Interim Results - NatWest Group (Part 2 of 2)

RNS Number : 1757U
NatWest Group plc
29 July 2022
 

Risk and capital management

Capital, liquidity and funding risk 

Introduction

NatWest 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 that NatWest Group operates within its regulatory requirements and risk appetite.

Key developments

CET1

The CET1 ratio decreased by 390 basis points to 14.3%. The decrease is primarily due to a £22.8 billion increase in RWAs and a £2.9 billion decrease in CET1 capital.

The CET1 decrease is mainly driven by:

the directed buyback of £1.2 billion;

foreseeable dividend accrual of £2.3 billion (special dividend will be paid on 16 September 2022, subject to approval at a General Meeting, with the notice and circular publication on 9 August 2022 and the General Meeting scheduled for 25 August 2022);

a £0.3 billion decrease in the IFRS 9 transitional adjustment;

the removal of adjustment for prudential amortisation on   software development costs of £0.4 billion;

a £0.3 billion decrease due to FX loss on retranslation on the redemption of a USD instrument; and

other reserve movements.

These reductions were partially offset by the £1.9 billion attributable profit in the period.

MREL (LAC)

MREL (LAC) ratio as a percentage of risk-weighted assets decreased to 31.7% from 39.8% due to a £22.8 billion increase in RWAs and £5.4 billion decrease in MREL resources.   The ratio remains well above the minimum of 22.2%, calculated as 2 x (Pillar 1 + Pillar 2A).


In the first half of 2022 there were redemptions of $3 billion and €1.5 billion Senior debt, and $1 billion Tier 1 instruments. These were partially offset by new issuances of $1 billion and £0.75 billion Senior debt.

Total RWAs

Total RWAs increased by £22.8 billion to £179.8 billion during H1 2022 reflecting:

An increase in credit risk RWAs of £23.6 billion, primarily due to £19.4 billion of model adjustments applied as a result of new regulation applicable to IRB models from 1 January 2022, in addition to increased exposure in Commercial & Institutional and Retail Banking. This was partially offset by improved risk metrics in Commercial & Institutional and Retail Banking.

An increase in market risk RWAs of £0.6 billion, driven by a raised capital multiplier for NWM Plc affecting VaR and SVaR calculations.

An increase in counterparty credit risk RWAs of £0.4 billion, mainly driven by the implementation of SA-CCR affecting the RWA calculation for non-internally modelled exposure.

A decrease in operational risk RWAs of £1.9 billion following the annual recalculation. 

UK leverage ratio

The leverage ratio at 30 June 2022 is 5.2% and has been calculated in accordance with changes to the UK's leverage ratio framework which were introduced by the PRA and came into effect from 1 January 2022. As at 31 December 2021, the UK leverage ratio was 5.9%, which was calculated under the prior year's UK leverage methodology. The key driver of the decrease is a £3.5 billion decrease in Tier 1 capital.

Liquidity portfolio

The liquidity portfolio decreased by £18.0 billion to £268.4 billion, with primary liquidity decreasing by £10.3 billion to £198.3 billion. The decrease in primary liquidity is driven by shareholder distributions (share buyback and dividends), redemption of Senior debt, maturing commercial papers and certificates of deposit and a marginal increase in lending outstripping growth in deposits. The reduction in secondary liquidity is due to a reduction in the pre-positioned collateral at the Bank of England.

 



 

Risk and capital management

Capital, liquidity and funding risk continued

Maximum Distributable Amount (MDA) and Minimum Capital Requirements

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

Where the CET1 ratio falls below the sum of the minimum capital and the combined buffer requirement, there is a subsequent automatic restriction on the amount available to service discretionary payments (including AT1 coupons), known as the MDA. Note that different capital requirements apply to individual legal entities or sub-groups and that the table shown does not reflect any incremental PRA buffer requirements, which are not disclosable.

The current capital position provides significant headroom above both NatWest Group's minimum requirements and its MDA threshold requirements.

Type

CET1

Total Tier 1

Total capital

Pillar 1 requirements

4.5%

6.0%

8.0%

Pillar 2A requirements

1.7%

2.3%

3.1%

Minimum Capital Requirements

6.2%

8.3%

11.1%

Capital conservation buffer

2.5%

2.5%

2.5%

Countercyclical capital buffer (1)  

-

-

-

MDA threshold (2)

8.7%

 

n/a

 

n/a

Subtotal

8.7%

10.8%

13.6%

Capital ratios at 30 June 2022

14.3%

16.4%

19.3%

Headroom (3)

5.6%

5.6%

5.7%









(1)  In response to COVID-19 many countries reduced their CCyB rates. In December 2021, the Financial Policy Committee announced an increase in the UK CCyB rate from 0% to 1% effective from 13 December 2022.   A further increase from 1% to 2% was announced on 5 July 2022, effective 5 July 2023.   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.

(2)  Pillar 2A requirements for NatWest Group are set on a nominal capital basis. The PRA has confirmed that from Q4 2022 Pillar 2A will be set as a variable amount with the exception of some fixed add-ons.

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

 



 

Risk and capital management

Capital, liquidity and funding risk continued

Capital and leverage ratios

The table below sets out the key capital and leverage ratios. From 1 January 2022, NatWest Group is subject to the requirements set out in the PRA Rulebook. Therefore, going forward the capital and leverage ratios are being presented under these frameworks on a transitional basis.


30 June

31 December


2022

2021

Capital adequacy ratios   (1)

%

%

CET1

14.3

18.2

Tier 1

16.4

21.0

Total

19.3

24.7




Capital

£m

£m

Tangible equity

27,858

30,689


 


Prudential valuation adjustment

(316)

(274)

Deferred tax assets

(738)

(761)

Own credit adjustments

(99)

21

Pension fund assets

(471)

(465)

Cash flow hedging reserve

1,526

395

Foreseeable dividends and pension contributions

(2,250)

(1,211)

Foreseeable charges - on-market ordinary share buyback programme

(91)

(825)

Prudential amortisation of software development costs

-

411

Adjustments under IFRS 9 transitional arrangements

284

621

Insufficient coverage for non-performing exposures

(10)

(5)

Total deductions

(2,165)

(2,093)


 


CET1 capital

25,693

28,596


 


End-point AT1 capital

3,875

3,875

Grandfathered instrument transitional arrangements

-

571

Transitional AT1 capital

3,875

4,446

Tier 1 capital

29,568

33,042


 


End-point Tier 2 capital

5,011

5,402

Grandfathered instrument transitional arrangements

172

304

Transitional Tier 2 capital

5,183

5,706

Total regulatory capital

34,751

38,748


 


Risk-weighted assets

 


Credit risk

143,765

120,116

Counterparty credit risk

8,352

7,907

Market risk

8,563

7,917

Operational risk

19,115

21,031

Total RWAs

179,795

156,971

 

(1)  Based on current PRA rules, therefore includes the transitional relief on grandfathered capital instruments and the transitional arrangements for the capital impact of IFRS 9 expected credit loss (ECL) accounting. The impact of the IFRS 9 transitional adjustments at 30 June 2022 was £0.3 billion for CET1 capital, £62 million for total capital and £32 million RWAs (31 December 2021 - £0.6 billion CET1 capital, £0.5 billion total capital and £36 million RWAs). Excluding these adjustments, the CET1 ratio would be 14.1% (31 December 2021 - 17.8%). The transitional relief on grandfathered instruments at 30 June 2022 was £0.2 billion (31 December 2021 - £0.9 billion). Excluding both the transitional relief on grandfathered capital instruments and the transitional arrangements for the capital impact of IFRS 9 expected credit loss (ECL) accounting, the end-point Tier 1 capital ratio would be 16.3% (31 December 2021 - 20.3%) and the end-point Total capital ratio would be 19.3% (31 December 2021 - 23.8%).



