Natwest Markets PLC

NatW

est

ark

ets Plc

2021 Annual Report

and Accounts

Contents

Strategic report

2021 Performance highlights

Our purpose framework

Chief Executive’s review

Outlook

Our business model

Our strategy

Operating environment

Risk management

Our stakeholders

Our colleagues

Learning and enterprise

Climate-related disclosures

Financial review

Board of directors and secretary

Risk and capital management

Report of the directors

Statement of directors’

responsibilities

Financial statements

179

Risk factors

201

Forward-looking statements

Approval of Strategic report

The Strategic report for the year ended

31 December 2021 set out on pages 1

to 33 was approved by the Board of

Directors on 17 February 2022.

By order of the Board

Company Secretary

Scott Gibson

17 February 2022

Chairman

Frank Dangeard

Executive Directors

Robert Begbie, CEO

David King, CFO

Non-Executive Directors

Vivek Ahuja

Tamsin Rowe

Anne Simpson

Sarah Wilkinson

Presentation of information

NatWest Markets Plc (‘NWM Plc’) is a wholly owned subsidiary of NatWest Group plc or

‘the ultimate holding company’. The NatWest Markets Group (‘NWM Group’) comprises

NWM Plc and its subsidiary and associated undertakings.

The term ‘NatWest Group’ comprises NatWest Group plc and its subsidiary and

associated undertakings.

At natwestgroup.com:

NatWest Group Annual Report and Accounts

Gives an overview of our business and our 2021

financial and non-financial performance. Also

includes our Financial statements and related

notes on our governance and remuneration,

and Risk and capital management reports.

NatWest Group Climate-related

Disclosures Report

Details our progress in 2021 on our climate-related

strategy, scenario analysis, risk management

and metrics.

NatWest Group ESG Supplement

Provides an overview of our purpose in action and

key environmental, social and governance matters

including progress in 2021.

NatWest Group Pillar 3 report

Focuses on our regulatory reporting requirements

and provides an explanation of our risk profile,

including our capital adequacy, risk appetite

and risk management.

2021 Performance highlights

We have supported customers’ evolving needs with innovative solution

and continued to deliver an integrated customer proposition across

NatWest Group. We have made good progress on building towards a

sustainable business and creating a platform for growth in its chosen

areas. We have reduced our risk-weighted assets (RWAs) and operating

expenses in the year and, in Q4 2021, introduced changes to Rates

within Fixed income which will improve the strategic alignment with

the rest of the business and drive sustainable income growth.

Please refer to the Chief Executive’s review on page 4 and the

Financial review section on page 36 for further details on the

financial performance for the period.

MREL ratio

(

42.1%

2020: 49.6%

Liquidity coverage ratio

(

205%

2020: 268%

Capital and leverage highlights

CET1 ratio

(

17.9%

2020: 21.7%

CRR leverage

(

4.3%

2020: 5.2%

RWAs

(

£22.7bn

2020: £25.6bn

ESG highlights

Climate and Sustainable Funding and Financing

(4)

£9.7bn

2020: £7.2bn

Financial highlights

Total income

£401m

2020: £1,158m

Income excl. asset

disposals/strategic risk

reduction & OCA

(1)

£459m

2020: £1,265m

Other operating expenses

(

£919m

2020: £1,106m

Operating loss

before tax

£(714)m

2020: £(315)m

We help NatWest Group’s

corporate and institutional

customers manage their

financial risks safely and

achieve their short-term

and long-term sustainable

financial goals. We think

and act as one bank

for our customers,

collaborating with

teams across the

NatWest Group to be

the partner of choice for

our customers and their

financial markets needs.

By focusing on the things

we do best and that

matter most to our

customers, we help

champion their potential.

When people, families and

businesses thrive, we all…

Thrive

Together

(1)

Asset disposals/strategic risk reduction

includes the costs of exiting positions and

the impact of risk reduction transactions

entered into as part of the optimisation

of the entity’s capital usage following

the strategic announcements of

14 February 2020. OCA refers

to own credit adjustments.

(2)

Excludes strategic costs and litigation

and conduct costs.

(3)

These metrics are shown for NWM Plc.

Capital, leverage and RWAs are based

on the PRA transitional arrangements for

NWM Plc. Regulatory capital is monitored

and reported at NWM Plc level.

(4)

Funding and financing for climate and

sustainable finance to support transition

towards a net-zero and climate resilient

economy. NatWest Group use internally

defined Climate and Sustainable Finance

Inclusion Criteria (CSFI criteria) to determine

the assets, activities and companies that

are eligible to be counted towards its

targets for Climate and Sustainable Funding

and Financing.

NatWest Markets Plc

2021 Annual Report and Accounts

Our purpose framework

A relationship bank

for a digital world

We champion potential, helping people, families

and businesses to thrive

Read more on pages 21 and 22

Focused on growth, underpinned by our values

and an intelligent approach to risk:

Supporting

customers at every

stage of their lives

Simple to

deal with

Sharpened capital

allocation

innovation and

partnerships

NatWest Markets Plc

2021 Annual Report and Accounts

Our purpose

As part of NatWest Group we are aligned under their Purpose,

which is at the heart of everything we do. This helps us ensure

we are the partner of choice to meet the financial markets

needs of NatWest Group’s customers, knowing that when

they thrive, so do we. Our business is focused on operating in

partnership across NatWest Group. We have the products our

customers need, aligning our expertise, global footprint and

talent to drive long-term sustainable returns.

Our stakeholders

As a purpose-led organisation, we balance the different

interests of all our stakeholders – customers, colleagues,

communities and shareholders – in our decision-making,

especially when there are difficult choices to be made.

Our growth strategy

Our purpose-driven strategy for growth ensures that we

are focused on what’s relevant and right for our customers,

society and the environment. It focuses on how we will grow

our business and financial returns to make NatWest Markets

a winning and sustainable business. We will also maintain our

leadership in climate and sustainable financing and continue to

drive innovation in this area. Finally, we will work together as

one team, leveraging our global platform and continuing to

develop our culture.

Our values

Our values are at the heart of how we deliver our purpose

driven strategy. In 2021, responding to feedback from

stakeholders, we have engaged with colleagues, customers

and communities to re-envision a modernized set of values

that fully align with our strategic priorities. These collaborative

and evolved values will be launched in 2022 and will form an

integral part of our company’s cultural identity.

Our positive impact

We recognise the huge responsibilities that our role brings, and

this informs our considered approach. From supporting local

housing to funding initiatives for sustainability-based targets

across our global clients, we continue to have a positive

impact on the environment and wider society.

We contribute to the three focus areas of NatWest Group,

where we can make a meaningful contribution and build

long-term value in our business:

Climate

We will continue to grow our climate and ESG activities to

maintain our leadership in climate and sustainable financing,

supported by our dedicated climate and sustainability teams.

Enterprise

We continue to serve more of our core NatWest Group

customers, removing barriers to enterprise and providing

businesses in the UK with the backing they need to grow.

Learning

As we drive towards winning with purpose, we are creating

the conditions that allow our colleagues to thrive personally

and professionally. We have continued to share our market-

leading insight on a number of initiatives with customers.

We also recognise that to be purpose-led requires a significant

mind-set change and as such we have engaged with thought

leaders on this topic to challenge and develop our strategy.

This new way of thinking has already led to great customer

innovation, colleague development and collaboration across

the bank. We have delivered several initiatives to drive this

cultural shift this year, including purpose workshops for over

800 colleagues and research and training to explore what it is

that colleagues need to thrive. We have also continued to hold

our purpose and engagement forums to provide a platform for

open discussion and to drive sustainable progress.

Our blueprint for better business

Honest and fair

with customers and

suppliers

A responsible and

responsive employer

A good citizen

A guardian for

future generations

Our purpose:

Deliver long-term

sustainable

performance by

championing potential,

helping people, families

and businesses to thrive

NatWest Markets Plc

2021 Annual Report and Accounts

Chief Executive’s review

A more

focused business

By simplifying our organisational

structure, prioritising the products

that matter most to our customers

and leveraging the benefits of

a One Bank approach, we are

now well-positioned for growth.

Robert Begbie

CEO, NatWest Markets

Supporting our customers

Our clear growth plans, with increased collaboration across

NatWest Group, have already started to deliver benefits. We

have strengthened our overall foreign exchange (FX) and

international payments proposition so that more customers

can benefit from our market-leading service. We collaborated

across RBSI, NatWest Markets and Commercial Banking to

establish a team to grow our offering to the investment

management sector enabling us to provide a more integrated

experience for our funds and sponsors customer base.

Our business in Europe, which is in collaboration with

Commercial Banking, is strong and primed for growth.

Simplifying our business, innovating and working

with partners

Following the announcement of our plans in February 2020,

the transformation of NatWest Markets is largely complete.

I believe this is a great achievement against the backdrop

of a global pandemic and is testament to the expertise and

dedication of our colleagues. To enable becoming a more

sustainable business, we have leveraged NatWest Group

investment in technology both for colleagues and customers.

I’m pleased that our first API (application programming

interface) product, Indicative FX Rates, has been added to

the NatWest bank of APIs, enhancing our ability to connect

with our customers and partners. We also progressed the

development of our digital bond capability, completing a pilot

trade of a ‘blockchain bond’ in the secondary market. To build

on this progress and support the growth of the business will

require continued significant investment in our technology

transformation. This investment is expected to have an impact

on our 2022 results, as will the incurrence of further costs,

if any, associated with litigation and regulatory matters.

Financial performance

Our total income was £401 million and the operating loss for

the year was £714 million. This reflected a weak performance

in Fixed Income, contrasting with the exceptional levels of

market activity in the prior period caused by the pandemic,

and ongoing strategic costs associated with restructuring the

business and strengthening the balance sheet. We continued to

reduce operating costs in line with the strategic announcement

in February 2020 and progressed in closing legacy matters.

We returned £1 billion capital to NatWest Group via dividends

during the year up to 31 December 2021, with a further

£250 million to be declared and payable to NatWest Group

plc on 18 February. We have also made significant progress in

rightsizing our cost and capital base to support a sustainable

and profitable future business. Our risk-weighted asset (RWA)

reduction is largely complete with a decrease of c£2.9 billion

during the year reflected in a strong CET1 ratio of 17.9%

and leverage ratio of 4.3%. Performance in Capital Markets

and Currencies was in line with expectations, but the under-

performance in Fixed Income was driven by the continued

reshaping of the business as well as an unfavourable

market environment.

NatWest Markets Plc

2021 Annual Report and Accounts

Read more about our strategy in

action on pages 8 and 9.

Outlook

(1,5)

Outlook

We aim to generate sustainable and

attractive returns over the medium

term, with efficient capital usage.

2022 outlook

NWM Plc 2022 funding plan targets £4-5 billion of

public benchmark issuance.

Medium-term outlook

Metric

(2)

Estimate

CET1 ratio

(3)

~14%

MREL ratio

(4)

>30%

Leverage ratio

>4%

Notes:

(1)

This supersedes all prior guidance.

(2)

All metrics presented relate to NWM Plc.

(3)

NWM Plc expects to run above the 15% target on a solo basis in 2022.

(4)

Includes total regulatory capital, non-eligible capital plus downstreamed internal MREL.

(5)

The targets, expectations and trends discussed in this section represent

management’s current expectations and are subject to change, including as a

result of the factors described in the ‘Risk factors’ section on pages 179 to 200 in

this document. These statements constitute forward-looking statements. Refer to

‘Forward-looking statements’ in this document.

Sharpening our capital allocation

Our Capital Management unit has actively managed capital

allocation and optimisation across our businesses. We have

reduced market-risk RWAs and counterparty-risk RWAs

across the trading businesses, allowing for reallocation

of capital to support our growth priorities and we have

returned capital to NatWest Group via dividends.

Climate and ESG

We’ve had a strong year supporting our customers’

climate and ESG-related finance needs, with product

innovation across bonds, FX, interest rate derivatives and

private finance. In 2021, we completed £9.7 billion of Climate

and Sustainable Funding and Financing, including £3.3 billion

in H2 2021 which will contribute towards the new NatWest

Group target of £100 billion between 1 July 2021 and the

end of 2025. A great example of our support for renewables

is on Vineyard Wind 1, the first commercial scale offshore

wind farm in the US where our regional expertise supported

other NatWest Group teams. And we’ve also been able to

tap into the Asia investor base, supporting Hitachi Capital

(UK) Plc with its first green bond.

With NatWest Group a principal partner for COP26,

I was delighted to attend the conference and be involved in

industry events such as the International Emissions Trading

Association (IETA) CEO Roundtable and Global Financial

Alliance for Zero (GFANZ) events. Our thought leadership in

this area, as well as our commitment to customers, ensures

we remain a leading underwriter for green, social and

sustainability (GSS) bonds issued by UK corporates and

sterling-denominated GSS bonds across all sectors.

Colleagues and ways of working

I’m proud of the way colleagues have adapted to the

changes in ways of working, while also keeping our culture

front of mind. Our purpose is helping to drive our culture and

we’ve been running a dedicated programme for colleagues

to explore and understand the role they play in delivering

Purpose and how it shapes our business. This engagement

and connection to our purpose is vital to the success of

our growth ambition and strategy. This year, we have also

stepped up our focus on developing a culture that champions

diversity and creates an inclusive workplace that gives all of

our people the best opportunity to succeed and grow their

careers. I look forward to seeing more progress in this

crucial area of diversity, equity and inclusion in the

coming months.

As I reflect on the year, I’m delighted by how we’ve

progressed our transformation to a sustainable business.

I believe that the creation of the new Commercial and

Institutional franchise will further enhance our plans

for sustainable growth and enable us to deepen

our relationships with customers and support their

growth ambitions – helping them, as ever, to thrive.

NatWest Markets Plc

2021 Annual Report and Accounts

Our business model

How we create

and protect value

As part of NatWest Group,

we support our corporate

and institutional customers,

which includes banks, asset

managers, insurers, pension

funds, sponsors, sovereigns,

supranationals and agencies.

Our customers

Our key strengths

and resources

Digitally-led Currencies

business that’s well

connected across

NatWest Group,

operating seamlessly

to deliver for customers.

Innovative Capital Markets

platform with market

leading structuring and

distribution expertise

and climate and

ESG capabilities.

Strong commitment

to climate and ESG and

award-winning innovation

in sustainable financing.

Talented and diverse

workforce with inclusive

and collaborative culture.

Strong capital and

liquidity positions.

We provide liquidity and risk

management in Currencies

and Fixed Income through

a combination of voice

and electronic delivery.

Through our Capital Markets

business, we provide an

integrated proposition

across financing, solutions

and advisory services.

Our products and solutions

Underpinned by our focus on

ESG as a driver of value creation

Our business

Fixed income

We have long-standing

expertise in the fixed income

markets and offer cash

bond, repo and interest rate

derivatives with a focus in

sterling, euros and US dollars

that supports our customers’

financing and hedging needs.

In addition, we provide liquidity

and credit for investment grade

and high yield bonds and loans

for both financial institutions

and corporate issuers.

Currencies

We’re an award-winning

foreign exchange service

provider offering FX spot,

forwards, cross currency

swaps and options well as

an FX prime brokerage

service and FX

digital solutions.

We understand the power of

building deep and enduring

relationships and one of

the ways we do this is by

providing relevant market

colour, content and ideas to

customers. Our strategists

and content experts across

Currencies, Fixed Income

and Capital Markets offer

We work in close

collaboration with teams

across NatWest Group to

provide capital markets and

risk management solutions

to its customers and be the

partner of choice for those

customers’ financial

markets needs.

Our purpose

NWM Group will be the partner of choice to meet the financial markets needs of NatWest Group customers.

NatWest Markets Plc

2021 Annual Report and Accounts

Our customers

Our products and solutions

Underpinned by our focus on

ESG as a driver of value creation

Our business

Capital markets

We’re a leading partner for our customers,

helping them to access global debt capital

markets across a wide variety of products

and target markets, including bonds, loans,

commercial paper, medium-term notes

(MTNs) and private placements, as well

as bespoke financing solutions and

primary lending products.

We also provide customers with thought

leadership, advice and products to support

their climate and ESG strategies through our

ESG and Climate Capital Markets platform.

Also refer to Board engagement with key stakeholders on page 16

NatWest Group

–

Providing access to financial markets for NatWest Group customers, providing

an integrated proposition and expertise.

–

Consistent return of capital to NatWest Group via dividends throughout 2021

totalling £1 billion.

Customers

Refer to page 9 for further examples of how NatWest Markets creates value for

its customers.

Our support for customers has been recognised by a number of industry awards

including:

–

‘Lead manager of the year, sustainability bonds – local authority/municipality’,

and ‘Lead manager of the year, green bonds – supranational, sub-sovereign

and agency (SSAs), from the Environmental Finance Bond Awards 2021.

–

‘Sterling Bond House of the Year’ from the IFR Awards 2020 (awarded

February 2021).

–

‘Best Agent of International US Private Placements’ from the GlobalCapital

Private Debt Awards 2020 (awarded February 2021).

–

‘Best Bank for ALM and Libor Transition Management’ from the GlobalCapital

Covered Bond Awards 2021.

–

‘#1 bank for Overall FX Service Quality to the UK corporate sector’ from

Coalition Greenwich 2021.

Colleagues

–

We are committed to investing in our workforce and our integrated wellbeing

strategy allows us to support colleagues, customers and communities, and is

a key part of being a purpose-led organisation.

NatWest Markets investors

–

We maintain a strong capital base and liquidity to minimise the risk of

defaulting and provide comfort to existing and future investors on the

stability of NWM Group as a business.

Community and environment

–

We completed £9.7 billion of Climate and Sustainable Funding and Financing

(CSFF) in 2021, including £3.3 billion in H2 2021 which will contribute towards

the new NatWest Group target of £100 billion between 1 July 2021 and the

end of 2025.

Regulators and industry bodies

–

We provide insights via our active participation in trade associations and

industry-wide forums on key topics such as the transition away from LIBOR

and climate-related and ESG financing.

–

For more details on our role in industry-wide climate-related and ESG forums,

refer to the climate-related disclosures on page 22.

We think and act as one bank for our

customers, leveraging NatWest Group’s

expertise and shared services. NWM

Group is centred in the UK with trading

hubs in Amsterdam, London, Singapore

and Stamford (US), with sales offices across

key locations in the UK, EU, US and Asia.

Financial markets access is offered by the

NWM Group across NatWest Markets Plc

(NWM Plc) and its subsidiaries, including

NatWest Markets Securities Inc. and

NatWest Markets N.V. (NWM N.V.).

Our operations

fresh thinking alongside market-leading

economic insights in the key economies

where our customers do business.

We have a sharp focus on digitisation

and automation with our range of digital

FX, fixed income, risk management and

international payments options which

use our applications or APIs (application

programme interfaces), including Agile

Markets and FXmicropay.

Value created for our stakeholders

Our purpose

NWM Group will be the partner of choice to meet the financial markets needs of NatWest Group customers.

NatWest Markets Plc

2021 Annual Report and Accounts

Our strategy

A strategy to deliver our purpose

and drive sustainable returns

Our execution delivers on our purpose using our strengths to support

customers’ needs.

Strategic priorities

Progress in the year

Our priorities

Supporting

our customers

Work as part of

One Bank to invest

in growth areas that

matter the most to

our customers.

–

Supported customers across Capital Markets with innovative

transactions in public and private finance markets as well as

continued the development of our product offering in sustainable

finance, transition finance and sustainable-linked debt.

–

We collaborated across RBSI, NatWest Markets and Commercial

Banking to establish a team to grow our offering to the investment

management sector and provide a more integrated experience for

our Funds and Sponsors customers.

–

Through close collaboration across NatWest Group, we have

strengthened the overall foreign exchange (FX) and international

payments proposition.

–

Continue delivery of

growth initiatives as part

of our One Bank plans.

–

The delivery of FX and

international payments

features in 2022 are

set to unlock further

opportunities.

innovation and

partnerships

Use new technology,

leverage our digital

expertise and partner

with leading external

organisations to

deliver excellent

customer experience.

–

We made significant progress on the implementation of our

agreement with BNP Paribas for the provision of house futures

and associated back-office services and in January 2022 we

successfully went live with the outsourcing of back office

services for our US-based Listed Derivatives business.

–

We developed our sustainability and ESG-linked product

suite for customers across FX, interest rate derivatives and

private financing.

–

By supporting NatWest Group’s collaboration with other

international banks to develop a transparent global marketplace

for carbon offsets with clear and consistent pricing and standards

known as Carbonplace, we advanced product innovation in the

voluntary carbon market.

–

We progressed the development of our digital bond capability,

completing a pilot trade of a ‘blockchain bond” in the

secondary market.

–

Continue innovation to

support customer needs

and explore opportunities

as we develop our Digital

Capital Markets capability.

–

Continue development of

Carbonplace partnership.

Simple to

deal with

Transform how

we operate and

simplify the business

to improve efficiency,

and the customer and

colleague experience.

–

Refined our country footprint and product range over the year to

further align with customers’ needs.

–

Through the introduction of our first API (application programming

interface) product, Indicative FX Rates, onto the Bank of APIs,

we have enhanced our ability to connect with our customers

and partners.

–

We leveraged NatWest Group’s investment in the technology

platform, streamlining the colleague desktop experience to

interface more easily with NatWest Markets colleagues.

–

In line with NatWest Group’s strategy, Other operating expenses

has reduced by £187 million reflecting progress on underlying

cost reductions.

–

Investment in technology

to support a simpler and

more digital business

model for our customers

including further

developing our

API-first approach.

–

Migrating all colleagues

to NatWest Group

technology platform

by end of 2022.

Sharpened

capital

allocation

Demonstrate effective

capital management

by reducing risk-

weighted assets

(RWAs) while

redeploying capital

to our growth areas.

–

Our Capital Management unit has actively managed capital

allocation and optimisation across the businesses.

–

We reduced market risk RWAs and counterparty risk RWAs

across the trading businesses, allowing for reallocation of

capital to support our growth agenda. Total RWAs have

reduced to £22.7 billion from £25.6 billion in 2020.

–

We returned £1 billion capital to NatWest Group via dividends

during the year up to 31 December 2021, with a further £250

million to be declared and payable to NatWest Group plc on

18 February 2022. This has been applied to the year-end

regulatory capital position.

–

Continue dividends/

capital allocations

to NatWest Group.

Underpinned by our commitment to sustainability and climate action.

NatWest Markets Plc

2021 Annual Report and Accounts

Our strategy

in action

Supporting the UK Government to tackle climate change

NatWest Markets has a vital role to play in green finance.

Being purpose led is about knowing and fulfilling our

responsibilities. It means delivering on our commitments

to our stakeholders, society and the environment.

One of the most important ways we can do this is by

helping tackle climate change.

To build out the green infrastructure needed to reach

net-zero targets first requires the funding and the market

mechanisms to deliver it. This is where NatWest Markets

has a vital role to play.

Following the UK Government’s announcement of its first-ever

sovereign green bond, we supported the second issuance of

green gilts in October 2021 as joint bookrunner.

The bond, which matures in July 2053, is the longest-dated

sovereign green bond currently outstanding in the market.

Crucially, it will help finance a whole range of climate

projects such as offshore windfarms, zero-emission

transport and schemes to decarbonise homes and buildings.

With these two green issuances, the UK’s Debt Management

Office has become one of the top three largest sovereign

issuers of green bonds in the world.

NatWest Markets is proud to be part of this process, and

to have helped deliver on the government’s commitment

to issue a minimum of £15 billion of green gilts in 2021-22.

Sustainability-linked FX in action

When a long-standing customer wanted to leverage

our expertise to help with its sustainability goals, we

were there to help.

The Co-op – a major food retailer and the UK’s largest

consumer co-operative – is accelerating its action to help

tackle climate change. As part of its ‘Co-operating for a

Fairer World’ vision, the organisation has launched a ten-point

climate plan, laying out how it will reach net zero by

2040 across its business areas.

The company turned to NatWest Market’s FX team to discuss

aligning its FX activities with its emissions targets – a concept

NatWest Markets previously introduced to the Co-op team.

In order to establish a sustainability-linked FX agreement,

Co-op and NatWest Markets settled on slightly adjusted

longer-term green key performance indicators in Co-op’s

revolving credit facility.

The agreement specified that if the Co-op meets its

approved science-based target to reduce operational

emissions by 2025, then it will qualify for a sustainability-linked

rebate. This is to be correlated to the volume of FX trades

booked with NatWest Markets between July 2021 and the

end of the 2021 financial year.

At the same time, the agreement allows the Co-op to continue

to book FX transactions with NatWest with no change to its

daily process.

By adopting this concept, the Co-op is a valuable role model

for other companies in different sectors to link sustainability

performance and financials. For us, it’s another example of

how we collaborate with our customers, using product

innovation to help solve their problems and fulfil their ESG goals.

Supporting EnBW’s climate neutrality plan

Helping our customers achieve their climate ambitions is

fundamental to our purpose. For us, it’s about understanding

their journey and using our expertise to help.

When it came to working with German integrated utility EnBW

Energie Baden-Württemberg AG, we knew it had clear and

long-standing plans for transitioning towards a lower-carbon

operating model.

After investing massively in the expansion of green energy,

EnBW now delivers renewables, electromobility and sustainable

energy solutions for its customers. What’s more, it is developing

smart grids to ensure that electricity networks can continue to

absorb the increasing proportion of decentralised renewable

energy generation. The company also offers access to the

largest electric vehicle charging network in Germany.

Having already supported EnBW in the role of structuring

adviser and global coordinator for its €500 million NC6 hybrid

bond in June 2020, the utility turned to NatWest Markets

for support again.

We were mandated by the company as joint bookrunner

on its first ever hybrid bond transaction, consisting of a

green and a non-green tranche marketed simultaneously.

This demonstrated our expertise in the sustainable debt hybrid

market which is an important pillar of our sustainable finance

offering. The two bonds, with an issue size of €500 million

each, replaced two existing non-green EnBW hybrids, and

will be used for projects such as offshore wind power and

large-scale solar schemes.

This is a great example of NatWest’s strategy in action, building

on our relationship to offer further areas of expertise and

supporting our customer to deliver a climate-positive outcome.

NatWest Markets Plc

2021 Annual Report and Accounts

Economy

Overview

NWM Group’s activities primarily relate to the UK, Europe

and the US, with the majority of its income from operations

in the UK. In all of these regions, economies expanded rapidly

in 2021 as the roll-out of vaccination programmes allowed

governments to remove social restrictions introduced to limit

the spread of COVID-19. Governments also maintained

substantial support for firms and consumers through the year

with transfers and loan guarantees, while central banks kept

monetary policy loose and engaged in quantitative easing.

Conditions in the second half of 2021 were more challenging

as demand returned to pre-pandemic levels and supply

constraints emerged. Unemployment remained lower than

forecast in many countries and business investment benefited

from some reduction in uncertainty. Against this backdrop,

inflationary pressure began to build with an increase in energy

prices particularly notable. Asset prices were volatile, reflecting

the varying sentiment towards the outlook.

Our response

NWM Group’s business and financial position correlates to

the economic conditions (in particular, economic growth and

the general level of interest rates and volume of transactions)

prevailing in its primary markets. Despite an uncertain

economic outlook, NatWest Markets remained focused

on meeting the diverse needs of customers across the

UK and internationally.

Regulation

Overview

NWM Group is comprised of NatWest Markets Plc (NWM Plc)

and its operating subsidiaries and associated undertakings. It

is primarily regulated by: the Financial Conduct Authority and

Prudential Regulation Authority in the UK; De Nederlandsche

Bank, Authority for the Financial Markets, and BaFin in Europe;

the Securities and Exchange Commission, Commodity Futures

Trading Commission, Chicago Mercantile Exchange, Federal

Reserve Bank of New York, Office of the Comptroller of the

Currency, and National Futures Association in the US; and

the Monetary Authority of Singapore, Hong Kong Monetary

Authority and Financial Services Agency in Asia.

Both the EU and UK have given significant focus to sustainable

finance regulation, with both jurisdictions having laid out clear

and ambitious roadmaps. With regard to the EU disclosure

regime, the level of firms’ alignment with the EU taxonomy

(which is divided into six climate and environmental categories)

will form the basis of metrics they are required to disclose,

such as the Green Asset Ratio (GAR). The UK will adopt a

similar approach and develop its own taxonomy, with two

of six categories to be defined before the end of 2022.

The environment we operate in is constantly changing. Understanding

the multiple influences on our business enables us to be prepared for change,

to respond quickly, and to create value for the long term.

NWM Group continues to adapt

to evolving market trends

Competitive landscape

Overview

NWM Group offers risk management, trading solutions and

debt financing to financial institutions and UK and European

corporate customers. It competes with large domestic banks,

major international banks and a number of investment banks.

We observed international banks and investment banks have

been hiring to grow their businesses across Fixed Income

and Capital Markets, notably in the US and selected areas in

Europe and APAC. During 2021 investment to build out ESG

and sustainable finance platforms has been a common theme

across corporate and investment banks. Competition is also

increasingly coming from non-bank liquidity providers using

low-latency and algorithmic trading to participate in high-

volume flow markets.

During 2021 there was solid performance across investment

banking divisions in the industry, particularly in mergers and

acquisitions and equities which showed robust performance

on the back of elevated activity. Across Fixed Income, credit

markets outperformed on a relative basis compared to

rates and FX following normalisation from COVID-19, lower

customer activity and challenging market conditions. With

the first signs of recovery from COVID-19, debt capital

markets also saw increased issuance activity.

Our response

During 2021, NWM Group continued to refine and innovate its

products and services to support the needs of corporate and

institutional customers. By doing so, we also looked to preserve

strong market positions in FX and Capital Markets in our areas

of focus, whilst reshaping our offering in Fixed Income to align

with the needs of our customers.

Operating environment

NatWest Markets Plc

2021 Annual Report and Accounts

Our response

An established prudential programme coordinates the

regulatory changes encompassed by Capital Requirements

Regulation (CRR2) and the Finalised Basel III framework. The

programme oversees required capital model changes, Internal

Models Approach (IMA) eligibility and business readiness for

the revised regulations as well as required changes across

trading, risk, finance and technology and simulates the

capital impact of the revised regulations.

Climate change

Overview

NWM Group recognises that climate change is a global

issue which has significant implications for our customers,

colleagues, suppliers, partners and NWM Group itself.

Our response

Throughout 2021, NWM Group has continued to play a key role

in NatWest Group’s climate ambition and climate-related targets

and commitments, while working to help our customers better

understand the role they can play in tackling climate change.

For further details refer to climate-related disclosures on page

22 and NatWest Group’s Climate-related Disclosures Report

2021 on our corporate website at natwestgroup.com

Technology

Overview

Post COVID-19 market growth has accelerated the need for

digital products that meet the changing needs of customers

and partners. As a result, there is increased investment in

key technologies such as APIs, data analytics and cloud

infrastructure to deliver digital propositions to customers

how and when they want them. These digital propositions

must respond to and anticipate changing customer needs

including growing demand for ESG – and deliver them in

their preferred medium quickly and efficiently.

Our response

In 2021 we invested £213 million in technology across three

of our key areas: customers, colleagues and capability. We are

enhancing the customer experience and generating revenue

growth by designing and delivering the digital products and

services that matter most to them. For colleagues, we’re

modernising our desktop and trading floor to provide the tools

they need to deliver value to customers. And for capability,

we are simplifying and modernising our application and

infrastructure estate, embedding digital capability, and

transforming through innovation. Against this backdrop, we

are also aligning to a consistent technology platform with the

rest of NatWest Group and creating strong partnerships with

our technology suppliers.

Cyber threats

Overview

Cyberattacks pose a constant risk to our operations, both in

relation to our own digital estate and indirectly with regards to

our supply chain, reinforcing the importance of due diligence

with the third parties on which we rely.

Our response

We continue to invest significant resources in the development

and evolution of cybersecurity controls, deploy rigorous due

diligence with regards to third parties and work to protect

and educate our customers on fraud and scam activity.

Human rights and modern slavery

Overview

At NatWest Markets, we understand that businesses have an

important role to play in promoting respect for human rights.

We believe that tackling modern slavery forms an integral part

of our approach to human rights.

Our response

We seek to operate in accordance with the Universal

Declaration of Human Rights and our approach to respecting

human rights is informed by other internationally accepted

standards and principles including the United Nations Guiding

Principles on Business and Human Rights. We are a member

of the human rights steering group, a management group that

brings representatives from across NatWest Group together

to co-ordinate activities, and to make recommendations to

NatWest Group Executive Committee and Board to develop

and strengthen our approach.

We seek to tackle modern slavery through continued

implementation of policies covering our customers, colleagues

and suppliers. For the third year, our colleagues supported the

TRIBE Freedom Foundation and raised over £30,000 to assist

their anti-slavery projects, enabling long-term support for

survivors and helping to prevent modern slavery. Our approach

to tackling modern slavery is outlined in the NatWest Group

annual Modern Slavery and Human Trafficking Statement

which can be found at natwestgroup.com.

NatWest Markets Plc

2021 Annual Report and Accounts

Risk management

Risk

overview

Impactful and effective risk

management is a vital part of delivering

NWM Group’s strategy and purpose.

Risk is an inherent part of doing business. Some types of

risk – such as market risk or credit risk for example – are

an integral part of NWM Group’s day-to-day activities and

are a vital part of revenue generation. Other risks, such

as those arising as a result of changes in the economy or

the competitive landscape, are an inescapable part of the

environment in which the Group operates and must also

be managed and mitigated.

Effective risk management is a vital element of ensuring

NWM Group is able to achieve its long-term strategy and

fulfil its purpose.

NWM Group operates within NatWest Group’s enterprise-wide

risk management framework. The framework is aligned to

NatWest Group’s purpose and is designed to support

intelligent risk-taking.

While all colleagues share ownership of risk management, the

three lines of defence model is used to define responsibilities

and accountabilities. This aims to ensure that risks are properly

identified, measured, monitored, controlled and reported.

NatWest Group’s independent Risk function designs and

maintains the framework. The Risk function also provides

oversight and monitoring of all risk management activities.

NatWest Group has identified a number of principal risks.

These are risks that are an inherent part of banking activity

and have the potential to significantly affect the Group’s

performance or prospects. They are categorised as

financial and non-financial principal risks.

Principal financial risks

Principal non-financial risks

Traded Market Risk

Conduct Risk

Non-Traded Market Risk

Financial Crime Risk

Capital Adequacy

Operational Risk

Liquidity & Funding

Regulatory Compliance Risk

Credit Risk

Model Risk

Earnings Stability

Climate Risk

Pension Risk

Reputational Risk

In addition, a regular process identifies top and emerging

risks – specific scenarios of concern that, without appropriate

management and mitigation, could have a significant negative

impact on NWM Group’s ability to meet its strategic objectives.

These are detailed in the Risk & Capital Management section,

beginning on p42.

Risk appetite is a key component of the framework. It defines

the level and types of risk NWM Group is willing to take as part

of its business activities. Risk appetite is set in line with overall

strategy and approved by the Board. It supports the strategic

aim of building a sustainable business by providing colleagues

with a structured approach to risk-taking within agreed

boundaries. Information on the risk profile relative to risk

appetite, as well as details of new and emerging risks, is

reported regularly to the Board and senior risk committees.

Areas of focus in 2021

The global economy continued to grow, though more slowly

than expected. The continuing effects of the pandemic also

intensified uncertainty across a number of markets. Accordingly,

risk management played a critical role throughout the year,

focusing both on striking the correct balance between risk and

opportunity but also in ensuring that supporting processes,

policies and controls were properly optimised.

The traded market risk profile remained broadly stable,

though given the heightened uncertainty, this was an area

of significant risk management focus. The non-traded market

risk profile also remained stable in line with expectations.

Compliance and conduct

While further progress was made on the compliance and

conduct agendas during 2021, in December NWM plc pled

guilty in the United States Federal Court to one count of

wire fraud and one count of securities fraud. This related

to historical spoofing conduct by former employees in US

Treasuries markets between January 2008 and May 2014

as well as, separately, during approximately three months

in 2018. As the result of a plea agreement with the US

Department of Justice and the United States Attorney’s Office,

District of Connecticut, NWM will pay a criminal fine of $25.2

million, approximately $2.8 million of criminal forfeiture and

approximately $6.8 million in restitution. The plea agreement

also imposes an independent corporate monitor. NWM has

also committed to compliance programme reviews and

improvements. Reporting and cooperation obligations

have also been agreed.

Financial crime

As changes in technology, the economy and wider society

take place, risks relating to money-laundering, bribery and

corruption, financial sanctions, tax evasion and terrorist

financing continue to evolve. NatWest Group has invested

significantly in a multi-year transformation programme to

strengthen and improve its overall response to the evolving

threat. This investment continued during 2021 and there

was significant risk management focus on the systems and

processes relating to customer due diligence, transaction

monitoring and automated customer screening. The

embedding of a consistent approach to managing financial

crime risk continued, co-ordinated by the enterprise-wide

Financial Crime Hub, and work to enhance capabilities and

controls remained a focus. Both NatWest Group and NWM

Group itself continue to work with law enforcement agencies,

industry bodies and regulators to develop intelligence and

collaborative solutions to prevent financial crime.

Anti-bribery and corruption (ABC)

NWM Group is committed to ensuring it acts responsibly and

ethically, both when pursuing its own business opportunities

and when awarding business. Consequently, it has embedded

appropriate policies, mandatory procedures and controls to

NatWest Markets Plc

2021 Annual Report and Accounts

ensure its employees, and any other parties it does business

with, understand these obligations and abide by them whenever

they act for the Group. ABC training is mandatory for all staff

on an annual basis, with targeted training appropriate for

certain roles. The Group considers ABC risk in its business

processes including, but not limited to, corporate donations,

charitable sponsorships, political activities and commercial

sponsorships. Where appropriate, ABC contract clauses are

required in written agreements.

Internal service management

NWM Group relies on a number of services provided by the

ring-fenced entities within NatWest Group. There continued

to be significant focus on this during 2021 to ensure such

arrangements are managed within the terms of the UK’s

ring-fencing legislation. In addition, there was a strong

emphasis on ensuring the risk management aspects of

such services are optimised for NWM Group’s business

lines, products and customer base.

Climate risk

The impact of climate change on NWM Group and its

customers continued to be a central risk management focus

during the year. This included participation in a number of

working groups – both internally and externally – set up to

address this agenda as well as oversight of programmes

designed to support customers as they tackle the challenges

posed by both the physical and transition risks of climate

change. NatWest Markets also contributed to NatWest

Group’s submission to the Bank of England Climate

Biennial Exploratory Scenario stress test.

LIBOR

Risks relating to the reform of interest-rate benchmarks were a

consistent focus during the year. With the exception of certain

tenors, publication of the London Inter-Bank Offered Rate

(LIBOR), a key benchmark in the global financial markets for

many years, ceased on 31 December 2021. In preparation for

the move to alternative risk-free rates – including the Sterling

Overnight Index Average (SONIA) – NatWest Group stopped

offering Sterling LIBOR for new transactions on 31 March

2021. A Group-wide transition programme co-ordinated work

to help customers smoothly transition from a range of LIBOR-

based products, such as investment-backed lending and

derivatives, to those using alternative benchmarks. Significant

attention was paid to the potential conduct risks arising from

transition activity, as well as related operational risks, in order

to ensure positive customer outcomes. In addition, there was a

strong focus on carefully managing the associated compliance

risk, market risk and counterparty credit risk. The complexity

of the transition, especially in relation to so-called “tough

legacy” contracts that cannot be transitioned to alternative

reference rates, also heightened execution risk. Given

additional challenges experienced by customers during the

pandemic, the FCA has proposed that use of synthetic sterling

LIBOR may be permitted for a number of legacy contracts. It’s

expected that management of related risks will remain a focus

into 2022 as NWM Group continues to support its customers

through the transition.

Information and cyber security

Cybercrime is an ever-present threat across the

digital landscape and continues to evolve rapidly.

Attacks may be from individuals or highly-organised

criminal groups intent on stealing money or

sensitive data, or potentially holding organisations

to ransom. NWM Group takes this threat seriously

and continues to work with industry bodies, peers

and the National Cyber Security Centre to gather

and share intelligence. During 2021, there was

continued risk management focus on ensuring

defences remain optimised for the evolving threat.

Risk culture

NatWest Group’s multi-year programme to enhance

risk management capability at every level of the organisation

continued with an ongoing emphasis on risk culture. This work

aims to embed a generative risk culture across all three lines

of defence – where risk management is an integral part of

the way colleagues work and think. The approach supports

intelligent risk-taking, better customer outcomes, stronger and

more sustainable business as well as an improved cost base.

During 2021, NWM Group focused on a number of risk culture

initiatives, including improvements in risk data and systems

alignment as well as enhancements to risk identification

processes and risk culture management information.

Control

There was significant focus on NWM Group’s control

environment throughout the year. Enhancements were made

to the testing regime in order to ensure assurance protocols

continue to be as robust as possible. Work to review and

strengthen NWM Group’s control environment will continue

in 2022.

Model risk

An effective understanding of likely future outcomes and the

scale of likely hazards is an essential part of forward-looking

risk management. NWM Group is heavily reliant on modelling

across all aspects of its business. Ensuring that its models are

designed effectively – and that associated assumptions, data

inputs and techniques are appropriate – remained a key risk

management focus in 2021. This included activity within NWM

N.V. to review and upgrade certain models to ensure statistical

estimates and outputs remain in line with requirements in the

rapidly-evolving business landscape.

Strategy

Potential execution risks relating to the NWM Group strategy

were also a significant consideration. This included striking a

balance between the risks related to implementation and other

correlated threats as the year progressed, such as the possible

impact of further lockdowns.

NatWest Markets Plc

2021 Annual Report and Accounts

Risk management

continued

Top and

emerging risks

NWM Group employs a regular process for identifying and managing its top

and emerging risks. These are specific scenarios of concern that could have

a significant negative impact on NWM Group’s ability to operate or meet its

strategic objectives. Details of these risks – and actions taken to mitigate them

– are set out below.

External

Climate-

related risks

Accelerating climate change may lead to heightened financial risks and faster-than-anticipated impacts on

NWM Group and the wider economy. Such impacts could include financial loss as a result of a deterioration

in credit quality, or a rise in market risk exposure or operational risk – all of which underline the importance

of NatWest Group’s climate commitments. NWM Group continues to adapt its operations and business strategy

to mitigate the risks of both climate change and the transition to a low-carbon economy. It is also embedding

climate risk into its risk management framework.

Competitive

environment

NWM Group’s target markets are highly competitive, with changes in technology, regulation, customer

behaviour and business models continuing to accelerate competitive pressure. As these evolve, there is a

risk that NWM Group is not able to adapt or compete effectively with the appropriate product offerings and

geography. NWM Group monitors the competitive environment and adapts strategy as appropriate to ensure

its business model remains sustainable and viable. It remains focused on innovating to deliver compelling

propositions for customers. While customer demands and expectations are high and increasing, NWM Group

is focused on delivering increased customer satisfaction as well as ensuring customers are offered all of

NatWest Group’s services appropriate to their needs.

Cyber threats

Cyber attacks continue to increase in frequency, sophistication and severity. There is a risk that a catastrophic

cyber attack could damage NWM Group’s ability to do business and/or compromise data security. NWM Group

operates a multi-layered approach to its defences and continues to invest in building its resilience and

cyber-security capabilities.

Regulatory,

legal and

conduct risk

NWM Group operates in a highly-regulated market and must manage compliance with current regulations and

prepare for future regulations, including the finalised Basel III framework and development of capital models in

NWM N.V. The implications of proposed, or potential, regulatory developments are incorporated into business

and financial plans. Conduct and supervisory risks have been heightened by both strategic change and

changing ways of working. NWM Group monitors conduct risk through the Conduct Risk framework and

continues to adapt and monitor adherence and appetite position through NWM Group’s Conduct Committee.

This aims to deliver strong customer and business outcomes, reducing the risk of material staff misconduct

and supporting business sustainability.

UK-EU

divergence

NWM Group has implemented plans to operate in the EU market and continues to monitor the evolving

situation arising from the UK’s withdrawal from the EU for any developments that may adversely affect NWM

Group and its operating environment. NWM continues to monitor the emerging regulatory environment – and

likely associated scenarios – to facilitate continuity of business.

NatWest Markets Plc

2021 Annual Report and Accounts

Internal

People risk

NWM Group’s operational risk could increase through the loss of key staff, the recalibration of roles or the

loss of institutional knowledge due to strategic change. NWM Group monitors people risk closely and has

plans in place to support retention of key roles. Wider NatWest Group programmes that support engagement

and training are in place for all employees. Given the importance of diversity – particularly the proportion of

females in senior roles, pay gaps and ethnic diversity – the risk of not supporting and promoting a diverse and

inclusive workforce could have an adverse impact on NWM Group employee engagement and strategy. This

could also lead to a reputational impact among investors and regulators. Creating an inclusive workplace is

an important part of NWM Group’s purpose and plays a powerful role in shaping the business as well as the

views of stakeholders.

Strategy

execution

NWM Group’s strategy includes an increased focus on serving NatWest Group’s corporate and institutional

customer base. NWM Group has already simplified its operating model and reduced its cost base, but

challenges still remain to meet income and cost targets in future years. This will entail material execution

risks, commercial risks and operational risks for NWM Group. There is a dependency on NatWest Group’s

strategic decisions which could affect NWM Group’s own strategy. NWM Group’s Board maintains proactive

engagement with NatWest Group to ensure strategic alignment.

Sustainable

control

environment

The internal system of controls is key to NWM Group’s management of its risks. Failure to maintain a

sustainable control environment, due to changes in NWM Group’s operating environment or business strategy,

could result in an increase in risks. To mitigate these risks, a robust operational risk management framework

is in place that supports ongoing identification, management and monitoring of our risk and control profile.

NWM Group’s control environment (including operational, conduct and financial crime controls) is formally

assessed half-yearly to ensure NWM Group’s control environment position remains within appetite.

NatWest Markets Plc

2021 Annual Report and Accounts

What matters to them

How we engaged

Outcome of engagement

Customers

The NWM Plc Board is mindful of the

significance of providing a reliable service to

our customers and supporting them to manage

their financial risks and achieve their short and

long-term financial goals.

–

The NWM Plc Board received regular updates on customer issues via reports

from the NWM Plc CEO and business heads, along with deep dive sessions on

product lines and customer segments.

–

The NWM Plc Board was regularly updated on the nature and extent of ESG

issuances and financing activity provided to customers following COVID-19.

The customer touchpoint rating and client profitability dashboard provided

the NWM Plc Board with regular analytics.

The NWM Plc CEO continued to meet with

customers throughout the year to enhance

relationships and explain the impact of the

refocusing of NWM Group.

Colleagues

The NWM Plc Board appreciates the

importance of a wide range of topics impacting

the workforce including diversity, equity and

inclusion, COVID-19 and talent management.

–

The NWM Plc Board asked colleagues to share thoughts on what it’s like

to work for NatWest Group, including in NWM Plc, by completing colleague

opinion surveys.

–

The NatWest Group-level Colleague Advisory Panel provided a mechanism

for directors to engage directly with colleagues on topics of strategic interest.

–

Colleagues were encouraged to report any concerns relating to wrongdoing

or misconduct using NatWest Group’s whistleblowing service, Speak Up.

–

The 2021 Talent academy provided a purpose-led opportunity to create a

talent pool of colleagues across all business areas, demographics and grades.

The NWM Plc Taskforce continued to support

delivery of NatWest Group’s commitments to

support our Black, Asian and Minority Ethnic

colleagues to create a more diverse and

inclusive culture.

Communications on the new ways of working

and hybrid return to the office were circulated to

colleagues and supporting colleagues’ wellbeing

became increasingly important during the

COVID-19 pandemic and subsequent transition

to the new ways of working.

Community

and environment

The NWM Plc Board recognises the growing

importance of climate change and its potential

impact on our society.

–

The NWM Plc Board received regular updates on the significant progress

made on green finance and the NWM Plc Board supported NatWest Group

as the banking sponsor of COP26.

–

The NWM Plc CEO led a forum which oversaw the response to the risks

posed by climate change as well as exploring the opportunities for growth

in the ESG market.

