.03
0.84
0.85
0.88
0.87
Impairment (releases)/losses
ECL (release)/charge
(4)
Stage 1
(243)
(995)
(256)
(945)
Stage 2
348
(30)
373
48
Stage 3
233
213
234
183
Third party
338
(812)
351
(714)
Inter-Group
3
(1)
40
(18)
341
(813)
391
(732)
Amounts written-off
321
388
272
352
(1)
NWB Group’s intercompany assets are classified in Stage 1.
(2)
Includes £2 million (2021 – £3 million) related to assets classified as FVOCI.
(3)
ECL provisions coverage is calculated as total ECL provisions divided by third party loans – amortised cost and FVOCI.
(4)
Includes a £0 million charge (2021 – £1 million charge) related to other financial assets, of which a £1 million release (2021 – £2 million charge) related to assets classified as FVOCI;
and a £0 million release (2021 – £13 million charge) related to contingent liabilities.
(5)
The table shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to Financial instruments within the scope of the IFRS 9 ECL
framework for further details. Other financial assets within the scope of the IFRS 9 ECL framework were cash and balances at central banks totaling £72.5 billion (2021 – £100.6
billion) and debt securities of £14.1 billion (2021 – £28.2 billion).
Credit risk enhancement and mitigation
For information on credit risk enhancement and mitigation held
as security, refer to Risk and capital management – credit risk
enhancement and mitigation section.
Critical accounting policy: Loan impairment provisions
Accounting policies note 2.3 sets out how the expected loss
approach is applied. At 31 December 2022, customer loan
impairment provisions amounted to £2,585 million (2021 -
£2,504 million). A loan is impaired when there is objective
evidence that the cash flows will not occur in the manner
expected when the loan was advanced. Such evidence includes
changes in the credit rating of a borrower, the failure to make
payments in accordance with the loan agreement, significant
reduction in the value of any security, breach of limits or
covenants, and observable data about relevant macroeconomic
measures.
The impairment loss is the difference between the carrying
value of the loan and the present value of estimated future
cash flows at the loan's original effective interest rate.
The measurement of credit impairment under the IFRS
expected loss model depends on management’s assessment of
any potential deterioration in the creditworthiness of the
borrower, its modelling of expected performance and the
application of economic forecasts. All three elements require
judgments that are potentially significant to the estimate of
impairment losses. For further information and sensitivity
analysis, refer to Risk and capital management – measurement
uncertainty and ECL sensitivity analysis section.
IFRS 9 ECL model design principles
Refer to Credit risk – IFRS 9 ECL model design principles
section for further details.
Approach for multiple economic scenarios (MES)
The base scenario plays a greater part in the calculation of
ECL than the approach to MES. Refer to Credit risk – economic
loss drivers – probability weightings of scenarios section for
further details.
NWB Group
Annual Report and Accounts 2022
14 Investments in Group undertakings
Investments in Group undertakings are carried at cost less impairment losses. Movements during the year were as follows
:
NWB Plc
2022
2021
£m
£m
At 1 January
2,319
2,374
Currency translation and other adjustments
(2)
(7)
Additional investments in Group undertakings
276
13
Disposals of investments in Group undertakings
(227)
—
Impairment of investments
(336)
(61)
At 31 December
2,030
2,319
The recoverable amount of investments in Group undertakings is the higher of net asset value as a proxy for fair value less cost to
sell or value in use. Where recoverable value is based on net asset value, the fair value measurement is categorised as Level 3 of
the fair value hierarchy. The carrying value of Investments in Group undertakings at 31 December 2022 is supported by the
respective recoverable values of the entities.
In 2022, additions and disposals relate primarily to the September 2022 AT1 issuance of £240 million by Coutts & Company and the
simultaneous redemption of £167 million of AT1 notes also issued by Coutts & Company. 2021 additions were related to the
investments in World Learning Limited and Silvermere Holdings Limited.
In 2022, Impairment of investments includes a £310 million impairment of the company’s investment in Ulster Bank Limited due to a
decline in its net asset value mainly driven by dividends paid during the year and losses incurred by the business. The impairment
in 2021 was also related to Ulster Bank Limited.
The value in use review as at 31 December 2022 did not indicate the need for a further impairment in the investment in Coutts &
Company. Future value in use is primarily affected by changes in profitability, and changes in discount rate. Adverse changes
would lead to value in use falling below carrying value. The most likely cause for this would be a failure to meet budgeted targets,
including cost targets, or external downgrades in the UK economy. If the carrying value is also not supported by the net asset
value, an impairment will be recorded. Beneficial changes would lead to a reversal of historic impairment.
The principal subsidiary undertakings
(2)
of the company are shown below and are wholly-owned directly or indirectly through
intermediate holding companies. Their capital consists of ordinary shares and additional Tier 1 notes which are unlisted. All those
subsidiary undertakings are included in NWB Group’s consolidated financial statements and have an accounting reference date of
31 December.
Nature of business
Country of incorporation
and principal area of
operations
Coutts & Company
(1)
Private banking
Great Britain
Lombard North Central PLC
Leasing
Great Britain
(1)
Coutts & Company is incorporated with unlimited liability.
(2)
The business of Ulster Bank Limited, which was included in the principal subsidiary undertakings in 2021, was transferred to NatWest Bank Plc on 3 May 2022. Ulster Bank Limited’s
banking license was removed on 29 December 2022.
For accounting policy information see Accounting policies note 2.5.
For full information on all related undertakings refer to Note 35.
NWB Group
Annual Report and Accounts 2022
15 Other financial assets
NWB Group
Debt securities
Central and local government
UK
US
Other
Other debt
Total
Equity
shares
Loans
Settlement
balances
Total
2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
Mandatory fair value through profit or loss
—
—
—
—
—
—
417
—
417
Fair value through other comprehensive
income
681
3,171
431
5,428
9,711
2
—
—
9,713
Amortised cost
888
—
—
3,522
4,410
—
—
6
4,416
Total
1,569
3,171
431
8,950
14,121
2
417
6
14,546
2021
Mandatory fair value through profit or loss
—
—
—
—
—
11
215
—
226
Fair value through other comprehensive
income
10,118
6,088
2,845
6,885
25,936
2
210
—
26,148
Amortised cost
1,582
—
—
1,075
2,657
—
—
—
2,657
Total
11,700
6,088
2,845
7,960
28,593
13
425
—
29,031
NWB Plc
Debt securities
Central and local government
UK
US
Other
Other debt
Total
Equity
shares
Loans
Settlement
balances
Total
2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
Mandatory fair value through profit or loss
—
—
—
—
—
—
417
—
417
Fair value through other comprehensive
income
681
3,171
431
5,428
9,711
2
—
—
9,713
Amortised cost
888
—
—
3,156
4,044
—
—
6
4,050
Total
1,569
3,171
431
8,584
13,755
2
417
6
14,180
2021
Mandatory fair value through profit or loss
—
—
—
—
—
11
215
—
226
Fair value through other comprehensive
income
10,118
6,088
2,845
6,885
25,936
2
210
—
26,148
Amortised cost
1,582
—
—
693
2,275
—
—
—
2,275
Total
11,700
6,088
2,845
7,578
28,211
13
425
—
28,649
For accounting policy information see Accounting policies note 3.8.
NWB Group
NWB Plc
2022
2021
2022
2021
£m
£m
£m
£m
Intangible assets (Note 17)
1,607
1,232
1,458
1,100
Property, plant and equipment (Note 18)
3,704
3,644
1,969
1,989
Pension schemes in net surplus (Note 5)
7
7
—
—
Assets of disposal groups
6
37
3
34
Prepayments
321
342
286
310
Accrued income
151
150
82
76
Tax recoverable
229
30
331
5
Deferred tax (Note 7)
1,117
1,268
1,104
1,244
Acceptances
128
58
119
55
Other assets
397
419
289
370
7,667
7,187
5,641
NWB Group
Annual Report and Accounts 2022
NWB Group
2022
2021
Goodwill
Other (1)
Total
Goodwill
Other (1)
Total
£m
£m
£m
£m
£m
£m
Cost
At 1 January
623
3,014
3,637
623
2,570
3,193
Currency translation and other adjustments
—
(3)
(3)
—
29
29
Additions
—
722
722
—
465
465
Disposals and write-off of fully amortised assets
—
(27)
(27)
—
(50)
(50)
At 31 December
623
3,706
4,329
623
3,014
3,637
Accumulated amortisation and impairment
At 1 January
564
1,841
2,405
564
1,537
2,101
Currency translation and other adjustments
—
(3)
(3)
—
31
31
Disposals and impairment of fully amortised assets
—
(18)
(18)
—
(28)
(28)
Amortisation charge for the year
—
338
338
—
299
299
Impairment of intangible assets
—
—
—
—
2
2
At 31 December
564
2,158
2,722
564
1,841
2,405
Net book value at 31 December
59
1,548
1,607
59
1,173
1,232
NWB Plc
2022
(1)
2021
(1)
£m
£m
Cost
At 1 January
2,889
2,478
Currency translation and other adjustments
—
24
Additions
690
433
Disposals and write-off of fully amortised assets
(11)
(46)
At 31 December
3,568
2,889
Accumulated amortisation
At 1 January
1,789
1,502
Currency translation and other adjustments
—
24
Disposals and write-off of fully amortised assets
(1)
(26)
Charge for the year
322
289
At 31 December
2,110
1,789
Net book value at 31 December
1,458
1,100
(1)
Principally internally generated software.
Intangible assets and goodwill are reviewed for indicators of
impairment. Impairment testing involves the comparison of the
carrying value of each cash-generating unit (CGU) with its
recoverable amount. The carrying values of the segments
reflect the equity allocations made by management which are
consistent with NatWest Group’s capital targets.
Recoverable amount is the higher of fair value less costs of
disposal and value in use. Fair value is the price that would be
received to sell an asset in an orderly transaction between
market participants. Value in use is the present value of
expected future cash flows from the CGU.
The recoverable amounts for all CGUs at 31 December 2022
were based on value in use, using management's latest five-
year revenue and cost forecasts. These are discounted cash
flow projections over five years. The forecast is then
extrapolated in perpetuity using a long-term growth rate to
compute a terminal value, which comprises the majority of the
value in use. The long-term growth rates have been based on
expected growth of the CGUs. The pre-tax risk discount rates
are based on those observed to be applied to businesses
regarded as peers of the CGUs.
For accounting policy information see Accounting policies notes
NWB Group
Annual Report and Accounts 2022
18 Property, plant and equipment
NWB Group
Investment
properties
Property, plant and
equipment
Operating
leases
Total
2022
£m
£m
£m
£m
Cost or valuation
At 1 January
840
6,970
1,095
8,905
Transfers to disposal groups
—
(7)
—
(7)
Transfers to fellow subsidiaries
—
(10)
—
(10)
Currency translation and other adjustments
(17)
(9)
—
(26)
Additions
145
399
146
690
Disposals and write-off of fully depreciated assets
(27)
(301)
(112)
(440)
At 31 December
941
7,042
1,129
9,112
Accumulated impairment, depreciation and amortisation
At 1 January
—
4,692
569
5,261
Transfers to disposal groups
—
(4)
—
(4)
Transfers to
fellow subsidiaries
—
4
—
4
Currency translation and other adjustments
(1)
—
28
—
28
Disposals and write-off of fully depreciated assets
—
(224)
(85)
(309)
Charge for the year
—
264
128
392
Impairment of property, plant and equipment
—
36
—
36
At 31 December
—
4,796
612
5,408
Net book value at 31 December
941
2,246
517
3,704
2021
Cost or valuation
At 1 January
760
6,954
1,129
8,843
Transfers to disposal groups
—
(71)
—
(71)
Transfers from fellow subsidiaries
—
3
—
3
Currency translation and other adjustments
(64)
13
—
(51)
Additions
144
767
98
1,009
Change in fair value of investment properties
—
—
—
—
Disposals and write-off of fully depreciated assets
—
(696)
(132)
(828)
At 31 December
840
6,970
1,095
8,905
Accumulated impairment, depreciation and amortisation
At 1 January
—
4,643
529
5,172
Transfers to disposal groups
—
(39)
—
(39)
Currency translation and other adjustments
(1)
—
260
—
260
Disposals and write-off of fully depreciated assets
—
(507)
(100)
(607)
Charge for the year
—
312
140
452
Impairment of property, plant and equipment
—
23
—
23
At 31 December
—
4,692
569
5,261
Net book value at 31 December
840
2,278
526
3,644
(1)
Other adjustments include the effect of the purchase of freeholds for properties where the Group was the primary leaseholder.
Investment property valuations principally employ present value
techniques that discount expected cash flows. Expected cash
flows reflect rental income, occupancy and residual market
values; valuations are sensitive to changes in these factors. The
investment property fair value measurements are categorised
as level 3. A 5% change in the most sensitive assumption,
residual values, is £33 million (2021: £27 million) on the value of
Investment property.
Valuations were carried out by qualified surveyors who are
members of the Royal Institution of Chartered Surveyors, or an
equivalent overseas body; property with a fair value of £135
million (2021 - £236 million) was valued by independent valuers
for the purposes of year end valuations.
For accounting policy information see Accounting policies notes
3.4 and 3.5.
NWB Group
Annual Report and Accounts 2022
NWB Plc
Investment
properties
Property, plant and
equipment
Total
2022
£m
£m
£m
Cost or valuation
At 1 January
6
6,479
6,485
Transfers to disposal groups
—
(7)
(7)
Transfers to subsidiaries and fellow subsidiaries
—
(10)
(10)
Currency translation and other adjustments
(6)
(9)
(15)
Additions
—
381
381
Disposals and write-off of fully depreciated assets
—
(262)
(262)
At 31 December
—
6,572
6,572
Accumulated impairment, depreciation and amortisation
At 1 January
—
4,496
4,496
Transfers to disposal groups
—
(4)
(4)
Transfers to subsidiaries and fellow subsidiaries
—
4
4
Currency translation and other adjustments
(1)
—
26
26
Disposals and write-off of fully depreciated assets
—
(194)
(194)
Charge for the year
—
240
240
Impairment of property, plant and equipment
—
35
35
At 31 December
—
4,603
4,603
Net book value at 31 December
—
1,969
1,969
2021
Cost or valuation
At 1 January
6
6,346
6,352
Transfers to disposal groups
—
(71)
(71)
Transfers from subsidiaries and fellow subsidiaries
—
132
132
Currency translation and other adjustments
—
(5)
(5)
Additions
—
735
735
Disposals and write-off of fully depreciated assets
—
(658)
(658)
At 31 December
6
6,479
6,485
Accumulated impairment, depreciation and amortisation
At 1 January
—
4,384
4,384
Transfers to disposal groups
—
(39)
(39)
Transfers from subsidiaries and fellow subsidiaries
—
83
83
Currency translation and other adjustments
(1)
—
239
239
Disposals and write-off of fully depreciated assets
—
(476)
(476)
Charge for the year
—
282
282
Impairment of property, plant and equipment
—
23
23
At 31 December
—
4,496
4,496
Net book value at 31 December
6
1,983
1,989
(1)
Other adjustments include the effect of the purchase of freeholds for properties where the Group was the primary leaseholder.
NWB Group
Annual Report and Accounts 2022
NWB Group
NWB Plc
2022
2021
2022
2021
£m
£m
£m
£m
Bank deposits - held-for-trading
7
66
7
66
Customer deposits - held-for-trading
10
33
10
33
Settlement balances
(1)
2
—
2
—
Debt securities in issue
- Commercial paper and certificates of deposit
1,664
3,399
1,664
3,399
- Covered bonds
2,842
2,886
2,842
2,886
- Securitisation
859
867
—
—
Total
5,384
7,251
4,525
6,384
NWB Group
Annual Report and Accounts 2022
20 Subordinated liabilities
NWB Group
NWB Plc
2022
2021
2022
2021
£m
£m
£m
£m
Undated loan capital
78
93
72
87
Preference shares
119
118
119
118
197
211
191
205
(1)
The table above excludes amounts due to holding company and fellow subsidiaries of £2,941 million (2021 - £3,074 million) for NWB Group and £2,941 million (2021 - £3,074 million)
for NWB Plc. Refer to intercompany balances in Note 9
.
(2)
The preference shares issued by NWB Plc are classified as liabilities; these securities remain subject to the capital maintenance rules of the Companies Act 2006.
For accounting policy information see Accounting policies notes 3.8 and 3.11.
2022
2021
Undated loan capital
First call date
Maturity date
Capital treatment
£m
£m
NWB Plc
£53 million
7.125% notes
Oct-2022
—
Tier 2
—
56
£35 million
11.5%
notes
Dec-2022
—
Tier 2
72
31
72
87
Preference shares
NWB Plc
£140 million
Non-cumulative preference shares of £1
—
—
Not applicable
119
118
119
118
191
205
Undated loan capital other subsidiaries
6
6
197
211
The following tables analyse these intercompany subordinated liabilities:
NWB Group and Bank
2022
2021
Other subsidiaries
£m
£m
Dated loan capital
2,241
2,374
Undated loan capital
700
700
Preference shares
2,941
3,074
2022
2021
Dated loan capital
£m
£m
NWB Plc
€411.4 million
1.043% notes
Jun-27
Sep-32
Tier 2
311
341
$750 million
3.754% notes
Nov-24
Nov-29
Tier 2
594
567
£500 million
3.622% notes
Aug-25
Aug-30
Tier 2
458
491
£1000 million
2.105% notes
May-26
Nov-31
Tier 2
878
975
2,241
2,374
Undated loan capital
NWB Plc
£700 million
Floating rate notes
—
—
Tier 2
700
700
700
700
(1)
Further details of the contractual terms of the preference shares are given in note 22 on the consolidated accounts
.
NWB Group
Annual Report and Accounts 2022
21 Other liabilities
NWB Group
NWB Plc
2022
2021
2022
2021
£m
£m
£m
£m
Lease liabilities
901
1,008
802
898
Provisions for liabilities and charges
550
640
519
604
Retirement benefit liabilities (Note 5)
35
48
9
12
Accruals
1,009
1,185
878
1,051
Deferred income
232
204
212
186
Current tax
2
21
2
1
Deferred tax (Note 7)
130
209
—
—
Acceptances
128
58
119
55
Other liabilities
483
561
202
288
3,470
3,934
2,743
3,095
NWB Group
Redress and other
litigation (1)
Property
Financial
commitments and
guarantees
Other (2)
Total
Provisions for liabilities and charges
£m
£m
£m
£m
£m
At 1 January 2022
302
166
63
109
640
Expected credit losses impairment charge
—
—
(4)
—
(4)
Currency translation and other movements
—
—
—
1
1
Charge to income statement
134
20
—
96
250
Release to income statement
(30)
(53)
—
(45)
(128)
Provisions utilised
(114)
(28)
—
(67)
(209)
At 31 December 2022
292
105
59
94
550
NWB Plc
Redress and other
litigation (1)
Property
Financial
commitments and
guarantees
Other (2)
Total
Provisions for liabilities and charges
£m
£m
£m
£m
£m
At 1 January 2022
294
163
60
87
604
Expected credit losses impairment release
—
(3)
—
(3)
Charge to income statement
134
18
—
94
246
Release to income statement
(30)
(52)
—
(42)
(124)
Provisions utilised
(112)
(26)
—
(66)
(204)
At 31 December 2022
286
103
57
73
519
(1)
Includes payment protection insurance provision which reflects the estimated cost of PPI redress attributable to claims prior to the Financial Conduct Authority (FCA) complaint
deadline of 29 August 2019. All pre-deadline complaints have been processed which removes complaint volume estimation uncertainty from the provision estimate. NatWest Group
continues to conclude remaining bank-identified closure work and conclude cases with the Financial Ombudsmen Service.
(2)
Other materially comprises provisions relating to restructuring costs.
Provisions are liabilities of uncertain timing or amount and are recognised when there is a present obligation as a result of a past
event, the outflow of economic benefit is probable and the outflow can be estimated reliably. Any difference between the final
outcome and the amounts provided will affect the reported results in the period when the matter is resolved.
For accounting policy information see Accounting policies note 2.4.
Critical accounting policy: Provisions for liabilities
The key judgment is involved in determining whether a present obligation exists. There is often a high degree of uncertainty and
judgment is based on the specific facts and circumstances relating to individual events in determining whether there is a present
obligation. Judgment is also involved in estimation of the probability, timing and amount of any outflows. Where NWB Group can
look to another party such as an insurer to pay some or all of the expenditure required to settle a provision, any reimbursement is
recognised when, and only when, it is virtually certain that it will be received.
Estimates
-
Provisions are liabilities of uncertain timing or amount and are recognised when there is a present obligation as a result
of a past event, the outflow of economic benefit is probable and the outflow can be estimated reliably. Any difference between the
final outcome and the amounts provided will affect the reported results in the period when the matter is resolved.
-
Customer redress: Provisions reflect the estimated cost of redress attributable to claims where it is determined that a present
obligation exists.
-
Litigation and other regulatory: NWB Group is engaged in various legal proceedings, both in the UK and in overseas
jurisdictions, including the US. For further information in relation to legal proceedings and discussion of the associated
uncertainties, refer to Note 26.
-
Property: This includes provision for contractual costs associated with vacant properties.
-
Other provisions: These materially comprise provisions for onerous contracts and restructuring costs. Onerous contract
provisions comprise an estimate of the costs involved in fulfilling the terms and conditions of contracts net of any expected
benefits to be received. This includes provision for contractual costs associated with vacant properties. Redundancy and
restructuring provisions comprise the estimated cost of restructuring, including redundancy costs where an obligation exists.
Background information on all material provisions is given in Note 26.
NWB Group
Annual Report and Accounts 2022
22 Share capital and reserves
2022
2021
Number of shares - 000s
Allotted, called up and fully paid
£m
£m
2022
2021
Ordinary shares of £1
1,678
1,678
1,678,177
1,678,177
Non-cumulative preference shares of £1
116
116
116,349
116,349
Ordinary shares
No ordinary shares were issued during 2022 or 2021.
In 2022, NWB Plc paid an ordinary dividend of £3.3 billion to
NWH Ltd (2021 – 1.6 billion).
Preference shares
The 9% non-cumulative preference shares Series A of £1 each
are non-redeemable.
The holders of sterling preference shares are entitled, on the
winding-up of NWB Plc, to priority over the ordinary
shareholders as regards payment of capital. Otherwise the
holders of preference shares are not entitled to any further
participation in the profits or assets of NWB Plc and accordingly
these shares are classified as non-equity shares.
The holders of sterling preference shares are not entitled to
receive notice of, attend, or vote at any general meeting unless
the business of the meeting includes the consideration of a
resolution for the winding-up of NWB Plc or the sale of the
whole of the business of NWB Plc or any resolution directly
affecting any of the special rights or privileges attached to any
of the classes of preference shares.
Under IFRS, NWB Plc preference shares are classified as debt
and are included in subordinated liabilities on the balance sheet
(Note 20).
Paid-in equity
Comprises equity instruments issued by NWB Plc other than
those legally constituted as shares.
Additional Tier 1 Instruments issued by NWB Plc having the
legal form of debt are classified as equity under IFRS. The
coupons on these Instruments are non-cumulative and payable
at NWB Plc’s discretion.
Capital recognised for regulatory purposes cannot be
redeemed without Prudential Regulation Authority consent. This
includes ordinary shares, preference shares and additional Tier
1 Instruments.
(1)
Instrument was partially redeemed in June 2022.
Reserves
Under UK companies legislation, when shares are redeemed or
purchased wholly or partly out of NWB Plc’s profits, the amount
by which NWB Plc’s issued share capital is diminished must be
transferred to the capital redemption reserve. The capital
maintenance provisions of UK companies legislation apply to
the capital redemption reserve as if it were part of NWB Plc’s
paid up share capital.
UK law prescribes that only reserves of NWB Plc are taken into
account for the purpose of making distributions and the
permissible applications of the share premium account and
capital redemption reserve of £631 million (2021 - £631 million)
included within other reserves.
NWB Plc optimises capital efficiency by maintaining reserves in
subsidiaries, including regulated entities. Certain preference
shares and subordinated debt are also included within
regulatory capital. The remittance of reserves to the parent
company or the redemption of shares or subordinated capital
by regulated entities may be subject to maintaining the capital
resources required by the relevant regulator.
For accounting policy information see Accounting policies note
3.11.
2022
2021
£m
£m
Additional Tier 1 instruments
US$2,000 million 3.8495% instruments callable
August 2023
(1)
US$750 million 4.3517% instruments callable June
2031
GBP£400 million 3.9438% instruments callable
March 2028
GBP£500 million 6.8543% instruments callable May
2027
1,077
541
400
500
1,436
541
400
-
2,518
2,377
NWB Group
Annual Report and Accounts 2022
A structured entity (SE) is an entity that has been designed
such that voting or similar rights are not the dominant factor in
deciding who controls the entity, for example when any voting
rights relate to administrative tasks only and the relevant
activities are directed by means of contractual arrangements.
SEs are usually established for a specific, limited purpose, they
do not carry out a business or trade and typically have no
employees.
In a securitisation, assets, or interests in a pool of assets, are
transferred, or the credit risk is transferred via a derivative or
financial guarantee to a SE which then issues liabilities to third
party investors.
NWB Group’s involvement in client securitisations takes a
number of forms. It may provide secured finance to, or
purchase asset-backed notes from, client sponsored SEs
secured on assets transferred by the client entity; or purchase
asset backed securities issued by client sponsored SEs in the
primary or secondary markets. In addition, NWB Group
undertakes own-asset securitisations to transfer the credit risk
Other credit risk transfers securitisations
NWB Group transfers credit risk on originated loans and
mortgages without the transfer of the assets to a SE. As part of
this, NWB Group enters into credit derivative and financial
guarantee contracts with consolidated SEs. At 31 December
2022, debt securities in issue by such SEs (and held by third
parties) were £859 million (2021 - £867 million). The associated
loans and mortgages at 31 December 2022 were £4,361 million
(2021 - £7,137 million). At 31 December, ECL in relation to non-
defaulted assets was reduced by £20 million (2021 - £28 million)
as a result of financial guarantee contracts with consolidated
SEs.
Covered bond programme
Certain loans to customers have been assigned to bankruptcy
remote limited liability partnerships to provide security for
issues of debt securities by NWB Group. NWB Group retains all
of the risks and rewards of these loans. The partnerships are
consolidated by NWB Group, the loans retained on NWB
Group’s balance sheet and the related covered bonds included
within debt securities in issue of the NWB Group. At 31
December 2022, £6,992 million of loans to customers have
been assigned to bankruptcy remote limited liability
partnerships to provide security for issues of debt securities by
the NWB Group of £2,842 million (2021 - loans to customers -
£8,267 million, debt securities in issue – £2,886 million).
NWB Group’s interest in unconsolidated structured entities is analysed below.
2022
2021
Asset backed
securitisation
vehicles
Investment funds
and other
Total
Asset backed
securitisation vehicles
Investment funds
and other
Total
£m
£m
£m
£m
£m
£m
Non trading assets
Loans to customers
30
254
284
5
208
213
Other financial assets
1,403
—
1,403
964
—
964
Total
1,433
254
1,687
969
208
1,177
Liquidity facilities/loan commitments
250
38
288
1
55
56
Guarantees
—
14
14
—
—
—
Maximum exposure
1,683
306
1,989
970
263
NWB Group
Annual Report and Accounts 2022
24 Asset transfers
Transfers that do not qualify for
derecognition
NWB Group enters into securities repurchase agreements and
securities lending transactions under which it transfers
securities in accordance with normal market practice.
Generally, the agreements require additional collateral to be
provided if the value of the securities falls below a
predetermined level.
Under standard terms for repurchase transactions in the UK
and US markets, the recipient of collateral has an unrestricted
right to sell or re-pledge it, subject to returning equivalent
securities on settlement of the transaction.
Securities sold under repurchase transactions are not
derecognised if NWB Group retains substantially all the risks
and rewards of ownership. The fair value (and carrying value)
of securities transferred under such repurchase transactions
included on the balance sheet, are set out below. All of these
securities could be sold or re-pledged by the holder.
For accounting policy information see Accounting policies note
3.9.
NWB Group
NWB Plc
2022
2021
2022
2021
The following assets have failed derecognition
(1)
£m
£m
£m
£m
Loans to bank - amortised cost
16
38
16
38
Loans to customers - amortised cost
398
1,837
398
1,837
Other financial assets
2,140
10,813
2,140
10,813
Total
2,554
12,688
2,554
12,688
(1)
Associated liabilities were £2,137 million for both NWB Group and NWB Plc (2021- £10,783 million).
NWB Group pledges collateral with its counterparties in respect of derivative liabilities and bank and stock borrowings
.
NWB Group
NWB Plc
2022
2021
2022
2021
Assets pledged against liabilities
£m
£m
£m
£m
Loans to banks - amortised cost
66
62
-
—
Loans to customers - amortised cost
17,493
20,108
17,493
20,108
Other financial assets
697
2,429
697
2,429
Total
18,256
22,599
18,190
22,537
(1)
Includes amount pledged for pension derivatives.
The following table analyses assets that have been transferred but have failed the derecognition rules under IFRS 9 and therefore
continue to be recognised on NWB Plc’s balance sheet
.
2022
2021
Asset type
(1)
£m
£m
UK mortgages - covered bond programme
6,992
8,267
(1)
NWB Group
Annual Report and Accounts 2022
Regulatory capital is assessed against minimum requirements that are set out under the Capital Requirements Regulation on a
legal entity and consolidated basis. Transitional arrangements on the phasing in of end-point capital resources are set by the
relevant regulatory authority.
The capital resources under the PRA transitional basis for NWB Plc are set out below.
2022
2021
Shareholders' equity (excluding non-controlling interests)
£m
£m
Shareholders’ equity
18,243
19,166
Other equity instruments
(2,518)
(2,377)
15,725
16,789
Regulatory adjustments and deductions
Cash flow hedging reserve
393
2
Deferred tax assets
(421)
(541)
Prudential valuation adjustments
(20)
(12)
Goodwill and other intangible assets
(1,458)
(703)
Excess of expected losses over impairment provisions
(86)
—
Instruments of financial sector entities where the institution has a significant investment
(430)
(607)
Significant investments in excess of secondary capital
—
(73)
Foreseeable dividends
(900)
(993)
Foreseeable pension contributions
—
(365)
Adjustment for trust assets
(1)
(365)
—
Adjustment under IFRS 9 transition arrangements
281
429
Insufficient coverage for non-performing exposures
(6)
(2)
(3,012)
(2,865)
CET1 capital
12,713
13,924
Additional Tier 1 (AT1) capital
Qualifying instruments and related share premium
2,518
2,377
Qualifying instruments and related share premium subject to phase out
—
—
2,518
2,377
Tier 1 capital
Instruments of financial sector entities where the institution has a significant investment
(275)
(262)
Tier 1 capital
14,956
16,039
Qualifying Tier 2 capital
Qualifying instruments and related share premium
3,188
3,156
Tier 2 deductions
Instruments of financial sector entities where the institution has a significant investment
(266)
(367)
Other regulatory adjustments
(1)
117
(267)
(250)
Tier 2 capital
2,921
2,906
Total regulatory capital
17,877
18,945
(1) Prudent deduction in respect of agreement with the pension fund to establish new legal structure. See Notes 5 and 33 in the NatWest Group 2022 Annual Report and Accounts.
In the management of capital resources, NWB Plc is governed
by NatWest Group's policy to maintain a strong capital base, to
expand it as appropriate and to utilise it efficiently throughout
its activities to optimise the return to shareholders while
maintaining a prudent relationship between the capital base and
the underlying risks of the business. In carrying out this policy,
NatWest Group has regard to the supervisory requirements of
the PRA. The PRA uses capital ratios as a measure of capital
adequacy in the UK banking sector, comparing a bank's capital
resources with its risk-weighted assets (the assets and off-
balance sheet exposures are weighted to reflect the inherent
credit and other risks); by international agreement, the Pillar 1
capital ratios, excluding capital buffers should be not less than
8% with a Common equity Tier 1 component of not less than
4.5%. NWB Plc has complied with the PRA’s capital requirements
throughout the year.
A number of subsidiaries and sub-groups within NWB Group,
principally banking entities, are subject to various individual
regulatory capital requirements in the UK and overseas.
Furthermore, the payment of dividends by subsidiaries and the
ability of members of NatWest Group to lend money to other
members of NatWest Group may be subject to restrictions such
as local regulatory or legal requirements, the availability of
NWB Group
Annual Report and Accounts 2022
26 Memorandum items
Contingent liabilities and commitments
The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31
December 2022. Although NWB Group is exposed to credit risk in the event of non-performance of the obligations undertaken by
customers, the amounts shown do not, and are not intended to, provide any indication of NWB Group’s expectation of future
losses
.
For accounting policy information see Accounting policies note 2.4.