 

Risk and capital management

Capital, liquidity and funding risk continued

Capital and leverage ratios continued

 

30 June

31 December

 

2022

2021

Leverage

£m

£m

Cash and balances at central banks

179,525

177,757

Trading assets

65,604

59,158

Derivatives

109,342

106,139

Financial assets

412,115

412,817

Other assets

25,705

17,106

Assets of disposal groups

14,187

9,015

Total assets

806,478

781,992

Derivatives

 


  - netting and variation margin

(107,295)

(110,204)

  - potential future exposures

20,552

35,035

Securities financing transactions gross up

5,184

1,397

Other off balance sheet items

45,095

44,240

Regulatory deductions and other adjustments

(16,314)

(8,980)

Claims on central banks

(176,163)

(174,148)

Exclusion of bounce back loans

(6,785)

(7,474)

UK leverage exposure  

570,752

561,858

UK leverage ratio (%)   (1)

5.2

5.9

 

(1)  The UK leverage exposure is calculated in accordance with the Leverage Ratio (CRR) part of the PRA Rulebook, and transitional Tier 1 capital is calculated in accordance with the PRA Rulebook. Excluding the IFRS 9 transitional adjustment, the UK leverage ratio would be 5.1% (31 December 2021 - 5.8%).

 

Capital flow statement

The table below analyses the movement in CET1, AT1 and Tier 2 capital for the half year ended 30 June 2022. It is being presented on a transitional basis as calculated under the PRA Rulebook Instrument requirements.


CET1

AT1

Tier 2

Total


£m

£m

£m

£m

At 31 December 2021

28,596

4,446

5,706

38,748

Attributable profit for the period

1,891

-

-

1,891

Directed buyback  

(1,212)

-

-

(1,212)

Foreseeable dividends  

(2,250)

-

-

(2,250)

Foreign exchange reserve

199

-

-

199

FVOCI reserve

(336)

-

-

(336)

Own credit

(120)

-

-

(120)

Share capital and reserve movements in respect of employee share schemes

64

-

-

64

Goodwill and intangibles deduction

(557)

-

-

(557)

Deferred tax assets

23

-

-

23

Prudential valuation adjustments

(42)

-

-

(42)

End of 2021 transitional relief on grandfathered instruments  

-

(571)

(232)

(803)

Net dated subordinated debt instruments

-

-

(605)

(605)

Foreign exchange movements

(254)

-

509

255

Adjustment under IFRS 9 transitional arrangements

(337)

-

-

(337)

Other movements

28

-

(195)

(167)

At 30 June 2022

25,693

3,875

5,183

34,751

 

The CET1 decrease is primarily due to the directed buyback of £1.2 billion, foreseeable dividend accrual of £2.3 billion, a £0.3 billion decrease in the IFRS 9 transitional adjustment, the removal of adjustment for prudential amortisation on software development costs of £0.4 billion, £0.3 billion due to FX loss on retranslation on the redemption of a USD instrument and other reserve movements in the period, partially offset by an attributable profit in the period of £1.9 billion.

The AT1 and Tier 2 movements are due to the end of the 2021 transitional relief on grandfathered instruments. In Tier 2 there was also a £0.2 billion decrease in the Tier 2 surplus provisions.

 

 



 

 

Risk and capital management

Capital, liquidity and funding risk continued

Capital resources (reviewed)

NatWest Group's regulatory capital is assessed against minimum requirements that are set out under the UK Capital Requirements Regulation to determine the strength of its capital base. This note shows a reconciliation of shareholders' equity to regulatory capital.


PRA transitional basis


30 June

31 December


2022

2021


£m

£m

Shareholders' equity (excluding non-controlling interests)



Shareholders' equity

38,617

41,796

Preference shares - equity

-

(494)

Other equity instruments

(3,890)

(3,890)


34,727

37,412

Regulatory adjustments and deductions

 


Own credit

(99)

21

Defined benefit pension fund adjustment

(471)

(465)

Cash flow hedging reserve  

1,526

395

Deferred tax assets

(738)

(761)

Prudential valuation adjustments

(316)

(274)

Goodwill and other intangible assets

(6,869)

(6,312)

Foreseeable dividends and pension contributions

(2,250)

(1,211)

Foreseeable charges - on-market share buyback programme

(91)

(825)

Adjustment under IFRS 9 transitional arrangements  

284

621

Insufficient coverage for non-performing exposures

(10)

(5)


(9,034)

(8,816)


 


CET1 capital

25,693

28,596

Additional Tier (AT1) capital

 


Qualifying instruments and related share premium

3,875

3,875

Qualifying instruments and related share premium to phase out

-

571

AT1 capital

3,875

4,446

Tier 1 capital

29,568

33,042


 


Qualifying Tier 2 capital

 


Qualifying instruments and related share premium

4,848

4,935

Qualifying instruments issued by subsidiaries and held by third parties

73

314

Other regulatory adjustments

262

457

Tier 2 capital

5,183

5,706

Total regulatory capital

34,751

38,748



 

Risk and capital management 

Capital, liquidity and funding risk continued

Loss absorbing capital

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


30 June 2022

 

31 December 2021


 

Balance

 

 

 


Balance




Par

sheet

Regulatory

LAC

 

Par

sheet

Regulatory

LAC


  value (1)

value

value (2,5)

value (3)

 

value

value

value

value


£bn

£bn

£bn

£bn

 

£bn

£bn

£bn

£bn

CET1 capital   (4)

25.7

25.7

25.7

25.7


28.6

28.6

28.6

28.6


 

 

 

 

 





Tier 1 capital: end-point CRR compliant AT1

 

 

 

 

 





  of which: NatWest Group plc (holdco)

3.9

3.9

3.9

3.9

 

3.9

3.9

3.9

3.9

  of which: NatWest Group plc operating  

 

 

 

 

 





  subsidiaries (opcos)

-

-

-

-

 

-

-

-

-


3.9

3.9

3.9

3.9

 

3.9

3.9

3.9

3.9


 

 

 

 

 





Tier 1 capital: end-point CRR non-compliant   (6)

 

 

 

 

 





  of which: holdco

-

-

-

-

 

0.6

0.6

0.5

0.5

  of which: opcos

0.1

0.1

-

-

 

0.1

0.1

-

-


0.1

0.1

-

-

 

0.7

0.7

0.5

0.5


 

 

 

 