The NWM Plc Board is committed to managing

the wider social, environmental and economic

impacts of NWM Plc’s operations and there has

been recognition of NWM Group’s strong ESG

credentials and climate initiatives in Europe.

Regulators

The focus of regulatory engagement in 2021

was on the strategic change programme and

go-forward European strategy, front office

changes and trading controls given the new

ways of working and growth initiatives as NWM

Group’s restructuring phase draws to a close.

–

The NWM Plc Board recognised the importance of open and continuous

dialogue with regulators and the NWM Plc Chairman, executive directors

and non-executive directors had regular meetings with the PRA and FCA.

The NWM Plc Board received regular reports on

regulatory matters from the Chief Governance &

Regulatory Officer.

Suppliers

The NWM Plc Board is mindful of the role

suppliers play in ensuring a reliable service is

delivered to customers and of the importance

of our relationships with key suppliers.

–

The NWM Plc Board regularly received analytics as NWM Plc progressed

further through the multi-year transformation programme which included the

transfer of support functions to NatWest Group to improve operating efficiency

and are provided using service level agreements. This allowed NWM Plc to

isolate any issues for remediation.

The NWM Plc Board, through the NWM Plc Board

Risk Committee, approved further key performance

indicators which are used to monitor delivery of the

outsourced services.

Our stakeholders

Board engagement

with key stakeholders

Here we highlight

who our key

stakeholders are

and how the NWM

Plc Board engages

with them to

create value.

NatWest Markets Plc

2021 Annual Report and Accounts

What matters to them

How we engaged

Outcome of engagement

Customers

The NWM Plc Board is mindful of the

significance of providing a reliable service to

our customers and supporting them to manage

their financial risks and achieve their short and

long-term financial goals.

–

The NWM Plc Board received regular updates on customer issues via reports

from the NWM Plc CEO and business heads, along with deep dive sessions on

product lines and customer segments.

–

The NWM Plc Board was regularly updated on the nature and extent of ESG

issuances and financing activity provided to customers following COVID-19.

The customer touchpoint rating and client profitability dashboard provided

the NWM Plc Board with regular analytics.

The NWM Plc CEO continued to meet with

customers throughout the year to enhance

relationships and explain the impact of the

refocusing of NWM Group.

Colleagues

The NWM Plc Board appreciates the

importance of a wide range of topics impacting

the workforce including diversity, equity and

inclusion, COVID-19 and talent management.

–

The NWM Plc Board asked colleagues to share thoughts on what it’s like

to work for NatWest Group, including in NWM Plc, by completing colleague

opinion surveys.

–

The NatWest Group-level Colleague Advisory Panel provided a mechanism

for directors to engage directly with colleagues on topics of strategic interest.

–

Colleagues were encouraged to report any concerns relating to wrongdoing

or misconduct using NatWest Group’s whistleblowing service, Speak Up.

–

The 2021 Talent academy provided a purpose-led opportunity to create a

talent pool of colleagues across all business areas, demographics and grades.

The NWM Plc Taskforce continued to support

delivery of NatWest Group’s commitments to

support our Black, Asian and Minority Ethnic

colleagues to create a more diverse and

inclusive culture.

Communications on the new ways of working

and hybrid return to the office were circulated to

colleagues and supporting colleagues’ wellbeing

became increasingly important during the

COVID-19 pandemic and subsequent transition

to the new ways of working.

Community

and environment

The NWM Plc Board recognises the growing

importance of climate change and its potential

impact on our society.

–

The NWM Plc Board received regular updates on the significant progress

made on green finance and the NWM Plc Board supported NatWest Group

as the banking sponsor of COP26.

–

The NWM Plc CEO led a forum which oversaw the response to the risks

posed by climate change as well as exploring the opportunities for growth

in the ESG market.

The NWM Plc Board is committed to managing

the wider social, environmental and economic

impacts of NWM Plc’s operations and there has

been recognition of NWM Group’s strong ESG

credentials and climate initiatives in Europe.

Regulators

The focus of regulatory engagement in 2021

was on the strategic change programme and

go-forward European strategy, front office

changes and trading controls given the new

ways of working and growth initiatives as NWM

Group’s restructuring phase draws to a close.

–

The NWM Plc Board recognised the importance of open and continuous

dialogue with regulators and the NWM Plc Chairman, executive directors

and non-executive directors had regular meetings with the PRA and FCA.

The NWM Plc Board received regular reports on

regulatory matters from the Chief Governance &

Regulatory Officer.

Suppliers

The NWM Plc Board is mindful of the role

suppliers play in ensuring a reliable service is

delivered to customers and of the importance

of our relationships with key suppliers.

–

The NWM Plc Board regularly received analytics as NWM Plc progressed

further through the multi-year transformation programme which included the

transfer of support functions to NatWest Group to improve operating efficiency

and are provided using service level agreements. This allowed NWM Plc to

isolate any issues for remediation.

The NWM Plc Board, through the NWM Plc Board

Risk Committee, approved further key performance

indicators which are used to monitor delivery of the

outsourced services.

NatWest Markets Plc

2021 Annual Report and Accounts

In this statement we describe how

our 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 NWM Plc Board reviews and confirms its key stakeholder

groups for the purposes of section 172 annually. For 2021, they

remained customers, colleagues, community and environment,

investors, regulators and suppliers. Examples of how the NWM

Plc Board has engaged with key stakeholders, including the

impact of principal decisions, can be found in this statement

and on pages 16 and 17.

Supporting effective NWM Plc Board discussions

and decision-making

Our purpose continues to influence NWM Plc Board discussions

and decision-making.

Our NWM Plc Board and Committee Terms of Reference

reinforce the importance of considering both our purpose

and the matters set out in section 172 in NWM Plc Board

discussions and decision-making. Our NWM Plc Board and

Committee paper template includes a section for paper

authors to explain how the paper aligns with our purpose

and a separate section for them to include an assessment of

the relevant stakeholder impacts for the directors to consider.

Our directors are mindful that it is not always possible to

achieve an outcome which meets the requirements, needs

and/or expectations of all stakeholders who are, or may be,

impacted. For decisions which are particularly challenging

or complex, we introduced an additional page to our paper

template in 2021 which 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 our broader

purpose framework.

Principal decisions

Principal decisions are those decisions taken by the NWM Plc

Board that are material, or of strategic importance, to the

company or are significant to NWM Plc’s key stakeholders.

Set out on the next page is an example of the principal

decisions taken by the NWM Plc Board during 2021.

Likely long-term consequences.

Employee interests.

Relationships with customers, suppliers and others.

The impact on community and environment.

Maintaining a reputation for high standards of

business conduct.

Acting fairly between members of the company.

Section 172(1)

statement

Our stakeholders

continued

NatWest Markets Plc

2021 Annual Report and Accounts

Factors

considered:

Approving the acceleration

of capital distributions

What was the decision-making process?

As part of the NWM Plc Board’s approval of the

2021 Business Plan and Budget in December 2020,

the NWM Plc three-year funding plan included

a forecast of capital distributions across a

three-year period.

Across 2021 at quarterly intervals in February, June,

and October, the NWM Plc Board approved updates

to the three-year funding plan and accelerated a

total of £1 billion in capital distributions to NatWest

Group plc.

The NWM Plc Board’s decisions were informed

by regular updates on NWM Plc’s financial and

capital positions and a key focus of NWM Plc

Board level discussions was how surplus capital

was being managed.

The NWM Plc Board Risk Committee also reviewed

all capital distribution proposals in advance of the

NWM Plc Board and recommended them to the

NWM Plc Board for approval.

To support the NWM Plc Board in its decision-

making, it received comprehensive papers prepared

by management which updated the NWM Plc Board

on the progress of the three-year funding plan and

sought the NWM Plc Board’s support to accelerate

each capital distribution.

How did the directors fulfil their duties under

section 172? How were stakeholder interests

considered? How did the decision align to

our purpose?

In approving the accelerated capital distributions

throughout 2021, directors were mindful of their

duties under section 172 including the likely long-

term consequences of the decision and whether

the acceleration of the capital distributions would

support the long-term sustainable success of

the company. Each update the NWM Plc Board

received provided an overview of the relevant

stakeholder considerations.

Substantial analysis was completed to evaluate

options and assess the long-term impacts of

accelerated capital distribution on key stakeholder

groups (including colleagues, customers, investors

and the environment), what their concerns were

likely to be and the key messages that would

support engagement. NWM Plc’s accelerated

progress against the strategic plan as the

restructuring phase draws to a close allows

for increased focus on growth initiatives in

areas such as green finance.

There was also extensive engagement with

representatives of NatWest Group to ensure proper

alignment and that the end state would support the

delivery of NatWest Group’s overarching purpose

and promote a high standard of business conduct.

This engagement ensured that the NWM Plc Board

understood the views of NatWest Group and could

balance these with the interests of other

stakeholders in making their decision.

Accelerated capital distributions from NWM Plc

to NatWest Group facilitate NatWest Group’s

management of its double leverage ratio. This

ratio is crucial in how NatWest Group distributes

its capital to support customers and the wider

economy. It also enables NatWest Group to pass

on excess capital to its shareholders and achieve

its purpose of championing the potential of people,

families and businesses.

How was our purpose considered as part of

the decision?

Considering relevant stakeholder interests is key

to purposeful decision-making. The new purposeful

decision-making page referred to previously was

used to provide the NWM Plc Board with a detailed

analysis of stakeholder considerations and impacts

using the five categories in the ‘Blueprint for Better

Business’ framework, specifically: ‘honest and fair

with customers and suppliers’; ‘a responsible and

responsive employer’; ‘a good citizen’; ‘a guardian

for future generations’; ‘and delivering long-term

sustainable performance’.

Actions and outcomes

The NWM Plc Board approved the acceleration of

capital distributions at its meetings throughout 2021

on 18 February 2021, 9 June 2021, and 28 October

2021. The NWM Plc Board continues to receive

updates on the progress of the three-year

funding plan.

NatWest Markets Plc

2021 Annual Report and Accounts

Our colleagues

Helping our

colleagues thrive

We aim for NatWest Markets to be

a great place to work. By offering

a fulfilling job, a healthy workplace,

fair rewards, excellent development,

and great leadership, we believe our

colleagues can thrive in what they do.

Our HR policies and procedures are aligned to NatWest Group

wherever possible, and information on Groupwide progress

can be found in the ‘Colleagues’ section in the NatWest Group

Annual Report and Accounts 2021.

Supporting colleagues’ wellbeing

A vital part of being a purpose-led organisation is having a fully

embedded wellbeing strategy. We take a holistic approach to

wellbeing and our proposition covers mental health, physical

health and financial wellbeing. In addition to NatWest

Group activity:

–

NatWest Markets Wellbeing network continued to offer

speaker sessions on topics such as resilience and

mental health.

–

The Analyst and Associates network, which supports and

promotes the development of the Graduate, Apprentice,

Analyst and Associate communities, helped its members

to navigate working from home at the early stage of

their careers.

Ways of Working

In 2021 we have adopted new ways of working as outlined

in NatWest Group’s ’Ways of Working’ framework. This is

designed to be a flexible and dynamic way to both deliver

colleague choice and better meet customer needs. The

regulatory oversight of some roles in NatWest Markets means

some colleagues have been assigned to the Office First model

where people will perform the majority of their work at their

designated hub. The remainder of colleagues align to the

Hybrid model and split their time more evenly between

their designated hub and home. As we’ve transitioned to

the new ways of working we’ve taken a phased test and

learn approach and ensured a focus on colleague wellbeing

and health and safety.

Helping colleagues realise their potential

Participation in NatWest Group initiatives has been strong,

with 1,300 colleagues accessing the NatWest Group Academy.

A further 82 were then selected for the Talent Academy which

supports high-potential colleagues through a programme of

challenging and purposeful development opportunities.

In addition we have supported around 100 senior women

to extend their business networks and to hear from inspiring

speakers through our continued sponsorship of the Reaching

Further initiative.

Diversity, equity and inclusion (DE&I)

We are focused on developing a community that champions

diversity while creating an inclusive workplace which gives our

people the best opportunity to succeed and grow their careers.

Examples of how we have worked towards this in 2021 include:

–

The NatWest Markets Diversity Task Force, which is chaired

by Robert Begbie, was established to regularly discuss and

progress the DE&I agenda in consultation with the senior

leadership team in NatWest Markets. The Task Force also

reviews all senior vacancies to ensure that a diverse

pipeline of candidates are considered for opportunities.

–

The employee-led network, NatWest Markets Women, was

enhanced in 2021 to create a community and voice for all

women in NatWest Markets. In addition to a programme of

events, the network set up a ‘buddy’ system to act as an

informal support system. NatWest Markets Women also

surveyed a number of customer-facing colleagues to

determine the key challenges facing women in

progressing their careers.

–

The ‘Talent to Watch’ global programme, which

provides coaching, support and leadership sponsorship,

was refreshed in 2021 to help it to continue to build and

develop future talent.

–

The target for 2021 was to have female representation

at CEO-3 or above at 25%. As of 31 December 2021 the

representation was 21%. The reported mean gender pay

gap is 38.3% (median: 28.4%) and the mean gender bonus

gap is 59.1% (median: 50.0%). We recognise we have more

to do and continue to focus on the recruitment, retention

and advancement of women to meet our ambition of having

full gender balance in our top three levels globally by 2030.

–

The 2021 target relating to representation of Black, Asian

and Minority Ethnic colleagues in the top four leadership

layers of the organisation was 18% and as of 31 December

2021, representation was 19.4%.

For people risk please refer to Top and emerging risks on page 15.

NatWest Markets Plc

2021 Annual Report and Accounts

Learning and

enterprise focus areas

Enterprise:

We continue to work across NatWest to support

initiatives that are removing barriers to enterprise

and providing businesses in the UK the support

they need to grow.

This year we have made progress in several areas and have

focused our attention on upskilling and further developing our

understanding of the issues that enterprises face, in order to

take meaningful action.

NatWest COP26 SMI Action Forum event

Members of the NatWest Markets team, including Robert

Begbie, CEO, and Victoria Cleverley, Chief of Staff, NatWest

Markets, were involved in creating and leading a One Bank

event focused on SMEs, in collaboration with the Sustainable

Markets Initiative, during COP26.

As a principal partner of COP26, NatWest Group convened

over 70 stakeholders in Glasgow to discuss practical and

actionable steps for SMEs to tackle climate change. The

purpose of the session was to bring together business leaders

and owners to establish impactful shared visions that support

SMEs to take action centred on our recent Springboard to

Sustainable Recovery report and how to accelerate SMEs’

journey to net zero. Whilst focused on climate this allowed

the team to hear directly from enterprises about what was

required on issues related to funding and market access,

amongst other topics.

Treasury Training

NatWest Markets worked in collaboration with Corporates &

Institutions to run a successful week-long series of bite-sized

customer seminars presented as the NatWest Treasury

Training boxset.

Hosted by a broad team of subject matter experts from across

the businesses, the programme of 29 sessions was attended by

participants from more than 400 companies and an average of

105 customers per session, with content ranging from capital

markets and risk management, to working capital and

open banking.

Those involved shared a view that supporting customer

education and building financial capability is an important

part of NatWest’s purpose and the event is a great

demonstration of how we can fulfil these ambitions

while deepening customer relationships.

Starting out as in-person, product specific training on a small

scale four years ago, our approach to providing free training to

customers has evolved and grown both in size and quality and

embracing technology has played a huge part in the success.

While seeing customers in person has significant benefits, the

virtual format allowed a broader range of topics to be offered

to a global external and internal audience, as well as providing

a recording and a wealth of data about which topics are of

most interest to which customers.

Learning:

As we continue to drive towards winning

with purpose, we are creating environments to

understand our colleagues’ thoughts and ideas and

importantly, what conditions we need to create for

colleagues to thrive.

We are engaging with colleagues, to help them to connect

their personal purpose to their roles. By doing so we believe

we can unlock the potential within our organisation. Our goal

is to create the conditions that allow our colleagues to thrive

personally and professionally and to ensure our strategy,

operating model, and culture are driven by purpose.

To support this over 800 colleagues have now attended

a purpose workshop.

We have continued to share our market-leading insight with

customers on a number of topics including ESG and the

transition away from LIBOR.

Our subject matter experts supported our customers’ learning

on many ESG themes through events and insight articles. For

colleagues we ran bi-monthly ESG Bitesize webinars covering

a range of case studies and product innovation. Over 300

colleagues globally signed up to the University of Edinburgh’s

Climate Change transformation programme, helping to

integrate our climate ambition across different roles

and functions.

Learning and enterprise

We are guided by our purpose and create a positive impact through our areas of

focus. You can read about our climate focus from page 22.

NatWest Markets Plc

2021 Annual Report and Accounts

The table below summarises the ongoing progress NWM Group has made during 2021 with regard to

climate-related risks, opportunities and the areas of future focus.

Climate disclosure themes

Governance

Strategy

Risk management

Metrics and targets

Progress

to date

–

Targeted training for NWM Plc Board

(the “Board”) to build climate knowledge and

support ongoing oversight of management’s

response to climate-related risks

and opportunities.

–

A monthly CEO led forum, the Climate &

Sustainability Committee (CSC) is attended

by members of the NWM Group Executive

team to discuss the business’s progress on

climate matters.

–

Established climate change roles and

responsibilities across the senior

management team.

–

Established a Climate and ESG Capital

Markets team to provide centralised

resource and expertise for customer

facing and product teams.

–

Continued to build climate knowledge with

all stakeholders. Delivered in excess of 180

publications and events throughout 2021

aimed at supporting learning journeys for

customers and colleagues; in excess of 300

NWM Group colleagues globally signed up to

the University of Edinburgh’s Climate Change

training programme.

–

Advanced product innovation in the voluntary

carbon market by supporting NatWest Group

with the launch of Carbonplace.

–

Climate change is monitored and managed as a principal

risk. NWM Group is aligned to the NatWest Group Climate

Risk Policy.

–

Credit risk: NWM Group adopted the NatWest Group

approach of integrating and embedding climate risk

into wholesale credit risk management. This included

mandatory qualitative climate commentary in credit

risk assessments and the development of the qualitative

scorecard approach to provide a standardised assessment

of customers’ exposure to physical/transition climate-

related risks and opportunities.

–

Market risk: A monthly climate sector and geography

report was developed to monitor key climate

risk concentrations.

–

Operational risk: Climate change considerations

were incorporated into NWM Group’s operational risk

assessment processes. A dedicated climate change

scenario was developed to assess potential risks.

–

Established quantitative assessments for the

following metrics:

–

NWM Group’s progress against its contribution to the

£100 billion NatWest Group Climate and Sustainable

Funding and Financing target.

–

NWM Group’s loan exposures to high-carbon

sectors identified based on physical and transition

risk assessment.

–

NWM Group’s capital markets transactions

(financing) – lead management activity by sector.

Areas of

future focus

–

Continue to develop operating rhythm for

Board review and oversight of climate-related

risks and opportunities.

–

Continue to enhance management roles and

responsibilities framework to incorporate

management of climate-related risk

and opportunities.

–

Quantify our climate impact across the

balance sheet and consider the impact of our

underwriting business on global emissions.

–

Establish NWM Group-specific

management actions based on

insights from scenario analysis.

–

Further develop technology and data

capabilities to support customer engagement,

business decision-making and governance.

–

NWM Group continues to refine and innovate ways

to further integrate climate within risk management

practices, including within the enterprise-wide risk

management framework.

–

Credit risk: The approval and launch of five scorecards

is scheduled for Q1 2022. The intention is to develop

subsequent scorecards to expand coverage of the NWM

Group portfolio. A more quantitative approach is in plan

to be developed within this methodology as data

becomes available.

–

Market risk: Ongoing engagement with regulators

will continue to ensure NWM Group remains in line with

industry standards. Additional work will be planned as

required – for example if the Bank of England revises its

approach and includes traded market risk in its scope for

the Climate Biennial Exploratory Scenario (CBES) in 2022,

NWM Group will provide further support for the NatWest

Group submission.

–

Operational risk: There will be further design,

implementation and embedding of climate change

considerations in risk and control, as well as change

impact assessments, which will require further training

of colleagues.

–

There will be ongoing assessment of the impact of the

European Central Bank (ECB) guidelines on our European

franchise (NWM N.V. Group) on environmental risk.

–

Continue to work with NatWest Group, on developing

NWM Group’s key metrics and targets to assess and

manage own climate-related risks and opportunities.

Climate-related

disclosures overview

Throughout 2021, NWM Group has continued to play a key role in NatWest

Group’s climate ambition, while working to help our customers better

understand the role they can play in addressing climate change.

Climate-related disclosures

NatWest Markets Plc

2021 Annual Report and Accounts

The table below summarises the ongoing progress NWM Group has made during 2021 with regard to

climate-related risks, opportunities and the areas of future focus.

Climate disclosure themes

Governance

Strategy

Risk management

Metrics and targets

Progress

to date

–

Targeted training for NWM Plc Board

(the “Board”) to build climate knowledge and

support ongoing oversight of management’s

response to climate-related risks

and opportunities.

–

A monthly CEO led forum, the Climate &

Sustainability Committee (CSC) is attended

by members of the NWM Group Executive

team to discuss the business’s progress on

climate matters.

–

Established climate change roles and

responsibilities across the senior

management team.

–

Established a Climate and ESG Capital

Markets team to provide centralised

resource and expertise for customer

facing and product teams.

–

Continued to build climate knowledge with

all stakeholders. Delivered in excess of 180

publications and events throughout 2021

aimed at supporting learning journeys for

customers and colleagues; in excess of 300

NWM Group colleagues globally signed up to

the University of Edinburgh’s Climate Change

training programme.

–

Advanced product innovation in the voluntary

carbon market by supporting NatWest Group

with the launch of Carbonplace.

–

Climate change is monitored and managed as a principal

risk. NWM Group is aligned to the NatWest Group Climate

Risk Policy.

–

Credit risk: NWM Group adopted the NatWest Group

approach of integrating and embedding climate risk

into wholesale credit risk management. This included

mandatory qualitative climate commentary in credit

risk assessments and the development of the qualitative

scorecard approach to provide a standardised assessment

of customers’ exposure to physical/transition climate-

related risks and opportunities.

–

Market risk: A monthly climate sector and geography

report was developed to monitor key climate

risk concentrations.

–

Operational risk: Climate change considerations

were incorporated into NWM Group’s operational risk

assessment processes. A dedicated climate change

scenario was developed to assess potential risks.

–

Established quantitative assessments for the

following metrics:

–

NWM Group’s progress against its contribution to the

£100 billion NatWest Group Climate and Sustainable

Funding and Financing target.

–

NWM Group’s loan exposures to high-carbon

sectors identified based on physical and transition

risk assessment.

–

NWM Group’s capital markets transactions

(financing) – lead management activity by sector.

Areas of

future focus

–

Continue to develop operating rhythm for

Board review and oversight of climate-related

risks and opportunities.

–

Continue to enhance management roles and

responsibilities framework to incorporate

management of climate-related risk

and opportunities.

–

Quantify our climate impact across the

balance sheet and consider the impact of our

underwriting business on global emissions.

–

Establish NWM Group-specific

management actions based on

insights from scenario analysis.

–

Further develop technology and data

capabilities to support customer engagement,

business decision-making and governance.

–

NWM Group continues to refine and innovate ways

to further integrate climate within risk management

practices, including within the enterprise-wide risk

management framework.

–

Credit risk: The approval and launch of five scorecards

is scheduled for Q1 2022. The intention is to develop

subsequent scorecards to expand coverage of the NWM

Group portfolio. A more quantitative approach is in plan

to be developed within this methodology as data

becomes available.

–

Market risk: Ongoing engagement with regulators

will continue to ensure NWM Group remains in line with

industry standards. Additional work will be planned as

required – for example if the Bank of England revises its

approach and includes traded market risk in its scope for

the Climate Biennial Exploratory Scenario (CBES) in 2022,

NWM Group will provide further support for the NatWest

Group submission.

–

Operational risk: There will be further design,

implementation and embedding of climate change

considerations in risk and control, as well as change

impact assessments, which will require further training

of colleagues.

–

There will be ongoing assessment of the impact of the

European Central Bank (ECB) guidelines on our European

franchise (NWM N.V. Group) on environmental risk.

–

Continue to work with NatWest Group, on developing

NWM Group’s key metrics and targets to assess and

manage own climate-related risks and opportunities.

NatWest Markets Plc

2021 Annual Report and Accounts

Climate-related disclosures

continued

Forum

Role/Responsibility

Board level

governance

NWM Plc Board

The NWM Plc Board approves NWM Group’s strategy and objectives within

the aims of the wider NatWest Group. This includes the progress towards

delivering on NatWest Group’s strategy, including climate ambitions. The

Board has received regular updates on the progress towards climate-

related funding and financing targets and future commitments as part

of NatWest Group ambitions.

NWM Plc Board Risk Committee

The NWM Plc Board Risk Committee (BRC) is responsible for the oversight

of NWM Group’s risk profile. The BRC has been involved in discussion on

the development of NWM Group’s climate risk appetite, including the

quantitative risk appetite measures.

NWM Plc Audit Committee

The NWM Plc Audit Committee is responsible for oversight of the bank’s

material disclosures, including non-financial disclosures as well as climate.

Executive level

governance

NWM Climate & Sustainability

Committee

The Climate & Sustainability Committee (CSC) is the senior NWM Group

forum which has the objective of assessing and managing climate-related

risks and opportunities. The CSC supports the NWM Plc CEO discharge

the delegated Senior Management Function (SMF) accountability from

the NatWest Group CEO for identifying and managing financial risks

and opportunities arising from climate change.

Climate-related disclosures:

Governance

The NWM Plc Board and senior management team are committed to ensuring

NWM Group, as part of NatWest Group, plays a leading role in the transition

to a net-zero economy.

Governance framework

During 2021 NWM Group has continued to embed its approach

to climate governance and build on the framework developed

in 2020. A key focus has been to ensure clarity of responsibility

over climate in relation to the NWM Plc Board, Board

Committees, management forums and individuals

across the business.

The Board and senior management intend to continue to

focus on the integration of climate into risk appetite and

the embedding of climate within established governance

operating rhythms.

The chart below provides insight into climate accountabilities

for both forums and individuals within NWM Group.

NWM Plc Board oversight

NWM Plc Board has ultimate oversight of how NWM Group

identifies, measures, manages and mitigates climate-related

risks and opportunities throughout the business. The NWM Plc

Board is assisted by the NWM Plc Board Risk Committee in

setting risk appetite and monitoring the risk management

response to climate change-related physical and transition

risks and opportunities within the business.

The NWM Plc Board Risk Committee has discussed the bank’s

progress towards meeting regulatory requirements as part

of the wider risk response to the financial risks posed by

climate change.

The NWM Plc Audit Committee continues to review disclosures,

including non-financial reporting and NWM Group specific

climate-related disclosures.

Management’s role in assessing and managing

climate-related risks and opportunities

NatWest Group has adopted an integrated climate governance

structure with legal entity boards and accountable individuals

within franchises expected to ensure that climate considerations

are built into day-to-day decision-making. There are a number

of cross-bank forums which support collaboration and

escalation, including the NatWest Group Climate Change

Executive Steering Group (CC ESG). The CC ESG is responsible

for coordinating the NatWest Group response across climate-

related regulations, risks and delivery of strategic climate

ambitions. The CC ESG includes cross-franchise and

functional representatives, including the NWM Plc CEO.

As part of the integrated cross-bank approach the NWM

CEO has been designated to support the NatWest Group

CEO in discharging the Senior Management Function 1

(SMF1) accountability for identifying and managing the risk

and opportunities from climate change, as well as delivery

on NatWest Group’s ambition to be a leading bank in the

UK helping to address the climate challenge.

To support the CEO and accountable individuals with their

responsibilities, and to further enhance the integration of

climate-related issues into the business, NWM Group continues

to operate a NWM Group Climate Programme (NWM CP)

which is overseen by the CEO chaired Climate &

Sustainability Committee (CSC).

NatWest Markets Plc

2021 Annual Report and Accounts

Climate-related disclosures:

Strategy

Climate is one of the three focus areas under the NatWest Group purpose.

The NWM Group’s climate strategy supports and contributes to NatWest Group’s

ambition to be a leading bank in the UK helping to address the climate challenge.

Climate-related risks

Climate risk is classified as a principal risk and remains

a significant area of focus for risk management activities.

Climate-related risks are also considered as part of NWM

Group’s top and emerging risks process, which also provides a

focus on developing issues such as biodiversity and nature loss.

Alongside regular reporting on the principal risks detailed

within the Risk & Capital Management section, top and

emerging risks are reported to the NWM Plc Board on

a regular basis.

NatWest Group’s enterprise-wide risk management framework,

which also applies to NWM Group, sets out a consistent

management approach for all principal risks, including climate

risk. In addition, where appropriate, climate risk considerations

are integrated into management activities for several of NWM

Group’s other principal risks. Climate risk is also considered

within internal risk and control assessments and scenario

analysis activities. This supports an evolving understanding

of climate-related impacts. Climate risk is regularly assessed

at the NWM Climate & Sustainability Committee and

progress was made during 2021 to enhance climate

risk management capabilities.

The risk events associated with NatWest Group failing to

adequately mitigate the transition and physical risks arising

from climate change are illustrated by a table within NatWest

Group 2021 Climate-related Disclosures Report section 3.2.

The table includes an initial assessment of expected time

horizons, potential impacts and links to different risk types,

where climate is considered to have a relatively significant

impact in the relevant time frame: short (1-5 years),

medium (10 years) and long term (30 years).

Due to the nature of its business, NWM Group would

additionally be affected by changes in the pricing of certain

traded financial instruments and services, affecting market

risk and model risk. NWM Group would be less affected

than NatWest Group by changes to mortgages.

NWM Group continues to leverage NatWest Group’s ongoing

assessment of the transition and physical risks arising from

climate change. NWM Group continues its work to assess the

impact of the most meaningful such events on its strategy,

operating model and risk profile, along the likely timeline

of when such events are expected to occur.

Climate-related opportunities

Established in December 2020, the Climate Opportunities

Group (COG) brings together colleagues from NatWest Group

business segments to conceptualise and develop opportunities

that complement the NatWest Group climate ambition. NWM

Group also connects on opportunities across NatWest Group

in the Green Finance forum – a One Bank collaboration with

NWM Group, Commercial, RBSI and Coutts which aims to

support customers’ ambitions around energy efficiency and

low-carbon generation to accelerate the transition to a

net-zero economy.

The table in the NatWest Group 2021 Climate-related

Disclosures Report section 3.3 illustrates the key climate-

related opportunities which underpin the achievement of

the NatWest Group climate ambition, which NWM Group

is aligned to, along with the potential financial impacts and

timing. Many of NWM Group’s climate opportunities, all of

which have reputational benefits for us along with potentially

increased revenues, impact on strategy and are discussed

further within this section.

In 2021, we have further adapted our business model to

help customers navigate their own journeys to transition to a

net-zero economy, and to provide them with climate-related

funding and financing, as well as an advisory service:

Centre of Excellence for climate and ESG financing and

customer solutions

We have established a Centre of Excellence for climate and

ESG in our Capital Markets business as we build out capability

and look to integrate climate into our customer and product

offering across NWM Group. This forms part of an ecosystem

across NWM Group that aims to provide thought leadership

and support our customers with solutions across financing

and risk management to achieve their climate ambitions.

NatWest Markets Plc

2021 Annual Report and Accounts

Climate-related disclosures

continued

Climate-related disclosures:

Strategy continued

Championing climate-related product innovation

We are a part of NatWest Group’s One Bank approach to

climate-related opportunities. Current activities are centred

on the scoping of product development opportunities aimed at

producing a comprehensive climate and ESG product suite and

broadening market presence into new areas such as private

finance, repo, FX and ESG-linked transactions, as well as

solutions to reduce the carbon intensity of portfolios. We

anticipate these enhanced product offerings will help

customers navigate their own transition to net zero.

We have also been active in the voluntary carbon markets.

These markets allow individuals, companies or governments

to purchase greenhouse gas or carbon credits to mitigate or

offset their own emissions. In 2021, we initiated dialogue with

customers, building out our intelligence to determine options

for a specialised role NWM Group can play in this market.

We have supported NatWest Group to play a key role in

establishing Carbonplace, a technology- based exchange

platform for trading high-quality carbon credits, aligned with

the Taskforce for Scaling Voluntary Carbon Markets (TSVCM).

Overall, our performance has been expansive across green,

social, and sustainability (GSS) bond transactions, as well as

sustainability-linked bonds (SLBs) and sustainability-linked

loans (SLLs). In 2021, NWM Group ranked in the top 2

bookrunners for supporting UK corporate issuers

, and in the

top 2 supporting issuers globally in Sterling (GBP) issuance,

with their GSS bonds

. NWM Group ranked in the top 5 for

supporting Western Europe corporate issuers, with their

GSS bonds

. We were also ranked number 6 for supporting

European financial institutions with their green bond issuance

as well as number 1 for all GBP-denominated GSS issues

by financial institutions

. NWM Group continued to support

financial institutions who were increasing their GSS issuance

as a proportion of their overall funding, acting as bookrunner

on 23 transactions which included 9 customers with their debut

green and social issuance, and a further 6 who accessed a

new currency or asset class within the green and social bond

market. We also supported the corporate and public sector,

as well as housing associations, with ESG structuring.

Many of these transactions are part of the NatWest Group

initial two-year target to provide £20 billion Climate and

Sustainable Funding and Financing which was exceeded

in under 18 months, and the additional £100 billion Climate

and Sustainable Funding and Financing target announced

in October 2021 that NatWest Group is aiming to provide

between 1 July 2021 and the end of 2025. This reflects a

shift in customer preferences and an opportunity for us

to reach new customers.

Thought leadership and influence

NWM Group’s subject matter experts delivered 108 articles and

53 events throughout 2021 across many ESG themes aimed at

supporting our customers’ learning journeys and bi-monthly

ESG Bitesize webinars to the benefit of NWM Group’s colleagues.

In excess of 300 NWM Group colleagues globally signed up to

the University of Edinburgh’s Climate Change transformation

programme, helping to integrate our climate ambition across

different roles and functions.

We play an active role in industry-wide sustainable finance-

related forums to develop our thought leadership and help to

shape and influence climate-related developments externally.

We are a Board Member of the Global Financial Markets

Association (GFMA), play a role with the International

Capital Market Association (ICMA) and are a Board Member

of the Association for Financial Markets in Europe (AFME),

which are crucial to building market momentum and

developing standardised frameworks and products. NWM

Group co-sponsored a report by Boston Consulting Group and

Global Financial Markets Association, ‘Unlocking the Potential

of Carbon Markets to Achieve Global Net Zero’, which provides

an overview of the developing carbon market and describes

the evolving carbon ecosystem which contains both

compliance and voluntary market alternatives. NWM Group

colleagues are involved with a range of industry bodies that

support the transition to net zero as well as the development

of the sustainable finance market to ensure a strong and

robust market for all participants.

We have also taken steps to embed climate thought leadership

into our US and APAC teams by expanding our engagement

with institutional investors and building out our investor

intelligence to support product development across our

financing activity. In the US we have also been increasing

the issuer dialogue with regard to ESG – both loans and bonds.

Approach to climate-related risks

We are part of NatWest Group’s One Bank approach to

climate-related risks. Our climate ambition incorporates

various climate-related opportunities and, at the same time,

enables us to identify, assess and manage climate-related

risks. In order to meet our commitments to help end the most

harmful activities and at least halve the climate impact of our

financing activity by 2030, NWM Group has assessed and

acted upon a number of risks related to our financing of fossil

fuels and are taking steps to develop our stance on nature and

biodiversity loss. We intend this ambition to result in limiting

activity with companies with more than 15% of activities

related to thermal and lignite coal and major oil & gas

producers, unless they had a Credible Transition Plan in

line with the 2015 Paris Agreement in place by end of 2021;

and over time reduced investment risk in customer portfolios

associated with climate change and reduced impact of

our financing activities.

(1)

Source, Dealogic.

NatWest Markets Plc

2021 Annual Report and Accounts

Evolving climate data and analytics

In light of the continued challenges we face in sourcing and

evaluating climate-related data of varied scope and quality we

have directed resources to invest in climate data and tools to

equip our customer facing teams with the analytics to best

support business origination and delivery. We plan to evolve

our capability and enhance NWM Group’s own set of

measurable KPIs for management information purposes

as well as external disclosure. Over time we expect these

enhancements to help us with the incorporation of climate

and ESG factors as part of NWM Group’s capital and

portfolio management; the standardisation of reporting

and measurement in respect of Climate and Sustainable

Funding and Financing products; as well as the enhancement

of our climate risk appetite measures in light of continued

product innovation.

Our own operational footprint

During 2021

(1)

, NatWest Group reduced its direct own

operational

(2)

carbon footprint 46% against 2019 baseline,

and increased renewable electricity consumption to 97%.

For NatWest Group own operations to support the public

commitments to the Net Zero Banking Alliance, they plan

to align to the Science Based Targets initiative (SBTi)’s ‘SBTi

Corporate Net-Zero Standard’ released in October 2021

and account for the wider value chain

(3)

, including suppliers.

NWM Group plan to work with NatWest Group to contribute

to stretching targets for minimum 90% decarbonisation by

2050 for all emissions to achieve net zero (excluding financed

emissions which is covered in more detail in the NatWest

Group 2021 Climate-related Disclosures Report section 5.7).

Climate-related impact on financial planning

and future looking plan

During 2021, we have worked with NatWest Group to

incorporate climate into the financial planning process by

developing the first carbon plan for NatWest Group. This work

progressed alongside the NatWest Group financial planning

process in the second half of the year. This included an

assessment of climate impact of:

–

lending and investment changes incorporated in the

financial plan over the next five years,

–

current and planned climate-related opportunities including,

but not limited to, NatWest Group’s commitment to provide

£100 billion Climate and Sustainable Funding and Financing

and the role that NWM Group will play in that,

–

to acknowledge our dependence on policies, technology

developments and customer behaviour, and the related

risks, we also assessed current and expected policies based

on the Climate Change Committee’s Sixth Carbon Budget

published in 2020 and any potential impacts on our climate

ambition. Refer to NatWest Group 2021 Climate-related

Disclosures Report section 5.7 for details on policy and

technology changes needed to support transition by sector.

During 2022, we plan to continue to work with NatWest Group

to develop capability to measure the impact of climate-related

risks and opportunities arising from NatWest Group actions and

also external factors. Our work on assessing emissions from

our own direct operations and on our lending and investments

is noted in the Natwest Group 2021 Climate-related Disclosures

Report sections 5.6 and 5.7. Section 5.7 also outlines current

estimates of 2030 emissions intensities for sectors analysed

and consequently the level of emissions reductions that may

be required, acknowledging the uncertainties arising from

dependence on customer behaviour changes, their transition

plans as well as policy and technology developments.

In 2022, NatWest Group plan to further enhance carbon

planning capability to support development of transition plans

to measure and track progress towards the NatWest Group

ambition to halve the climate impact of our financing activity

by 2030.

Scenario analysis

In 2021, NWM Group participated in the Climate Biennial

Exploratory Scenario (CBES) within the overall NatWest

Group submission. While the trading book was excluded from

scope under the Bank of England guidance, we have produced

stressed credit risk results for the banking book, including both

impairments and risk-weighted assets projections, for each

of the ‘Early’, ‘Late’ and ‘No Policy Action’ scenarios. NWM

Group supported the analysis of large financial counterparties.

Beyond CBES, we continue to strengthen our overall climate-

risk scenario capabilities and have explicitly included climate

effects in one of the core scenarios to be used in this year’s

Internal Capital Adequacy Assessment Process (ICAAP). We

remain aligned to NatWest Group’s initiatives to develop the

necessary methodology and processes to perform climate

scenario analysis as an integral part of risk management

and strategic decision-making.

(1)

Our own operational footprint reporting year runs from October 2020 to September 2021.

(2)

NatWest Group defines direct own operations as our Scope 1, Scope 2 market-based and Scope 3 (paper, water, waste, business travel, commuting and work from home emissions).

It therefore excludes upstream and downstream emissions from our value chain.

(3)

Upstream operational value chain emissions are all the indirect Scope 3 emissions required for our operations to occur, including emissions from our suppliers, energy creation and

transport to our facilities, and our mail. Downstream operational value chain emissions are all of the indirect Scope 3 emissions associated with our operations during and after serving

our customers, including customer transport to and from our facilities, how our products are used and how they are disposed of.

NatWest Markets Plc

2021 Annual Report and Accounts

Climate-related disclosures

continued

Climate-related disclosures:

Risk management

The organisation’s processes

for identifying and assessing

climate-related risks

(1)

Climate risk is the risk of financial loss or adverse non-financial

impacts associated with climate change and the political,

economic and environmental responses to it. Climate change

represents inherent risk to NWM Group, not only from its

impact on the global economy and the businesses of its

customers, but also through its potential effects on asset

values, operational costs and business models. As a result,

NWM Group has adopted a dual approach to climate risk

management in line with the wider NatWest Group. Climate

risk is recognised as a principal risk as well as a causal factor

affecting other financial and non-financial risks. Throughout

2021, NatWest Group continued to embed this dual approach,

updating existing risk policies and toolkits, where appropriate,

to incorporate climate considerations.

Climate-related risks are classified as either physical or

transition risks

(2)

. In April 2021, the NatWest Group Board Risk

Committee approved a principles-based climate risk policy,

which defined the key requirements for effectively managing

climate risk: the identification and assessment of climate risk

through the incorporation of climate considerations in key risk

management processes. This is largely delivered through the

following mechanisms:

–

Scenario analysis to identify, assess, measure and

mitigate climate risk on NatWest Group’s balance sheet.

–

Long-term balance sheet transformation driven by

NatWest Group’s strategic ambition and purpose to

reduce its climate impact.

–

Enhanced climate risk data capabilities.

NatWest Group has adopted three first generation risk appetite

measures to embed climate risk capabilities and support the

identification, assessment and mitigation of climate risk in the

day-to-day operations of the business. These will be considered

by NWM Group when designing and embedding their risk

appetite measures into their business-as-usual risk

management practices in 2022.

Integrating climate-related risks into our principal

risk management

Following inclusion of climate risk as a principal risk in

the NatWest Group Risk Directory in Q1 2021, an approach

which uses iterative multi-year enhancements was established

to fully integrate climate risk as a factor within NatWest

Group’s risk management, including NWM Group. The timing

of this multi-year journey reflects both the complexity of the

task and evolving nature of climate data capabilities and

supporting tooling.

A climate maturity rating scale has been developed to

support the ongoing assessment of climate risk management

throughout NatWest Group. This approach translated NatWest

Group’s climate risk policy into thematic management

outcomes. Implementation of processes, procedures and

controls against these outcomes by the first line of defence

provides a measurement of the level of maturity of climate risk

management. This is overseen by the second line of defence.

At year-end 2021, measured against this scale, NWM

Group achieved the minimum expectation of first-generation

implementation. This means a predominantly qualitative

approach to the policy outcomes, with coverage across priority

sectors or customers. For example, NWM Group now requires

mandatory qualitative climate commentary in credit risk

assessments and has developed qualitative scorecards

to assess customers’ exposure to physical/transition

risks and opportunities.

Once all outcomes have been achieved to the most advanced

maturity rating, the principal climate risk will no longer be

required as the capabilities to manage climate-related

risks effectively would be integrated to respective risk

management activity.

Within NWM Group, progress has been made in

embedding climate considerations in credit and operational

risk management, with all areas progressing and further

development plans in place for 2022. Having the right climate-

related data available is essential for further integration, and

NWM Group is working closely with NatWest Group’s data

teams to evolve capabilities.

Climate Risk Challenges

Climate risk management is an evolving discipline. Climate risk

metrics are complex and require many methodological choices,

judgements and assumptions. Many climate metrics and data

are based on underlying assumptions made about climate

changes, policies, technologies and other matters that are

uncertain or not yet known. For further details see NatWest

Group 2021 Climate-related Disclosures Report section 5.8.

(1)

For further information on our process for identifying and assessing climate-related risks please refer to 2021 NatWest Group Climate-related Disclosures Report section 4.1.

(2)

Physical risks can be either acute, such as extreme weather events resulting in business disruption to the bank’s own operations, or chronic effects such as prolonged drought

conditions adversely affecting agricultural yields. Transition risks are those associated with shift towards a net-zero economy.

NatWest Markets Plc

2021 Annual Report and Accounts

Credit risk

NWM Group participates in NatWest Group’s Wholesale Credit

Risk Climate Forum which brings together key stakeholders

to integrate and embed climate risk into wholesale credit

risk management.

This activity is supported by working groups in the business

segments carrying out detailed activity to integrate climate

risk in the credit assessment process. Key climate decisions

impacting credit risk frameworks, policies and risk-

management activities are escalated to the NWM

Group Credit Risk Committee for approval.

During 2021, climate risk was further embedded in the

credit risk-management process. Climate risk was included

as a factor in determining sector classification. Transaction

Acceptance Standards (TAS) were also updated to

incorporate climate considerations.

Qualitative assessment of climate risk and the mandatory

inclusion of climate commentary was incorporated into the

existing review processes for NWM Group’s credit portfolio

from Q4 2021. This may include an assessment of physical

and transition risks as well as the quality of transition plans,

an understanding of customer capabilities to manage climate-

related risks, emissions assessments and associated potential

financial impacts.

A methodology was also developed to assess climate-risk

exposure among NatWest Group’s wholesale customers,

including NWM Group, using scorecards. These provide

a consistent approach to the qualitative assessment of

customers’ exposure to physical or transition risks and

opportunities. The scorecards are aligned with probability

of default models.

Scorecards are being phased in to ensure NatWest

Group’s exposure to heightened climate risk sectors and

key counterparty types are prioritised for assessment and

monitoring. In Q4 2021, the first scorecards (mid-large and

large corporate, property, housing association, banks and

leveraged funds) were finalised for approval and launch in

Q1 2022. These cover approximately 60% of NWM Group’s

exposure at default (EAD) and 90% of EAD associated with

heightened climate risk sectors.

In Q4 2021, NatWest Group started planning a more

quantitative assessment of climate risk within the credit

assessment process. The aim is to integrate climate activities,

seeking to improve customer-level analysis, including carbon

budget reporting, credible transition plans, climate stress

testing scenario output and climate scorecards. This is

expected to help determine risk appetite, differentiate

pricing and support appropriate business opportunities

and risk management.

Building on progress made over the past year, several

enhancements are planned for 2022, including evolving TAS.

Further scorecard development is planned to include those

used to assess securitisation, then covering approximately

75% of NWM Group’s EAD. Strategic integration of the

scorecards is expected with a phased migration into

NatWest Group’s ratings platform, enhancing monitoring

and reporting capabilities.

As the availability of quantitative climate data improves,

the aim is to incorporate it into the scorecard tool, which is

expected to become increasingly automated to help improve

the consistency of assessment.

For further information please refer to NatWest Group 2021

Climate-related Disclosures Report section 4.3.

Market risk

The impact of extreme climate events or an acute shift in

global climate-related regulation has the potential to affect

market risk across all products.

Increased market risk may also arise because of supply

chain disruption, changes in demand for products, and

sharp adjustments to market prices for affected sectors

or geographies.

The embedding of market risk climate-specific stress

scenarios will follow industry standards and regulatory

guidance. A monthly climate sector and geography report

has been developed to monitor sector, issuer and country

concentrations across traded bonds, loans and credit

default swaps.

The reporting provides information on the existing climate-risk

profile as well as informing decisions on future profile and

guideline setting.

NatWest Markets Plc

2021 Annual Report and Accounts

Climate-related disclosures

continued

Climate-related disclosures:

Risk management continued

Model risk

NWM Group leverages NatWest Group-wide models and

policy standards where applicable for climate risk. Unlike other

risk-estimation models, there are limited benchmarking options

available for climate risk. As a result, an understanding of the

underlying uncertainty and holistic view of the impact on

existing models is still developing.

Reputational risk

The correlation between reputational risk and climate

change issues remained a significant area of focus during

2021. Enhancements were made to the Environmental, Social

& Ethical risk management framework to mitigate reputational

risk arising from exposure to carbon-intensive sectors and to

support the transition to a net-zero economy.