NWB Group
NWB Plc
2022
2021
2022
2021
£m
£m
£m
£m
Contingent liabilities and commitments
Guarantees
1,728
796
1,664
742
Other contingent liabilities
1,197
1,193
1,190
1,187
Standby facilities, credit lines and other commitments
87,221
79,826
83,321
75,936
90,146
81,815
86,175
77,865
(1)
In the normal course of business, NWB Plc guarantees specified third party liabilities of certain subsidiaries; it also gives undertakings that individual subsidiaries will fulfil their
obligations to third parties under contractual or other arrangements which are excluded from the table above.
Banking commitments and contingent obligations, which have
been entered into on behalf of customers and for which there
are corresponding obligations from customers, are not included
in assets and liabilities. NWB Group’s maximum exposure to
credit loss, in the event of its obligation crystallising and all
counterclaims, collateral or security proving valueless, is
represented by the contractual nominal amount of these
instruments included in the table above. These commitments
and contingent obligations are subject to NWB Group’s normal
credit approval processes.
Guarantees - NWB Group gives guarantees on behalf of
customers. A financial guarantee represents an irrevocable
undertaking that NWB Group will meet a customer’s specified
obligations to a third party if the customer fails to do so. The
maximum amount that NWB Group could be required to pay
under a guarantee is its principal amount as disclosed in the
table above. NWB Group expects most guarantees it provides
to expire unused.
Other contingent liabilities - these include standby letters of
credit, supporting customer debt issues and contingent
liabilities relating to customer trading activities such as those
arising from performance and customs bonds, warranties and
indemnities.
Standby facilities and credit lines - under a loan commitment
NWB Group agrees to make funds available to a customer in
the future. Loan commitments, which are usually for a specified
term, may be unconditionally cancellable or may persist,
provided all conditions in the loan facility are satisfied or
waived.
Commitments to lend include commercial standby facilities and
credit lines, liquidity facilities to commercial paper conduits and
unutilised overdraft facilities.
Other commitments - these include documentary credits, which
are commercial letters of credit providing for payment by NWB
Group to a named beneficiary against presentation of specified
documents, forward asset purchases, forward deposits placed
and undrawn note issuance and revolving underwriting
facilities, and other short-term trade related transactions.
Indemnity deed
In April 2019, NWM Plc and NWB Plc entered into a cross
indemnity agreement for losses incurred within the entities in
relation to business transferred to or from the ring-fenced bank
under the NatWest Group’s structural re-organisation. Under
the agreement, NWM Plc is indemnified by NWB Plc against
losses relating to the NWB Plc transferring businesses and ring-
fenced bank obligations and NWB Plc is indemnified by NWM
Plc against losses relating to NWM Plc transferring businesses
and non ring-fenced bank obligations with effect from the
relevant transfer date.
Capital Support Deed
NWB Plc, together with certain other subsidiaries of NatWest
Holdings Limited, is party to a Capital Support Deed (CSD).
Under the terms of the CSD, the Bank may be required, if
compatible with its legal obligations, to make distributions on,
or repurchase or redeem, its ordinary shares. The amount of
this obligation is limited to the NWB Plc’s capital resources in
excess of the capital and financial resources needed to meet its
regulatory requirements. NWB Plc may also be obliged to make
onward distribution to its ordinary shareholders of dividends or
other capital distributions received from subsidiaries that are
party to the CSD. The CSD also provides that, in certain
circumstances, funding received by NWB Plc
from other
parties to the CSD becomes immediately repayable, such
repayment being limited to the NWB Plc’s available resources.
Contractual obligations for future expenditure not provided for in the accounts
The following table shows contractual obligations for future expenditure not provided for in the accounts at the year end
.
NWB Group
NWB Plc
2022
2021
2022
2021
£m
£m
£m
£m
Capital expenditure on other property, plant and equipment
4
14
4
13
Contracts to purchase goods or services
(1)
671
677
549
568
675
691
553
581
(1)
Of which due within 1 year: £318 million (2021 - £298 million) for NWB Group and £290 million (2021 - £273 million) for NWB Plc.
NWB Group
Annual Report and Accounts 2022
Trustee and other fiduciary activities
In its capacity as trustee or other fiduciary role, NWB Group
may hold or place assets on behalf of individuals, trusts,
companies, pension schemes and others. The assets and their
income are not included in NWB Group's financial statements.
NWB Group earned fee income of £215 million (2021 - £216
million) from these activities.
The Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS), the UK's
statutory fund of last resort for customers of authorised
financial services firms, pays compensation if a firm is unable to
meet its obligations. The FSCS funds compensation for
customers by raising management expenses levies and
compensation levies on the industry. In relation to protected
deposits, each deposit-taking institution contributes towards
these levies in proportion to their share of total protected
deposits on 31 December of the year preceding the scheme
year (which runs from 1 April to 31 March), subject to annual
maxima set by the Prudential Regulation Authority. In addition,
the FSCS has the power to raise levies on a firm that has
ceased to participate in the scheme and is in the process of
ceasing to be authorised for the costs that it would have been
liable to pay had the FSCS made a levy in the financial year it
ceased to be a participant in the scheme.
Litigation and regulatory matters
NWB Plc and its subsidiary and associated undertakings (‘NWB
Group’) are party to legal proceedings and involved in
regulatory matters, including as the subject of investigations
and other regulatory and governmental action (Matters) in the
United Kingdom (UK), the United States (US), the European
Union (EU) and other jurisdictions.
NWB Group recognises a provision for a liability in relation to
these Matters when it is probable that an outflow of economic
benefits will be required to settle an obligation resulting from
past events, and a reliable estimate can be made of the amount
of the obligation.
In many of these Matters, it is not possible to determine
whether any loss is probable, or to estimate reliably the amount
of any loss, either as a direct consequence of the relevant
proceedings and regulatory matters or as a result of adverse
impacts or restrictions on NWB Group’s reputation, businesses
and operations. Numerous legal and factual issues may need to
be resolved, including through potentially lengthy discovery and
document production exercises and determination of important
factual matters, and by addressing novel or unsettled legal
questions relevant to the proceedings in question, before a
liability can reasonably be estimated for any claim. NWB Group
cannot predict if, how, or when such claims will be resolved or
what the eventual settlement, damages, fine, penalty or other
relief, if any, may be, particularly for claims that are at an early
stage in their development or where claimants seek substantial
or indeterminate damages.
There are situations where NWB Group may pursue an
approach that in some instances leads to a settlement
agreement. This may occur in order to avoid the expense,
management distraction or reputational implications of
continuing to contest liability, or in order to take account of the
risks inherent in defending claims or regulatory matters, even
for those Matters for which NWB Group believes it has credible
defences and should prevail on the merits. The uncertainties
inherent in all such Matters affect the amount and timing of
any potential outflows for both Matters with respect to which
provisions have been established and other contingent liabilities
in respect of any such Matter.
It is not practicable to provide an aggregate estimate of
potential liability for our legal proceedings and regulatory
matters as a class of contingent liabilities.
The future outflow of resources in respect of any Matter may
ultimately prove to be substantially greater than or less than
the aggregate provision that NWB Group has recognised.
Where (and as far as) liability cannot be reasonably estimated,
no provision has been recognised. NWB Group expects that in
future periods, additional provisions, settlement amounts and
customer redress payments will be necessary, in amounts that
are expected to be substantial in some instances. Please refer
to Note 21 for information on material provisions.
Matters which are, or could be material, having regard to NWB
Group, considered as a whole, in which NWB Group is currently
involved are set out below. We have provided information on
the procedural history of certain Matters, where we believe
appropriate, to aid the understanding of the Matter.
For a discussion of certain risks associated with NWB Group’s
litigation and regulatory matters, see the Risk Factors relating
to legal, regulatory and governmental actions and
investigations set out on pages 190-192.
Litigation
London Interbank Offered Rate (LIBOR) and other rates
litigation
In August 2020, a complaint was filed in the United States
District Court for the Northern District of California by several
United States retail borrowers against the USD ICE LIBOR
panel banks and their affiliates (including NatWest Group plc,
NatWest Markets Plc, NatWest Markets Securities Inc. and NWB
Plc), alleging (i) that the very process of setting USD ICE LIBOR
amounts to illegal price-fixing; and (ii) that banks in the United
States have illegally agreed to use LIBOR as a component of
price in variable retail loans. In September 2022, the district
court dismissed the complaint, subject to re-pleading by the
plaintiffs. The plaintiffs filed an amended complaint in October
2022, which the defendants are again seeking to have
dismissed.
Offshoring VAT assessments
HMRC issued protective tax assessments in 2018 against
NatWest Group plc totalling £143 million relating to unpaid VAT
in respect of the UK branches of two NatWest Group
companies registered in India. NatWest Group formally
requested reconsideration by HMRC of their assessments, and
this process was completed in November 2020. HMRC upheld
their original decision and, as a result, NatWest Group plc
lodged an appeal with the Tax Tribunal and an application for
judicial review with the High Court of Justice of England and
Wales, both in December 2020. In order to lodge the appeal
with the Tax Tribunal, NatWest Group plc was required to pay
£143 million to HMRC, and payment was made in December
2020. The appeal and the application for judicial review have
both been stayed pending resolution of a separate case
involving another bank.
NWB Group
Annual Report and Accounts 2022
Regulatory matters
NWB Group’s financial condition can be affected by the actions
of various governmental and regulatory authorities in the UK,
the US, the EU and elsewhere. NWB Group and/or NatWest
Group have engaged, and will continue to engage, in
discussions with relevant governmental and regulatory
authorities, including in the UK, the US, the EU and elsewhere,
on an ongoing and regular basis, and in response to informal
and formal inquiries or investigations, regarding operational,
systems and control evaluations and issues including those
related to compliance with applicable laws and regulations,
including consumer protection, investment advice, business
conduct, competition/anti-trust, VAT recovery, anti-bribery,
anti-money laundering and sanctions regimes. NWB Group
expects government and regulatory intervention in financial
services to be high for the foreseeable future, including
increased scrutiny from competition and other regulators in the
retail and SME business sectors.
Any matters discussed or identified during such discussions and
inquiries may result in, among other things, further inquiry or
investigation, other action being taken by governmental and
regulatory authorities, increased costs being incurred by NWB
Group, remediation of systems and controls, public or private
censure, restriction of NWB Group’s business activities and/or
fines. Any of the events or circumstances mentioned in this
paragraph or below could have a material adverse effect on
NWB Group, its business, authorisations and licences,
reputation, results of operations or the price of securities issued
by it, or lead to material additional provisions being taken.
NWB Group is co-operating fully with the matters described
below.
Investment advice review
In October 2019, the FCA notified NatWest Group of its
intention to appoint a Skilled Person under section 166 of the
Financial Services and Markets Act 2000 to conduct a review of
whether NatWest Group’s past business review of investment
advice provided during 2010 to 2015 was subject to
appropriate governance and accountability and led to
appropriate customer outcomes. The Skilled Person’s review
has concluded and, after discussion with the FCA, NatWest
Group has now commenced additional review / remediation
work.
NWB Group
Annual Report and Accounts 2022
27 Analysis of the net investment in business interests and intangible assets
NWB Group
NWB Plc
2022
2021
2022
2021
£m
£m
£m
£m
Additional investments in associates
—
(11)
—
(10)
Additional investments in Group undertakings
—
—
(256)
(13)
Disposal of investments in Group undertakings
—
—
227
—
Purchase of net assets and liabilities
(1)
(270)
(3,256)
—
(2,666)
Net outflow of cash in respect of purchases
(270)
(3,267)
(29)
(2,689)
Disposal of net assets and liabilities
—
29
—
27
Profit on disposal of net assets and liabilities
—
2
—
2
Net inflow of cash in respect of disposals
—
31
—
29
Net cash expenditure on intangible assets
(722)
(465)
(690)
(433)
Net outflow of cash
(992)
(3,701)
(719)
(3,093)
(1)
In 2021 NWB Group net assets and liabilities purchased is the settlement of the 2020 purchase of Loans and advances to customers from Metro Bank plc of £3.2 billion. NWB Plc Net
assets and liabilities purchased includes the Metro Bank plc transaction as for NWB Group, and the transfer of Ulster Bank Limited business including cash and cash equivalents of
£266m, Loans and advances to customers of £3.5 billion, and Customer deposits of £8.5 billion.
NWB Group
NWB Plc
Called up share
capital, share
premium, and
paid-in equity
Subordinated
liabilities(1)
MRELs
(2)
Called up share
capital, share
premium, and
paid-in equity
Subordinated
liabilities(1)
MRELs
(2)
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January
6,280
6,273
3,285
4,539
5,687
3,90
8
6,280
6,273
3,279
4,539
5,133
3,597
Issue of paid-in equity
500
941
500
941
Redemption of paid-in equity
(388)
(934)
(388)
(934)
Issue of
subordinated liabilities
—
1,351
—
1,351
Redemption of subordinated liabilities
(55)
(2,468)
(55)
(2,468)
Interest on subordinated liabilities
(145)
(150)
(144)
(150)
Issue of MRELs
750
1,93
1
700
1,679
Interest on MRELs
(202)
(169)
(191)
(164)
Net cash inflow/(outflow) from financing
112
7
(200)
(1,267)
548
1,76
2
112
7
(199)
(1,267)
509
1,515
Effects of foreign exchange
86
(53)
612
66
86
(54)
599
73
Changes in fair value of subordinated liabilities
and MRELs
(178)
(195)
(734)
(225)
(178)
(195)
(746)
(223)
Interest on subordinated liabilities and MRELs
145
139
226
176
144
139
214
171
Loss on redemption of own debt
—
117
—
117
Other
29
—
—
5
—
—
29
—
—
—
—
—
At 31 December
6,421
6,280
3,138
3,285
6,339
5,68
7
6,421
6,280
3,132
3,279
5,709
5,133
(1)
Subordinated liabilities include intercompany subordinated liabilities.
(2)
NWB Group MRELs balances are included in amounts due to holding companies and fellow subsidiaries. NWB Plc MRELs balances are shown net of the effect of down streaming
funding to subsidiary companies.
In the cash flow statement, cash and cash equivalents comprises cash and loans to banks with an original maturity of less than
three months that are readily convertible to known amounts of cash and subject to insignificant risk of change in value.
NWB Group
NWB Plc
2022
2021
2022
2021
£m
£m
£m
£m
At 1 January
106,645
68,048
105,546
67,194
Net (decrease)/increase in cash and cash equivalents
(30,327)
38,597
(30,074)
38,352
At 31 December
76,318
106,645
75,472
105,546
Comprising:
Cash and balances at central banks
73,065
101,213
73,062
101,210
Other financial assets
234
7
234
7
Loans to banks including intragroup balances
(1)
3,019
5,425
2,176
4,329
Cash and cash equivalents
76,318
106,645
75,472
105,546
(1)
NWB Group
Annual Report and Accounts 2022
The composition of NWB Plc’s board of directors is aligned to its intermediate holding company NatWest Holdings Ltd. The
directors are remunerated for their services to NatWest Group as a whole, and their remuneration cannot be apportioned in
respect of their services to NWB Plc.
The directors’ emoluments in the table below represent the NWH Group emoluments of the directors.
2022
2021
Directors' remuneration
£000
£000
Non-executive directors emoluments
1,950
1,955
Chairman and executive directors emoluments
5,804
4,688
7,754
6,643
Amounts receivable under long-term incentive plans and share option plans
542
549
8,296
7,192
The total emoluments and amounts receivable under long-term incentive plans and share option plans of the highest paid director
were £3,497,000 (2021 - £2,808,000).
The executive directors may participate in the NatWest Group's long-term incentive plans, executive share option and sharesave
schemes. Where directors of NWB Plc are also directors of NatWest Group plc, details of their share interests can be found in the
2022 Annual Report and Accounts of NatWest Group plc, in line with regulations applying to NatWest Group plc as a premium
listed company.
Compensation of key management
The aggregate remuneration of directors and other members of key management
(1)
during the year was as follows:
2022
2021
£000
£000
Short-term benefits
18,390
14,921
Post-employment benefits
594
683
Share-based payments
1,823
1,967
20,807
17,571
(1)
Key management comprises members of the NWH Ltd Executive Committee.
Short term benefits include benefits expected to be settled wholly within twelve months of Balance Sheet date. Post-employment
benefits include defined benefit contributions for active members and pension funding to support contributions to the defined
contribution schemes. Share-based payments include awards vesting under rewards schemes.
31 Transactions with directors and key management
At 31 December 2022, amounts outstanding in relation to transactions, arrangements and agreements entered into by authorised
institutions in NWB Group, as defined in UK legislation, were £9,636,586 in respect of loans to 8 persons who were directors of
NWB Plc at any time during the financial period.
For the purposes of IAS 24 ‘Related Party Disclosures’, key management comprises directors of NWB Plc and members of the NWB Plc
Executive Committee. Amounts in the table below are attributed to each person at their highest level of NatWest Group key management.
2022
2021
£000
£000
Loans to customers - amortised cost
11,172
8,632
Customer deposits
42,932
45,719
Key management have banking relationships with NatWest Group entities which are entered into in the normal course of business
and on substantially the same terms, including interest rates and security, as for comparable transactions with other persons of a
similar standing or, where applicable, with other employees. These transactions did not involve more than the normal risk of
repayment or present other unfavourable features. Key management had no reportable transactions or balances with the holding
NWB Group
Annual Report and Accounts 2022
32 Related parties
UK Government
The UK Government through HM Treasury is the ultimate
controlling party of NatWest Group plc. The UK Government’s
shareholding is managed by UK Government Investments
Limited, a company wholly owned by the UK Government. As a
result the UK Government and UK Government controlled
bodies are related parties of the Group.
At 31 December 2022, HM Treasury’s holding in NatWest
Group’s ordinary shares was 45.97%.
NWB Group enters into transactions with many of these bodies.
Transactions include the payment of: taxes, principally UK
corporation tax (Note 7) and value added tax; national
insurance contributions; local authority rates; and regulatory
fees and levies; together with banking transactions such as
loans and levy sits undertaken in the normal course of banker-
customer relationships.
Bank of England facilities
NWB Group may participate in a number of schemes operated
by the Bank of England in the normal course of business.
Members of NWB Group that are UK authorised institutions are
required to maintain non-interest bearing (cash ratio) deposits
with the Bank of England amounting to 0.403% of their average
eligible liabilities in excess of £600 million. They also have
access to Bank of England reserve accounts: sterling current
accounts that earn interest at the Bank of England base rate.
NWB Plc guarantees certain liabilities of NWH Group to the
Bank of England.
Other related parties
(a)
In their roles as providers of finance, NWB Group
companies provide development and other types of capital
support to businesses. These investments are made in the
normal course of business.
(b) To further strategic partnerships, NWB Group may seek to
invest in third parties or allow third parties to hold a
minority interest in a subsidiary of NatWest Group. We
disclose as related parties where stakes of 10 per cent or
more are held. Ongoing business transactions with these
entities are on normal commercial terms.
(c)
NWB Group recharges NatWest Group Pension Fund with
the cost of administration services incurred by it. The
amounts involved are not material to NWB Group.
(d)
In accordance with IAS 24, transactions or balances
between NWB Group entities that have been eliminated on
consolidation are not reported.
(e)
The primary financial statements include transactions and
balances with its subsidiaries which have been further
disclosed in the relevant parent company notes.
Holding companies and fellow subsidiaries
Transactions NWB Group enters with its holding companies and fellow subsidiaries also meet the definition of related party
transactions. The table below discloses transactions between NWB Group and subsidiaries of NatWest Group.
2022
2021
£m
£m
Interest receivable
41
33
Interest payable
(777)
(220)
Fees and commissions receivable
97
31
Fees and commissions payable
(70)
(6)
Other operating income
(1)
1,641
1,497
932
1,335
(1) Includes internal service recharges of £1,616 million.
Amounts due from/to holding companies and fellow subsidiaries are shown in Note 9. During the year Coutts & Company, a
subsidiary of National Westminster Bank Plc, acquired the Adam & Company business from The Royal Bank of Scotland plc,
another subsidiary of NatWest Group plc for a net consideration value of £270m. This was acquired as a business under common
control. The transfer was carried out at the fair value of those assets and liabilities on the day of transfer as would take place with
a third party on an arm’s length basis.
33 Ultimate holding company
NWB Group’s ultimate holding company is NatWest Group plc and its intermediate parent company is NatWest Holdings Limited
(‘NWH Ltd’ or ‘the intermediate holding company’).
NatWest Group plc is incorporated in the United Kingdom and
registered in Scotland and NWH Ltd is registered in England.
As at
31 December 2022, NatWest Group
plc heads the largest group in which NWB Group is consolidated. Copies of the consolidated
accounts of both companies may be obtained from
Legal, Governance & Regulatory Affairs, NatWest Group plc, Gogarburn, PO
Box 1000, Edinburgh EH12 1HQ, the Registrar of Companies or at natwestgroup.com.
Following placing and open offers by NatWest Group plc in December 2008 and April 2009, the UK Government, through HM
Treasury, held 45.97% (at 31 December 2022)
of the issued ordinary share capital of NatWest Group plc and is therefore NWB
Group’s ultimate controlling party.
NWB Group
Annual Report and Accounts 2022
On 6 February 2023, NWB reached agreement with the trustees of the Main Section of the Group pension scheme to recognise
that the final distribution linked contribution to the Main Scheme, of up to £471 million, in 2023 is not expected to be required. In its
place, agreement was reached to establish a new legal
structure to hold assets with a value equivalent to £471 million. These
assets would become transferrable to the Main section in the event that future triggers, reflecting a funding requirement, were
met. The assets are not de-recognised from NWB balance sheet, but are recorded as encumbered. The Group believes likelihood of
triggers being met are remote given the current funding position of the Main section.
There have been no other significant events between 31 December 2022 and the date of approval of these accounts which would
35 Related undertakings
Legal entities and activities at 31 December 2022
In accordance with the Companies Act 2006, NWB Plc’s related undertakings and the accounting treatment for each are listed
below. All undertakings are wholly-owned by NWB Plc or subsidiaries of NWB Plc and are consolidated by reason of contractual
control (Section 1162(2) CA 2006), unless otherwise indicated. NWB Group interest refers to ordinary shares of equal values and
voting rights unless further analysis is provided in the notes. Activities are classified in accordance with Annex I to the Capital
Requirements Directive (“CRD V”) and the definitions in Article 4 of the UK Capital Requirements Regulation.
The following table details active related undertakings incorporated in the UK which are 100% owned by NWB Group and fully
consolidated for accounting purposes
.
Entity name
Activity
Regulatory
treatment
Notes
AD Aggregator Platform Ltd
OTH
FC
(31)
Caledonian Sleepers Rail Leasing Ltd
BF
FC
(1)
Coutts & Company
CI
FC
(13)
Coutts Finance Company
BF
FC
(13)
East Grove Holding Ltd
INV
DE
(32)
Esme Loans Ltd
BF
FC
(1)
FreeAgent Central Ltd
SC
FC
(21)
FreeAgent Holdings Ltd
SC
FC
(21)
G L Trains Ltd
BF
FC
(16)
Gatehouse Way Developments Ltd
INV
DE
(1)
German Biogas Holdco Ltd
INV
DE
(31)
KUC Properties Ltd
BF
DE
(3)
Land Options (West) Ltd
INV
DE
(3)
Lombard & Ulster Ltd
BF
FC
(12)
Lombard Business Leasing Ltd
BF
FC
(1)
Lombard Corporate Finance
(December 1) Ltd
BF
FC
(1)
Lombard Corporate Finance
(December 3) Ltd
BF
FC
(1)
Lombard Corporate Finance (June 2) Ltd
BF
FC
(1)
Lombard Discount Ltd
BF
FC
(1)
Lombard Finance Ltd
BF
FC
(1)
Lombard Industrial Leasing Ltd
BF
FC
(1)
Lombard Lease Finance Ltd
BF
FC
(1)
Lombard Leasing Company Ltd
BF
FC
(1)
Lombard Leasing Contracts Ltd
BF
FC
(1)
Lombard Lessors Ltd
BF
FC
(1)
Lombard Maritime Ltd
BF
FC
(1)
Lombard North Central Leasing Ltd
BF
FC
(1)
Entity name
Activity
Regulatory
treatment
Notes
Lombard North Central Plc
BF
FC
(1)
Lombard Property Facilities Ltd
BF
FC
(1)
Lombard Technology Services Ltd
BF
FC
(1)
Mettle Ventures Ltd
OTH
FC
(1)
National Westminster Home Loans Ltd
BF
FC
(1)
NatWest Property Investments Ltd
INV
DE
(1)
Pittville Leasing Ltd
BF
FC
(1)
Premier Audit Company Ltd
BF
FC
(1)
R.B. Capital Leasing Ltd
BF
FC
(1)
R.B. Leasing (September) Ltd
BF
FC
(1)
R.B. Quadrangle Leasing Ltd
BF
FC
(1)
RBS Asset Management Holdings
BF
FC
(13)
RBS Collective Investment Funds Ltd
BF
FC
(10)
RBS Invoice Finance Ltd
BF
FC
(1)
RBSG Collective Investments Holdings Ltd
BF
FC
(10)
RBSSAF (2) Ltd
BF
FC
(1)
RBSSAF (25) Ltd
BF
FC
(1)
Royal Bank Leasing Ltd
BF
FC
(3)
Royal Bank of Scotland (Industrial
Leasing) Ltd
BF
FC
(3)
Royal Scot Leasing Ltd
BF
FC
(3)
RoyScot Trust Plc
BF
FC
(1)
Silvermere Holdings Ltd
BF
FC
(3)
The Royal Bank of Scotland Group
Independent Financial Services Ltd
BF
FC
(3)
Ulster Bank Ltd
BF
FC
(12)
Ulster Bank Pension Trustees Ltd
TR
DE
(12)
Walton Lake Developments Ltd
INV
DE
(1)
World Learning Ltd
BF
FC
(19)
NWB Group
Annual Report and Accounts 2022
The following table details active related undertakings incorporated outside the UK which are 100% owned by NWB Group and fully
consolidated for accounting purposes
Entity name
Activity
Regulatory
treatment
Notes
Airside Properties AB
BF
FC
(2)
Airside Properties ASP Denmark AS
BF
FC
(11)
Airside Properties Denmark AS
BF
FC
(11)
Arkivborgen KB
BF
FC
(2)
Artul Koy
BF
FC
(4)
BD Lagerhus AS
BF
FC
(5)
Bilfastighet i Akalla AB
BF
FC
(2)
Bilfastighet i Avesta AB
BF
FC
(2)
Bilfastighet i Bollnas AB
BF
FC
(2)
Bilfastighet i Hemlingby AB
BF
FC
(2)
Bilfastighet i Hudiksvall AB
BF
FC
(2)
Bilfastighet i Ludvika AB
BF
FC
(2)
Bilfastighet i Märsta AB
BF
FC
(14)
Bilfastighet i Mora AB
BF
FC
(2)
Bilfastighet i Uppsala KB
BF
FC
(14)
Bilfastighet Kista AB
BF
FC
(14)
Brödmagasinet KB
BF
FC
(2)
Eiendomsselskapet Apteno La AS
BF
FC
(5)
Espeland Naering AS
BF
FC
(5)
Eurohill 4 KB
BF
FC
(2)
Fab Ekenäs Formanshagen 4
BF
FC
(4)
Fastighets AB Flöjten I Norrköping
BF
FC
(10)
Fastighets Aktiebolaget Sambiblioteket
BF
FC
(2)
Fastighetsbolaget Holma I Höör AB
BF
FC
(10)
Forskningshöjden KB
BF
FC
(2)
Entity name
Activity
Regulatory
treatment
Notes
Förvaltningsbolaget Dalkyrkan KB
BF
FC
(10)
Förvaltningsbolaget Klöverbacken Skola KB
BF
FC
(10)
Fyrs!te Fastighets AB
BF
FC
(2)
Grinnhagen KB
BF
FC
(2)
Hatros 1 AS
BF
FC
(5)
Horrsta 4:38 KB
BF
FC
(2)
IR Fastighets AB
BF
FC
(2)
IR IndustriRenting AB
BF
FC
(2)
Kallebäck Institutfastigheter AB
BF
FC
(10)
Kastrup Commuter K/S
BF
FC
(11)
Kastrup Hangar 5 K/S
BF
FC
(11)
Kastrup V & L Building K/S
BF
FC
(11)
KB Eurohill
BF
FC
(2)
KB Lagermannen
BF
FC
(2)
KB Likriktaren
BF
FC
(2)
Koy Lohjan Ojamonharjuntie 61
BF
FC
(4)
Koy Vantaan Rasti IV
BF
FC
(4)
Koy Harkokuja 2
BF
FC
(17)
Koy Pennalan Johtotie 2
BF
FC
(4)
Koy Porkkanakatu 2
BF
FC
(4)
Koy Espoon Entresse II
BF
FC
(4)
Koy Helsingin Mechelininkatu 1
BF
FC
(4)
Entity name
Activity
Regulatory
treatment
Notes
Koy Helsingin Osmontie 34
BF
FC
(4)
Koy Helsingin Panuntie 6
BF
FC
(4)
Koy Helsingin Panuntie 11
BF
FC
(4)
Koy Iisalmen Kihlavirta
BF
FC
(4)
Koy Jämsän Keskushovi
BF
FC
(4)
Koy Jasperintie 6
BF
FC
(17)
Koy Kokkolan Kaarlenportti Fab
BF
FC
(4)
Koy Kouvolan Oikeus ja Poliisitalo
BF
FC
(4)
Koy Millennium
BF
FC
(4)
Koy Nummelan Portti
BF
FC
(4)
Koy Nuolialan päiväkoti
BF
FC
(4)
Koy Peltolantie 27
BF
FC
(17)
Koy Porkkanakatu 2
BF
FC
(17)
Koy Puotikuja 2 Vaasa
BF
FC
(4)
Koy Raision Kihlakulma
BF
FC
(4)
Koy Ravattulan Kauppakeskus
BF
FC
(4)
Koy Tapiolan Louhi
BF
FC
(4)
Koy Vapaalan Service-Center
BF
FC
(4)
Kvam Eiendom AS
BF
FC
(5)
Läkten 1 KB
BF
FC
(2)
Leiv Sand Eiendom AS
BF
FC
(5)
LerumsKrysset KB
BF
FC
(2)
Limstagården KB
BF
FC
(2)
Lundbyfilen 5 AB
BF
FC
(14)
Narmovegen 455 AS
BF
FC
(5)
National Westminster International
Holdings B.V.
BF
FC
(3)
NatWest Services (Switzerland) Ltd
SC
FC
(28)
Entity name
Activity
Regulatory
treatment
Notes
Nordisk Renting AB
BF
FC
(2)
Nordisk Renting AS
BF
FC
(26)
Nordisk Renting Facilities Management AB
BF
FC
(14)
Nordisk Renting OY
BF
FC
(4)
Nordisk Specialinvest AB
BF
FC
(2)
Nordiska Strategifastigheter Holding AB
BF
FC
(2)
Nybergflata 5 AS
BF
FC
(5)
OFH Eiendom AS
BF
FC
(33)
Optimus KB
BF
FC
(2)
RBS Asset Management (Dublin) Ltd
BF
FC
(30)
RBS Deutschland Holdings GmbH
BF
FC
(22)
RBS Polish Financial Advisory Services Sp. Z o.o.