 





Tier 2 capital: end-point CRR compliant

 

 

 

 

 





  of which: holdco

6.5

6.2

4.7

6.1

 

7.1

7.1

4.9

6.0

  of which: opcos

-

-

-

-

 

0.3

0.3

-

-


6.5

6.2

4.7

6.1

 

7.4

7.4

4.9

6.0


 

 

 

 

 





Tier 2 capital: end-point CRR non-compliant   (6)

 

 

 

 

 





  of which: holdco

1.1

1.1

0.1

-

 

-

-

-

-

  of which: opcos

0.6

0.8

0.1

-

 

0.6

0.9

0.3

0.1


1.7

1.9

0.2

-

 

0.6

0.9

0.3

0.1


 

 

 

 

 





Senior unsecured debt securities  

 

 

 

 

 





  of which: holdco

22.3

21.7

-

21.0

 

22.8

23.4

-

22.8

  of which: opcos

25.6

22.6

-

-


22.7

22.6

-

-


47.9

44.3

-

21.0


45.5

46.0

-

22.8


 

 

 

 

 





Tier 2 capital

 

 

 

 

 





  Other regulatory adjustments

-

-

0.3

0.3


-

-

0.5

0.5


-

-

0.3

0.3


-

-

0.5

0.5


 

 

 

 






Total

85.8

82.1

34.8

57.0


86.7

87.5

38.7

62.4


 

 

 

 






RWAs

 

 

 

179.8





157.0

UK leverage exposure

 

 

 

570.8





561.9


 

 

 

 






LAC as a ratio of RWAs

 

 

 

31.7%





39.8%

LAC as a ratio of UK leverage exposure

 

 

 

10.0%





11.1%

 

(1)  Par value reflects the nominal value of securities issued.

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

(3)  LAC value reflects NatWest Group's interpretation of the Bank of England's approach to setting a minimum requirement for own funds and eligible liabilities (MREL), published in December 2021 (updating June 2018). MREL policy and requirements remain subject to further potential development, as such NatWest Group's estimated position remains subject to potential change. Liabilities excluded from LAC include instruments with less than one year remaining to maturity, structured debt, operating company senior debt, and other instruments that do not meet the MREL criteria. The LAC calculation includes Tier 1 and Tier 2 securities before the application of any regulatory caps or adjustments.

(4)  Corresponding shareholders' equity was £38.6 billion (31 December 2021 - £41.8 billion).

(5)  Regulatory amounts reported for AT1, Tier 1 and Tier 2 instruments incudes grandfathered instruments as per the transitional provisions allowed under CRR2 (until 28 June 2025).

(6)  (i) CRR1 non-compliant instruments (2021) - All Tier 1 and Tier 2 instruments that were grandfathered under CRR1 compliance have lost their regulatory value and no longer form part of our regulatory capital resources from 1 January 2022. As at 31 December 2021, these are reported under the "Tier 1 capital: end-point CRR non-compliant" and  "Tier 2 capital: end-point CRR non-compliant" categories. 

(ii) CRR2 non-compliant instruments (2022) - From January 2022, All Tier 1 and Tier 2 instruments that were grandfathered under CRR2 compliance (until 28 June 2025) are reported under "Tier 1 capital: end-point CRR non-compliant" and  "Tier 2 capital: end-point CRR non-compliant" category. 



 

Risk and capital management

Capital, liquidity and funding risk continued

Loss absorbing capital

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



 

NatWest

 

 

 

 

NatWest

NWM

RBS



NatWest

Holdings

NWB

RBS

UBI

NWM

Markets

Securities

International



Group plc

Limited

Plc

plc

DAC

Plc

N.V.

Inc.

Limited



£bn

£bn

£bn

£bn

£bn

£bn

£bn

£bn

£bn

Tier 1 (Inclusive of AT1)

Externally issued

3.9

-

0.1

-

-

-

-

-

-

Tier 1 (Inclusive of AT1)

Internally issued

-

3.7

2.5

1.0

-

0.9

0.2

-

0.3



3.9

3.7

2.6

1.0

-

0.9

0.2

-

0.3

Tier 2

Externally issued

7.2

-

0.1

-

0.1

0.1

0.5

-

-

Tier 2

Internally issued

-

4.7

3.0

1.5

0.4

1.5

0.1

0.3

-



7.2

4.7

3.1

1.5

0.5

1.6

0.6

0.3

-

Senior unsecured

Externally issued

21.7

-

-

-

-

-

-

-

-

Senior unsecured

Internally issued

-

11.8

6.5

0.4

0.5

3.1

-

-

-



21.7

11.8

6.5

0.4

0.5

3.1

-

-

-

Total outstanding issuance

32.8

20.2

12.2

2.9

1.0

5.6

0.8

0.3

0.3

 

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

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

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

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

(5)  Tier 1 (inclusive of AT1) does not include CET1 numbers.

 



 

Risk and capital management

Capital, liquidity and funding risk continued

Risk-weighted assets

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


 

Counterparty

 

Operational

 


Credit risk

credit risk

Market risk

risk

Total  


£bn

£bn

£bn

£bn

£bn

At 31 December 2021

120.2

7.9

7.9

21.0

157.0

Foreign exchange movement

1.2

-

-

-

1.2

Business movement

3.7

-

1.0

(1.9)

2.8

Risk parameter changes

(2.8)

-

-

-

(2.8)

Methodology changes

0.2

0.4

-

-

0.6

Model updates

21.4

-

(0.3)

-

21.1

Acquisitions and disposals  

(0.1)

-

-

-

(0.1)

At 30 June 2022

143.8

8.3

8.6

19.1

179.8

 

The table below analyses segmental RWAs.


Go-forward group

 

 


 

 

 

 

Total excluding  

 

Total  


Retail

Private

Commercial &

Central items  

Ulster Bank

Ulster

NatWest


Banking

Banking

Institutional  

& other

ROI

Bank RoI

Group

Total RWAs

£bn

£bn

£bn

£bn

£bn

£bn

£bn

At 31 December 2021

36.7

11.3

98.1

1.8

147.9

9.1

157.0

Foreign exchange movement

-

-

1.0

-

1.0

0.2

1.2

Business movement

2.4

-

1.2

(0.1)

3.5

(0.7)

2.8

Risk parameter changes  

(1.4)

-

(1.4)

-

(2.8)

-

(2.8)

Methodology changes

-

-

0.4

-

0.4

0.2

0.6

Model updates

15.3

-

3.7

-

19.0

2.1

21.1

Acquisitions and disposals

-

-

-

-

-

(0.1)

(0.1)

At 30 June 2022

53.0

11.3

103.0

1.7

169.0

10.8

179.8


 

 

 

 

 

 

 

Credit risk

46.0

10.0

76.3

1.6

133.9

9.9

143.8

Counterparty credit risk

0.2

0.1

8.0

-

8.3

-

8.3

Market risk

0.1

-

8.5

-

8.6

-

8.6

Operational risk

6.7

1.2

10.2

0.1

18.2

0.9

19.1

Total RWAs

53.0

11.3

103.0

1.7

169.0

10.8

179.8

 

Total RWAs increased by £22.8 billion to £179.8 billion during the period mainly reflecting:

Model updates totalling £21.1 billion primarily due to model adjustments applied as a result of new regulation applicable to IRB models from 1 January 2022 within Retail Banking, Commercial & Institutional and Ulster Bank ROI.