NWM Group applies the NatWest Group reputational risk

policy which sets out expectations around the identification

and assessment of reputational risk. The policy links to

Environmental, Social & Ethical mandatory procedures

which provide clear guidance to employees when dealing

with customers, projects and transactions that present

heightened environmental, social and ethical risks.

The NWM Group Reputational Risk Committee is the point

for escalation and review of potential issues that arise at a

transactional, business or legal entity level. It receives authority

from the NWM Group Executive Risk Committee and is also

overseen by the NWM Plc Board Risk Committee and the

NatWest Group Reputational Risk Committee. The NWM

Group Climate and Sustainability Committee also has a

focus on environmental, social and ethical issues.

Operational risk

Climate change is a source of operational risk, including

disruption to business services, damage to physical assets

and supply chain disruption.

The NatWest Group change and risk and control assessment

frameworks that NWM Group uses have been enhanced

to incorporate climate change considerations. NWM Group

completed a risk discovery heat map in 2021 to ensure

adequate coverage of climate change considerations

across these assessments and scenario analysis.

During 2021, a NatWest Group-wide operational risk climate

scenario exercise was performed, focused on operations in UK

and India. For full details of the scenario analysis see NatWest

Group 2021 Climate-related Disclosures Report section 4.3.

The impact for NWM Group was:

–

The customer impact from a 1-in-25 years scenario was

categorised as ‘Important’, with a direct cost implication

estimated at approximately £0.2 million.

–

The customer and reputation impact of a 1-in-100 years

scenario was categorised as ‘Significant’, with direct costs

estimated at approximately £2.9 million.

The scenario outcomes and learnings will be used, alongside

the risk discovery heatmap work, to support our 2022 planning.

Conduct and compliance risk

Climate change and responses to it may amplify existing

conduct risks. These include risks associated with the design

and distribution of products and NWM Group’s compliance

with the rapid pace of change in climate legislation, regulation

and best practice.

NWM Group is committed to identifying, managing

and mitigating these additional risks as part of its climate

programme. It considers conduct risk as part of its product

governance and approval processes for ESG-focused products.

Climate-related risks are escalated to the CSC and other risk

fora, as appropriate. NWM Group also considers potential

legislative and regulatory changes in the jurisdictions in which

it operates to ensure it continues to remain compliant with

local requirements and expectations.

To support NatWest Group’s purpose and climate agenda,

NWM Group is reviewing its current product governance

processes and procedures with enhancements being delivered

to ensure they remain fit for purpose and effective in the

management of conduct and compliance risk.

NatWest Markets Plc

2021 Annual Report and Accounts

Climate-related disclosures:

Metrics and targets

NatWest Group has developed metrics and internal reporting tools to assess and

monitor climate-related risks and opportunities. These metrics continue to evolve

in step with NatWest Group’s growing climate capability and industry guidance.

This section includes the metrics used to assess climate-related risks and

opportunities as relevant to NWM Group.

Heightened climate-related risk sectors

As part of its risk-management activity, NatWest Group identified 13 sectors within its wholesale portfolio as exposed to heightened

climate-related risk impacts

(1)

. The table below summarises NWM Group loan exposures

(2,3)

to these sectors; the amounts reported

include all lending to customers including climate and sustainable lending.

Total exposure to heightened climate-related risk sectors reduced by £1.7 billion during 2021. There is a decrease across the

majority of sectors with the largest decrease, £0.5 billion, in the power utilities sector:

31 December 2021

31 December 2020

Heightened climate-related

risk sectors

Loans

£m

Off-Balance

sheet

£m

Total sector

exposure

£m

Total sector

exposure as

% of Total

NWG

Loans

£m

Off-Balance

sheet

£m

Total sector

exposure

£m

Total sector

exposure as

% of Total

NWG

Power utilities

1,398

1,486

7.3%

161

1,795

1,956

8.6%

Automotive

686

735

3.6%

863

912

4.0%

Land transport and logistics

231

306

1.5%

457

544

2.4%

Commercial real estate

182

279

1.4%

166

313

479

2.1%

Oil and gas

269

309

1.5%

377

441

1.9%

Airlines and aerospace

207

214

1.1%

356

389

1.7%

Chemicals

0.3%

164

0.7%

Shipping

0.0%

0.4%

Construction

0.4%

Building materials

0.1%

0.3%

Agriculture

0.2%

Housing associations

0.1%

Mining and metals

0.0%

Total Heightened climate-related sectors

654

2,896

3,550

17.5%

625

4,587

5,212

23.0%

Total NWM Group all sectors

8,547

11,714

20,261

100.0%

9,536

13,140

22,676

100.0%

(1)

Refer to NatWest Group 2021 Climate-related Disclosures Report section 4.3 for further details of the identification and review process.

(2)

Loans to customers and banks – amortised cost and FVOCI. This table shows gross loans only and excludes amounts that are outside the scope of the Expected Credit Loss

(ECL) framework.

(3)

Off-balance sheet includes loan commitments and contingent liabilities.

NatWest Markets Plc

2021 Annual Report and Accounts

Climate-related disclosures

continued

Climate-related disclosures:

Metrics and targets continued

Climate and Sustainable Funding and Financing

NatWest Group aims to play a leading role in championing

climate solutions by supporting its customers’ transition

towards a net-zero, climate-resilient and sustainable economy

through Climate and Sustainable Funding and Financing.

NatWest Group uses its Climate and Sustainable Funding and

Financing Inclusion Criteria (CSFI) criteria

to determine the

assets, activities and customers that are eligible to be counted

towards the NatWest Group Climate and Sustainable Funding

and Financing targets.

During H1 2021 NatWest Group exceeded its 2020-21 target

of providing £20 billion of Climate and Sustainable Funding

and Financing in the two years ended 2021. In October 2021,

NatWest Group announced a new target to provide an

additional £100 billion of Climate and Sustainable Funding

and Financing between 1 July 2021 and the end of 2025.

In the full year ended December 2021, NatWest Group

completed £17.5 billion of Climate and Sustainable Funding

and Financing. This comprised £9.7 billion in NWM Group

from 71 deals. Of these 53 were green bonds and private

placements totalling a notional amount of £38.7 billion which

accounts for c.16% of the total lead managed transactions

by NWM Group during the period

(2)

Climate and Sustainable Funding and Financing

(1)

Full year ended

31 December

2021

£m

Half year ended

31 December

2021

£m

Half year ended

30 June

2021

£m

Full year ended

31 December

2020

£m

Green Public Bonds and Green Private Placements

(2)

8,227

2,777

5,450

5,030

Green Loan Underwriting

(2)

153

–

153

–

Sustainability Linked Loans

(3)

639

347

292

732

Sustainability Linked Bonds and Private Placements

(3)

201

–

Other financing within the CSFI criteria

(4)

430

–

430

1,395

Total

9,650

3,325

6,325

7,157

(1)

For the full year ended 31 December 2021, the NatWest Group 2021 CSFI criteria published in February 2021 has been used to determine the assets, activities and companies that are

eligible to be counted. The revised CSFI criteria published in October 2021 will be used from 1 January 2022. Full details of the CSFI criteria can be found at natwestgroup.com

(2)

Underwriting of specific use of proceeds debt capital market issuances for project expenditures, as well as green loan commitments when customers meet the CSFI criteria. Amounts

represent the NWM Group share of the notional (total underwriting amount lead managed or placed by NWM Group), based on the number of underwriters within a specific deal.

During the year ended 31 December 2021 53 green bonds and private placements totalling a notional amount of £38.7 billion (36 deals, £22.7 billion during full year 2020), account

for c.16% of the total lead managed or placed transactions by NWM Group during the period (c.4% for full year 2020).

(3)

Sustainability Linked Loans, Bonds and private placements made to customers, in line with Loan Market Association (LMA) Sustainability Linked Loan principles and International Capital

Market Association (ICMA) Sustainability Linked Bond principles where deal targets include green performance indicators, aligned to CSFI criteria.

(4)

In addition to transactions that directly meet CSFI criteria based on use of proceeds for green purposes, the CSFI criteria also includes certain general purpose bonds and private

placements to customers who can evidence (to NatWest Group’s satisfaction through review of the customers’ profit and loss statement) 50% or more of revenues from the categories

and sectors outlined in the criteria. In the year ended 31 December 2021, the £430 million relates to bonds and private placements on this basis.

UK Debt

Management Office

NWM Group acted

as joint lead manager

raising £6 billion for

the Debt Management

Office’s second green

bond; read more on

page 9.

Examples of

green deals

Origin Housing

NWM Group acted as

sole ESG structurer and

agent on Origin Housing’s

inaugural green £120

million private placement.

We thereby helped this

social landlord lock in

long-term financing to

develop affordable and

energy-efficient homes

for its tenants in London

and Hertfordshire.

KfW

NWM Group acted as

joint bookrunner on KfW’s

€4 billion green bond

issuance. This issuance

supported KfW’s two

green loan initiatives:

the ‘Renewable Energies

Programme’, which

mainly funds wind and

photovoltaics projects;

and the ‘Energy-efficient

Construction’ programme

which supports energy-

efficiency in new

residential buildings

in Germany.

NatWest Markets Plc

2021 Annual Report and Accounts

Capital markets transactions (financing)

NWM Group also supports customers through capital

markets by providing an integrated proposition across

financing, solutions and advisory services. We are a leading

partner for our customers, helping them to access global debt

capital markets across a wide variety of products, including

bonds, loans, commercial paper, medium-term notes and

private placements as well as bespoke financing solutions

and primary lending products.

As part of capital markets transactions, NWM Group acts as

a facilitator

(1)

to support customers to issue debt instruments.

These transactions are not recorded on the balance sheet

since the climate-related exposure is held by the investor

who places the bonds or private placements in their portfolio.

The chart below shows NWM Group’s lead management

activity during 2021 by sector.

Finance: 42.2%

Gov

ernment: 20.8%

Utility & Energy: 8.0%

Real Es

tate/Pr

operty: 4.9%

Oil & Gas: 1.6%

Construction/Building: 3.3%

Insurance: 1.6%

Prof

essional Services: 3.0%

Computer & Electr

onics: 1.7%

elecommunications

: 2.0%

Aut

ruck: 1.8%

Mining: 0.1%

ransportation: 3.8%

Other: 5.1%

NWM Gr

oup

’

s Underwriting Business b

y Sector in

2021

42.2%

20.8%

8.0%

4.9%

5.1%

1.8%

2.0%

1.7%

3.0%

1.6%

3.3%

1.6%

0.1%

3.8%

The data is sourced from Dealogic, and uses the Dealogic

General and Specific Industry Group classifications. Financing

volumes are reported on a manager-proceeds basis including

bonds and securitised bonds; no modifications have been made

by NWM Group. This data represents a third party view of our

financing and is subject to Dealogic’s league table methodology,

which pro-rates volume across lead-managers.

The table below shows value for financing related to mining,

oil & gas and utility & energy sectors. These are identified

as high risk as they are emissions intensive and therefore

particularly exposed to rising carbon costs; however, those

deals meeting the CSFI criteria have been shown separately

given their decarbonisation scope/trajectory:

Sector

2021

£m

% of

Total

2020

£m

% of

Total

Utility & Energy

5,706

8.0%

5,761

7.4%

Of which fall under the

CSFI criteria

899

2,931

Mining

0.1%

270

0.3%

Oil & Gas

1,166

1.6%

589

0.8%

Grand Total of all industries

(NWM Group

apportioned value)

71,210

77,471

As methodologies are developed by the industry, NWM Group

intends to incorporate facilitated emissions into its measuring

and reporting cycle.

(1)

The Partnership for Carbon Accounting Financials (PCAF) discussion paper on Capital Markets, issued in November 2021 defines a facilitator as: ‘An institution (usually large

international banks) that helps an entity (in this paper only corporates are in scope) to issue equity or debt instruments in the capital markets. The facilitator may carry out activities

including advising the issuing entity on structure, pricing, and process; preparing materials for and engaging with investors; and arranging and guiding issuing entities on a roadshow.

Formal roles encompassed by this term include Lead/Active/Passive Bookrunner(s) and Lead/Co-Manager(s).’

NatWest Markets Plc

2021 Annual Report and Accounts

NatWest Markets Plc

2021 Annual Report and Accounts

Financial Review

Board of directors and secretary

Risk and capital management

Report of the directors

Statement of directors’ responsibilities

Financial statements

179

Risk factors

201

Forward-looking statements

NatWest Markets Plc

2021 Annual Report and Accounts

Strategic report

Financial review

Risk and capital management

Report of the directors

Risk factors

Financial statements

Financial rev

iew

NWM Group

Annu

al Report an

d Accounts 202

Presentation of information

NatWest Markets Plc (‘NWM Plc’) is a wholly-owned su

bsidiary

of NatWest Group plc or ‘the ultimate hol

ding company’. The

term ‘NWM Group’ or ‘we’ refers to NWM Plc

and its subsidiary

and associated undertakings.

The term ‘NatWest Group’ refers to NatWest G

roup plc and its

subsidiary and associated undertakings. The te

rm ‘NWH Group’

refers to NatWest Holdings Limited (‘NWH’) and its su

bsidiary

and associated undertakings.

The term ‘NatWest Bank

Plc’ or

‘NWB Plc’ refers to National We

stminster Bank Plc.

NWM Group publishes its financial statemen

ts in pounds

sterling (‘£’ or ‘sterling’). The abbreviations ‘£m’ and ‘£

bn’

represent millions and thousands of millions of p

ounds sterling,

respectively, and references to

‘pence’ represent pence where

amounts are denominated in pound sterling (‘

GBP’). Reference

to ‘dollars’ or ‘$’ are to United

States of America (‘US’) dollars.

The abbreviations ‘$m’ and ‘$b

n’ represent millions and

thousands of millions of dollars, respectively. T

he abbreviation

‘€’ represents the ‘euro’, and the abbreviations ‘€m’ an

d ‘€bn’

represent millions and thousands of millions of eur

os,

respectively.

NWM Group legal entity disclosures

There is a distinction between the disclosure of the N

atWest

Markets operating segment per

formance in NatWest Group

plc’s 2021 Annual Report and Acc

ounts (ARA), and NWM

Group’s disclosures as presented in this documen

t, with

differences primarily as follows:



NWM Group’s legal entity disclos

ures include the Central

items & other segment,



NatWest Group plc’s 2021 ARA reports the NatWes

t Markets

segment excluding the Central items & othe

r segment.

Non-IFRS financial measures

NWM Group prepares its financial statemen

ts in accordance

with generally accepted accounting pri

nciples (GAAP). This

document contains a number of adjusted or alternati

performance measures, also known as non-

GAAP or non-IFRS

performance measures. These

measures are adjusted for

certain items which management believe are no

t representative

of the underlying performance of the business an

d which

distort period-on-period comparison. These

non-IFRS measures

provide users of the financial statemen

ts with a consistent basis

for comparing business performance between financial pe

riods

and information on elements of performance

that are one-off in

nature. The non-IFRS measures

also include the calculation of

metrics that are used throughout the banking indus

try. These

non-IFRS measures are not measures within the s

cope of IFRS

and are not a substitute for IFRS measures. Re

fer to the

section, ‘Non-IFRS financial measures’, on page 178

for further

information and calculations of

non-IFRS financial measures

included throughout this docu

ment, and, where relevant, the

most directly comparable IFRS financial measures.

Financial review

continued

NWM Group

Annu

al Report an

d Accounts 202

Performance overview

NWM Group reported a loss for the year ended 31

December

2021 of £491 million compared

with a loss of £327 million for

the year ended 31 December 2020

. Lower income reflected

under-performance in Fixed Income in 2021

and the

exceptional market activity in the prio

r year in response to the

COVID-19 pandemic. Operating expenses f

or the current year

were lower than in 2020, largel

y reflecting lower litigation and

conduct costs and progress on u

nderlying cost reductions.

Financial performance



Income was £401 million in 2021

, compared with £1,158

million in 2020, driven by under-perform

ance in Fixed

Income, in contrast to the prior y

ear which benefitted from

exceptional levels of market ac

tivity generated by the initial

spread of the COVID-19 virus.



Operating expenses of £1,1

50 million were £281 million

lower compared with £1,431 million in 20

20. Litigation and

conduct costs of £17 million credit reflected progress in

closing legacy matters and were £

151 million lower than

£134 million in 2020. Strategic costs were £2

48 million, up

from £191 million in the prior ye

ar, as work continued on the

refocusing of NWM Group. Other operating expenses of

£919 million were £187 million lower than i

n 2020, reflecting

progress on underlying cost reductions.



Impairment releases were £35 million in 2021, la

rgely driven

by credit improvements and releases on individual IFRS 9

Stage 2 and Stage 3 counterpa

rties, compared with losses

of £42 million in the prior year

which were largely due to the

credit deterioration of an individual counterp

arty and the

impact of expected credit losses recognised following

the

COVID-19 pandemic.



NWM Group’s total assets and liabilities dec

reased by £70.1

billion and £68.2 billion to £203.0

billion and £195.6 billion

respectively at 31 December 2021

, compared with the prior

year. The decreases primarily r

eflect lower derivative fair

values, largely driven by increas

es in interest rates across

major currencies during the year.



Total dividends paid to NatWest Group

plc during the year

ended 31 December 2021 amounted to £

1.0 billion. On 17

February 2022, the NWM Plc Board approved

a further

interim dividend of £250 million, to be declared

and payable

to NatWest Group plc on 18 February 2022

. There has been

no adjustment to the year-end statutory financi

statements, however a £250 mi

llion foreseeable dividend

deduction has been applied to t

he year-end regulatory

capital position.

Capital and leverage



Total NWM Plc RWAs reduced to £22

.7 billion at 31

December 2021 from £25.6 billion at 31

December 2020,

reflecting lower levels of credit, c

ounterparty credit, market

and operational risk which have trended downwa

rds as the

business seeks to reduce RWAs through the execution of

capital optimisation actions, including strategic risk

reduction transactions and exit activity.



NWM Plc’s Common Equity Tier 1 (CET1) ratio was 17.9

% at

31 December 2021, compared with 21.7% at 31 Decem

ber

2020. The decrease in the year ref

lected the impact of

dividends paid to NatWest Group plc and o

ther reserve

movements, partly offset by the reduction in RWAs. The

CRR

leverage ratio decreased to 4.3% from 5.2

% at 31 December

2020.



Total MREL for NWM Plc at 31 Dece

mber 2021 was £9.6

billion, or 42.1% of RWAs, down from £12.7 billion o

r 49.6%

of RWAs at 31 December 2020. The dec

rease in the year

was largely due to the redemption of a $1.

5 billion internal

instrument issued to NatWest Group plc an

d the reduction in

CET1 capital.

Liquidity and funding



NWM Plc’s liquidity portfolio at

31 December 2021 was £16.1

billion with an LCR of 205%, compared with £19

.4 billion and

an LCR of 268% at 31 December 2020

. Stressed coverage

ratio was 146% at 31 December 202

1, compared with 207%

at 31 December 2020.



NWM Plc issued £4.3 billion of term senior unsecured de

securities during 2021, including two bench

mark

transactions under the US MTN pro

gramme amounting to

$2.55 billion of notes, two benchmark transac

tions under the

EMTN programme amounting to €2

.25 billion of notes, and

other private placements.

Financial review

continued

NWM Group

Annu

al Report an

d Accounts 202

NWM Group business review

The table below presents a segment

al analysis of key lines of NWM Group’s inc

ome statement. Commentary

refers to the table

below as well as the statutory income statement p

resented on page 105.

2021

2020

Central

NatWest

items &

NatWest

items &

Markets

other

Total

Markets

other

Total

Variance

Income statement

£m

Net interest income

—

(62)

(60)

(113%)

Non

interest income

401

(8)

393

1,180

1,218

(825)

(68%)

Total income

409

(8)

401

1,118

1,158

(757)

(65%)

Strategic costs

(236)

(12)

(248)

(207)

(191)

(57)

30%

Litigation and conduct costs

—

(4)

(130)

(134)

151

(113%)

Other operating expenses

(921)

(919)

(1,106)

—

(1,106)

187

(17%)

Operating

expenses

(1,157)

(1,150)

(1,317)

(114)

(1,431)

281

(20%)

Operating loss before impairments

(748)

(1)

(749)

(199)

(74)

(273)

(476)

174%

Impairment releases/(losses)

—

(40)

(2)

(42)

(183%)

Operating loss before tax

(713)

(1)

(714)

(239)

(76)

(315)

(399)

127%

Tax credit/(charge)

223

(12)

235

(1,958%)

Loss for the year

(491)

(327)

(164)

50%

Income

(8)

Fixed Income

(1,2,3,4,5)

(64)

—

(64)

511

—

511

(575)

(113%)

Currencies

(2,4)

427

—

427

583

—

583

(156)

(27%)

Capital Markets

(2,3,4)

336

—

336

384

—

384

(48)

(13%)

Capital Management Unit and other

(1,2,5,6)

(35)

(8)

(43)

(60)

(20)

(23)

115%

Income before Revenue share paid, Asset

disposals and OCA

664

(8)

656

1,418

1,458

(802)

(55%)

Revenue share with other NatWest Group

segments

(197)

—

(197)

(193)

—

(193)

(4)

Income excluding Asset disposals and OCA

467

(8)

459

1,225

1,265

(806)

(64%)

Asset disposals/Strategic risk reduction

(7)

(64)

—

(64)

(83)

—

(83)

(23%)

Own credit adjustments (OCA)

—

(24)

—

(24)

(125%)

Total income

409

(8)

401

1,118

1,158

(757)

(65%)

(1)

Income of £(12) million reported within Fixed Income relates to business subs

equently reallocated to Capital Management Unit during 2021. Comparatives have not been restated.

The full year equivalent amount for 2020 was £

1 million.

(2)

Income of £(42) million, £(8) million and £

(14) mil

lion reported within Fixed Income, Currencies a

nd Capital Markets respectively in 2020 relates to business that was subsequently

reallocated to Capital Management Unit during 2020.

(3)

Income of £33 million reported within Capital Markets in

2020 relates to business that was subsequently transferred to Fixed Income during 2020.

(4)

Income of £59 million and £8 million reported within Fixed Income in

2020 relates to business that was subsequently transferred to Currencies and Capital Markets respectively

during 2020.

(5)

Fixed Income includes income of £(7) million (2020: £37 million) relating

to miscellaneous balances that from Q2 2021 have been included in Capital Management Unit and other.

(6)

Capital Management Unit was set up in Q3 2020 to manage the capital usage and optimisation across all p

arts of NatWest Markets. The income shown here relates to legacy assets

and other miscellaneous balances. Other relates t

o income booked to the Central items & other operating segment.

(7)

Asset disposals/Strategic risk reduction relates t

o the costs of exiting positions, which includes changes in carrying value to align to the expected exit valuation, and the impact of

risk reduction transactions entered into, in respect of the strategic announcements of 14 Februa

ry 2020.

(8)

Product performance includes gross income earned

on a NatWest group-wide basis, including amounts contributed to other segments.

Financial review

continued

NWM Group

Annu

al Report an

d Accounts 202

NWM Group business review continued

Income

Net interest income was £8 million for 2021

, compared with net

interest expense of £60 million in 2

020. Net interest income

largely represents interest income from le

nding activity and

capital hedges, offset by interest expense f

rom the funding

costs of the business. The mov

ement in the year primarily

reflected reduced funding costs for the business

driven by the

ongoing repayment of legacy debt.

Non-interest income decreased by £82

5 million to £393 million,

compared with £1,218 million in 2020

. Income from trading

activities decreased to £263 mil

lion from £1,088 million in 2020,

reflecting under-performance in Fixed Income which

was

impacted by the re-shaping of the business

, in contrast to the

prior year which benefitted from the excep

tional market

activity generated by the initial spread of the COVI

D-19 virus.

Asset disposals/Strategic risk reduction was a £64

million loss

for the year, compared with a £

83 million loss in the prior year

following the strategic announcements in Fe

bruary 2020.

Operating expenses

Operating expenses of £1,1

50 million in the current year were

£281 million lower than £1,431

million in 2020. Litigation and

conduct costs credit of £17 milli

on for the year reflected

continued progress in closing legacy matters and we

re down

£151 million from £134 million i

n 2020. Strategic costs were

£248 million in 2021 compared with £191

million in 2020, as

work continued on the refocusing of NWM Group. Othe

operating expenses decreased to £919 million from £1,1

million in 2020, primarily reflecting ongoing pro

gress on

underlying cost reductions.

Impairments

Impairment releases were £35 million in 2021, la

rgely driven by

credit improvements and releases on individual IFRS 9 S

tage 2

and Stage 3 exposures, compared wi

th losses of £42 million in

2020, which were largely due to the credit dete

rioration of an

individual counterparty and the increased expe

cted credit

losses recognised following the COVID-19 p

andemic.

NatWest Markets segment

The operating loss before tax was £71

3 million compared with

a loss of £239 million in 2020. Income excluding asset

disposals

and own credit adjustments of £4

67 million was £758 million

lower than in 2020, reflecting under-pe

rformance in Fixed

Income which was impacted by the re-sh

aping of the business,

and the increased customer ac

tivity in the prior year as the

market reacted to COVID-19. O

perating expenses of £1,15

million were £160 million lower

than £1,317 million in 2020,

largely driven by a decrease in

other operating expenses

reflecting continued progress on underlyin

g cost reductions.

Central items & other segment

The operating loss before tax was £1 million c

ompared with a

loss of £76 million in 2020. Litigation and conduct costs of £1

million credit reflected progress in closing leg

acy matters and

were down £147 million from £1

30 million in 2020.

Financial review

continued

NWM Group

Annu

al Report an

d Accounts 202

NWM Group business review continued

Balance sheet profile as at 31 December 2021

NWM Group’s balance sheet pr

ofile is summarised below. Commentary

refers to the tables below as well

as the consolidated

balance sheet on page 106.

Assets

Liabilities

2021

2020

2021

2020

£bn

Cash and balances at central banks

16.6

15.8

Securities

25.0

29.2

25.0

26.8

Short positions

Reverse repos

(1)

20.7

19.4

19.0

Repos

(2)

Derivative cash collateral posted

(3)

12.0

18.5

17.6

23.2

Derivative cash collateral received

(4)

Other trading assets

1.4

1.6

2.5

3.3

Other trading liabilities

Total trading assets

59.1

68.7

64.5

72.3

Total trading liabilities

Loans - amortised cost

8.4

9.4

4.1

4.4

Deposits - amortised cost

Settlement balances

2.1

2.3

2.1

2.2

Settlement balances

Amounts due from holding company

Amounts due to holding company

and fellow subsidiaries

1.5

1.6

6.1

8.1

and fellow subsidiaries

Other financial assets

8.8

9.0

19.3

18.2

Other financial liabilities

Other assets

0.9

0.7

1.0

1.3

Other liabilities

Funded assets

97.4

107.5

97.1

106.5

Liabilities excluding derivatives

Derivative assets

105.6

165.6

98.5

157.3

Derivative liabilities

Total assets

203.0

273.1

195.6

263.8

Total liabilities

of which:

21.1

20.6

wholesale funding

(5)

9.2

9.5

short-term wholesale funding

(5)

Net derivative assets

3.6

4.7

2.9

3.6

Net derivative liabilities

(1)

Comprises bank reverse repos of £3.9 billion (2020 - £2.2 billion) and customer reverse

repos of £16.8 billion (2020 - £17.2 billion).

(2)

Comprises bank repos of £0.8 billion (2020 - £1.0 billion) and cust

omer repos of £18.6 billion (2020 - £18.0 billion).

(3)

Comprises derivative cash collateral posted relating to banks of £4

.3 billion (2020 - £7.5 billi

on) and

customers of £7.7 billion (2020 - £11.0 billion).

(4)

Comprises derivative cash collateral received relating t

o banks of £8.1 billion (2020 - £11.8 billion) and customers of £9.5 billion (2020 - £11.4 billion).

(5)

Predominantly comprises bank deposits (excluding repos), debt securities in

issue and third party subordinated liabilities.

Total assets and liabilities

decreased by £70.1 billion a

£68.2 billion to £203.0 billion and £19

5.6 billion respectively at

31 December 2021, compared with £273.1 billion a

nd £263.8

billion at 31 December 2020. The decreases primarily refle

lower derivative fair values, largely driven by increases in

interest rates across major currencies

. Funded assets, which

exclude derivatives, decreased by £1

0.1 billion to £97.4 billion

at 31 December 2021.

Trading assets

, which primarily relate to client-led

activity as

well as derivative cash collater

al posted, decreased to £59.1

billion at 31 December 2021 from £68.7

billion at 31 December

2020, driven by decreases in d

erivative cash collateral posted

and securities, partially offset by

an increase in reverse repos

as the balance sheet was managed within limits.

Trading

liabilities

decreased by £7.8 billion to £64.5 billion

at 31

December 2021 (2020 - £72

.3 billion), driven largely by a

reduction in derivative cash coll

ateral received.

Derivative assets and derivative liabilities

were down £60.0

billion to £105.6 billion and £58.8

billion to £98.5 billion

respectively compared with year end 202

0. The decreases in

mark-to-market were largely driven by increases in in

terest

rates across major currencies during the ye

ar.

Other financial liabilities

creased to £19.3 billion from £18.2

billion at 31 December 2020, driven by new iss

uance partially

offset by maturities, and include

s £12.4 billion of medium term

notes issued.

Board of dir

ectors and s

ecretary

NWM Group

Annu

al Report an

d Accounts 202

Board and committees

Chairman

Frank Dangeard

Chairman of the Board and Chairman of the No

minations and

Governance Committee

Executive directors

Robert Begbie

Chief Executive Officer

David King

Chief Financial Officer

Independent non-executive directors

Vivek Ahuja

Chairman of Board Risk Committee

Anne Simpson

Chairman of Audit Committee

Tamsin Rowe

Chairman of the Performance and Remuneration Com

mittee

Sarah Wilkinson

Board changes in 2021

Brendan Nelson (non-executive director) resigned o

n 30 June

2021.

Auditors

Ernst & Young LLP

Chartered Accountants and Statutory Audi

tor

25 Churchill Place

London E14 5EY

Registered office

36 St Andrew Square

Edinburgh EH2 2YB

Principal office

NatWest Markets Plc

250 Bishopsgate

London EC2M 4AA

NatWest Markets N.V.

Claude Debussylaan 94

1082 MD Amsterdam

The Netherlands

NatWest Markets Holdings USA Inc

600 Washington Blvd

Stamford

CT 06901 USA

NatWest Markets Plc

Registered in Scotland No. SC0

90312

Risk and ca

pital managem

ent

NWM Group

Annu

al Report an

d Accounts 202

Presentation of information

Where marked as audited in the se

ction header, certain

information in the Risk and cap

ital management section (pages

42 to 88) is within the scope of the Independen

t auditor’s

report. Risk and capital management is generally c

onducted on

an overall basis within NatWest Group such that com

mon

policies, procedures, frameworks

and models apply across

NatWest Group. Therefore, for the most p

art, discussion on

these qualitative aspects reflects those in NatWest

Group as

relevant for the businesses and operations in NWM

Group.

Update on COVID-19

While the immediate disruption diminished duri

ng the year, the

ongoing impacts of the global p

andemic remained a significant

focus for risk management in 20

21 and uncertainty in the

operating environment continued. NWM Group

remained

committed to supporting its cus

tomers while operating safely

and soundly in line with its strategic objecti

ves.

Against the backdrop of a slowly

-recovering economy, the

credit risk profile remains heightened and there is an

expectation that the impacts of the pandemic

will continue to

be seen in the performance of NWM G

roup’s portfolios for

some time.

While the direct impact on NWM Group’s ope

rational risk profile

reduced, NWM Group continued to closely mo

nitor the second-

order impacts on its transformation agen

da, with a significant

focus on managing resource to protect key regulato

deliveries. The continued evolution of NWM

Group’s ways of

working – to include large-scale

working from home – also

required significant operational

risk focus, particularly in terms

of business resilience. As a result of its strong balance she

and prudent approach to risk manageme

nt, NWM Group

remains well placed to withstand these aftershocks as well

providing support to customers when they need i

t most.

Risk management framework

Introduction

NWM Group operates under NatWest G

roup’s enterprise-wide

risk management framework, which is cent

red around the

embedding of a strong risk culture. T

he framework ensures the

governance, capabilities and methods are in place to f

acilitate

risk management and decision-making ac

ross the organisation.

The framework ensures that NWM G

roup’s principal risks –

which are detailed in this section – are appropri

ately controlled

and managed. It sets out the standards and objec

tives for risk

management as well as defining the division of role

s and

responsibilities.

This seeks to ensure a consistent app

roach to risk management

across NWM Group. It aligns ris

k management with NWM

Group’s overall strategic object

ives.

The framework, which is designed and m

aintained by NatWest

Group’s independent Risk funct

ion, is owned by the NatWest

Group Chief Risk Officer. It is reviewed and approve

d annually

by the NatWest Group Board. The

framework incorporates risk

governance, NatWest Group’s t

hree lines of defence operating

model and the Risk function’s mandate.

Risk appetite, supported by a robust set of p

rinciples, policies

and practices, defines the levels

of tolerance for a variety of

risks and provides a structured approach to risk-takin

g within

agreed boundaries.

While all NWM Group colleague

s are responsible for managing

risk, the Risk function provides oversight and

monitoring of risk

management activities, including the implemen

tation of the

framework and adherence to its

supporting policies, standards

and operational procedures. The Chie

f Risk Officer plays an

integral role in providing the Bo

ard with advice on NWM

Group’s risk profile, the perfor

mance of its controls and in

providing challenge where a proposed business strate

gy may

exceed risk tolerance.

In addition, there is a process to identify and man

age top risks,

which are those that could hav

e a significant negative impact

on NWM Group’s ability to mee

t its strategic objectives. A

complementary process operates

to identify emerging risks.

Both top and emerging risks 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

Risk management framework

Introduction

Culture

Governance

Risk appetite

Identification and measurement

Mitigation

Stress testing

Market risk

Traded market risk

Non-traded market risk

Capital, liquidity and funding r

isk

Definitions and sources

Key developments in 2021

Capital management

Liquidity and funding management

Minimum requirements

Measurement

Credit risk

Key developments

Impairment, provisioning and write-offs

Economic loss drivers and ECL s

ensitivity

Trading activities and banking activities

Pension risk

Compliance & conduct risk

Financial crime risk

Climate risk

Operational risk

Model risk

Reputational risk

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Risk management framework continu

Culture

Risk culture is at the heart of NWM G

roup’s risk management

framework and its risk management practice. T

he risk culture

target is to make risk part of the

way employees work and

think.

A focus on leaders as role models

and action to build clarity,

develop capability and motivate e

mployees to reach the

required standards of behaviour are key to achieving

the risk

culture target. Colleagues are expected

to:



Take personal responsibility for understanding

and

proactively managing the risks associated with individual

roles.



Respect risk management and the part it pl

ays in daily work.



Understand the risks associated with individual

roles.



Align decision-making to NWM Group’s risk appeti

te.



Consider risk in all actions and

decisions.



Escalate risks and issues early; taking action t

o mitigate

risks and learning from mistakes and near-misses



Challenge others’ attitudes, ideas and actions.



Report and communicate risks transparently.

The target risk culture behaviours are embedde

d in NatWest

Group’s Critical People Capabilities and are clea

rly aligned to

the core values of “serving cust

omers”, “working together”,

“doing the right thing” and “thinking long te

rm”. These act as

an effective basis for a strong risk culture because the C

ritical

People Capabilities form the ba

sis of all recruitment and

selection processes.

Training

Enabling employees to have th

e capabilities and confidence to

manage risk is core to NatWest Group’s le

arning strategy.

NatWest Group offers a wide r

ange of learning, both technical

and behavioural, across the ris

k disciplines. This training can be

mandatory, role-specific or for personal develop

ment.

Mandatory learning for all staff is f

ocused on keeping

employees, customers and NatWest Group safe. This is e

asily

accessed online and is assigned to each perso

n 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 st

andards of

conduct that support the values

. The code explains the effect of

decisions that are taken and describes the p

rinciples 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 wit

h commercial

strategy and actions. The emb

edding of these principles

facilitates sound decision-making and a clear focus on

good

customer outcomes.

Where appropriate, if conduct falls short of Na

tWest Group’s

required standards, the accoun

tability review process is used to

assess how this should be reflec

ted in pay outcomes for the

individuals concerned. The NatWest Group remune

ration policy

ensures that the remuneration arrangements for

all employees

reflect the principles and standards prescribed by the PRA

rulebook and the FCA handbook. Any e

mployee falling short of

the expected standards would also be subject

to internal

disciplinary policies and procedures. If appro

priate, the relevant

authority would be notified.

Risk and capital m

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nt continued

NWM Group

Annu

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Risk management framework continu

Governance

Committee structure

The diagram shows NWM Plc’s risk com

mittee structure in 2021 and the main purposes of ea

ch committee.

(1)

The Executive Committee is chaired by the NWM

Chief Executive Officer and supports him in discharging his individual accountabilities in accordance with the authority delegated

to him by the NWM Plc Board of Directors.

(2)

The Executive Risk Committee is chaired by the NWM Ch

ief Risk Officer and supports him in discharging his risk management accountabilities.

(3)

The Operating Committee is chaired by the NWM Ch

ief Operating Officer and supports him in discharging his individual accountabilities in accordance with the authority delegated

to him by the NWM Chief Executive Officer.

(4)

The Climate & Sustainability Committee is chaired

by the NWM Chief Executive Officer and supports him in discharging his climate risk accountab

ilities.

(5)

The Assets & Liabilities Committee is chaired by the NWM Chief Financial Off

icer and supports him in discharging his individual accountabilities relating to treasury and balance

sheet management.

(6)

The Pension Committee is chaired by the NWM Ch

ief Financial Officer and supports him in discharging his individual accountabilities relating to the management of NatW

est

Markets’ pension schemes.

(7)

The Financial Crime Risk Committee, the E-Trading Oversight Committee, the Reput

ational Risk Committee, the Valuations Committee, the Enterprise Wide Risk Committee, the

Policy Approval Committee, the Model Risk Committee, the Provisions

Committee and the Credit Risk Committee are not shown here. They support the Executive Risk Committee in

discharging its risk management responsibilities.

Ass

s &

Lia

bil

iti

Committe

(5)

ecut

e R

isk

Committe

(2)

ecut

Committe

(1)

Pen

Committe

(6)

c B

oar

rec

tors

Boa

Committe

Aud

Committee

Cli

te &

sta

inab

ity

Committe

(4)

M S

ecu

riti

pan

Lim

Boa

M N

.V.

Sup

erv

ory

Boa

M S

ecu

riti

Inc

oard

Considers the

financial risks posed

by climate change as

well as the progress

against NWM’s

regulatory and

strategic climate

commitments.

Reviews, challenges

and debates all

material and

enterprise-wide risk

and control matters.

Oversees

management of

NWM Group’s

current and future

balance sheet

aligned with chosen

business strategy

and approved risk

appetite

Considers the financial

strategy, risk

management and policy

implications

of NatWest Markets’

pension schemes.

eng

Ope

tin

Committe

(3)

Oversees all aspects of

NWM Group’s control

environment, and

delivers the adoption of

Group-wide risk

frameworks.

Risk and capital m

anageme

nt continued

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Annu

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Risk management framework continu

Governance

Risk management structure

The diagram shows NWM Group’s risk man

agement structure in 2021.

(1)

The NWM Chief Risk Officer reports directly to the NWM Chief Executive Off

icer and the NatWest Group Chief Risk Officer. The NWM Chief Risk Officer also has an additional

reporting line to the chair of the NWM Board Risk

Committee, and a right of access to the committee.

(2)

The NWM Group Risk function is independent and provides

oversight of risk management activities to ensure risks are adequately monitored and controlled. The heads of risk work

closely with the NWM N.V. Chief Risk Officer, the US Head of Risk and the Chief Risk

Offic

er Asia Pacific to ensure consistency across th

e international businesses.

(3)

The NWH Group Risk function provides services a

cross NatWest Group, including – where agreed – to the NWM Chief Risk Officer. These services are managed, as app

licable,

through service level agreements and resource augmentation agreements

NatWest

Group Chi

Risk Offi

cer

NWM Chief

Execut

ive

Officer

Head of Compliance,

Conduct & Financial Crime

Head of Credit Risk

Head of Traded Market

Risk

Risk Chief Operating

Officer and Head of

Operational Risk

Head of Model Risk and

eTrading Oversight

NatWest Group

Chief

Executive

Officer

NWM N.V

Chief Ri

sk Of

ficer

Asia Pac

ific

Chief Ri

sk Of

ficer

US Head of Risk

Head of Capital

Optimisation Risk

Risk and capital m

anageme

nt continued

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Annu

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Risk management framework continu

Three lines of defence

NatWest Group uses the industry-standard th

ree lines of

defence model to articulate accountabilities a

nd responsibilities

for managing risk. This supports the embedding of eff

ective risk

management throughout the organisation.

First line of defence

The first line of defence incorporates most roles in N

atWest

Group, including those in the customer-facing f

ranchises,

Technology and Services as well as support func

tions such as

Human Resources, Legal and Finance.

The first line of defence is emp

owered to take risks within the

constraints of the risk management framework and policie

s as

well as the risk appetite stateme

nts set by NatWest Group and

measures set by the Board.

The first line of defence is responsible for managing its di

rect

risks. With the support of specialist functio

ns such as Legal,

Human Resources and Technology, 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 con

tinuous

monitoring activities to confirm that NatWest Group eng

ages in

permissible and sustainable risk-taking activities.

The second line of defence advis

es on, monitors, challenges,

approves, escalates and reports

on the risk-taking activities of

the first line, ensuring that thes

e are within the constraints of

the risk management framework and policies as well

s the risk

appetite statements set by NatWes

t Group and measures set by

the Board.

Third line of defence

The third line of defence is the Internal Audi

t function and is

independent of the first and se

cond lines.

The third line of defence is responsible for providing

independent and objective assu

rance to the Board, its

subsidiary legal entity boards and executive

management on

the adequacy and effectiveness of ke

y internal controls,

governance and the risk management in place

to monitor,

manage and mitigate the key ris

ks to NatWest Group and its

subsidiary companies achieving their objectives.

The third line of defence executes its duties freel

y and

objectively in accordance with the Charte

red Institute of

Internal Auditors’ Code of Ethics and Internation

al Standards.

Risk appetite

Risk appetite defines the type and aggregate level of

risk NWM

Group is willing to accept in pursuit of its s

trategic objectives

and business plans. Risk appetite supports sound risk t

aking,

the promotion of robust risk practices and risk beh

aviours, and

is calibrated annually.

For certain principal risks, risk

capacity defines the maximum

level of risk NWM Group can as

sume before breaching

constraints determined by regulatory capital

and liquidity

requirements, the operational environment, and fr

om a conduct

perspective. Establishing risk capacity helps dete

rmine where

risk appetite should be set, ensuring there is a

buffer between

internal risk appetite and NWM Group’s ulti

mate capacity to

absorb losses.

Risk appetite framework

The risk appetite framework supports eff

ective risk

management by promoting sound risk-taking t

hrough a

structured approach, within agreed bounda

ries. It also ensures

emerging risks and risk-taking activities that

might be out of

appetite are identified, assessed, es

calated and addressed in a

timely manner.

To facilitate this, a detailed annu

al review of the framework is

carried out. The review includes:



Assessing the adequacy of the f

ramework when compared

to internal and external expectations.



Ensuring the framework remains ef

fective and acts as a

strong control environment for

risk appetite.



Assessing the level of embedding of risk

appetite across the

organisation.

The Board approves the risk appe

tite framework annually.

Establishing risk appetite

In line with NatWest Group’s risk appetite framewo

rk, risk

appetite is maintained across NWM Group th

rough risk appetite

statements. These are in place for all princi

pal risks and

describe the extent and type of activi

ties that can be

undertaken.

Risk appetite statements consist of quali

tative statements of

appetite supported by risk limits and triggers tha

t operate as a

defence against excessive risk-taking. Risk

measures and their

associated limits are an integral part of the risk a

ppetite

approach and a key part of embedding risk a

ppetite in day-to-

day risk management decisions. A cle

ar tolerance for each

principal risk is set in alignment with busi

ness activities.

The annual process of reviewing and upd

ating risk appetite

statements is completed alongside the business an

d 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

NWM Group is well placed to meet its priorities and long-

term

targets even in challenging economic environ

ments. This

supports NWM Group in remaining resilient

and secure as it

pursues its strategic business objec

tives.

NWM Group’s risk profile is frequently reviewed an

d monitored.

Management focus is concentrated on all p

rincipal risks as well

as the top and emerging risk issue

s which may correlate to

them. Risk profile relative to risk appetite is reporte

d regularly

to senior management and the Board.

NatWest Group policies directly support the quali

tative aspects

of risk appetite. They define the qualitative ex

pectations,

guidance and standards that stipulate the nature

and extent of

permissible risk taking and are consistently a

pplied across

NatWest Group and its subsidiaries.

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Annu

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Risk management framework continu

Identification and measuremen

Identification and measurement

within the risk management

process comprise:



Regular assessment of the overall risk profile, inco

rporating

market developments and trends, as well as ex

ternal and

internal factors.



Monitoring of the risks associat

ed 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 unusu

business transactions.

The financial and non-financial risks that NWM G

roup faces are

detailed in its Risk Directory. This provides a common risk

language to ensure consistent terminology is use

d across NWM

Group. The Risk Directory is subject to annu

al review to ensure

it continues to fully reflect the risk

s that NWM Group faces.

Mitigation

Mitigation is a critical aspect of ensuring that risk

profile

remains within risk appetite. Risk mitigation st

rategies are

discussed and agreed within NWM G

roup.

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 t

evaluate results. Early identification, an

d effective management

of changes in legislation and regulation are cri

tical to the

successful mitigation of compliance an

d conduct risk. The

effects of all changes are managed to ensure the timely

achievement of compliance. Those c

hanges assessed as having

a high or medium-high impact are managed mo

re closely.

Emerging risks 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 an

alysis, including

the stress testing of exposures, is

also carried out.

Stress testing

Stress testing – capital management

Stress testing is a key risk managemen

t tool and a fundamental

component of NatWest Group’s approach to c

apital

management. It is used to quan

tify and evaluate the potential

impact of specified changes to risk factors on the fina

ncial

strength of NWM Group, including its capit

al position.

Stress testing includes:



Scenario testing, which examines

the impact of a

hypothetical future state to define changes in risk f

actors.



Sensitivity testing, which exami

nes the impact of an

incremental change to one or more risk factors.

The process for stress testing consists of four bro

ad stages:

Define

scenarios



Identify macro and NWM Group spec

ific

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 NWM

Group.

Calculate

results and

assess

implications



Aggregate impacts into overall results.



Results form part of the risk management

process.



Scenario results are used to inf

orm NWM

Group’s business and capital plans.

Develop and

agree

management

actions



Scenario results are analysed by su

bject

matter experts. Appropriate management

actions are then developed.



Scenario results and manageme

nt actions

are reviewed by the relevant E

xecutive

Risk Committees and Board Risk

Committees, and agreed by the rele

vant

Boards.

Stress testing is used widely across NatWest Grou

p, including at

NWM Group level. The diagram

below summarises key areas of

focus.

Specific areas that involve capi

tal management include:



Strategic financial and capital planning

– by assessing the

impact of sensitivities and scenarios on the capital pl

an and

capital ratios.



Risk appetite

– by gaining a be

tter 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 posi

tion.



Risk mitigation

– by identifying actions to mitigate risks, or

those that could be taken, in the e

vent of adverse changes

to the business or economic environment. Key

risk-

mitigating actions are documented in NWM G

roup’s

recovery plan.

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anageme

nt continued

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Annu

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Risk management framework continu

Reverse stress testing is also ca

rried out in order to identify

circumstances that may lead to

specific, defined outcomes such

as business failure. Reverse stres

s testing allows potential

vulnerabilities in the business model to be exami

ned more fully.

Capital sufficiency – going concern forward-looking view

Going concern capital requireme

nts are examined on a

forward-looking basis – including as part of t

he annual

budgeting process – by assessing the resilience

of capital

adequacy and leverage ratios under hypothe

tical future states.

These assessments include assumptions about regula

tory and

accounting factors (such as IFRS 9). The

y incorporate

economic variables and key ass

umptions on balance sheet and

P&L drivers, such as impairmen

ts, to demonstrate that NWM

Group and its operating subsidiaries main

tain sufficient capital.