BF
FC
(27)
RBS Services India Private Ltd
SC
FC
(24)
Rigedalen 44 Eiendom AS
BF
FC
(5)
Ringdalveien 20 AS
BF
FC
(5)
Sandmoen Naeringsbygg AS
BF
FC
(5)
SFK Kommunfastigheter AB
BF
FC
(2)
Sjöklockan KB
BF
FC
(2)
Skinnarängen KB
BF
FC
(2)
Sletta Eiendom II AS
BF
FC
(5)
Snipetjernveien 1 AS
BF
FC
(5)
Solbänken KB
BF
FC
(2)
Solnorvika AS
BF
FC
(5)
Strand European Holdings AB
BF
FC
(14)
Svenskt Fastighetskapital AB
BF
FC
(2)
Svenskt Energikapital AB
BF
FC
(2)
Svenskt Fastighetskapital Holding AB
BF
FC
(2)
Tygverkstaden 1 KB
BF
FC
(2)
NWB Group
Annual Report and Accounts 2022
The following table details active related undertakings which are 100% owned by NWB Group but are not consolidated for
accounting purposes
Entity name
Activity
Regulatory
treatment
Notes
Bioenergie Dargun Immobilien GmbH
OTH
DE
(29)
Bioenergie Jessen Immobilien GmbH
OTH
DE
(29)
Bioenergie Wiesenburg GmbH & Co. KG
INV
DE
(29)
Bioenergie Wiesenburg Verwaltungs GmbH
OTH
DE
(29)
Bioenergie Zittau GmbH
OTH
DE
(29)
Bioenergie Zittau Immobilien GmbH
OTH
DE
(29)
Capulet Homes Florida LLC
OTH
DE
(6)
Crook Hill Properties Ltd
OTH
DE
(34)
DBV Deutsche Bioenergie Verbinder GmbH
OTH
DE
(29)
European Investments (Crook Hill) Ltd
OTH
DE
(35)
Montague Homes Florida LLC
OTH
DE
(6)
Reaps Moss Ltd
OTH
DE
(34)
Reppinichen Dritte Biogas Betriebs GmbH
OTH
DE
(29)
Reppinichen Erste Biogas Betriebs GmbH
OTH
DE
(29)
Reppinichen Zweite Biogas Betriebs GmbH
OTH
DE
(29)
Romeo Homes Florida LLC
OTH
DE
(6)
Romeo Homes Georgia LLC
OTH
DE
(6)
Romeo Homes Indiana LLC
OTH
DE
(6)
Romeo Homes Kansas LLC
OTH
DE
(6)
Entity name
Activity
Regulatory
treatment
Notes
Romeo Homes Nevada LLC
OTH
DE
(6)
Romeo Homes North Carolina LLC
OTH
DE
(6)
Romeo Homes Oklahoma LLC
OTH
DE
(6)
Romeo Homes Tennessee LLC
OTH
DE
(6)
Romeo Homes Texas LLC
OTH
DE
(6)
Ventus Investments Ltd
OTH
DE
(35)
WGH Development LLC
OTH
DE
(6)
WGH Florida LLC
OTH
DE
(6)
WGH Georgia LLC
OTH
DE
(6)
WGH Indiana LLC
OTH
DE
(6)
WGH Kansas LLC
OTH
DE
(6)
WGH Nevada LLC
OTH
DE
(6)
WGH North Carolina LLC
OTH
DE
(6)
WGH Oklahoma LLC
OTH
DE
(6)
WGH Texas LLC
OTH
DE
(6)
Wiesenburg Dritte Biogas Betriebs GmbH
OTH
DE
(29)
Wiesenburg Erste Biogas Betriebs GmbH
OTH
DE
(29)
Wiesenburg Zweite Biogas Betriebs GmbH
OTH
DE
(29)
Wiesenburger Marktfrucht GmbH
OTH
DE
(29)
The following table details active related undertakings incorporated in the UK where NWB Group ownership is less than 100%
Entity name
Activity
Accounting
treatment
Regulatory
treatment
Group
%
Notes
Falcon Wharf Ltd
OTH
EAJV
PC
50
(20)
GWNW City
Developments Ltd
BF
EAJV
DE
50
(20)
Jaguar Cars Finance Ltd
BF
FC
FC
50
(1)
JCB Finance Ltd
BF
FC
FC
75
(18)
Entity name
Activity
Accounting
treatment
Regulatory
treatment
Group
%
Notes
London Rail Leasing Ltd
BF
EAJV
PC
50
(25)
Natwest Covered
Bonds (LM) Ltd
BF
IA
PC
20
(15)
Natwest Covered Bonds LLP
BF
FC
FC
73
(16)
Pollinate International Ltd
OTH
EAA
DE
30
(36)
The following table details active related undertakings incorporated outside the UK where NWB Group ownership is less than 100%
Entity name
Activity
Accounting
treatment
Regulatory
treatment
Group
%
Notes
Nightingale CRE 2018-1 Ltd
BF
FC
DE
0
(9)
Nightingale LF 2021-1 Ltd
BF
FC
DE
0
(9)
Nightingale Project Finance
2019 1 Ltd
BF
FC
DE
0
(9)
Nightingale Securities
2017-1 Ltd
BF
FC
DE
0
(9)
Entity name
Activity
Accounting
treatment
Regulatory
treatment
Group
%
Notes
Nightingale UK Corp
2020 2 Ltd
BF
FC
DE
0
(9)
Pharos Estates Ltd
OTH
AHC
DE
49
(23)
Wiöniowy Management
sp. Z.o.o.
SC
AHC
DE
25
(27)
The following table details related undertakings that are not active (actively being dissolved)
Entity name
Accounting
treatment
Regulatory
treatment
Group
%
Notes
Belfast Bankers' Clearing
Company Ltd
OTH
NC
25
(37)
Lombard Ireland Group Holdings
Unlimited
FC
FC
100
(38)
Lombard Ireland Ltd
FC
FC
100
(38)
NatWest Nominees Ltd
FC
FC
100
(1)
The following table details related undertakings that are dormant
Entity name
Accounting
treatment
Regulatory
treatment
Group
%
Notes
Coutts Scotland Nominees Ltd
FC
FC
100
(10)
Dunfly Trustee Ltd
FC
FC
100
(1)
JCB Finance Pension Ltd
FC
DE
88
(12)
NatWest FIS Nominees Ltd
FC
FC
100
(1)
NatWest Group Retirement
Savings Trustee Ltd
FC
FC
100
(1)
NatWest Group Secretarial
Services Ltd
FC
FC
100
(3)
NatWest Invoice Finance Ltd
FC
FC
100
(1)
NatWest Pension Trustee Ltd
NC
DE
100
(1)
NatWest PEP Nominees Ltd
FC
FC
100
(1)
Nordisk Renting A/S
FC
FC
100
(5)
Entity name
Accounting
treatment
Regulatory
treatment
Group
%
Notes
Nordisk Renting HB
FC
FC
100
(2)
NWB Nominee 1 Ltd
FC
FC
100
(1)
R.B. Leasing (March) Ltd
FC
FC
100
(1)
RBS Investment Executive Ltd
NC
DE
100
(3)
RBSG Collective Investments Nominees
Ltd
FC
FC
100
(10)
RoosterMoney UK Ltd
FC
FC
100
(19)
Strand Nominees Ltd
FC
FC
100
(13)
Syndicate Nominees Ltd
FC
FC
100
(1)
The Royal Bank of Scotland
Group Ltd
FC
FC
100
(1)
Voyager Leasing Ltd
FC
FC
100
(1)
NWB Group
Annual Report and Accounts 2022
The following table details the overseas branches of NWB Group
Subsidiary
National Westminster Bank Plc
Geographic location
Germany
Key:
BF
Banking and financial institution
CI
Credit institution
INV
Investment (shares or property) holding company
SC
Service company
TR
Trustee
OTH
Other
DE
Deconsolidated
FC
Full consolidation
PC
Pro-rata consolidation
AHC
Associate held at cost
EAJV
Equity accounting – Joint venture
IA
Investment accounting
NC
Not consolidated
Notes
Registered addresses
Country of incorporation
(1)
UK
(2)
Care of Nordisk Renting AB, Jakobsbergsgatan 13, 8th Floor, Box 14044, Stockholm, SE-111 44
Sweden
(3)
RBS Gogarburn, 175 Glasgow Road, Edinburgh, EH12 1HQ
UK
(4)
c/o Epicenter, Mikonkatu 9, 6th Floor, Helsinki, 00100
Finland
(5)
c/o Advokatfirmaet Wiersholm AS, Postboks 1400, 0115 Oslo
Norway
(6)
251, Little Falls Drive, Wilmington, DE, 19808
USA
(7)
Ulster Bank Head Office, Block B Central Park, Leopardstown, Dublin 18, D18 N153
RoI
(8)
Grand Pavilion Commercial Centre, 802 West Bay Road, P.O. Box 31119
Cayman Islands
(9)
44 Esplanade, St Helier, JE4 9WG
Jersey
(10)
6-8 George Street, Edinburgh, EH2 2PF
UK
(11)
C/O Visma Services Danmark A/S, Lyskaer 3C-3D, 2730 Herlev
Denmark
(12)
UK
(13)
440, Strand, London, WC2R OQS
UK
(14)
C/O Nordisk Renting AB, Box 14044, SE-104 40 Stockholm
Sweden
(15)
1 Bartholomew Lane London EC2N 2AX
UK
(16)
1 Princes Street, London, EC2R 8BP
UK
(17)
c/o Nordisk Renting Oy, Mikonkatu 9, 00100, Helsinki
Finland
(18)
The Mill, High Street, Rocester, Staffordshire, ST14 5JW
UK
(19)
64 New Cavendish Street, London, W1G 8TB
UK
(20)
Gate House, Turnpike Road, High Wycombe, Buckinghamshire, HP12 3NR
UK
(21)
One Edinburgh Quay, 133 Fountainbridge, Edinburgh, EH3 9QG
UK
(22)
Roßmarkt 10, Frankfurt am Main, 60311
Germany
(23)
24 Demostheni Severi, 1st Floor, Nicosia, 1080
Cyprus
(24)
6th Floor, Building 2, Tower A, GIL IT/ITES SEZ, Candor TechSpace, Sector 21, Gurugram, Haryana, 122016
India
(25)
99 Queen Victoria Street, London, EC4V 4EH
UK
(26)
H. Heyerdahlsgate 1, Postboks 2020 Vika, Oslo, 0125
Norway
(27)
ul. Ilzecka 26, building E, 02-135, Warsaw
Poland
(28)
Lerchenstrasse 18, Zurich, CH 8022
Switzerland
(29)
Liszt Straße 10, Regensburg, D-93053
Germany
(30)
One Dockland Central, Guild Street, IFSC, Dublin 1
RoI
(31)
Greencoat Capital, 5 The Peak, Wilton Road, London, Greater London, SW1V 1AN, England
UK
(32)
8 Sackville Street, London, W1S 3DG, England
UK
(33)
Rakkestadsveien 15, 1814 Askim
Norway
(34)
2nd floor, Palm Grove House, Road Town, Tortola
British Virgin Islands
(35)
18 Riversway Business Village, Navigation Way, Ashton-on Ribble, Preston, PR2 2YP
UK
(36)
2nd Floor 120 Old Broad Street, London, EC2N 1AR
UK
(37)
Scottish Provident Building, 7 Donegall Square West, Belfast, BT1 6JH
UK
(38)
13-18 City Quay, Dublin 2
Risk factors
NWB Group
Annual Report and Accounts 2022
172
Principal Risks and Uncertainties
Set out below are certain risk factors
that could adversely affect NWB Group’s
future results, its financial condition
and/or prospects and cause them to be
materially different from what is forecast
or expected, and directly or indirectly
impact the value of its securities. These
risk factors are broadly categorised and
should be read in conjunction with other
sections of this annual report, including
the forward-looking statements section,
the strategic report and the risk and
capital management section. They
should not be regarded as a complete
and comprehensive statement of all
potential risks and uncertainties facing
NWB Group.
Economic and political risk
NWB Group, its customers and its
counterparties face continued economic
and political risks and uncertainties in
the UK and global markets, including as
a result of high inflation and rising
interest rates, supply chain disruption
and the Russian invasion of Ukraine.
NWB Group is affected by global
economic and market conditions.
Uncertain and volatile economic
conditions can create a challenging
operating environment for financial
services companies such as NWB Group.
The outlook for the global economy has
many uncertainties including: falling
economic activity, high inflation, rising
interest rates, elevated energy prices
and higher cost-of-living, supply chain
disruption, changes to monetary and
fiscal policy, and the impact of armed
conflict (in particular the Russian
invasion of Ukraine).
These conditions, including the current
cost of living crisis, could be worsened
by a number of factors including:
instability in the global financial system,
market volatility and change, fluctuations
in the value of the pound sterling, new or
extended economic sanctions, the
ongoing effects of the COVID-19
pandemic, economic volatility in
emerging markets, volatility in
commodity prices or concerns regarding
sovereign debt or sovereign credit
ratings. Economic conditions may also
be affected by the changing
demographics in the markets that NWB
Group serves, increasing social and
other inequalities, or rapid changes to
the economic environment due to the
adoption of technology, automation and
artificial intelligence, or due to climate
change, environmental degradation,
biodiversity loss and/or other
sustainability risks.
NWB Group is also exposed to risks
arising out of geopolitical events or
political developments, such as exchange
controls and other measures taken by
sovereign governments that may hinder
economic or financial activity levels.
Unfavourable political, military or
diplomatic events, increasing geopolitical
tensions leading to armed conflict,
protectionist policies or trade barriers,
secession movements or the exit of other
member states from the EU, changes to
monetary and fiscal policy, new and
widespread public health crises
(including any epidemics or pandemics),
state and privately sponsored cyber and
terrorist acts or threats, and the
responses to each of the above
economic, political or other scenarios by
various governments and markets, could
negatively affect the business and
performance of NWB Group, including as
a result of the indirect impact on regional
or global trade and/or NWB Group’s
customers and counterparties.
The UK experienced significant political
uncertainty in 2022 that may persist into
the foreseeable future.
This could lead
to a loss of confidence in the UK, that
could in turn, negatively impact
companies operating in the UK. NWB
Group also faces political uncertainty in
Scotland as a result of a possible second
Scottish independence referendum.
Independence may adversely affect NWB
Group both in relation to entities
incorporated in Scotland and in other
jurisdictions. Any changes to Scotland’s
relationship with the UK or the EU may
adversely affect the the environment in
which NatWest Group and its
subsidiaries operate and may require
further changes to NatWest Group’s
(including NWB Group’s) structure,
independently or in conjunction with
other mandatory or strategic structural
and organisational changes, any of
which could adversely affect NWB
Group.
The COVID-19 pandemic prompted
many changes that may prove to be
permanent shifts in customer behaviour
and economic activity, such as changes
in spending patterns and significantly
more people working in a more flexible
manner. These changes may affect asset
prices, the economic environment, and
NWB Group’s customers’ and
counterparties’ financial performance
and needs. In response to the COVID-19
pandemic, central banks, governments,
regulators, and legislatures in the UK and
elsewhere offered unprecedented levels
of support and various schemes to assist
businesses and individuals, many of
which have since been curtailed or
withdrawn. However, risks remain as to
whether these loans will be repaid.
The value of NWB Group’s own and
other securities may be materially
affected by market risk, including as a
result of market fluctuations. Market
volatility, illiquid market conditions and
disruptions in the credit markets may
make it extremely difficult to value
certain of NWB Group’s own and other
securities, particularly during periods of
market displacement. This could cause a
decline in the value of NWB Group’s own
and other securities, which may have an
adverse effect on NWB Group’s results of
operations in future periods, or
inaccurate carrying values for certain
financial instruments.
In addition, financial markets are
susceptible to severe events evidenced
by rapid depreciation in asset values,
which may be accompanied by a
reduction in asset liquidity. Under these
conditions, hedging and other risk
management strategies may not be as
effective at mitigating losses as they
would be under more normal market
conditions. Moreover, under these
conditions, market participants are
particularly exposed to trading strategies
employed by many market participants
simultaneously and on a large scale,
increasing NWB Group’s counterparty
risk. NWB Group’s risk management and
monitoring processes seek to quantify
and mitigate NWB Group’s exposure to
more extreme market moves. However,
market events have historically been
difficult to predict, and NWB Group, its
customers and its counterparties could
realise significant losses if extreme
market events were to occur.
Any of the above may adversely affect
NWB Group.
Changes in interest rates have
significantly affected, and will continue to
affect, NWB Group’s business and
results.
NWB Group’s performance is affected by
changes in interest rates. Benchmark
overnight interest rates, such as the UK
base rate, increased in 2022 and are
expected to continue to rise in the short-
term accompanied by quantitative
tightening. However, forward rates at 31
December 2022 suggested interest rates
may fall again in the medium-term.
Risk factors continued
NWB Group
Annual Report and Accounts 2022
173
Stable interest rates support predictable
income flow and less volatility in asset
and liability valuations, although
persistently low and negative interest
rates, such as those experienced during
the COVID-19 pandemic, are generally
expected to be less favourable for banks.
For NWB Group, persistently low interest
rates may reduce the yield on its lower
interest income.
Volatility in interest rates may also result
in unexpected outcomes both for interest
income and asset and liability valuations
which may adversely affect NWB Group.
For example, unexpected movements in
spreads between key benchmark rates
such as sovereign and swap rates in turn
affect liquidity portfolio valuations.
Finally, sharp unexpected rises in rates
may also have negative impacts on some
asset and derivative valuations, for
example. Any of the above may have an
adverse effect on NWB Group’s future
results, financial condition and/or
prospects.
Movements in interest rates also
influence and reflect the macro-
economic situation more broadly,
affecting factors such as business and
consumer confidence, property prices,
default rates on loans and other
indicators that may indirectly affect NWB
Group’s and may adversely affect its
future results, financial condition and/or
prospects.
Fluctuations in currency exchange rates
may adversely affect NWB Group’s
results and financial condition.
Decisions of central banks (including the
Bank of England, the European Central
Bank and the US Federal Reserve) and
political or market events which are
outside NWB Group’s control, may lead
to sharp and sudden fluctuations in
currency exchange rates.
Although NWB Group is principally a UK
focused banking group, it is subject to
structural foreign exchange risk from
capital deployed in NatWest Group’s
foreign subsidiaries and branches. NWB
Group also issues instruments in non-
sterling currencies that assist in meeting
NWB Group’s MREL. NWB Group
conducts banking activities in non-
sterling currencies (for example loans
and deposits) which affects its revenue
and also uses service providers based
outside of the United Kingdom for certain
services and as a result certain operating
results are subject to fluctuations in
currency exchange rates.
NWB Group maintains policies and
procedures designed to manage the
impact of exposures to fluctuations in
currency exchange rates. Nevertheless,
changes in currency exchange rates,
particularly in the sterling-US dollar and
euro-sterling rates, may adversely affect,
various factors including, the value of
assets, liabilities (including the total
amount of MREL-eligible instruments),
income and expenses, RWAs and hence
the reported earnings and financial
condition of NWB Plc.
Continuing uncertainty regarding the
effects and extent of the UK’s post Brexit
divergence from EU laws and regulation,
and NWB Group’s post Brexit EU
operating model may adversely affect
NWB Group and its operating
environment.
The UK ceased to be a member of the
EU and the European Economic Area
(‘EEA’) on 31 January 2020 (‘Brexit’) and
the 2020 EU-UK Trade and Cooperation
Agreement (‘TCA’) ended the transition
period on 31 December 2020. The TCA
was accompanied by a Joint Declaration
on financial services which sets out an
intention for the EU and UK to cooperate
on matters of financial regulation and to
agree a Memorandum of Understanding
(‘MoU’), which remains unsigned. Certain
aspects of the services provided by NWB
Group are therefore subject to obtaining
local licences or are subject to individual
equivalence decisions (temporary or
otherwise) by relevant regulators. The
EU’s equivalence regime does not cover
most lending and deposit taking, and
determinations in respect of non-EU
countries have not, to date, covered the
provision of most financial investment
services. In addition, equivalence
determinations do not guarantee
permanent access rights and can be
withdrawn with short notice.
In late
2021 the European Commission
proposed legislation that would require
non-EU firms to establish a branch or
subsidiary in the EU before providing
‘banking services’ in the EU. If these
proposals become law all ‘banking
services’ will be licensable activities in
each EU member state and member
states will not be permitted to offer
bilateral permissions to financial
institutions outside the EU allowing them
to provide ‘banking services’ in the EU.
Uncertainty remains as to whether
‘banking services’ will also include
investment products.
NatWest Group continues to evaluate its
post Brexit EU operating model, making
adaptations as necessary. NatWest
Group also continues to assess where
NatWest Group companies can obtain
bilateral regulatory permissions to
facilitate intragroup transactions and/or
to permit business to continue from its
UK entities, transferring what cannot be
continued to be rendered from the UK to
an EEA subsidiary or branch where
permitted or commercially reasonable to
do so. Where these regulatory
permissions are temporary or are
withdrawn, a different approach may
need to be taken or may result in a
change in operating model or some
business being ceased. Not all NatWest
Group entities have applied for bilateral
regulatory permissions and instead
conduct EEA business through an EEA
licensed subsidiary or branch. Certain
permissions are required in order to
maintain the ability to clear euro
payments. Other permissions, including
the ability to have two intermediate EU
parent undertakings, may need to be
obtained, and structural changes may
need to be made, to allow NWB Group to
continue to serve EEA customers from
both the ring-fenced and non-ring-
fenced banking entities. Any failure to
obtain such permissions or make such
structural changes in a timely manner, or
at all, could adversely affect NWB Group
and the EEA customers it serves.
Furthermore, transferring business to an
EEA based subsidiary is a complex
exercise and involves legal, regulatory
and execution risks, and could result in a
loss of business and/or customers or
higher than anticipated costs. The
changes to NatWest Group’s operating
model have been costly and failure to
receive the requested regulatory
permissions and/or further changes to its
business operations, product offering
and customer engagement could result
in further costs and/or regulatory
sanction.
The long-term effects of Brexit and the
uncertainty regarding NWB Group’s EU
operating model may adversely affect
NWB Group and its customers and
counterparties who are themselves
dependent on trading with the EU or
personnel from the EU. The long-term
effects of Brexit may also be
exacerbated by wider UK and global
macro-economic trends and events.
Uncertainties remain as to the extent to
which EU/EEA laws will diverge from UK
law. For example, bank regulation in the
UK may diverge from European bank
regulation if the Financial Services and
Markets Bill (‘FSM’) is enacted into law.
The UK government has also proposed
legislation to introduce automatic
‘sunset’ clauses for retained EU law by
the end of 2023 (the Retained EU Law
(Revocation and Reform) Bill 2022),
which if enacted could potentially cause
market disruption and require additional
resources to manage the legal and
regulatory consequences. NatWest
Group (including NWB Group) may not
be able to respond to these changes
effectively, in a timely manner, or at all.
The actions taken by regulators in
response to any new or revised bank
regulation and other rules affecting
financial services, may adversely affect
NWB Group, including
its business, non-
UK operations, group structure,
compliance costs, intragroup
arrangements and capital requirements.
Risk factors continued
NWB Group
Annual Report and Accounts 2022
174
HM Treasury (or UKGI on its behalf)
could exercise a significant degree of
influence over NatWest Group and NWB
Group is controlled by NatWest Group.
In its March 2021 Budget, the UK
Government announced its intention to
carry out a programme of sales of
NatWest Group plc ordinary shares with
the objective of selling all of its remaining
shares in NatWest Group plc by 2026.
NatWest Group plc has: (i) carried out
directed buybacks of NatWest Group plc
ordinary shares from UK Government
Investments Limited (‘UKGI’) in March
2021 and in March 2022, (ii) carried out
sales of NatWest Group plc shares by
UKGI by accelerated bookbuild in May
2021 and (iii) made purchases under
NatWest Group plc’s directed and on-
market buyback programmes
announced in July 2021 and in March
2022. As at 17 January 2023, the UK
Government held 44.98% of the ordinary
share capital with voting rights of
NatWest Group plc. NatWest Group may
participate in similar directed or on-
market buybacks in the near- and
medium-term future. The precise timing
and extent of further UKGI’s sell-downs
is uncertain, which could result in a
prolonged period of price volatility for
NatWest Group plc’s ordinary shares and
other securities.
Any offers or sales of a substantial
number of ordinary shares in NatWest
Group plc by UKGI, market expectations
about these sales and any associated
directed, on or off market buyback
activity by NatWest Group, could affect
the prevailing market price for the
outstanding ordinary shares of NatWest
Group plc which may have an adverse
effect on NWB Group.
HM Treasury has indicated that it intends
to respect the commercial decisions of
NatWest Group and that NatWest Group
entities (including NWB Group) will
continue to have their own independent
board of directors and management
team determining their own strategy.
However, for as long as HM Treasury
remains NatWest Group plc’s largest
single shareholder, HM Treasury and
UKGI (as manager of HM Treasury’s
shareholding) could exercise a significant
degree of influence over NatWest Group
(including NWB Group) including: the
election of directors and appointment of
senior management, NatWest Group’s
(including NWB Group’s) capital strategy,
dividend policy, remuneration policy or
the conduct of NatWest Group’s
(including NWB Group’s) operations.
HM Treasury or UKGI’s approach
depends on government policy, which
could change. The manner in which HM
Treasury or UKGI exercises HM
Treasury’s rights as the largest single
shareholder of NatWest Group could give
rise to conflicts between the interests of
HM Treasury and the interests of other
shareholders, including as a result of a
change in government policy. The
exertion of such influence over NatWest
Group may in turn adversely affect the
governance, business strategy, future
results, financial condition and/or
prospects of NWB Group.
In addition, NWB Plc is a wholly owned
subsidiary of NatWest Group plc, and
NatWest Group plc therefore controls
NWB Group’s board of directors,
corporate policies and strategic
direction. The interests of NatWest
Group plc as an equity holder and as
NWB Group’s parent may differ from the
interests of NWB Group or of potential
investors in NWB Group’s securities.
Strategic risk
NatWest Group (NWB Plc’s parent
company) continues to implement its
purpose-led strategy, which carries
significant execution and operational
risks and may not achieve its stated aims
and targeted outcomes.
NatWest Group (NWB Plc’s parent
company) continues to implement its
purpose-led strategy, which is designed
to champion potential and to help
individuals, families and businesses to
thrive. NatWest Group’s strategy is
intended to reflect the rapidly shifting
environment and backdrop of
unprecedented disruption in society
driven by technology and changing
customer expectations, as accelerated
by the COVID-19 pandemic. Further,
shifting trends include digitalisation,
decarbonisation, automation, e-
commerce and hybrid working, each of
which has resulted in significant market
volatility and change. There is also
increased investor, employee,
stakeholder, regulatory and customer
scrutiny regarding how businesses
address these changes and related
climate change, biodiversity and other
sustainability issues, including tackling
inequality, working conditions, workplace
health, safety and wellbeing, diversity
and inclusion, data protection and
management, workforce management,
human rights and supply chain
management.
In recent years, as part of its purpose-led
strategy, NatWest Group has refocused
its NatWest Markets business, and has
also created the Commercial &
Institutional business segment. The
Commercial & Institutional business
segment combined the pre-existing
Commercial, NatWest Markets and RBS
International businesses to form a single
business segment, which focuses on
serving Commercial & Institutional
customers. The Commercial &
Institutional business segment is intended
to allow closer operational and strategic
alignment to support growth, with
increased levels of services being
provided between NatWest Group
entities, with the potential increased risk
of breach of the UK ring-fencing regime
requiring effective conflicts of interest
policies.
Many factors may adversely impact the
successful implementation of NatWest
Group’s purpose-led strategy, including:
Macro-economic challenges
including rising inflation and interest
rates and falling economic activity
which may adversely affect
economic growth and which could
in turn impact certain strategic
initiatives and new venture
opportunities for NWB Group;
an internal culture shift across NWB
Group as to how NWB Group
conducts its business to strive
towards NatWest Group’s One Bank
strategy;
maintaining effective governance,
procedures, systems and controls
giving effect to NatWest Group’s
purpose-led strategy whilst also
managing emerging climate, ESG
and other sustainability-related risks
and opportunities;
achieving a number of financial,
capital and operational targets and
expectations, both for the short
term and throughout the
implementation period;
cost-controlling measures, which
may result in material one-off
provisions to lower NatWest Group’s
(and NWB Group) cost base, may
divert investment from other areas,
and may vary considerably from
year to year;
lower customer confidence and
confidence from the wider market,
which may result in a decrease of
customer activity and related
income levels;
changes in the economic, political
and regulatory environment in
which NWB Group, its customers
and counterparties operate,
regulatory uncertainty and changes,
strong market competition and
industry disruption and economic
volatility; and
any economic downturn which may
adversely affect the strategy as
certain initiatives depend on
achieving growth in new ventures
and opportunities for NatWest
Group, which in turn would impact
NWB Group.
In pursuing NatWest Group’s purpose-led
strategy, NWB Group may not be able to
successfully: (i) implement some or all
Risk factors continued
NWB Group
Annual Report and Accounts 2022
175
aspects of its strategy; (ii) meet any or all
of the related targets or expectations of
its strategy; or (iii) realise the intended
strategic objectives of any other future
strategic or growth initiative. The scale
and scope of NatWest Group’s (and NWB
Group’s) strategy and the intended
changes continue to present material
business, operational and regulatory
(including compliance with the UK ring-
fencing regime), conflicts, legal,
execution, IT system, internal culture,
conduct and people risks. Implementing
many changes and strategic actions
concurrently, including in respect of any
growth initiatives, will require application
of robust governance and controls
frameworks and robust IT systems; there
is a risk that NatWest Group (and NWB
Group) may not be successful in these
respects. The implementation of NatWest
Group’s purpose-led strategy and any
other strategic initiatives could result in
materially higher costs than initially
contemplated (including due to material
uncertainties and factors outside of
NatWest Group’s control) and may not
be completed as planned, or at all, or
could be phased or could progress in a
manner other than currently expected.
This could lead to additional
management actions by NatWest Group
(or NWB Group).
Each of these risks, and others identified
in these Risk Factors, individually or
collectively could jeopardise the
implementation and delivery of NatWest
Group’s purpose-led strategy and other
strategic initiatives, result in higher than
expected costs, impact NWB Group’s
products and services offering, its
reputation with customers or business
model and adversely affect NWB Group’s
ability to deliver its strategy and meet its
targets and guidance, each of which
could adversely affect NWB Group’s
future results, financial condition and/or
prospects.
Future acquisitions or divestments by
NatWest Group (and/or NWB Group) may
not be successful, and consolidation or
fragmentation of the financial services
industry may adversely affect NatWest
Group.
The financial services industry is
experiencing continued competitive
pressure with technological
advancement disrupting traditional
business models. In order to compete
effectively, NatWest Group (of which
NWB Group forms part), as part of its
purpose-led strategy, may decide to
undertake divestments, restructurings or
reorganisations. Conversely,
NatWest
Group (or NWB Group) may decide to
grow its business through acquisitions,
joint ventures, investments and/or
strategic partnerships as well as other
transactions and initiatives to: (i)
enhance capabilities that may lead to
better productivity or cost efficiencies; (ii)
acquire talent; (iii) pursue new products
or expand existing products; and/or (iv)
enter new markets or enhance its
presence in existing markets.
There are risks that NWB Group may not
fully realise the expected benefits and
value from these transactions and
initiatives in the time, or to the degree
anticipated, or at all. In particular,
NatWest Group (and NWB Group) may:
(i) fail to realise the business rationale for
the transaction or initiative, or
assumptions underlying the business
plans supporting the valuation of a target
business may prove inaccurate, for
example, regarding synergies and
expected commercial demand; (ii) fail to
successfully integrate any acquired
businesses (including in respect of
technologies, existing strategies,
products and human capital) or to
successfully divest or restructure a
business; (iii) fail to retain key employees,
customers and suppliers of any acquired
business; (iv) be required or wish to
terminate pre-existing contractual
relationships, which could prove costly
and/or be executed at unfavourable
terms and conditions; (v) fail to discover
certain contingent or undisclosed
liabilities in businesses that it acquires, or
its due diligence to discover any such
liabilities may be inadequate; and (vi) not
obtain necessary regulatory and other
approvals or onerous conditions may be
attached to such approvals. Accordingly,
NatWest Group (or NWB Group) may not
be successful in growing its business
through divestments, restructurings,
reorganisations or acquisitions, and
initiatives and any particular transaction
may not succeed, may be limited in
scope or scale (including due to NatWest
Group’s current ownership structure)
and may not conclude on the terms
contemplated, or at all. Any of the above
may adversely affect NWB Group’s
future results, financial condition and/or
prospects.
Continued competitive pressure in the
financial services industry, including from
technology companies, may have a
negative impact on NWB Group’s
business. If NatWest Group Commercial
& Institutional customers merge or are
acquired by other entities that are not
NatWest Group customers, this may also
lead to losses for NatWest Group (and
NWB Group). Existing larger banks or
financial institutions (and those that
emerge from mergers and
consolidations) may have more
bargaining power in negotiations than
NatWest Group (and NWB Group). Each
of these developments may adversely
affect NWB Group.
The transfer of NatWest Group’s Western
European corporate portfolio involves
certain risks.
To improve efficiencies and best serve
customers following Brexit, NWB Group
expects that certain of NatWest Group’s
assets, liabilities, transactions and
activities (including NatWest Group’s
Western European corporate portfolio,
principally consisting of term funding and
revolving credit facilities), may be: (i)
transferred from the ring-fenced
subgroup of NatWest Group, to NWM
Group and/or (ii) transferred to the ring-
fenced subgroup of NatWest Group from
NWM Group, subject to regulatory and
customer requirements. The timing,
success and quantum of any of these
transfers remain uncertain as is the
impact of these transactions on its
results of operations. As a result,
NatWest Group’s (including NWB
Group’s) future results, financial
condition and/or prospects may be
adversely affected.
Financial resilience risk
NWB Group may not meet the targets it
communicates or generate sustainable
returns.
As part of NatWest Group’s strategy, it
has set a number of financial, capital and
operational targets for NWB Group
including in respect of: MREL targets,
funding plans and requirements,
employee engagement, diversity and
inclusion as well as ESG (including
climate and sustainable funding and
financing targets) and customer
satisfaction targets.