Business movements totalling £2.8 billion driven by increased credit risk exposures within Retail Banking and Commercial & Institutional, partially offset by a reduction in credit risk exposures within Ulster Bank ROI.

There was a partially offsetting decrease of approximately £2.8 billion RWAs due to improved risk metrics within Commercial & Institutional and Retail Banking.

 

 



 

 

Risk and capital management

Capital, liquidity and funding risk continued

Funding sources (reviewed)

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


30 June 2022

 

31 December 2021


Short-term

Long-term

 

 

Short-term

Long-term



less than

more than

 

 

less than

more than



1 year

1 year

Total

 

1 year

1 year

Total


£m

£m

£m

 

£m

£m

£m

Bank deposits








Repos

4,720

-

4,720

 

7,912

-

7,912

Other bank deposits   (1)

7,588

12,554

20,142

 

5,803

12,564

18,367


12,308

12,554

24,862

 

13,715

12,564

26,279

Customer deposits

 

 

 

 




Repos

19,195

-

19,195

 

14,541

-

14,541

Non-bank financial institutions

62,291

525

62,816

 

57,885

67

57,952

Personal

232,686

714

233,400

 

230,525

829

231,354

Corporate

176,331

333

176,664

 

175,850

113

175,963


490,503

1,572

492,075

 

478,801

1,009

479,810

Trading liabilities   (2)

 

 

 

 




Repos   (3)

29,406

-

29,406

 

19,389

-

19,389

Derivative collateral

18,276

-

18,276

 

17,718

-

17,718

Other bank customer deposits

442

657

1,099

 

849

704

1,553

Debt securities in issue - Medium term notes

60

743

803

 

178

796

974


48,184

1,400

49,584

 

38,134

1,500

39,634

Other financial liabilities

 

 

 

 




Customer deposits

542

-

542

 

568

-

568

Debt securities in issue:

 

 

 

 




  Commercial papers and certificates of deposit

6,214

127

6,341

 

9,038

115

9,153

  Medium term notes

7,007

30,173

37,180

 

6,401

29,451

35,852

  Covered bonds

775

2,044

2,819

 

53

2,833

2,886

  Securitisation

-

862

862

 

-

867

867


14,538

33,206

47,744

 

16,060

33,266

49,326

Subordinated liabilities

1,804

6,306

8,110

 

1,375

7,054

8,429

Total funding

567,337

55,038

622,375

 

548,085

55,393

603,478

Of which: available in resolution   (4)

 

 

26,173


 

 

29,624

 

(1)  Includes £12.0 billion (31 December 2021 - £12.0 billion) relating to Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises participation.

(2)  Excludes short positions of £24.8 billion (31 December 2021 - £25.0 billion).

(3)  Comprises central & other bank repos of £3.1 billion (31 December 2021 - £0.8 billion), other financial institution repos of £23.4 billion (31 December 2021 - £17.0 billion) and other corporate repos of £2.9 billion (31 December 2021 - £1.6 billion).

(4)  Eligible liabilities (as defined in the Banking Act 2009 as amended from time to time) that meet the eligibility criteria set out in the regulations, rules, policies, guidelines, or statements of the Bank of England including the Statement of Policy published by the Bank of England in December 2021 (updating June 2018). The balance consists of £20.4 billion (31 December 2021 - £23.4 billion) under debt securities in issue (senior MREL) and £5.8 billion (31 December 2021 - £6.2 billion) under subordinated liabilities.



 

Risk and capital management

Capital, liquidity and funding risk continued

Liquidity portfolio (reviewed)

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


Liquidity value


30 June 2022

 

31 December 2021


NatWest

NWH

UK DoL

 

NatWest

NWH

UK DoL


Group   (1)

Group   (2)

Sub   (3)

 

Group  

Group  

Sub  


£m

£m

£m

 

£m

£m

£m

Cash and balances at central banks

176,976

143,463

139,230


174,328

140,562

136,154

AAA to AA- rated governments

18,458

8,656

7,998


31,073

21,710

21,123

A+ and lower rated governments

3

-

-


25

-

-

Government guaranteed issuers, public sector entities  

 

 

 


 



  and government sponsored entities

236

222

102


307

295

174

International organisations and multilateral

 

 

 





  development banks

2,589

1,849

1,574


2,720

1,807

1,466

LCR level 1 bonds

21,286

10,727

9,674

 

34,125

23,812

22,763

LCR level 1 assets

198,262

154,190

148,904

 

208,453

164,374

158,917

LCR level 2 assets

-

-

-

 

117

-

-

Non-LCR eligible assets

-

-

-

 

-

-

-

Primary liquidity  

198,262

154,190

148,904

 

208,570

164,374

158,917

Secondary liquidity   (4)

70,186

70,046

69,980

 

77,849

77,660

76,573

Total liquidity value

268,448

224,236

218,884


286,419

242,034

235,490

 

(1)

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

(2)

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

(3)

UK DoLSub comprises NatWest Group's three licensed deposit-taking UK banks within the ring-fenced bank: NWB Plc, RBS plc and Coutts & Company. Ulster Bank Limited was previously a member of the UK DoLSub and was removed from the UK DoLSub effective 1 January 2022.

(4)

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

(5)

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



 

 

 

 



 


Risk and capital management

Non-traded market risk

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.

Key developments


In the UK, the base rate has risen from 0.25% at 31 December 2021 to 1.25% at 30 June 2022. Market concerns increasingly centred on the speed and extent to which central banks will raise their policy rates and use other monetary policy tightening measures to manage inflation.

The five-year sterling swap rate increased to 2.48% at the end of June 2022 from 1.05% at the end of December 2021. The ten-year sterling swap rate also increased, to 2.33% from 0.95%.


The structural hedge notional increased by £24 billion from £206 billion to £230 billion, mainly due to increased hedging of higher deposit volumes realised through the pandemic. The structural hedge yield rose over the same period to 0.78% from 0.71% as new hedges were booked at current market rates and maturing hedges were replaced.

Sterling weakened against both the US dollar and the euro over the period. Against the dollar, sterling was 1.21 at 30 June 2022 compared to 1.35 at 31 December 2021. Against the euro, it was 1.16 at 30 June 2022 compared to 1.19 at 31 December 2021. Structural foreign currency exposure decreased, in sterling equivalent terms, by £267 million over the period, mainly due to increased hedging of euro exposure.

 

Non-traded internal VaR (1-day 99%) (reviewed)

The following table shows one-day internal banking book Value-at-Risk (VaR) at a 99% confidence level, split by risk type.