A range of future states are tested. In pa

rticular, capital

requirements are assessed:



Based on a forecast of future busines

s performance, given

expectations of economic and market conditio

ns over the

forecast period.



Based on a forecast of future busines

s performance under

adverse economic and market conditions over

the forecast

period. Scenarios of different severity may be exa

mined.

The examination of capital requirements under

both normal

and adverse economic and market conditions enables Na

tWest

Group to determine whether its projected

business

performance meets internal plans and regulato

ry capital

requirements.

The potential impact of normal and

adverse economic and

market conditions on capital requirements is asse

ssed through

stress testing, the results of which are not only us

ed widely

across NatWest Group but also by the regulators to se

t specific

capital buffers. NatWest Group takes part in st

ress tests run by

regulatory authorities to test industry-wide vulne

abilities under

crystallising global and domestic sy

stemic risks.

Under stress testing, the peak-t

o-trough change in CET1 may

be affected by the transitions from Stage 1 to St

age 2 in stress

conditions. Stress and peak-to-trough movemen

ts are used to

help assess the amount of capital NWM

Group needs to hold in

stress conditions in accordance with the capital risk a

ppetite

framework.

Internal assessment of capital adequacy

An internal assessment of material risks is c

arried out annually

to enable an evaluation of the

amount, type and distribution of

capital required to cover these risks. T

his is referred to as the

Internal Capital Adequacy Assess

ment Process (ICAAP). The

ICAAP consists of a point-in-time assess

ment of exposures and

risks at the end of the financial y

ear together with a forward-

looking stress capital assessment. The ICAAP is a

pproved by

the Board and submitted to the PRA.

The ICAAP is used to form a vie

w of capital adequacy

separately to the minimum regulatory requiremen

ts. The ICAAP

is used by the PRA to assess NWM Group’s specific ca

pital

requirements through the Pillar 2 f

ramework.

Capital allocation

NWM Group has mechanisms to allocate capi

tal across its

businesses. These

aim to optimise the use of capital resources

taking into account applicable regulatory requi

rements,

strategic and business objectives

and risk appetite. The

framework for allocating capital is

approved by the CFO with

support from the Assets & Liabi

lities Committee.

Governance

Capital management is subject to substantial

review and

governance. The Board approves the capital pl

ans, including

those for key legal entities and busines

ses 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 st

ress test the risks

on the balance sheet. Limit frameworks are in place t

o control

the level of liquidity risk, asset and liability mism

atches and

funding concentrations. Liquidity

risks are reviewed at

significant legal entity and business

levels daily, with

performance reported to the A

ssets & Liabilities Committee on

a regular basis. Liquidity Condition Indicators

are monitored

daily. This ensures any build-up of stress is detected ea

rly and

the response escalated approp

riately through recovery

planning.

Internal assessment of liquidity

Under the liquidity risk management fra

mework, NWM Group

maintains the Internal Liquidity Adequacy As

sessment Process.

This includes assessment of net stressed liquidi

ty outflows

under a range of extreme but plausible stress scena

rios

detailed in the following table.

Type

Description

Idiosyncratic

scenario

The market perceives NWM Group to

suffering from a severe stress event, which

results in an immediate assump

tion 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. NWM 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 s

tress

occurring at once, severely affec

ting

funding markets and the liquidity of some

assets.

NWM Group uses the most severe outcome to set

the internal

stress testing scenario which u

nderpins its internal liquidity risk

appetite. This complements the regula

tory liquidity coverage

ratio requirement.

Stress testing – recovery and resolution plan

ning

Within NWM Group, both NWM Plc and NWM N.V. e

ch have a

recovery plan explaining how they would identify

and respond

to a financial stress event and res

tore their financial position so

that they remain viable on an ongoing basis.

The recovery plan ensures risks that could del

ay the

implementation of a recovery strategy are highligh

ted and

preparations are made to minimise the impac

t of these risks.

Preparations include:



Developing a series of recovery indica

tors to provide early

warning of potential stress eve

nts.



Clarifying roles, responsibilities and escal

ation 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 diff

erent stress

conditions.



Appointing dedicated option owners to reduce the risk of

delay and capacity concerns.

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Annu

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Risk management framework continu

The plan is intended to enable critical services an

d products to

be maintained, as well as core business

lines while operating

within risk appetite and restoring financial con

dition. It is

assessed for appropriateness on an ongoin

g basis and is

updated annually. The NWM Plc

plan is reviewed and approved

by the Board prior to submission to the PRA each

year.

Fire drill simulations of possible recovery even

ts are used to

test the effectiveness of the recovery plans. T

he fire drills are

designed to replicate possible financial s

tress 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 a

re used to

enhance the overall approach to recovery pl

anning.

Under the resolution assessment part of the

PRA rulebook,

NatWest Group is required to carry out an assess

ment of its

preparations for resolution, sub

mit a report of the assessment

to the PRA and publish a summary of this repo

rt.

Resolution would be implement

ed if NatWest Group was

assessed by the UK authorities to have failed a

nd the

appropriate regulator put it into resolution. T

he process of

resolution is owned and implemented by the B

ank of England

(as the UK resolution authority). A multi-year program

me is in

place to further develop resolution capability in line wit

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 ove

rview of NatWest

Group’s banking book interest rate exposu

re. The report

includes detailed product information analysed by in

terest rate

driver and other characteristics, including

accounting

classification, currency and counterparty type.

Scenario analysis based on hypothetic

al 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 in

ternal 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, e

quity risk

and accounting volatility risk. The ICAA

P is completed with a

combination of value and earni

ngs 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 his

torical volatility,

produced with a 99% confidence

level. Methodologies are

reviewed by NatWest Group Model Risk and the

results are

approved by the NatWest Group T

echnical Asset & Liability

Management Committee.

Non-traded market risk stress res

ults are combined with those

for other risks into the capital plan p

resented to the Board. The

cross-risk capital planning proce

ss is conducted once a year,

with a planning horizon of five

years. The scenario narratives

cover both regulatory scenarios and macroecono

mic 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. Vulner

ability-

based stress testing is used for internal man

agement

information and is not subject to limits. The resul

s for relevant

scenarios are reported to senio

r management.

Traded market risk

NatWest Markets carries out regular market risk s

tress testing

to identify vulnerabilities and potential losses in e

xcess of, or

not captured in, value-at-risk. T

he calculated stresses measure

the impact of changes in risk factors on the fair v

alues of the

trading portfolios.

NatWest Markets conducts historical, macroeconomic

and

vulnerability-based stress testing. Historical s

tress testing is a

measure that is used for intern

al management. Using the

historical simulation framework e

mployed for value-at-risk, the

current portfolio is stressed usi

ng historical data since 1

January 2005. This methodology

simulates the impact of the

99.9 percentile loss that would be incur

red by historical risk

factor movements over the period, assuming variable hol

ding

periods specific to the risk factors and the busine

sses.

Historical stress tests form part of the m

arket risk limit

framework and their results are reported re

gularly to senior

management. Macroeconomic stress tests are ca

rried out

periodically as part of the bank-wide, cross-risk ca

pital

planning process. The scenario narratives are tra

nslated into

risk factor shocks using historical events a

nd insights by

economists, risk managers and the first line.

Market risk stress results are combined wit

h those for other

risks into the capital plan presented to the Boa

rd. The cross-

risk capital planning process is

conducted once a year, with a

planning horizon of five years. The sc

enario narratives cover

both regulatory scenarios and

macroeconomic scenarios.

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. Vulner

ability-

based stress testing is used for internal man

agement

information and is not subject to limits. The resul

s for relevant

scenarios are reported to senio

r management.

Risk and capital m

anageme

nt continued

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Annu

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Risk management framework continu

Internal scenarios

During 2021, NWM Group continued to review a

nd refine its

internal scenarios where appropriate.

In addition, NWM Group vulnerabilities are conside

red as part

of the development of all NatWes

t Group-wide integrated

scenarios and exercises.

Regulatory stress testing

In 2021, NWM Group contributed to NatWest Group’s

submission to the regulatory stress

tests conducted by the Bank

of England. The scenario was hypothetical in n

ature and does

not represent a forecast of NatWest G

roup’s future business or

profitability. The results of regulatory stress tests

are carefully

assessed and form part of the wider risk management of

NatWest Group. Following the UK’s exit from the Eu

ropean

Union on 31 December 2020, o

nly relevant European

subsidiaries of NatWest Group will take part in

the European

Banking Authority stress tests going forwa

rd. NatWest Group

itself will not participate.

NWM Group also contributed to NatWest G

roup’s submission to

the Bank of England’s Climate Biennial Explo

ratory Scenario

(CBES). This exercise was designed to assess the resilience

the largest UK banks and insurers to the physical

and transition

risks associated with climate change. The CBES used

three 30-

year scenarios to explore the risks – Early Action (in whic

h the

transition to a net-zero emissions e

conomy gets underway with

carbon taxes and associated policie

s intensifying gradually),

Late Action (in which the transition is delayed u

ntil 2031, with a

sudden increase in the intensity of c

arbon taxes and climate

policy leading to a recession) and No Addi

tional Action (in

which no new climate policies are introduced a

nd the physical

impacts of climate change are most severe). The Ba

nk of

England is expected to publish aggregate findings in 20

though, given the exploratory nature of the exercise, it

will not

use CBES to set capital requirements.

In addition to its participation in NatWest G

roup’s stress testing

programme, NWM Group has a fu

rther regulatory commitment

in relation to its traded risk model approvals for ma

rket risk

(IMA) and counterparty credit ris

k (IMM). A robust stress

testing framework is a regulatory requi

rement.

The purpose of this stress testing framework includes

the

identification of possible causes of large losses, a

n estimation of

their size and potential impact on capital adequ

acy together

with the identification of steps that could be taken t

o manage

those exposures as required. Such risk managemen

t-led stress

testing covers both traded marke

t risk and counterparty credit

risk and is used to monitor and

set risk appetite.

The requirements of NWM Gro

up’s stress testing programme

are codified in NWM Group’s stress testing

policy and

associated mandatory procedures.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Market

risk

(audited)

NWM Group is exposed to traded market risk throug

h its

trading activities and to non-traded

market risk through its

banking activities. Traded and non-traded ma

rket risk

exposures are managed and discuss

ed separately. The traded

market risk section begins below. T

he non-traded market risk

section begins on page 54.

Pension-related activities also g

ive rise to market risk. Refer to

page 83 for more information on risk related to pensio

ns.

Traded market risk

Definition

(audited)

Traded market risk is the risk arising from ch

anges in fair value

on positions, assets, liabilities or commitmen

ts in trading

portfolios as a result of fluctuations in market prices.

Sources of risk

(audited)

Traded market risk mainly aris

es from NWM Group’s trading

activities. These activities provide a range of fin

ancing, risk

management and investment se

rvices to clients – including

corporations and financial instit

utions – around the world. From

a market risk perspective, activities are focused on

rates;

currencies; and traded credit.

NWM Group undertakes transactions in fin

ancial instruments

including debt securities, as well as se

curities financing and

derivatives.

The key categories of traded market risk are inte

rest rate risk,

credit spread risk and foreign currency price risk.

Trading activities may also give rise to coun

terparty credit risk.

For further detail, refer to the C

redit risk section.

Key developments in 2021



The UK, US and Eurozone economies rebou

nded strongly in

2021 following the rollout of COVID-19 v

accines. However,

inflation rose in H2 2021, in part due to global supply

disruptions. This led to further market volatili

ty, particularly

in Rates, due to significant shifts

in inflation expectations.



Traded VaR remained within appetite,

with an average-

basis year-on-year reduction d

riven by de-risking activity in

line with the strategic focus on RWA reduc

tion.

Governance

(audited)

Market risk policy statements set out the gove

rnance and risk

management framework. Responsibility for identifying,

measuring, monitoring and controlling market risk

arising from

trading activities lies with the re

levant trading business. The

Market Risk function independently advises

on, monitors and

challenges the risk-taking activi

ties undertaken by the trading

business ensuring these are within the co

nstraints of the

market risk framework, policies, and

risk appetite statements

and measures.

Risk appetite

NWM Group’s qualitative appetite for traded m

arket risk is set

out in the traded market risk appetite statement. Qua

ntitative

appetite is expressed in terms of

exposure limits. The limits at

NWM Group level comprise value-at-risk (VaR) a

nd stressed

value-at-risk (SVaR). More details

on these are provided on the

following pages.

For each trading business, a document known

as a dealing

authority compiles details of all applicable limits an

d trading

restrictions. The desk-level mandates

comprise qualitative limits

related to the product types wit

hin the scope of each desk, as

well as quantitative metrics spec

ific to the desk’s market risk

exposures. These additional limits and metrics ai

m to control

various risk dimensions such as exposure size, aged in

ventory,

currency and tenor.

The limits are reviewed to reflect changes i

n risk appetite,

business plans, portfolio composition and the

market and

economic environments and rec

alibrated to ensure that they

remain aligned to NWM Group RWA targe

ts. Limit reviews

focus on optimising the alignment between t

raded market risk

exposure and capital usage.

To ensure approved limits are not breached an

d that NWM

Group remains within its risk appetite, tri

ggers have been set

such that if exposures exceed a specified le

vel, action plans are

developed by the relevant business and the Ma

rket Risk

function and implemented.

For more detail on risk appetite, refer to page 46.

Monitoring and mitigation

Traded market risk is identified and asse

ssed by gathering,

analysing, monitoring and reporting market risk info

rmation at

desk, business and NWM Group-wide levels. In

dustry expertise,

continued system developments and techniques suc

h as stress

testing are also used to enhance the eff

ectiveness of the

identification and assessment of all materi

al market risks.

Traded market risk exposures are monitored ag

ainst limits and

analysed daily. A daily report summarising the

position of

exposures against limits at desk, business and NWM G

roup

levels is provided to senior management and marke

t risk

managers across the function. Li

mit reporting is supplemented

with regulatory capital and stres

s testing information as well as

ad-hoc reporting.

A risk review of trading busines

ses is undertaken weekly with

senior risk and front office staff. This includes

a review of profit

and loss drivers, notable position concentrations

and other

positions of concern.

Business profit and loss performance is

monitored

automatically through loss trigge

rs which, if breached, require

a remedial action plan to be agreed between

the Market Risk

function and the business. The loss triggers are se

t using both a

fall-from-peak approach and an absolu

te loss level. In addition,

regular updates on traded market risk positions a

re provided to

NWM Group’s Executive Risk Committee and Boa

rd Risk

Committee.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Traded market risk continued

Measurement

(audited)

NWM Group uses VaR, SVaR and the incremental

risk charge

to measure traded market risk. Risks

that are not adequately

captured by VaR or SVaR are captured by

the Risks Not In VaR

(RNIV) framework to ensure that NWM Group is

adequately

capitalised for market risk. In addition, st

ress testing is used to

identify any vulnerabilities and poten

tial losses.

The key inputs into these measurement met

hods are market

data and risk factor sensitivities. Sensitivities ref

er to the

changes in trade or portfolio value that result f

rom small

changes in market parameters that are subject t

o the market

risk limit framework. Revaluatio

n ladders are used in place of

sensitivities to capture the impact of la

rge moves in risk factors

or the joint impact of two risk factors.

The suite of internal metrics use

d for risk management

purposes at NWM Group level have been desig

ned to capture

correlation effects and to allow f

or an aggregated view of

traded market risk across risk types

, markets and business lines

while also taking into account the characte

ristics of each risk

type.

Value-at-risk

For internal risk management purposes, VaR assu

mes a time

horizon of one trading day and

a confidence level of 99%.

The internal VaR model – which captures all tradin

g book

positions including those products approved by the

regulator –

is based on a historical simulation, utilising m

arket data from

the previous 500 days on an equ

ally-weighted basis.

The model also captures the potential imp

act of interest rate

risk, credit spread risk, foreign currency price risk, equi

ty price

risk and commodity price risk.

When simulating potential move

ments in such risk factors, a

combination of absolute, relativ

e and rescaled returns is used.

The performance and adequacy of the VaR model

are tested

regularly through the following processes:



Back-testing: Internal and regul

atory back-testing is

conducted on a daily basis. For f

urther information on

back-testing, refer to the following page.



Ongoing model validation: VaR

model performance is

assessed both regularly and on an ad-hoc basis if m

arket

conditions or portfolio profile change sig

nificantly.



Model Risk Management revie

w: As part of the model

lifecycle, all risk models (including the VaR model)

are

independently reviewed to ensure the model is

still fit for

purpose given current market conditions and po

rtfolio

profile. For further detail on the

independent model

validation carried out by Model

Risk Management, refer to

page 87. More information relating to pricing

and market

risk models is presented in the NatWest G

roup Pillar 3

Report.

One-day 99% traded internal VaR

(audited)

The table below shows one-day 9

9% internal VaR for the trading portfolios of NWM G

roup, split by exposure type.

2021

2020

Period

Average

Maximum

Minimum

end

Average

Maximum

Minimum

end

Traded internal VaR (1-day 99%)

£m

Interest rate

10.4

25.3

4.5

8.9

8.7

20.2

4.8

6.3

Credit spread

11.3

13.4

9.4

10.7

15.3

27.2

9.1

10.3

Currency

3.4

9.4

1.7

2.2

4.2

8.4

2.1

3.0

Equity

0.4

0.8

—

0.2

0.6

2.0

0.2

0.7

Commodity

0.1

0.5

—

0.1

0.6

—

0.2

Diversification

(1)

(12.3)

(10.5)

(12.8)

(10.3)

Total

13.3

23.9

9.3

11.5

16.1

25.7

10.1

10.2

(1)

NWM Group benefits from diversification across various finan

cial 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 part

icular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.



Traded VaR increase

d in the first half

of 2021 reflecti

ng a rise

in tenor basis

risk in sterling flow t

rading. This related

to the

transition from LIBOR to alternative risk-free r

ates.



A regulator-approved update to the VaR mo

del was applied

in the second

half of the year, to

address the impa

ct of this

transition.



On an average basis, traded VaR decreased in 202

compared to 2020. This was driven by de-risking ac

tivity in

line with the strategic focus on RWA reduc

tion.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Traded market risk continued

VaR back-testing

The main approach employed to asses

s the VaR model’s ongoing performance is b

ack-testing, which counts the number of d

ays

when a loss exceeds the corresponding daily VaR esti

mate, measured at a 99% confidence lev

el.

Two types of profit and loss (P&L) are used in back-testi

ng comparisons: Actual P&L and Hyp

othetical P&L. For more details on the

back-testing approach and the

differences between internal and regulatory VaR,

refer to the Market risk section of the NatW

est

Group Pillar 3 Report.

The table below shows regulat

ory back-testing exceptions in NWM Plc fo

r the 250-business-day period to 31

December 2021 for

one-day 99% traded regulatory VaR compared with Ac

tual and Hypothetical (Hypo) P&L.

Back-testing

exceptions

Actual

Hypo

NWM Plc



In the 250-day rolling window to 3

1 December 2021, NWM

Plc experienced one Actual and three Hypothetical

VaR P&L

back-testing exceptions.



The Actual exception and two of the Hypo

thetical

exceptions occurred in October 2

021, driven by market

moves in sterling rates and inflation.



The third Hypothetical exception occurred in

December

2021, driven by market moves in sterling and US d

ollar

rates.

The table below shows internal back-tes

ting exceptions in the major NWM business

es for the 250-business-day period to 31

December 2021. Internal back-testing co

mpares one-day 99% traded internal V

aR with Actual and Hypo P&L.

Back

testing except

ions

Actual

Hypo

Rates

Currencies

Credit

—

xVA

—



The exceptions in the Rates bu

siness were mainly driven by

market moves in sterling, euro and US doll

ar rates.



The exceptions in the Currenci

es business were mainly

driven by market moves related to the Turkish li

ra.

Stressed VaR (SVaR)

As with VaR, the SVaR methodology produces e

stimates of the potential change in the marke

t value of a portfolio, over a specified

time horizon, at a given confide

nce level. SVaR is a VaR-based measure using histo

rical data from a one-year period of s

tressed

market conditions. A simulation of 99

% VaR is run on the current portfolio for each 25

0-day period from 2005 to the cur

rent VaR

date, moving forward one day at a time. T

he SVaR is the worst VaR outcome of the simul

ated results.

This is in contrast with VaR, which is based on

a rolling 500-day historical data se

t. A time horizon of ten trading days is assu

med

with a confidence level of 99%. NWM G

roup’s internal traded SVaR model captures all tra

ding book positions.

The table below analyses 10

-day 99% internal SVaR for the trading portfolios of NW

M Group.

2021

2020

Average

Maximum

Minimum

Period end

Average

Maximum

Minimum

Period end

£m

Total internal traded SVaR

175

196



Traded SVaR increased in the first half of 2

021, reflecting a

rise in tenor basis risk in sterling flow trading. This

to the transition from LIBOR to alterna

tive risk-free rates.



Traded SVaR subsequently decreased in

the second half of

the year following changes to the treatment of tenor

basis

risk in the VaR model.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Traded market risk continued

Risks Not In VaR (RNIVs)

The RNIV framework is used to identify and quantify m

arket

risks that are not fully captured by the intern

al VaR and SVaR

models.

RNIV calculations form an integral part of ongoin

g model and

data improvement efforts to capture all marke

t risks in scope

for model approval in VaR and

SVaR.

For further qualitative and quantitative disclos

ures on RNIVs,

refer to the Market risk section of the NatWest Grou

p Pillar 3

Report.

Stress testing

For information on stress testing, refer to pa

ge 47.

Incremental risk charge (IRC)

The IRC model quantifies the impact of r

ating migration and

default events on the market value of instruments with

embedded credit risk (in particular, bonds and c

redit default

swaps) held in the trading book

. It further captures basis risk

between different instruments, ma

turities and reference

entities. For further qualitative and quan

titative disclosures on

the IRC, refer to the Market risk s

ection of the NatWest Group

Pillar 3 Report.

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 suc

h as interest rates,

foreign exchange rates and eq

uity prices, or from changes in

managed rates.

Sources of risk

(audited)

The key sources of non-traded market risk are interest

rate

risk, credit spread risk, foreign exchange risk and equity

risk.

For detailed qualitative and quantitative info

rmation on each of

these risk types, refer to the separate sub-se

ctions starting on

the following page.

Key developments in 2021



NWM Plc’s non-traded internal VaR expe

rienced less

volatility compared to 2020. O

n an average basis, it

decreased driven by the foreign exchange componen

mainly due to the strategic focus on RWA reduction.

NWM Plc continued to maintain a foreign exchange hedgi

programme to mitigate the downside risk to its solo C

ET1

capital ratio from movements in foreign exchange r

ates.

Ahead of a revised regulatory permission th

at came into

effect in the UK on 31 Decembe

r 2021, increased hedging

of some exposures was carried

out. However, the aim of

the programme remains uncha

nged and the impact of the

change was managed within risk appetite.



NWM Plc maintains a structural hedge of its co

mmon equity

and reserves. At 31 December 20

21, the notional amount of

the structural hedge in place w

as £3.9 billion (£4.8 billion at

31 December 2020). NWM policy is to align the notion

al of

the hedge to its business strate

gy.



During the year, the structural hedging program

me fully

transitioned to SONIA-linked swaps, instead of

LIBOR.

Governance

(audited)

Responsibility for identifying, measuring, monito

ring and

controlling market risk arising from non-tradi

ng activities lies

with the relevant business. Oversight is provided

by NWM

Group’s Non-Traded Market Risk f

unction.

Risk positions are reported regularly to NWM

Group’s Executive

Risk Committee and the Board Ris

k Committee, as well as to

the Assets & Liabilities Committee

(ALCo). Non-traded market

risk policy statements set out the governance a

nd risk

management framework.

Non-traded market risk is managed separately on bo

th sides of

the ring-fence. It is aggregated and monitored ag

ainst risk

appetite at both NWM Plc and NatWest G

roup levels.

Risk appetite

NWM Group’s qualitative appetite is s

et out in the non-traded

market risk appetite statement.

Its quantitative appetite is expresse

d in terms of exposure

limits. At NWM Plc level, the Bo

ard limit comprises a VaR

measure. This is supplemented with SVaR, sensi

tivities

(including to the CET1 ratio), earnings-at-risk and econo

mic-

value-of-equity measures monit

ored at Executive governance

level.

To ensure limits are not breached and that NWM Plc

remains

within its risk appetite, triggers have been set such

that if

exposures exceed a specified leve

l, action plans are developed

by the business, Non-Traded Market Risk

and Finance for

implementation. Limits are revi

ewed regularly to reflect

changes in risk appetite, busine

ss plans, portfolio composition

and the external environment. For furthe

r information on risk

appetite, refer to page 46.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Non-traded market risk continued

Non-traded internal VaR (one-day 99%)

(audited)

The market risk exposures arisi

ng as a result of banking activitie

s are measured using a combination of value-based

metrics (VaR

and sensitivities) and earnings-based me

trics. The following table shows NWM

Plc’s one-day internal banking book V

aR at a 99%

confidence level, split by risk ty

pe. VaR values for each year are calcula

ted based on one-day values for each of the 12

month-end

reporting dates. For NWM N.V., refe

r to the appropriate key point below the table.

2021

2020

Average

Maximum

Minimum

Period end

Average

Maximum

Minimum

Period end

NWM Plc

£m

Interest rate

2.8

3.4

2.1

2.6

2.9

3.4

2.3

Credit spread

5.8

7.8

4.4

4.9

7.0

8.5

3.8

7.6

Foreign exchange rate

4.8

5.9

4.3

4.4

11.5

14.3

7.7

Equity risk

2.8

3.1

2.5

2.6

2.3

3.0

1.0

3.0

Diversification

(1)

(7.8)

(7.0)

(7.7)

(8.9)

Total

8.4

10.9

6.4

7.5

16.0

19.7

11.8

(1)

NWM Plc benefits from diversification across various financial instrument types,

currencies and markets. The extent of the diversification benefit depends on th

e correlation between

the assets and risk factors in the portfolio at a particular t

ime. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.



In NWM Plc, non-traded interna

l VaR decreased on an

average basis.



This was driven by a decrease in the foreign e

xchange VaR,

mainly due to the strategic focus on RWA reduction. C

redit

spread VaR also decreased, mainly

reflecting a reduction in

risk sensitivities in FVOCI loan portfolios.



In NWM N.V., non-traded VaR

was £0.9 million on an

average basis (2020 - £1.3

million) and £0.5 million on a

period end basis (2020 - £1.4 mill

ion).

Interest rate risk

Non-traded interest rate risk (NT

IRR) mainly arises from capital

hedges, in portfolios held for liq

uidity purposes and from interes

rate repricing mismatches betwe

en assets and liabilities in other

portfolios. When aggregated, thes

e products form portfolios of

assets and liabilities with varying degrees of s

ensitivity to

changes in market interest rate

s. 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 depen

ds on

whether changes to the term structure of interes

t rates

occur consistently across the yie

ld curve (parallel risk) or

differentially by period (non-parallel risk).



Basis risk: captures the impact of relative chan

ges in interest

rates for financial instruments t

hat have similar tenors but

are priced using different interest rate indices, o

r on the

same interest rate indices but with different tenors.



Option risk: arises from option derivative p

ositions or from

optional elements embedded in asse

ts, liabilities and/or off-

balance sheet items, where NWM Group or its cust

omer can

alter the level and timing of their cash flows.

To manage exposures within appetite, NWM Grou

p aggregates

its interest rate positions and hedges these externally us

ing cash

and derivatives (primarily intere

st rate swaps).

Credit spread risk

Credit spread risk arises from the potential

adverse economic

impact of a change in the spread betwee

n bond (or other

credit-sensitive instrument) yiel

ds and swap rates, where the

portfolios are accounted at fair value. Credi

t risk also arises on

loan portfolios classified at fair value.

To ensure NWM Group can con

tinue to meet its obligations in

the event that access to wholesale f

unding markets is restricted,

it maintains a liquidity buffer in the for

m of bond portfolios –

comprising primarily high-quality securities – and cent

ral bank

cash. Credit spread risk is monitored daily through sensiti

vities

and VaR measures. The dealing authorities in pl

ace for the bond

portfolios further mitigate the risk by imposing const

raints by

duration, asset class and credit rating. Exposures a

nd limit

utilisations are reported to senior managemen

t on a daily basis.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Non-traded market risk continued

Foreign exchange risk

Non-traded foreign exchange risk arises from two m

ain

sources:



Structural foreign exchange rat

e risk: arises from the

capital deployed in foreign curr

ency operations (mainly

overseas subsidiaries and bran

ches) net of related currency

hedging.



Transactional foreign exchange rate risk: a

rises mainly

from non-sterling denominated transac

tions and associated

gains and losses.

Structural foreign exchange rat

e risk is assessed and managed

by NWM Plc Treasury, with the aim of reducing NWM Plc’s sol

CET1 ratio sensitivity to unexpe

cted movements in spot foreign

exchange rates.

The position is managed within

risk appetite levels under

delegated authority from NWM Plc ALCo. T

he sensitivity of the

CET1 ratio to exchange rates is repo

rted to NWM Plc senior

management monthly.

Gains or losses arising from the

retranslation of net investments

in overseas operations are reco

gnised in equity reserves and

reduce the sensitivity of capital ratios to foreign exc

hange rate

movements primarily arising from the retra

nslation of non-

sterling denominated RWAs.

Foreign exchange exposures ari

sing from customer

transactions are sold down by businesse

s on a regular basis in

line with NatWest Group policy.

Foreign exchange exposures

(audited)

The table below shows NWM Group’s structural fo

reign currency e

xposures.

Residual

Net

Structural

structural

investments in

Net

foreign

investment

currency

Economic

currency

operations

hedges

exposures

hedges

exposures

2021

£m

US dollar

(1)

1,250

(

260)

990

(

853)

137

Euro

2,400

(

221)

2,179

—

2,179

Swiss franc

171

(

171)

—

Other non

sterling

392

(69)

323

—

323

4,213

(

721)

3,492

(853)

2,639

2020

US dollar

(1)

1,300

—

1,300

(842)

458

Euro

2,349

(

236)

2,113

—

2,113

Swiss franc

184

(

174)

—

Other non

sterling

404

—

404

—

404

4,237

(

410)

3,827

(842)

2,985

(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 p

urposes.



Against the euro, sterling strengthened

to 1.19 at 31

December 2021 compared to 1.11

at 31 December 2020.

Against the dollar, sterling weakened slightly to 1.35 a

t 31

December 2021 compared to 1.37

at 31 December 2020.



During the year, NWM Plc incre

ased net investment

hedging in US dollars and other non-ste

rling currencies to

reduce the potential impact on RWAs of changes

to its

regulatory FX hedging permission.



Changes in foreign currency exchange rates aff

ect equity in

proportion to structural foreign currency exposure. Fo

example, a 5% strengthening or weakening in fo

reign

currencies against sterling would result in a gain o

r loss of

£0.2 billion in equity, respectivel

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Capital, liquidity and fundin

g risk

NWM Group continually ensures

a comprehensive approach is

taken to the management of capital, liquidi

ty and funding,

underpinned by frameworks, ris

k appetite and policies, to

manage and mitigate capital, liquidity & fundin

g risks. The

framework ensures the tools and capability a

re in place to

facilitate the management and mitigation of risk ensu

ring the

Group operates within its regulatory requirements an

d risk

appetite.

Definitions

(audited)

Regulatory capital consists of r

eserves and instruments issued

that are available, have a degree

of permanency and are

capable of absorbing losses. A number of strict con

ditions are

set by applicable regulations to

determine capital eligibility.

Capital adequacy risk is the risk that there is or

will be

insufficient capital and loss abs

orbing debt instruments to

operate effectively including me

eting minimum regulatory

requirements for capital, leverage and MREL, oper

ating within

Board approved NWM Group ri

sk appetite and supporting

strategic goals.

Liquidity consists of assets that can be readily con

verted to

cash within a short timeframe and with a reli

able value.

Liquidity risk is the risk of being u

nable to meet financial

obligations as and when they fall due.

Funding consists of on-balance shee

t liabilities that are used to

provide cash to finance assets.

Funding risk is the risk of not

maintaining a diversified, stable and cost-effe

ctive funding

base.

Liquidity and funding risks arise in a nu

mber 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;



Credit ratings;



Wholesale market conditions; a



Depositor and investor behaviour.

Sources

(audited)

Capital

The eligibility of instruments and financial resou

rces as

regulatory capital is laid down by applic

able 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, d

egree of permanency and the

ranking of loss absorption. There are three broad c

ategories 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 sh

ares issued

and retained earnings.



Additional Tier 1 (AT1) capital - T

his is the second type of

loss absorbing capital and must be capable of abso

rbing

losses on a going concern basis. The

se instruments are

perpetual in nature, with an initial call period of

at least five

years from issue and are written off

or converted into CET1

capital if a pre-specified CET1 ratio is reac

hed. The sum of

CET1 and AT1 capital is referred to as Tier 1 ca

pital.



Tier 2 capital - Tier 2 capital is the bank entities

’

supplementary capital and provides loss abso

rption on a

gone concern basis. Gone concern refers to the si

tuation in

which resources must be available to enable an o

rderly

resolution, in the event that the Bank of Englan

d (BoE)

deems that NWM Plc has failed. T

ier 2 capital absorbs

losses after Tier 1 capital. It typic

ally consists of

subordinated debt securities with a minimum i

nitial maturity

of five years.

Minimum requirement for own funds and eligible

liabilities (MREL)

In addition to capital, other spec

ific loss absorbing instruments,

including senior notes with a residual maturity of

at least one

year issued by NWM Plc, may be

used to cover certain gone

concern capital requirements.

Liquidity

NWM Group maintains a prudent approach to

the definition of

liquidity resources. Liquidity resources are divided i

nto primary

and secondary liquidity as follows:



Primary liquid assets include cash and bal

ances at central

banks, Treasury bills and other high-quality gover

nment

and US agency bonds.



Secondary liquid assets are elig

ible as collateral for local

central bank liquidity facilities. T

hese assets may include

lower-quality bonds and eligible

loans that are retained on

balance sheet and pre-positione

d with a central bank so

that they may be converted into additional sources of

liquidity at very short notice.

Funding

NWM Group’s primary funding

sources are as follows:

Type

Description

Wholesale

markets

Includes:



Short-term (less than 1 year)

unsecured money market funding.



Commercial paper and certificates

of deposit.



Secured repo market funding.

Term debt

Includes:



Long-term (typically more than 1

year) senior unsecured and secu

red

debt securities.



Long-term subordinated liabilities.

Internal capital

and MREL

Includes:



Equity, AT1, Tier 2 capital

instruments and MREL issued to

NatWest Group plc (under the

Single Point of Entry regime).

Managing capital, liquidity and funding requirements:

regulated entities

In line with paragraph 135 of I

AS 1 ‘Presentation of Financial

Statements’, NWM Group manages capital havi

ng regard to

regulatory requirements. Regulatory capital, MREL,

RWA and

leverage is monitored and reported on an individual

regulated

bank legal entity basis (‘bank entity’), which is

the CRR

transitional basis as relevant in the UK and

EU.

Liquidity metrics including the L

CR are presented for the solo

legal entity as regulated by the PRA. Funding sou

rces and

Notes issued disclosures are prese

nted for NWM Group rather

than for NatWest Markets Plc.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Capital, liquidity and fundin

g risk continued

Key developments in 2021



NWM Plc’s CET1 ratio decreased by 38

0 basis points to

17.9% at 31 December 2021, from 21.7% at 31 Decembe

2020, primarily driven by the de

crease in CET1 capital,

partially offset by impact of lower RWAs. The decrease in

CET1 capital reflected the impact of dividends pai

d to

NatWest Group plc, including a £2

50 million foreseeable

ordinary dividend deduction, a

nd other reserve movements.



NWM Plc’s RWAs decreased by £2

.9 billion to £22.7 billion

at 31 December 2021, reflecting lower levels of

credit,

counterparty credit and market risk which have

trended

downwards as the business seeks

to reduce RWAs including

through the execution of capital optimisation ac

tions and

exit activity. Operational risk RWAs reduced followi

ng the

annual recalculation.



CRR leverage exposure for NWM Plc decreased

to £110.6

billion compared with £123.9 billion at 31 December 2020



The leverage ratio on a CRR ba

sis, using PRA transitional

capital, was 4.3% at 31 December 202

1 compared with

5.2% at the prior year end. The decrease was

driven by a

reduction in Tier 1 capital, offset partially by the dec

rease in

leverage exposure.



Following the Financial Policy Committee’s planned

review

of the UK’s leverage ratio framework, the PRA h

introduced changes to the fram

ework. As per the new

framework, NWM Plc is required to implement ch

anges to

the definition of leverage exposure measu

re and to

reporting and disclosure requirements with effe

ct from 1

January 2022. The UK leverage ratio of 4.8

% for 2021 has

been calculated under the exist

ing CRR as well as the

existing PRA UK leverage framework.



NWM Plc’s MREL at 31 December 202

1 was £9.6 billion, or

42.1% of RWAs, down from £12.7 billion and 49

.6%

respectively at 31 December 2020

. The decrease in the

year was largely due to the redemption of a $1.5 billion

internal instrument issued to NatWest G

roup and the

reduction in CET1 capital.



The NWM Plc liquidity portfolio was £16.1

billion at 31

December 2021, a decrease of

£3.3 billion from £19.4 billion

at the prior year end.



The LCR for NWM Plc was 205% at 31 Decembe

r 2021,

compared with 268% at year end 20

20.

Capital management

Capital management is the process

by which banks ensure that

they have sufficient capital and other loss

absorbing

instruments to operate effec

tively. This includes meeting

minimum regulatory requireme

nts, operating within Board-

approved risk appetite, maintaining cre

dit ratings and

supporting strategic goals. Capital managemen

t is critical in

supporting banks businesses. Capital man

agement within NWM

Group is executed in accordan

ce with the NatWest Group-wide

framework.

NWM Plc’s capital plans are produced and updated by the b

ank

on a monthly basis. This proces

s includes integration into

NatWest Group’s wider annual

budgeting process and is

summarised below. Other elem

ents of capital management,

including risk appetite and stress

testing, are set out on pages

46 and 47.

Produce

capital

plans



A capital plan is produced for NWM Plc

using a five year planning horizon under

expected and stress conditions. Stressed

capital plans are produced to su

pport

internal stress testing through the ICAAP

or for regulatory purposes.



A shorter term (rolling 12 month) forecas

is updated frequently in respon

se to actual

performance, changes in internal and

external business environment and to

manage risks and opportunities.

Assess

capital

adequacy



Capital plans are developed to ensure that

capital of sufficient quantity and quality is

planned to be available to support NWM

Group’s business and strategic

plans over

the planning horizon within approved risk

appetite, as determined via stress testing,

and minimum regulatory requir

ements.



Impact assessment captures input from

across NWM Group including from

businesses.

Inform

capital

actions



Capital planning informs potent

ial capital

actions including managing capital through

new issuance, redemptions or i

nternal

transactions.



Decisions on capital actions will be

influenced by strategic and regulatory

requirements, the cost and prevailing

market conditions.



As part of capital planning, NWM Group

will monitor its portfolio of capital

securiti

es and assess the optimal blend.

Capital planning is one of the tools that NW

M Group uses to

monitor and manage capital adequacy risk on

a going and

gone concern basis, including the risk of e

xcessive leverage.

Liquidity and funding managemen

Liquidity and funding management follows a simila

r process to

that outlined above for capital.

Liquidity portfolio management

The size of the portfolio is determined by reference t

o NWM

Group’s liquidity risk appetite.

Consistent with NatWest Group,

NWM Group retains a prudent approach to settin

g the

composition of the liquidity portfolio, which is subject

to internal

policies and limits over quality of counterpa

rty, maturity mix

and currency mix. NWM Group categorises its liquidi

ty portfolio,

including its locally managed liquidity por

tfolios, into primary

and secondary liquid assets. The majority of the N

WM Plc

portfolio is managed by NatWest Holdings Treasu

ry on behalf

of NWM Plc, for which the NatWest Markets Treasu

rer is

responsible.

NatWest Markets Securities Inc. and NatWes

t Markets N.V.,

both of which are significant ope

rating subsidiaries of NWM Plc,

hold locally managed liquidity portfolios

to comply with local

regulations that differ from PRA

rules.

The liquidity value of the portfolio is deter

mined by taking

current market prices and applying a discount o

r haircut, to

give a liquidity value that represe

nts the amount of cash that

can be generated by the asset.

Funding risk management

NWM Group manages funding risk through a co

mprehensive

framework which measures and monito

rs the funding risk on

the balance sheet.

The long term obligations of NWM Group must

be met with

diverse and stable funding sources

, the behavioural maturity of

these liabilities must at a minimum equal

those of the assets.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Capital, liquidity and fundin

g risk continued

Minimum requirements

Capital ratios

The Bank entities are subject to

minimum capital requirements relative to R

WAs. The table below summarises the CRR end

-point

minimum requirements of capital to RWAs that

the UK bank entities are expected to meet.

Type

CET1

Total

Tier 1

Total capital

Minimum capita

l requirements

4.5%

6.0%

8.0%

Capital conservatio

n buffer

(1)

2.5%

Countercyclical capi

tal buffer

(1)

0.0%

Total

(2)

7.0%

8.5%

10.5%

(1)

The institution specific countercyclical capital buffer

requirement is based on the weighted average of geographical exposures. The Financial Policy Committee (FPC) sets the

countercyclical capital buffer. In December 2021, the FPC announced an increase in th

e UK CCyB rate from 0% to 1%. This rate will come into effect from December 2022 in line

with the 12 month implementation period. Foreign exposures

may be subject to different countercyclical capital buffer rates dependent on the rate set in those jurisdictions. NWM

Plc’s main relevant exposures are to the UK (54%) and the

US (19%). The capital conservation buffer and the countercyclical capital buffer are required to be met with CET1 capital

only.

(2)

In addition, NWM Plc is subject to Pillar 2A requirements which are not disclosed p

ublicly.

Leverage ratio

At present, NWM Plc only has a le

verage ratio reporting requirement, and not

a regulatory minimum leverage requiremen

Following the publication of the new UK lever

age ratio framework on 8 October 2021

, NWM Plc will be subject to the minimum

leverage requirement from 1 Ja

nuary 2023.

Measurement

Capital, RWAs and leverage

Capital resources, RWAs and le

verage based on the PRA transitional arrange

ments for NWM Plc are set out below. Regulato

capital is monitored and reported at legal enti

ty level for large subsidiaries of NatWest G

roup.

2021

2020

Capital adequacy ratios

CET1

17.9

21.7

Tier 1

21.0

25.2

Total

25.9

30.3

Total MREL

42.1

49.6

Capital

(1)

£m

CET1

4,072

5,547

Tier 1

4,755

6,433

Total

5,870

7,753

Total MREL

(2)

9,555

12,679

RWAs

Credit risk

6,878

6,902

Counterparty credit risk

6,854

8,130

Market risk

6,934

8,150

Operational risk

2,020

2,382

Total RWAs

22,686

25,564

Leverage

(3)

CRR leverage exposure (£m)

110,603

123,927

Tier 1 capital (£m)

4,755

6,433

CRR leverage ratio (%)

(4)

4.3

5.2

(1)

CRR end-point for UK banks set by the PRA is 10.5% minimum total capital ratio, with a minimum CET1

ratio of 7.0%.

(2)

Includes senior internal debt instruments issued to

NatWest Group plc with a regulatory value of £3.7 billion (2020 - £4.9 billion).

(3)

Leverage exposure is broadly aligned to the accounting

value of on and off-balance sheet exposures, subject to specific adjustments for derivatives, securities financing positions

and off-balance sheet exposures.

(4)

CRR leverage exposure includes netting of regular wa

y deals pending settlement in line with CRR amendments that came into effect in June 2020.

(5)

Following the Financial Policy Committee’s planned review of the

UK’s leverage ratio fram

ework, the PRA has introduced chang

es to the framework. As per the new framework,

NWM Plc is required to implement changes to the def

inition of leverage exposure measure and to reporting and disclosure requirements with effect from 1 January 2022. The UK

leverage ratio of 4.8% for 2021 has been calculated under the existing CRR as well as the existing

PRA UK leverage framework.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Capital, liquidity and fundin

g risk continued

Leverage exposure

The leverage exposure is based on the CRR Deleg

ated Act.

2021

2020

Leverage

£m

Cash and balances at central banks

12,294

11,736

Trading assets

41,222

52,169

Derivatives

103,042

164,104

Net loans to customers

21,988

23,827

Other assets

4,008

4,246

Total assets

182,554

256,082

Derivatives

netting

(106,317)

(169,152)

- potential future exposures

32,235

35,654

Securities financing transactions gross up

1,298

999

Undrawn commitments

4,993

5,037

Regulatory deductions and other adjustmen

(3,186)

(2,977)

Exclusion of core UK-group exposures

(974)

(1,716)

Leverage exposure

110,603

123,927

Liquidity portfolio

(audited)

The table below shows the liquidity po

rtfolio by LCR product, with the inco

rporation of discounts (or haircuts

) used within the

internal stressed outflow coverage. Secondary li

quidity comprises asse

ts eligible for discount at central banks, which do no

t form

part of the liquid asset portfolio for LCR or stressed ou

tflow coverage purposes.

Liquidity va

lue

(1)

2021

2020

NatWest Markets Plc

£m

Cash and balances at central banks

12,277

11,773

AAA to AA- rated governments

3,457

7,207

A+ and

lower rated governments

Government guaranteed issuers, public sector entities

and government sponsored entities

—

International organisations and multil

ateral development banks

140

144

LCR level 1 bonds

3,628

7,430

LCR level 1 assets

15,905

19,203

LCR level 2 assets

—

Non-LCR eligible assets

—

Primary liquidity

15,905

19,203

Secondary liquidity

(2)

190

224

Total liquidity value

16,095

19,427

The table below shows the liquidity value of

the liquidity portfolio by currency.

GBP

USD

EUR

Other

Total

Total liquidity portfolio

£m

2021

7,947

3,010

5,120

16,095

2020

8,838

3,793

6,716

19,427

(1)

Liquidity value is aligned to the internal stressed outflow coverage, which is stated after discounts

(or haircuts) are applied to the instruments.

(2)

Comprises assets eligible for discounting at the Bank

of England and other central banks.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Capital, liquidity and fundin

g risk continued

Funding sources

(audited)

The table below shows NWM Group’s car

rying values of the principal funding sou

rces based on contractual maturity.

2021

2020

Short

term

Long

term

Short

term

Long

term

less than

more than

less than

more than

1 year

Total

1 year

Total

£m

Bank deposits

1,244

564

1,808

1,294

514

1,808

of which: repos (amortised co

st)

522

—

522

200

—

200

Customer deposits

2,161

107

2,268

2,526

2,618

of which: repos (amortised co

st)

—

Trading liabilities

(1)

Repos

(2)

19,389

—

19,389

19,036

—

19,036

Derivative cash collateral received

17,619

—

17,619

23,226

—

23,226

Other bank and customer deposits

832

704

1,536

818

985

1,803

Debt securities in issue

178

796

974

527

881

1,408

38,018

1,500

39,518

43,607

,866

45,473

Other financial liabilities

Customer deposits (designated at fair value)

568

—

568

616

180

796

Debt securities in issue

commercial paper and certificates of deposits

5,179

115

5,294

3,253

168

3,421

medium term notes (MTNs)

2,693

9,737

12,430

4,441

8,407

12,848

Subordinated liabilities

275

688

963

—

1,105

8,715

10,540

19,255

8,310

9,860

18,170

Amounts due to holding company and fellow subsi

diaries

(3)

Internal MREL

939

2,919

3,858

—

5,181

Other bank and customer deposits

623

—

623

925

—

925

Subordinated liabilities

—

1,464

—

1,753

1,562

4,383

5,945

925

6,934

7,859

Total funding

51,700

17,094

68,794

56,662

19,266

75,928

Of which: available in resolutio

(4)

6,010

8,039

(1)

Funding sources excludes short positions of £24,964 million (2020 - £26,779 million) reflected

as trading liabilities on the balance sheet.