NWB Group’s ability to meet NatWest
Group and NWB Group’s respective
targets and to successfully fulfil its
strategy are subject to various internal
and external factors and risks. These
include, but are not limited to: market,
regulatory, macro-economic and political
uncertainties, developments relating to
litigation, governmental actions,
investigations and regulatory matters,
and operational risks and risks relating
to NWB Group’s business model and
strategy (including risks associated with
climate, ESG and other sustainability-
related issues). A number of factors, may
impact NWB Group’s ability to maintain
its current CET1 ratio, including:
impairments, limited organic capital
generation or unanticipated increases in
RWAs. In addition, the run-down of
RWAs may be accompanied by the
recognition of disposal losses which may
be higher than anticipated. See also
‘
NatWest Group (NWB Plc’s parent
company) continues to implement its
purpose-led strategy, which carries
significant execution and operational
risks and may not achieve its stated aims
and targeted outcomes.
’
Additional information
Risk factors continued
NWB Group
Annual Report and Accounts 2022
176
NWB Group has significant exposure to
counterparty and borrower risk.
NWB Group has exposure to many
different industries, customers and
counterparties, and risks arising from
actual or perceived changes in credit
quality and the recoverability of monies
due from borrowers and other
counterparties are inherent in a wide
range of NWB Group’s businesses. NWB
Group’s lending strategy and associated
processes/systems may fail to identify,
anticipate or quickly react to weaknesses
or risks in a particular sector, market or
borrower, or NatWest Group’s credit risk
appetite relative to competitors, or fail to
adequately value physical or financial
collateral. This may result in increased
default rates or a higher loss given
default for loans, which may, in turn,
impact NWB Group’s profitability. See
also ‘
Risk and capital management —
Credit Risk
’.
The credit quality of NWB Group’s
borrowers and other counterparties may
be affected by the recent UK and global
macro-economic and political
uncertainties and a further deterioration
in prevailing economic and market
conditions (including a resurgence of the
COVID-19 pandemic or other new health
crises) and by the legal and regulatory
landscape in the UK and countries where
NWB Group is exposed to credit risk. Any
further deterioration in these conditions
or changes to legal or regulatory
landscapes could worsen borrower and
counterparty credit quality or impact the
enforcement of contractual rights over
security, increasing credit risk.
An increase in drawings upon committed
credit facilities may also increase NWB
Group’s RWAs. In addition, the level of
household indebtedness in the UK
remains high. The ability of households
to service their debts could be worsened
by a period of high unemployment,
increasing interest rates and higher
inflation, particularly if prolonged.
NWB Group may be affected by volatility
in property prices (including as a result
of the general UK political or economic
climate) given that NWB Group’s
mortgage loan and wholesale property
loan portfolios as at 31 December 2022,
amounted to £208.3 billion, representing
68% of NWB Group’s total customer loan
exposure. If property prices were to
weaken this could lead to higher
impairment charges, particularly if
default rates also increase. In addition,
NWB Group’s credit risk may be
exacerbated if the collateral that it holds
cannot be realised as a result of market
conditions or regulatory intervention or if
it is liquidated at prices not sufficient to
recover the net amount after accounting
for any IFRS 9 provisions already made.
This is most likely to occur during
periods of illiquidity or depressed asset
valuations.
Concerns about, or a default by, a
financial institution could lead to
significant liquidity problems and losses
or defaults by other financial institutions,
since the commercial and financial
soundness of many financial institutions
is closely related and interdependent as
a result of credit, trading, clearing and
other relationships. Any perceived lack
of creditworthiness of a counterparty or
borrower may lead to market-wide
liquidity problems and losses for NWB
Group. This systemic risk may also
adversely affect financial intermediaries,
such as clearing agencies, clearing
houses, banks, securities firms and
exchanges with which NWB Group
interacts on a daily basis. See also, ‘
NWB
Group may not be able to adequately
access sources of liquidity and funding
’.
As a result, adverse changes in borrower
and counterparty credit risk may cause
accelerated impairment charges under
IFRS 9, increased repurchase demands,
higher costs, additional write-downs and
losses for NWB Group and an inability to
engage in routine funding transactions.
NWB Group has applied an internal
analysis of multiple economic scenarios
(MES) together with the determination of
specific overlay adjustments to inform its
IFRS 9 ECL (Expected Credit Loss). The
recognition and measurement of ECL is
complex and involves the use of
significant judgment and estimation. This
includes the formulation and
incorporation of multiple forward-looking
economic scenarios into ECL to meet the
measurement objective of IFRS 9. The
ECL provision is sensitive to the model
inputs and economic assumptions
underlying the estimate. Going forward,
NWB Group anticipates observable credit
deterioration of a proportion of assets
resulting in a systematic uplift in defaults,
which is mitigated by those economic
assumption scenarios being reflected in
the Stage 2 ECL across portfolios, along
with a combination of post model
overlays in both wholesale and retail
portfolios reflecting the uncertainty of
credit outcomes. See also, ‘
Risk and
capital management — Credit Risk
’. A
credit deterioration would also lead to
RWA increases. Furthermore, the
assumptions and judgments used in the
MES and ECL assessment at 31
December 2022 may not prove to be
adequate resulting in incremental ECL
provisions for NWB Group.
In line with certain mandated COVID-19
pandemic support schemes, NWB Group
assisted affected customers with a
number of initiatives including NWB
Group’s participation in BBLS, CBILS and
CLBILS products. NWB Group has sought
to manage the risks of fraud and money
laundering against the need for the fast
and efficient release of funds to
customers and businesses. NWB Group
may be exposed to fraud, conduct and
litigation risks arising from inappropriate
approval (or denial) of BBLS,CBILS or
CLBILS or the enforcing or pursuing
repayment of BBLS, CBILS and CLBILS
(or a failure to exercise forbearance),
which may have an adverse effect on
NWB Group’s reputation and results of
operations. The implementation of the
initiatives and efforts mentioned above
may result in litigation, regulatory and
government actions and proceedings.
These actions may result in judgments,
settlements, penalties or fines
.
If NWB Group experiences losses and a
reduction in future profitability, this is
likely to affect the recoverable value of
fixed assets, including goodwill and
deferred taxes, which may lead to write-
downs.
NWB Group operates in markets that are
highly competitive, with increasing
competitive pressures and technology
disruption.
The market for UK financial services is
highly competitive. NWB Group expects
such competition to continue and
intensify in response to various changes.
These include: evolving customer
behaviour, technological changes
(including digital currencies and other
instruments, stablecoins and the growth
of digital banking, such as from fintech
entrants), competitor behaviour, new
entrants to the market (including non-
traditional financial services providers
such as retail or technology
conglomerates, who may have
competitive advantages in scale,
technology and customer engagement),
competitive foreign-exchange offerings,
industry trends resulting in increased
disaggregation or unbundling of financial
services or conversely the re-
intermediation of traditional banking
services, and the impact of regulatory
actions and other factors. In particular,
developments in the financial sector
resulting from new banking, lending and
payment solutions offered by rapidly
evolving incumbents, challengers and
new entrants, notably with respect to
payment services and products, and the
introduction of disruptive technology
may impede NWB Group’s ability to grow
or retain its share and impact its
revenues and profitability, particularly in
its key UK retail and commercial banking
segments. Moreover, innovations such as
biometrics, artificial intelligence,
automation, the cloud, blockchain,
cryptocurrencies and quantum
computing may rapidly facilitate industry
transformation.
Risk factors continued
NWB Group
Annual Report and Accounts 2022
177
These trends have been catalysed by
various regulatory and competition
policy interventions, including the UK
initiative on Open Banking (PSD2), ‘Open
Finance’ and other remedies imposed by
the Competition and Markets Authority
(‘CMA’) which are designed to further
promote competition within retail
banking. The competition enhancing
measures under NatWest Group’s
independently administered Alternative
Remedies Package (‘ARP’) benefits grant
recipients and eligible competitors. The
ARP may be more costly than
anticipated and may adversely affect
customer service for NWB Group’s own
customers, its competitive position and
reputation. Failure to comply with the
terms of the scheme could result in the
imposition of additional measures or
limitations on NWB Group’s operations,
additional supervision by NWB Group’s
regulators, and loss of investor
confidence.
Increasingly, many of the products and
services offered by NWB Group are, and
will become, more technology intensive,
including through digitalisation and the
use of artificial intelligence. For example,
NWB Group has invested in a number of
fintech ventures, including Mettle,
FreeAgent, Tyl, Rapid Cash, Rooster
Money and Vodeno. NWB Group’s ability
to develop or acquire such digital
solutions (which also need to comply
with applicable and evolving regulations)
has become increasingly important to
retaining and growing NWB Group’s
customer business in the UK. There can
be no certainty that NWB Group’s
innovation strategy (which includes
investment in its IT capability intended to
address the material increase in
customer use of online and mobile
technology for banking as well as
selective acquisitions, which carry
associated risks) will be successful or
that it will allow NWB Group to continue
to maintain or grow such services in the
future. Certain of NWB Group’s current
or future competitors may be more
successful in implementing innovative
technologies for delivering products or
services to their customers. NWB Group
may also fail to identify future
opportunities or derive benefits from
disruptive technologies in the context of
rapid technological innovation, changing
customer behaviour and growing
regulatory demands resulting in
increased competition from traditional
banking businesses as well as new
providers of financial services, including
technology companies with strong brand
recognition, that may be able to develop
financial services at a lower cost base.
NWB Group’s competitors may also be
better able to attract and retain
customers and key employees, may have
more advanced IT systems, and may
have access to lower cost funding and/or
be able to attract deposits on more
favourable terms than NWB Group.
Although NWB Group invests in new
technologies and participates in industry
and research led initiatives aimed at
developing new technologies, such
investments may be insufficient or
ineffective, especially given NWB Group’s
focus on cost efficiencies. This may limit
additional investment in areas such as
innovation and could affect NWB Group’s
offering of innovative products or
technologies for delivering products or
services to customers and its competitive
position. Furthermore, the development
of innovative products depends on NWB
Group’s ability to produce underlying
high-quality data, failing which its ability
to offer innovative products may be
compromised.
If NWB Group is unable to offer
competitive, attractive and innovative
products that are also profitable and
timely, it will lose share, incur losses on
some or all of its initiatives and lose
opportunities for growth. In this context,
NWB Group is investing in the
automation of certain solutions and
interactions within its customer-facing
businesses, including through automation
and artificial intelligence. Such initiatives
may result in operational, reputational
and conduct risks if the technology used
is defective, inadequate or is not fully
integrated into NWB Group’s current
solutions. There can be no certainty that
such initiatives will deliver the expected
cost savings and investment in
automated processes will likely also
result in increased short-term costs for
NWB Group.
In addition, the implementation of
NatWest Group’s purpose-led strategy
(including in relation to acquisitions,
reorganisations and/or partnerships),
delivery on its climate ambition, cost-
controlling measures, as well as
employee remuneration constraints, may
also have an impact on NWB Group’s
ability to compete effectively and
intensified competition from incumbents,
challengers and new entrants could
affect NWB Group’s ability to maintain
satisfactory returns. Moreover, activist
investors have increasingly become
engaged and interventionist in recent
years, which may pose a threat to
NatWest Group’s (including NWB
Group’s) strategic initiatives.
Furthermore, continued consolidation or
technological or other developments in
certain sectors of the financial services
industry could result in NWB Group’s
remaining competitors gaining greater
capital and other resources, including
the ability to offer a broader range of
products and services and geographic
diversity, or the emergence of new
competitors. Any of the above may
adversely affect NWB Group’s future
results, financial condition and/or
prospects.
NWB Group may not meet the prudential
regulatory requirements for regulatory
capital and MREL, or manage its capital
effectively, which could trigger the
execution of certain management
actions or recovery options.
NatWest Group and NWB Plc (on a
standalone basis) are required by
regulators in the UK, the EU and other
jurisdictions in which they undertake
regulated activities to maintain adequate
financial resources. Adequate capital
provides NatWest Group (including NWB
Group) with financial flexibility
specifically in its core UK operations in
the face of turbulence and uncertainty in
the UK and the global economy.
As at 31 December 2022, NWB Plc’s
CET1 ratio was 11.3%. A number of
subsidiaries and sub-groups within NWB
Group, principally banking entities, are
subject to various individual regulatory
capital requirements in the UK and
overseas. NatWest Group plc currently
targets a CET1 ratio of 13-14% by the
end of 2023. NatWest Group plc’s target
CET1 ratio is based on a combination of
its expected regulatory requirements and
internal modelling, including stress
scenarios and management’s and/or the
Prudential Regulation Authority’s (‘PRA’)
views on appropriate buffers above
minimum operating levels.
NatWest Group’s current capital strategy
for NWB Plc is based on: the expected
accumulation of additional capital
through the accrual of profits over time;
the receipt of assets and resultant RWAs
from other NatWest Group entities; RWA
growth in the form of regulatory uplifts
and lending growth and other capital
management initiatives which focus on
improving capital efficiency through
improved data and upstreaming of
dividends from NWB Plc to NatWest
Group plc and ensuring NatWest Group
meets its medium to long term targets.
A number of factors may impact NWB
Group’s ability to maintain its current
CET1 ratio target and achieve its capital
strategy. These include:
a depletion of its capital resources
through increased costs or liabilities
or reduced profits;
an increase in the quantum of
RWAs/Leverage Exposure in excess
of that expected, including due to
regulatory changes or a failure in
internal controls or procedures to
accurately measure and report
RWAs/Leverage Exposure; and
changes in prudential regulatory
Risk factors continued
NWB Group
Annual Report and Accounts 2022
178
requirements/ Leverage Requirement
including NWB Plc’s Total Capital
Requirement set by the PRA, as
applicable, including Pillar 2
requirements, as applicable, and
regulatory buffers as well as any
applicable scalars.
In addition to regulatory capital, NWB Plc
is required to maintain a set quantum of
internal MREL set as the higher of its
RWAs or leverage requirement. The
Bank of England has identified single
point-of-entry at NatWest Group plc, as
the preferred resolution strategy for
NatWest Group. As a result, NatWest
Group plc is the only entity that can
externally issue securities that count
towards its MREL, the proceeds of which
can then be downstreamed to meet the
internal MREL of its operating entities,
including NWB Plc. NWB Plc is therefore
dependent not only on NatWest Group
plc to fund NWB Plc’s internal MREL
targets over time, but also on NatWest
Group plc’s ability to issue and maintain
sufficient amounts of external MREL
liabilities to support this. In turn, NWB Plc
is required to fund the internal capital
requirements and MREL of its
subsidiaries. See also, ‘
NWB Group is
reliant on NatWest Group for capital and
funding support, and is substantially
reliant on NatWest Group plc’s ability to
issue sufficient amounts of capital and
external MREL securities and
downstream the proceeds to NWB
Group. The inability to do so may
adversely affect NWB Group
.’
If, under a stress scenario, the level of
regulatory capital or MREL falls outside
of risk appetite, there are a range of
recovery management actions (focused
on risk reduction and mitigation) that
NWB Group could take to manage its
capital levels, but any such actions may
not be sufficient to restore adequate
capital levels. Under the EU Bank
Recovery and Resolution Directives I and
II (‘BRRD’), as implemented in the UK,
NatWest Group must maintain a
recovery plan acceptable to its regulator,
such that a breach of NWB Group’s
applicable capital or leverage
requirements may trigger the application
of NatWest Group’s recovery plan to
remediate a deficient capital position.
NatWest Group’s regulator may request
that NWB Group carry out certain capital
management actions or, if NatWest
Group plc’s CET1 ratio falls below 7%,
certain regulatory capital instruments
issued by NatWest Group plc will be
written-down or converted into equity
and there may be an issue of additional
equity by NatWest Group plc, which
could result in the reduction in value of
the holdings of NatWest Group plc’s
existing shareholders. The success of
such issuances will also be dependent on
favourable market conditions and
NatWest Group may not be able to raise
the amount of capital required on
acceptable terms or at all. Separately,
NatWest Group may address a shortage
of capital by taking action to reduce
leverage exposure and/or RWAs via
asset or business disposals. These
actions may, in turn, affect: NWB
Group’s product offering, credit ratings,
ability to operate its businesses, pursue
its current strategies and pursue
strategic opportunities, any of which
may adversely affect NWB Group’s
future results, financial condition and/or
prospects. See also
,
‘
NatWest Group
(including NWB Group) may become
subject to the application of UK statutory
stabilisation or resolution powers which
may result in, for example, the write-
down or conversion of NWB Group’s
eligible liabilities.
’
NWB Group may not be able to
adequately access sources of liquidity
and funding.
NWB Group is required to access sources
of liquidity and funding through retail
and wholesale deposits, as well as
through the debt capital markets. As at
31 December 2022, NWB Plc held £322.6
billion in deposits. The level of deposits
may fluctuate due to factors outside
NWB Group’s control, such as a loss of
customers and/or investor confidence
(including in individual NatWest Group
entities), changes in interest rates,
government support, increasing
competitive pressures for retail and
corporate customer deposits or the
reduction or cessation of deposits by
wholesale depositors, which could result
in a significant outflow of deposits within
a short period of time. An inability to
grow, or any material decrease in NWB
Group’s deposits could, particularly if
accompanied by one of the other factors
described above, may adversely affect
NWB Group’s ability to satisfy its liquidity
or funding needs. In turn, this could
require NWB Group to adapt its funding
plans or change its operations.
Current economic uncertainties and any
significant market volatility could affect
NWB Group’s ability to access sources of
liquidity and funding, which may result in
higher funding costs and failure to
comply with regulatory capital, funding
and leverage requirements. As a result,
NWB Group could be required to adapt
its funding plans.
This could exacerbate
funding and liquidity risk, which may
adversely affect NWB Group.
As at 31 December 2022, NWB Plc’s
liquidity coverage ratio was 131%. If
NWB Plc’s liquidity position were to come
under stress, and if NWB Plc were unable
to raise funds through deposits or in the
debt capital markets on acceptable
terms or at all, its liquidity position could
be adversely affected and it might be
unable to meet deposit withdrawals on
demand or at their contractual maturity,
to repay borrowings as they mature, to
meet its obligations under committed
financing facilities, to comply with
regulatory funding requirements, to
undertake certain capital and/or debt
management activities, or to fund new
loans, investments and businesses. NWB
Group may need to liquidate assets to
meet its liabilities, including disposals of
assets not previously identified for
disposal to reduce its funding
commitments or trigger the execution of
certain management actions or recovery
options. In a time of reduced liquidity,
NWB Group may be unable to sell some
of its assets, or may need to sell assets
at depressed prices, which in either case
may adversely affect NWB Group’s
future results, financial condition and/or
prospects.
NWB Group is reliant on NatWest Group
for capital and funding support, and is
substantially reliant on NatWest Group
plc’s ability to issue sufficient amounts of
capital and external MREL securities and
downstream the proceeds to NWB
Group. The inability to do so may
adversely affect NWB Group.
NWB Plc receives capital and funding
from NatWest Group. NWB Plc has set
target levels for different tiers of capital
and for the internal MREL, as
percentages of its RWAs. The level of
capital and funding required for NWB Plc
to meet its internal targets is therefore a
function of the level of RWAs and its
leverage exposure in NWB Plc and this
may vary over time.
NWB Plc’s internal MREL comprises the
capital value of regulatory capital
instruments and loss-absorbing senior
funding issued by NWB Plc to its ultimate
parent, NatWest Group plc. The Bank of
England has identified that the preferred
resolution strategy for NatWest Group is
as a single point of entry at NatWest
Group plc. As a result, only NatWest
Group plc is able to issue Group MREL
eligible liabilities to third-party investors,
using the proceeds to fund the internal
MREL targets and/or requirements of its
operating entities, including NWB Plc.
NWB Plc is therefore dependent on
NatWest Group plc to fund its internal
capital targets and its ability to source
appropriate funding at NatWest Group
plc level to support this. NWB Plc is also
dependent on NatWest Group plc to fund
its internal MREL target over time and its
ability to raise and maintain sufficient
amounts of external MREL liabilities to
support this.
If NatWest Group plc is unable to issue
adequate levels of MREL securities such
that it is unable to downstream sufficient
Risk factors continued
NWB Group
Annual Report and Accounts 2022
179
amounts to NWB Plc, this could lead to a
failure of NWB Group to meet its own
individual internal MREL as well as the
internal MREL of subsidiaries within NWB
Group. See also, ‘
NWB Group may not
meet the prudential regulatory
requirements for capital and MREL, or
manage its capital effectively, which
could trigger the execution of certain
management actions or recovery
options
’.
Any reduction in the credit rating and/or
outlooks assigned to NatWest Group plc,
any of its subsidiaries (including NWB Plc
or other NWB Group subsidiaries) or any
of their respective debt securities could
adversely affect the availability of
funding for NWB Group, reduce its
liquidity position and increase the cost of
funding.
Rating agencies regularly review
NatWest Group plc, NWB Plc and other
NatWest Group entity credit ratings and
outlooks. In October 2022, Moody’s
changed the outlook from stable to
negative for NWB Plc’s issuer rating.
NWB Group entity credit ratings and
outlooks could be negatively affected
(directly or indirectly) by a number of
factors that can change over time,
including: credit rating agencies’
assessment of NWB Group’s strategy
and management’s capability; its
financial condition including in respect of
profitability, asset quality, capital,
funding and liquidity; the level of political
support for the industries and regions in
which NWB Group operates; the
implementation of structural reform; the
legal and regulatory frameworks
applicable to NWB Group’s legal
structure; business activities and the
rights of its creditors; changes in rating
methodologies; changes in the relative
size of the loss-absorbing buffers
protecting bondholders and depositors;
the competitive environment, political
and economic conditions in NWB Group’s
key markets (including higher interest
rates and inflation, supply chain
disruptions and the outcome of any
further Scottish independence
referendum); any reduction of the UK’s
sovereign credit rating (currently on
negative outlook by Moody’s, S&P and
Fitch) and market uncertainty. In
addition, credit ratings agencies are
increasingly taking into account
sustainability-related factors, including
climate, environmental, social and
governance related risk, as part of the
credit ratings analysis, as are investors in
their investment decisions. See also
‘A
reduction in the ESG ratings of NWB
Group could have a negative impact on
NWB Group's reputation and on
investors' risk appetite and customers'
willingness to deal with NWB Group.
’
Any reductions in the credit ratings of
NatWest Group plc, NWB Plc or of
certain other NatWest Group entities,
including, in particular, downgrades
below investment grade, or a
deterioration in the capital markets’
perception of NWB Group’s financial
resilience could significantly affect NWB
Group’s access to capital markets,
reduce the size of its deposit base and
trigger additional collateral or other
requirements in its funding arrangements
or the need to amend such
arrangements, which could adversely
affect NWB Group’s (and, in particular,
NWB Plc’s) cost of funding and its access
to capital markets and could limit the
range of counterparties willing to enter
into transactions with NWB Group (and,
in particular, with NWB Plc). This may in
turn adversely affect NWB Group’s
competitive position and threaten its
prospects in the short to medium-term.
NWB Group may be adversely affected if
NatWest Group fails to meet the
requirements of regulatory stress tests.
NatWest Group is subject to annual
stress tests by its regulator in the UK.
Stress tests are designed to assess the
resilience of banks to potential adverse
economic or financial developments and
ensure that they have robust, forward-
looking capital planning processes that
account for the risks associated with
their business profile. If the stress tests
reveal that a bank’s existing regulatory
capital buffers are not sufficient to
absorb the impact of the stress, then it is
possible that the NWB Group will need to
take action to strengthen its capital
position.
Failure by NatWest Group to meet the
quantitative and qualitative requirements
of the stress tests as set forth by its UK
regulator
may result in: NatWest
Group’s regulators requiring NatWest
Group to generate additional capital,
reputational damage, increased
supervision and/or regulatory sanctions,
restrictions on capital distributions and
loss of investor confidence, all of which
may adversely affect its future results,
financial condition and/or prospects of
NatWest Group and in turn NWB Group.
NWB Group could incur losses or be
required to maintain higher levels of
capital as a result of limitations or failure
of various models.
Given the complexity of NWB Group’s
business, strategy and capital
requirements, NWB Group relies on
analytical and other models for a wide
range of purposes, including to manage
its business, assess the value of its assets
and its risk exposure, as well as to
anticipate capital and funding
requirements (including to facilitate
NatWest Group’s mandated stress
testing). Uncertainties relating to the
COVID-19 pandemic has made reliance
on analytical models and planning and
forecasting for NWB Group more
complex, and may result in uncertainty
impacting the risk profile of NatWest
Group and/or that of the wider banking
industry. In addition, NWB Group utilises
models for valuations, credit approvals,
calculation of loan impairment charges
on an IFRS 9 basis, financial reporting
and for financial crime (criminal activities
in the form of money laundering,
terrorist financing, bribery and
corruption, tax evasion and sanctions as
well as fraud risk management
(collectively, ‘financial crime’). NWB
Group’s models, and the parameters and
assumptions on which they are based,
are periodically reviewed.
As models analyse scenarios based on
assumed inputs and a conceptual
approach, model outputs therefore
remain uncertain. Failure of models
(including due to errors in model design)
or new data inputs (including non-
representative data sets), for example, to
accurately reflect changes in the micro
and macro-economic environment in
which NWB Group operates (for example
to account for high inflation) to capture
risks and exposures at the subsidiary
level and to update for changes to
NatWest Group’s or NWB Group’s
current business model or operations, or
for findings of deficiencies by NatWest
Group’s (and in particular, NWB Group’s)
regulators (including as part of NatWest
Group’s mandated stress testing), may
render some business lines uneconomic,
result in increased capital requirements,
may require management action or may
subject NWB Group to regulatory
sanction. NWB Group may also face
adverse consequences as a result of
actions based on models that are poorly
developed, implemented or used, models
that are based on inaccurate or
compromised data or as a result of the
modelled outcome being misunderstood,
or by such information being used for
purposes for which it was not designed.
NWB Group’s financial statements are
sensitive to underlying accounting
policies, judgments, estimates and
assumptions.
The preparation of financial statements
requires management to make
judgments, estimates and assumptions
that affect the reported amounts of
assets, liabilities, income, expenses,
exposures and RWAs. While estimates,
judgments and assumptions take into
account historical experience and other
factors, (including market practice and
expectations of future events that are
believed to be reasonable under the
circumstances), actual results may differ
due to the inherent uncertainty in
making estimates, judgments and
assumptions (particularly those involving
Risk factors continued
NWB Group
Annual Report and Accounts 2022
180
the use of complex models). Further,
accounting policy and financial
statement reporting requirements are
likely to increasingly require
management to adjust existing
judgments, estimates and assumptions
for the effects of
climate-related,
sustainability and other matters that are
inherently uncertain and for which there
is little historical experience which may
affect the comparability of NWB Group’s
future financial results with its historical
results. Actual results may differ due to
the inherent uncertainty in making
climate-related and sustainability
estimates, judgments and assumptions.
Accounting policies deemed critical to
NWB Group’s results and financial
position, based upon materiality and
significant judgments and estimates,
involve a high degree of uncertainty and
may have a material impact on its
results. For 2022, these include loan
impairments, fair value, deferred tax and
conduct and litigation provisions. These
are set out in ‘
Critical accounting policies
and sources of estimation uncertainty
’.
Changes in accounting standards may
materially impact NWB Group’s financial
results.
NWB Group prepares its consolidated
financial statements in conformity with
the requirements of the Companies Act
2006 and in accordance with IFRS as
issued by the International Accounting
Standards Board. Changes in accounting
standards or guidance by accounting
bodies or in the timing of their
implementation, whether immediate or
foreseeable, could result in NWB Group
having to recognise additional liabilities
on its balance sheet, or in further write-
downs or impairments to its assets and
could also significantly impact the
financial results, condition and prospects
of NWB Group.
From time to time, the International
Accounting Standards Board may issue
new accounting standards or
interpretations that could materially
impact how NWB Group calculates,
reports and discloses its financial results
and financial condition, and which may
affect NWB Group capital ratios,
including the CET1 ratio. New
accounting standards and interpretations
that have been issued by the
International Accounting Standards
Board but which have not yet been
adopted by NWB Group are discussed in
‘
Future accounting developments
’.
NatWest Group (including NWB Group)
may become subject to the application of
UK statutory stabilisation or resolution
powers which may result in, for example,
the write-down or conversion of NWB
Group’s eligible liabilities.
HM Treasury, the Bank of England and
the PRA and FCA (together, the
‘Authorities’) are granted substantial
powers to resolve and stabilise UK-
incorporated financial institutions. Five
stabilisation options exist: (i) transfer of
all of the business of a relevant entity or
the shares of the relevant entity to a
private sector purchaser; (ii) transfer of
all or part of the business of the relevant
entity to a ‘bridge bank’ wholly-owned
by the Bank of England; (iii) transfer of
part of the assets, rights or liabilities of
the relevant entity to one or more asset
management vehicles for management
of the transferor’s assets, rights or
liabilities; (iv) the write-down, conversion,
transfer, modification, or suspension of
the relevant entity’s equity, capital
instruments and liabilities; and (v)
temporary public ownership of the
relevant entity. These tools may be
applied to NatWest Group plc as the
parent company or to NWB Group, as an
affiliate, where certain conditions are
met (such as, whether the firm is failing
or likely to fail, or whether it is
reasonably likely that action will be taken
(outside of resolution) that will result in
the firm no longer failing or being likely
to fail). Moreover, there are modified
insolvency and administration
procedures for relevant entities, and the
Authorities have the power to modify or
override certain contractual
arrangements in certain circumstances
and amend the law for the purpose of
enabling their powers to be used
effectively and may promulgate
provisions with retrospective
applicability.
Under the UK Banking Act, the
Authorities are generally required to
have regard to specified objectives in
exercising the powers provided for by
the Banking Act. One of the objectives
(which is required to be balanced as
appropriate with the other specified
objectives) refers to the protection and
enhancement of the stability of the
financial system of the UK. Moreover, the
‘no creditor worse off’ safeguard
contained in the Banking Act may not
apply in relation to an application of the
separate write-down and conversion
power relating to capital instruments
under the Banking Act, in circumstances
where a stabilisation power is not also
used. Holders of debt instruments which
are subject to the power may, however,
have ordinary shares transferred to or
issued to them by way of compensation.
Uncertainty exists as to how the
Authorities may exercise their powers
including the determination of actions
undertaken in relation to the ordinary
shares and other securities issued by
NatWest Group (including NWB Group),
which may depend on factors outside of
NWB Group’s control. Moreover, the
Banking Act provisions remain largely
untested in practice, particularly in
respect of resolutions of large financial
institutions and groups.
If NatWest Group is at or is approaching
the point of non-viability such that
regulatory intervention is required, there
may be a corresponding adverse effect
on the future results, financial conditions
and/or prospects of NWB Group.
NatWest Group is subject to Bank of
England and PRA oversight in respect
of resolution, and NWB Group could be
adversely affected should the Bank of
England in the future deem NatWest
Group’s preparations to be inadequate.
NatWest Group is subject to regulatory
oversight by the Bank of England and
the PRA and is required (under the PRA
rulebook) to carry out an assessment of
its preparations for resolution, submit a
report of the assessment to the PRA,
and disclose a summary of this report.
NatWest Group has dedicated
significant resources towards the
preparation of NatWest Group for a
potential resolution scenario. In June
2022 the Bank of England
communicated its assessment of
NatWest Group’s preparations and did
not identify any shortcomings,
deficiencies or substantive impediments
although two areas were highlighted as
requiring further enhancements.
NatWest Group, and in turn NWB, could
be adversely affected should future
Bank of England assessments deem
NatWest Group’s preparations to be
inadequate.
If future Bank of England assessments
identify a significant gap in NatWest
Group’s ability to achieve the
resolvability outcomes, or reveals that
NatWest Group is not adequately
prepared to be resolved, or did not have
adequate plans in place to meet
resolvability requirements, NatWest
Group may be required to take action to
enhance its preparations to be
resolvable, resulting in additional costs
and the dedication of additional
resources. Such a scenario may have an
impact on NatWest Group (and NWB
Group) as, depending on the Bank of
England’s assessment, potential action
may include, but is not limited to,
restrictions on maximum individual and
aggregate exposures, a requirement to
dispose of specified assets, a
requirement to change legal or
operational structure, a requirement to
cease carrying out certain activities
and/or maintaining a specified amount of
MREL. This may also impact NatWest
Group’s (and NWB Group’s) strategic
plans and may adversely affect its
financial condition and/or reputation or
lead to a loss of investor confidence.
Risk factors continued
NWB Group
Annual Report and Accounts 2022
181
Climate and sustainability-related risks
NWB Group and its customers, suppliers
and counterparties face significant
climate and sustainability-related risks,
which may adversely affect NWB Group.