Half year ended


30 June 2022

30 June 2021

31 December 2021


 

 

 

Period




Period




Period


Average

Maximum

Minimum

end

Average

Maximum

Minimum

end

Average

Maximum

Minimum

end


£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

Interest rate

17.0

37.8

7.6

37.8

11.7

13.0

9.2

12.8

8.4

9.5

6.4

8.6

Credit spread

48.8

86.6

33.4

34.6

103.6

113.5

99.6

99.6

100.9

108.5

92.4

100.9

Structural foreign  

 

 

 

 









  exchange rate

8.8

10.9

5.4

7.0

11.0

12.8

9.2

12.8

11.9

13.2

10.3

12.0

Equity

18.9

22.2

13.7

18.8

11.3

11.7

11.1

11.7

13.6

14.6

11.6

14.3

Pipeline risk   (1)

1.0

2.9

0.3

2.9

0.3

0.4

0.3

0.4

0.7

1.2

0.5

1.2

Diversification   (2)

(33.4)

 

 

(48.1)

(3.4)



(8.5)

(20.9)



(35.6)

Total

61.1

91.2

52.3

53.0

134.5

147.1

128.8

128.8

114.6

128.3

101.4

101.4

 

(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)

NatWest 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.

 

Credit spread VaR decreased in H1 2022 reflecting bond disposals in the period. In addition, the heightened market volatility in March 2020, resulting from the onset of the COVID-19 crisis, dropped out of the rolling window for VaR calculation during H1 2022.

The credit spread VaR decrease was the main driver of the reduction in total non-traded VaR.

Interest rate VaR rose on an average basis, reflecting an increase in hedging undertaken to reduce the sensitivity of interest income to downward interest rate shocks.

The increase in equity VaR reflects the agreement to invest in Permanent TSB as part of the UBIDAC withdrawal strategy.


Risk and capital management

Non-traded market risk continued

Structural hedging

NatWest Group has a significant pool of stable, non and low interest-bearing liabilities, principally comprising equity and money transmission accounts. These balances are usually hedged, either by investing directly in longer-term fixed-rate assets (such as fixed-rate mortgages or UK government gilts) or by using interest rate swaps, which are generally booked as cash flow hedges of floating-rate assets, in order to provide a consistent and predictable revenue stream.

After hedging the net interest rate exposure externally, NatWest Group allocates income to equity or products in structural hedges by reference to the relevant interest rate swap curve. Over time, this approach has provided a basis for stable income attribution to products and interest rate returns. The programme aims to track a time series of medium-term swap rates, but the yield will be affected by changes in product volumes and NatWest Group's capital composition.

The table below shows the total income and total yield, incremental income relative to short-term cash rates, and the period-end and average notional balances allocated to equity and products in respect of the structural hedges managed by NatWest Group.


Half year ended


30 June 2022

 

30 June 2021


31 December 2021


 

 

Period

 

 

 



Period






Period




Incremental

Total

-end

Average

Total

 

Incremental

Total

-end

Average

Total


Incremental

Total

-end

Average

Total


income

income

notional

notional

yield

 

income

income

notional

notional

yield


income

income

notional

notional

yield


£m

£m

£bn

£bn

%

 

£m

£m

£bn

£bn

%


£m

£m

£bn

£bn

%

Equity  

111

178

20

20

1.77


235

244

23

23

2.13


190

204

21

21

1.96

Product

42

585

182

168

0.70

 

360

412

146

135

0.61


383

450

161

155

0.58

Other

29

76

28

27

0.57

 

74

62

21

22

0.56


65

52

24

23

0.45

Total

182

839

230

215

0.78


669

718

190

180

0.80


638

706

206

199

0.71

 

(1)  Incremental income represents the difference between total income (i.e. hedged income) and an unhedged return that is based on short-term cash rates. For example, the sterling overnight index average (SONIA) is used to estimate incremental income from sterling structural hedges.

 

Equity structural hedges refer to income allocated primarily to equity and reserves. At 30 June 2022, the equity structural hedge notional was allocated between NWH Group and NWM Plc in a ratio of approximately 83%/17% respectively.

Product structural hedges refer to income allocated to customer products by NWH Group Treasury, mainly current accounts and customer deposits in Commercial & Institutional and Retail Banking. Other structural hedges refer to hedges managed by UBIDAC, Coutts & Co and RBS International legal entities.

At 30 June 2022, approximately 93% by notional of total structural hedges were sterling-denominated.

The following table presents the incremental income associated with product structural hedges at segment level.


Half year ended


30 June

30 June

31 December


2022

2021

2021


£m

£m

£m

Retail Banking

12

168

178

Commercial & Institutional  

30

192

206

Total

42

360

384





The increase in the structural hedge notional mainly resulted from hedging of Retail and Commercial deposits.

The five-year sterling swap rate rose to 2.48% at 30 June 2022 from 1.05% at 31 December 2021. The ten-year sterling swap rate also rose, to 2.33% from 0.95%. Higher swap rates resulted in the total yield of the structural hedge rising to 0.78% from 0.71% in H1 2022.

Despite the increase in total yield, incremental income fell. This reflects the relative stability of the total yield of the structural hedge compared to an unhedged portfolio earning short-term cash rates. Compared to the 7-basis-point increase in the structural hedge total yield, SONIA increased 100 basis points to 1.19% at 30 June 2022 from 0.19% at 31 December 2021. 

 



 

Risk and capital management

Non-traded market risk continued

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 always 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 based on the 30 June 2022 balance sheet, which is assumed to remain constant. An earnings projection is derived from the market-implied 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.

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.

Three-year 25 basis point sensitivity table

The table below shows the sensitivity of net interest earnings - for both structural hedges and managed rate accounts - on a one, two and three-year forward-looking basis to an upward or downward interest rate shift of 25 basis points.

In the upward rate scenarios, yield curves were assumed to move in parallel. The downward rate scenarios allow interest rates to fall to negative rates. At 30 June 2022, negative rates affected only euro earnings sensitivity.


+25 basis points upward shift

 

-25 basis points downward shift


Year 1  

Year 2 (1)

Year 3 (1)

 

Year 1  

Year 2 (1)

Year 3 (1)

30 June 2022

£m

£m

£m

 

£m

£m

£m

Structural hedges

45

150

253

 

(45)

(150)

(253)

Managed margin

231

227

223

 

(219)

(205)

(227)

Total

276

377

476

 

(264)

(355)

(480)


 

 

 

 

 

 

 

31 December 2021

 

 

 

 

 

 

 

Structural hedges

40

132

224


(40)

(132)

(224)

Managed margin

269

203

239


(245)

(199)

(177)

Total

309

335

463


(285)

(331)

(401)









(1)  Earnings sensitivity considers only the main drivers, namely structural hedging and margin management.

(2)  Following a change in the basis of preparation of this table, it now excludes UBIDAC. Including UBIDAC would increase Year 1 sensitivity by 4-5%.

 

The following table analyses the one-year scenarios by currency and, in addition, shows the impact over one year of a 100-basis-point upward shift in all interest rates.