(2)

Comprises Central and other bank repos of £827 million (2020 - £1

,048 million), other financial institution repos of £16,935 million (2020 - £15,973 million) and other corporate repos

of £1,627 million (2020 - £2,015 million).

(3)

Amounts due to holding company and fellow subsidiaries relating t

o non-financial instruments of £181 millio

n (2020

- £275 million) have been excluded from the table.

(4)

Eligible liabilities (as defined in the Banking Act 2009 as a

mended from time to time) that meet the eligibility criteria set out in the regulations, rules, policies, guidelines, or

statements of the Bank of England including the Statement of Policy published in June

2018.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Capital, liquidity and fundin

g risk continued

Senior notes and subordinated liabilities - residual ma

turity profile by instrument type

(audited)

The table below shows NWM Group’s debt securi

ties in issue, subordinated liabilities an

d internal resolution instruments by re

sidual

maturity.

Trading

Amounts due t

o holding

liabilities

Other finan

cial liabilities

company and fellow

Debt

Debt securities in iss

subsidiaries

securities

Commercial

in issue

paper

Subordinated

Total notes

MTNs

and CDs

MTNs

liabilities

Total

Internal MREL

liabilities

in issue

2021

£m

Less than 1 year

178

5,179

2,693

275

8,147

939

—

9,264

1-3 years

335

105

4,907

222

5,234

2,919

824

9,312

5 years

112

4,425

4,456

—

4,568

More than 5 years

349

—

405

445

850

—

640

1,839

Total

974

5,294

12,430

963

18,687

3,858

1,464

24,983

2020

Less than 1 year

527

3,253

4,441

—

7,694

—

8,221

1-3 years

169

165

4,444

549

5,158

5,181

—

10,508

3-5 years

240

3,356

—

3,359

—

889

4,488

More than 5 years

472

—

607

556

1,163

—

864

2,499

Total

1,408

3,421

12,848

1,105

17,374

5,181

1,753

25,716

The table below shows the curr

ency breakdown of total notes in issue.

GBP

USD

EUR

Other

Total

2021

£m

Commercial paper and CDs

257

1,801

3,236

—

5,294

MTNs

552

4,439

6,906

1,507

13,404

External subordinated liabilities

216

703

—

963

Internal MREL due to NatWest Group plc

—

2,060

1,798

—

3,858

Subordinated liabilities due to NatWest G

roup plc

—

640

824

—

1,464

Total

853

9,156

13,467

1,507

24,983

2020 Total

724

8,029

14,588

2,375

25,716

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Credit risk

Definition

(audited)

Credit risk is the risk that custo

mers and counterparties fail to

meet their contractual obligatio

n to settle outstanding amounts.

Sources of risk

(audited)

The principal sources of credit risk for NWM G

roup are lending,

off-balance sheet products, derivatives

and securities financing,

debt securities, and settlement risk th

rough trading activities.

Key developments in 2021

(audited)



The outlook for credit risk and asset quality imp

roved

during 2021 with the economic recovery from

the disruption

caused by COVID-19 being faster than initially forec

ast.



NWM Group continues to monitor sector and coun

try

impact closely and adjust limits

as necessary.



Stage 1 and Stage 2 expected credit loss (ECL)

reduced

due to the improved economic outlook, which led

to a

reduction in underlying PDs and LGDs. The S

tage 2

population in particular saw a marked reduc

tion, due to the

strategic exit of some positions and the improved e

conomic

outlook leading to migration of asse

ts into Stage 1.



Qualitative assessment of climate risk was made m

andatory

for the majority of the wholesal

e credit risk portfolio. This

was supported by enhancements to Transaction

Acceptance Standards (TAS),

with the inclusion of sector-

specific climate considerations for the heightened

risk

sectors and generic climate considerations fo

r all other TAS

documents.

Governance

(audited)

The Credit Risk function provid

es oversight and challenge of

frontline credit risk management activities. Autho

rity is

delegated to credit risk officers who operate within design

ated

limits set at a customer level an

d a portfolio level.

Governance activities include:



Defining credit risk appetite me

asures 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 mitiga

te them.



Approving and monitoring operational limits for busine

segments and credit limits for c

ustomers.



Oversight of the first line of defence to ensure that credi

risk remains within the appetite

set by the Board and that

controls are being operated ade

quately and effectively.



Assessing the adequacy of ECL provisions i

ncluding

approving key IFRS 9 inputs (su

ch as significant increase in

credit risk (SICR) thresholds) an

d any necessary in-model

and post model adjustments through pr

ovisions and model

committees.



Development and approval of credit gr

ading models.

A Credit Risk Committee provid

es oversight of the overall credit

risk profile and sector/product/asse

t class concentrations.

Risk appetite

Credit risk appetite aligns to th

e strategic risk appetite set by

the Board and is set and monit

ored through a risk appetite

framework.

The framework has been designed to refle

ct factors that

influence the ability to operate within risk a

ppetite. Tools such

as stress testing and economic capital are use

d to measure

credit risk volatility and develop links between t

he framework

and risk appetite limits.

Four formal frameworks are use

d, classifying, measuring and

monitoring credit risk exposure across single na

me, sector and

country concentrations and product and asset cl

asses with

heightened risk characteristics.

The framework is supported by a suite of t

ransactional

acceptance standards that set out the risk par

ameters within

which businesses should operate

Credit policy standards are in p

lace and are expressed as a set

of mandatory controls.

Identification and measuremen

Credit stewardship

(audited)

Risks are identified through relationship man

agement and

credit stewardship of customers

and portfolios. Credit risk

stewardship takes place throughout the custo

mer relationship,

beginning with the initial approval. It includes the ap

plication of

credit assessment standards, c

redit risk mitigation and

collateral, ensuring that credit documen

tation is complete and

appropriate, carrying out regular portfolio o

r customer reviews

and problem debt identification and ma

nagement.

Asset quality

(audited)

All credit grades map to an ass

et quality (AQ) scale, used for

financial reporting. This AQ scale is based on Basel p

robability

of defaults. Performing loans are de

fined 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 defaul

ted when the

payment status becomes 90 day

s 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 obli

gations of

customers under derivative and secu

rities financing

transactions. It is a material pa

rt of NWM Group’s credit risk.

NWM Group mitigates counterparty credit risk t

hrough

collateralisation and netting agreements, w

hich allow amounts

owed by NWM Group to a counterp

arty to be netted against

amounts the counterparty owe

s NWM Group.

Mitigation

Mitigation techniques, as set out in the ap

propriate credit

policies and transactional acceptance s

tandards, are used in

the management of credit portfolios across N

WM Group. These

techniques mitigate credit concentrations in rel

ation to an

individual customer, a borrower g

roup or a collection of related

borrowers. Where possible, customer credit balances a

netted against obligations. Mitigation tools can i

nclude

structuring a security interest in a physical

or financial asset,

the use of credit derivatives including credit default sw

aps,

credit-linked debt instruments and securi

tisation structures, and

the use of guarantees and similar ins

truments (for example,

credit insurance) from related and third parties

Assessment and monitoring

Customers – including corporat

es, banks and other financial

institutions – are grouped by industry secto

rs 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 t

ransaction. Credit

approvals are subject to environmental, social

and governance

risk policies which restrict expos

ure to certain highly carbon

intensive industries as well as those with poten

tially heightened

reputational impacts. Customer specif

ic climate risk

commentary is now mandatory

Risk and capital m

anageme

nt continued

NWM Group

Annu

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Credit risk continued

In response to COVID-19, a new framework was int

roduced to

categorise clients in a consistent manne

r across the portfolio,

based on the effect of COVID-19 on their financi

al position and

outlook in relation to the sector risk appetite. This fr

amework

has been retained and updated to consider vi

ability impacts

beyond those directly related to COVID-19 and classific

ation via

the framework is now mandatory and must be refreshed

annually. The framework extends to all bo

rrowing customers

and supplements the Risk of Credit Loss framewo

rk in

assessing whether customers exhibit a S

ICR, if support is

considered to be granting forbearance and the time i

t would

take for customers to return to operating

within transactional

acceptance standards.

For lower risk transactions below spec

ific thresholds, credit

decisions can be approved through self

-sanctioning within the

business. This process is facilitated through sys

tems, strategies

and policy rules.

For all other transactions, credit is only g

ranted to customers

following joint approval by an approver f

rom the business and

the credit risk function, or by t

wo credit officers. The joint

business and credit approvers act wi

thin a delegated approval

authority under the Wholesale Credit Authorities F

ramework

Policy. The level of delegated a

uthority 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 acc

ountable

for the quality of each decision taken, although

the credit risk

approver holds ultimate sanctioning authority.

Transactional acceptance standards provide de

tailed

transactional lending and risk a

cceptance 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, includi

ng reconfirmation or adjustment

of risk parameter estimates; th

e adequacy of security;

compliance with terms and conditions; and refinancing

risk.

Problem debt management

Early problem identification

Each sector has defined early warning i

ndicators to identify

customers experiencing financial difficulty, and to incre

ase

monitoring if needed. Early warning in

dicators may be internal,

such as a customer’s bank account activi

ty, or external, such

as a publicly-listed customer’s share price. If ea

rly warning

indicators show a customer is experiencing potenti

al or actual

difficulty, or if relationship managers or credit office

rs identify

other signs of financial difficulty, they may

decide to classify the

customer within the Risk of Cre

dit Loss framework.

Risk of Credit Loss framework

The Risk of Credit Loss framework is used whe

re the credit

profile of a customer has deteriorated mate

rially since

origination. Experienced credit risk off

icers apply expert

judgment to classify cases into categories th

at reflect

progressively deteriorating credit risk. The

re are two

classifications in the framework that apply to non-

defaulted

customers – Heightened Monitoring and Risk of C

redit Loss. For

the purposes of provisioning, all exposures subject

to the

framework are categorised as Stage 2 and subjec

t to a lifetime

loss assessment. The framewor

k also applies to those

customers that have met NWM Group’s default crite

ria (AQ10

exposures). Defaulted exposures are catego

rised as Stage 3

impaired for provisioning purposes.

Customers classified in the Heightened Monitoring ca

tegory are

those who are still performing but have certain ch

aracteristics

– such as trading issues, covenant breaches, ma

terial PD

downgrades and past due facilities – that may

affect the ability

to meet repayment obligations. Heightened Moni

toring

customers require pre-emptive actions to return or m

aintain

their facilities within risk appetite prior to ma

turity.

Risk of Credit Loss customers a

re performing customers that

have met the criteria for Heighte

ned Monitoring and also pose

a risk of credit loss to NWM Group in the next 12 mont

should mitigating action not be taken or not be succ

essful.

Once classified as either Heightened Monitoring o

r Risk of

Credit Loss, a number of mandatory actions a

re taken in

accordance with policies. Actions include

a review of the

customer’s credit grade, facility

and security documentation

and the valuation of security. De

pending on the severity of the

financial difficulty and the size of the exposu

re, the customer

relationship strategy is reassesse

d by credit officers, by

specialist credit risk or relationship m

anagement units in the

relevant business, or by Restructuring.

Restructuring

Where customers are categoris

ed as Risk of Credit Loss,

relationships are mainly managed by the Rest

ructuring team in

NatWest Bank Plc as a service to NWM Group. The tea

protects NWM Group’s capital by

working with corporate and

commercial customers to supp

ort their turnaround and

recovery strategies and enable them to return to

mainstream

banking.

Forbearance

(audited)

Forbearance takes place when a conces

sion is made on the

contractual terms of a loan/debt in response to

a customer’s

financial difficulties. The aim of f

orbearance is to support and

restore the customer to financi

al health while minimising risk.

The type of forbearance offered is tailored

to the customer’s

individual circumstances and may involve cove

nant waivers,

amendments to margins, payment concessions and loa

rescheduling (including extensions in con

tractual maturity),

capitalisation of arrears, and de

bt forgiveness or debt-for-

equity swaps.

Credit grading models

Credit grading models is the colle

ctive term used to describe all

models, frameworks and methodologies used to c

alculate 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 cha

racteristics.



A meaningful differentiation of

credit risk.



Accurate internal default rate, loss and exposure es

timates

that are used in the capital calc

ulation or wider risk

management purposes.

Impairment, provisioning and write-offs

(audited)

In the overall assessment of cre

dit risk, impairment provisioning

and write-offs are used as key indica

tors of credit quality.

NWM Group’s IFRS 9 provisioning models, which use e

xisting

Basel models as a starting point, inco

rporate term structures

and forward-looking information. Regulatory conse

rvatism

within the Basel models has been removed as app

ropriate to

comply with the IFRS 9 requirement fo

r unbiased ECL

estimates.

Risk and capital m

anageme

nt continued

NWM Group

Annu

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Credit risk continued

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 indica

tors that have most

influence on credit loss for each portfolio

and the severity of

impact (this leverages existing s

tress testing models which

are reviewed annually).



The build of term structures to extend the deter

mination of

the risk of loss beyond 12 mont

hs that will influence the

impact of lifetime loss for exposures in Stage 2.

Model application:



The assessment of the SICR an

d the formation of a

framework capable of consistent application.



The determination of asset lifetimes that refl

ect behavioural

characteristics while also repre

senting management actions

and processes (using historical data and expe

rience).



The choice of forward-looking economic scenarios a

nd their

respective probability weights.

Refer to Accounting policies note 9

for further details.

IFRS 9 ECL model design principles

(audited)

Modelling of ECL for IFRS 9 follows the conventio

nal approach

to divide the estimation of credit losse

s into its component parts

of PD, LGD and EAD.

To meet IFRS 9 requirements, the PD, LGD and EA

parameters differ from their Pillar 1 in

ternal ratings based

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 reflec

t actual economic

conditions at the reporting date instead of lo

ng-run average

or downturn conditions.



Forward-looking – IFRS 9 PD e

stimates and, where

appropriate, EAD and LGD estimates refle

ct forward-

looking economic conditions.



Lifetime measurement – IFRS 9 PD, L

GD and EAD are

provided as multi-period term structures up

to exposure

lifetimes instead of over a fixed one-ye

ar horizon.

IFRS 9 requires that at each repor

ting date, an entity shall

assess whether the credit risk on an accoun

t has increased

significantly since initial recognition. Part of this asse

ssment

requires a comparison to be made between the cur

rent lifetime

PD (i.e. the PD over the remaining life

time at the reporting

date) and the equivalent lifetime PD as de

termined at the date

of initial recognition.

For assets originated before IFRS 9 was introduced,

comparable lifetime origination PDs did no

t exist. These have

been retrospectively created using the relevan

t model inputs

applicable at initial recognition.

PD estimates

PD models use a point-in-time/through-the-cyc

le framework to

convert one-year regulatory PDs into point-in-ti

me estimates

that reflect economic conditions

at the reporting date. The

framework utilises credit cycle indices

(CCIs) for a

comprehensive set of region/industry seg

ments. Further detail

on CCIs is provided in the Economic loss d

rivers section.

One-year point-in-time PDs are extended to forwa

rd-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 Basel LGD models with bespoke adjust

ments to

ensure estimates are unbiased and, where

relevant, forward-

looking.

Forward-looking economic information is inco

rporated into

LGD estimates using the existing CCI framewo

rk. For low-

default portfolios, including sovereigns and b

anks, loss data is

too scarce to substantiate estimates

that vary with economic

conditions. Consequently, for th

ese portfolios, LGD estimates

are assumed to be constant throughout the p

rojection horizon.

EAD estimates

EAD values are projected using product specific credi

conversion factors (CCFs), clos

ely following the product

segmentation and approach of the respective B

asel model.

However, the CCFs are estimate

d over multi-year time horizons

and contain no regulatory conse

rvatism or downturn

assumptions.

No explicit forward-looking information is inco

rporated, on the

basis of analysis showing the temporal varia

tion in CCFs is

mainly attributable to changes in exposure ma

nagement

practices rather than economic conditions.

Risk and capital m

anageme

nt continued

NWM Group

Annu

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Credit risk continued

Governance and post model adjustm

ents

(audited)

The IFRS 9 PD, EAD and LGD models are subject to NWM

Group’s model risk policy that stipulates

periodic model

monitoring, periodic re-validation and define

s approval

procedures and authorities according to mo

del materiality.

Various post model adjustments were applied whe

management judged they were

necessary to ensure an

adequate level of overall ECL p

rovision. All post model

adjustments were subject to formal approval throu

provisioning governance, and

were categorised as follows:



Deferred model calibrations – EC

L adjustments where PD

model monitoring indicated that actual defaul

ts 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. As a consequence, any

potential ECL release was deferred and ret

ained on the

balance sheet.



Economic uncertainty – ECL adjustments primarily a

rising

from uncertainties associated with multiple economic

scenarios (also for 2020) and credit outco

mes as a result of

the effect of COVID-19 and the consequences

government support schemes. In both cases

, management

judged that additional ECL was required until furthe

r credit

performance data became available on the behaviou

ral and

loss consequences of COVID-19



Other adjustments – ECL adjustments where it w

as judged

that the modelled ECL required to be amended.

Post model adjustments will re

main a focus area of NWM

Group’s ongoing ECL adequacy asse

ssment process. A holistic

framework has been established including reviewi

ng a range of

economic data, external benchmark inform

ation and portfolio

performance trends, particularl

y with more observable

outcomes from the unwinding

of COVID-19 support schemes.

key part of the assessment is also understandi

ng the current

levels of ECL coverage (portfolio by portfolio) ag

ainst pre-

COVID-19 levels, recognising changes in portfolio/se

ctor mix.

ECL post model adjustments

(audited)

The table below shows ECL post model adjust

ments.

2021

2020

£m

Deferred model calibrations

—

Economic uncertainty

Other adjustments

—

Total

Of which:

- Stage 1

—

- Stage 2

Stage 3

—

Risk and capital m

anageme

nt continued

NWM Group

Annu

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Credit risk continued

Significant increase in credit risk (SICR)

(audited)

Exposures that are considered significantly c

redit deteriorated

since initial recognition are classifie

d in Stage 2 and assessed

for lifetime ECL measurement (e

xposures not considered

deteriorated carry a 12-month ECL). NWM Group h

as adopted

a framework to identify deterioration based p

rimarily on

relative movements in lifetime PD suppor

ted by additional

qualitative backstops. The princ

iples applied are consistent

across NWM Group and align to credit risk m

anagement

practices, where appropriate.

The framework comprises the following elements:



IFRS 9 lifetime PD assessment (

the primary driver)

– on

modelled portfolios, the assessment is base

d on the relative

deterioration in forward-lookin

g lifetime PD and is assessed

monthly. To assess whether credit dete

rioration has

occurred, the residual lifetime PD at balance she

et date

(which PD is established at date of initial recogni

tion) is

compared to the current PD. If the current lifetime P

exceeds the residual origination PD by mo

re than a

threshold amount, deterioration is assu

med to have

occurred and the exposure transferred into Stage 2 fo

r a

lifetime loss assessment. In broad terms,

a doubling of PD

would indicate a SICR. However, the PD uplift mus

t be at

least 0.1%.



Qualitative high-risk backstops

– the PD assessmen

t is

complemented with the use of qualitative high-risk

backstops to further inform whe

ther significant

deterioration in lifetime risk of default has occur

red. The

qualitative high-risk backstop ass

essment includes the use

of the mandatory 30+ days past due backstop, as

prescribed by IFRS 9 guidance, and other featu

res such as

forbearance support and expos

ures managed within the

Risk of Credit Loss framework.

The criteria are based on a significant amount of e

mpirical

analysis and seek to meet thre

e key objectives:



Criteria effectiveness – the criteria should be e

ffective in

identifying significant credit deterioration and

prospective default population.



Stage 2 stability – the criteria should not in

troduce

unnecessary volatility in the Stage 2 popul

ation.



Portfolio analysis – the criteria should produce results

which are intuitive when report

ed as part of the wider

credit portfolio.

Provisioning for forbearance

Provisions for forborne loans are

assessed in accordance with

normal provisioning policies. Th

e customer’s financial position

and prospects – as well as the likely

effect of the forbearance,

including any concessions granted, and revised PD or L

gradings – are considered in or

der to establish whether an

impairment provision increase i

s required.

Loans granted forbearance are individually credi

t assessed in

most cases. Performing loans subject to forbeara

nce treatment

are categorised as Stage 2 and subject to a life

time loss

assessment.

Forbearance may result in the value of the outst

anding debt

exceeding the present value of the es

timated future cash flows.

This difference will lead to a cus

tomer being classified as non-

performing.

In the case of non-performing f

orborne loans, an individual loan

impairment provision assessment generally t

akes place prior to

forbearance being granted. The amount of the

loan impairment

provision may change once the terms of the forbea

rance are

known, resulting in an addition

al provision charge or a release

of the provision in the period the f

orbearance is granted.

The transfer of loans from impaired to performing s

tatus

follows assessment by relationship manage

rs and credit. When

no further losses are anticipate

d 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 returned to

performing

status. This is not dependent on a specified ti

me period and

follows the credit risk manager’s asse

ssment.

Customers seeking COVID-19 related support, includi

payment holidays, who were not subject to any

wider SICR

triggers and who were assessed as having

the ability in the

medium term post-COVID-19 to be viable

and meet credit

appetite metrics, were not consi

dered to have been granted

forbearance.

Asset lifetimes

(audited)

The choice of initial recognition and asse

t duration is another

critical judgment in determining the quantu

m of lifetime losses

that apply.



The date of initial recognition re

flects the date that a

transaction (or account) was firs

t recognised on the

balance sheet; the PD recorded

at that time provides

the baseline used for subsequent determination of S

ICR

as detailed above.



For asset duration, the approach applied in line wi

IFRS 9 requirements is:



Term lending – the contractual maturity date, reduced

for behavioural trends where a

ppropriate (such as,

expected prepayment and amo

rtisation).



Revolving facilities – asset duration is b

ased on annual

customer review schedules and will be se

t to the next

review date.

Economic loss drivers

(audited)

Introduction

The portfolio segmentation and se

lection of economic loss

drivers for IFRS 9 follow closely the approach used in

stress

testing. To enable robust modelling the fo

recasting models for

each portfolio segment (defined by pro

duct or asset class and

where relevant, industry sector

and region) are based on a

selected, small number of econ

omic factors, (typically three to

four) that best explain the temporal varia

tions in portfolio loss

rates. The process to select economic loss d

rivers involves

empirical analysis and expert judgment.

The most material economic loss drivers for the UK po

rtfolios

include UK gross domestic product (GDP), wo

rld GDP, the

unemployment rate, the house price index, an

d the Bank of

England base rate. Similar metrics are used fo

r other key

country exposures in NWM Group.

Economic scenarios

At 31 December 2021, the range

of anticipated future

economic conditions was defined by a set of four i

nternally

developed scenarios and their r

espective probabilities. In

addition to the base case, they comprised upside, d

ownside

and extreme downside scenarios. The s

cenarios primarily

reflected a range of outcomes for the path of COVI

D-19 as well

as recovery, and the associated eff

ects on labour and asset

markets.

Risk and capital m

anageme

nt continued

NWM Group

Annu

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Credit risk continued

Economic loss drivers

(audited)

The four scenarios were deemed appropriate in ca

pturing the

uncertainty in economic forecasts and the no

n-linearity in

outcomes under different scen

arios. The scenarios were

developed to provide sufficient coverage acr

oss potential

changes in unemployment, asset price and the deg

ree of

permanent damage to the economy, aroun

d which there are

pronounced levels of uncertainty

at this stage.

Upside

– This scenario assumes a very stron

g recovery

through 2022 as consumers dip into excess savings built

over the last two years. The labour market

remains resilient,

with the unemployment rate falling below pre-COVI

D-19 levels.

Inflation is higher than the base

case but eventually comes

back close to the target. The strong economic

recovery enables

tightening to be quicker than the

base case. The housing

market continues its recent strong pe

rformance.

Base case

– COVID-19 related risks remain con

tained. After a

strong recovery in 2021, the gr

owth moderates in 2022. Most

of the furloughed workers can go back to

their existing job or

find a new job very quickly, with the unemploymen

t rate

reaching 4.1% by the end of 2022. Inflation initially increases

but retreats over 2022. Interest rates are raised, s

tarting in

early 2022. There is a gradual cool down in the housing

market

but activity is still at healthy lev

els.

Downside

– This scenario assumes a reversal in recove

ry as

inflation build up leads to a less

ening of expectations. Interest

rates are raised aggressively to counter

the inflation risks.

However, starting in 2023, the interest hikes

are reversed to

assist the recovery. Unemployment is higher

than the base

case and there is a modest decline

in house prices.

Extreme downside

– This scenario assumes a

resurgence of

COVID-19 related risks. There is a renewed downturn wi

declines in consumer spending

and business investment.

Interest rates are reduced into negative territory to -0.5

There is wide-spread job shedding in the labou

r market while

asset prices see deep corrections, with housing

market falls

higher than those seen during

previous episodes. The recovery

is tepid throughout the five-year period,

meaning only a

gradual decline in joblessness.

The approach of using four scenarios is s

imilar to that as at 31

December 2020. Previously, NWM Group used five disc

rete

scenarios to characterise the dis

tribution of risks in the

economic outlook. For 2021, the f

our scenarios were deemed

appropriate in capturing the uncertainty in econo

mic forecasts

and the non-linearity in outcom

es under different scenarios.

These four scenarios were deve

loped to provide sufficient

coverage across potential rises in unemployment, inf

lation,

asset price falls and the degree of permanent damage to

the

economy, around which there remains pronounce

d levels of

uncertainty.

The tables and commentary be

low provide details of the key

economic loss drivers under the f

our scenarios.

The main macroeconomic variables for each of the fou

scenarios used for ECL modelling are se

t out in the main

macroeconomic variables table

below. The compound annual

growth rate (CAGR) for GDP is s

hown. It also shows the five-

year average for unemployment and the Bank of En

gland base

rate. The house price index and commercial real est

ate figures

show the total change in each asse

t over five years.

Main macroeconomic variables

2021

2020

Extreme

Upside

Base case

Downside

downside

Upside

Base case

Downside

downside

Five-year summary

GDP - CAGR

2.4

1.7

1.4

0.6

3.6

3.1

2.8

1.3

Unemployment - average

3.5

4.2

4.8

6.7

4.4

5.7

7.1

9.7

House price index

total change

22.7

12.1

4.3

(5.3)

12.5

7.6

4.4

(19.0)

Bank of England base rate - av

erage

1.5

0.8

0.7

(0.5)

0.2

—

(0.1)

(0.5)

Commercial real estate price - total cha

nge

18.2

7.2

5.5

(6.4)

4.3

0.7

(12.0)

(31.5)

World GDP

CAGR

3.5

3.2

2.6

0.6

3.5

3.4

2.9

2.8

Probability weight

30.0

45.0

20.0

5.0

20.0

40.0

30.0

10.0

(1)

The five year period starts after Q3 2021 for 2021 and Q3 2020 for 2020.

Probability weightings of scenarios

NWM Group’s approach to IFRS 9

multiple economic scenarios

(MES) involves selecting a suitable se

t of discrete scenarios to

characterise the distribution of risks in the economic ou

tlook

and assigning appropriate prob

ability weights. The scale of the

economic impact of COVID-19 and the range of recovery p

aths

necessitates a change of approach to assigning p

robability

weights from that used in recent updates. Prio

r to 2020, GDP

paths for NWM Group’s scenarios were compa

red against a set

of 1,000 model runs, following which a percen

tile in the

distribution was established tha

t most closely corresponded to

the scenario.

Instead, NWM Group has subje

ctively applied probability

weights, reflecting expert views

within NWM Group. The

probability weight assignment was judged

to present good

coverage to the central scenarios and the po

tential for a robust

recovery on the upside and exceptionally challenging ou

tcomes

on the downside. A 30% weighting was applied to the upside

scenario, a 45% weighting applie

d to the base case scenario, a

20% weighting applied to the downside sce

nario and a 5%

weighting applied to the extreme downside sce

nario. NWM

Group assessed the downside r

isk posed by COVID-19 to be

diminishing over the course of 2

021, with the vaccination roll-

out and positive economic data being observed since t

gradual relaxing of lockdown res

trictions. NWM Group therefore

judged it was appropriate to apply a higher prob

ability to

upside-biased scenarios than at 31 December 2020

. However,

compared to 31 December 2020, the base case h

as a higher

weight reflecting reduction in uncertainty

as the path of

economy recovery became clearer.

The 25% weighting to the two downside scena

rios gives

appropriate consideration to the threats posed to the recove

including inflation, supply and COVID-19-rel

ated risks. Balanced

against that is the adaptability of the UK economy to succe

ssive

waves of COVID-19, and the re

silience of labour and asset

markets. The potential for further better than e

xpected

outcomes is reflected in the 30% p

robability weighting applied to

the upside scenario.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Credit risk continued

Economic loss drivers

100

105

110

115

Q4 2019

Q4 2020

Q4 2021

Q4 2022

Q4 2023

Q4 2024

Q4 2025

Q4 2026

UK gross domestic product

Upside

Base

Downside

Extreme downside

-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

Q4 2019

Q4 20

Q4 2021

Q4 2022

Q4 2023

Q4 2

024

Q4 2025

Q4 2026

Bank of England base rate

Upside

Base

Downsid

Extreme downside

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Credit risk continued

Economic loss drivers

(audited)

Annual figures

Extreme

Upside

Base case

Downside

downside

GDP - annual growth

2021

7.0

2022

8.1

5.0

1.5

(3.6)

2023

2.1

1.6

2.4

4.1

2024

1.2

0.9

1.6

1.2

2025

1.2

1.3

1.4

2026

1.2

1.5

1.6

1.5

Extreme

Upside

Base case

Downside

downside

Unemployment rate

annual average

2021

4.6

2022

3.5

4.1

5.1

8.3

2023

3.3

4.0

5.2

8.8

2024

3.4

4.1

4.7

6.6

2025

3.4

4.2

4.5

5.2

2026

3.6

4.2

4.5

4.9

Extreme

Upside

Base case

Downside

downside

House price index - four quarter growth

2021

6.9

2022

7.9

1.6

(2.9)

(20.4)

2023

4.2

1.6

(0.2)

(

2.6)

2024

3.1

2.9

1.7

13.0

2025

3.0

2.7

3.0

4.7

2026

3.0

2.7

3.0

3.6

Extreme

Upside

Base case

Downside

downside

Commercial real estate price - f

our quarter growth

2021

8.4

2022

10.2

4.4

(

2.7)

(29.8)

2023

3.4

1.9

4.2

17.2

2024

1.7

0.2

1.7

5.2

2025

0.6

(0.8)

0.3

3.5

2026

(0.8)

(

0.2)

3.2

Extreme

Upside

Base case

Downside

downside

Bank of England base rate - an

nual average

2021

0.10

2022

1.02

0.63

1.06

(0.40)

2023

1.58

1.00

1.06

(0.50)

2024

1.75

1.00

0.50

(0.50)

2025

1.75

0.90

0.50

(0.50)

2026

1.75

0.75

0.50

(0.50)

Worst points

31 December 2021

31 December 2020

Extreme

Downside

downside

Downside

downside

Quarter

GDP

(1.8)

Q1 2022

(7.9)

Q1 2022

(5.1)

Q1 2021

(10.4)

Q1 2021

Unemployment rate (peak)

5.4

Q1 2023

9.4

Q4 2022

9.4

Q4 2021

13.9

Q3 2021

House price index

(3.0)

Q3 2023

(

26.0)

Q2 2023

(11.2)

Q2 2021

(32.0)

Q4 2021

Commercial real estate price

(2.5)

Q1 2022

(

29.8)

Q3 2022

(28.9)

Q2 2021

(40.4)

Q2 2021

Bank of England base rate

1.5

Q4 2022

(0.5)

Q2 2022

(0.1)

Q3 2021

(0.5)

Q1 2021

(1)

For the unemployment rate, the figures show the peak levels. For the

Bank of England base rate, the figures show highest or lowest levels. For other parameters, the figures show

falls relative to the starting period.

The calculations are performed over five years

, with a starting point of Q3 2021 for 31 December 2021 scenarios.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Credit risk continued

Economic loss drivers

(audited)

Use of the scenarios in lending

The lending ECL methodology is based on the concep

t of credit

cycle indices (CCIs). The CCIs re

present all relevant economic

loss drivers for a region/industry s

egment 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 lo

ss rates at long-run average

levels, a positive CCI value corresponds to loss rates

below

long-run average levels and a negative CC

I value corresponds

to loss rates above long-run av

erage levels.

The four economic scenarios a

re translated into forward-

looking projections of CCIs using a set of econo

metric models.

Subsequently the CCI projections for the indivi

dual scenarios

are averaged into a single central CCI projec

tion according to

the given scenario probabilities. T

he central CCI projection is

then overlaid with an additional mean reversion

assumption i.e.

that after reaching their worst forecast positio

n the CCIs start

to gradually revert to their long-run aver

age of zero.

Finally, ECL is calculated using a Monte Carlo a

pproach by

averaging PD and LGD values arising from many CCI p

aths

simulated around the central CCI projection.

The rationale for the approach is

the long-standing observation

that loss rates in the portfolios tend to follow

regular cycles.

This allows NWM Group to enrich the range and de

pth of future

economic conditions embedded i

n the final ECL beyond what

would be obtained from using the discrete m

acro-economic

scenarios alone.

UK economic uncertainty

Treatment of COVID-19 relief mechanisms

Use of COVID-19 relief mechan

isms does not automatically

merit identification of SICR and trigger a Stage 2 classific

ation

in isolation.

NWM Group continues to provide support, where a

ppropriate,

to existing customers. Those who are deemed eithe

r (a) to

require a prolonged timescale to retu

rn to within NWM Group’s

risk appetite, (b) not to have bee

n viable pre-COVID-19, or (c)

not to be able to sustain their d

ebt once COVID-19 is over, will

trigger a SICR and, if concessions are sought, be categ

orised

as forborne, in line with regulatory guidance. P

ayment holiday

extensions beyond an aggregate of

12 months in an 18 month

period to cover continuing COVID-19 business inte

rruption are

categorised as forbearance, inc

luding for customers where no

other SICR triggers are present.

Model monitoring and enhancement

The severe economic impact from COVI

D-19 and the ensuing

government support schemes have disru

pted the normal

relationships between key economic loss drivers

and credit

outcomes. While most governm

ent support schemes have now

been phased out and economic conditions a

re normalising, the

effect of this disruption is still evident in model

monitoring and

accounted for in judgments applied to

the use and

recalibrations of models.

Most significantly, latest PD model moni

toring shows general

overprediction across all key portfolios, i.e., obse

rved default

rates still at or even below pre-CO

VID-19 levels despite

increased PD estimates from a deteriora

tion in several key

economic variables. Model rec

alibrations to adjust for this

overprediction have been deferred base

d on the judgment that

default rate actuals are distorted due to

government support.

In addition, to account for residual model unce

rtainty and the

risk of eventual default emergence hitherto sup

ressed by

government support, lag assumptions of up to 12 m

onths are

applied in the models. These assumptions are consistent

with

and unchanged from previous disclosures in 2

021, although

their effective impact gradually reduces over time.

Industry sector detail

The economic impact of COVID-19 is highly diff

erentiated by

industry sector, with hospitality and other contact

-based

leisure, service, travel and pass

enger transport activities

significantly more affected than the overall econo

my. On the

other hand, the corporate and commercial econo

metric

forecasting models used in Wholesale are secto

r agnostic.

Sector performance was monitored throughou

t the year and

additional post model adjustments were

recognised where a

risk of higher than expected future default levels, includi

ng their

timing and value, was identified.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Credit risk continued

Measurement uncertainty and ECL sensitivity an

alysis

(audited)

The recognition and measurement of ECL is co

mplex and

involves the use of significant judgment and esti

mation,

particularly in times of economi

c volatility and uncertainty. This

includes the formulation and inc

orporation of multiple forward-

looking economic conditions into ECL to meet the measu

rement

objective of IFRS 9. The ECL provision is sensi

tive to the model

inputs and economic assumptions u

nderlying the estimate.

The focus of the simulations is

on ECL provisioning

requirements on performing exposures in S

tage 1 and Stage 2.

The simulations are run on a stand-alone basis and a

independent of each other; the potential

ECL impacts reflect

the simulated impact at 31 Dece

mber 2021. Scenario impacts

on SICR should be considered when evaluating t

he ECL

movements of Stage 1 and Stage 2. In all scenarios

the total

exposure was the same but exposure by st

age varied in each

scenario.

Stage 3 provisions are not subje

ct to the same level of

measurement uncertainty – default is an observed eve

nt as at

the balance sheet date. Stage 3 provisions therefo

re have not

been considered in this analysis.

The impact arising from the bas

e case, upside, downside and

extreme downside scenarios has bee

n simulated. In the

simulations, NWM Group has assumed that

the economic

macro variables associated with these sc

enarios replace the

existing base case economic ass

umptions, giving them a 100%

probability weighting and therefore serving as a sin

gle

economic scenario.

These scenarios have been applied to all modelled

portfolios in

the analysis below, with the simulation impacting both P

Ds and

LGDs. Modelled post model adjustments present i

n the

underlying ECL estimates are also sens

itised in line with the

modelled ECL movements, but those that were judg

mental in

nature, primarily those for deferred model c

alibrations and

economic uncertainty, were not (refer to the Go

vernance and

post model adjustments section). As expected, the s

cenarios

create differing impacts on EC

L 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 f

actors would also

have an impact, for example, potential custo

mer behaviour

changes and policy changes by lenders that might i

mpact on

the wider availability of credit.

NWM Group’s core criterion to identify a SICR is f

ounded on PD

deterioration, as discussed abo

ve. Under the simulations, PDs

change and result in exposures moving bet

ween Stage 1 and

Stage 2 contributing to the ECL impact.

Extreme

31 December 2021

Actual

Base case

Upside

Downside

downside

Stage 1 modelled exposure (£m)

7,723

7,225

Stage 1 modelled ECL (£m)

Stage 1 coverage (%)

0.08%

Stage 2 modelled exposure (£m)

137

635

Stage 2 modelled ECL (£m)

Stage 2 coverage (%)

2.19%

1.73%

Stage 1 and Stage 2 modelled exposure (£m)

7,860

Stage 1 and Stage 2 modelled ECL (£m)

Stage 1 and Stage 2 coverage (%)

0.11%

0.22%

Variance – (lower)/higher to actual tot

al Stage 1 and Stage 2 ECL

—

(1)

Variations in future undrawn exposure values across the s

cenarios are modelled, however the exposure position reported is that used to calculate modelled ECL as at 31 December

2021 and therefore does not include variation in f

uture undrawn exposure values.

(2)

Reflects ECL for all modelled exposure in s

cope for IFRS 9. The analysis excludes non-modelled portfolios and exposures relating to bonds and cash.

(3)

All simulations are run on a stand-alone basis and are ind

ependent of each other, with the potential ECL impact reflecting the simulated impact as at 31 December 2021. The

simulations change the composition of Stage 1 and Stage

2 exposure but total exposure is unchanged under each scenario as the loan population is static.

(4)

Refer to the Economic loss drivers section for details of

economic scenarios.

(5)

Refer to the NWM Group 2020 Annual Report and Accounts for 2020 comparatives.

Measurement uncertainty and ECL adequacy

(audited)

The improvement in the economic outlook an

d scenarios used in

the IFRS 9 MES framework in 202

1 resulted in a release of

modelled ECL. Given that continued uncertain

ty remains due to

COVID-19 despite the improve

d economic outlook, NWM Group

utilised a framework of quantitative and qualitative

measures to

support the directional change

and levels of ECL coverage,

including economic data, credit performance i

nsights and

problem debt trends. This was

particularly important for

consideration of post model adjustments.

As government support schem

es continued to conclude during

2021, NWM Group anticipates further credit dete

rioration in the

portfolios. However, the income

statement effect of this will be

mitigated by the forward-looking provisions

retained on the

balance sheet at 31 December 202

There are a number of key factors that could d

rive further

downside to impairments, through deteriorating econo

mic and

credit metrics and increased stage migr

ation as credit risk

increases for more customers.

A key factor would be a more

adverse deterioration in GDP a

nd unemployment in the

economies in which NWM Grou

p operates, but also, among

others:



The ongoing trajectory of lockdown restric

tions within the

UK and any future repeated lockdown requirements.



The progress of the COVID-19 vaccination roll-out

and its

effectiveness against new variants.



The long-term efficacy of the various governmen

t support

schemes in terms of their ability to defray cust

omer defaults

is yet to be proven over an ext

ended period.



The impact on customer afford

ability in the event of

sustained inflationary pressures.



The level of revenues lost by co

rporate clients and pace of

recovery of those revenues may

affect NWM Group’s clients’

ability to service their borrowin

g, especially in those sectors

most exposed to the effects of COVID-19.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Credit risk – Trading activities

This section details the credit risk profile of NWM

Group's trading activities.

Securities financing transactions and collateral

(audited)

The table below shows securiti

es financing transactions in NWM Group. B

alance sheet captions include balances held a

t all

classifications under IFRS.

Reverse repos

Repos

Outside

Of which:

netting

Of which:

netting

Total

can be

offset

arrangements

Total

can be offset

arrangements

2021

£m

Gross

45,511

44,861

650

44,333

43,186

1,147

IFRS offset

(24,422)

—

(24,422)

—

Carrying value

21,089

20,439

650

19,911

18,764

1,147

Master

netting arrangements

(900)

—

(900)

—

Securities collateral

(19,467)

—

(17,863)

—

Potential for offset not recognised under IFRS

(20,367)

—

(18,763)

—

Net

722

650

1,148

1,147

2020

Gross

46,169

45,806

363

44,102

42,402

1,700

IFRS offset

(24,866)

—

(24,866)

—

Carrying value

21,303

20,940

363

19,236

17,536

1,700

Master netting arrangements

(929)

—

(929)

—

Securities collateral

(19,938)

—

(16,607)

—

Potential for offset not recognised under IFRS

(20,867)

—

(17,536)

—

Net

436

363

1,700

—

1,700

Debt securities

(audited)

The table below shows debt securities held at manda

tory fair value through profit or loss by i

ssuer as well as ratings based on the

lowest of Standard & Poor’s, Moody’s and Fi

tch.

Central and local g

overnment

Financial

Other

institutions

Corporate

Total

2021

£m

AAA

—

2,011

838

—

2,849

AA to AA+

—

3,329

3,145

1,401

7,937

A to AA-

6,919

—

1,950

308

9,234

BBB- to A-

—

3,792

346

513

4,651

Non

investment grade

—

163

276

Unrated

—

Total

6,919

3,329

10,929

3,059

717

24,953

Short positions

(9,790)

(

56)

(12,907)

(2,074)

(137)

(24,964)

2020

AAA

—

3,114

1,113

—

4,227

AA to AA+

—

5,149

3,651

576

9,425

A to AA-

4,184

—

1,358

272

5,895

BBB

to A

—

8,277

444

656

9,377

Non-investment grade

—

127

216

Unrated

—

150

151

Total

4,184

5,149

16,436

2,682

840

29,291

Short positions

(5,704)

(1,123)

(18,135)

(1,761)

(56)

(26,779)

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Credit risk – Trading activities contin

ued

Derivatives

(audited)

The table below shows third party derivatives by type of co

ntract. The master netting

agreements and collateral shown do

not

result in a net presentation on t

he balance sheet under IFRS.

2021

2020

Notional

GBP

USD

EUR

Other

Total

Assets

Liabilities

Notional

Assets

Liabilities

£bn

£m

£bn

£m

Gross exposure

104,614

97,500

164,252

155,787

IFRS offset

—

Carrying value

3,227

3,220

4,047

1,224

11,718

104,614

97,500

13,697

164,252

155,787

Of which:

Interest rate

(1)

2,907

1,844

3,493

314

8,558

66,091

57,955

10,371

111,879

100,632

Exchange rate

318

1,372

546

910

3,146

38,369

39,202

3,310

52,204

54,771

Credit

—

154

343

161

376

Equity and commodity

—

Carrying value

11,718

104,614

97,500

13,697

164,252

155,787

Counterparty mark

market

netting

(83,633)

(134,913)

(

134,913)

Cash collateral

(14,938)

(9,902)

(19,606)

(14,778)

Securities collateral

(2,428)

(1,070)

(5,053)

(2,487)

Net exposure

3,615

2,895

4,680

3,609

Banks

(2)

314

404

206

532

Other financial institutions

(3)

1,549

1,515

1,416

1,939

Corporate

(4)

1,683

905

2,921

1,046

Government

(5)

137

Net exposure

3,615

2,895

4,680

3,609

1,940

1,030

2,833

1,516

Europe

709

1,008

1,076

1,192

645

653

470

644

RoW

321

204

301

257

Net exposure

3,615

2,895

4,680

3,609

Asset quality of uncollateralised

derivative assets

AQ1-AQ4

2,909

3,388

AQ5

AQ8

649

1,263

AQ9-AQ10

Net exposure

3,615

4,680

(1)

The notional amount of interest rate derivatives includes £5,830 b

illion (2020 – £7,074 billion) in respect of contracts cleared through central clearing counterparties.

(2)

Transactions with certain counterparties with which

NWM Group has netting arrangements but collateral is not posted on a daily basis; certain transactions with specific terms that

may not fall within netting and collateral arrangements; derivat

ive positions in certain jurisdictions, for example, China, where the collateral agreements are not deemed to be

legally enforceable.

(3)

Includes transactions with securitisation vehicles and funds wh

ere collateral posting is contingent on NWM Group’s external rating.

(4)

Mainly large corporates with which NWM Group may ha

ve netting arrangements in place, but operational capability does not support collateral posting.

(5)

Sovereigns and supranational entities with no collateral arrangements, collatera

l arrangements that are not considered enforceable, or one-way collateral agreements in their

favour.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Credit risk – Trading activities contin

ued

Derivatives: settlement basis and central coun

terparties

(audited)

The table below shows the third party de

rivative notional and fair value by trading

and settlement method.

Notional

Asset

Liability

Traded over th

e counter

Traded on

Settled

Not settled

Traded on

Traded

Traded on

Traded

recognised

by central

recognised

over th

recognised

over th

2021

exchanges

counterparties

count

erparties

Total

exchanges

counter

exchanges

counter

£bn

£m

Interest rate

723

5,830

2,005

8,558

—

66,091

—

57,955

Exchange rate

—

3,144

3,146

—

38,369

—

39,202

Credit

—

154

—

343

Equity and commodity

—

Total

725

5,830

5,163

11,718

—

104,614

—

97,500

2020

Interest rate

1,032

7,074

2,265

10,371

—

111,879

—

100,632

Exchange rate

—

3,308

3,310

—

52,203

—

54,771

Credit

—

162

—

376

Equity and commodity

—

Total

1,034

7,074

5,589

13,697

—

164,252

—

155,787

Credit risk – Net credit exposures for banking and trading activi

ties

Asset quality

(audited)

The table below shows the curr

ent and potential exposure by high-level asset cl

ass and asset quality. It represents

total credit risk

for assets held in the banking book in addition to

counterparty credit risk for traded products.

Refer to page 79 for a mapping

AQ band to probability of default range and indica

tive external credit rating.

Cash &

Sovereign

Loans

Collateralised

Uncollateralised

balances at

debt

and other

Other debt

rate risk

Repo and

Off-

balance

central ban

securities

lending

securities

management

reverse repo

sheet items

Leasing

Total

2021

£m

AQ1-AQ4

16,645

5,176

6,998

3,060

2,355

1,520

510

669

36,982

AQ5-AQ8

—

534

238

327

428

—

1,566

AQ9

—

AQ10

—

Current exposure

16,645

5,176

7,576

3,299

2,684

2,002

520

698

38,649

Potential exposure

16,645

5,176

18,065

3,299

10,493

3,865

1,590

2,014

61,196

2020

AQ1-AQ4

15,771

5,968

6,687

1,432

2,399

2,109

351

815

35,587

AQ5-AQ8

—

1,183

479

985

—

2,764

AQ9

—

168

—

174

AQ10

—

Current exposure

15,771

5,968

8,068

1,491

2,881

3,105

351

876

38,570

Potential exposure

15,771

5,968

20,119

1,491

11,969

4,764

1,306

1,811

63,258



Measured against NWM Group’s asset quality s

cale, 96%

(2020 – 92%) of total current ex

posure was rated in the

AQ1-AQ4 bands, which in the c

ontext of external credit

ratings was equivalent to an inves

tment grade rating of

BBB- or better and a PD range

of 0-0.381%.