Climate-related risks represent a source
of systemic risk in the global financial
system. The financial impacts of climate-
related risks are expected to be
widespread, exacerbating already
existing financial vulnerabilities and may
disrupt the proper functioning of
financial markets and institutions,
including NWB Group.
Financial and non-financial risks from
climate change and sustainability-related
risks can arise through physical and
transition risks. In addition, physical and
transition risks can trigger further losses,
stemming directly or indirectly from legal
claims, litigation and conduct liability
(referred to as ‘liability risk’). See also,
‘NWB Group may be subject to potential
climate, environmental, human rights
and other sustainability-related litigation,
enforcement proceedings, investigations
and conduct risk.’
There are significant uncertainties as to
the location, extent and timing of the
manifestation of the physical risks of
climate change, such as more severe
and frequent extreme weather events
(storms, flooding, subsidence, heat
waves, droughts and wildfires), rising sea
levels, nature and biodiversity loss,
declining food yields, destruction of
critical infrastructure, supply chain
disruption and resource scarcity.
Damage to NWB Group customers’,
suppliers’ and counterparties’ properties
and operations could disrupt business,
impair asset values and negatively
impact the creditworthiness of customers
leading to increased default rates,
delinquencies, write-offs and impairment
charges in NWB Group’s portfolios. In
addition, NWB Group premises and
operations, or those of its critical
outsourced functions may experience
damage or disruption leading to
increased costs and adversely affect
NWB Group’s reputation, future results,
financial condition and/or prospects.
In October 2021, the UK Government
published its Net Zero Strategy which
sets out how the UK will deliver on its
commitment to reach net-zero emissions
by 2050 (defined as the point at which
greenhouse gas emissions from sources
are equal to removals by sinks as set out
in Article 4 of the 2015 Paris
Agreement). An independent review of
the government’s approach to delivering
its net zero target to ensure it is pro-
business and pro-growth was published
in January 2023. The timing, content and
implementation of the specific policies
and proposals remain uncertain and are
subject to continuous changes and
developments. The transition to a net-
zero economy across all sectors of the
economy and markets in which NWB
Group operates will be required to meet
the goals of the UN Framework
Convention on Climate Change (1994),
the 2015 Paris Agreement, the UK’s Net
Zero Strategy and the European Green
Deal initiatives. The impacts of the
extensive social, commercial,
technological, policy and regulatory
changes required to achieve transition
remain uncertain but are expected to be
significant, subject to continuous
changes and developments and may be
disruptive across the global economy
and markets, especially if these changes
do not occur in an orderly or timely
manner or are not effective in reducing
emissions sufficiently. Some sectors such
as property, energy (including the oil and
gas industry), mobility (including land
transport, aviation, and shipping
industries and the related manufacturing
and infrastructure industry) and food
(including the agriculture industry) are
expected to be particularly impacted.
The timing and pace of the transition to
a net-zero economy is also uncertain,
will depend on many factors and
uncertainties and may be near term,
gradual and orderly or delayed, rapid
and disorderly, or a combination of
these. There is also growing attention on
the need for a
'just transition'
and
‘energy justice’
– in recognition that the
transition to net zero should not
disproportionally affect the most
disadvantaged members of society.
In addition, NWB Group and its
customers, suppliers and counterparties
may face economic, financial and non-
financial risks arising from broader
sustainability issues such as: (i) risks
relating to degradation of the
environment, such as air, water and land
pollution, water stress, nature and
biodiversity loss and deforestation which
may include for instance loss and/or
decline of the state of nature (including
the state of biodiversity); (ii) social
matter-related risks (including violent
conflicts, geopolitical implications,
impacts on indigenous people, migration,
human rights, diversity, equality and
inclusion, the living wage, fair taxation
and value chains); and (iii) governance-
related risks (including board diversity,
ethics, executive compensation and
management structure).
Financial institutions, including NWB
Group, are directly and indirectly
exposed to multiple types of
environmental risks (including nature
and biodiversity related risks) through
their activities, including through the risk
of default by clients. In addition to
safeguards and interventions that focus
on reducing negative impacts on the
environment (including nature and
biodiversity), there is also a growing
need to implement solutions
that focus
on increasing positive impacts on
environment (including nature and
biodiversity) through nature-based
solutions. In 2021, NatWest Group
(including NWB Group) classified
‘
Biodiversity and Nature Loss
’ as an
emerging risk for NatWest Group
(including NWB Group) within its Risk
Management Framework.
The Taskforce on Nature-Related
Financial Disclosures (TNFD) is a global,
market-led initiative with the mission to
develop and deliver a risk management
and disclosure framework for
organisations to report and act on
evolving nature-related risks and
opportunities, with the ultimate aim of
supporting a shift in global financial flows
away from nature-negative outcomes
and toward nature-positive outcomes.
NatWest Group (including NWB Group) is
a member of the Informal Working Group
2020 of TNFD and is a Forum Member
since 2021.
Measuring the environmental related
financial impacts (including impacts on
nature and biodiversity related financial
impacts) as a result of funding and
financing activities as well as reporting
on these is an evolving and complex
area for the financial services industry
which requires collaborative approaches
with partners, stakeholders, peers and
public sector bodies to help measure and
mitigate the negative impacts of the
activities which NatWest Group
(including NWB Group) finances on the
environment (including nature and
biodiversity), as well as supporting the
growing sector of nature-based solutions
and habitat restoration and biodiversity
markets. NatWest Group (including NWB
Group) is in the early stages of
developing its approach to assess,
manage and mitigate environmental
risks and by using emerging industry
guidance such as the TNFD beta
framework, NatWest Group (including
NWB Group) is seeking to further its
understanding of how NatWest Group’s
(including NWB Group’s) business
activities impact nature, the
dependencies NatWest Group (including
NWB Group) and its customers have on
nature, and the risks and opportunities
nature can generate.
There is also increased scrutiny from
NWB Group’s employees, investors,
customers, counterparties (including its
suppliers), communities, regulators and
other stakeholders regarding how
businesses address social issues,
including tackling inequality, working
conditions, workplace health, safety and
wellbeing, diversity and inclusion, data
protection and management, workforce
Risk factors continued
NWB Group
Annual Report and Accounts 2022
182
management, human rights and supply
chain management which may impact
NWB Group’s employees, suppliers,
customers, and their business activities
or the communities in which they
operate.
These climate and sustainability-related
risks may:
adversely affect economic activity,
asset pricing and valuations of
financial instruments and, in turn,
the wider financial system;
impact economic activities directly
(for example through lower
corporate profitability or the
devaluation of assets) or indirectly
(for example through macro-
financial changes);
also affect the viability or resilience
of business models over the medium
to longer term, particularly those
business models most vulnerable to
climate and sustainability-related
risks;
trigger further losses stemming
directly or indirectly from legal
claims (liability risks) and
reputational damage as a result of
the public, customers,
counterparties, suppliers and/or
investors associating NWB Group or
its customers with adverse climate
and sustainability-related issues;
intersect with and add further
complexity and challenge to
contributing to achieving NatWest
Group’s purpose-led strategy
including climate ambitions and
targets;
be drivers of several different risk
categories simultaneously and may
exacerbate existing risks, including
credit risk, operational risk
(including business continuity),
market risk (both traded and non-
traded), liquidity and funding risk
(for example, net cash outflows or
depletion of liquidity buffers),
pension risk and conduct risk; and
if combined, may have a greater
adverse effect on NWB Group’s
reputation, future results, financial
condition and/or prospects.
If NWB Group fails in a timely manner to
identify and address climate and
sustainability-related risks and
opportunities and changing regulatory
and market expectations, or to
appropriately identify, measure, manage
and mitigate climate and sustainability-
related physical, transition and liability
risks and opportunities that NWB Group,
its customers, counterparties and
suppliers face, this may adversely affect
NWB Group’s reputation, future results,
financial condition and/or prospects.
NatWest Group’s climate change related
strategy, ambitions, targets and
transition plan entail significant
execution and reputational risk and are
unlikely to be achieved without
significant and timely government policy,
technology and customer behavioural
changes.
In February 2020, NatWest Group
announced its ambition to become a
leading bank in the UK helping to
address the climate challenge. As part of
the implementation of its climate
ambitions, at NatWest Group’s Annual
General Meeting in April 2022, ordinary
shareholders passed an advisory ‘Say on
Climate’ resolution endorsing NatWest
Group’s previously announced strategy
to address climate change, including its
ambitions to at least halve the climate
impact of its financing activity by 2030,
achieve alignment with the 2015 Paris
Agreement and reach net zero by 2050
across its financed emissions, assets
under management and operational
value chain.
Furthermore, as part of its efforts to
support the transition to a net-zero
economy, NatWest Group has
announced its plans to (i) stop lending
and underwriting to companies with
more than 15% of activities related to
thermal and lignite coal, unless they had
a Credible Transition Plan in line with the
2015 Paris Agreement in place by end of
2021; phase out of thermal and lignite
coal for UK and non-UK customers who
have UK coal production, coal-fired
generation and coal-related
infrastructure by 1 October 2024, with a
full global phase out by 1 January 2030;
(ii) to stop lending and underwriting to
major oil and gas producers unless they
had a Credible Transition Plan aligned
with the 2015 Paris Agreement in place
by the end of 2021; (iii) from February
2023 stop providing reserve based
lending specifically for the purpose of
financing oil and gas exploration,
extraction and production for new
customers, and, after the 31 December
2025 not to renew, refinance or extend
existing reserve- based lending
specifically for the purpose of financing
oil and gas exploration, extraction and
production; and (iv) stop providing
reserve-based lending and borrowing
base financing to upstream Oil and Gas
companies specifically for the purpose of
financing upstream assets located in
Arctic or Antarctic Waters.
In December 2022, NatWest Group
published its science based targets
validated by Science Based Target
Initiative (SBTi) for its own operational
footprint and for 79% of its loans and
investments (debt securities and equity
shares) on its 2019 balance sheet, at
sector level. NatWest Group has also
announced and in the future it may also
announce other climate ambitions and
targets which support its overarching
strategy to address climate change.
Making the changes necessary to
contribute to achieving NatWest Group’s
strategy on addressing climate change,
including achieving NatWest Group’s
climate ambitions and targets and
executing its transition plan, may
adversely affect NWB Group’s business
and operations and will require
significant reductions to its financed
emissions and to its exposure to
customers that do not align with a
transition to net zero or do not have a
credible transition plan in place.
Increases in lending and financing
activities may wholly or partially offset
some or all these reductions, which may
increase the extent of changes and
reductions necessary. It is anticipated
that achieving these reductions, together
with the active management of climate
and sustainability-related risks and other
regulatory, policy and market changes, is
likely to necessitate material and
accelerated changes to NWB Group’s
business, operating model its existing
exposures and the products and services
NWB Group provides to its customers
(potentially on accelerated timescales)
which may adversely affect NWB
Group’s ability to achieve its financial
targets and generate sustainable returns.
NatWest Group (including NWB Group)
also needs to ensure that its strategy
and business model adapt to changing
national and international standards,
industry and scientific practices,
regulatory requirements and market
expectations regarding climate change,
which remain under continuous
development and are subject to different
interpretations. There can be no
assurance that these standards,
practices, requirements and expectations
will not be interpreted differently than
what was the understanding of NatWest
Group (including NWB Group) when
defining its climate-related ambitions and
targets or change in a manner that
substantially increases the cost or effort
for NatWest Group (including NWB
Group) to achieve such ambitions and
targets. In addition, NatWest Group’s
ambitions and targets may prove to be
considerably more difficult or even
impossible to achieve under such
changing circumstances. This may be
exacerbated if NatWest Group (including
NWB Group) chooses or is required to
accelerate its climate-related ambitions
or targets as a result of (among other
things) UK or international regulatory
developments or stakeholder
expectations.
NWB Group’s ability to contribute to
achieving NatWest Group’s strategy to
address climate change, including
achieving its climate ambitions and
Risk factors continued
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Annual Report and Accounts 2022
183
targets will depend to a large extent on
many factors and uncertainties beyond
NatWest Group’s (including NWB
Group’s) control. These include the
extent and pace of climate change,
including the timing and manifestation of
physical and transition risks, the macro-
economic environment, the timely
implementation and integration of
adequate government policies, the
effectiveness of actions of governments,
legislators, regulators, businesses,
investors, customers and other
stakeholders to mitigate the impact of
climate and sustainability-related risks,
changes in customer behaviour and
demand, changes in the available
technology for mitigation, the roll-out of
low carbon infrastructure and the
availability of accurate, verifiable,
reliable, consistent and comparable data.
See also, ‘
There are significant
challenges in accessing reliable,
verifiable and comparable climate and
other sustainability-related data due to
availability, quality and other limitations,
which contribute to the substantial
uncertainties in accurately modelling and
reporting on climate and sustainability
information, as well as making
appropriate important internal decisions
.’
These external factors and other
uncertainties will make it challenging for
NatWest Group to meet its climate
ambitions and targets and for NWB
Group to contribute to them and there is
a significant risk that all or some of these
will not be achieved.
Any delay or failure by NWB Group to
contribute to setting, making progress
against or meeting NatWest Group’s
climate-related ambitions and targets
may adversely affect NWB Group, its
reputation, future results, financial
condition and/or prospects and may
increase the climate and sustainability-
related risks NWB Group faces.
There are significant limitations related
to accessing reliable, verifiable and
comparable climate and other
sustainability-related data, including as a
result of lack of standardisation,
consistency and completeness which,
alongside other factors, contribute to
substantial uncertainties in accurately
modelling and reporting on climate and
sustainability information, as well as
making appropriate important internal
decisions.
Meaningful reporting of climate and
sustainability-related risks and
opportunities and their potential impacts
and related metrics depends on access
to accurate, reliable, consistent and
comparable climate and sustainability-
related data from counterparties or
customers. Data may not be generally
available or, if available, may not be
accurate, verifiable, auditable, reliable,
consistent, or comparable. Any failure of
NWB Group to incorporate climate
and/or sustainability-related factors into
its counterparty and customer data
sourcing and accompanying analytics, or
to collect or develop accurate, verifiable,
auditable, reliable, consistent and
comparable counterparty and customer
data, may adversely affect NWB Group’s
ability to prepare meaningful reporting of
climate and sustainability-related risks
and opportunities, and it may adversely
affect NWB Group’s regulatory
compliance, reputation, business and its
competitive position.
In the absence of other sources,
reporting of financed emissions by
financial institutions, including NWB
Group, is necessarily based on
aggregated information developed by
third parties that may be prepared in an
inconsistent way using different
methodologies, interpretations, or
assumptions. NWB Group’s climate and
sustainability-related disclosures use a
greater number and level of assumptions
and estimates than many of its financial
disclosures. These assumptions and
estimates are highly likely to change
over time, and, when coupled with the
longer timeframes used in these climate
and sustainability-related disclosures,
make any assessment of materiality
inherently uncertain. In particular, in the
absence of actual emissions monitoring
and measurement, emissions estimates
are based on industry and other
assumptions that may not be accurate
for a given counterparty or customer.
There may also be data gaps that are
filled using proxy data, such as sectoral
averages, again developed in different
ways. As a result, NWB Group’s climate
and sustainability-related disclosures
may be amended, updated or restated in
the future as the quality and
completeness of NWB Group’s data and
methodologies continue to improve.
These data quality challenges, gaps and
limitations could have a material impact
on NWB Group’s ability to make effective
business decisions about climate risks
and opportunities, including risk
management decisions, to comply with
disclosure requirements and to monitor
and report progress in meeting ambitions
and targets.
Significant risks, uncertainties and
variables are inherent in the assessment,
measurement and mitigation of climate-
related risks. These include data quality
gaps and limitations mentioned above, as
well as the pace at which climate
science, greenhouse gas accounting
standards and various emissions
reduction solutions develop. In addition,
there is significant uncertainty about
how climate change and the transition to
a net-zero economy will unfold over the
coming years and decades and how and
when climate-related risks will manifest.
These timeframes are considerably
longer than NWB Group’s historical
strategic, financial, resilience and
investment planning horizons.
As a result, it is very difficult to predict
and model the impact of climate-related
risks into precise financial and economic
outcomes and impacts. Climate-related
risks present significant methodological
challenges due to their forward-looking
nature, the lack and/or quality of
historical testing capabilities, lack of
standardisation and incompleteness of
emissions and other climate and sub-
sector related data and the immature
nature of risk measurement and
modelling methodologies. The evaluation
of climate-related risk exposure and the
development of associated potential risk
mitigation techniques largely depend on
the choice of climate scenario modelling
methodology and the assumptions made
which involves a number of risks and
uncertainties, for example:
climate scenarios are not
predictions of what is likely to
happen or what NatWest Group
would like to happen, rather they
explore the possible implications of
different judgments and
assumptions by considering a series
of scenarios;
climate scenarios do not provide a
comprehensive description of all
possible future outcomes;
lack of specialist expertise in banks
such that NWB Group needs to rely
on third party advice, modelling, and
data which is also subject to many
limitations and uncertainties;
immaturity of modelling of and data
on climate-related risks on financial
assets which will evolve rapidly in
the coming years;
the number of variables and
forward-looking nature of climate
scenarios which makes them
challenging to back test and
benchmark;
the significant uncertainty as to how
the climate will evolve over time,
how and when governments,
regulators, businesses, investors and
customers respond and how those
responses impact the economy,
asset valuations, land systems,
energy systems, technology, policy
and wider society;
the assumptions will be continually
evolving with more data/information
which may affect the baselines for
comparability across reporting
periods and impact internal and
external verification processes; and
the pace of the development of the
methodologies across different
sectors may be different and
Risk factors continued
NWB Group
Annual Report and Accounts 2022
184
therefore it may be challenging to
report on the whole balance sheet
with regard to emissions.
Accordingly, these risks and
uncertainties coupled with significantly
longer timeframes make the outputs of
climate-related risk modelling, including
emission reduction targets and
pathways, inherently more uncertain
than outputs modelled for traditional
financial planning cycles based on
historical financial information.
Furthermore, there is a lack of scientific,
industry and regulatory consensus
regarding the appropriate metrics,
methodologies, modelling and
standardised reporting to enable the
assessment of the location, acuteness,
and severity of environmental risks
(including nature and biodiversity-related
risks) and the monitoring and mitigation
of these risks in the economy and
financial system.
Capabilities within NWB Group to
appropriately assess, model, report and
manage climate and sustainability-
related risks and impacts and the
suitability of the assumptions required to
model and manage climate and
sustainability-related risks appropriately
are developing. The development of
NWB Group’s capabilities to assess,
model, report and manage the impacts
of climate change and broader
environmental risk (including nature and
biodiversity-related risks) is in its early
stages. Even when those capabilities are
developed, the high level of uncertainty
regarding any assumptions modelled, the
highly subjective nature of risk
measurement and mitigation techniques,
incorrect or inadequate assumptions and
judgments and data quality gaps and
limitations may lead to inadequate risk
management information and
frameworks, or ineffective business
adaptation or mitigation strategies,
which may adversely affect NWB
Group’s regulatory compliance,
reputation, future results, financial
condition and/or prospects.
A failure to implement effective climate
change resilient governance, procedures,
systems and controls in compliance with
legal and regulatory expectations to
manage climate and sustainability-
related risks and opportunities could
adversely affect NWB Group’s ability to
manage those risks.
The prudential regulation of climate-
related risks is an important driver in
how NWB Group develops its risk
appetite for financing activities or
engaging with counterparties. Legislative
and regulatory authorities are publishing
expectations as to how banks should
prudently manage and transparently
disclose climate-related and
environmental risks under prudential
rules.
In April 2019, the PRA published a
supervisory statement (‘SS 3/19’) with
particular focus on the management of
financial risks from climate change with
respect to governance, risk
management, scenario analysis and
disclosures. In response to the PRA’s SS
3/19, following the submission of initial
plans in October 2019, on 8 October
2020 NatWest Group provided the PRA
with an update to its original plan, noting
that the COVID-19 pandemic had
disrupted some elements of its original
plan and, as a result, the updated plan
would require additional operating cycles
reaching into 2022 and beyond to prove
embedding. Throughout 2022, NatWest
Group provided the PRA with updates on
how it had addressed the commitments
made in its October 2020 plan, noting
the delivery of a first generation, largely
qualitative in nature, approach to the
supervisory requirements. In 2022, the
PRA has also started actively supervising
firms against their supervisory
expectations, and it issued another ‘Dear
CEO letter’ providing a summary of
capabilities, which the PRA would expect
firms to be able to demonstrate, setting
out thematic observations on firms’
levels of embeddedness, and providing
examples of effective practices identified.
In June 2021, the Bank of England
launched its 2021 Biennial Exploratory
Scenario (‘2021 CBES’) to stress test the
resilience of the current business models
of the largest banks, insurers and the
financial system to the physical and
transition risks from climate change
under three climate scenarios. NatWest
Group delivered its first 2021 CBES
submission to the PRA in October 2021
and its submission to the second phase
of the 2021 CBES exercise in the first
quarter of 2022. In May 2022, the PRA
published the results of the 2021 CBES
which has shown that UK banks,
including NatWest Group (including NWB
Group), need to do more to understand
and manage their exposure to climate
risks and that the lack of available data
on corporates’ current emissions and
future transition plans is a collective
issue affecting all participating firms. In
July 2022, the participating banks in the
2021 CBES exercise were invited to
discuss methodologies and challenges
with regards to climate risk scenario
analysis.
In October 2022, the Bank of England
and the PRA held a conference to
facilitate discussion on the complex
issues associated with adjusting the
capital framework to take account of
climate-related financial risks with the
aim of providing more guidance on its
approach to climate and capital by the
end of 2022. The Bank of England does
not think capital frameworks should be
used to address the causes of climate
change. However, as set out in the PRA’s
Climate Change Adaptation Report 2021,
and as with any other risk, it does think
the capital framework could be a useful
tool within the broader regulatory
frameworks to ensure that PRA-
regulated firms are resilient to climate
risks.
Any failure of NatWest Group (including
NWB Group) to fully and timely embed
climate-related risks into its risk
management practices and framework
to appropriately identify, measure,
manage and mitigate the various
climate-related physical and transition
risks and apply the appropriate product
governance in line with applicable legal
and regulatory requirements and
expectations, may adversely affect NWB
Group’s regulatory compliance,
prudential capital requirements, liquidity
position, reputation, future results,
financial condition and/or prospects.
Climate and sustainability-related
disclosures are a rapidly evolving area
and increasingly expose NWB Group to
risk in the face of legal and regulatory
expectations, regulatory enforcement
and class action risk. NatWest Group and
its subsidiaries currently are and in the
future will be subject to increasing entity-
wide climate-related and other non-
financial disclosure requirements,
including pursuant to the
recommendations of the Task Force on
Climate-related Financial Disclosure
(‘TCFD’), the proposed SEC Climate
Disclosure Rules and ISSB sustainability
reporting requirements and under other
regimes. As from February 2022,
NatWest Group is required to provide
enhanced climate-related disclosures
consistent with the TCFD
recommendations to comply with the
FCA Policy Statement on ‘Proposals to
enhance climate-related disclosures by
listed issuers and clarification of existing
disclosure obligations’ (PS 20/17) which
introduced new Listing Rules that require
commercial companies with a UK
premium listing – such as NatWest Group
- to make climate-related disclosures,
consistent with TCFD, on a ‘comply or
explain’ basis.
By its Policy Statement ‘Enhancing
climate-related disclosures by standard
listed companies’ (PS 21/23), the FCA
has confirmed its final policy position set
forth in PS 20/17, extended the scope of
issuers that are subject to the new
Listing Rules and added guidance
provisions on transition plan disclosure
(for issuers in scope of both the PS 20/17
and the new PS 21/23 rules). NWB Plc is
currently not in scope of the FCA Policy
Statement (PS 20/17) or Policy
Risk factors continued
NWB Group
Annual Report and Accounts 2022
185
Statement (PS 21/23) and therefore, it is
not required to publish climate-related
disclosures consistent with the TCFD at
the company level. As required by the
FCA Policy Statement (PS 20/17) or
Policy Statement (PS 21/23), NatWest
Group publishes climate-related
disclosures that it believes are consistent
with the TCFD for the consolidated
group, including NWB Group.
In addition, as of 5 April 2022, NatWest
Group is also required to prepare
mandatory climate-related financial
disclosures pursuant to The Companies
(Strategic Report) (Climate-related
Financial Disclosure) Regulations 2022.
NWB Plc, being a subsidiary of NatWest
Group, falls under the subsidiary
exemption of The Companies (Strategic
Report) (Climate-related Financial
Disclosure) Regulations 2022. Therefore,
NWB Plc to date is not required to
produce any separate, standalone
climate-related disclosures.
Furthermore, in October 2022, the FCA
published a Consultation Paper on
‘
Sustainability Disclosure Requirements
(SDR) and investment labels
’ (CP 22/20)
which proposes that the FCA will require
all regulated firms to ensure that from
June 2023 the naming and marketing of
financial products and services in the UK
is clear, fair and not misleading, and
consistent with the sustainability profile
of the products or services, i.e.
proportionate and not exaggerated.
Misrepresenting or over-emphasising the
extent to which an investment, strategy
or other type of product takes into
account environmentally friendly,
sustainable or ethical features and
concerns, using misleading labels and
language in relation to such products
and/or omitting material information
about NWB Group’s contribution to the
climate crisis (including its direct or
indirect contribution to greenhouse gas
emissions), or other sustainability-related
issues, could potentially result in
complaints, regulatory intervention,
claims and/or litigation and reputational
damage.
Any failure of NWB Group to implement
robust and effective climate and
sustainability-related disclosure
governance and to embed appropriate
product governance policies, procedures
and controls to make accurate public
statements and claims about how
environmentally friendly, sustainable or
ethical NWB Group’s products and
services are and to apply these in line
with applicable legal and regulatory
requirements and expectations, may
adversely affect NWB Group’s regulatory
compliance and reputation and could
give rise to litigation.
Increasing levels of climate,
environmental, human rights and other
sustainability-related laws, regulation
and oversight which are constantly
evolving may adversely affect NWB
Group.
There is an increasing number of EU, UK
and other regulatory and legislative
initiatives to address issues around
climate change (including promoting the
transition to a net-zero economy),
environment (including nature and
biodiversity), human rights and other
sustainability-related risks and
opportunities. As a result, an increasing
number of laws, regulations and
legislative actions, including proposals,
guidance, policy and regulatory
initiatives many of which have been
introduced or amended recently and are
subject to further changes, is likely to
affect the financial sector and the wider
economy.
Many of these initiatives are focused on
developing standardised definitions and
criteria for green and sustainable criteria
of assets and liabilities, integrating
climate change and sustainability into
decision-making and customers’ access
to green and sustainable financial
products and services which may have a
significant impact on the services
provided by NWB Group, and its
subsidiaries and its associated credit,
market and financial risk profile. They
could also impact NWB Group’s
recognition of its climate and sustainable
funding and financing activity and may
adversely affect NWB Group’s ability to
achieve its strategy and climate and
sustainable funding and financing
ambitions.
In addition, NWB Group’s EU and other
non-UK subsidiaries and branches are
and will continue to be subject to an
increasing array of the EU/EEA and US
climate and sustainability-related legal
and regulatory requirements. These
requirements (potentially including the
EU Corporate Sustainability Due
Diligence Directive or the EU Corporate
Sustainability Reporting Directive) may
be applicable to UK businesses such as
NWB Group, or used as the basis for UK
laws and regulations (such as the UK
Green Taxonomy and the FCA’s
Consultation Paper on ‘Sustainability
Disclosure Requirements (SDR) and
investment labels’ (CP 22/20)), or be
regarded by investors and regulators as
best practice standards whether or not
they apply to UK businesses (such as the
EU Green Bond Standard). Any
divergence between UK, EU/EEA and US
climate and sustainability-related legal
and regulatory requirements and their
interpretation may result in NWB Group,
or any of its subsidiaries, not meeting
regulatory requirements, investors’
expectations may increase the cost of
doing business (including increased
operating costs) and contentious
regulatory and litigation risk and may
restrict access of NWB Group’s UK
business to the EU/EEA and US market.
NatWest Group (including NWB Group) is
also participating in various voluntary
carbon reporting and other standard
setting initiatives for disclosing climate
and sustainability-related information,
many of which have differing objectives
and methodologies and are at different
stages of development in terms of how
they apply to financial institutions.
Compliance with these developing and
evolving climate and sustainability-
related legal and regulatory
requirements is likely to require NWB
Group to implement significant changes
to its business models, products and
other governance, internal controls over
financial reporting, disclosure controls
and procedures, modelling capability and
risk management systems, which may
increase the cost of doing business, and
entail additional change risk and
increased compliance, regulatory
sanctions and litigation (including
settlements) costs.
Failure to implement and comply with
these legal and regulatory requirements
or emerging best practice expectations
may have a material adverse effect on
NWB Group’s regulatory compliance and
may result in regulatory sanctions,
reputational damage and investor
disapproval each of which may
adversely affect NWB Group’s future
results, financial condition and/or
prospects.
NWB Group may be subject to potential
climate, environmental, human rights
and other sustainability-related litigation,
enforcement proceedings, investigations
and conduct risk.
Due to increasing new climate and
sustainability-related jurisprudence, laws
and regulations in the UK and other
jurisdictions, growing demand from
investors and customers for
environmentally sustainable products
and services, and regulatory scrutiny,
financial institutions, including NWB
Group, may through their business
activities, face increasing litigation,
conduct, enforcement and contract
liability risks related to climate change,
environmental degradation, human
rights violations and other social,
governance and sustainability-related
issues.
These risks may arise, for example, from
claims pertaining to: (i) failure to meet
obligations, targets or commitments
relating to, or to disclose accurately, or
provide updates on material climate
and/or sustainability-related risks, or
Risk factors continued
NWB Group
Annual Report and Accounts 2022
186
otherwise provide fair, balanced and
appropriate disclosure to investors,
customers, counterparties and other
stakeholders; (ii) conduct, mis-selling and
customer protection claims, including
claims which may relate to alleged
insufficient product understanding,
unsuitable product offering and /or
reliance upon information provided by
NatWest Group or claims alleging unfair
pricing of climate-related products, for
example in relation to products where
limited liquidity or reliable market data
exists for benchmarking purposes or
which may be impacted by future
climate policy uncertainty or other
factors; (iii) marketing that portrays
products, securities, activities or policies
as having positive climate, environmental
or sustainable outcomes to an extent
that may not be the case, or may not
adequately be qualified and/or omits
material information about NWB Group’s
contribution to the climate crisis and/or
its direct / indirect contribution to
greenhouse gas emissions or other
sustainability related issues; (iv) damages
claims under various tort theories,
including common law public nuisance
claims, or negligent mismanagement of
physical and/or transition risks; (v)
alleged violations of officers’, directors’
and other fiduciaries’ duties, for example
by financing various carbon-intensive,
environmentally harmful or otherwise
highly exposed assets, companies, and
industries; (vi) changes in the
understanding of what constitutes
positive climate, environmental or
sustainable outcomes as a result of
developing climate science, leading to
discrepancy between current product
offerings and investor and/or market
and/or broader stakeholder
expectations; (vii) any weaknesses or
failures in specific systems or processes
associated particularly with climate,
environmental or sustainability linked
products, and/or human rights due
diligence, including any failure in the
timely implementation, onboarding
and/or updating of such systems or
processes; or (viii) counterparties,
collaborators, customers to whom
NatWest Group (including NWB Group)
provides services and third parties in
NWB Group’s value chain who act, or fail
to act, or undertake due diligence, or
apply appropriate risk management and
product governance in a manner that
may adversely affect NatWest Group’s
(including NWB Group’s) reputation or
sustainability credentials.
Furthermore, there is a risk that
shareholders, campaign groups,
customers and special interest groups
could seek to take legal action against
NWB Group for financing or contributing
to climate change, environmental
degradation and human rights violations
and for not supporting the principles of
‘just transition’ (i.e. maximising the social
benefits of the transition, mitigating the
social risks of the transition, empowering
those affected by the change,
anticipating future shifts to address
issues up front and mobilising
investments from the public and private
sectors).
There is a risk that as environmental and
climate science develop and societal
understanding of these issues increases
and deepens, courts, regulators and
enforcement authorities may apply the
then current understandings of
environmental, climate and broader
sustainability-related matters
retrospectively when assessing claims
about historical conduct or dealings of
financial institutions, including NatWest
Group. See also, NWB Group is exposed
to the risks of various litigation matters,
regulatory and governmental actions
and investigations as well as remedial
undertakings, including conduct-related
reviews, anti-money laundering and
redress projects, the outcomes of which
are inherently difficult to predict, and
which could have an adverse effect on
NWB Group.’
These potential litigation, conduct,
enforcement and contract liability risks
may have a material adverse effect on
NWB Group’s ability to achieve its
strategy, including its climate ambition,
and may adversely affect NWB Group’s
reputation, future results, financial
condition and/or prospects.