Shifts in yield curve


30 June 2022

 

31 December 2021


+25 basis  

-25 basis  

+100 basis

 

+25 basis  

-25 basis  

+100 basis


points

points

points

 

points

points

points

 

£m

£m

£m

 

£m

£m

£m

Euro

7

6

47


7

15

64

Sterling

255

(253)

980


260

(265)

950

US dollar

13

(16)

56


40

(33)

143

Other

1

(1)

6


2

(2)

11

Total

276

(264)

1,089


309

(285)

1,168

 

(1)  Following a change in the basis of preparation of this table, it now excludes UBIDAC.



 

Risk and capital management

Non-traded market risk continued

Foreign exchange risk (reviewed)

The table below shows structural foreign currency exposures.


 

 

Structural

 

 


Net

 

foreign currency

 

Residual


investments

Net

exposures

 

structural


in foreign

investment

pre-economic

Economic

foreign currency


operations

hedges

hedges

hedges (1)

exposures

30 June 2022

£m

£m

£m

£m

£m

US dollar

1,332

(206)

1,126

(1,126)

-

Euro

7,051

(3,898)

3,153

-

3,153

Other non-sterling

1,011

(420)

591

-

591

Total

9,394

(4,524)

4,870

(1,126)

3,744


 

 

 

 

 

31 December 2021

 

 

 

 

 

US dollar

1,275

(260)

1,015

(1,015)

-

Euro

6,222

(2,669)

3,553

-

3,553

Other non-sterling

990

(421)

569

-

569

Total

8,487

(3,350)

5,137

(1,015)

4,122

 

(1)  Economic hedges of US dollar net investments in foreign operations represent US dollar equity securities that do not qualify as net investment hedges for accounting purposes. They provide an offset to structural foreign exchange exposures to the extent that there are net assets in overseas operations available.

 

The increase in net investments in foreign operations resulted from increased investment in European operations. Sterling weakening against other currencies over the period also contributed to the increase.

The increase in net investment hedges notably reflected increased hedging of European operations as well as the sterling weakening.

Changes in foreign currency exchange rates affect equity in proportion to structural foreign currency exposure. For example, a 5% strengthening or weakening in foreign currencies against sterling would result in a gain or loss of £0.2 billion in equity respectively.

 

 



 

Risk and capital management

Traded market risk

Traded market risk is the risk arising from changes in fair value on positions, assets, liabilities or commitments in trading portfolios as a result of fluctuations in market prices.

Traded VaR (1-day 99%) (reviewed)

The table below shows one-day internal value-at-risk (VaR) for NatWest Group's trading portfolios, split by exposure type.


Half year ended


30 June 2022

 

30 June 2021


31 December 2021


 

 

 

Period

 




Period





Period


Average

Maximum

Minimum

end

 

Average

Maximum

Minimum

end


Average

Maximum

Minimum

end


£m

£m

£m

£m

 

£m

£m

£m

£m


£m

£m

£m

£m

Interest rate

7.4

12.6

4.1

6.0


11.3

19.0

4.5

17.4


9.6

25.3

4.7

8.9

Credit spread

8.5

12.0

6.5

6.9

 

11.0

13.4

9.4

11.2


11.6

13.2

10.0

10.7

Currency

2.8

8.0

1.2

2.3

 

3.9

9.4

2.0

2.4


3.0

8.6

1.7

2.2

Equity

0.1

0.3

-

-

 

0.5

0.8

0.2

0.2


0.2

0.5

-

0.2

Commodity

-

-

-

-

 

0.2

0.5

-

-


-

0.1

-

-

Diversification   (1)

(8.3)

 

 

(6.0)

 

(13.5)



(15.5)


(11.1)



(10.5)

Total

10.5

15.1

7.2

9.2


13.4

23.9

9.5

15.7


13.3

21.1

9.3

11.5

 

(1)

NatWest 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.

 

-

The decrease in average interest rate VaR, compared to both H1 2021 and H2 2021, reflected a reduction in tenor basis risk in sterling flow trading. This followed a regulator-approved update to the VaR model, which was applied in Q3 2021 to address the impact of the transition from LIBOR to alternative risk-free rates.

-

Average credit spread VaR also declined because the heightened market volatility in March 2020, resulting from the onset of the COVID-19 crisis, dropped out of the rolling window for VaR calculation during H1 2022.



 



 


Risk and capital management

Other risks

Operational risk

Risk management continued to focus on delivering strong operational resilience and a robust supply chain, with particular emphasis on internal change programmes aimed at enhancing customer experience, ensuring NatWest Group's operations and external suppliers continue to be resilient against disruption and developing technology solutions to mitigate operational risks.

The security threat and the potential for cyber-attacks on NatWest Group and its supply chain continued to be closely monitored and timely remediation of any identified control gaps. NatWest Group continued to focus heavily on its defences during the reporting period as well as on the security of its supply chain.

 

Conduct & compliance risk

The impact of the cost of living challenge remained a key priority for the conduct and regulatory compliance agenda. NatWest Group continues to review forbearance and treatment for customers, recognising differing needs and support required where appropriate to provide good outcomes for all.

There was continued oversight of delivery of the mandatory and regulatory change programmes, with a particular focus on the impact of proposed regulation to enhance customer care.

In addition, there was a sustained emphasis on compliance with the UK's ring-fencing legislation as NatWest Group continued to review and update organisational designs to best serve its customers.

 

Climate risk

NatWest Group continued to embed climate considerations within its risk management framework throughout the reporting period, with work focused on making iterative advancements in capabilities towards quantitative techniques in risk assessment .

Particular attention continues to be paid to developing a NatWest Group transition plan for which the identification, assessment and management of transition risk is a critical component.

NatWest Group has also continued to develop its data, modelling and scenario analysis capabilities to support the assessment of customers' physical and transition risks.

The Bank of England's findings following its Climate Biennial Exploratory Scenario - in which NatWest Group participated - were released to the industry in Q2 2022. These provided helpful insights for the continued maturing of NatWest Group's climate risk activity for H2 2022 and beyond; NatWest Group will seek alignment with the 'observed examples of good practice' published by the Bank of England as appropriate.

 







 

 

 



 


 

Condensed consolidated income statement for the period ended 30 June 2022 (unaudited)


Half year ended


30 June

30 June

2022

2021


£m

£m

Interest receivable

5,250

4,610

Interest payable

(916)

(866)

Net interest income  

4,334

3,744

Fees and commissions receivable

1,424

1,304

Fees and commissions payable

(300)

(285)

Income from trading activities

709

231

Other operating income  

52

147

Non-interest income

1,885

1,397

Total income

6,219

5,141

Staff costs

(1,808)

(1,880)

Premises and equipment

(534)

(502)

Other administrative expenses

(898)

(703)

Depreciation and amortisation  

(413)

(414)

Operating expenses

(3,653)

(3,499)

Profit before impairment releases

2,566

1,642

Impairment releases

54

683

Operating profit before tax

2,620

2,325

Tax charge

(795)

(432)

Profit from continuing operations  

1,825

1,893

Profit from discontinued operations, net of tax  

190

177

Profit for the period

2,015

2,070

Attributable to:

 


Ordinary shareholders

1,891

1,842

Preference shareholders

-

9

Paid-in equity holders

121

178

Non-controlling interests

3

41


2,015

2,070


 