The decrease in total exposure primarily refle

cted lower

levels of credit and counterparty c

redit risk, due to risk

reduction following the strategic decisi

ons made in 2020.



Non-investment grade exposures

were proportionally lower

than the prior year and concentrated withi

n loans and other

lending, collateralised and uncollateralised rate

risk

management.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Credit risk – Banking activities

Introduction

This section details the credit risk profile of NWM

Group’s banking activities. Refer to Accoun

ting policies note 9 and Note 14

to the

financial statements for policies and c

ritical judgments relating to impairment loss dete

rmination.

Financial instruments within the scope of the IFRS 9 ECL framework

(audited)

Refer to Note 9 to the financial

statements for balance sheet a

nalysis of financial assets that are classified as amor

tised cost or fair

value through other comprehensive income (FVOCI),

the starting point for IFRS 9 ECL f

ramework assessment.

Financial assets

31 December 2021

31 December 2020

Gross

ECL

Net

Gross

ECL

Net

£bn

Balance sheet total gross amortised cost and

FVOCI

36.0

36.6

In scope of IFRS 9 ECL framework

33.6

33.9

% in scope

93%

Loans to customers - in scope -

amortised cost

7.5

0.1

7.4

8.5

0.2

8.3

Loans to customers - in scope -

FVOCI

0.1

—

0.1

—

Loans to banks - in scope - amortised cost

0.9

—

0.9

1.0

—

1.0

Total loans - in scope

8.5

0.1

8.4

9.5

0.2

9.3

Stage 1

8.3

—

8.3

7.8

—

7.8

Stage 2

0.1

—

0.1

1.6

0.1

1.5

Stage 3

0.1

—

0.1

—

Other financial assets - in scope - amortised cost

19.8

—

19.8

18.3

—

18.3

Other financial assets - in scope - FVOCI

5.3

—

5.3

6.1

—

6.1

Total other financial assets - in scope

25.1

—

25.1

24.4

—

24.4

Stage 1

25.0

—

25.0

24.4

—

24.4

Stage 2

0.1

—

0.1

—

Stage 3

—

Out of scope of IFRS 9 ECL framework

2.4

2.7

Loans to customers - out of sco

pe - amortised cost

—

0.1

Loans to banks - out of scope - amortised cos

—

Other financial assets

out of scope

amortised cost

2.2

2.3

Other financial assets - out of scope - FVOCI

0.2

0.3

na = not applicable

The assets outside the scope of IFRS 9 ECL framewo

rk were as

follows:



Settlement balances, items in t

he course of collection, cash

balances and other non-credit risk asse

ts of £2.2 billion

(2020 – £2.4 billion). These we

re assessed as having no ECL

unless there was evidence that they were defaul

ted.



Equity shares of £0.1 billion (202

0 – £0.1 billion) as not

within the IFRS 9 ECL framework by definition.



Fair value adjustments on loans and debt securities he

dged

by interest rate swaps, where the u

nderlying loan was

within the IFRS 9 ECL scope of

£0.1 billion (2020 – £0.2

billion).

In scope assets also include an addition

al £0.7 billion (2020 –

£0.8 billion) of inter-Group assets not shown in the

table above.

Contingent liabilities and commitments

In addition to contingent liabilitie

s and commitments disclosed

in Note 25 to the financial statements,

reputationally-committed

limits are also included in the sc

ope of the IFRS 9 ECL

framework. These were offset by £

0.2 billion (2020 – £0.2

billion) out of scope balances primarily related to facili

ties that,

if drawn, would not be classifie

d as amortised cost or FVOCI, or

undrawn limits relating to financ

ial assets exclusions. Total

contingent liabilities (including financial guarantees

) and

commitments within IFRS 9 ECL s

cope of £11.7 billion (2020 –

£13.1 billion) comprised Stage 1 £1

1.4 billion (2020 – £10.8

billion); Stage 2 £0.3 billion (2020 – £2

.3 billion); and Stage 3 nil

(2020 – nil).

The ECL relating to off balance s

heet exposures was nil (2020 –

nil billion). The total ECL in the remainder of the cre

dit risk

section of £0.1 billion included ECL for both on and off b

alance

sheet exposures.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Credit risk – Banking activities continued

Portfolio summary

(audited)

The table below shows gross loans and ECL,

by stage, within the scope of the IFRS 9 ECL f

ramework.

2021

2020

£m

Loans - amortised cost and FV

OCI

Stage 1

8,301

7,799

Stage 2

147

1,566

Stage 3

171

Of which: individual

162

Of which: collective

Inter-Group

(1)

731

755

Total

9,278

10,291

ECL provisions

Stage 1

Stage 2

Stage 3

132

Of which: individual

124

Of which: collective

Inter-Group

—

Total

194

ECL provisions coverage

(2)

Stage 1 (%)

0.07

0.15

Stage 2 (%)

2.04

3.13

Stage 3 (%)

75.76

77.19

Inter

Group (%)

—

0.13

Total

0.98

2.02

Impairment (releases)/losses

ECL

(release)/charge

Stage 1

(14)

(2)

Stage 2

(11)

Stage 3

(9)

(12)

Of which: individual

(6)

(3)

Of which: collective

(3)

(9)

Third party

(34)

Inter-Group

(1)

Total

(35)

Amounts written

off

Of which: individual

(1)

NWM Group’s intercompany assets were classified in Stag

e 1. The ECL for these loans was £0.2 million (2020 – £1.2 million).

(2)

ECL provisions coverage is calculated as ECL p

rovisions divided by loans - amortised cost and FVOCI. It is calculated on third party loans and total ECL provisions

(3)

The

able

shows

gross

loans

only

and

excludes

mounts

that

are

outside

scope

the

ECL

framework.

efer

the

Financial

instruments

within

the

cope

the

IFR

ECL

framework

section

further

details.

Other

financial

assets

within

scope

the

IFRS

ECL

framework

were

cash

and

balances

central

banks

totalling

£16.6

billion

(2020

–

£15.8 billion) and debt securities of £8.4 b

illion (2020 – £8.7 billion).

(4)

The stage allocation of the ECL charge was aligned to the stag

e transition approach that underpins the analysis in the Flow statement section.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

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, impairmen

t by

sector, asset quality and geographic

al region based on the country of operation

of the customer. The tables below report only

third

party exposures and related E

CL provisions, charges and write-offs.

Property

Corporate

FI (1)

Sovereign

Total

2021

£m

Loans by geography

122

773

7,353

299

8,547

- UK

172

2,780

3,049

Other Europe

447

1,374

174

2,073

- RoW

154

3,199

3,425

Loans by stage

122

773

7,353

299

8,547

- Stage 1

107

614

7,284

296

8,301

- Stage 2

—

147

Stage 3

of which: individual

of which: collective

—

Weighted average life*

- ECL measurement (years)

Weighted average 12 months PDs*

- IFRS 9 (%)

0.20

0.97

0.12

0.02

0.18

Basel (%)

0.66

1.83

0.15

0.02

0.28

ECL provisions by geography

- UK

- Other Europe

—

- RoW

—

ECL provisions by stage

- Stage 1

—

Stage 2

—

- Stage 3

—

of which: individual

—

of which: collective

—

ECL provisions coverage (%)

7.38

8.41

0.10

1.00

0.98

Stage 1 (%)

—

0.07

0.34

0.07

- Stage 2 (%)

—

1.23

3.03

—

2.04

- Stage 3 (%)

60.00

82.05

—

66.67

75.76

ECL (release)/charge - Third party

—

(8)

(25)

(1)

(34)

Amounts written

off

—

Other

financial assets by asset

quality

(2)

—

3,563

21,465

25,083

- AQ1-AQ4

—

3,181

21,465

24,646

- AQ5-AQ8

—

382

—

437

- AQ9

—

Off-balance sheet

270

4,954

6,453

11,714

Loan commitments

251

4,857

5,864

11,009

- Financial guarantees

589

—

705

Off-balance sheet by asset quality

(2)

270

4,954

6,453

11,714

- AQ1-AQ4

190

4,204

6,102

10,533

- AQ5-AQ8

737

348

—

1,163

AQ9

—

- AQ10

—

*Not within audit scope.

For the notes to this table refer to the following pa

ge.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Credit risk – Banking activities continued

Sector analysis – portfolio summary

(audited)

Property

Corporate

FI (1)

Sovereign

Total

2020

£m

Loans by geography

190

958

8,208

180

9,536

- UK

167

3,726

4,009

Other Europe

140

577

1,573

2,334

- RoW

—

214

2,909

3,193

Loans by stage

190

958

8,208

180

9,536

- Stage 1

127

629

6,933

110

7,799

- Stage 2

182

1,272

1,566

Stage 3

147

171

of which: individual

141

162

of which: collective

—

Weighted average life*

- ECL measurement (years)

—

Weighted average 12 months PDs*

- IFRS 9 (%)

0.61

2.22

1.29

0.98

1.34

- Basel (%)

0.75

2.08

1.04

0.03

1.10

ECL provisions by geography

124

193

- Other Europe

—

108

- RoW

—

ECL provisions by stage

124

193

- Stage 1

Stage 2

—

- Stage 3

117

132

of which: individual

112

124

of which: collective

—

ECL provisions coverage (%)

5.79

12.94

0.67

1.67

2.02

- Stage 1 (%)

0.79

0.16

0.13

0.91

0.15

Stage 2 (%)

—

3.30

3.38

—

3.13

- Stage 3 (%)

55.56

79.59

100.00

66.67

77.19

ECL (release)/charge - Third party

(1)

(2)

Amounts written-off

—

Other financial assets by asset quality

(2)

107

2,905

21,251

24,361

- AQ1-AQ4

—

107

2,648

21,231

23,986

- AQ5-AQ8

—

257

375

- AQ9

—

Off-balance sheet

478

6,421

6,204

13,140

- Loan commitments

446

6,291

5,591

12,365

Financial guarantees

130

613

—

775

Off-balance sheet by asset quality

(2)

478

6,421

6,204

13,140

- AQ1-AQ4

420

5,288

5,766

11,511

- AQ5-AQ8

1,101

432

—

1,585

AQ9

—

- AQ10

—

*Not within audit scope.

(1)

Financial institutions (FI) includes transactions, such as securitisations, where the und

erlying assets may be in other sectors.

(2)

AQ bandings are based on Basel PDs and mapp

ing 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%

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Credit risk – Banking activities continued

Sector analysis – portfolio summary

(audited)

The table below shows ECL by stage, for key s

ectors that continue to be affected by COVID-19

Loans - amortised cos

t and FVOCI

Off-balance sh

eet

ECL provisions

Stage 1

Stage 2

Stage 3

Total

Loan

Contingent

Stage 1

Sta

ge 2

Stage

Total

2021

£m

commitment

iabilities

£m

Property

107

—

122

251

—

Financial institutions

7,284

7,353

5,864

589

—

Sovereign

296

—

299

—

Corporate

614

773

4,857

—

Of which:

Airlines and aerospace

—

163

—

Automotive

—

686

—

Health

—

150

—

Land transport and logistics

—

230

—

Leisure

—

304

—

Oil and gas

252

—

269

—

Retail

—

289

—

Total

8,301

147

8,547

11,009

705

2020

Property

127

190

446

—

Financial institutions

6,933

1,272

8,208

5,591

613

Sovereign

110

180

—

Corporate

629

182

147

958

6,291

130

117

Of which:

Airlines and aerospace

—

312

—

Automotive

—

863

—

Health

—

Land transport and logistics

451

—

Leisure

—

472

—

Oil and gas

374

—

Retail

—

342

—

Total

7,799

1,566

171

9,536

12,365

775

132

193

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Credit risk – Banking activities continued

Sector analysis – portfolio summary

(audited)

Forbearance

The table below shows forbearance, Heigh

tened Monitoring and Risk of Credi

t Loss by sector. This table show current exp

osure

but reflects risk transfers where there is a gu

arantee by another customer.

Property

Sovereign

Other corporate

Total

2021

£m

Forbearance (flow)

—

Forbearance (stock)

—

Heightened Monitoring and Risk of Credit Loss

—

2020

Forbearance (flow)

—

114

121

Forbearance (stock)

—

155

163

Heightened Monitoring and Risk of Credit Loss

—

295

324

Credit risk enhancement and mitigat

ion

(audited)

The table below shows exposures

of modelled portfolios within the scope of the

ECL framework and related credit risk

enhancement and mitigation (CREM).

Gross

Maximum credit risk

CREM by type

CREM coverage

Exposure post

CREM

exposure

ECL

Total

Stage 3

Financial (1)

Property

Other (2)

Total

age 3

Total

Stage 3

2021

£bn

Financial assets

Cash and balances at central

banks

16.6

—

16.6

—

16.6

—

Loans - amortised cost

(3)

8.5

0.1

8.4

—

0.7

—

0.7

—

7.7

—

Debt securities

8.4

—

8.4

—

8.4

—

Total financial assets

33.5

0.1

33.4

—

0.7

—

0.7

—

32.7

—

Contingent liabilities

and commitments

11.7

—

11.7

—

1.3

—

1.3

—

10.4

—

Total off-balance sheet

11.7

—

11.7

—

1.3

—

1.3

—

10.4

—

Total exposure

45.2

0.1

45.1

—

2.0

—

2.0

—

43.1

—

2020

Financial assets

Cash and balances at central banks

15.8

—

15.8

—

15.8

—

Loans - amortised cost

(3)

9.5

0.2

9.3

—

2.2

—

2.2

—

7.1

—

Debt securities

8.6

—

8.6

—

8.6

—

Total financial assets

33.9

0.2

33.7

—

2.2

—

2.2

—

31.5

—

Contingent liabilities

and commitments

13.1

—

13.1

—

2.0

—

2.0

—

11.1

—

Total off-balance sheet

13.1

—

13.1

—

2.0

—

2.0

—

11.1

—

Total exposure

47.0

0.2

46.8

—

4.2

—

4.2

—

42.6

—

(1)

Includes cash and securities collateral.

(2)

Includes guarantees and charges over trade debt

ors.

(3)

NWM Group holds collateral in respect of individual loans – amortised cost to banks and customers. Th

is collateral includes mortgages over property; charges over business assets

such as plant and equipment, inventories and trade debt

ors; and guarantees of lending from parties other than the borrower. NWM Group obtains collateral in the form of securities

in reverse repurchase agreements. Collateral values a

re capped at the value of the loan.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Credit risk – Banking activities continued

Flow statement

(audited)

The flow statement that follows shows the main ECL a

related income statement movements. It also shows t

changes in ECL as well as the changes in rela

ted financial

assets used in determining ECL. Due to diffe

rences in scope,

exposures may differ from those

reported in other tables,

principally in relation to exposures in Stage 1 an

d Stage 2.

These differences do not have a material ECL impact. Ot

her

points to note:



Financial assets include treasury liquidity portfolios,

comprising balances at central banks and deb

t securities,

as well as loans. Both modelled and non-modelled p

ortfolios

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 t

ransitioning to a

worse stage being a primary driver of income s

tatement

charges. Similarly, there is an ECL benef

it for accounts

improving stage.



Changes in risk parameters shows the

reassessment of the

ECL within a given stage, including any ECL ove

rlays and

residual income statement gains or losses

at the point of

write-off or accounting write-d

own.



Other (P&L only items) includes any subsequent changes in

the value of written-down assets

along with other direct

write-off items such as direct rec

overy costs. Other (P&L

only items) affects the income statement but does not

affect

balance sheet ECL movements.



Amounts written-off represent

the gross asset written-down

against accounts with ECL, including the net

asset write-

down for any debt sale activity.

Stage 1

Stage 2

Stage 3

Total

Financial

assets

ECL

assets

ECL

asset

ECL

ssets

ECL

NWM Group

£m

At 1 January 2021

33,327

1,671

167

132

35,165

193

Currency translation and other adjustments

(799)

—

(38)

(1)

(3)

(9)

(840)

(10)

Inter-group transfers

(105)

—

(105)

—

Transfers from Stage 1 to Stage 2

(881)

(1)

881

—

Transfers from Stage 2 to Stage 1

1,762

(1,762)

(9)

—

Transfers to Stage 3

—

(1)

—

Net re-measurement of ECL on stage transfer

(7)

—

(3)

Changes in risk parameters

(7)

(9)

(2)

(18)

Other changes in net exposure

—

(530)

(8)

(27)

(3)

(478)

(11)

Other (P&L only items)

—

(4)

(2)

Income statement (releases)/charges

(14)

(11)

(9)

(34)

Amounts written-off

—

(24)

(43)

(67)

At 31 December 2021

33,383

197

33,675

Net carrying amount

33,377

194

33,591

At 1 January 2020

32,877

188

184

132

33,249

146

2020 movements

450

1,483

(17)

—

1,916

At 31 December 2020

33,327

1,671

167

132

35,165

193

Net carrying amount

33,315

1,622

34,972



Consistent with other Wholesale portfolios, Stage 1 an

Stage 2 ECL reduced due to the

improved economic

outlook which led to a reductio

n in underlying PDs and

LGDs.



The Stage 2 population reduce

d materially with the

improved economic outlook improving c

redit metrics and

resulting in migration of assets into Sta

ge 1.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Pension risk

Definition

Pension risk is the risk to NWM Group caused by i

ts contractual

or other liabilities to, or with respect to, a pension sche

(whether established for its employee

s or those of a related

company or otherwise). It is also the risk that NW

M Group will

make payments or other contributions to, o

r with respect to, a

pension scheme because of a

moral obligation or because

NatWest Group considers that it needs to

do so for some other

reason.

Sources of risk

NWM Group has exposure to pe

nsion risk through its defined

benefit schemes worldwide. The two largest NWM G

roup

schemes are the AA and the NatWest Ma

rkets sections of The

NatWest Group Pension Fund with a combined £1

.4 billion of

assets and £1.1 billion of liabilitie

s at 31 December 2021 (2020

–

£1.5 billion of assets and £1.1 billion of liabilities). Ref

er to Note

5 to the financial statements, for further details on N

Group’s pension obligations, inclu

ding sensitivities to the main

risk factors.

Pension scheme liabilities vary with changes in l

ong-term

interest rates and inflation as we

ll as with pensionable salaries,

the longevity of scheme members and legisl

ation. Pension

scheme assets vary with changes

in interest rates, inflation

expectations, credit spreads, exchange rates, a

nd equity and

property prices. NWM Group is e

xposed to the risk that the

schemes’ assets, together with future returns and addi

tional

future contributions, are estimated to be insuff

icient to meet

liabilities as they fall due. In such circumstances, NWM G

roup

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 2021



There were no material changes to NWM Group’s exposu

to pension risk during the year,

and the overall positions of

the main defined benefit scheme

s that NWM Group

sponsors remained broadly stable or improved.



The triennial actuarial valuations for the two l

argest NWM

Group schemes, with an effective date of 31 Decem

ber

2020, were completed on 14 De

cember 2021.

As both

schemes were in surplus at this date, no defici

t repair

contributions were required, although there remain ong

oing

contributions due in respect of f

uture service benefits and

scheme expenses.

Governance

The Pension Committee, chaired by the Chief Fi

nancial Officer,

reviews and monitors risk managemen

t, asset and liability

strategy and financing issues on behalf of NW

M Group. As part

of its remit, the Committee:



Considers the financial strategy, risk managemen

t and

policy implications of NWM Group pension schemes.



Reviews and recommends NW

M Group pension risk

appetite to the NWM Group Executive Risk C

ommittee and

the NWM Group Board Risk Committee.



Reviews the pension impact on the capi

tal plan for NWM

Group and escalates any concerns to the NW

M Group

Assets & Liabilities Committee.

The performance of NatWest Group’s

material pension funds

(including those sponsored by

NWM Group) is reviewed by

NatWest Group’s Assets & Liabilities Committee.

For further information on governance

, refer to page 44.

Risk appetite

NWM Group maintains an independent

view of the risk inherent

in its pension funds. NWM Group has an annually

reviewed

pension risk appetite statement, incorpor

ating defined metrics

against which risk is measured.

Policies and standards are in place to provide for

mal controls

for pension risk reporting, modelling, governance and s

tress

testing. A pension risk policy, which sits wi

thin the NWM Group

enterprise-wide risk management fr

amework, is also in place

and is subject to associated framework controls.

Monitoring and measurement

Pension risk is monitored by the NWM Group

Executive Risk

Committee and the NWM Group Board Risk Commit

tee by way

of the monthly Risk Management Report.

Stress tests are carried out each y

ear on NWM Group’s

material defined benefit pension schemes. The

se tests are also

used to satisfy the requests of r

egulatory bodies such as the

Bank of England.

The stress testing framework inclu

des 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 pu

rposes. The results of the

stress tests and their consequential impact on NWM

Group’s

balance sheet, income statement and ca

pital position are

incorporated into NWM Group’

s and overall NatWest Group

stress test results.

Mitigation

Following risk mitigation measures taken

by the Trustee in

recent years, the AA and the NatWest Markets sections of

the

NatWest Group Pension Fund are now well protected

against

interest rate and inflation risks and are being run on

a low

investment risk basis with relatively s

mall equity risk

exposure.

The AA and the NatWest Markets se

ctions of the

NatWest Group Pension Fund also use

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 asse

ts of the pension schemes. The

Trustee monitors the risk to its investments fro

m changes in the

global economy and invests, where return justifies t

he risk, in

sectors that reduce the world’s reliance on fossil f

uels, or that

may otherwise promote environmental benefits.

Further details

regarding the Trustee’s approac

h to managing climate change

risk can be found in its Responsible O

wnership Policy and its

net zero commitment. The Trustee has reported in line wi

th the

Task Force on Climate-related Financial Disclosures in its

Annual Report and Accounts.

Compliance & conduct risk

Definition

Compliance risk is the risk that

the behaviour of NWM Group

towards customers fails to comply with laws,

regulations, rules,

standards and codes of conduc

t. Such a failure may lead to

breaches of regulatory requirements, organisa

tional standards

or customer expectations and could result in legal o

r regulatory

sanctions, material financial loss or reputation

al damage.

Conduct risk is the risk that the c

onduct of NWM Group and its

subsidiaries and its staff towards cus

tomers – or in the markets

in which it operates – leads to u

nfair or inappropriate customer

outcomes and results in reputa

tional damage, financial loss or

both.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Compliance & conduct risk continued

Sources of risk

Compliance and conduct risks exist ac

ross all stages of NWM

Group’s relationships with its customers and a

rise from a

variety of activities including product desig

n, marketing and

sales, complaint handling, staff training, an

d handling of

confidential inside information.

As set out in Note 25 to the

financial statements, members of

NatWest Group are party to

legal proceedings and are subject to inves

tigation and other

regulatory action in the UK, the US and other jurisdictions.

Key developments in 2021



There was significant focus on a programme of work

enhance first and second line surveillance func

tionality.



Risk appetite statements and measures were updated

with

an enhanced focus to provide better visibility of key

risks

across NWM Group.



Strategic oversight and advice was provided to N

atWest

Group’s LIBOR transition programme.

Governance

NWM Group defines appropriate

standards of compliance and

conduct and ensures adherence

to those standards through its

risk management framework. Re

levant compliance and

conduct matters are escalated through Executive Ris

Committee and Board Risk Committee.

Risk appetite

Risk appetite for compliance an

d conduct risks is set at Board

level. Risk appetite statements articulate the levels of risk t

hat

legal entities, businesses and fu

nctions work within when

pursuing their strategic objectives and business plans.

A range of controls is operated to ensure t

he business delivers

good customer outcomes and is

conducted in accordance with

legal and regulatory requirements. A suite of policies

addressing compliance and conduct risks set

appropriate

standards across NWM Group including

policies relating to

customers in vulnerable situations, cross-border ac

tivities and

market abuse. Continuous mon

itoring and targeted assurance

is carried out as appropriate.

Monitoring and measurement

Compliance and conduct risks are measured

and managed

through continuous assessment and repo

rting to NWM Group’s

senior risk committees and at B

oard level. The compliance and

conduct risk framework facilitates the consisten

t monitoring

and measurement of compliance

with laws and regulations and

the delivery of consistently goo

d customer outcomes. The first

line of defence is responsible for effec

tive risk identification,

reporting and monitoring, with oversight, ch

allenge and review

by the second line. Compliance

and conduct risk management

is also integrated into NWM Group’s s

trategic planning cycle.

Mitigation

Activity to mitigate the most-material compliance

and conduct

risks is carried out across NWM Group with specif

ic areas of

focus in the customer-facing business

es and legal entities.

Examples of mitigation include consideration of

customer needs

in business and product planni

ng, targeted training, complaints

management, as well as independent monitoring

activity.

Internal policies help support a strong custo

mer focus across

NWM Group. Independent assessments of compliance

with

applicable regulations are also carried out at a leg

al entity

level.

Financial crime risk

Definition

Financial crime risk is presented by cri

minal activity in the form

of money laundering, terrorist financing, b

ribery and

corruption, sanctions and tax evasion, as well as fr

aud risk

management.

Sources of risk

Financial crime risk may be prese

nted if NWM Group’s

customers, employees or third parties under

take or facilitate

financial crime, or if NWM Group’s products o

r services are

used to facilitate such crime. Fi

nancial crime risk is an inherent

risk across all lines of business.

Key developments in 2021



There was a significant focus o

n the financial crime control

environment – including activity

designed to strengthen

customer due diligence standards and controls – across

NatWest Group in 2021.



NWM Group is fully engaged with NatWest Group’s mul

ti-

year transformation plan. The plan has bee

n developed to

ensure that, as the financial crime th

reat evolves with

changes in technology, the economy and wi

der society,

risks relating to money-laundering, terrorist-financin

g, tax

evasion, bribery and corruption and financial s

anctions are

managed, mitigated and control

led as effectively as

possible. As part of this, NWM Group implemented the firs

two phases of a new external contextual transac

tion

monitoring system. A final phas

e is scheduled for

implementation.



NWM Group is represented on the new NatWest

Group-

wide Financial Crime Executive Steering Committee

provide oversight of the transformation plan and its

implementation, and is part of NatWest G

roup’s

Transformation Committee, Financial Crime Pe

rformance

Committee and Customer Due Diligence E

xecutive Steering

Group.

Governance

The Financial Crime Risk Committee (FCRC),

which is chaired

by the Head of Compliance & Financial Crime, is N

WM Group’s

principal financial crime risk management foru

m. The

committee reviews and, where appropriate, escala

tes material

financial crime risks and issues across NW

M Group to the NWM

Executive Risk Committee and NWM Boa

rd Risk Committee.

Additionally, NWM Group is represe

nted on NatWest Group’s

Financial Crime Executive Steering Group, which ove

rsees

financial crime risk management, ope

rational performance, and

transformation matters across NatWest Group.

Risk appetite

There is no appetite to operate in an environmen

t where

systems and controls do not enable the identifica

tion,

assessment, monitoring, management

and mitigation of

financial crime risk. NWM Group’s systems and controls

must

be comprehensive and proporti

onate to the nature, scale and

complexity of its businesses. There is no tole

rance to

systematically or repeatedly breach relevant financial c

rime

regulations and laws.

NWM Group operates a framework of preventa

tive and

detective controls designed to mitigate

the risk that it could

facilitate financial crime. These cont

rols are supported by a

suite of policies, procedures and guidance to ensu

re they

operate effectively.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Financial crime risk continued

Monitoring and measurement

Financial crime risks are identifi

ed and reported through

continuous risk management and regular repo

rting to NWM

Group’s senior risk committees and the NatWest

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, releva

nt policies,

systems, processes and controls are used to miti

gate and

manage financial crime risk. This includes the use

of dedicated

screening and monitoring syste

ms and controls to identify

people, organisations, transactions and behaviours

that may

require further investigation or other actio

ns. Centralised

expertise within NatWest Group is available

to detect and

disrupt threats to NWM Group

and its customers. Intelligence is

shared with law enforcement, regulators and govern

ment

bodies to strengthen national and internation

al defences

against those who would misuse the financial sy

stem for

criminal motives.

Climate risk

Definition

Climate risk is the threat of fina

ncial loss or adverse non-

financial impacts associated with clim

ate change and the

political, economic and environmental respo

nses to it.

Sources of risk

Physical risks may arise from cl

imate and weather-related

events such as heatwaves, droughts, floo

ds, storms and sea

level rises. They can potentially result in fin

ancial losses,

impairing asset values and the creditworthiness of bo

rrowers.

NWM Group could be exposed

to physical risks directly by the

effects on its property portfolio and, indirec

tly, by the impacts

on the wider economy as well as on the proper

ty and business

interests of its customers.

Transition risks may arise from the proce

ss of adjustment

towards a low-carbon economy. Changes in policy

, technology

and sentiment could prompt reasses

sment of customers’

financial risk and may lead to falls in the v

alue of a large range

of assets. NWM Group could be exposed to transi

tion risks

directly through the costs of adaptation wi

thin economic

sectors and markets as well as supply chain disrup

tion leading

to financial impacts on it and its customers. Poten

tial indirect

effects include the erosion of NWM Group’s co

mpetitiveness,

profitability, or reputation damage.

Key developments in 2021



NWM Group adopted the NatWes

t Group’s principles-based

climate risk policy, approved in A

pril 2021.



A number of first-generation quantitative clim

ate risk

appetite measures were approved by Na

tWest Group Board

in December 2021. These

will enable reporting of climate

risk appetite and link business-

as-usual risk management to

NatWest Group’s strategic goals and prio

rities.



NWM Group contributed to NatWest Group’s sub

mission to

the Bank of England’s Climate Biennial Explo

ratory

Scenario (CBES) exercise. This helped to strengthen cli

mate

scenario analysis capabilities with inc

reased coverage

across the balance sheet.



A new Climate Centre of Excellence

was established to

provide strategic horizon scanning, guidance and specialis

climate expertise across NatWest Group.



Qualitative assessment of climate risk was made m

andatory

for the majority of the wholesal

e credit risk portfolio. This

was supported by enhancements to Transaction

Acceptance Standards (TAS) criteria, with the inclusion of

sector-specific climate considerations fo

r the heightened

risk sectors and generic climate considerations fo

r all other

TAS documents.

Risk governance

The Board is responsible for monitoring and oversee

ing

climate-related risk within NWM Group’s ove

rall business

strategy and risk appetite. The poten

tial impact, likelihood and

preparedness of climate-related risk is reported regul

arly to

NatWest Group’s Board Risk Committee and NatWest

Group

Board.

The Chief Risk Off

icer shares accountability with the CEO

under the Senior Managers & Certification Regi

me for

identifying and managing the financial risks a

rising from

climate change. This includes ensuring th

at the financial risks

from climate change are adequately reflected in

risk

management frameworks, and that the Group can iden

tify,

measure, monitor, manage, and report on its exposure

to these

risks.

A Climate Change Executive Stee

ring Group is in place at

NatWest Group and is responsible f

or overseeing the direction

of and progress against climate-rela

ted commitments, including

activities in NWM Group. During 2021

, the Executive Steering

Group focused on overseeing the Group Climate Ch

ange

Programme (GCCP), which wa

s tasked with continuing to

deliver both the Group-wide climate strategy

and the climate-

related mandatory change agenda before the

activity

transitions into business-as-usual operations. T

he NatWest

Group Climate Centre of Excellence s

upports the Executive

Steering Group as it supervises strategic implemen

tation and

delivery, including within NWM Group.

Risk appetite

NWM Group’s climate ambition is

underpinned by activity to

reduce the climate impact of its financing activity by a

t least

50% by 2030 and to do what is neces

sary to achieve alignment

with the 2015 Paris Agreement.

Work continued in 2021 to integrate climate-

related risk into

the risk management framework, includin

g the development of

appropriate risk appetite metrics. In Decembe

r 2021, the

NatWest Group Board approved the adoption of th

ree first-

generation climate risk appetite measures into the e

nterprise-

wide risk management framework, for integration i

nto

business-as-usual risk management.

Risk monitoring and measuremen

NWM Group has focused on developing the capabili

ties to use

scenario analysis to identify the most material clim

ate risks and

opportunities for its customers, s

eeking to harness insights to

inform risk management practic

es and maximise the

opportunities arising from a transition to a low-carb

economy.

Scenario analysis allows NWM Group to

test a range of possible

future climate pathways and understand the n

ature and

magnitude of the risks they prese

nt. The purpose of scenario

analysis is not to forecast the fu

ture but to understand and

prepare to manage risks that c

ould arise.

NWM Group participated in NatWes

t Group’s submission to the

Bank of England’s 2021 CB

ES exercise.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Climate risk continued

NWM Group regularly considers

existing and emerging

regulatory requirements related to climate chan

ge. It continues

to participate in several industry-wide initiatives

to develop

consistent risk measurement methodologies including

the

Securities Industry & Financial Markets Associ

ation and Asia

Securities Industry & Financial Markets Associ

ation Sustainable

Finance working groups.

Operational risk

Definition

Operational risk is the risk of los

s resulting from inadequate or

failed internal processes, people and systems, o

r external

events. It arises from day-to-da

y 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. T

his can take

the form of human error, an inability to deliver cha

nge

adequately or on time, the non-availability of

technology

services, or the loss of customer data. Systems failu

re, theft of

NatWest Group property, information loss and

the impact of

natural, or man-made, disasters – as well as the threa

t of

cyber-attacks – are sources of operation

al risk. Operational risk

can also arise from a failure to account for ch

anges in law or

regulations or to take appropriate measures to

protect assets.

Key developments in 2021



Aligned to the implementation of the enterprise-wi

de risk

management framework, a new operational

risk policy was

approved in April 2021. T

he new policy sets out the

qualitative expectations, guidanc

e and standards that

stipulate the nature and extent of

permissible risk-taking for

operational risk.



There was also a continued focus on oper

ational resilience

to ensure planning, controls and operational activities

remained robust and appropriate, with conti

nuing attention

on the potential operational risks arising fro

m changes in

working practices.



The security threat and the pote

ntial for cyber-attacks on

NWM Group and its supply chain continue

d to be closely

monitored. During 2021, NatWe

st Group further invested in

its defences in response to the evolving th

reat. There was

also continued focus on assuring the securi

ty of the supply

chain.



There was a sustained focus on reducing the

risks

associated with data use, particularly in

terms of assuring

data quality. This was aligned to the NatWest

Group data

strategy, designed to identify and implement en

hancements

to the effective use of data across NatWest Group.

Governance

The governance arrangements in place for oper

ational risk are

aligned to the requirements set out in the Board-

approved

enterprise-wide risk management fr

amework and are

consistent with achieving safety

, soundness and sustainable

risk outcomes. The Operating Committee discusse

s operational

risk matters relating to the control envi

ronment, NWM’s

implementation of the enterprise-wide risk man

agement

framework, risk identification and oversight of retu

rn-to-

appetite plans. Significant issues are escala

ted to the Board

Risk Committee.

Risk appetite

Operational risk appetite supports effec

tive 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. N

atWest Group’s operational risk

appetite statement encompasses

the full range of operational

risks faced by its legal entities, businesse

s and functions.

Mitigation

The Control Environment Certification (CEC) pr

ocess is a half-

yearly self-assessment by the CEOs of NatWes

t Markets as well

as the senior executives of NatWes

t Group’s other principal

businesses, functions and legal entities. I

t provides a consistent

and comparable view on the adequacy an

d effectiveness of the

internal control environment.

CEC covers material risks and the underlying key con

trols,

including financial, operational and compliance con

trols, as well

as supporting risk management frameworks. The CEC

outcomes are reported to Group Audit Co

mmittee 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-O

xley 404 requirements

concerning internal control over financial reporting, an

d certain

requirements of the UK Corporate Govern

ance Code.

Risks are mitigated by applying ke

y preventative and detective

controls, an integral step in the

risk assessment methodology

which determines residual risk e

xposure. Control owners are

accountable for the design, exe

cution, performance and

maintenance of key controls. Ke

y controls are regularly

assessed for adequacy and tested for eff

ectiveness. The results

are monitored and, where a material change in

performance is

identified, the associated risk is re-evalu

ated.

Monitoring and measurement

Risk and control assessments are use

d across all business

areas and support functions to

identify and assess material

operational and conduct risks and key

controls. All risks and

controls are mapped to NWM Group’s Ris

k Directory. Risk

assessments are refreshed at least annually t

o ensure they

remain relevant and capture a

ny emerging risks and also

ensure risks are reassessed.

The process is designed to conf

irm that risks are effectively

managed in line with risk appet

ite. Controls are tested at the

appropriate frequency to verify

that they remain fit-for-purpose

and operate effectively to reduce identified risks.

NWM Group uses the standardise

d approach to calculate its

Pillar 1 operational risk capital requirement. This is b

ased on

multiplying three years’ average historical g

ross income by

coefficients set by the regulator based on

business line. As part

of the wider Internal Capital Ade

quacy Assessment Process an

operational risk economic capital model is use

d 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-looki

scenario analysis to provide a risk-se

nsitive view of NatWest

Group’s Pillar 2A capital require

ment.

Scenario analysis is used to asse

ss how severe but plausible

operational risks will affect NWM Group. It p

rovides a forward-

looking basis for evaluating and managing o

perational risk

exposures.

Risk and capital m

anageme

nt continued

NWM Group

Annu

al Report an

d Accounts 202

Operational risk continued

Refer to the Capital, liquidity and fu

nding risk section for

operational risk capital requirement figures.

Operational resilience

NWM Group manages and monitors operational

resilience

through its risk and control asse

ssment methodology. This is

underpinned by setting and monitoring risk indic

ators and

performance metrics for key busi

ness services. Progress

continues on the response to regulator expectations o

operational resilience, with invol

vement in a number of

industry-wide operational resilie

nce forums. This enables a

more holistic view of the operati

onal resilience risk profile and

the pace of ongoing innovation and change, bot

h internally and

externally.

Event and loss data management

The operational risk event and l

oss data management process

ensures NatWest Group captures

and records operational risk

financial and non-financial events that meet defined c

riteria.

Loss data is used for regulatory and indust

ry reporting and is

included in capital modelling w

hen calculating economic capital

for operational risk. The most s

erious events are escalated in a

simple, standardised process to

all senior management, by way

of a Group Notifiable Event Proc

ess. All financial impacts

associated with an operational risk event are re

ported in

NatWest Group’s Annual Report and Accounts.

Model risk

Definition

Model risk is the potential for adverse consequences a

rising

from inaccurate financial assessments o

r decisions made as a

result of incorrect or misused model ou

tputs and reports. NWM

Group defines a model as a quantitative me

thod, system, or

approach that applies statistical, economic, fin

ancial,

accounting, mathematical or data science

theories, techniques

and assumptions to process input data into

quantitative

estimates.

Sources of risk

NWM Group uses a variety of models in

the course of its

business activities. Examples include the use of model ou

tputs

to support measuring and assessing risk exposures (includin

credit and market risk), as well as for valuation of posi

tions and

for calculating regulatory capital and liquidi

ty requirements.

The models used for stress-testing purposes also pl

ay a key

role in ensuring NWM Group hol

ds sufficient capital, even in

stressed market scenarios.

Key developments in 2021



A number of model improvements were made to ensure

the

model portfolio was operating within ap

petite.

Enhancement work remains a ke

y focus.



There was further embedding and enhancemen

t of

frameworks and governance re

lating to model risk.

Governance

A governance framework is in place to ensure policies

and

processes relating to models ar

e appropriate and effective.

Two roles are key to this – Model Risk O

wners and Model Risk

Officers. Model Risk Owners ar

e responsible for model approval

and ongoing performance monitoring. Model Ris

k Officers, in

the second line, are responsible f

or oversight, including

ensuring that models are independently valida

ted prior to use

and on an ongoing basis aligned to the model’s risk rati

ng.

Escalations are made to senior

management through the NWM

Group Model Risk Committee. T

he committee also considers

whether a model can be approved for use. Models

used for

regulatory reporting may additionally require regul

atory

approval before implementation. Further es

calation can also be

made to the NatWest Group Model Risk

Oversight Committee.

Risk appetite

Model risk appetite is set in order to limit

the level of model risk

that NWM Group is willing to acce

pt in the course of its

business activities. NWM Group has defined limits and t

riggers

that align with the NatWest Group’s model risk ap

petite

statement. The first line is responsible for

monitoring

performance against appetite, reporting on

the model

population and carrying out any

necessary remediation for

positions outside appetite.

Risk controls

Policies and procedures related to the develop

ment, validation,

approval, implementation and use

and ongoing monitoring of

models are in place to ensure adequate co

ntrol across the

lifecycle of an individual model. Validation of m

aterial models is

conducted by an independent risk function comprised

of skilled,

well-informed subject matter experts. This is c

ompleted for new

models or amendments to existing models and as p

art of an

ongoing periodic programme to asse

ss model performance.

The frequency of periodic validation is aligned to

the risk rating

of the model. The independent valid

ation focuses on a variety

of model features, including mo

delling 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.

Monitoring and measurement

The level of risk relating to an individual model is asse

ssed

through a model risk rating that is based on the model’s

materiality and validation rating. This appro

ach provides the

basis for model risk appetite me

asures and enables model risk

to be robustly monitored and managed across NWM

Group.

Ongoing performance monitoring is conduc

ted by the first line

and overseen by the second line

to ensure parameter estimates

and model constructs remain fit for purpose

, model

assumptions remain valid and that models are bein

g used

consistently with their intended purpose. This allows ti

mely

action to be taken to remediate poor mo

del performance

and/or any control gaps or weaknesse

Mitigation

Model risk is inherent in the use

of models. It is managed by

refining or redeveloping models where app

ropriate – either due

to changes in market condition

s, 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 proces

s within which the model

output is used in order to furthe

r limit risk levels.

Risk and capital m

anageme

nt continued

NWM Group

Annu

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d Accounts 202

Reputational risk

Definition

Reputational risk is defined as the risk of da

mage to

stakeholder trust due to negative consequence

s arising from

internal actions or external events.

Sources of risk

Reputational risks originate fro

m internal actions and external

events. The three primary drivers of reputation

al risk have

been identified as: failure in inte

rnal execution; a conflict

between NWM Group’s values and the public agenda;

and

contagion (when NWM Group’s reputation is dama

ged by

failures in the wider financial sector).

Key developments in 2021



Reputation risk registers were introduced at NatWest

Group

level in order to enhance monit

oring of the most material

reputational risks.



An updated reputational risk appetite state

ment was

introduced with a specific focus on public

trust.



The correlation between reputational risk and cli

mate

change issues remained a significant area of f

ocus during

2021. Enhancements were made to the Environment

al,

Social & Ethical risk management framework

to mitigate

reputational risk arising from exposure

to carbon-intensive

sectors and to support the trans

ition to a lower carbon

economy.

Governance

A reputational risk policy supports reputational

risk

management across NWM Group. The

NWM Reputational Risk

Committee reviews relevant issu

es at an individual business or

entity level, while the NatWest Group Reputati

onal Risk

Committee – which has delegate

d authority from the NatWest

Group Executive Risk Committee

– opines on cases, issues,

sectors and themes that represent a material repu

tational risk.

The NatWest Group Board Risk Committee ove

rsees the

identification and reporting of reputational risk. The Na

tWest

Group Sustainable Banking Committee has

a specific focus on

environmental, social and ethical issue

Risk appetite

NWM Group manages and articu

lates its appetite for

reputational risk through a qualitative repu

tational risk appetite

statement and quantitative measures. NWM

Group seeks to

identify, measure and manage

risk exposures arising from

internal actions and external events. This

is designed to ensure

that stakeholder trust is retained. Howeve

r, reputational risk is

inherent in NWM Group’s operating envi

ronment and public

trust is a specific factor in setting reputa

tional risk appetite.

Monitoring and measurement

Relevant internal and external facto

rs are monitored through

regular reporting to NWM Group Reput

ational Risk Committee

and escalated, where appropriate, to Na

tWest Group’s

Reputational Risk Committee, Board Risk Commit

tee or

Sustainable Banking Committee

Mitigation

Standards of conduct are in place across NatWest

Group

requiring strict adherence to p

olicies, procedures and ways of

working to ensure business is transacted in a way

that meets –

or exceeds – stakeholder expectations.

External events that could caus

e reputational damage are

identified and mitigated through NatWest Group’s

top and

emerging risks process as well as through the N

atWest Group

and franchise-level risk registers

ort of the dir

ors

NWM Group

Annu

al Report an

d Accounts 202

The directors present their report together with the au

dited

accounts for the year ended 31 December 2021

Other information incorporated into this rep

ort by reference

can be found at:

Page

Financial review

Board of directors and secretar

Segmental

analysis

117

Share capital and reserves

162

Post balance sheet events

174

Risk factors

179

Group structure

NatWest Markets Plc (‘NWM Plc’) is a wholly-owned su

bsidiary

of NatWest Group plc (‘NWG plc’ or ‘the holdi

ng company’).

The NatWest Markets Group (‘

NWM Group’) comprises NWM

Plc and its subsidiary and associated undertakings. The

term

‘NatWest Group’ comprises NWG plc and its su

bsidiary and

associated undertakings. NWG plc is

incorporated in the UK

and has its registered office at 36

St Andrew Square,

Edinburgh, EH2 2YB.

Details of NWM Plc’s principal subsidia

ry undertakings and their

activities are shown in Note 31 on the accounts. A full list of

related undertakings of NWM Plc

is shown in Note 34 on the

accounts.

The financial statements of NatWes

t Group plc can be obtained

from NatWest Group Legal, Go

vernance and Regulatory Affairs,

Gogarburn, Edinburgh, EH12 1

HQ, the Registrar of Companies

or at natwestgroup.com.

Activities

NWM Group is engaged principally in providi

ng financing, risk

management and trading solutions to customers.

Results and dividends

The loss attributable to the ordinary shareholders of NW

Group for the year ended 31 Dec

ember 2021 was £593 million

compared with a loss of £328 million fo

r the year ended 31

December 2020, as set out in the consolidated income

statement on page 105.

Total dividends paid to NatWest Group

plc during the year

amounted to £1 billion.

On 17 February 2022, the Board approved an inte

rim dividend

of £250 million, declared and payable to Na

tWest Group plc on

18 February 2022.

Employees

At 31 December 2021, NWM Group employe

d 1,600 people

(excluding temporary staff). Details of all rela

ted costs are

included in Note 3 to the consolidated accoun

ts.

Corporate Governance statement

The Companies (Miscellaneous Re

porting) Regulations 2018

introduced new statutory reporting require

ments for financial

years beginning on or after 1 January 201

9. As a result of these

new requirements, the directors of

the company are required

to provide a statement in the Directors’ report stating

which

corporate governance code, if any, the co

mpany followed

during the year; how it applied the code and any pa

rt of the

code it did not follow. For the fi

nancial year ended 31

December 2021, the company has chosen t

o report against the

Wates Corporate Governance Principles fo

r Large Companies

(the Wates Principles) and the disclos

ures below explain how

the company has applied the Wates P

rinciples in the context of

its corporate governance arrangements.

1. Purpose and leadership

Purpose

NatWest Group’s purpose is established by

the NWG plc Board,

promoted across NatWest Group and cascaded to su

bsidiaries

including NWM Group. Further i

nformation on NatWest Group’s

purpose can be found in the NatWest Grou

p plc 2021 Annual

Report and Accounts.

Strategy

NatWest Group’s strategy is set and

approved by the NWG plc

Board. The NWM Plc Board (the B

oard) reviews and sets the

strategic direction of NWM Plc

and, as appropriate, the

strategies for each of its businesse

s within the parameters set

by the NWG plc Board. It subsequently oversees

the execution

of the strategy and holds management to acc

ount for its

delivery.

Culture

The NWG plc Board is supporte

d in monitoring culture across

NatWest Group by the Group Su

stainable Banking Committee

and the Group Board Risk Committee. NatWes

t Group is on a

journey towards a generative ris

k culture whereby risk is simply

part of the way people work and think.

Building a healthy culture that e

mbodies Our Values is a core

priority for NatWest Group.

Our Values, which guide the way NatWes

t Group identifies the

right people to serve customers well, and how

to manage,

engage and reward colleagues,

are at the heart of Our Code

(the NatWest Group-wide Code of

Conduct).