A reduction in the ESG ratings of
NatWest Group (including NWB Group)
could have a negative impact on
NatWest Group’s (including NWB
Group’s) reputation and on investors’
risk appetite and customers’ willingness
to deal with NatWest Group (including
NWB Group).
ESG ratings from agencies and data
providers which rate how NatWest
Group (including NWB Group) manages
environmental, social and governance
risks are increasingly influencing
investment decisions pertaining to
NatWest Group and/or NWB Group
and/or their subsidiaries’ securities or
being used as a basis to label financial
products and services as environmentally
friendly or sustainable. ESG ratings are
(i) unsolicited; (ii) subject to the
assessment and interpretation by the
ESG rating agencies; (iii) provided
without warranty; (iv) not a sponsorship,
endorsement, or promotion of NatWest
Group (including NWB Group) by the
relevant rating agency; and (v) may
depend on many factors some of which
are beyond NatWest Group’s and NWB
Group’s control (e.g. any change in
rating methodology). In addition, certain
NatWest Group entities offer or sell
products and services to customers and
counterparties based exclusively or
largely on a rating by an unregulated
ESG rating agency. ESG rating agencies,
at this stage, are not subject to any
specific regulatory or other regime or
oversight (although there are proposals
by regulators in different jurisdictions to
regulate rating agencies and data
providers). Regulators have expressed
concern that harm may arise from
potential conflicts of interest within ESG
rating and review or opinion providers
and there is a lack of transparency in
methodologies and data points, which
renders ratings and reviews
incomparable between agencies or
providers. There is currently no market
consensus on what precise attributes are
required for a particular asset to be
classified as ‘ESG’. Any reduction in the
ESG ratings of NatWest Group (including
NWB Group), or a regulatory sanction or
enforcement action involving an ESG
rating agency used by a NatWest Group
entity, could have a negative impact on
NWB Group’s reputation, could influence
investors’ risk appetite for NWB Group’s
and/or its subsidiaries’ securities,
particularly ESG securities, could
increase the cost of issuing securities for
NWB Group and/or its subsidiaries and
could affect a customer’s willingness to
deal with NWB Group.
Operational and IT resilience risk
Operational risks (including reliance on
third party suppliers and outsourcing of
certain activities) are inherent in NWB
Group’s businesses.
Operational risk is the risk of loss or
disruption resulting from inadequate or
failed internal processes, procedures,
people or systems, or from external
events, including legal and regulatory
risks. NWB Group offers a diverse range
of products and services supported
directly or indirectly by third party
suppliers. As a result, operational risks or
losses can arise from a number of
internal or external factors (including for
example, payment errors or financial
crime and fraud), for which there is
continued scrutiny by third parties on
NWB Group’s compliance with financial
crime requirements; see ‘
NWB Group is
exposed to the risks of various litigation
matters, regulatory and governmental
actions and investigations as well as
remedial undertakings, including
conduct-related reviews, anti-money
laundering and redress projects, the
outcomes of which are inherently difficult
to predict, and which could have an
adverse effect on NWB Group.
’
These risks are also present when NWB
Group relies on critical service providers
(suppliers) or vendors to provide services
to it or its customers, as is increasingly
the case as NWB Group outsources
Risk factors continued
NWB Group
Annual Report and Accounts 2022
187
certain activities, including with respect
to the implementation of technologies,
innovation and responding to regulatory
and market changes.
Operational risks continue to be
heightened as a result of the
implementation of NatWest Group’s
purpose-led strategy, and the
organisational and operational changes
involved, including: NatWest Group’s
current cost-controlling measures, the
progression towards working as One
Bank across NatWest Group (of which
NWB Group is part) to serve customers
and conditions affecting the financial
services industry generally (including
macro-economic and other geo-political
developments) as well as the legal and
regulatory uncertainty resulting
therefrom. It is unclear as to how the
future ways of working may evolve,
including in respect of how working
practices may develop, or how NWB
Group will evolve to best serve its
customers. Any of the above may place
significant pressure on NWB Group’s
ability to maintain effective internal
controls and governance frameworks.
The effective management of operational
risks is critical to meeting customer
service expectations and retaining and
attracting customer business. Although
NWB Group has implemented risk
controls and mitigation actions, with
resources and planning having been
devoted to mitigate operational risk, such
measures may not be effective in
controlling each of the operational risks
faced by NWB Group. Ineffective
management of such risks may
adversely affect NWB Group’s future
results, financial conditions and/or
prospects.
NWB Group is subject to increasingly
sophisticated and frequent cyberattacks.
NatWest Group experiences a constant
threat from cyberattacks across the
entire NatWest Group (including NWB
Group) and against NatWest Group and
NWB Group’s supply chain, reinforcing
the importance of due diligence of and
close working relationship with the third
parties on which NWB Group relies. NWB
Group is reliant on technology, against
which there is a constantly evolving
series of attacks that are increasing in
terms of frequency, sophistication,
impact and severity. As cyberattacks
evolve and become more sophisticated,
NWB Group is required to continue to
invest in additional capability designed to
defend against emerging threats. In
2022, NWB Group and its supply chain
were subjected to a small number of
Distributed Denial of Service (‘DDOS’)
and ransomware attacks, which are a
pervasive and significant threat to the
financial services industry. The focus is
to manage the impact of the attacks and
sustain availability of services for NWB
Group’s customers. NWB Group
continues to invest significant resources
in the development and evolution of
cyber security controls that are designed
to minimise the potential effect of such
attacks.
Hostile attempts are made by third
parties to gain access to, introduce
malware (including ransomware) into
and exploit vulnerabilities of NWB
Group’s IT systems. NWB Group has
information and cyber security controls
in place to seek to minimise the impact
of any such attacks, which are subject to
review on a continuing basis, but given
the nature of the threat, there can be no
assurance that such measures will
prevent the potential negative impacts of
any such attacks from occurring. See
also, ‘
NWB Group’s operations are highly
dependent on its complex IT systems and
any IT failure could adversely affect NWB
Group.
’
Any failure in NWB Group’s
cybersecurity policies, procedures or
controls, may result in significant
financial losses, major business
disruption, inability to deliver customer
services, or loss of data or systems or
other sensitive information (including as
a result of an outage) and may cause
associated reputational damage. Any of
these factors could increase costs
(including costs relating to notification of,
or compensation for customers, credit
monitoring or card reissuance), result in
regulatory investigations or sanctions
being imposed, or may affect NWB
Group’s ability to retain and attract
customers. Regulators in the UK, US,
Europe and Asia continue to recognise
cybersecurity as an important systemic
risk to the financial sector and have
highlighted the need for financial
institutions to improve their monitoring
and control of, and resilience
(particularly of critical services) to
cyberattacks, and to provide timely
reporting or notification of them, as
appropriate. Cyberattacks on NWB
Group’s counterparties may also damage
NWB Group’s operations. Additionally,
third parties may also fraudulently
attempt to induce employees, customers,
third party providers or other users who
have access to NWB Group’s systems to
disclose sensitive information in order to
gain access to NWB Group’s data or
systems or that of NWB Group’s
customers or employees. Cybersecurity
and information security events can
derive from groups or factors such as:
internal or external threat actors, human
error, fraud or malice on the part of
NWB Group’s employees or third parties,
including third party providers, or may
result from technological failure. Any of
the above may have an adverse effect
on NWB Group’s reputation, future
results, financial condition and/or
prospects.
NWB Group expects greater regulatory
engagement, supervision and
enforcement to continue at a high level
in relation to its overall resilience to
withstand IT and IT-related disruption,
either through a cyberattack or some
other disruptive event. Such increased
regulatory engagement, supervision and
enforcement is uncertain in relation to
the scope, cost, consequence and the
pace of change, which may adversely
affect NWB Group’s future results,
financial condition and/or prospects. Due
to NWB Group’s reliance on technology
and the increasing sophistication,
frequency and impact of cyberattacks,
such attacks may have an adverse effect
on NWB Group.
In accordance with the Data Protection
Act 2018 and the European Union
Withdrawal Act 2018, the Data
Protection, Privacy and Electronic
Communications (Amendments Etc.) (EU
Exit) Regulations 2019, as amended by
the Data Protection, Privacy and
Electronic Communications
(Amendments Etc.) (EU Exit) Regulations
2020 (‘UK Data Protection Framework’)
and European Banking Authority (‘EBA’)
Guidelines on ICT and Security Risk
Management, NWB Group is required to
ensure it implements timely, appropriate
and effective organisational and
technological safeguards against
unauthorised or unlawful access to the
data of NWB Group, its customers and its
employees. In order to meet this
requirement, NWB Group relies on the
effectiveness of its internal policies,
controls and procedures to protect the
confidentiality, integrity and availability
of information held on its IT systems,
networks and devices as well as with
third parties with whom NWB Group
interacts. A failure to monitor and
manage data in accordance with the UK
Data Protection Framework and EBA
requirements of the applicable legislation
may result in financial losses, regulatory
fines and investigations and associated
reputational damage.
NWB Group operations and strategy are
highly dependent on the accuracy and
effective use of data.
NWB Group relies on the effective use of
accurate data to support, monitor,
evaluate, manage and enhance its
operations and deliver its strategy.
Investment is being made in data tools
and analytics, including raising
awareness around data ethical usage
and privacy across NWB Group. The
availability and accessibility of current,
complete, detailed, accurate and,
wherever possible, machine-readable
customer segment and sub-sector data,
Risk factors continued
NWB Group
Annual Report and Accounts 2022
188
together with appropriate governance
and accountability for data, is fast
becoming a critical strategic asset, which
is subject to increased regulatory focus.
Failure to have or be able to access that
data or the ineffective use or governance
of that data could result in a failure to
manage and report important risks and
opportunities or satisfy customers’
expectations including the inability to
deliver products and services. This could
also result in a failure to deliver NWB
Group’s strategy and could place NWB
Group at a competitive disadvantage by
increasing its costs, inhibiting its efforts
to reduce costs or its ability to improve
its systems, controls and processes,
which could result in a failure to deliver
NWB Group’s strategy. These data
weaknesses and limitations, or the
unethical or inappropriate use of data,
and/or non-compliance with data
protection laws could give rise to
conduct and litigation risks and may
increase the risk of operational
challenges, losses, reputational damage
or other adverse consequences due to
inappropriate models, systems,
processes, decisions or other actions.
NWB Group’s operations are highly
dependent on its complex IT systems and
any IT failure could adversely affect NWB
Group.
NWB Group’s operations are highly
dependent on the ability to process a
very large number of transactions
efficiently and accurately while
complying with applicable laws and
regulations. The proper functioning of
NatWest Group’s (including NWB
Group’s) payment systems, financial
crime, fraud systems and controls, risk
management, credit analysis and
reporting, accounting, customer service
and other IT systems (some of which are
owned and operated by other entities in
NatWest Group or third parties), as well
as the communication networks between
their branches and main data processing
centres, is critical to NWB Group’s
operations.
Individually or collectively, any critical
system failure, material loss of service
availability or material breach of data
security could cause significant damage
to (i) important business services and (ii)
NWB Group’s ability to provide services
to its customers, which could result in
reputational damage, significant
compensation costs and regulatory
sanctions (including fines resulting from
regulatory investigations), or a breach of
applicable regulations and could affect
NWB Group’s regulatory approvals,
competitive position, business and
brands, which could undermine its ability
to attract and retain customers. NWB
Group outsources certain functions as it
innovates and offers new digital solutions
to its customers to meet the demand for
online and mobile banking. Outsourcing
alongside hybrid working patterns of
NWB Group employees, heighten the
above risks.
NWB Group uses IT systems that enable
remote working interface with third-
party systems, and NWB Group could
experience service denials or disruptions
if such systems exceed capacity or if a
third-party system fails or experiences
any interruptions, all of which could
result in business and customer
interruption and related reputational
damage, significant compensation costs,
regulatory sanctions and/or a breach of
applicable regulations.
In 2022, NWB Group continued to make
considerable investments to further
simplify, upgrade and improve its IT and
technology capabilities (including
migration of certain services to cloud
platforms). NWB Group also continues to
develop and enhance digital services for
its customers and seeks to improve its
competitive position through enhancing
controls and procedures and
strengthening the resilience of services
including cyber security. Any failure of
these investment and rationalisation
initiatives to achieve the expected
results, due to cost challenges or
otherwise, may adversely affect NWB
Group’s operations, its reputation and
ability to retain or grow its customer
business or adversely affect its
competitive position.
NWB Group relies on attracting, retaining
and developing diverse senior
management and skilled personnel, and
is required to maintain good employee
relations.
NWB Group’s success depends on its
ability to attract, retain through creating
an inclusive environment, and develop
highly skilled and qualified diverse
personnel, including senior management,
directors and key employees especially
for technology and data focused roles, in
a highly competitive market and under
internal cost efficiency pressures.
NWB Group’s ability to do this may be
more difficult due to the cost-controlling
measures, a failure to pay employees
competitive compensation, heightened
regulatory oversight of banks and the
increasing scrutiny of, and (in some
cases) restrictions placed upon,
employee compensation arrangements
(in particular those of banks that have
been in receipt of government support
such as NatWest Group). This may
impact the cost of hiring, training and
retaining diverse skilled personnel. In
addition, certain economic, market and
regulatory conditions and political
developments may reduce the pool of
candidates for key management and
non-executive roles, including non-
executive directors with the right skills,
knowledge and experience, or increase
the number of departures of existing
employees. Moreover, a failure to foster
a diverse and inclusive workforce may
adversely affect NWB Group’s employee
engagement and the formulation and
execution of its strategy, and could also
have an adverse effect on its reputation
with customers, investors and regulators.
The inability to compensate employees
competitively and/or any reduction of
compensation, as a result of negative
economic developments or otherwise,
could have an adverse effect on NWB
Group’s ability to hire, retain and engage
appropriately qualified employees,
especially at a senior level, which may
adversely affect NatWest Group’s future
results, financial condition and/or
prospects.
Many of NWB Group’s employees in the
UK, the ROI and continental Europe are
represented by employee representative
bodies, including trade unions and works
councils. Engagement with its employees
and such bodies is important to NWB
Group in maintaining good employee
relations. Any failure to do so may
adversely affect NWB Group’s ability to
operate its business effectively.
A failure in NWB Group’s risk
management framework could adversely
affect NWB Group, including its ability to
achieve its strategic objectives.
Risk management is an integral part of
all of NWB Group’s activities and delivery
of its long-term strategy. NatWest
Group’s Enterprise-Wide Risk
Management Framework sets out the
approach for managing risk within the
NWB Group including in relation to risk
governance and risk appetite. A failure
to adhere to this framework, or any
material weaknesses or deficiencies in
the framework’s controls and
procedures, could adversely affect
NatWest Group’s financial condition and
strategic delivery including in relation to
inaccurate adherence to agreed risk
appetite statements and accurate risk
reporting of risk exposures.
In addition, financial crime risk
management is dependent on the use
and effectiveness of financial crime
assessment, systems and controls. Weak
or ineffective financial crime processes
and controls may risk NWB Group
inadvertently facilitating financial crime
which may result in regulatory
investigation, sanction, litigation, fines
and reputational damage. Financial
crime continues to evolve, whether
through fraud, scams, cyber-attacks or
other criminal activity. NatWest Group
(and NWB Group) has made and
continues to make significant, multi-year
Risk factors continued
NWB Group
Annual Report and Accounts 2022
189
investments to strengthen and improve
its overall financial crime control
framework with prevention systems and
capabilities. As part of its ongoing
programme of investment, there is
current and future investment planned to
further strengthen financial crime
controls over the coming years, including
investment in new technologies and
capabilities to further enhance customer
due diligence, transaction monitoring,
sanctions and anti-bribery and
corruption systems.
Ineffective risk management may arise
from a wide variety of factors, including
lack of transparency or incomplete risk
reporting, manual processes and
controls, inaccurate data, inadequate IT
systems, unidentified conflicts or
misaligned incentives, lack of
accountability control and governance,
incomplete risk monitoring and
management or insufficient challenges or
assurance processes, or a failure to
timely complete risk remediation
projects. Failure to manage risks
effectively, or within regulatory
expectations, could adversely affect NWB
Group’s reputation or its relationship
with its regulators, customers,
shareholders or other stakeholders.
NWB Group’s operations are inherently
exposed to conduct risks, which include
business decisions, actions or reward
mechanisms that are not responsive to
or aligned with NWB Group’s regulatory
obligations, customers’ needs or do not
reflect NWB Group’s customer-focused
strategy, ineffective product
management, unethical or inappropriate
use of data, information asymmetry,
implementation and utilisation of new
technologies, outsourcing of customer
service and product delivery, the
possibility of mis-selling of financial
products and mishandling of customer
complaints. Some of these risks have
materialised in the past and ineffective
management and oversight of conduct
risks may lead to further remediation
and regulatory intervention or
enforcement.
NWB Group’s businesses are also
exposed to risks from employee-
misconduct including non-compliance
with policies and regulations, negligence
or fraud (including financial crimes and
fraud), any of which could result in
regulatory fines or sanctions and serious
reputational or financial harm to NWB
Group. Remote working arrangements
for NWB Group employees continues to
place heavy reliance on the IT systems
that enable remote working and may
place additional pressure on NWB
Group’s ability to maintain effective
internal controls and governance
frameworks. Remote working
arrangements are also subject to
regulatory scrutiny to ensure adequate
recording, surveillance and supervision
of regulated activities, and compliance
with regulatory requirements and
expectations, including requirements to:
meet threshold conditions for regulated
activities; ensure the ability to oversee
functions (including any outsourced
functions); ensure no detriment is caused
to customers; and ensure no increased
risk of financial crime.
NWB Group has been seeking to embed
a strong risk culture across the
organisation and has implemented
policies and allocated new resources
across all levels of the organisation to
manage and mitigate conduct risk and
expects to continue to invest in risk
management, including the ongoing
development of a NatWest Group risk
management strategy in line with
regulatory expectations. However, such
efforts may not insulate NWB Group
from instances of misconduct and no
assurance can be given that NWB
Group’s strategy and control framework
will be effective. Any failure in NWB
Group’s risk management framework
could negatively affect NWB Group and
its financial condition through
reputational and financial harm and may
result in the inability to achieve its
strategic objectives for their customers,
employees and wider stakeholders.
NWB Group’s operations are subject to
inherent reputational risk.
Reputational risk relates to stakeholder
and public perceptions of NWB Group
arising from an actual or perceived
failure to meet stakeholder or the
public’s expectations, including with
respect to NatWest Group’s purpose-led
strategy and related targets, the creation
of the Commercial & Institutional
business segment, the progression
towards working as One Bank across the
NatWest Group (of which NWB Group is
part) to serve customers, or due to any
events, behaviour, action or inaction by
NWB Group, its employees or those with
whom NWB Group is associated. See
also, ‘
NWB Group’s businesses are
subject to substantial regulation and
oversight, which are constantly evolving
and may adversely affect NWB Group.
’
This includes harm to its brand, which
may be detrimental to NWB Group’s
business, including its ability to build or
sustain business relationships with
customers, and may cause low employee
morale, regulatory censure or reduced
access to, or an increase in the cost of,
funding.
Reputational risk may arise whenever
there is, or there is perceived to be, a
material lapse in standards of integrity,
compliance, customer or operating
efficiency and may adversely affect NWB
Group’s ability to attract and retain
customers. In particular, NWB Group’s
ability to attract and retain customers
(particularly, corporate/institutional and
retail depositors) and engage with
counterparties may be adversely
affected by factors including: negative
public opinion resulting from the actual
or perceived manner in which NWB
Group or any other member of NatWest
Group conducts or modifies its business
activities and operations, media
coverage (whether accurate or
otherwise), employee misconduct, NWB
Group’s financial performance, IT
systems failures or cyberattacks, data
breaches, financial crime and fraud, the
level of direct and indirect government
support, or the actual or perceived
practices in the banking and financial
industry in general, or a wide variety of
other factors.
Modern technologies, in particular online
social networks and other broadcast
tools that facilitate communication with
large audiences in short timeframes and
with minimal costs, may also significantly
increase and accelerate the impact of
damaging information and allegations.
Although NWB Group has implemented a
Reputational Risk Policy to monitor the
identification, assessment and
management of customers, transactions,
products and issues which represent a
reputational risk, NWB Group cannot be
certain that it will be successful in
avoiding damage to its business from
reputational risk.
Legal, regulatory and conduct risk
NWB Group’s businesses are subject to
substantial regulation and oversight,
which are constantly evolving and may
adversely affect NWB Group.
NWB Group is subject to extensive laws,
regulations, guidelines, corporate
governance practice and disclosure
requirements, administrative actions and
policies in each jurisdiction in which it
operates, which represents ongoing
compliance and conduct risks. Many of
these have been introduced or amended
recently and are subject to further
material changes, which may increase
compliance and conduct risks,
particularly as EU/EEA and UK laws
diverge as a result of Brexit. NWB Group
expects government and regulatory
intervention in the financial services
industry to remain high for the
foreseeable future.
In recent years, regulators and
governments have focused on reforming
the prudential regulation of the financial
services industry and the manner in
which the business of financial services is
conducted. Measures have included:
enhanced capital, liquidity and funding
requirements, implementation of the UK
ring-fencing regime, implementation and
Risk factors continued
NWB Group
Annual Report and Accounts 2022
190
strengthening of the recovery and
resolution framework applicable to
financial institutions in the UK, the EU
and the US, financial industry reforms
(including in respect of MiFID II),
corporate governance requirements,
restrictions on the compensation of
senior management and other
employees, enhanced data protection
and IT resilience requirements, financial
market infrastructure reforms (including
enhanced data protection and IT
resilience requirements), enhanced
regulations in respect of the provision of
‘investment services and activities’ and
increased regulatory focus in certain
areas, including conduct, consumer
protection, competition and disputes
regimes, anti-money laundering, anti-
corruption, anti-bribery, anti-tax evasion,
payment systems, sanctions and anti-
terrorism laws and regulations.
In addition, there is significant oversight
by competition authorities of the
jurisdictions in which NWB Group
operates. The competitive landscape for
banks and other financial institutions in
the UK, EU/EEA, Asia and the US is
rapidly changing. Recent regulatory and
legal changes have and may continue to
result in new market participants and
changed competitive dynamics in
certain key areas. Regulatory and
competition authorities, including the
CMA, are currently also looking at and
focusing more on how they can support
competition and innovation in digital
and other markets. Recent regulatory
changes, proposed (such as US
proposals to increase regulation around
cybersecurity) or future developments
and heightened levels of public and
regulatory scrutiny in the UK, the EU
and the US have resulted in increased
capital, funding and liquidity
requirements, changes in the
competitive landscape, changes in other
regulatory requirements and increased
operating costs, and have impacted,
and will continue to impact, product
offerings and business models.
Other areas in which, and examples of
where, governmental policies, regulatory
and accounting changes and increased
public and regulatory scrutiny could
have an adverse effect (some of which
could be material) on NWB Group
include, but are not limited to, the
following:
general changes in government,
central bank, regulatory or
competition policy, or changes in
regulatory regimes that may
influence investor decisions in the
jurisdictions in which NWB Group
operates;
rules relating to foreign ownership,
expropriation, nationalisation and
confiscation of assets;
increased scrutiny including from the
CMA, FCA and Payment Systems
Regulator (‘PSR’) for the protection
and resilience of, and competition
and innovation in, digital and other
markets, UK payment systems and
retail banking developments relating
to the UK initiative on Open Banking,
Open Finance and the European
directive on payment services;
the ongoing compliance by NatWest
Group with CMA’s Market Orders
including the Retail Banking Market
Order 2017 (the ‘Order’) and SME
Undertakings as well as the ongoing
consultation by the UK Government
to introduce penalties for breaches of
such requirements (in addition to the
current customer remediation
requirements);
ongoing competition litigation in the
English courts around payment card
interchange fees, combined with
increased regulatory scrutiny (from
the PSR) of the Visa and Mastercard
card schemes;
increased risk of new class action
claims being brought against NWB
Group in the Competition Appeal
Tribunal for breaches of competition
law;
new or increased regulations relating
to customer data protection as well
as IT controls and resilience, such as
the proposed UK Data Protection and
Digital Information Bill and in India,
the Digital Personal Data Protection
Bill;
the introduction of, and changes to,
taxes, levies or fees applicable to
NWB Group’s operations, such as the
imposition of a financial transaction
tax, introduction of global minimum
tax rules, changes in tax rates,
changes in the scope and
administration of the Bank Levy,
increases in the bank corporation tax
surcharge in the UK, restrictions on
the tax deductibility of interest
payments or further restrictions
imposed on the treatment of carry-
forward tax losses that reduce the
value of deferred tax assets and
require increased payments of tax
increased regulatory focus on
customer protection (such as the
FCA’s Consumer Duty policy
statement and final rules and
guidance in retail or other financial
markets;
the potential introduction by the
Bank of England of a Central Bank
Digital Currency which could result in
deposit outflows, higher funding
costs, and/or other implications for
UK banks including NWB Group; and
regulatory enforcement in the form
of PRA imposed financial penalties
for failings in banks’ regulatory
reporting governance and controls,
and regulatory scrutiny following the
2019 PRA ‘Dear CEO letter’
regarding PRA’s ongoing focus on:
the integrity of regulatory reporting,
which the PRA considers has equal
standing with financial reporting; the
PRA’s thematic reviews of the
governance, controls and processes
for preparing regulatory returns of
selected UK banks, including NatWest
Group; the publication of the PRA’s
common findings from those reviews
in September 2021; and NatWest
Group’s programme of improvements
to meet PRA expectations.
These and other recent regulatory
changes, proposed or future
developments and heightened levels of
public and regulatory scrutiny in the UK,
the EU and the US have resulted in
increased capital, funding and liquidity
requirements, changes in the competitive
landscape, changes in other regulatory
requirements and increased operating
costs, and have impacted, and will
continue to impact, competitive position,
product offerings and business models.
Future competition investigations, market
reviews, or the regulation of mergers
may lead to the imposition of financial
penalties or market remedies that may
adversely affect NatWest Group’s
competitive or financial position. Any of
these developments (including any failure
to comply with new rules and
regulations) could also have a significant
impact on NWB Group’s authorisations
and licences, the products and services
that NWB Group may offer, its reputation
and the value of its assets, NWB Group’s
operations or legal entity structure, and
the manner in which NWB Group
conducts its business. Material
consequences could arise should NWB
Group be found to be non-compliant
with these regulatory requirements.
Regulatory developments may also result
in an increased number of regulatory
investigations and proceedings and have
increased the risks relating to NWB
Group’s ability to comply with the
applicable body of rules and regulations
in the manner and within the timeframes
required.
Changes in laws, rules or regulations, or
in their interpretation or enforcement, or
the implementation of new laws, rules or
regulations, including contradictory or
conflicting laws, rules or regulations by
key regulators or policymakers in
different jurisdictions, or failure by NWB
Group to comply with such laws, rules
and regulations, may adversely affect
NWB Group’s business, results of
operations and outlook. In addition,
uncertainty and insufficient international
regulatory coordination as enhanced
supervisory standards are developed and
implemented may adversely affect NWB
Group’s ability to engage in effective
Risk factors continued
NWB Group
Annual Report and Accounts 2022
191
business, capital and risk management
planning.
NWB Group is exposed to the risks of
various litigation matters, regulatory and
governmental actions and investigations
as well as remedial undertakings,
including conduct-related reviews, anti-
money laundering and redress projects,
the outcomes of which are inherently
difficult to predict, and which could have
an adverse effect on NWB Group.
NWB Group’s operations are diverse and
complex and it operates in legal and
regulatory environments that expose it to
potentially significant civil actions
(including those following on from
regulatory sanction), as well as criminal,
regulatory and governmental
proceedings. NWB Group has resolved a
number of legal and regulatory actions
over the past several years but continues
to be, and may in the future be, involved
in such actions in the US, the UK, Europe
and other jurisdictions.
NWB Group is currently, has recently
been and will likely be involved in a
number of significant legal and
regulatory actions, including
investigations, proceedings and ongoing
reviews (both formal and informal) by
governmental law enforcement and
other agencies and litigation
proceedings, including in relation to the
offering of securities, conduct in the
foreign exchange market, the setting of
benchmark rates such as LIBOR and
related derivatives trading, the issuance,
underwriting, and sales and trading of
fixed-income securities (including
government securities), product mis-
selling, customer mistreatment, anti-
money laundering, antitrust, VAT
recovery and various other
issues. Legal
and regulatory actions are subject to
many uncertainties, and their outcomes,
including the timing, amount of fines,
damages or settlements or the form of
any settlements, which may be material
and in excess of any related provisions,
are often difficult to predict, particularly
in the early stages of a case or
investigation. NWB Group’s expectation
for resolution may change and
substantial additional provisions and
costs may be recognised in respect of
any matter.
For information relating to legal and
regulatory proceedings and matters to
which NWB Group is currently exposed,
see ‘
Litigation and regulatory matters
’ at
Note 26 to the consolidated accounts.
Recently resolved matters or adverse
outcomes or resolution of current or
future legal or regulatory actions,
including conduct-related reviews or
redress projects, could increase the risk
of greater regulatory and third-party
scrutiny and could have material
collateral consequences for NWB
Group’s business and result in
restrictions or limitations on NWB
Group’s operations. These may include
consequences resulting from the need to
reapply for various important licences or
obtain waivers to conduct certain
existing activities of NWB Group, which
may take a significant period of time and
the results and implications of which are
uncertain.
Failure to obtain such licences or waivers
may adversely affect NWB Group’s
business, including if it results in NWB
Group being precluded from carrying out
certain activities. This in turn and/or any
fines, settlement payments or penalties
may adversely affect NWB Group’s
capital position. Similar consequences
could result from legal or regulatory
actions relating to other parts of NatWest
Group.
Failure to comply with undertakings
made by NWB Group to its regulators
may result in additional measures or
penalties being taken against NWB
Group. In addition, any failure to
administer conduct redress processes
adequately, or to handle individual
complaints fairly or appropriately, could
result in further claims as well as the
imposition of additional measures or
limitations on NWB Group’s operations,
additional supervision by NWB Group’s
regulators, and loss of investor
confidence.
NWB Group may not effectively manage
the transition of LIBOR and other IBOR
rates to replacement risk-free rates.
UK and international regulators are
driving the transition from the use of
interbank offer rates (‘IBORs’), to
replacement rates generally referred to
as ‘risk-free rates’ (‘RFRs’). As of 31
December 2021, LIBOR, as currently
determined, has ceased for all tenors of
GBP, JPY, CHF, EUR, and for the 1 week
and 2-month tenors for USD. The
remaining USD LIBOR tenors, as
currently determined, are due to cease
after 30 June 2023. The FCA has used its
powers under the UK Benchmarks
Regulation (‘UK BMR’) to require, for a
limited period of time after 31 December
2021, the ongoing publication of the 1-,
3-, and 6-month GBP and JPY LIBOR
tenors using a changed methodology
(i.e., ‘Art23A LIBOR’ on a synthetic
basis). The UK has passed the Critical
Benchmarks (References and
Administrators’ Liability) Act 2021
(‘Critical Benchmarks Act’) which
establishes a framework that allows the
ongoing use of Art23A LIBOR under
certain circumstances where contracts
have not pro-actively transitioned onto
the replacement rates. These
concessions provided under UK BMR and
the Critical Benchmarks Act are
temporary. The FCA confirmed that
Art23A will no longer be available from:
(i) the end of 2022 for JPY, (ii) March
2023 for 1- and 6-month GBP LIBOR and
(iii) March 2024 for 3-month GBP LIBOR.
The transition away from these
temporary concessions may expose NWB
Group, its customers and the financial
services industry more widely to various
risks, including: (i) the FCA further
restricting use of Art23A LIBOR resulting
in proactive transition of contracts; and
(ii) mis-matches between positions in
cleared derivatives and the exposures
they are hedging where those exposures
are permitted to make use of Art23A
LIBOR. Although the formal cessation
date for the remaining USD LIBOR tenors
(as currently determined) is not until the
end of June 2023, US and UK regulators
have clarified that this is only to support
the rundown of existing USD LIBOR
exposures. No new contracts should
reference these USD LIBOR tenors after
31 December 2021, other than in a very
limited range of circumstances. NWB
Group will continue to have ongoing
exposure to the remaining USD LIBOR
tenors until cessation in June 2023.
NWB Group has held significant
exposures to various IBORs and has
actively sought to transition away from
these during 2021 and 2022 in
accordance with regulatory expectations
and milestones. Transition measures
have included the pro-active
development of new products using the
replacement rates, restructuring existing
LIBOR exposures to reference these
replacement rates and embedding RFR
transition language into relevant
contracts. Central Counterparty Clearing
houses (CCPs) conducted mass
conversion exercises in December 2021
covering GBP, JPY, CHF and EUR LIBOR,
transitioning derivatives to the relevant
RFR, conversion exercises for USD are
scheduled for May 2023. NWG entities,
along with many of their major
counterparties, have adhered to the
ISDA IBOR fall-backs protocol which
establishes a contractual process to
transition from IBORs to RFRs for
bilateral derivative products.