Earnings per ordinary share - continuing operations

15.7p

14.1p

Earnings per ordinary share - discontinued operations

1.7p

1.5p

Total earnings per share attributable to ordinary shareholders - basic

17.4p

15.6p

Earnings per ordinary share - fully diluted continuing operations

15.6p

14.0p

Earnings per ordinary share - fully diluted discontinued operations

1.7p

1.5p

Total earnings per share attributable to ordinary shareholders - fully diluted

17.3p

15.5p

 



 

Condensed consolidated statement of comprehensive income for the period ended 30 June 2022 (unaudited)

 


Half year ended


30 June

30 June

2022

2021


£m

£m

Profit for the period

2,015

2,070

Items that do not qualify for reclassification

 


Remeasurement of retirement benefit schemes   (1)

(517)

(734)

Changes in fair value of credit in financial liabilities designated at fair value through profit or loss  

 


  (FVTPL) due to own credit risk

91

(25)

Fair value through other comprehensive income (FVOCI) financial assets

3

8

Tax

123

182


(300)

(569)

Items that do qualify for reclassification

 


FVOCI financial assets

(458)

(145)

Cash flow hedges

(1,557)

(365)

Currency translation

185

(288)

Tax

566

65


(1,264)

(733)

Other comprehensive losses after tax

(1,564)

(1,302)

Total comprehensive income for the period

451

768

 

 


Attributable to:

 


Ordinary shareholders

327

535

Preference shareholders

-

9

Paid-in equity holders

121

178

Non-controlling interests

3

46


451

768

 

 

(1)  Following the purchase of ordinary shares from UKGI in March 2021, 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. In line with our policy, the present value of defined benefit obligations and the fair value of plan assets at the end of the interim reporting period are assessed to identity significant market fluctuations and one-off events since the end of the prior financial year.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Condensed consolidated balance sheet as at 30 June 2022 (unaudited)


30 June

31 December

2022

2021


£m

£m  

Assets

 


Cash and balances at central banks

179,525

177,757

Trading assets

65,604

59,158

Derivatives

109,342

106,139

Settlement balances

10,294

2,141

Loans to banks - amortised cost

10,668

7,682

Loans to customers - amortised cost

362,551

358,990

Other financial assets

38,896

46,145

Intangible assets

6,869

6,723

Other assets

8,542

8,242

Assets of disposal groups

14,187

9,015

Total assets

806,478

781,992

Liabilities

 


Bank deposits  

24,862

26,279

Customer deposits

492,075

479,810

Settlement balances

9,779

2,068

Trading liabilities

74,345

64,598

Derivatives

102,719

100,835

Other financial liabilities

47,744

49,326

Subordinated liabilities

8,110

8,429

Notes in circulation

2,947

3,047

Other liabilities

5,270

5,797

Total liabilities

767,851

740,189

Equity

 


Ordinary shareholders' interests

34,727

37,412

Other owners' interests

3,890

4,384

Owners' equity

38,617

41,796

Non-controlling interests

10

7

Total equity

38,627

41,803

Total liabilities and equity

806,478

781,992


 

 

 


Condensed consolidated statement of changes in equity for the period ended 30 June 2022 (unaudited)

 


Half year ended


30 June

30 June

2022

2021


£m

£m

Called-up share capital - at beginning of period

11,468

12,129

Ordinary shares issued

-

38

Share cancellation   (1,4)

(885)

(391)

At end of period

10,583

11,776

Paid-in equity - at beginning of period

3,890

4,999

Securities issued during the period   (2)

-

937

At end of period

3,890

5,936

Share premium account - at beginning of period

1,161

1,111

Ordinary shares issued

-

50

At end of period

1,161

1,161

Merger reserve - at beginning and end of period

10,881

10,881

FVOCI reserve - at beginning of period

269

360

Unrealised losses

(444)

(113)

Realised gains

(17)

(23)

Tax

125

15

At end of period

(67)

239

Cash flow hedging reserve - at beginning of period

(395)

229

Amount recognised in equity

(1,386)

(323)

Amount transferred from equity to earnings

(171)

(42)

Tax

426

59

At end of period

(1,526)

(77)

Foreign exchange reserve - at beginning of period

1,205

1,608

Retranslation of net assets

307

(336)

Foreign currency (losses)/gains on hedges of net assets

(122)

43

Tax

14

(11)

At end of period

1,404

1,304

Capital redemption reserve - at beginning of period

722

-

Share cancellation   (1,4)

885

390

Redemption of preference shares

-

24

At end of period

1,607

414

Retained earnings - at beginning of period

12,966

12,567

Profit attributable to ordinary shareholders and other equity owners

 


  - continuing

1,822

1,855

  - discontinued

190

174

Equity preference dividends paid

-

(9)

Paid-in equity dividends paid

(121)

(178)

Ordinary dividends paid

(841)

(347)

Shares repurchased during the year   (1,4)

(1,958)

(748)

Redemption of preference shares   (5)

(750)

(24)

Tax on redemption/reclassification of paid-in equity  

(21)

-

Realised losses/(gains) in period on FVOCI equity shares

6

(1)

Remeasurement of the retirement benefit schemes   (3)

 


  - gross

(517)

(734)

  - tax

133

182

Changes in fair value of credit in financial liabilities designated at fair value through profit or loss

 


  - gross

91

(25)

  - tax

(9)

2

Shares issued under employee share schemes

5

-

Share-based payments

(33)

(82)

At end of period

10,963

12,632

 



 

Condensed consolidated statement of changes in equity for the period ended 30 June 2022 continued (unaudited)

 


Half year ended


30 June

30 June

2022

2021


£m

£m

Own shares held - at beginning of period

(371)

(24)

Shares issued under employee share schemes

92

17

Own shares acquired  

-

(384)

At end of period

(279)

(391)

Owners' equity at end of period

38,617

43,875

Non-controlling interests - at beginning of period

7

(36)

Currency translation adjustments and other movements

-

5

Profit attributable to non-controlling interests

3

41

At end of period

10

10

Total equity at end of period

38,627

43,885

Attributable to:

 


Ordinary shareholders

34,727

37,445

Preference shareholders

-

494

Paid-in equity holders

3,890

5,936

Non-controlling interests

10

10


38,627

43,885




 

(1)  In March 2022, there was an agreement with HM Treasury to buy 549.9 million ordinary shares in the Company from UK Government Investments Ltd (UKGI), at 220.5p per share for the total consideration of £1.22 billion. NatWest Group cancelled 549.9 million of the purchased ordinary shares. The nominal value of the share cancellation has been transferred to the capital redemption reserve.

(2)  In June 2021, AT1 capital notes totalling US$750 million less fees were issued.

(3)  Following the purchase of ordinary shares from UKGI in Q1 2022, NatWest Group contributed £500 million (2021 - £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 (2021 - £354 million). In line with our policy, the present value of defined benefit obligations and the fair value of plan assets at the end of the interim reporting period, are assessed to identity significant market fluctuations and one-off events since the end of the prior financial year.