There is regular reporting to the

Board on culture, so as to

provide appropriate oversight of cul

ture matters. More

specifically, with regards to risk culture, signific

ant progress

has been made towards addres

sing historical conduct issues,

including risk appetite enhancements, increased

monitoring of

conduct risk, and a new risk appetite me

asure for Golden Rule

breaches. This supports our ambition to create

a positive

culture and strengthen ‘good conduct’ outco

mes for clients.

2. Board Composition

The Board

The Board has seven directors comprising; the Chai

rman, two

executive directors (being the C

hief Executive Officer and Chief

Financial Officer) and four independent

non-executive

directors. The size of the Board is considered app

ropriate,

taking into account the size and scale of NWM Plc’s

business.

The Chairman

The role of Chairman is to lead the Boa

rd and ensure its overall

effectiveness. This is

distinct and separate from that of the

Chief Executive Officer who manages the business

day-to-day.

The Chairman is also a member of the NWG plc Bo

ard which

provides an appropriate linkage

to the wider NatWest Group

and ensures alignment and awareness in respec

t of NatWest

Group-wide matters.

Non-Executive Directors

The majority of the Board comprises independent no

executive Directors. Their role is to challenge an

d scrutinise the

performance of management and to help develop

proposals on

strategy. They also review the performance

of management in

meeting agreed goals and objectives and mo

nitor the firm’s risk

profile. The non-executive directors combine broad

business

and commercial expertise and bring experience from

a wealth

of areas including audit, banking, finance, hu

man resources,

technology, and telecommunications.

Report of the direct

ors continued

NWM Group

Annu

al Report an

d Accounts 202

The Board periodically undertakes an independence

assessment of the non-executive

directors. With the exception

of the Chairman, who is a member of the NWG

plc Board, all

non-executive directors are considered to be indepen

dent and

there are no relationships or circ

umstances that are likely to

affect their judgment.

Induction Training

All new directors undergo a formal inductio

n programme upon

joining the Board which is coordina

ted by the Company

Secretary and tailored to their individual needs. This includes

meetings with other directors, senior executives

and business

heads. Meetings with the external auditor, leg

al counsel and

other key stakeholders are arranged as ap

propriate. Directors

also receive comprehensive gui

dance from the Company

Secretary on NWM Plc’s corporate govern

ance framework and

associated policies, including their duties as directors.

Continuous Development.

Non-executive directors discuss

their professional development

annually with the Chairman. Directors maintain

their

knowledge and familiarity with NWM Plc through

regular

meetings with senior management (including

representatives of

NatWest Group) and participate

in scheduled Board training

and other external sessions as appropriate.

During 2021, climate and teach-in sessions on the in

tegration of

NatWest’s purpose-led strategy as well as on Capi

tal Markets

and Large Corporates was arranged for the

directors. Directors

may also request individual in-depth briefings from

time to time

on areas of particular interest.

Board Diversity

The Board is committed to promoting diversity a

nd inclusion in

the boardroom and aims to meet industry t

argets and

recommendations wherever possible. T

he Board has agreed a

Boardroom Inclusion Policy whic

h aims to promote diversity

and inclusion in the composition of the Board of

Directors and

in the nomination and appointment process. T

he Policy reflects

the values of the wider NatWest Group, its Inclusio

n Policy and

relevant legal, regulatory or best practice require

ments.

Committees

The responsibilities of the Board are executed, in part,

through

its committees (namely, the Audit Co

mmittee, the Board Risk

Committee, the Performance and Remuneration Co

mmittee

and the Nominations and Governance Com

mittee). All matters

that the Board has specifically delegated to the

se committees

are set out in their terms of reference (ToRs). All othe

r matters,

including responsibility for the day-to-d

ay operation of NWM

Plc (that are not specifically reserved for the Boa

rd or

delegated to a committee) are delegated to the NWM

Plc Chief

Executive Officer (CEO) in accordance with such policies a

directions as the Board determines appropria

te, including the

NWM Plc CEO’s role profile.

Succession

The Board is responsible for ensuring that NWM Plc h

as in

place succession plans for the Board and senior

management

so as to maintain an appropriate balance of skills and

experience. The NatWest Group Nominations an

d Governance

Committee is also required to approve all

appointments to the

Board, reflecting the company’s position as a subsidiary of

NatWest Group

Board Effectiveness

The effectiveness of

the Board, including the Chairman,

individual directors and Board committees, is asse

ssed

periodically. The Board considers such asse

ssments to play an

important role in the identification of areas for fu

rther

improvement, focus and for strengthening its overall

performance.

The Company Secretary

In fulfilling its role, the Board is

supported by the Company

Secretary. The Company Secretary is responsible fo

r ensuring

good information flows between the Board and its com

mittees

and between senior management and no

n-executive directors,

as well as facilitating induction

and assisting with professional

development of non-executive directors, as require

d. The

directors may also seek independent, professional

advice,

where necessary, at NWM Plc’s e

xpense.

3. Director Responsibilities

Policy & Framework

NatWest Group has in place a Corporate Gove

rnance

Framework, including a Corpor

ate Governance Policy. All

directors of NWM Plc are required to ensure that

they are

familiar with the Corporate Governance Fra

mework and that

NWM Plc complies with it. NWM Plc also p

roduces and

maintains a document called ‘Our Governance’ which sets

out

the high-level governance frame

work for NWM plc at both

regional and global levels.

The Board has a programme of

seven scheduled meetings

every year. The Board’s ToRs i

nclude a formal schedule of

matters specifically reserved for the Bo

ard which are reviewed

at least annually. Each director has a role p

rofile which clearly

articulates their responsibilities and accountabilities

. Similarly,

any additional regulatory responsibilities an

d accountabilities

where any of the directors undertake a Senio

r Manager

Function (as defined under the Prudential Re

gulation

Authority’s and Financial Conduct Authority’s ‘Senior M

anager

Regimes’) are set out in their St

atement of Responsibilities.

To support them in the discharge of their duties, all

directors

receive regular and timely information on all key aspects of

the

business including financial performance, st

rategy, key risks,

and market conditions.

Conflicts of Interest

The Board follows NatWest Group’s guidance rela

ting to

directors’ conflicts of interest.

The Board has the power to au

thorise any actual or potential

conflicts of interest in accordance with the Companies A

2006 and NWM Plc’s Articles of

Association. The company

maintains a register of directors’ interests and

appointments

and there is discussion of directors’ conflicts in B

oard meetings,

as required. During the year, none of the di

rectors declared

any material interest, directly or indirectly, in any con

tract of

significance with any company within Nat

West Group.

All directors were reminded of their obligations i

n respect of

transacting in NWM Plc securities

(Personal Account Dealing)

and all directors have confirmed that they have complied

with

their obligations.

Report of the direct

ors continued

NWM Group

Annu

al Report an

d Accounts 202

Board Committees

In order to provide effective ov

ersight and leadership, the

Board has established a number of Board committees wit

particular responsibilities:

The Audit Committee

comprises at least two independen

non-executive directors, one of whom is the Ch

airman of the

Board Risk Committee. The Committee assists

the Board in

discharging its responsibilities for monitorin

g the integrity of the

financial statements. It reviews the accoun

ting policies,

financial reporting and regulatory compliance p

ractices of

NWM Plc, its system and standards of internal co

ntrols, and

monitors the processes for internal audi

t and external audit.

The Board Risk Committee

comprises at least two

independent non-executive dire

ctors, one of whom is the

Chairman of the Audit Committee

. The Committee provides

oversight and advice to the Board in rel

ation to current and

potential future risk exposures and futu

re risk profile, including

determination of risk appetite, the e

ffectiveness of the risk

management framework and (in conjuncti

on with the Audit

Committee) internal controls required

to manage risk. The

Committee also reviews compliance with Na

tWest Group Policy

Framework and reviews the performance of NWM Plc

relative

to risk appetite.

The Performance and Remuneration Committee (RemCo)

comprises at least four independent non-executive

directors

and assists the NatWest Group Performance and

Remuneration

Committee with the oversight and im

plementation of NatWest

Group’s remuneration policy. It also considers

and makes

recommendations on remuneration ar

rangements for senior

executives of NWM Plc.

The Nominations and Governance Committee

comprises the

Chairman and at least two other independent non-executi

directors. It is responsible for a

ssisting the Board in the formal

selection and appointment of directo

rs. It reviews the structure,

size and composition of the Board an

d membership and

chairmanship of Board committe

es.

4. Opportunity and risk

The role of the Board is to promote

the long-term sustainable

success of NWM Plc.

The Board reviews and approves

risk appetite for strategic and

material risks in accordance with NatWest Group’s risk

appetite

framework; monitors performance

against risk appetite for

NWM Plc; and considers any material risks

and approves (as

appropriate) recommended actions es

calated by the NWM Plc

Board Risk Committee.

NWM Plc’s risk strategy is informed and sha

ped by an

understanding of the risk landscape includin

g a range of

significant risks and uncertainties

in the external economic,

political and regulatory environments.

NWM Plc complies with NatWest G

roup’s risk appetite

framework, which is approved annually by the NWG plc Boa

rd,

in line with NatWest Group’s risk appetite sta

tements,

frameworks and policies. NatWe

st Group risk appetite is set in

line with overall strategy.

NatWest Group operates an integrated risk

management

framework, which is centred on the embedding of a st

rong risk

culture. The framework ensures the tools

and capability are in

place to facilitate sound risk management and decis

ion-making

across the organisation.

NWM Plc also complies with the NatWest Group Policy

Framework, the purpose of which is to ensure

that NatWest

Group establishes and maintains N

atWest Group-wide policies

that adequately address the material inherent risks it faces in

its business activities.

Further information on NWM Plc’s risk management f

ramework

including risk culture, risk governance, risk appetite, risk

controls and limits, and risk identification and

measurement

can be found in the capital and risk management sec

tion of this

report.

5. Remuneration

NatWest Group Remuneration Policy

provides a consistent

policy across all companies in NatWest Group and ensu

res

compliance with regulatory req

uirements. The policy is aligned

with the business strategy, obje

ctives, values and long-term

interests of the company. The policy s

upports a culture where

individuals are rewarded for delivering sustained

performance

in line with risk appetite and fo

r demonstrating the right

conduct and behaviours.

The Performance and Remuneration Committee

(RemCo)

reviews remuneration for executives of the co

mpany and

considers reports on the wider workfo

rce including annual pay

outcomes and diversity information. The RemCo

helps to

ensure that the remuneration policie

s, procedures and

practices being applied are appropriate at NWM Plc level.

Executive remuneration structures incentivise individu

als to

deliver sustainable performance

based on strategic objectives

for NatWest Group and the relevant business a

rea.

Performance is assessed against a balanced scoreca

rd of

financial and non-financial measures and va

riable pay is

subject to deferral as well as malus and cl

awback provisions to

ensure rewards are justified in

the long-term.

The approach to performance management provides

clarity for

employees on how their contribution links to Na

tWest Group’s

ambition and all employees have goals set ac

ross a balanced

scorecard of measures. NatWes

t Group continues to ensure

employees are paid fairly for the

work they do and are

supported by simple and transparen

t pay structures in line with

industry best practices. This clarity and certainty on

how pay is

delivered is also helping to improve employees’ f

inancial

wellbeing, which is a priority. Employee

s are provided with

flexibility in terms of how they wish to receive

pay to suit their

circumstances. Pay is benchmarked agains

t the external

market so that pay and benefits

are competitive.

NatWest Group is a fully accredited Livin

g Wage Employer in

the UK with rates of pay that c

ontinue to exceed the Living

Wage Foundation Benchmarks.

NatWest Group ensures colleague

s have a common awareness

of the financial and economic f

actors affecting its performance

through quarterly ‘Results Expl

ained’ communications and

Workplace Live events with the Group Chief

Executive Officer

and Chief Financial Officer.

Further information on the remuneration policy

can be found in

the Directors’ remuneration report (DRR) of

the NatWest Group

plc 2021 Annual Report and Accounts along wi

th the steps

being taken to build an inclusive and engaged

workforce. The

DRR also contains details of pay

ratios for NatWest Group.

Gender and Ethnicity Pay Gap information can be f

ound in the

Strategic report section of the NatWest Group plc 2021

Annual

Report and Accounts.

6. Stakeholder relationships and engagement

NWM Plc is committed to managing the wide

r social,

environmental and economic impacts of its o

perations which

includes the way it deals with its

customers and manages the

sustainability of its supply chain

Report of the direct

ors continued

NWM Group

Annu

al Report an

d Accounts 202

The Board recognises the importance of engaging

with

stakeholders and discussions at B

oard meetings are focused

around the impact that NWM Plc’s activities

may have on key

stakeholder groups. A new Board

reporting style has also been

introduced with a specific section focussing on

the stakeholder

impacts to support decision-making.

For further details on the Board’s e

ngagement with employees,

customers, suppliers and others, and how these

stakeholders’

interests have influenced one of the Board’s p

rincipal decisions,

see page 18 of the Strategic report.

Internal control over financial reporting

The internal controls over financi

al reporting for NWM Group

are consistent with those at NatWest Group leve

l. NWM Group

has designed and assessed the e

ffectiveness of its internal

control over financial reporting as of 31 Dece

mber 2021 based

on the criteria set forth by the Committee of Sp

onsoring

Organizations of the Treadway Commission in t

he 2013

publication of ‘Internal Control – Integrated Frame

work’. As

part of the assessment, management have conside

red the

additional activities required for its internal co

ntrol over

financial reporting during the ye

ar, such as oversight on

controls performed on NWM Group’s behalf,

to better reflect

the size, scale and overall mate

riality of the business profile

compared to the NatWest Group framework. Any def

iciencies

identified are reported to NWM Group Audit C

ommittee along

with management’s remediation plans

Directors’ interests

Where directors of NWM Plc ar

e also directors of NWG plc,

their interests in the shares of the ultimate holding co

mpany at

31 December 2021 are shown in the Annu

al report on

remuneration section of the NatWest Group plc 202

1 Annual

Report and Accounts.

None of the directors held an interest in the lo

an capital of the

ultimate holding company or in the sha

res or loan capital of

NWM Plc or any of its subsidiaries

, during the period from 1

January 2021 to 17 February 20

22.

Directors' indemnities

In terms of section 236 of the Companies Act 200

6 (the

‘Companies Act’), Qualifying Third Party Indemni

ty Provisions

have been issued by the ultimate holding com

pany to its

directors, members of NWM Plc’s Executive Commi

ttee,

individuals authorised by the P

RA/FCA and certain directors

and/or officers of NatWest Group’s subsidiaries and all t

rustees

of NatWest Group’s pension scheme.

Going concern

NWM Plc’s business activities a

nd financial position, the factors

likely to affect its future development an

d performance and its

objectives and policies in managing the financi

al risks to which

it is exposed, and its capital are discuss

ed in the Financial

review. NWM Plc’s regulatory capital resou

rces and significant

developments in 2021, and anticipated future develo

pments are

detailed in the Capital, liquidity and fundi

ng sections. These

sections also describe NWM Plc’s funding and liquidity p

rofile,

including changes in key metrics and the build-up of liquidi

reserves.

Having reviewed NWM Plc’s pri

ncipal risks, forecasts,

projections, the potential impac

t of COVID-19 and other

relevant evidence, the directors have a reasonable ex

pectation

that NWM Plc will continue in operational existence for

a period

of 12 months from the date of this report. Accordingly

, the

financial statements of NWM Plc have been prepa

red on a

going concern basis.

Political donations

During 2021, no political donations were m

ade in the UK or EU,

nor any political expenditure incurred in the U

K 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 au

dit

information of which NWM Plc’s

auditors are unaware; and

(b)

the director has taken all the steps that he/she ough

t to

have taken as a director to make himself/he

rself aware of

any relevant audit information and to establish tha

t NWM

Plc’s auditors are aware of that information. This

confirmation is given and should be inte

rpreted in

accordance with the provisions of se

ction 418 of the

Companies Act.

Auditors

Ernst & Young LLP (EY LLP) are the auditors and

have

indicated their willingness to continue in office. A resolutio

n to

re-appoint EY LLP as NWM Plc’

s auditors will be proposed at

the forthcoming NatWest Group Annual Gener

al Meeting.

By order of the Board

Scott Gibson

Company Secretary

17 February 2022

NatWest Markets Plc

is registered in Scotland No. SC09

0312

eme

nt of dir

ect

ors

’

responsib

ilities

NWM Group

Annu

al Report an

d Accounts 202

This statement should be read in conjunction wi

th the responsibilities of the auditor set ou

t in their report on pages 95 to 104.

The directors are responsible for the preparati

on of the Annual Report and Accounts. T

he directors are required to prepare

Group

financial statements, and as permitted by the Co

mpanies Act 20

06 have elected to prepare company financial st

atements, for each

financial year in accordance with UK adopted Inte

rnational Accounting Standards, Interna

tional Financial Reporting Standard

(IFRS) as issued by the International Accounting St

andards Board and IFRS as adopted Europe

an Union. They are responsible f

preparing financial statements that prese

nt fairly the financial position, financial performance

and cash flows of NWM Group

and

NWM Plc. In preparing those financial sta

tements, the directors are required to:



select suitable accounting policies

and then apply them consistently;



make judgments and estimates that are reas

onable, relevant and reliable; an



state whether applicable accounting standa

rds have been followed, subject to any

material departures disclosed and explai

ned

in the financial statements.



prepare the financial statements

on a going concern basis unless

it is inappropriate to presume that the comp

any and Group

will continue in business

The directors are responsible for keeping pro

per accounting records which disclose

with reasonable accuracy at any time t

financial position of NWM Group and to enable them to e

nsure that the Annual Report and Ac

counts complies with the Comp

anies

Act 2006. They are also responsible for safegua

rding the assets of NWM Plc and NWM G

roup and hence for taking reasonable

steps for the prevention and de

tection of fraud and other irregularities.

Under applicable law and regulations, the directo

rs are also responsible for preparing a Strat

egic report and Report of the

directors, that comply with that law and those regul

ations. The directors are responsible for

the maintenance and integrity of the

corporate and financial information include

d on the company’s website.

The directors confirm that to the bes

t of their knowledge:



the financial statements, prepared in accordance wi

th UK adopted International Accounti

ng Standards, International Financial

Reporting Standards as issued by the International Accou

nting Standards Board and I

FRS as adopted European Union, give

true and fair view of the assets, liabilities, fin

ancial position and profit or loss of N

WM Plc and the undertakings included in

the

consolidation taken as a whole;

and



the Strategic report and Report

of the directors (incorporating the Financial review) include

s a fair review of the development

and performance of the business and the positio

n of NWM Plc and the undert

akings 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

Frank Dangeard

Robert Begbie

David King

Chairman

Chief Executive Officer

Chief Financial Officer

17 February 2022

Board of directors

Chairman

Executive directors

Non

executive directors

Frank Dangeard

Rober

t Begbie

David King

Vivek Ahuja

Tamsin Rowe

Anne Simpson

Sarah Wilkinson

Financial statements

NWM Group

Annual Report and Accounts 2021

Page

Independent auditor’s report

Consolidated income statement

105

Consolidated statement of comprehensive income

105

Balance sheet

106

Statement of changes in equity

107

Cash flow statement

108

Accounting policies

110

Notes to the accounts

Net interest income

115

Non-interest income

115

Operating expenses

116

Segmental analysis

117

Pensions

119

Auditor’s remuneration

123

Tax

123

Profit/loss dealt with in the accounts of NWM Plc

125

Financial instruments - classification

126

Financial instruments - valuation

135

Financial instruments - maturity analysis

146

Trading assets and liabilities

149

Derivatives

150

Loan impairment provisions

156

Other financial assets

158

Investment in group undertakings

159

Other assets

159

Other financial liabilities

159

Subordinated liabilities

160

Other liabilities

161

Share capital and reserves

162

Structured entities

163

Asset transfers

164

Capital resources

165

Memorandum items

166

Analysis of the net investment in business interests

171

Analysis of changes in financing during the year

172

Analysis of cash and cash equivalents

172

Directors’ and key management remuneration

173

Transactions with directors and key management

173

Related parties

174

Ultimate holding company

174

Post balance sheet events

174

Related undertakings

175

Independent

auditor’s

report to

the members of

NatWest Ma

rkets Plc

NWM Group

Annu

al Report an

d Accounts 202

Opinion

In our opinion:



The financial statements of NatWes

t Markets Plc (the ‘Bank’) and its subsidiaries (toge

ther, 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 2021 and of

the Group’s loss for the year then

ended;



The Group financial statements

have been properly prepared in accordance

with UK adopted international accoun

ting

standards and International Financial Reporting St

andards (‘IFRS’) as adopted by the Eu

ropean Union and IFRS as issued by the

International Accounting Standards Board (‘IA

SB’);



The Bank’s financial statements have been prope

rly prepared in accordance with UK a

dopted international accounting

standards as applied in accordance with sec

tion 408 of the Companies Act 2006

; and



The financial statements have bee

n prepared in accordance with the requiremen

ts of the Companies Act 2006

e hav

e audited the financial statemen

ts (see t

able below) of

the Group

and the Bank for the

year ended 31 D

ecember 2

021 which

comprise:

Group

Bank



Consolidated balance sheet as

at 31 December 2021;



Consolidated income statement f

or the year then ended;



Consolidated statement of comprehensive inco

me for the

year then ended;



Consolidated statement of changes i

n equity for the year then

ended;



Consolidated cash flow statement for the year then ende



Accounting Policies;



Related notes 1 to 34 to the financial s

tatements; and



Risk and capital management se

ction identified as ‘audited’.



Balance sheet as at 31 Decembe

r 2021;



Statement of changes in equity for the yea

r then

ended;



Cash flow statement for the year

then ended;



Accounting Policies; and



Related notes 1 to 34 to the financial s

tatements.

The financial reporting framework that has

been applied in their preparation is a

pplicable law and UK adopted Interna

tional

Accounting Standards, and as regard to the gr

oup financial st

atements

, IFRS as adopted b

y the European Union and IFRS as

issued b

y the IA

B, and as r

egards the parent c

ompany fi

nancial statemen

ts, as ap

plied in acc

ordance wi

th section 408 o

f the

Companies Act 2006

Basis for opinion

We conducted our audit in accordance with Inter

national Standards on Auditing (UK) (ISAs

(UK)) and applicable law. Our

responsibilities under those sta

ndards are further described in the Auditor’s responsibili

ties for the audit of the financial statements

section of our report. We are in

dependent of the Group and Bank in accordance with

the ethical requirements that are relevant to

our audit of the financial statements in the UK, i

ncluding the FRC’s Ethical Standard as a

pplied to listed public interest entitie

s, and

we have fulfilled our other ethical responsibilities in

accordance with these requirements.

We believe that the audit evidence

we have obtained is sufficient and approp

riate to provide a basis for our opinion.

Conclusions relating to going concern

In auditing the financial statements, we have c

oncluded that the directors’ use of the going c

oncern basis of accounting in the

preparation of the financial stat

ements is appropriate. Our evaluation of the directo

rs’ 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 fina

ncial close process, we confirmed ou

r understanding of the director’s

going concern assessment proce

ss. We engaged with management early to ensure ke

y factors were considered in the

assessment;



We evaluated the directors’ going concer

n assessment which included reviewing

their evaluation of long-term business a

strategic plans on the future capital adequ

acy, liquidity and funding positions of the Grou

p and Bank. Management also

assessed these positions consid

ering internal stress tests which included considera

tion of top and emerging risks. The Group’s

risk profile and risk management prac

tices were considered including credit risk, m

arket risk, climate risk, compliance and

conduct risk, and operational risk;



We further evaluated their assessment by consi

dering the Group and Bank’s ability to continu

e as a going concern under

different scenarios considering the continued econo

mic impact of COVID-19. We use

d economic specialists in assessing the

macroeconomic assumptions in the forecas

t through benchmarking to institutional forecasts,

HMT consensus and peer

comparative economic forecasts; and



We reviewed the Group’s going concern disclosu

res included in the Annual Report and Accou

nts in order to assess that the

disclosures were appropriate and in confo

rmity with the reporting standards.

Independent a

uditor’s report to t

he member

s of NatWest Market

s Plc continue

NWM Group

Annu

al Report an

d Accounts 202

Based on the work we have performed, we have no

t identified any material unce

rtainties relating to events or conditi

ons that,

individually or collectively, may cast significant doub

t on the Group and Bank’s ability

to continue as a going concern over the

twelve months from the date

when the financial state

ments are authorised for issue.

Our r

esponsibilities and the responsibilities o

f the direct

ors with r

espect to going concern ar

e described in the r

elev

ant sections of

this report. H

ver

, because not all future e

ents or c

onditions can be pr

edicted, this st

atement is not a guarant

ee as to the

Group

’

s or Bank’

s ability to c

ontinue as a going conce

rn.

An overview of the scope of NatWest Markets Plc and Group audits

Tailoring the scope

Our assessment of audit risk, our evaluation of m

ateriality and our allocation of performance

materiality determine our audit scope

for each component within the Group. Taken to

gether, this enables us to form an opinion on

the consolidated financial state

ments.

We take into account size, risk profile, the org

anisation of the Group and effe

ctiveness of Group wide controls, changes in the

business environment and other factors such

as the results from internal audits when asse

ssing the level of work to be perfo

rmed

at each component.

In assessing the risk of material misstatemen

t to the Group financial statements, and

to ensure we had adequate quanti

tative

coverage of significant accounts in the financial st

atements, we identified five components ba

sed on size and risk which represe

the principal reporting legal entities within the

Group and the Group’s central functions.

Of the five components listed b

elow, we performed an audit of the complete financial info

rmation of two components (“full s

cop

components”) which were sele

cted based on their size or risk characteristics. For two co

mponents (“specific scope compone

nt”),

we performed audit procedures on spec

ific accounts within those

components that we considered had the poten

tial for the

greatest impact on the significant accounts in the fina

ncial statements either because of the si

ze of these accounts or their risk

profile. We also instructed one location to perfo

rm specified procedures over certain as

pects of selected accounts.

Component

ope

ey l

ocations

Nat

est Mark

ets Plc

Full

ited Kingdom, United

State

s, Indi

a and Poland

Nat

est Mark

ets N.

Full

ited Kingdom, India, P

oland

and the Nether

lands

Nat

est Mark

ets Securities Inc.

Specific

United State

Nat

est Mark

ets Securities

Japan

Limited

Centr

al Functions*

Specified procedur

Specific

Japan

United Kingdom

*Centr

l functions compri

se EY f

unctional component teams f

ocused on the audit of specific

balances across in sc

pe legal e

ntity

components.

The table below illustrates the coverage obtained f

rom the work performed by our audi

t teams. We considered total assets,

total

equity and the total income to verify we had ap

propriate overall coverage.

Full scope

Specific sc

ope

Specified

procedur

Other

procedur

es*

otal

otal assets

90%

<1%

100%

otal equity

99%

100%

otal income (absolute

)

78%

18%

100%

*Other procedur

es: consider

ed in analytical pr

cedur

es.

As a result of the continued impact of the COVI

D-19 pandemic and resulting lockdown restri

ctions for part of the year in countries

where full or specific scope audit procedures h

ave been performed, we modified ou

r audit strategy to allow for the audit to

performed remotely at both the Group and co

mponent locations. This approach was suppo

rted through remote user access

to the

Group’s financial systems and t

he use of EY software collaboration platforms for

the secure and timely delivery of requeste

d audit

evidence.

Involvement with component teams

In establishing our overall approach to the Group au

dit, 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 compo

nent auditors from other EY glob

al network firms

operating under our instruction.

The primary audit engagement team interacted regul

arly with the component audit teams wh

ere appropriate throughout the

course of the audit, which included holding planni

ng meetings, maintaining regular commu

nications on the status of the audit,

reviewing key working papers and taking respo

nsibility for the scope and direction of the

audit process. The primary audit te

continued to follow a programme of oversight visi

ts that has been designed to ensure that

the Senior Statutory Auditor, or another

Group audit partner, visits all full scope and specific scope loc

ation

s. During the current ye

ar’s audit cycle, due to continued

COVID-19 restrictions, the visits undertaken by t

he primary audit team were necessarily vi

rtual visits. These visits involved video

call meetings with local management and discussions o

n the audit approach with the co

mponent team and any issue

s arising from

their work. The primary team inter

acted regularly with the component teams and mai

ntained a continuous and open di

alogue with

component teams, as well as holding formal closing mee

tings quarterly, to ensure that the primary tea

m were fully aware of their

progress and results of their procedures. The

primary team also reviewed key working pape

rs and were responsible for the

scope

and direction of the audit process. T

his, together with the additional procedures at Group level

, g

ave us appropriate evidence

for

our opinion on the Group finan

cial statements.

Independent a

uditor’s report to t

he member

s of NatWest Market

s Plc continue

NWM Group

Annu

al Report an

d Accounts 202

Climate change

There has been increasing interest from st

akeholders as to how climate change will i

mpact companies. The Group has deter

mined

that the most significant future impacts from climate ch

ange on its operations will be from cre

dit risk, operational risk, reputational

risk, conduct risk and regulatory

compliance risk. These are explained in t

he Climate Risk section in the Strategic Repor

t and in the

Climate Risk section within the Ris

k and capital management sec

tion, which form part of the “Other information”. O

ur procedures

on these disclosures consisted s

olely of considering whether they are mate

rially inconsistent with the financial statements o

r our

knowledge obtained in the course of the audit or othe

rwise appear to be materially misstated.

As explained in the Accounting Policy note, the G

roup makes use of reasonable and suppo

rtable information to make accou

nting

judgments and estimates, including the observable eff

ect of the physical and transition risks o

f climate change on the current

creditworthiness of borrowers, asset values and

market indicators, as well as their effe

ct on the Group’s competitiveness

and

profitability. Many of the matters arising will be longe

r term in nature, with an inherent level

of uncertainty, and have limited eff

ect

on accounting judgments and estimates f

or the current period under the requi

rements of UK adopted international

accounting

standards, IFRS as adopted by

the European Union and IFRS as

issued by the IASB. In the Accounting Policy no

te, explanation of

the impact of certain transition

and physical risks were provided for the key

assumptions and significant judgements a

nd estimates.

Our audit effort in considering climate change

was focused on ensuring that the eff

ects of material climate risks as disclosed

in the

Accounting Policy note have been appropriately refle

cted in the asset and liability valu

ations and the nature and timing of future

cash flows. Details of our proce

dures and results on valuation of f

inancial instruments with higher risk charac

teristics and expected

credit loss provisions are included in our key au

dit matters below. We also challenged the dir

ectors’ considerations of climat

change in their assessment of going concern

and associated disclosures.

Whilst NatWest Group Plc has stated its co

mmitment to the aspirations of the Paris Agreeme

nt to achieve net zero emissions

2050, as stated above the impacts arising will

be longer term in nature, and there is a

n inherent level of uncertain

ty in determining

the full future economic impact

on the Group’s business model, operational plans and custo

mers.

Key audit matters

ey audi

t matters ar

e th

ose m

atters that, in our

prof

essional judgment, w

e of most signific

ance

in our audit of the financial

state

ments of the curr

ent p

eriod and include the most signific

ant a

ssess

ed risks o

f mater

ial misstate

ment (whether or not due t

fraud

) that we iden

tified. These matt

ers included those

which had the great

est e

ffect on the o

ver

all audit strat

egy, the allocat

ion of

resour

ces in the audit and dire

cting the effor

ts of the engagement tea

m. These matters

wer

e add

res

sed in the co

nte

t of our

audit

of the financial st

tements as a whole, and in our opi

nion ther

eon, and we d

o not pro

vid

e a s

eparate opinion on

these matter

Independent a

uditor’s report to t

he member

s of NatWest Market

s Plc continue

NWM Group

Annu

al Report an

d Accounts 202

Risk

Our response to the

risk

luation of financial ins

truments with higher risk char

acteris

tics including r

elated inc

ome fr

om tr

ading activities

At 31 December 2021 the company held

financial instruments with higher risk

characteristics, including (but not limited to)

reported level 3 assets of £2.0 billion (2020:

£1.7 billion) and level 3 liabilities of £

0.6

billion (2020: £0.9 billion) whose value is

dependent upon unobservable inputs, as

reported in note 10 of the financial

statements

The valuation of those financial i

nstruments

with higher risk characteristics can include

both significant judgement and the risk of

inappropriate revenue recognition through

incorrect pricing as outlined below. The

fair

value of these instruments can

involve

complex valuation models and significant fair

value adjustments, both of whi

ch may be

reliant on inputs where there is limited

market observability.

Management’s estimates which

required

significant judgement include:



Complex models

: Complex model-

dependent valuations of financial

instruments, which include interest rate

swaps linked to pre-payment be

haviour

and interest rate and foreign exchange

options with exotic features;



Illiquid inputs

: Pricing inputs and

calibrations for illiquid instruments,

including debt securities and loans.

Additionally, the valuation of derivative

instruments is dependent on discount

rates associated with complex collateral

arrangements;



Fair value adjustments

: The

appropriateness and completene

ss of fair

value adjustments made to derivatives

valuations including Funding Valuation

Adjustments (FVA), Credit Valuation

Adjustments (CVA), and material product

and deal specific adjustments o

n long

dated derivative portfolios; and



The manipulation of revenue re

cognition

is most likely to arise through t

inappropriate valuation of these

instruments given the level of judgment

involved.

Controls testing

: We evaluated the design and oper

ating effectiveness of

controls relating to financial ins

trument valuation and related income st

atement

measurement including independent price verific

tion, valuation models

governance, collateral management, income st

atement analysis, and the

associated controls over relevant info

rmation technology systems. We also

observed the Valuation Commit

tees where valuation inputs, assumptions and

adjustments were discussed and approved.

We involved our financial instru

ment valuation and modelling specialists to

assist

us in performing procedures including the following



Complex models

: Testing complex model-dependen

t valuations by

performing independent revaluation to asse

ss the appropriateness of models

and the adequacy of assumptions and inputs used

by the Group.



Illiquid inputs

: Independently re-pricing instrume

nts that had been valued

using illiquid pricing inputs, using alte

rnative pricing sources where available,

to evaluate management’s valuation.



Fair value adjustments

: Comparing fair v

alue adjustment methodologies to

current market practice and as

sessing the appropriateness and adequ

acy of

the valuation adjustment framework in light of e

merging market practice and

changes in the risk profile of th

e underlying portfolio; and revaluing a sample

of counterparty level FVA and CVA, comparing fundi

ng spreads to third

party data and independently challenging illiquid CVA i

nputs.

Throughout our audit procedure

s we considered the appropriateness of

modelling changes in relation to IBOR transiti

on and impact of climate change

on the valuation of financial ins

truments, particularly in relation to long-d

ated

illiquid positions.

In addition, we asse

ssed wheth

er ther

e we

re an

y indicators of aggreg

ate bias in

financial instrument marking a

nd methodology assumptions.

e performed back-testing ana

lysis o

f r

ecent tr

ade activity and asset disposals

to ev

alua

the driver

s of signific

ant differ

ences betw

een bo

ok value and tr

ade

value and to

assess the impact on the

fair v

alue of similar instr

ents within the

portfolio. W

e performed an analy

sis of significant collater

al discr

epancies with

counter

parties to assess the pote

ntial impact on the fair value

of the underlying

(and similar) financial instrume

nts.

Key observations communicated to the

Group Audit Committee

We are satisfied that the assum

ptions used by management to reflec

t the fair value of financial instruments with higher risk

characteristics and the recognition of related income is

reasonable and in accordance with IF

RS. We highlighted the following

matters to the Group Audit Committee:



Complex-model dependent valuations were approp

riate based on the output of our indepen

dent revaluations, analysis of

trade activity, assessment of the

output of the independent price verification proces

s, inspection of collateral disagreemen

and peer benchmarking;



The fair value estimates of hard-to-price fin

ancial instruments appropriately reflected p

ricing information available at 31

December 2021; and



Valuation adjustments applied to derivative

portfolios for credit, funding

and other risks were recorded in accorda

nce with

the requirements of IFRS considering trade activi

ty for positions with common risk charac

teristics, analysis of market data

and peer benchmarking.

Relevant references in the A

nnual Report and Accounts

Report of the Group Audit Committee

Accounting policies

Note 10 on the financial stateme

nts

Independent a

uditor’s report to t

he member

s of NatWest Market

s Plc continue

NWM Group

Annu

al Report an

d Accounts 202

Risk

Our response to the

risk

Provisions for conduct, litigation and regulatory m

atters

t 31 Dece

mber 2021, the Group has

report

ed £0.26 billion (2020: £0.33 billion) of

pro

isions for c

onduct, litigation and other

regulator

y matters

, as detailed

in Note 20

the financial state

ents.

gulatory scrutin

y a

nd the co

ntinued

litigious envir

onment give rise t

o a high lev

of management judgement in d

etermining

appropriate pr

ovisions and disc

losures

Management judgement is nee

ed to

determine whether a pr

esent obligation

xisted, and a pr

ovision s

ould be r

ecor

as at 31 December 2

021 in acc

ordance wi

the accoun

ting criteria se

t out under IA

S 37.

Management’s estimates which

required

significant judgement include:



Assumptions:

The

selection and use of

assumptions in the estimation o

material pro

visions. Ther

e is a risk of

management bias in the deter

mination

of whether an outflo

w in respect of

identified material conduc

t or legal

matters is pr

obable and can be

estimated r

eliably;

and



Disclosur

: The assessment of

the

adequacy of discl

osur

es of pr

vision for

contingent liabilities giv

en the

underlying estimation unce

rtainty in the

pro

isions.

Controls testing:

e evaluat

ed the design and opera

ting effect

ive

ness of k

controls o

ver the identificati

on, estimation, monitor

ing and disc

losure

pro

isions considering t

he potential for managemen

t ov

erride of controls

. The

controls t

este

d included those d

esigned and operate

d by mana

gement to

identify and monitor clai

ms, and t

o ensure the c

ompletenes

s and accur

acy o

data used t

o estimate

pro

isions

amination

egula

tory

and

legal

corr

espond

ence

examined

rele

van

regulator

y and

legal corr

espondence to assess dev

elopments in certain matters

For

atters

which

ere

settled

during

the

per

iod,

compar

the

actual

outflow

with

the

vision

that

had

been

ecor

ded

and

onsidered

whether

further risk e

xisted.

Inquiry of legal counse

: For le

gal matters t

hat we identified as

having a hig

her

lik

elihood of material misst

atem

ent,

‘significan

t legal matters

’

, we

rec

eived

confirmations fr

om the Group

’

s e

xternal legal coun

sel to assist

us in ev

aluat

ing

the exis

tence of an obligation and in asse

ssing management

’

s estimate o

f the

outflow at y

ear-end. W

e also co

ducted inquiries with inte

rnal legal counsel

respec

t of the e

xistence

of an

y legal obligations and r

elated pr

ovisions. W

performed proce

dures t

o identify unr

ecorded pr

ovisions t

o deter

mine if there

re an

y cases not considered

in the pro

ision by

assessing ag

ainst e

xternal

legal confirmations

discussing

with internal counse

l and analy

sing legal costs.

esting of assumptions

For the

pro

visions related to signific

nt legal matters

underst

d and asses

sed the pr

ovisioning methodology. W

e teste

d the

underlying data and assump

tions used in the dete

rmination of the pr

visions

rec

rded, legal c

osts,

and the timing of se

ttlement. W

e conside

red the accu

racy

of management

’

s historic

al estimates b

y comparing the actual

settlement to the

pro

ision and consider

ed p

eer bank settlement in simil

ar case

s where

appropriate. W

e assesse

d management

’

s conclusion by

luating the

underlying information used i

n estimating the

pro

isions including the

consider

ation of alter

nate sour

ces.

Disclosur

: W

e evaluated t

he disclosur

es of

contingent liabilities

and provisio

for litigation and other r

egulatory pro

visions to assess whether they c

mplied

with accountin

g standar

Key observations communicated to the

Group Audit Committee

e are sa

tisfied that the pro

visions for conduct, litiga

tion and other re

gulatory matters ar

e r

easonable

and rec

ognised in

accor

nce with

IFRS. W

e concur with the lev

el of disclosur

e in the financial state

ments. W

e did not identify any mater

ial

unrec

orded pr

visions.

Relevant references in the A

nnual Report and Accounts

Report of the Group Audit Committee

Accounting policies

Notes 20 and 25 to the financial statements

Independent a

uditor’s report to t

he member

s of NatWest Market

s Plc continue

NWM Group

Annu

al Report an

d Accounts 202

100

Risk

Our response to the risk

Expected Credit L

osses (‘ECL

’) pr

visions under IFRS 9

t 31 Dece

mber 2021 the Group

report

ed total gross

loans of £9.3

billion (2020: £10.3 billion) and £84

million of e

xpected cr

edit loss

pro

isions under IFRS 9 (2020

: £194

million) as detailed in note 14

the

financial stat

ements.

Management

’

s judgements and

estimates ar

e especially subjectiv

e due

to significant unc

ertainty ass

ciated

with the assumptions used.

Uncert

ainty related

with the path to

rec

overy fr

om COVID-19 a

nd the

impact of climate change w

consider

ed in our risk assess

ment.

Aspects with increased complexity in

respect of the timing and

measurement of ECL include:



Staging

Allo

cation of

ssets to

stage 1, 2, or

3 using criter

ia in

accor

nce with

IFRS 9;



Model estimations

Acc

ounting

interpr

etations, m

odelling

assumptions and data used t

build and run the Probability o

Default

(‘PD’), L

oss Given De

fault

(‘LGD

’)

and Exposure

at Def

ult

(‘EAD’)

models that calculate t

ECL;



Economic sc

enarios

: Inputs,

assumptions and weigh

tings use

to estimate

the impact of multiple

economic sce

narios particularly

those impacted b

y C

VID-19

including any c

hange to sce

narios

requir

ed t

hroug

h 31 Dec

ember

2021; and



Individual pro

visions

Measur

ement of individually

assessed pro

visions including the

assessment of

multiple scenario

considering the impact of C

OVID-

19 on e

xit stra

tegies and time t

collect.

Controls testing

: We evaluated the design and operating ef

fectiveness of controls across

the processes relevant to ECL,

including the judgements and estimates note

d, involving

specialists to assist us in performing our procedu

res where appropriate. These included,

among others, controls over:



the allocation of assets into stage

s including management’s monitoring of

stage

effectiveness;



model governance including m

onitoring and model validation;



data accuracy and completeness;



credit monitoring;



multiple economic scenarios;



individual provisions; and



production of journal entries and disclosures.

In evaluating the governance process

, we observed the Group Provisions Com

mittee

and Metrics Oversight Committ

ee meetings where the inputs, assumptions a

adjustments to the ECL were di

scussed and approved.

Overall assessment

: We performed an overall asses

sment of the ECL provision levels by

stage to determine if they were reason

able by considering the overall credit quali

ty of

the Group’s portfolio, risk profile, credit risk m

anagement practices and the impact of

COVID-19 and climate change on customers.

Staging

: We evaluated the criteria used to allocate

a financial asset to stage 1, 2 o

r 3 in

accordance with IFRS 9. We recalculated the assets i

stage 1, 2 and 3, and asses

sed if

they were allocated to the appropriate stage and pe

rformed sensitivity analysis to

assess the impact of different criteria on

the ECL. To test credit monito

ring, which

drives the probability of default e

stimates used in the staging calculation, we

recalculated the risk ratings for a sample of perfo

rming loans, focussing our testing on

high risk industries. We also assess

ed whether the credit reviews performed by

management appropriately cons

idered risk factors by considering independent publicly

available information.

Model estimations

We performe

d a risk assessment on all models

used in the

calculation of ECL to select a sample of models t

o test. We involved modelling

specialists to assist us to test thi

s sample of ECL models by testing the assumptions,

inputs and formulae used. This included a combinati

on of assessing the appropriatenes

of model design and formulae, alternative mo

delling techniques, recalculating the P

LGD and EAD, and model implementation. We also consi

dered the results of the intern

model validation results. To evaluate data quality, we a

greed a sample of ECL

calculation data points to source s

ystems, including balance shee

t date data used to

run the models and historic loss

data to monitor models. We also tested the ECL d

ata

points from the calculation engine through

to the general ledger and disclosures.

Economic scenarios

: We involve

d EY economic specialists to assist us to evaluate the

base case and alternative economic scenarios, includi

ng evaluating probability weights

and considered contrary evidence

by comparing these to other sce

narios from a variety

of external sources. This assessment included the

latest developments related to

COVID-19 as at 31 December 20

21. We assessed whether forecasted macroecono

mic

variables were appropriate, such as G

DP, unemployment rate and interest

rates. With

the support of our EY modelling s

pecialists we assessed the correlation and the

overall

impact of the macroeconomic factors to

the ECL.

Individual provisions

: We recalcu

lated and challenged the scenarios, assump

tions and

cash flows for a sample of individual p

rovisions including the alternative scena

rios and

evaluating probability weights assigned. T

he sample was based on a num

ber of factors,

including higher risk sectors and materiality.

Disclosure

We tested the data flows us

ed to populate the disclosures and assess

ed the

adequacy of disclosures for compliance with the

accounting standards and regula

tory

considerations.

Key observations communicated to the

Group Audit Committee

We are satisfied that

provisions for the impairment of loans we

re reasonable and

rec

gnised i

n accor

dance

with IFRS 9. We

highlighted the following matters to the Group Audit Co

mmittee:



Our testing on the staging criteria did not iden

tify material differences and overall, we conclu

ded that the stage allocation

at 31 December 2021 was reasonable;



Our testing of models and mod

el assumptions did not highlight material diffe

rences; and



Our

testing of individually asses

sed impairments did not highlight any materi

al differences

Relevant references in the A

nnual Report and Accounts

Report of the Group Audit Committee

Credit Risk section of the Risk a

nd capital management section

Accounting policies

Note

to the financial statements

Independent a

uditor’s report to t

he member

s of NatWest Market

s Plc continue

NWM Group

Annu

al Report an

d Accounts 202

101

Risk

Our response to the

risk

IT systems and controls impacting financi

al reporting

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.

This risk is also impacte

d by the

greater dependency on third-parties,

increasing use of cloud platforms,

decommissioning of legacy systems, and

migration to new systems. Appropriate IT

controls are required to ensure that

applications process data as expected and

that changes are made in an appropriate

manner. Such controls contribute to

mitigating the risk of potential fraud or

errors as a result of changes to applic

ations

and data.

Controls testing

We evaluated the design and oper

ating effectiveness of IT

general controls over the applications, operating sy

stems and databases that

are relevant to financial reporting. During our planning

and test of design

phases, we performed procedures to de

termine whether changes in restrictions

in different global locations as a result of the on

going COVID-19 pandemic had

caused material changes in IT processes or con

trols.

We tested user access by assess

ing the controls in place for in-scope

applications, in particular those pertaining to the a

ddition and periodic

recertification of users’ access. We tested ch

ange management controls in

relation to amendments to applic

ations. We tested IT application and controls

over data interfaces between applica

tions.

As part of our user access testing, we assesse

d the core access management

processes. We tested controls ove

r approvals, user entitlement reviews, and

managements approval process over role combina

tions.

For relevant external cloud and sys

tem migrations completed in 2021

, we

performed procedures to evalu

ate the governance structure and key controls in

place to manage the key risks associated with these mi

grations.

Where control deficiencies wer

e identified, we tested remediation activities

performed by management and compens

ating controls in place

and assessed

what additional testing procedu

res were necessary to mitigate any residu

al risk.

Key observations communicated to the

Group Audit Committee

We are satisfied that IT controls impacting financi

al reporting are designed and ope

rating effectively. The following matters were

reported to the Group Audit Committee:



Where control issues were noted in relation to

access management, these were re

mediated by 31 December 2021 or

mitigated by compensating con

trols. We performed additional testing in response to

deficiencies identified, where required.

Independent a

uditor’s report to t

he member

s of NatWest Market

s Plc continue

NWM Group

Annu

al Report an

d Accounts 202

102

Our application o

f materiality

e apply the conc

ept of materi

ality in planning and performing the audit, in e

aluating the effe

ct of identified misst

tements

on the

audit and in forming our audit opinion.

Materiality

The magnitude o

f an omission or misst

atement that

, individually or in the aggr

gat

e, could reas

onably be e

xpected t

o influence the

economic decisions o

f the

users

of the financial

atement

s. Mat

ialit

y provid

es a basis for d

ermining the nat

ure and e

xtent o

f our

audit proc

edures

We determined materiality for the

Group and the Bank to be £73 million (2020: £

91 million), which is 1% (2020: 1%) of shareholder’s

equity of the Bank.