These transition efforts have involved
extensive engagement with customers,
industry working groups and regulators
to seek to deliver transition in a
transparent and economically
appropriate manner. These changes
coincide with the recognition that market
liquidity is lower than it has been and
whilst it will be inherently difficult to
disaggregate the different impacts from
each other it may be that similar levels
of market liquidity are not reached for
these RFR products, clear and consistent
market conventions for all replacement
products may not be implemented or
Risk factors continued
NWB Group
Annual Report and Accounts 2022
192
they may not be accepted by market
participants including NWB Group
counterparties. Where there remains an
uncertainty around the manner of
transition to RFRs, NWB Group, clients
and the financial services industry are
exposed to the related risks.
Examples of these risks include (i) legal
(including litigation) risks relating to
documentation for new and the majority
of existing transactions (including,
changes, lack of changes, unclear
contractual provisions, and disputes in
respect of these); (ii) financial risks from
any changes in valuation of financial
instruments linked to relevant IBORs,
including cost of funds and relevant risk
management related financial models;
(iii) changes to benchmark rates could
impact pricing, interest rate or
settlement mechanisms for certain
instruments; (iv) operational risks linked
to the adaptation of IT systems, trade
reporting infrastructure and operational
processes, as well as ensuring
compliance with restrictions on new USD
LIBOR usage after December 2021; (v)
conduct risks arising from
communication of the potential impact
on customers, engagement with
customers during and after the transition
period, or non-acceptance by customers
of replacement rates; and (vi) different
legislative provisions in different
jurisdictions, for example, unlike certain
US states and the EU, the UK has not
provided a clear and robust safe harbour
to protect against litigation and potential
liability arising out of the switch to
‘synthetic LIBOR’.
Although the majority of NWG’s IBOR
exposure has already been transitioned
to RFRs, there remains a large
population linked to USD LIBOR,
scheduled for transition by June 2023.
Until IBOR transition is complete there is
some uncertainty as to the impact of the
transition, or the potential costs of
implementing any relevant remedial
action including in the event that the
transition is not completed in a timely
manner, or at all. The implementation of
any alternative RFRs may be impossible
or impracticable under the existing terms
of certain financial instruments and may
adversely affect their value or return and
therefore on NWB Group’s future results.
Changes in tax legislation or failure to
generate future taxable profits may
impact the recoverability of certain
deferred tax assets recognised by NWB
Group.
In accordance with the accounting
policies set out in ‘
Critical accounting
policies and key sources of estimation
uncertainty
’, NWB Group has recognised
deferred tax assets on losses available to
relieve future profits from tax only to the
extent it is probable that they will be
recovered. The deferred tax assets are
quantified on the basis of current tax
legislation and accounting standards and
are subject to change in respect of the
future rates of tax or the rules for
computing taxable profits and offsetting
allowable losses.
Failure to generate sufficient future
taxable profits or further changes in tax
legislation (including with respect to
rates of tax) or accounting standards
may reduce the recoverable amount of
the recognised tax loss deferred tax
assets, amounting to £1,117 million as at
31 December 2022. Changes to the
treatment of certain deferred tax assets
may impact NWB Group’s capital
position. In addition, NWB Group’s
interpretation or application of relevant
tax laws may differ from those of the
relevant tax authorities and provisions
are made for potential tax liabilities that
may arise on the basis of the amounts
expected to be paid to tax authorities.
The amounts ultimately paid may differ
materially from the amounts provided
depending on the ultimate resolution of
such matters.
Forward-looking statements
NWB Group
Annual Report and Accounts 2022
193
Cautionary statement regarding forward-looking statements
This document may include forward-looking statements within the meaning of the United States Private Securities Litigation
Reform Act of 1995, such as statements that include, without limitation,
the words ‘expect’, ‘estimate’, ‘project’, ‘anticipate’,
‘commit’, ‘believe’, ‘should’, ‘intend’, ‘will’, ‘plan’, ‘could’, ‘probability’, ‘risk’, ‘Value-at-Risk (VaR)’, ‘target’, ‘goal’, ‘objective’, ‘may’,
‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and similar expressions or variations on these expressions. These statements
concern or may affect future matters, such as NWB Group’s future economic results, business plans and strategies. In particular,
this document may include forward-looking statements relating to NWB Group in respect of, but not limited to: its economic and
political risks, its regulatory capital position and related requirements, its financial position, profitability and financial performance
(including financial, capital, cost savings and operational targets), the implementation of NatWest Group’s purpose-led strategy, its
environmental, social and governance and climate related targets, its access to adequate sources of liquidity and funding,
increasing competition from new incumbents and disruptive technologies, its exposure to third party risks, its ongoing compliance
with the UK ring-fencing regime and ensuring operational continuity in resolution, its impairment losses and credit exposures under
certain specified scenarios, substantial regulation and oversight, ongoing legal, regulatory and governmental actions and
investigations, the transition of LIBOR and IBOR rates to replacement risk free rates and NWB Group’s exposure to, operational
risk, conduct risk, financial crime risk, cyber, data and IT risk, key person risk and credit rating risk.
Forward-looking statements
are subject to a number of risks and uncertainties that might cause actual results and performance to differ materially from any
expected future results or performance expressed or implied by the forward-looking statements. Factors that could cause or
contribute to differences in current expectations include, but are not limited to, future growth initiatives (including acquisitions, joint
ventures and strategic partnerships), the outcome of legal, regulatory and governmental actions and investigations, the level and
extent of future impairments and write-downs, legislative, political, fiscal and regulatory developments, accounting standards,
competitive conditions, technological developments, interest and exchange rate fluctuations, and general economic and political
conditions and the impact of climate related risks and the transitioning to a net zero economy. These and other factors, risks and
uncertainties that may impact any forward-looking statement or the NWB Group's actual results are discussed in the NWB Plc's UK
2021 Annual Report and Accounts (ARA). The forward-looking statements contained in this document speak only as of the date of
this document and NWB Plc does not assume or undertake any obligation or responsibility to update any of the forward-looking
statements contained in this document, whether as a result of new information, future events or otherwise, except to the extent
legally required.
National Westminster Bank Plc
2022 Annual Results
Financial review
NWB Group
Annual Results 2022
2
Presentation of information
National Westminster Bank Plc (‘NWB Plc’) is a wholly-owned subsidiary of NatWest Holdings Limited (‘NWH Ltd’ or ‘the
intermediate holding company’). The term ‘NWB Group’ or ‘we’ refers to NWB Plc and its subsidiary and associated undertakings.
The term ‘NWH Group’ refers to NWH Ltd and its subsidiary and associated undertakings. NatWest Group plc is ‘the ultimate
holding company’. The term ‘NatWest Group’ refers to NatWest Group plc and its subsidiary and associated undertakings.
NWB Plc publishes its financial statements in pounds sterling (‘£’ or ‘sterling’). The abbreviations ‘£m’ and ‘£bn’ represent millions
and thousands of millions of pounds sterling (‘GBP’), respectively, and references to ‘pence’ represent pence where amounts are
denominated in sterling. Reference to ‘dollars’ or ‘$’ are to United States of America (‘US’) dollars. The abbreviations ‘$m’ and
‘$bn’ represent millions and thousands of millions of dollars, respectively. The abbreviation ‘€’ represents the ‘euro’, and the
abbreviations ‘€m’ and ‘€bn’ represent millions and thousands of millions of euros, respectively.
Description of business
The principal entities under NWH Ltd are National Westminster Bank Plc (which wholly owns Coutts & Company and Ulster Bank
Limited), The Royal Bank of Scotland plc and Ulster Bank Ireland DAC (UBIDAC).
Principal activities and operating segments
NWB Group serves customers across the UK with a range of retail and commercial banking products and services. A wide range of
personal products are offered including current accounts, credit cards, personal loans, mortgages and wealth management
services. NWB Plc is the main provider of shared services for NatWest Group.
On 27 January 2022, NatWest Group announced that a new
business segment, Commercial & Institutional, would be created,
bringing together the Commercial, NatWest Markets and RBSI businesses to form a single
business segment, with common
management and objectives, to best support our customers across the full non-personal customer lifecycle.
Comparatives have been re-presented. The re-presentation of operating segments does not change the consolidated financial
results of NWB Group.
The reportable operating segments are as follows:
Retail
Banking
serves personal customers in the UK and includes Ulster Bank customers.
Private Banking
serves UK-connected, high-net-worth, individuals and their business interests.
Commercial & Institutional
offers SME’s, Commercial, Corporate and Institutional clients comprehensive banking and financing
solutions throughout the UK and internationally.
Central items & other
includes corporate functions, such as ring-fenced bank and NatWest Group treasury, finance, risk
management, compliance, legal, communications and human resources. The services are mainly provided to NWH Group,
however, in certain instances, where permitted, services are also provided to the wider NatWest Group including the non ring-
fenced business.
Page
Financial Review
Presentation of information
2
Description of business
2
Principal activities and operating segments
2
Performance overview
3
Financial statements
6
Notes to the financial statements
11
Statement of directors’ responsibilities
20
Forward-looking statements
21
Financial review continued
NWB Group
Annual Results 2022
3
Performance overview
Strong financial performance
NWB Group profit for the year was £3,689 million compared with £2,907 million in 2021, driven by increased income, partially
offset by additional operating expenses and net impairment losses.
Total income increased by £2,474 million compared with 2021, reflecting the beneficial impact of interest rate increases, combined
with higher fee income.
Operating expenses increased by £89 million compared with 2021, primarily reflecting continued investment in technology and
data capabilities, partially offset by a reduction in conduct and litigation charges. The cost:income ratio decreased from 66.9% to
53.5%.
Net impairment losses of £341 million principally reflects the latest macro-economics, including updated scenarios, with more
weight being placed on the downside scenarios. Underlying book performance remains strong. Total impairment provisions
increased by £0.1 billion to £2.6 billion in the year, which resulted in a reduction in the ECL coverage ratio from 0.85% at 31
December 2021 to 0.84%.
Robust balance sheet with strong capital levels
Total assets decreased by £25.1 billion to £409.5 billion compared with £434.6 billion at 31 December 2021. This was primarily
driven by a net decrease of £28.1 billion in cash balances, resulting from growth in loans to customers and customer deposit
outflows.
Loans to customers increased by £14.7 billion primarily driven by growth in mortgage balances and an increase in commercial
lending due to increased facility utilisation, partially offset by continued UK Government financial support scheme repayments.
Customer deposits decreased by £6.8 billion primarily reflecting higher outflows from savings and current account balances due to
an overall market liquidity contraction.
The CET1 ratio decreased 480 basis points over the period due to a £1.2 billion decrease in CET1 capital and a £26.2 billion
increase in RWAs. The CET1 decrease reflects the attributable profit in the period, offset by dividends paid, the removal of the
adjustment for the prudential amortisation on software development costs and an increase in intangible assets.
Total RWAs increased by £26.2 billion to £112.4 billion mainly reflecting an increase in credit risk RWAs, due to new regulations
impacting model adjustments, combined with increased exposures, partially offset by improved credit risk metrics.
Financial review continued
NWB Group
Annual Results 2022
4
Summary consolidated income statement for the year ended 31 December 2022
Year ended
Retail
Banking
Private
Banking
Commercial&
Institutional
Central items &
other
31 December
2022
31 December
2021
Variance
£m
£m
£m
£m
£m
£m
£m
%
Net interest income
4,494
754
2,740
(456)
7,532
6,002
1,530
25
Non-interest income
399
271
1,286
2,255
4,211
3,267
944
29
Total income
4,893
1,025
4,026
1,799
11,743
9,269
2,474
27
Operating expenses
(2,115)
(596)
(1,939)
(1,638)
(6,288)
(6,199)
(89)
1
Profit before impairment losses/releases
2,778
429
2,087
161
5,455
3,070
2,385
78
Impairment (losses)/releases
(218)
2
(126)
1
(341)
813
(1,154)
(142)
Operating profit before tax
2,560
431
1,961
162
5,114
3,883
1,231
32
Tax charge
(1,425)
(976)
(449)
46
Profit for the year
3,689
2,907
782
27
Key metrics and ratios
2022
2021
Cost:income ratio (%)
(1)
53.5
66.9
Loan impairment rate (bps)
(2)
11
(28)
CET1 ratio (%)
(3)
11.3
16.1
Leverage ratio (%)
(4)
4.4
4.8
Risk weighted assets (RWAs) (£bn)
112.4
86.2
Loan:deposit ratio (%)
(5)
90
83
(6)
Cost:income ratio is total operating expenses divided by total income.
(7)
Loan impairment rate is the loan impairment charge divided by gross customer loans.
(8)
Common Equity Tier 1 (CET1) ratio is CET1 capital divided by RWAs.
(9)
Leverage ratio is
Tier 1 capital divided by total exposure. This is
in accordance with changes to the UK’s
leverage ratio framework, refer to page 63 of the NatWest Bank Plc 2022
Annual Report and Accounts for further details.
(10)
Loan deposit ratio is total loans divided by total deposits.
NWB Group reported a profit of £3,689 million compared with £2,907 million in 2021, driven by an increase in total income of
£2,474 million, partially offset by an increase in operating expenses of £89 million and net impairment losses of £341 million
compared with releases of £813 million in 2021.
Total income
increased by £2,474 million, or 27%, to £11,743 million compared with £9,269 million in 2021.
Net interest income
increased by £1,530 million, or 25%, to £7,532 million compared with £6,002 million in 2021, reflecting
mortgage balance growth and a beneficial impact from interest rate increases.
Non-interest income
increased by £944 million, or 29%, to £4,211 million compared with £3,267 million in 2021.
Net fees and commissions increased by £144 million to £1,626 million, primarily due to higher transaction-related fee income.
Other operating income
increased by £800 million to £2,585 million compared with £1,785 million in 2021, reflecting:
£676 million higher income from hedging activities, including gains on economic hedging derivatives, due to interest rate rises;
non-repeat of 2021 incurred losses of £117 million upon partial redemption of debt instruments and £44 million upon the sale of
properties;
an £80 million payment received from an insurance settlement; and
additional £152 million income from the recharging of costs to other NatWest Group entities, principally reflecting the impact of
organisational restructure activity; partially offset by
bond disposal losses of £88 million in 2022, a reduction of £208 million compared with gains of £120 million in 2021 and a
number of other small movements.
Operating expenses
increased by £89 million to £6,288 million, compared with £6,199 million in 2021, reflecting:
a staff costs increase of £81 million primarily due to continued investment in key areas, including Data, Technology and
Financial Crime, as well as an increase in costs subsequently recharged to other NatWest Group entities;
additional increases in premises and equipment and outsourcing costs resulting from investment in technology and data
capabilities, partially offset by
non-repeat of one-off conduct and litigation charges in 2021.
Net impairment losses
of £341 million principally reflects the latest macro-economics, including updated scenarios, with more
weight being placed on the downside scenarios. Underlying book performance remains strong. Total impairment provisions
increased by £0.1 billion to £2.6 billion in the year, which resulted in a reduction in the ECL coverage ratio from 0.85% at 31
December 2021 to 0.84%.
Financial review continued
NWB Group
Annual Results 2022
5
Summary consolidated balance sheet as at 31 December 2022
2022
2021
Variance
£m
£m
£m
%
Assets
Cash and balances at central banks
73,065
101,213
(28,148)
(28)
Derivatives
4,407
2,460
1,947
79
Loans to banks - amortised cost
3,197
4,182
(985)
(24)
Loans to customers - amortised cost
301,684
286,971
14,713
5
Amounts due from holding companies and fellow subsidiaries
4,903
3,519
1,384
39
Other financial assets
14,546
29,031
(14,485)
(50)
Other assets
7,667
7,187
480
7
Total assets
409,469
434,563
(25,094)
(6)
Liabilities
Bank deposits
16,060
22,831
(6,771)
(30)
Customer deposits
322,614
329,440
(6,826)
(2)
Amounts due to holding companies and fellow subsidiaries
38,771
45,136
(6,365)
(14)
Derivatives
2,088
4,119
(2,031)
(49)
Other financial liabilities
5,384
7,251
(1,867)
(26)
Subordinated liabilities
197
211
(14)
(7)
Notes in circulation
809
904
(95)
(11)
Other liabilities
3,470
3,934
(464)
(12)
Total liabilities
389,393
413,826
(24,433)
(6)
Total equity
20,076
20,737
(661)
(3)
Total liabilities and equity
409,469
434,563
(25,094)
(6)
Total assets
decreased by £25.1 billion to £409.5 billion at 31 December 2022, compared with £434.6 billion at 31 December 2021.
Cash and balances at central banks
decreased by £28.1 billion to £73.1 billion, compared with £101.2 billion at 31 December 2021,
driven primarily by:
£25.0 billion decrease resulting from growth in loans to customers and customer deposit outflows;
£8.9 billion decrease in balances held at central banks; and
£3.5 billion decrease due to repo activity; partially offset by
£11.7 billion net increase in liquidity assets held.
Loans to banks – amortised cost
decreased by £1.0 billion to £3.2 billion, compared with £4.2 billion at 31 December 2021, mainly
representing a decrease in US dollar and European Central Bank balances as part of treasury activities.
Loans to customers
increased by £14.7 billion to £301.7 billion, compared with £287.0 billion at 31 December 2021, driven by:
£17.6 billion mortgage growth as a result of strong gross new lending;
£4.5 billion increase in commercial lending, primarily due to increased facility utilisation, whilst repayments drove further
reductions in UK Government scheme balances;
£6.8 billion net decrease in relation to Treasury reverse repo activity; and
£1.4 billion decrease due to collateral placed for net repo trades.
Amounts due from holding companies and fellow subsidiaries
increased by £1.4 billion to £4.9 billion, compared with £3.5 billion at
31 December 2021, primarily reflecting loans and advances provided to UBIDAC to support liquidity management during the
phased withdrawal from the Republic of Ireland.
Other financial assets
decreased by £14.5 billion to £14.5 billion, primarily driven by bond disposals and maturities of £25.4 billion, a
reduction in fair value of the remaining bond portfolio of £1.6 billion due to changes in interest and FX rates, partially offset by
bond purchases of £11.9 billion.
Bank deposits
decreased by £6.8 billion to £16.1 billion, driven by a £6.5 billion decrease in repo balances.
Customer deposits
decreased by £6.8 billion to £322.6 billion, driven by:
£5.9 billion reflecting higher outflows from savings and current account balances due to an overall market liquidity contraction;
£5.0 billion decrease in repos facing customers; partially offset by
£4.1 billion deposit growth in Private Banking.
Amounts due to holding companies and fellow subsidiaries
decreased by £6.4 billion to £38.8 billion, compared with £45.1 billion at
31 December 2021, primarily due to movements on balances with NWG Plc and NWH Ltd.
Derivative liabilities
decreased by £2.0 billion to £2.1 billion, compared with £4.1 billion at 31 December 2021, driven by interest
rate rises across all currencies and GBP spot rate depreciation.
Other financial liabilities
decreased by £1.9 billion to £5.4 billion, compared with £7.3 billion at 31 December 2021, driven by a
reduction in long term fixed rate investment products, as a result of the current market environment and increasing rates outlook.
Other liabilities
decreased by £0.5 billion to £3.5 billion, compared with £3.9 billion at the 31 December 2021, primarily due to a
reduction in financial guarantees and accruals.
Total equity
decreased by £0.7 billion to £20.1 billion, compared with £20.7 billion at 31 December 2021. The decrease reflects
dividends paid to NatWest Holdings and decreases in cash flow hedging reserves due to interest rate rises, partially offset by
attributable profit of £3.7 billion.
Consolidated income statement for the year ended
31 December 2022
NWB Group
Annual Results 2022
6
2022
2021
Note
£m
£m
Interest receivable
9,159
6,721
Interest payable
(1,627)
(719)
Net interest income
1
7,532
6,002
Fees and commissions receivable
2,119
1,862
Fees and commissions payable
(493)
(380)
Other operating income
2,585
1,785
Non-interest income
2
4,211
3,267
Total income
11,743
9,269
Staff costs
(2,896)
(2,815)
Premises and equipment
(994)
(948)
Other administrative expenses
(1,630)
(1,660)
Depreciation and amortisation
(768)
(776)
Operating expenses
3
(6,288)
(6,199)
Profit before impairment losses/releases
5,455
3,070
Impairment (losses)/releases
13
(341)
813
Operating profit before tax
5,114
3,883
Tax charge
7
(1,425)
(976)
Profit for the year
3,689
2,907
Attributable to:
Ordinary shareholders
3,564
2,793
Paid-in equity holders
120
109
Non-controlling interests
5
5
3,689
2,907
Consolidated statement of comprehensive income
for the year ended 31 December 2022
2022
2021
£m
£m
Profit for the year
3,689
2,907
Items that do not qualify for reclassification
Remeasurement of retirement benefit schemes
(1)
(556)
(531)
Tax
146
158
(410)
(373)
Items that do qualify for reclassification
FVOCI financial assets
(392)
(96)
Cash flow hedges
(2)
(542)
180
Currency translation
(2)
(22)
Tax
276
(40)
(660)
22
Other comprehensive loss after tax
(1,070)
(351)
Total comprehensive income for the year
2,619
2,556
Attributable to:
Ordinary shareholders
2,494
2,442
Paid-in equity holders
120
109
Non-controlling interests
5
5
2,619
2,556
(3)
Following the purchase of ordinary shares from UKGI in Q1 2022, NatWest Group contributed £500 million to its main pension scheme in line with the memorandum of
understanding announced on 17 April 2018. After tax relief, this contribution reduced total equity by £365 million. Other material movements came from asset underperformance
relative to movements in the schemes’ liabilities over the year. In line with our policy, the present value of defined benefit obligations and the fair value of plan assets at the end of
the reporting period, are assessed to identify significant market fluctuations and one-off events since the end of the prior financial year.
(4)
The unrealised losses on cash flow hedge reserves is mainly driven by deferment of losses on GBP net received fixed swaps as interest rates have increased.
Balance sheet as at 31 December 2022
NWB Group
Annual Results 2022
7
NWB Group
NWB Plc
2022
2021
2022
2021
Note
£m
£m
£m
£m
Assets
Cash and balances at central banks
9
73,065
101,213
73,062
101,210
Derivatives
12
4,407
2,460
4,430
2,547
Loans to banks - amortised cost
9
3,197
4,182
2,870
3,638
Loans to customers - amortised cost
9
301,684
286,971
267,401
255,443
Amounts due from holding companies and fellow subsidiaries
9
4,903
3,519
32,133
27,122
Securities subject to repurchase agreements
2,140
10,813
2,140
10,813
Other financial assets excluding securities subject to repurchase agreements
12,406
18,218
12,040
17,836
Other financial assets
15
14,546
29,031
14,180
28,649
Investment in group undertakings
14
—
—
2,030
2,319
Other assets
16
7,667
7,187
5,641
5,183
Total assets
409,469
434,563
401,747
426,111
Liabilities
Bank deposits
9
16,060
22,831
16,059
22,829
Customer deposits
9
322,614
329,440
281,558
292,470
Amounts due to holding companies and fellow subsidiaries
9
38,771
45,136
75,037
76,722
Derivatives
12
2,088
4,119
2,582
4,336
Other financial liabilities
19
5,384
7,251
4,525
6,384
Subordinated liabilities
20
197
211
191
205
Notes in circulation
809
904
809
904
Other liabilities
21
3,470
3,934
2,743
3,095
Total liabilities
389,393
413,826
383,504
406,945
Owners' equity
22
20,066
20,727
18,243
19,166
Non-controlling interests
10
10
—
—
Total equity
20,076
20,737
18,243
19,166
Total liabilities and equity
409,469
434,563
401,747
426,111
Owners’ equity of NWB Plc as at 31 December 2022 includes the profit for the year of £3,457 million (2021- £2,752 million).
Statement of changes in equity for the year ended
31 December 2022
NWB Group
Annual Results 2022
8
NWB Group
NWB Plc
2022
2021
2022
2021
£m
£m
£m
£m
Called-up share capital - at 1 January and 31 December
1,678
1,678
1,678
1,678
Share premium - at 1 January and 31 December
2,225
2,225
2,225
2,225
Paid-in equity - at 1 January
2,377
2,370
2,377
2,370
Redeemed
(359)
(934)
(359)
(934)
Issued
500
941
500
941
At 31 December
2,518
2,377
2,518
2,377
Merger reserve - at 1 January
14
9
(89)
(140)
Additions
24
—
—
—
Amortisation
39
5
87
51
At 31 December
77
14
(2)
(89)
FVOCI reserve - at 1 January
192
280
193
279
Unrealised (losses)/gains
(3)
(485)
26
(486)
28
Realised losses/(gains)
93
(122)
93
(122)
Tax
124
8
124
8
At 31 December
(76)
192
(76)
193
Cash flow hedging reserve - at 1 January
(1)
(133)
(2)
(133)
Amount recognised in equity
(4)
(283)
102
(288)
100
Amount transferred from equity to earnings
(259)
78
(255)
79
Tax
152
(48)
152
(48)
At 31 December
(391)
(1)
(393)
(2)
Foreign exchange reserve - at 1 January
(85)
(63)
(16)
(13)
Retranslation of net assets
29
(44)
31
(18)
Foreign currency (losses)/gains on hedges of net assets
(31)
22
(33)
15
At 31 December
(87)
(85)
(18)
(16)
Capital redemption reserve - at 1 January
820
796
820
796
Redemption of preference shares
—
24
—
24
At 31 December
820
820
820
820
Retained earnings - at 1 January
13,507
12,720
11,980
11,402
Profit attributable to ordinary shareholders and other equity owners
3,684
2,902
3,457
2,752
Ordinary dividends paid
(3,293)
(1,600)
(3,293)
(1,600)
Paid-in equity dividends paid
(120)
(109)
(120)
(109)
Remeasurement of retirement benefit schemes
(2)
- gross
(556)
(531)
(565)
(545)
- tax
146
158
146
159
Amortisation of merger reserve
(39)
(5)
(87)
(51)
Redemption of preference shares
—
(24)
—
(24)
Redemption/reclassification of paid-in equity
- gross
(29)
(23)
(29)
(23)
- tax
(6)
5
(6)
5
Share-based payments
- gross
—
(3)
—
(3)
- tax
2
7
2
7
Employee share schemes
6
10
6
10
At 31 December
13,302
13,507
11,491
11,980
Owners' equity at 31 December
20,066
20,727
18,243
19,166
For the notes to this table refer to the following page.
Statement of changes in equity for the year ended 31 December 2022 continued
NWB Group
Annual Results 2022
9
NWB Group
NWB Plc
2022
2021
2022
2021
£m
£m
£m
£m
Non-controlling interests - at 1 January
10
10
—
—
Profit attributable to non-controlling interests
5
5
—
—
Dividends paid
(5)
(5)
—
—
At 31 December
10
10
—
—
Total equity at 31 December
20,076
20,737
18,243
19,166
Attributable to:
Ordinary shareholders
17,548
18,350
15,725
16,789
Paid-in equity holders
2,518
2,377
2,518
2,377
Non-controlling interests
10
10
—
—
20,076
20,737
18,243
19,166
(5)
The total distributable reserves for NWB Plc is £11,002 million (2021 – £11,873 million).
(6)
Following the purchase of ordinary shares from UKGI in Q1 2022, NatWest Group contributed £500 million to its main pension scheme in line with the memorandum of
understanding announced on 17 April 2018. After tax relief, this contribution reduced total equity by £365 million. Other material movements came from asset underperformance
relative to movements in the schemes’ liabilities over the year. In line with our policy, the present value of defined benefit obligations and the fair value of plan assets at the end of
the reporting period, are assessed to identify significant market fluctuations and one-off events since the end of the prior financial year.
(7)
Certain assets within this category have been hedged with derivatives which are not in an accounting hedge relationship. The effect of this creates a temporary difference between
other comprehensive income and the income statement due to the difference in recognition criteria. This temporary difference is expected to reverse through the income statement
over the duration of the hedge.
(8)
The unrealised losses on cash flow hedge reserves is mainly driven by deferment of losses on GBP net received fixed swaps as interest rates have increased.
Cash flow statement for the year ended
31 December 2022
NWB Group
Annual Results 2022
10
NWB Group
NWB Plc
2022
2021
2022
2021
Note
£m
£m
£m
£m
Cash flows from operating activities
Operating profit before tax
5,114
3,883
4,687
3,542
Adjustments for:
Impairment losses/(releases)
341
(813)
389
(732)
Amortisation of discounts and premiums of other financial assets
—
181
—
181
Depreciation and amortisation
768
776
598
594
Net impairment charges of investments in Group undertakings
—
—
336
61
Change in fair value taken to profit or loss on other financial assets
1,177
1,595
1,177
1,595
Change in fair value taken to profit or loss on other financial liabilities and
subordinated liabilities
(912)
(420)
(924)
(418)
Elimination of foreign exchange differences
(47)
1,120
(3)
1,118
Other non-cash items
(195)
87
(215)
58
Income receivable on other financial assets
(303)
(412)
(303)
(412)
Loss/(profit) on sale of other financial assets
93
(120)
93
(120)
Dividends receivable from subsidiaries
—
—
(1,010)
(424)
Loss on sale of other assets and net assets/liabilities
5
34
6
34
Loss on redemption of own debt
—
117
—
117
Interest payable on MRELs and subordinated liabilities
371
315
358
310
Charges and releases on provisions
122
388
122
388
Defined benefit pension schemes
154
173
132
146
Net cash flows from trading activities
6,688
6,904
5,443
6,038
(Increase)/decrease in derivative assets
(2,230)
930
(2,171)
991
Increase in loans to banks
(198)
(89)
(164)
(155)
Increase in loans to customers
(14,448)
(14,511)
(12,313)
(12,741)
(Increase)/decrease in amounts due from holding companies and fellow subsidiaries
(355)
(443)
(6,204)
5,288
Decrease/(increase) in other financial assets
239
(116)
239
(116)
(Increase)/decrease in other assets
(34)
(19)
14
(16)
(Decrease)/increase in bank deposits
(6,771)
7,960
(6,770)
7,963
(Decrease)/increase in customer deposits
(9,065)
35,835
(10,912)
28,707
(Decrease)/increase in amounts due to holding companies and fellow subsidiaries
(7,218)
6,033
(2,191)
5,426
Decrease in derivative liabilities
(2,031)
(2,433)
(1,754)
(2,437)
Decrease in other financial liabilities
(1,867)
(5)
(1,859)
(100)
Decrease in notes in circulation
(95)
(108)
(95)
(362)
Decrease in other liabilities
(1,197)
(1,199)
(1,194)
(1,121)
Changes in operating assets and liabilities
(45,270)
31,835
(45,374)
31,327
Income taxes paid
(1,161)
(923)
(998)
(791)
Net cash flows from operating activities
(1)
(39,743)
37,816
(40,929)
36,574
Cash flows from investing activities
Sale and maturity of other financial assets
25,721
10,272
25,339
9,884
Purchase of other financial assets
(13,388)
(3,193)
(13,022)
(2,811)
Income received on other financial assets
371
412
371
412
Net movement
in business interests and intangible assets
27
(992)
(3,701)
(719)
(3,093)
Dividends received from subsidiaries
—
—
1,010
424
Sale of property, plant and equipment
138
58
82
17
Purchase of property, plant and equipment
(618)
(876)
(316)
(617)
Net cash flows from investing activities
11,232
2,972
12,745
4,216
Cash flows from financing activities
Movement in MRELs
548
1,762
509
1,515
Movement in subordinated liabilities
(200)
(1,267)
(199)
(1,267)
Dividends paid
(3,418)
(1,714)
(3,413)
(1,709)
Issue of paid-in equity
500
941
500
941
Redemption of paid-in equity
(388)
(934)
(388)
(934)
Net cash flows from financing activities
28
(2,958)
(1,212)
(2,991)
(1,454)
Effects of exchange rate changes on cash and cash equivalents
1,142
(979)
1,101
(984)
Net (decrease)/increase in cash and cash equivalents
(30,327)
38,597
(30,074)
38,352
Cash and cash equivalents at 1 January
106,645
68,048
105,546
67,194
Cash and cash equivalents at 31 December
29
76,318
106,645
75,472
105,546
(3)
NWB Group includes interest received of £9,167 million (2021 - £6,623 million) and interest paid of £1,412 million (2021 - £693 million), and NWB Plc includes interest received of
£8,421 million (2021 – £5,937 million) and interest paid of £1,623 million (2021 - £779 million).