(4)  NatWest Group plc repurchased and cancelled 345.6 million shares for total consideration of £756.7 million excluding fees in H1 2022, as part of the On Market Share Buyback Programme. Of the 345.6 million shares bought back, 10.7 million shares were settled and cancelled in July 2022. The nominal value of the share cancellations has been transferred to the capital redemption reserve.

(5)  Following an announcement of a Regulatory Call in February 2022, the Series U preference shares were reclassified to liabilities. A £254 million loss was recognised in P&L reserves due to FX unlocking.

 



 

Condensed consolidated cash flow statement for the period ended 30 June 2022 (unaudited)


Half year ended


30 June

30 June

2022

2021


£m

£m

Operating activities

 


Operating profit before tax from continuing operations  

2,620

2,325

Operating profit before tax from discontinued operations  

190

180

Adjustments for non-cash items  

355

2,635

Net cash flows from trading activities

3,165

5,140

Changes in operating assets and liabilities

7,966

25,745

Net cash flows from operating activities before tax

11,131

30,885

Income taxes paid

(575)

(259)

Net cash flows from operating activities

10,556

30,626

Net cash flows from investing activities

5,713

(790)

Net cash flows from financing activities

(6,970)

(359)

Effects of exchange rate changes on cash and cash equivalents

2,224

(1,935)

Net increase in cash and cash equivalents

11,523

27,542

Cash and cash equivalents at beginning of period

190,706

139,199

Cash and cash equivalents at end of period

202,229

166,741

 



 


Notes

1. Presentation of condensed consolidated financial statements

The condensed consolidated financial statements are set out on pages 80 to 104 and the reviewed sections of Risk and capital management on pages 19 to 79. The directors have prepared these on a going concern basis after assessing the principal risks, forecasts, projections and other relevant evidence over the twelve months from the date they are approved and in accordance with IAS 34 'Interim Financial Reporting', as adopted by the UK and as issued by the International Accounting Standards Board (IASB), and the Disclosure Guidance and Transparency Rules sourcebook of the UK's Financial Conduct Authority. They should be read in conjunction with NatWest Group plc's 2021 Annual Report and Accounts.

Comparative period results have been re-presented from those previously published to reclassify certain items as discontinued operations. For further details refer to Note 8 on page 90.

2. Accounting policies

NatWest Group's principal accounting policies are as set out on pages 307 to 312 of NatWest Group plc's 2021 Annual Report and Accounts. Amendments to IFRS effective from 1 January 2022 had no material effect on the condensed consolidated financial statements.

Critical accounting policies and key sources of estimation uncertainty

The judgments and assumptions that are considered to be the most important to the portrayal of NatWest Group's financial condition are those relating to deferred tax, fair value of financial instruments, loan impairment provisions, goodwill and provisions for liabilities and charges. These critical accounting policies and judgments are noted on page 311 of NatWest Group plc's 2021 Annual Report and Accounts. Management's consideration of uncertainty is outlined in the relevant sections of NatWest Group plc's 2021 Annual Report and Accounts, including the ECL estimate for the period in the Risk and capital management section contained in NatWest Group plc's 2021 Annual Report and Accounts.

Information used for significant estimates

Key financial estimates are based on management's latest five-year revenue and cost forecasts. Measurement of goodwill, deferred tax and expected credit losses are highly sensitive to reasonably possible changes in those anticipated conditions. Changes in judgments and assumptions could result in a material adjustment to those estimates in future reporting periods. (Refer to the Summary Risk Factors on page 106 which should be read in conjunction with the Risk factors included in NatWest Group plc's 2021 Annual Report and Accounts).


Notes

3. Net interest income

 


Half year ended


30 June

30 June

2022

2021

Continuing operations

£m

£m

Loans to customers - amortised cost

4,483

4,261

Loans to banks - amortised cost

582

217

Other financial assets

185

132

Interest receivable  

5,250

4,610

 

 


Deposits by banks

157

99

Customer deposits

179

319

Other financial liabilities

433

314

Subordinated liabilities

141

130

Internal funding of trading businesses

6

4

Interest payable  

916

866

Net interest income

4,334

3,744

 

4. Non-interest income

 

 

Half year ended

 

30 June

30 June

 

2022

2021

Continuing operations

£m

£m

Net fees and commissions   (1)

1,124

1,019


 


Foreign exchange

258

183

Interest rate

416

(6)

Credit

33

54

Equity, commodities and other

2

-

Income from trading activities

709

231

 

 


Loss on redemption of own debt

(24)

(138)

Operating lease and other rental income

114

108

Changes in fair value of financial liabilities designated at fair value through profit or loss   (2)

21

(4)

Hedge ineffectiveness

(22)

13

Loss on disposal of amortised cost assets

(16)

(6)

Profit on disposal of fair value through other comprehensive income assets

10

24

Share of profit of associated entities

(20)

129

Other income   (3)

(11)

21

Other operating income

52

147

Non-interest income

1,885

1,397

 

(1)  Refer to Note 6 for further analysis.

(2)  Includes related derivatives.

(3)  Includes income from activities other than banking.

 

5. Operating expenses

 

 

Half year ended

 

30 June

30 June

 

2022

2021

Continuing operations

£m

£m

 

 


Salaries

1,103

1,172

Bonus awards

195

142

Temporary and contract costs

116

114

Social security costs

163

150

Pension costs

184

177

  - defined benefit schemes

108

110

  - defined contribution schemes

76

67

Other

47

125

Staff costs

1,808

1,880

Premises and equipment

534

502

Depreciation and amortisation

413

414

Other administrative expenses

898

703

Administrative expenses

1,845

1,619

Operating expenses

3,653

3,499




Notes

6. Segmental analysis

On 27 January 2022, NatWest Group announced that a new franchise, Commercial & Institutional, would be created, bringing together the Commercial, NatWest Markets and RBSI businesses to form a single franchise, 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.

 

The business is organised into the following reportable segments: Retail Banking, Private Banking, Commercial & Institutional, Central items & other and Ulster Bank RoI.

Analysis of operating profit/(loss) before tax

The following tables provide a segmental analysis of operating profit/(loss) before tax by the main income statement captions.


Go-forward group

 



 

 

 

 

Total  

 



 

 

 

Central

excluding

Ulster



Retail

Private

Commercial &

  items &

Ulster

Bank



Banking

Banking

Institutional

other

Bank RoI

RoI

Total

Half year ended 30 June 2022

£m

£m

£m

£m

£m

£m

£m

Continuing operations

 

 

 

 

 

 

 

Net interest income

2,340

315

1,764

(91)

4,328

6

4,334

Net fees and commissions

219

131

753

7

1,110

14

1,124

Other non-interest income

(5)

15

420

318

748

13

761

Total income

2,554

461

2,937

234

6,186

33

6,219

Depreciation and amortisation

-

-

(82)

(331)

(413)

-

(413)

Other operating expenses

(1,242)

(285)

(1,738)

279

(2,986)

(254)

(3,240)

Impairment (losses)/releases

(26)

11

59

2

46

8

54

Operating profit/(loss)

1,286

187

1,176

184

2,833

(213)

2,620









Half year ended 30 June 2021