(4)
The total cash outflow for leases for NWB Group was £130 million (2021: £149 million) and for NWB Plc £119 million (2021: £138 million). This included payment of principal for NWB
Group of £111 million (2021: £126 million) and NWB Plc of £99 million (2021: £114 million). These amounts are included in the operating activities in cash flow statement.
Notes to the financial statements
NWB Group
Annual Results 2022
11
1 Presentation of condensed consolidated financial statements
The condensed consolidated financial statements should be read in conjunction with NatWest Bank Plc's 2022 Annual Report and
Accounts. The critical and significant accounting policies are the same as those applied in the consolidated financial statements.
The directors have prepared the condensed consolidated financial statements on a going concern basis after assessing the
principal risks, forecasts, projections and other relevant evidence over the twelve months from the date they are approved.
2 Critical accounting policies and key sources of estimation uncertainty
The critical accounting policies and judgements are noted in NatWest Bank Plc’s 2022 Annual Report and Accounts.
Information used for significant estimates
Key financial estimates are based on management's latest five-year revenue and cost forecasts. Measurement of deferred tax and
expected credit losses are highly sensitive to reasonably possible changes in those anticipated conditions. Changes in judgements
and assumptions could result in a material adjustment to those estimates in future reporting periods. (Refer to the Risk factors in
NatWest Bank Plc’s 2022 Annual Report and Accounts).
3 Operating expenses
2022
2021
£m
£m
Wages, salaries and other staff costs
2,138
2,079
Temporary and contract costs
207
206
Social security costs
263
241
Pension costs
288
289
- defined benefit schemes (see Note 5)
154
173
- defined contribution schemes
134
116
Staff costs
2,896
2,815
Premises and equipment
994
948
Depreciation and amortisation
768
776
Other administrative expenses
(1)
1,630
1,660
Administrative expenses
3,392
3,384
6,288
6,199
(1)
Includes redress and litigation. Further details are provided in Note 7.
Notes to the financial statements continued
NWB Group
Annual Results 2022
12
4 Segmental analysis
Reportable operating segments
On 27 January 2022, NatWest Group announced that a new
business segment, Commercial & Institutional, would be created,
bringing together the Commercial, NatWest Markets and RBSI businesses to form a single business segment, with common
management and objectives, to best support our customers across the full non-personal customer lifecycle. Comparatives have
been re-presented. The re-presentation of operating segments does not change the consolidated financial results of NatWest
Group.
NWB Plc is organised into the following reportable segments: Retail Banking, Private Banking, Commercial & Institutional and
Central items & other.
Retail Banking
serves personal customers in the UK and includes Ulster Bank customers.
Private Banking
serves UK-connected high-net-worth individuals and their business interests.
Commercial & Institutional
offers SME’s and Corporate and Institutional clients comprehensive banking and financing solutions
throughout the UK and internationally.
Central items & other
includes corporate functions, such as NatWest Group treasury, finance, risk management, compliance, legal,
communications and human resources. NWB Plc is the main provider of shared services and treasury activities for NatWest Group.
The services are mainly provided to NWH Group, however, in certain instances, where permitted, services are also provided to the
wider NatWest Group including the non-ring fenced business.
Retail Banking
Private Banking
Commercial &
Institutional
Central items &
other
Total
2022
£m
£m
£m
£m
£m
Net interest income
4,494
754
2,740
(456)
7,532
Net fees and commissions
334
243
1,038
11
1,626
Other operating income
65
28
248
2,244
2,585
Total income
4,893
1,025
4,026
1,799
11,743
Depreciation and amortisation
—
—
(135)
(633)
(768)
Other operating expenses
(2,115)
(596)
(1,804)
(1,005)
(5,520)
Impairment (losses)/releases
(218)
2
(126)
1
(341)
Operating profit
2,560
431
1,961
162
5,114
2021
Net interest income
3,541
461
2,171
(171)
6,002
Net fees and commissions
303
239
947
(7)
1,482
Other operating income
42
24
93
1,626
1,785
Total income
3,886
724
3,211
1,448
9,269
Depreciation and amortisation
—
—
(146)
(630)
(776)
Other operating expenses
(1,917)
(513)
(1,746)
(1,247)
(5,423)
Impairment releases
23
53
737
—
813
Operating profit/(loss)
1,992
264
2,056
(429)
3,883
Total revenue
(1)
Retail Banking
Private
Banking
Commercial &
Institutional
Central items &
other
Total
2022
£m
£m
£m
£m
£m
External
5,039
856
3,660
4,308
13,863
Intersegment
29
416
118
(563)
—
Total
5,068
1,272
3,778
3,745
13,863
2021
External
4,660
703
3,030
1,975
10,368
Intersegment
97
161
147
(405)
—
Total
4,757
864
3,177
1,570
10,368
(2)
Total revenue comprises interest receivable, fees and commissions receivable and other operating income.
Total income
Retail Banking
Private
Banking
Commercial &
Institutional
Central items &
other
Total
2022
£m
£m
£m
£m
£m
External
4,865
721
4,112
2,045
11,743
Intersegment
28
304
(86)
(246)
—
Total
4,893
1,025
4,026
1,799
11,743
2021
External
3,791
668
3,191
1,619
9,269
Intersegment
95
56
20
(171)
—
Total
3,886
724
3,211
1,448
9,269
Notes to the financial statements continued
NWB Group
Annual Results 2022
13
Segmental analysis continued
Analysis of net fees and commissions
Retail Banking
Private Banking
Commercial
&Institutional
Central items &
other
Total
2022
£m
£m
£m
£m
£m
Fees and commissions receivable
- Payment services
254
25
489
—
768
- Credit and debit card fees
323
14
170
—
507
- Lending and financing
15
8
446
—
469
- Brokerage
34
6
—
—
40
- Investment management, trustee and fiduciary services
4
213
—
—
217
- Underwriting fees
—
—
3
—
3
- Other
—
3
113
(1)
115
Total
630
269
1,221
(1)
2,119
Fees and commissions payable
(296)
(26)
(183)
12
(493)
Net fees and commissions
334
243
1,038
11
1,626
2021
Fees and commissions receivable
- Payment services
248
33
415
—
696
- Credit and debit card fees
276
10
111
—
397
- Lending and financing
11
10
416
—
437
- Brokerage
38
5
—
—
43
- Investment management, trustee and fiduciary services
3
214
—
—
217
- Underwriting fees
—
—
—
—
—
- Other
—
35
128
(91)
72
Total
576
307
1,070
(91)
1,862
Fees and commissions payable
(273)
(68)
(123)
84
(380)
Net fees and commissions
303
239
947
(7)
1,482
Retail
Banking
Private Banking
Commercial &
Institutional
Central items &
other
Total
2022
£m
£m
£m
£m
£m
Assets
184,140
19,734
86,406
119,189
409,469
Liabilities
153,304
41,489
127,301
67,299
389,393
2021
Assets
168,228
18,509
83,347
164,479
434,563
Liabilities
153,653
37,219
133,156
89,798
413,826
Notes to the financial statements continued
NWB Group
Annual Results 2022
14
5 Tax
2022
2021
£m
£m
Current tax
Charge for the year
(1,187)
(998)
Over provision in respect of prior years
63
38
(1,124)
(960)
Deferred tax
Charge for the year
(151)
(195)
UK tax rate change impact
(1)
(82)
161
(Decrease)/increase in the carrying value of deferred tax assets in respect of UK losses
(6)
14
(Under)/over provision in respect of prior years
(2)
(62)
4
Tax charge for the year
(1,425)
(976)
(3)
It was announced in the UK Government’s budget on 27 October 2021 that the main UK banking surcharge will decrease from 8% to 3% from 1 April 2023. This legislative change
was enacted on 24 February 2022.
(4)
Prior year tax adjustments incorporate refinements to tax computations made on submission and agreement with the tax authorities and adjustments to provisions in respect of
uncertain tax positions.
The actual tax charge differs from the expected tax charge, computed by applying the standard rate of UK corporation tax of 19%
(2021 – 19%), as follows:
2022
2021
£m
£m
Expected tax charge
(972)
(738)
Losses and temporary differences in period where no deferred tax asset recognised
—
1
Foreign profits taxed at other rates
(8)
(6)
Items not allowed for tax:
- losses on disposals and write-downs
(8)
(50)
- UK bank levy
(12)
(12)
- regulatory and legal actions
6
(73)
- other disallowable items
(13)
(15)
Non-taxable items
18
9
Taxable foreign exchange movements
2
1
Unrecognised losses brought forward and utilised
—
2
(Decrease)/increase in the carrying value of deferred tax assets in respect of:
- UK losses
(6)
14
Banking surcharge
(373)
(328)
Tax on paid in equity dividends
22
16
UK tax rate change impact
(82)
161
Adjustments in respect of prior years
1
42
Actual tax charge
(1,425)
(976)
Judgment: Tax contingencies
NWB Group’s corporate income tax charge and its provisions for corporate income taxes necessarily involve a significant degree of
estimation and judgment. The tax treatment of some transactions is uncertain and tax computations are yet to be agreed with the
tax authorities in a number of jurisdictions. NWB Group recognises anticipated tax liabilities based on all available evidence and,
where appropriate, in the light of external advice. Any difference between the final outcome and the amounts provided will affect
current and deferred income tax assets and charges in the period when the matter is resolved.
For accounting policy information see Accounting policies note 3.7 of the NatWest Bank Plc 2022 Annual Report and Accounts.
Notes to the financial statements continued
NWB Group
Annual Results 2022
15
6 Loan impairment provisions
Loan exposure and impairment metrics
The table below summarises loans and related credit impairment measures within the scope of ECL framework.
NWB Group
NWB Plc
31 December
2022
31 December 2021
31 December
2022
31 December 2021
£m
£m
£m
£m
Loans - amortised cost
Stage 1
266,722
264,656
236,809
236,255
Stage 2
37,216
26,003
32,765
22,492
Stage 3
3,783
2,985
3,383
2,548
Inter-Group
(1)
4,220
2,555
30,633
25,362
Total
311,941
296,199
303,590
286,657
ECL provisions
(2)
Stage 1
506
231
459
207
Stage 2
813
1,105
765
1,026
Stage 3
1,262
1,167
1,170
1,037
Inter-Group
4
1
48
8
2,585
2,504
2,442
2,278
ECL provision coverage
(3)
Stage 1
(%)
0.19
0.09
0.19
0.09
Stage 2
(%)
2.18
4.25
2.33
4.56
Stage 3
(%)
33.36
39.10
34.58
40.70
Inter-Group
(%)
0.09
0.04
0.16
0.03
0.84
0.85
0.88
0.87
Impairment (releases)/losses
ECL (release)/charge
(4)
Stage 1
(243)
(995)
(256)
(945)
Stage 2
348
(30)
373
48
Stage 3
233
213
234
183
Third party
338
(812)
351
(714)
Inter-Group
3
(1)
40
(18)
341
(813)
391
(732)
Amounts written-off
321
388
272
352
(6)
NWB Group’s intercompany assets are classified in Stage 1.
(7)
Includes £2 million (2021 – £3 million) related to assets classified as FVOCI.
(8)
ECL provisions coverage is calculated as total ECL provisions divided by third party loans – amortised cost and FVOCI.
(9)
Includes a £0 million charge (2021 – £1 million charge) related to other financial assets, of which a £1 million release (2021 – £2 million charge) related to assets classified as FVOCI;
and a £0 million release (2021 – £13 million charge) related to contingent liabilities.
(10)
The table shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to Financial instruments within the scope of the IFRS 9 ECL
framework of the NatWest Bank Plc 2022 Annual Report and Accounts for further details. Other financial assets within the scope of the IFRS 9 ECL framework were cash and
balances at central banks totaling £72.5 billion (2021 – £100.6 billion) and debt securities of £14.1 billion (2021 – £28.2 billion).
Credit risk enhancement and mitigation
For information on credit risk enhancement and mitigation held as security, refer to Risk and capital management – credit risk
enhancement and mitigation section of the NatWest Bank Plc 2022 Annual Report and Accounts.
Critical accounting policy: Loan impairment provisions
Accounting policies note 2.3 of the NatWest Bank Plc 2022 Annual Report and Accounts sets out how the expected loss approach
is applied. At 31 December 2022, customer loan impairment provisions amounted to £2,585 million (2021 - £2,504 million). A loan is
impaired when there is objective evidence that the cash flows will not occur in the manner expected when the loan was advanced.
Such evidence includes changes in the credit rating of a borrower, the failure to make payments in accordance with the loan
agreement, significant reduction in the value of any security, breach of limits or covenants, and observable data about relevant
macroeconomic measures.
The impairment loss is the difference between the carrying value of the loan and the present value of estimated future cash flows
at the loan's original effective interest rate. The measurement of credit impairment under the IFRS expected loss model depends on
management’s assessment of any potential deterioration in the creditworthiness of the borrower, its modelling of expected
performance and the application of economic forecasts. All three elements require judgments that are potentially significant to the
estimate of impairment losses. For further information and sensitivity analysis, refer to Risk and capital management –
measurement uncertainty and ECL sensitivity analysis section of the NatWest Bank Plc 2022 Annual Report and Accounts.
IFRS 9 ECL model design principles
Refer to Credit risk – IFRS 9 ECL model design principles section of the NatWest Bank Plc 2022 Annual Report and Accounts
for
further details.
Approach for multiple economic scenarios (MES)
The base scenario plays a greater part in the calculation of ECL than the approach to MES. Refer to Credit risk – economic loss
drivers – probability weightings of scenarios section of the NatWest Bank Plc 2022 Annual Report and Accounts for further details.
Notes to the financial statements continued
NWB Group
Annual Results 2022
16
7 Provisions for liabilities and charges
NWB Group
Redress and other
litigation (1)
Property
Financial
commitments and
guarantees
Other (2)
Total
Provisions for liabilities and charges
£m
£m
£m
£m
£m
At 1 January 2022
302
166
63
109
640
Expected credit losses impairment charge
—
—
(4)
—
(4)
Currency translation and other movements
—
—
—
1
1
Charge to income statement
134
20
—
96
250
Release to income statement
(30)
(53)
—
(45)
(128)
Provisions utilised
(114)
(28)
—
(67)
(209)
At 31 December 2022
292
105
59
94
550
NWB Plc
Redress and other
litigation (1)
Property
Financial
commitments and
guarantees
Other (2)
Total
Provisions for liabilities and charges
£m
£m
£m
£m
£m
At 1 January 2022
294
163
60
87
604
Expected credit losses impairment release
—
(3)
—
(3)
Charge to income statement
134
18
—
94
246
Release to income statement
(30)
(52)
—
(42)
(124)
Provisions utilised
(112)
(26)
—
(66)
(204)
At 31 December 2022
286
103
57
73
519
(3)
Includes payment protection insurance provision which reflects the estimated cost of PPI redress attributable to claims prior to the Financial Conduct Authority (FCA) complaint
deadline of 29 August 2019. All pre-deadline complaints have been processed which removes complaint volume estimation uncertainty from the provision estimate. NatWest Group
continues to conclude remaining bank-identified closure work and conclude cases with the Financial Ombudsmen Service.
(4)
Other materially comprises provisions relating to restructuring costs.
Provisions are liabilities of uncertain timing or amount and are recognised when there is a present obligation as a result of a past
event, the outflow of economic benefit is probable and the outflow can be estimated reliably. Any difference between the final
outcome and the amounts provided will affect the reported results in the period when the matter is resolved.
For accounting policy information see Accounting policies note 2.4 of the Natwest Bank Plc 2022 Annual Report and Accounts for
further details.
Critical accounting policy: Provisions for liabilities
The key judgment is involved in determining whether a present obligation exists. There is often a high degree of uncertainty and
judgment is based on the specific facts and circumstances relating to individual events in determining whether there is a present
obligation. Judgment is also involved in estimation of the probability, timing and amount of any outflows. Where NWB Group can
look to another party such as an insurer to pay some or all of the expenditure required to settle a provision, any reimbursement is
recognised when, and only when, it is virtually certain that it will be received.
Estimates
-
Provisions are liabilities of uncertain timing or amount and are recognised when there is a present obligation as a result
of a past event, the outflow of economic benefit is probable and the outflow can be estimated reliably. Any difference between the
final outcome and the amounts provided will affect the reported results in the period when the matter is resolved.
-
Customer redress: Provisions reflect the estimated cost of redress attributable to claims where it is determined that a present
obligation exists.
-
Litigation and other regulatory: NWB Group is engaged in various legal proceedings, both in the UK and in overseas
jurisdictions, including the US. For further information in relation to legal proceedings and discussion of the associated
uncertainties, refer to Note 8.
-
Property: This includes provision for contractual costs associated with vacant properties.
-
Other provisions: These materially comprise provisions for onerous contracts and restructuring costs. Onerous contract
provisions comprise an estimate of the costs involved in fulfilling the terms and conditions of contracts net of any expected
benefits to be received. This includes provision for contractual costs associated with vacant properties. Redundancy and
restructuring provisions comprise the estimated cost of restructuring, including redundancy costs where an obligation exists.
-
Background information on all material provisions is given in Note 8.
Notes to the financial statements continued
NWB Group
Annual Results 2022
17
8 Memorandum items
Contingent liabilities and commitments
The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31
December 2022. Although NWB Group is exposed to credit risk in the event of non-performance of the obligations undertaken by
customers, the amounts shown do not, and are not intended to, provide any indication of NWB Group’s expectation of future
losses
.
For accounting policy information see Accounting policies note 2.4 of the NatWest Bank Plc Annual Report and Accounts for
further details.
NWB Group
NWB Plc
2022
2021
2022
2021
£m
£m
£m
£m
Contingent liabilities and commitments
Guarantees
1,728
796
1,664
742
Other contingent liabilities
1,197
1,193
1,190
1,187
Standby facilities, credit lines and other commitments
87,221
79,826
83,321
75,936
90,146
81,815
86,175
77,865
(2)
In the normal course of business, NWB Plc guarantees specified third party liabilities of certain subsidiaries; it also gives undertakings that individual subsidiaries will fulfil their
obligations to third parties under contractual or other arrangements which are excluded from the table above.
Trustee and other fiduciary activities
In its capacity as trustee or other fiduciary role, NWB Group may hold or place assets on behalf of individuals, trusts, companies,
pension schemes and others. The assets and their income are not included in NWB Group's financial statements. NWB Group
earned fee income of £215 million (2021 - £216 million) from these activities.
The Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS), the UK's statutory fund of last resort for customers of authorised financial
services firms, pays compensation if a firm is unable to meet its obligations. The FSCS funds compensation for customers by raising
management expenses levies and compensation levies on the industry. In relation to protected deposits, each deposit-taking
institution contributes towards these levies in proportion to their share of total protected deposits on 31 December of the year
preceding the scheme year (which runs from 1 April to 31 March), subject to annual maxima set by the Prudential Regulation
Authority. In addition, the FSCS has the power to raise levies on a firm that has ceased to participate in the scheme and is in the
process of ceasing to be authorised for the costs that it would have been liable to pay had the FSCS made a levy in the financial
year it ceased to be a participant in the scheme.
Litigation and regulatory matters
NWB Plc and its subsidiary and associated undertakings (‘NWB Group’) are party to legal proceedings and involved in regulatory
matters, including as the subject of investigations and other regulatory and governmental action (Matters) in the United Kingdom
(UK), the United States (US), the European Union (EU) and other jurisdictions.
NWB Group recognises a provision for a liability in relation to these Matters when it is probable that an outflow of economic
benefits will be required to settle an obligation resulting from past events, and a reliable estimate can be made of the amount of
the obligation.
In many of these Matters, it is not possible to determine whether any loss is probable, or to estimate reliably the amount of any
loss, either as a direct consequence of the relevant proceedings and regulatory matters or as a result of adverse impacts or
restrictions on NWB Group’s reputation, businesses and operations. Numerous legal and factual issues may need to be resolved,
including through potentially lengthy discovery and document production exercises and determination of important factual matters,
and by addressing novel or unsettled legal questions relevant to the proceedings in question, before a liability can reasonably be
estimated for any claim. NWB Group cannot predict if, how, or when such claims will be resolved or what the eventual settlement,
damages, fine, penalty or other relief, if any, may be, particularly for claims that are at an early stage in their development or
where claimants seek substantial or indeterminate damages.
There are situations where NWB Group may pursue an approach that in some instances leads to a settlement agreement. This
may occur in order to avoid the expense, management distraction or reputational implications of continuing to contest liability, or
in order to take account of the risks inherent in defending claims or regulatory matters, even for those Matters for which NWB
Group believes it has credible defences and should prevail on the merits. The uncertainties inherent in all such Matters affect the
amount and timing of any potential outflows for both Matters with respect to which provisions have been established and other
contingent liabilities in respect of any such Matter. It is not practicable to provide an aggregate estimate of potential liability for our
legal proceedings and regulatory matters as a class of contingent liabilities.
The future outflow of resources in respect of any Matter may ultimately prove to be substantially greater than or less than the
aggregate provision that NWB Group has recognised. Where (and as far as) liability cannot be reasonably estimated, no provision
has been recognised. NWB Group expects that in future periods, additional provisions, settlement amounts and customer redress
payments will be necessary, in amounts that are expected to be substantial in some instances. Please refer to Note 7 for
information on material provisions.
Matters which are, or could be material, having regard to NWB Group, considered as a whole, in which NWB Group is currently
involved are set out below. We have provided information on the procedural history of certain Matters, where we believe
appropriate, to aid the understanding of the Matter.
For a discussion of certain risks associated with NWB Group’s litigation and regulatory matters, see the Risk Factors relating to
legal, regulatory and governmental actions and investigations set out on pages 190-192 of the NatWest Bank Plc Annual Report
and Accounts.
Notes to the financial statements continued
NWB Group
Annual Results 2022
18
8 Memorandum items continued
Litigation
London Interbank Offered Rate (LIBOR) and other rates litigation
In August 2020, a complaint was filed in the United States District Court for the Northern District of California by several United
States retail borrowers against the USD ICE LIBOR panel banks and their affiliates (including NatWest Group plc, NatWest Markets
Plc, NatWest Markets Securities Inc. and NWB Plc), alleging (i) that the very process of setting USD ICE LIBOR amounts to illegal
price-fixing; and (ii) that banks in the United States have illegally agreed to use LIBOR as a component of price in variable retail
loans. In September 2022, the district court dismissed the complaint, subject to re-pleading by the plaintiffs. The plaintiffs filed an
amended complaint in October 2022, which the defendants are again seeking to have dismissed.
Offshoring VAT assessments
HMRC issued protective tax assessments in 2018 against NatWest Group plc totalling £143 million relating to unpaid VAT in respect
of the UK branches of two NatWest Group companies registered in India. NatWest Group formally requested reconsideration by
HMRC of their assessments, and this process was completed in November 2020. HMRC upheld their original decision and, as a
result, NatWest Group plc lodged an appeal with the Tax Tribunal and an application for judicial review with the High Court of
Justice of England and Wales, both in December 2020. In order to lodge the appeal with the Tax Tribunal, NatWest Group plc was
required to pay £143 million to HMRC, and payment was made in December 2020. The appeal and the application for judicial
review have both been stayed pending resolution of a separate case involving another bank.
Regulatory matters
NWB Group’s financial condition can be affected by the actions of various governmental and regulatory authorities in the UK, the
US, the EU and elsewhere. NWB Group and/or NatWest Group have engaged, and will continue to engage, in discussions with
relevant governmental and regulatory authorities, including in the UK, the US, the EU and elsewhere, on an ongoing and regular
basis, and in response to informal and formal inquiries or investigations, regarding operational, systems and control evaluations
and issues including those related to compliance with applicable laws and regulations, including consumer protection, investment
advice, business conduct, competition/anti-trust, VAT recovery, anti-bribery, anti-money laundering and sanctions regimes. NWB
Group expects government and regulatory intervention in financial services to be high for the foreseeable future, including
increased scrutiny from competition and other regulators in the retail and SME business sectors.
Any matters discussed or identified during such discussions and inquiries may result in, among other things, further inquiry or
investigation, other action being taken by governmental and regulatory authorities, increased costs being incurred by NWB Group,
remediation of systems and controls, public or private censure, restriction of NWB Group’s business activities and/or fines. Any of
the events or circumstances mentioned in this paragraph or below could have a material adverse effect on NWB Group, its
business, authorisations and licences, reputation, results of operations or the price of securities issued by it, or lead to material
additional provisions being taken.
NWB Group is co-operating fully with the matters described below.
Investment advice review
In October 2019, the FCA notified NatWest Group of its intention to appoint a Skilled Person under section 166 of the Financial
Services and Markets Act 2000 to conduct a review of whether NatWest Group’s past business review of investment advice
provided during 2010 to 2015 was subject to appropriate governance and accountability and led to appropriate customer
outcomes. The Skilled Person’s review has concluded and, after discussion with the FCA, NatWest Group has now commenced
additional review/remediation work.
Notes to the financial statements continued
NWB Group
Annual Results 2022
19
9 Related parties
UK Government
The UK Government through HM Treasury is the ultimate controlling party of NatWest Group plc. The UK Government’s
shareholding is managed by UK Government Investments Limited, a company wholly owned by the UK Government. As a result
the UK Government and UK Government controlled bodies are related parties of the Group.
At 31 December 2022, HM Treasury’s holding in NatWest Group’s ordinary shares was 45.97%.
NWB Group enters into transactions with many of these bodies. Transactions include the payment of: taxes, principally UK
corporation tax (Note 5) and value added tax; national insurance contributions; local authority rates; and regulatory fees and
levies; together with banking transactions such as loans and levy sits undertaken in the normal course of banker-customer
relationships.
Bank of England facilities
NWB Group may participate in a number of schemes operated by the Bank of England in the normal course of business.
Members of NWB Group that are UK authorised institutions are required to maintain non-interest bearing (cash ratio) deposits with
the Bank of England amounting to 0.403% of their average eligible liabilities in excess of £600 million. They also have access to
Bank of England reserve accounts: sterling current accounts that earn interest at the Bank of England base rate.
NWB Plc guarantees certain liabilities of NWH Group to the Bank of England.
Other related parties
(a)
In their roles as providers of finance, NWB Group companies provide development and other types of capital support to
businesses. These investments are made in the normal course of business.
(b) To further strategic partnerships, NWB Group may seek to invest in third parties or allow third parties to hold a minority interest
in a subsidiary of NatWest Group. We disclose as related parties where stakes of 10 per cent or more are held. Ongoing
business transactions with these entities are on normal commercial terms.
(c)
NWB Group recharges NatWest Group Pension Fund with the cost of administration services incurred by it. The amounts
involved are not material to NWB Group.
(d)
In accordance with IAS 24, transactions or balances between NWB Group entities that have been eliminated on consolidation
are not reported.
(e)
The captions in the primary financial statements of the parent company include amounts attributable to subsidiaries. These
amounts have been disclosed in aggregate in the relevant notes to the financial statements. Other net income/(expenses)
represents the share of post-tax results of associates and joint ventures, profit (or loss) on disposal of subsidiaries, associates
and joint ventures, and gains on acquisitions.
Holding companies and fellow subsidiaries
Transactions NWB Group enters with its holding companies and fellow subsidiaries also meet the definition of related party
transactions. The table below discloses transactions between NWB Group and subsidiaries of NatWest Group.
2022
2021
£m
£m
Interest receivable
41
33
Interest payable
(777)
(220)
Fees and commissions receivable
97
31
Fees and commissions payable
(70)
(6)
Other operating income
(1)
1,641
1,497
932
1,335
(1)
Includes internal service recharges of £1,616 million.
10 Date of approval
The annual results for the year ended 31 December 2022 were approved by the board of directors on 16 February 2023
11 Post balance sheet events
On 6 February 2023, NWB reached agreement with the trustees of the Main Section of the Group pension scheme to recognise
that the final distribution linked contribution to the Main Scheme, of up to £471 million, in 2023 is not expected to be required. In its
place, agreement was reached to establish a new legal
structure to hold assets with a value equivalent to £471 million. These
assets would become transferrable to the Main section in the event that future triggers, reflecting a funding requirement, were
met. The assets are not de-recognised from NWB balance sheet, but are recorded as encumbered. The Group believes likelihood of
triggers being met are remote given the current funding position of the Main section.
There have been no other significant events between 31 December 2022 and the date of approval of these accounts which would
require a change to or additional disclosure in the accounts.
Statement of directors’ responsibilities
NWB Group
Annual Results 2022
20
This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 89 to 99 of the
NatWest Bank Plc 2022 Annual Report and Accounts.
The directors are responsible for the preparation of the Annual Report and Accounts. The directors are required to prepare Group
financial statements, and as permitted by the Companies Act 2006 have elected to prepare company financial statements, for each
financial year in accordance with UK adopted International Accounting Standards. They are responsible for preparing financial
statements that present fairly the financial position, financial performance and cash flows of NWB Group and NWB Plc. In
preparing those financial statements, the directors are required to:
select suitable accounting policies and then apply them consistently;
make judgments and estimates that are reasonable, relevant and reliable; and
state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained
in the financial statements.
prepare the financial statements on a going concern basis unless it is inappropriate to presume that the company and Group
will continue in business.
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the
financial position of NWB Group and to enable them to ensure that the Annual Report and Accounts complies with the Companies
Act 2006. They are also responsible for safeguarding the assets of NWB Plc and NWB Group and hence for taking reasonable steps
for the prevention and detection of fraud and other irregularities.
Under applicable law and regulations, the directors are also responsible for preparing a Strategic report and Directors’ report, that
comply with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and
financial information included on the company’s website.
The directors confirm that to the best of their knowledge:
the financial statements, prepared in accordance with UK adopted International Accounting Standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss of the Bank and the undertakings included in the consolidation taken
as a whole; and
the Strategic report and Directors’ report (incorporating the Financial review) includes a fair review of the development and
performance of the business and the position of the Bank and the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties that they face.
By order of the Board
Howard Davies
Alison Rose-Slade DBE
Katie Murray
Chairman
Chief Executive Officer
Chief Financial Officer
16 February 2023
Board of directors
Chairman
Executive directors
Non-executive directors
Howard Davies
Alison Rose-Slade DBE
Katie Murray
Francesca Barnes
Graham Beale
Ian Cormack
Roisin Donnelly
Patrick Flynn
Morten Friis
Yasmin Jetha
Mike Rogers
Mark Seligman
Lena Wilson
Forward-looking statements
NWB Group
Annual Results 2022
21
Cautionary statement regarding forward-looking statements
This document may include forward-looking statements within the meaning of the United States Private Securities Litigation
Reform Act of 1995, such as statements that include, without limitation,
the words ‘expect’, ‘estimate’, ‘project’, ‘anticipate’,
‘commit’, ‘believe’, ‘should’, ‘intend’, ‘will’, ‘plan’, ‘could’, ‘probability’, ‘risk’, ‘Value-at-Risk (VaR)’, ‘target’, ‘goal’, ‘objective’, ‘may’,
‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and similar expressions or variations on these expressions. These statements
concern or may affect future matters, such as NWB Group’s future economic results, business plans and strategies. In particular,
this document may include forward-looking statements relating to NWB Group in respect of, but not limited to: its economic and
political risks, its regulatory capital position and related requirements, its financial position, profitability and financial performance
(including financial, capital, cost savings and operational targets), the implementation of NatWest Group’s purpose-led strategy, its
environmental, social and governance and climate related targets, its access to adequate sources of liquidity and funding,
increasing competition from new incumbents and disruptive technologies, its exposure to third party risks, its ongoing compliance
with the UK ring-fencing regime and ensuring operational continuity in resolution, its impairment losses and credit exposures under
certain specified scenarios, substantial regulation and oversight, ongoing legal, regulatory and governmental actions and
investigations, the transition of LIBOR and IBOR rates to replacement risk free rates and NWB Group’s exposure to, operational
risk, conduct risk, financial crime risk, cyber, data and IT risk, key person risk and credit rating risk.
Forward-looking statements
are subject to a number of risks and uncertainties that might cause actual results and performance to differ materially from any
expected future results or performance expressed or implied by the forward-looking statements. Factors that could cause or
contribute to differences in current expectations include, but are not limited to, future growth initiatives (including acquisitions, joint
ventures and strategic partnerships), the outcome of legal, regulatory and governmental actions and investigations, the level and
extent of future impairments and write-downs, legislative, political, fiscal and regulatory developments, accounting standards,
competitive conditions, technological developments, interest and exchange rate fluctuations, and general economic and political
conditions and the impact of climate related risks and the transitioning to a net zero economy. These and other factors, risks and
uncertainties that may impact any forward-looking statement or the NWB Group's actual results are discussed in the NWB Plc's UK
2021 Annual Report and Accounts (ARA). The forward-looking statements contained in this document speak only as of the date of
this document and NWB Plc does not assume or undertake any obligation or responsibility to update any of the forward-looking
statements contained in this document, whether as a result of new information, future events or otherwise, except to the extent
legally required.
Legal Entity Identifier: 213800IBT39XQ9C4CP71