Per

formance materiality

The application o

f mat

ialit

y at the individual ac

count or balanc

e lev

el. It is se

t at an amount t

o r

educe t

o an appr

opriately lo

w lev

the probabilit

y that the aggregat

e of uncorr

ect

d and unde

tect

ed misst

ement

s e

eeds material

On the basis of our

risk assessments, t

ogether with our asses

sment of the Gr

oup

’

s ov

all control en

vironment, our judgement w

that performance mater

iality w

as 50% (2020:

50%) of our planning materiality, n

amely £36 million (2020

: £46 million). W

e hav

e set

performance materiali

ty at this per

centage (which is at the lo

west end of t

he acce

ptable r

ange o

f our audit methodology) based on

various c

siderations i

ncluding the past history

of miss

tatem

ents, the ef

fective

ness of the c

ontrol e

nvir

onment

and other f

actors

affecting the entity and its fina

ncial reporting.

udit work at co

mponent locations for the

purpose of obtaini

ng audit co

ver

age ov

er significant financial statement ac

counts is

undertak

en based on a per

centage of total perfor

mance mate

riality. The performanc

e mater

iality set for each c

omponent is based

on the relativ

e scale and risk of the c

omponent to the Grou

as a whole and our asse

ssment of the ris

k of misstate

ent at that

component. In the curr

ent year

, the range o

f performance mat

eriality allo

cate

d to co

mponents was betw

een £15.5

million and £36

million (2020: £8 million and £46

million).

porting threshold

An amount below which id

entified misst

atement

s are consider

ed as being clearly trivial.

e agreed with the

Group

Audit C

ommittee th

at we w

uld report to the

m all uncorr

ected audit differenc

es in e

xcess o

f £4 million

(2020: £4 million), which is set

at 5% of planning mater

iality, as

wel

l as differe

nces belo

w t

hat threshold that, in our

view, w

arranted

reporting on qualita

tive gr

unds.

e ev

luate an

y uncorr

ected misstate

ments against both the quantitativ

e measur

es of materiality discusse

d abov

e and

in light of

other rele

vant qualitative

consider

ions in for

ming our opinion.

Other information

The other information c

omprises the infor

mation included in the

Ann

ual Re

port and

ounts (including the Str

ategic R

eport,

Financial R

evie

Repor

t of the dir

ectors

, State

ment of dir

ector

’

res

ponsibilities, Risk F

actors and Forw

ard-looking state

ents and

Non-IFRS financi

al measures

) other than the financial st

atements and our audit

or’

s report ther

eon. The directors ar

e re

sponsible for

the other information co

ntained within the a

nnual report.

Our opinion on the financial st

atements does not co

ver the other infor

mation and, e

ept

to t

he e

xtent otherwise e

xplicitly stat

ed in

this report, w

e do not e

press

form of assur

ance c

onclusion ther

eon.

Our responsibility is to read the other infor

mation and, in doing so, consider whet

her the other information is materially

inconsistent with the financial statements or ou

r knowledge obtained in the course of the

audit or otherwise appears to be

materially misstated. If we identify

such material inconsistencies or apparent materi

al misstatements, we are required to determine

whether this gives rise to a material misstatement in the fin

ancial statements themselves

. If, based on the work we have

performed, we conclude that there is a material

misstatement of the other info

rmation, we are required to report tha

t fact.

We have nothing to report in th

is regard.

Opinions on other matters pr

escribed by

the Companies

ct 2006

In our opinion, based on the w

ork under

tak

en in the cours

e of the

audit:



the information give

n in the Str

tegic r

eport and the Re

port of the dir

ectors for

the financial y

ear for which the financial

state

ments are pr

epa

red is c

nsist

ent with the financial st

ateme

nts; and



the Strategic r

eport and the Report of

the directors

hav

e been pr

epared in accord

ance with applicable legal requirements.

Independent a

uditor’s report to t

he member

s of NatWest Market

s Plc continue

NWM Group

Annu

al Report an

d Accounts 202

103

Matters o

n which we are

required t

o re

port by e

epti

In the light of the kno

ledge and underst

and

ing of t

he Group a

nd the Bank and its en

viron

ment obtained in the c

ourse o

f t

he audit,

hav

e not

identified material misst

atements in the Strate

gic r

eport or the Re

port of the direct

ors.

We have nothing to report in respect of the followi

ng matters in relation to which the Compa

nies Act 2006 requires us to report to

you if, in our opinion:



adequate acc

ounting re

cor

ds ha

not been kept b

y the Gr

oup and the Bank, or r

eturns adequate

for our audit ha

not been

rec

eived from br

anches not visi

ted b

y us; or



the Group

’

s and Bank’

s financial state

ment

s ar

e not in agr

eement with the ac

counting r

ecor

ds and returns; or



cert

ain disclosures o

f dire

ctors

’

remuneration specifie

d by la

w a

re not

made; or



hav

e not

rec

eived all the information and explanations we require fo

r our audit.

sponsi

bilities of dir

ecto

As explained more fully in the Statemen

t of directors’ responsibilities, the directors a

re responsible for the preparation of th

financial statements and for being satisfied

that they give a true and fair view, and for such in

ternal control as the directors

determine is necessary to enable the preparation of f

inancial statements that are free fro

m material misstatement, whether due to

fraud or error.

In preparing the financial statements, the di

rectors are responsible for assessing the Group and Bank’s a

bility to continue as a

going concern, disclosing, as applicable, matte

rs related to going concern and using the goi

ng concern basis of accounting

unless

the directors either intend to liquidate the Group or Bank

or to cease operations, or have no

realistic alternative but to do so.

Auditor’s responsibilities for the audit of the fi

nancial statements

Our objectiv

es are t

o obtain r

easonable assur

nce about whether the financi

al state

ents as a whole are

fre

e fro

material

misstatemen

t, whether due to f

raud or er

ror

, and to issue an auditor’

s repor

t that includes our opinion. R

easonable assur

ance is a

high lev

el of assur

ce bu

t is not a guar

antee that an audit co

nducted in ac

cor

dance with IS

As (UK) will alway

s detect a mater

ial

misstatemen

t when it e

xists.

Misstate

ments can arise

from

ud or err

or and are co

sidere

d material if

, individually or in the aggr

egate, the

y could reaso

ably

be e

xpected to influenc

e the economic decisions of

users tak

en on the basis of these financial

state

ments.

Explanation as to what ext

ent the audit was co

nsidered capable of detec

ting irregularities, including fr

aud

Irregularities

, in

cluding fr

aud,

e instances o

f non-compliance

with law

s a

nd r

egulations

. W

e design procedur

es in line with

our

responsibilities

, outlined abov

e, to detect irre

gularities, inclu

ding frau

d. The risk o

f not detecting a material

misstatemen

t due to

fraud is hi

gher than the risk o

f not detecting one r

esulting from err

or, as fr

aud may in

volv

e deliberate

conce

alment by, f

or e

mple,

forger

y or intentional misr

epre

sent

ations, or thr

ough

collusio

n. The e

xtent to which our pr

ocedur

es are

capable of dete

cting

irre

gularities, including fr

ud is

detailed belo

wev

er, the primary r

esponsibility for the pre

vention and dete

ction of fr

aud re

sts with both those cha

rged with go

vernance

of the

Group

, the Bank and

management.



e obtained an underst

ding o

f the legal and regul

atory fr

amew

orks that are

applicable t

o the Grou

p and determined th

the most signific

ant are the r

egulations, licenc

e conditions and supervisory r

equirements of the Prudential R

egulation A

uthority

(PRA), the Financial Co

nduct

uthority (FCA) and the C

ompanies

Act 20

06.



e understood how

the Group i

s complying with thos

e fr

mew

orks by

making inquiries of management, in

ternal audit and

those responsible f

or legal and c

ompliance matter

s. W

e also re

viewe

d corr

espondence betw

n the Group and r

egulatory

bodies; re

view

ed minutes of the B

oard and Risk C

ommittees

; and gained an unders

tanding of the Group

’

s go

rnance

fra

mew

ork.



e assessed the sus

ceptibility o

f the G

roup

’

s financial statemen

ts to materi

al misstat

ement, including ho

w fr

aud might occur b

considering the con

trols est

ablished to address r

isks identified

to pre

vent or detect fr

ud. W

e also identified the risk

s of fraud in

our k

ey audit m

atters as descr

ibed abov

e. Other areas of risk that w

e identified included manual o

verride o

f controls

unauthorised tr

ading and the appr

opriateness o

f sourc

es used when performing confirmation

testing on

accounts such

cash, loans and securities



Based on this unders

tanding w

e designed our audit procedure

s to identify non-c

ompliance with such la

ws and re

gulations. O

procedur

es in

volved inquiries

of legal counsel, e

xecutiv

e management and internal audit. W

e also te

sted c

ontrols a

performed proce

dures t

o respond to

the fr

aud risks as iden

tified in our k

ey au

dit matters

. Thes

e procedur

es wer

e performed

by both the primary t

eam and component teams wi

th ov

ersight from the primary t

eam.



The Group oper

ates in the banking indus

try which is a highly r

egulated en

iron

ment.

As such,

the Senior Statutory

Auditor

consider

ed the e

xperience and e

xpertise of the engagement team to

ensur

e that the team had the appr

opriate c

petence

and capabilities, in

volving specialists wher

e appropriat

Independent a

uditor’s report to t

he member

s of NatWest Market

s Plc continue

NWM Group

Annu

al Report an

d Accounts 202

104

A further description of our responsibilities fo

r the audit of the financial statements is loc

ated on the Financial Reporting Council’s

website at https://www.frc.org.uk/auditorsresponsibilities. T

his description forms part of our a

uditor’s report.

Other matters we are required to address



Follo

wing

the rec

ommendation

from the N

atW

est Holdings

Audit Co

mmittee w

e were

appointed by the Group

at its annual

general meeting on 4 M

ay 2

016 to audit the

financial state

ments of the Gr

oup and the Bank fo

r the ye

ar ended 31 Dec

ember

2016 and subsequent financial

periods. The period of t

otal uninterr

upted engagement includi

ng previ

ous re

new

ls and

reappointments is six ye

ars, co

ring periods from our appointment thr

ough 31 Dece

mber 2021.



The non-audit servic

es pr

ohibited b

y the FRC

’

s Ethical Standar

d were not pr

ovided

to the Gr

oup or Bank and w

e r

emain

independent of the Group

and Bank in conducting

the audit.

Our responsibility is to obtain reasonable assurance for our opinion whether the presentation of the Annual Report and

Accounts in this reporting package complies with the RTS on ESEF. Our procedures, taking into account Alert 43 of the NBA

(the Netherlands Institute of Chartered Accountants), included amongst others

- obtaining an understanding of the entity’s financial reporting process, including the preparation of the reporting package

- obtaining

the

reporting

package

and

performing

validations

determine

whether

the

reporting

package

containing

the

Inline XBRL instance and the XBRL extension taxonomy files has been presented in accordance with the technical

specifications as included in the RTS on ESEF

- examining the information related to the consolidated financial statements in the reporting package to determine whether all

required mark-ups have been applied and whether these are in accordance with the RTS on ESEF.

Use of our r

ort

This re

port is made solely to the Gr

’

s and the Bank’

s members, as a body, in acc

rdanc

e wit

h Chapter 3 o

f P

art 16 of the

Companies

Act 2006. Our

audit wor

k has been undertak

en so

that we might

state t

o the Gr

oup

’

s and the Bank’

s members those

matters w

e are requir

ed to s

tate t

o them in an auditor’

s r

eport and for no other purpose. T

o the fullest exte

nt permitted b

y law

, w

do not accept or

assume res

ponsibility to an

yone other

than the Group and

the Bank and the Gr

oup

’

s and the Bank’

s members as a

body, for our audit work,

for this r

eport, or for the opinions we ha

formed.



The audit opinion is consis

tent

with the additional report to

the Group

Audi

t Commi

ttee.

European Single Electronic Reporting Format

The

Group has

prepared the

Annual Report

and Accounts

the European

single

electronic reporting

format (ESEF).

The requirements for this format are set out in the Commission Delegated Regulation (EU) 2019/815 with regard to regulatory

technical standards on the specification of a single electronic reporting format (hereinafter: the RTS on ESEF).

our

opinion,

the

presentation of

the

Annual

Report

and Accounts,

prepared

the

XHTML format,

including

the

partially marked-up consolidated financial statements, as included in the reporting package by the Group, complies in all

material respects with the RTS on ESEF.

Management is responsible for presenting the Annual Report and Accounts, including the financial statements, in accordance

with RTS on ESEF, whereby management combines the various components into a single reporting package.

Manprit Dos

anjh (Senior Statut

ory

Auditor

)

for and on behalf of Erns

t & Y

oung LLP, St

utory

Auditor

London, United

Kingdom

March

2022

Consolidate

d income st

atement f

or the year e

nded

31 Decemb

er 2021

NWM Group

Annu

al Report an

d Accounts 202

105

2021

2020

Note

£m

Interest receivable

343

531

Interest payable

(335)

(591)

Net interest income

(60)

Fees and commissions receivable

262

386

Fees and commissions payable

(104)

(287)

Income from trading activities

263

1,088

Other operating income

(28)

Non-interest income

393

1,218

Total income

401

1,158

Staff costs

(498)

(670)

Premises and equipment

(110)

(107)

Other administrative expenses

(522)

(629)

Depreciation and amortisation

(20)

(25)

Operating expenses

(1,150)

(1,431)

Loss before impairment releases/(losses

)

(749)

(273)

Impairment releases/(losses)

(42)

Operating loss before tax

(714)

(315)

Tax credit/(charge)

223

(12)

Loss for the year

(491)

(327)

Attributable to:

Ordinary shareholders

(593)

(328)

Paid-in equity holders

Non

controlling interests

(67)

(491)

(327)

onsolidat

d st

ement of c

mpr

ensiv

e income

or the year ended 31 December 20

2021

2020

£m

Loss for the year

(491)

(327)

Items that do not qualify for rec

lassification

Remeasurement of retirement benefit schemes

(21)

(Loss) on fair value of credit in f

inancial liabilities designated as at fair value th

rough profit or loss

(FVTPL) due to own credit risk

(29)

(52)

FVOCI financial assets

(210)

Tax

(10)

(1)

(241)

Items that do qualify for reclassif

ication

FVOCI financial assets

(2)

Cash flow hedges

(206)

Currency translation

(124)

Tax

(28)

(287)

128

Other comprehensive loss after tax

(288)

(113)

Total comprehensive loss for the

year

(779)

(440)

Attributable to:

Ordinary shareholders

(885)

(459)

Paid

in equity holders

Non-controlling interests

(49)

(779)

(440)

The accompanying notes on pages 11

5 to 177, the accounting policies on pages 11

0 to 114 and the audited sections of the

Financial review and Risk and capital man

agement on pages 37 to 88 form an in

tegral part of these financial statemen

ts.

Balance shee

t as at 31

Dec

ber

2021

NWM Group

Annu

al Report an

d Accounts 202

106

NWM Group

NWM Plc

2021

2020

2021

2020

Note

£m

Assets

Cash and balances at central banks

16,645

15,771

12,294

11,736

Trading assets

59,101

68,689

41,222

52,169

Derivatives

105,550

165,619

103,042

164,104

Settlement balances

2,139

2,296

795

1,084

Loans to banks - amortised cost

962

1,003

712

701

Loans to customers - amortised cost

7,471

8,444

6,810

7,477

Amounts due from holding company and fe

llow subsidiaries

1,479

1,587

6,723

7,606

Other financial assets

8,786

9,041

7,743

8,043

Investment in group undertakings

—

2,481

2,600

Other assets

878

688

732

562

Total assets

203,011

273,138

182,554

256,082

Liabilities

Bank deposits

1,808

1,762

Customer deposits

2,268

2,618

1,510

1,469

Amounts due to holding company and fellow subsi

diaries

6,126

8,134

10,978

16,189

Settlement balances

2,068

2,248

1,028

604

Trading liabilities

64,482

72,252

47,119

56,916

Derivatives

98,497

157,332

95,096

153,754

Other financial liabilities

19,255

18,170

16,877

15,370

Other liabilities

1,055

1,234

789

866

Total liabilities

195,559

263,796

175,205

246,930

Owners’ equity

7,455

9,388

7,349

9,152

Non-controlling interests

(3)

(46)

—

Total equity

7,452

9,342

7,349

9,152

Total liabilities and equity

203,011

273,138

182,554

256,082

Owners’ equity of NWM Plc as at 31 December 202

1 includes the loss for the year of £527 mi

llion (2020 loss - £212

million).

The accompanying notes on pages 11

5 to 177, the accounting policies on pages 11

0 to 114 and the audited sections of the

Financial review and Risk and capital man

agement on pages 37 to 88 form an in

tegral part of these financial statemen

ts.

The accounts were approved by the Board of di

rectors on 17 February 2022 and signed on it

s behalf by:

Frank Dangeard

Robert Begbie

vid King

NatWest Markets Plc

Chairman

Chief Executive Officer

Chief Fina

ncial Office

Registration No. SC090312

eme

nt of changes in equ

y f

or the y

ar end

31 Dec

er 2021

NWM Group

Annu

al Report an

d Accounts 202

107

NWM Group

NWM Plc

2021

2020

2021

2020

£m

Called-up share capital - at 1 January and 31

December

400

Share premium - at 1 January

1,759

Redemption of preference shar

187

—

187

—

At 31 December

1,946

1,759

1,946

1,759

Paid-in equity - at 1 January and 31 December

904

FVOCI reserve - at 1 January

(134)

(149)

Unrealised (losses)/gains

(1)

(221)

Realised losses

(1)

389

385

Tax

(1)

—

(1)

At 31 December

Cash flow hedging reserve - at 1 January

201

137

201

137

Amount

recognised in equity

(207)

(208)

Amount transferred from equity

to earnings

Tax

(28)

At 31 December

201

Foreign exchange reserve - at 1

January

121

(192)

(168)

Retranslation of net assets

(158)

(27)

(29)

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

(31)

—

Tax

(6)

—

Recycled to profit or loss on disposal of businesse

(23)

—

At 31 December

(13)

121

(218)

(192)

Retained earnings - at 1 January

5,969

6,764

6,066

6,748

Loss attributable to ordinary shareholders and o

ther equity holders

(530)

(260)

(527)

(212)

Ordinary dividends paid

(1,000)

—

(1,000)

—

Paid-in equity dividends paid

(63)

(68)

(63)

(68)

Redemption of preference shar

(188)

—

(188)

Realised losses on FVOCI equity

(1)

gross

—

(376)

(2)

(373)

- tax

—

Remeasurement of retirement benefit schemes

- gross

(21)

- tax

(13)

(1)

(13)

(1)

Changes in fair value of credit in fi

nancial liabilities designated at FVTPL

- gross

(29)

(52)

(11)

(30)

- tax

Share based payments

(2)

(47)

(42)

(47)

(42)

Distribution

—

(40)

—

Capital contribution

—

At 31

December

4,138

5,969

4,253

6,066

Owners’ equity at 31 December

7,455

9,388

7,349

9,152

Non

controlling interests

at 1 January

(46)

—

Currency translation adjustments and othe

r movements

—

Profit/(loss) attributable to non-controlling i

nterests

(67)

—

At 31 December

(3)

(46)

—

Total equity at 31 December

7,452

9,342

7,349

9,152

Attributable to:

Ordinary shareholders

6,551

8,484

6,445

8,248

Paid-in equity holders

904

Non-controlling interests

(3)

(46)

—

7,452

9,342

7,349

9,152

(1)

During 2020 NWM Plc sold its entire equity holding in Saudi British Ban

k (SABB) leading to a realised loss of £337 million after tax which was recognised through other

comprehensive income and reclassified to retained earnings.

(2)

Share-based payments includes a tax credit of £4 million.

The accompanying notes on pages 11

5 to 177, the accounting policies on pages 11

0 to 114 and the audited sections of the

Financial review and Risk and capital man

agement on pages 37 to 88 form an in

tegral part of these financial statemen

ts.

ash flow s

ement

r the y

ar en

ded

31 Dec

er 2021

NWM Group

Annu

al Report an

d Accounts 202

108

NWM Group

NWM Plc

2021

2020

2021

2020

Note

£m

Cash flows from operating activities

Operating loss

before tax

(714)

(315)

(702)

(205)

Adjustments for:

Impairment (releases)/losses

(35)

(36)

Amortisation of discounts and premiums of othe

r financial assets

Depreciation and amortisation

Write

down of

investments in subsidiaries

—

347

Change in fair value taken to profit or loss of ot

her financial asse

(43)

Change in fair value taken to profit or loss on o

ther financial liabilities

and subordinated liabilities

(180)

132

(147)

Elimination of foreign exchange diff

erences

738

(841)

529

(713)

Other non-cash items

(1)

Income receivable on other financial asse

(130)

(198)

(146)

(216)

Loss on sale of other financial assets

—

Dividends receivable from subsi

diaries

—

(65)

(529)

Profit on sale of subsidiaries and associa

tes

—

(64)

—

Loss on sale of other assets and net assets/li

abilities

—

Interest payable on MRELs and subordina

ted

liabilities

204

329

166

307

Loss on sale of MRELs and subordinated liabilities

Charges and release on provisions

(7)

106

Defined benefit pension schemes

Net cash flows from trading act

ivities

(669)

(130)

(790)

Decrease in trading assets

7,664

4,127

8,117

1,601

Decrease/(increase) in derivative assets

59,861

(16,905)

60,854

(16,628)

Decrease in settlement balance asse

157

2,043

289

2,269

Increase in net loans to banks

(122)

(137)

(122)

(125)

Decrease/(increase) in net loans

to customers

1,003

(152)

688

(599)

Decrease)/(increase) in amounts due from holding com

pany and subsidiaries

351

(179)

1,366

(307)

Decrease in other financial asse

212

203

(Increase)/decrease in other asse

(10)

(14)

(Decrease)/increase in bank deposits

—

(281)

(276)

(Decrease)/increase in customers deposits

(350)

(1,085)

(778)

(Decrease)/increase in amounts due to holding co

mpany and fellow

subsidiaries

(394)

(3,597)

(464)

(Decrease)/increase in settlement balance li

abilities

(180)

(1,774)

424

(2,044)

(Decrease)/increase in trading liabilities

(7,771)

(1,584)

(9,797)

3,340

(Decrease)/increase in derivatives liabilities

(58,835)

13,190

(58,658)

11,364

Increase/(decrease) in other financial li

abilities

1,199

(297)

1,597

(2,057)

Decrease in other liabilities

(154)

(506)

(141)

(323)

Changes in operating assets and liabili

ties

2,460

(3,248)

1,130

(4,787)

Income taxes received/(paid)

(73)

(12)

Net cash flows from operating activi

ties

(1)

2,499

(3,990)

1,055

(5,589)

For notes to this table refer to the f

ollowing page.

Cash flow statement

for the

year ended 31 D

ecember

2021 continued

NWM Group

Annu

al Report an

d Accounts 202

109

NWM Group

NWM Plc

2021

2020

2021

2020

Note

£m

Cash flows from investing activities

Sale and maturity of other financial assets

4,523

10,735

3,842

10,354

Purchase of other financial assets

(4,617)

(8,020)

(3,822)

(7,337)

Income received on other financial assets

130

198

146

216

Net movement in business interests

358

269

Dividends received from subsidiaries

—

529

Sale of property, plant and equipment

(4)

Purchase of property, plant and equipmen

(1)

(2)

—

(1)

Net cash flows from investing activities

3,271

231

4,032

Cash flows from financing activities

Movement in MRELs

(1,234)

(191)

(1,234)

(191)

Movement in subordinated liabilities

(378)

(548)

(339)

(515)

Dividends paid

(1,063)

(68)

(1,063)

(68)

Capital contribution

—

Net cash flows from financing

activities

(2,675)

(785)

(2,636)

(752)

Effects of exchange rate on cas

h & cash equivalents

(994)

841

(721)

636

Net decrease in cash and cash equivalents

(1,130)

(663)

(2,071)

(1,673)

Cash and cash equivalents at 1 January

26,380

27,043

21,285

22,958

Cash and cash equivalents at 31 December

25,250

26,380

19,214

21,285

(1)

NWM Group includes interest received of £419 million (2020 - £671

million) and interest paid of £330 million (2020 - £632 million), and NWM Plc includes interest received of £

438

million (2020 - £693 million) and interest paid of £353 million (2020 - £635 million).

The accompanying notes on pages 11

5 to 177, the accounting policies on pages 11

0 to 114 and the audited sections of the

Financial review and Risk and capital man

agement on pages 37 to 88 form an in

tegral part of these financial statemen

ts.

Accounting

policies

NWM Group

Annu

al Report an

d Accounts 202

110

1. Presentation of financial statements

NatWest Markets Plc (NWM Plc) is incorporated in the U

K and

registered in Scotland. The financial statemen

ts are presented

in the functional currency, pounds sterlin

NWM Plc consolidated financial statements inco

rporate the

results of NWM Plc and the enti

ties it controls. Control arises

when NWM Plc has the power t

o direct the activities of an

entity so as to affect the return from the entity. Cont

rol is

assessed by reference to our ability to enfo

rce our will on the

other entity, typically through voting rights.

On acquisition of a subsidiary, its identifiable assets, lia

bilities

and contingent liabilities are included in the consolid

ated

financial statements at their fai

r value. A subsidiary is included

in the consolidated financial statements f

rom the date it is

controlled by NWM Group until the date NWM

Group ceases to

control it through a sale or a significant change in

circumstances. Changes in NWM Group’s interest in

subsidiary that do not result in NWM Group ceasing to con

trol

that subsidiary are accounted for as equity t

ransactions.

The consolidated financial statements are p

repared under

consistent accounting policies.

Transactions and balances betwee

n Group companies are

eliminated in the consolidated financial statemen

ts to show only

those transactions and balances e

xternal to the NWM Group.

The audited financial statements are set out on pages 10

5 to

177 and the audited sections of the Risk an

d capital

management on pages 42 to 88. T

he directors have prepared

the financial statements on a going conce

rn basis after

assessing the principal risks, forecasts, projecti

ons and other

relevant evidence over the twelve mon

ths from the date the

financial statements are approved (see the Repo

rt of the

directors, page 89) and in acco

rdance with UK adopted

International Accounting Standards (IAS), In

ternational

Financial Reporting Standards (

IFRS) as issued by the

International Accounting Standards Board (IASB)

and IFRS as

adopted by the European Union. The significant accoun

ting

policies and related judgments are set out below.

Except for certain financial instruments as described in

Accounting policies 8 and 11, t

he financial statements are

presented on a historical cost basis.

Accounting policy changes effective 1 January 202

The IASB amended IFRS 16 Leases with “COVI

D-19

amendments on lease modifications – A

mendments to IFRS 16

– Leases (IFRS 16)” The eff

ect of the amendment on NWM

Group’s financial statements is i

mmaterial.

2. Revenue recognition

Interest income and expense 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 th

rough other

comprehensive income and the ef

fective part of any related

accounting hedging instrument

s. Negative interest on financial

assets is presented in interest payable and neg

ative interest on

financial liabilities is presented in interest receiva

ble.

Other interest relating to financial instruments measu

red at fair

value is recognised as part of the movement in f

air value and is

reported in income from trading activities or other ope

rating

income as relevant.

Fees in respect of services are recognised

as the right to

consideration accrues through the performance of e

ach distinct

service obligation to the customer. The arrange

ments are

generally contractual and the cost of providing the s

ervice is

incurred as the service is rendered. The price is usually f

ixed

and always determinable.

3. Held for sale and Disposal group

An asset or disposal group (assets and liabilities

) is classified as

held for sale if NWM Group will recover its carryin

g amount

principally through a sale transaction rathe

r than through

continuing use. These are measured at the lower of its c

arrying

amount or fair value less cost to s

ell unless scoped out of IFRS

5 in which case the existing measurement p

rovisions of IFRS

apply.

4. Staff costs

Employee costs, such as salaries, paid absence

s, and other

benefits are recognised over the

period in which the employees

provide the related services to NWM Group. Employe

es may

receive variable compensation in cash, in defe

rred cash or debt

instruments of NWM Group or in ordinary sha

res of NatWest

Group plc. NWM Group operates

a number of share-based

compensation schemes (which

NWM Group employees are

eligible to) under which it grants

awards of NatWest Group plc

shares and share options to its employees. Such aw

ards are

subject to vesting conditions.

Variable compensation that is se

ttled in cash or debt

instruments is charged to the income statemen

t on a straight-

line basis over the period

during which services are

provided,

taking account of forfeiture an

d clawback criteria. The value of

employee services received in exchange fo

r NatWest Group plc

shares and share options is recognised as an expense o

ver the

vesting period

subject to deferral. clawback an

d forfeiture

criteria with a corresponding increase in equity. The fai

r value

of the instruments granted is based on ma

rket prices at the

grant date.

Defined contribution pension scheme

A scheme where NatWest Grou

p pays fixed contributions and

there is no legal or constructive obligation to pay furthe

contributions or benefits. Contributions are

recognised in the

income statement as employee service costs acc

rue.

Defined benefit pension scheme

A scheme that defines the ben

efit an employee will receive on

retirement and is dependent on one or more f

actors 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. T

he defined benefit obligation

is measured on an actuarial bas

is. The charge to the income

statement for pension costs (m

ainly 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 ben

efit asset or liability

due to

changes in actuarial measurement assumptions) a

re recognised

in other comprehensive income in full in the pe

riod in which

they arise, and not subject to re

cycling to the income

statement. The difference betwe

en scheme assets and scheme

liabilities, the net defined benefit asset or liability, is reco

gnised

on the balance sheet if the crite

ria the asset celling test are

met. This requires the net define

d benefit surplus to be limited

to the present value of any economic benefits av

ailable to NWM

Group in the form of refunds fr

om the plan or reduced

contributions to it.

NWM Group will recognise a liability where a minimu

m funding

requirement exists for any of its def

ined benefit pension

schemes. This reflects agreed minimum funding and

the

availability of a net surplus as d

etermined as described above.

When estimating the liability for minimum fundi

ng requirements

NWM Group only include contributions that are subst

antively or

contractually agreed and do not include disc

retionary features,

including dividend-linked contri

butions.

Accounting polici

es continued

NWM Group

Annu

al Report an

d Accounts 202

111

5. Foreign currencies

Foreign exchange differences arising on the set

tlement of

foreign currency transactions and from the transla

tion of

monetary assets and liabilities are reported in income fr

trading activities except for differences

arising on cash flow

hedges and hedges of net investments in foreign ope

rations.

Non-monetary items denominated in foreign currencies

that

are stated at fair value are translated into the fu

nctional

currency at the foreign exchange rates ruling at the d

ates the

values are determined. Translation differences are recog

nised

in the income statement except for differences arisi

ng on non-

monetary financial assets classif

ied as fair value through other

comprehensive income.

Income and expenses of foreign subsidia

ries and branches are

translated into sterling at avera

ge exchange rates unless these

do not approximate the foreign e

xchange rates ruling at the

dates of the transactions. Foreign exchange differences a

rising

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 st

atement on

disposal of a foreign operation.

6. Provisions and contingent liabilities

NWM Group recognises a provis

ion for a present obligation

resulting from a past event when it is more likely

than not that

it will be required to pay to settle

the obligation and the amount

of the obligation can be estimated reliably.

Provision is made for restructuri

ng costs, including the costs of

redundancy, when NWM Group has a co

nstructive obligation.

An obligation exists when NWM Group has a det

ailed formal

plan for the restructuring and h

as raised a valid expectation in

those affected either by starting to implemen

t the plan or by

announcing its main features.

NWM Group recognises any one

rous cost of the present

obligation under a contract as

a provision. An onerous cost is

the unavoidable cost of meeting its contractu

al obligations that

exceed the expected economic benefits. When NW

M Group

intends to vacate a leasehold property o

r right of use asset, the

asset would be tested for impairment and a provisi

on may be

recognised for the ancillary contractual occupa

ncy costs, such

as rates.

Contingent liabilities are possible obligations arising f

rom past

events, whose existence will be

confirmed only by uncertain

future events, or present obligations arising from pas

t events

that are not recognised because e

ither an outflow of economic

benefits is not probable, or the

amount of the obligation cannot

be reliably measured. Continge

nt liabilities are not recognised

but information about them is d

isclosed unless the possibility of

any outflow of economic benefits in settle

ment is remote.

7. Tax

Tax encompassing current tax

and deferred tax is recognised

the income statement except w

hen taxable items are

recognised in other comprehensive income or equity. T

consequences arising from servicing financial inst

ruments

classified as equity are recogni

sed in the income statement in

line with IAS 12.

Current tax is tax payable or re

coverable in respect of the

taxable profit or loss for the year arisin

g in the income

statement, other comprehensive income or equity. P

rovision is

made for current tax at rates enacted, or subs

tantively

enacted, at the balance sheet date.

Deferred tax is the tax expected to be

payable or recoverable

in respect of temporary difference

s between the carrying

amount of an asset or liability for accountin

g purposes and the

carrying amount for tax purposes. Defe

rred tax liabilities are

generally recognised for all taxable temporary diff

erences and

deferred tax assets are recogni

sed 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 busines

s combination) that at the time

of the transaction affects neither accounting nor taxa

ble profit

or loss. Deferred tax is calculat

ed using tax rates expected to

apply in the periods when the a

ssets will be realised or the

liabilities settled, based on tax rates and la

ws enacted, or

substantively enacted, at the b

alance sheet date.

Deferred tax assets and liabilities are offse

t where NWM Group

has a legally enforceable right t

o offset and where they relate

to income taxes levied by the same taxation au

thority either on

an individual NatWest Group company or o

n NatWest Group

companies in the same tax group that intend, in future

periods,

to settle current tax liabilities and assets on a net basis o

r on a

gross basis simultaneously.

Accounting for taxes is judgmental and c

arries a degree of

uncertainty because tax law is subject to inter

pretation, which

might be questioned by the rele

vant tax authority. NWM Group

recognises the most likely curre

nt and deferred tax liability or

asset, assessed for uncertainty us

ing consistent judgments and

estimates. Current and deferre

d tax assets are only recognised

where their recovery is deemed probable, an

d current and

deferred tax liabilities are reco

gnised at the amount that

represents the best estimate of

the probable outcome having

regard to their acceptance by the tax authorities

8. Financial instruments

Financial instruments are meas

ured at fair value on initial

recognition on the balance sheet.

Monetary financial assets are classifie

d into one of the following

subsequent measurement categories (subject to busi

ness model

assessment and review of contractual cash flow for the

purposes of sole payments of p

rincipal and interest where

applicable):



amortised cost

measured at cost using the effective

interest rate method, less any impairment allow

ance;



fair value through other comprehensive income (FVOCI

)

measured at fair value, using the e

ffective interest rate

method and changes in fair valu

e through other

comprehensive income;



mandatory fair value through profit or loss (MFVTPL)

measured at fair value and cha

nges in fair value reported in

the income statement; or



designated at fair value through profit or loss (DFV)

measured at fair value and cha

nges in fair value reported in

the income statement.

Classification by business model refle

cts how NWM Group

manages its financial assets to generate cash flows. A busi

ness

model assessment helps to asce

rtain the measurement

approach depending on whethe

r cash flows result from holding

financial assets to collect the contractual cash f

lows, from

selling those financial assets, or both.

Accounting polici

es continued

NWM Group

Annu

al Report an

d Accounts 202

112

Business model assessment of asse

ts is made at portfolio level,

being the level at which they are managed to achie

ve a

predefined business objective. T

his is expected to result in the

most consistent classification of assets because it aligns wi

the stated objectives for the portfolio, its risk

management,

manager’s remuneration and the ability to monit

or sales of

assets from a portfolio.

The contractual terms of a financial asset;

any leverage

features; prepayment and exte

nsion terms; and triggers 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 designa

ted at fair value

through profit or loss (DFV) upon initial recognition if s

uch

designation eliminates, or significantly reduces

, accounting

mismatch

Equity shares are measured at fair value throug

h profit or loss

unless specifically ele

cted as at fair value through other

comprehensive income (FVOCI).

Upon disposal, the cumulative gains or losses

in fair value

through other comprehensive income reserve are

recycled to

the income statement for monetary asse

ts and non-monetary

assets (equity shares) the cumulative gains o

r losses are

transferred directly to retained e

arnings.

Regular way purchases of financ

ial assets classified as

amortised cost are recognised on the set

tlement date; all other

regular way transactions in fin

ancial assets are recognised on

the trade date.

Financial liabilities are classified

into one of following

measurement categories:



amortised cost

measured at cost using the ef

fective interest

rate method;



held for trading

measured at fair value and c

hanges in fair

value reported in income statement; or



designated at fair value through profit or loss

measured at

fair value and changes in fair value repo

rted in the income

statement except changes in fair value attributable to

the

credit risk component recognis

ed in other comprehensive

income when no accounting mismatch occurs.

9. Impairment: expected credit losses (ECL)

At each balance sheet date eac

h financial asset or portfolio of

financial assets measured at amortised cost or

at fair value

through other comprehensive income, issued fi

nancial

guarantee and loan commitment (other than those cl

assified as

held for trading) is assessed for impair

ment. Any change in

impairment is reported in the income statemen

t. Loss

allowances are forward-looking

, based on 12-month ECL

where there has not been a significant increase in c

redit risk

rating, otherwise allowances are

based on lifetime expected

losses.

ECL are a probability-weighted e

stimate of credit losses. The

probability is determined by the risk of def

ault 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 a

re adjusted from 12

months to lifetime. This will lead to a higher impai

rment charge.

Judgment is exercised as follows:



Models

– in certain low default portfolios, Base

l 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 signific

ant

increase in credit risk. Benchmark PDs,

EADs and LGDs are

reviewed annually for appropri

ateness. The ECL calculation

is based on expected future cash flows, which is

typically

applied at a portfolio level.



Multiple economic scenarios (MES)

– the centr

al, or base,

scenario is most critical to the ECL calcula

tion, independent

of the method used to generate a range of

alternative

outcomes and their probabilities



Significant increase in credit risk

- IFRS 9 requi

res that at

each reporting date, an entity s

hall assess whether the

credit risk on an account has increased significa

ntly since

initial recognition. Part of this asse

ssment 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 d

ate of

initial recognition.

On restructuring where a financial asset is no

t derecognised,

the revised cash flows are used

in re-estimating the credit loss.

Where restructuring causes derecognition of the o

riginal

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 orde

rly realisation of a loan, it is

exchanged for equity shares or property, the exch

ange is

accounted for as the sale of the

loan and the acquisition of

equity securities or investment property. Where NWM

Group ’s

acquired interest is in equity shares, relevant polices

for

control, associates and joint ventures apply.

Impaired financial assets are written off and the

refore

derecognised from the balance shee

t when NWM Group

concludes that there is no longer any

realistic prospect of

recovery of part, or all, of the loan. For fin

ancial assets that are

individually assessed for impairment,

the timing of the write-off

is determined on a case-by-cas

e basis. Such financial assets

are reviewed regularly and write

-off will be prompted by

bankruptcy, insolvency, re-neg

otiation, and similar events.

Business loans are generally written off wi

thin five years.

10. Financial guarantee contracts

Under a financial guarantee contract, NWM

Group, in return for

a fee, undertakes to meet a customer’s obligatio

ns under the

terms of a debt instrument if th

e customer fails to do so. A

financial guarantee is recognised as a liability; ini

tially at fair

value and, if not designated as

at fair value through profit or

loss, subsequently at the higher of its initi

al value less

cumulative amortisation and any provision under

the contract

measured in accordance with ECL Acc

ounting policy.

Amortisation is calculated to recognise fee

s receivable in profit

or loss over the period of the guarantee.

11. Derecognition

A financial asset is derecognised (removed f

rom the balance

sheet) when the contractual right to receive cash flows f

rom

the asset has expired or when it has been transfer

red and the

transfer qualifies for derecognition. Conve

rsely, an asset is not

derecognised in a contract under which N

WM Group retains

substantially all the risks and rewards of owne

rship.

A financial liability is removed from the balance s

heet when the

obligation is paid, or is cancelled, or expires. Cance

llation

includes the issuance of a substitute inst

rument on substantially

different terms.

Accounting polici

es continued

NWM Group

Annu

al Report an

d Accounts 202

113

12. Netting

Financial assets and financial li

abilities are offset, and the net

amount presented on the balance

sheet when, and only when,

NWM Group currently has a legally e

nforceable right to set off

the recognised amounts and it intends eithe

r to settle on a net

basis or to realise the asset and settle the liabili

simultaneously. NWM Group is party to a number of

arrangements, including master netting

agreements, that give it

the right to offset financial assets and financi

al liabilities, but

where it does not intend to settle

the amounts net or

simultaneously, the assets and liabilities conce

rned are

presented separately on the ba

lance sheet.

13. Capital instruments

NWM Group classifies a financial instrumen

t that it issues as a

liability if it is a contractual obligation to deliver c

ash or another

financial asset, or to exchange

financial assets or financial

liabilities on potentially unfavourable ter

ms and as equity if it

evidences a residual interest in the assets of NWM

Group after

the deduction of liabilities. Increment

al costs and related tax

that are directly attributable to

an equity transaction are

deducted from equity.

The consideration for any ordin

ary shares of NWM Plc

purchased by NWM Group (known as treasu

ry shares or own

shares held) is deducted from equity. On the c

ancellation of

treasury shares their nominal v

alue is removed from equity and

any excess of consideration over nominal

value is treated in

accordance with the capital maintenance p

rovisions of the

Companies Act 2006.

On the sale or re-issue of treasu

ry shares the consideration

received and related tax are cre

dited to equity, net of any

directly attributable incremental costs.

14. Derivatives and hedging

Derivatives are reported on the balance she

et at fair value.

NWM Group uses derivatives as part of its

trading activities or

to manage its own risk such as i

nterest rate, foreign exchange,

or credit risk. Not all derivative

s used to manage risk are in

hedge accounting relationships (an IFRS method

to reduce

accounting mismatch from changes in the fai

r value of

derivatives reported in the income statement.

Gains and losses arising from changes in the fai

r value of

derivatives that are not in hedge relationships are reco

gnised in

the income statement in Income f

rom trading activities except

for gains and losses on those d

erivatives that are managed

together with financial instruments designated a

t fair value;

these gains and losses are included in Othe

r operating income.

Hedge accounting

NWM Group enters into three types of

hedge accounting

relationships (see later). Hedge accounting

relationships are

designated and documented at inception in line with t

requirements of IAS 39

Financi

al instruments – Recognition and

Measurement

. The documentat

ion identifies the hedged item,

the hedging instrument and details of the risk

that is being

hedged and the way in which eff

ectiveness will be assessed at

inception and during the period of

the hedge

Fair value hedge

the gain or loss on the hedging i

nstrument

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 design

ated hedge

relationship is recognised in other comprehensive inco

me and

the ineffective portion in the in

come statement. When the

hedged item (forecasted cash flows) results in the

recognition

of a financial asset or financial liability, the cumul

ative gain or

loss is reclassified from equity to the income s

tatement in the

same periods in which the hedged forecas

ted 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 recognise

d in other

comprehensive income. Any ine

ffective portion is recognised in

profit or loss. Non-derivative financial li

abilities 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 mee

ts the criteria for hedge

accounting

i.e. the hedge is not

highly effective in offsetting

changes in fair value or cash flows attribut

able to the hedged

risk, consistent with the documented risk manage

ment

strategy; the hedging instrument expires or is sol

d, terminated

or exercised; or if hedge designation is revoked.

For fair value hedging any cumulative adjust

ment is amortised

to the income statement over t

he 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 cum

ulative unrealised gain or loss is

reclassified from equity to the income statemen

t when the

hedged cash flows occur or, if the forecast transac

tion results

in the recognition of a financial

asset or financial liability, when

the hedged forecast cash flows affec

t the income statement.

Where a forecast transaction is no longer expected to occu

the cumulative unrealised gain or loss is reclassified fro

m equity

to the income statement immediately.

For net investment hedging on disposal or partial disposal

of a

foreign operation, the amount accumulated in equi

ty is

reclassified from equity to the income statemen

15. Investment in Group undertakings

NWM Plc’s investments in its Group undertakings (subsidi

aries)

are stated at cost less any impairment.

Critical accounting policies and key sources of estimation

uncertainty

The reported results of NWM Group are sensitive to the

accounting policies, assumptions and esti

mates that underlie

the preparation of its financial s

tatements. The accounting

standards used in the preparati

on of the financial statements

(see presentation of financial statemen

ts above) require the

directors, in preparing NWM Gr

oup's financial statements, to

select suitable accounting policies

, apply them consistently and

make judgements and estimates

that are reasonable and

prudent. In the absence of accounting guid

ance, standards

used in the preparation of the fi

nancial statements require the

directors to develop and apply an accounting policy

that

results in relevant and reliable i

nformation in the light of the

requirements and guidance in IFRS de

aling with similar and

related issues and the IASB's ’Conceptual F

ramework for

Financial Reporting’.

Accounting polici

es continued

NWM Group

Annu

al Report an

d Accounts 202

114

The judgments and assumptions involved in NWM

Group's

accounting policies that are considered by

the Board to be the

most important to the portrayal of

its financial condition are

noted below. The use of estimates, assumptions o

r models that

differ from those adopted by NWM Group would

affect its

reported results. Estimation unce

rtainty continues to be

affected by the COVID-19 pandemic. The

COVID-19 pandemic

continued to cause significant economic and soci

al disruption

during 2021. Key financial estimates are b

ased on

management's latest five-year revenue an

d cost forecasts.

Measurement of deferred tax a

nd expected credit losses are

highly sensitive to reasonably pos

sible changes in those

anticipated conditions. Other reasonably possible assum

ptions

about the future include a prolonged fina

ncial effect of the

COVID-19 pandemic on the economy of the UK and o

ther

countries or greater economic e

ffect as countries and

companies implement plans to counter cli

mate risks.

How Climate risk affects our accounting judgments and

estimates

NWM Group makes use of reasonable and suppor

table

information to make accounting judg

ments and estimates. This

includes information about the observable ef

fects of the

physical and transition risks of c

limate change on the current

creditworthiness of borrowers, asset values and

market

indicators. It also includes the eff

ect on NWM Group’s

competitiveness and profitability. Many of the effe

cts arising

from climate change will be longer term in nature, with

inherent level of uncertainty,

and

have limited

effe

ct on

accounting judgments and estimates

for the current period.

Some physical and transition risk

s can manifest in the shorter

term. The following items represe

nt the most significant effects:



The classification of financial instruments linked to clim

ate,

or other sustainability indicators: consideration is given t

whether the effect of climate related terms preven

t the

instrument cashflows being sole

ly payments of principal and

interest.



The measurement of expected

credit loss considers the

ability of borrowers to make pay

ments as they fall due.

Future cashflows are discounte

d, so long dated cashflows

are less likely to affect current expectations on credi

t loss.

NWM Group’s assessment of se

ctor specific risks, and

whether additional adjustments are required, inclu

expectations on the ability of those

sectors to meet their

financing needs in the market. Changes in c

redit

stewardship and credit risk appetite that s

tem 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 f

uture

cashflows and uses the NWM Group’s five-yea

r forecast

and the expectation of long term economic growth beyond

this period. The five-year forecast takes account of

management’s current expectations on co

mpetitiveness

and profitability, including near term effects on cli

mate

transition risk. The long term growth rate refle

cts external

indicators which will include market expectations o

n climate

risk. NWM Group did not consider any

additional

adjustments to this indicator.



The use of market indicators as i

nputs to fair value is

assumed to include current information an

d knowledge

regarding the effect of climate risk.

Changes in judgments and assumptions could

result in a

material adjustment to those es

timates in the next reporting

periods. Consideration of this source of e

stimation uncertainty

has been set out in the notes below (as applic

able).

Critical accounting policy

Note

Deferred tax

Fair value

financial instruments

Loan impairment provisions

Provisions for liabilities and

charges

Future accounting developments

International Financial Reporting Standards

Effective 1 January 2022



Onerous Contracts – Cost of Fulf

illing a Contract

(Amendments to IAS 37);



Property, Plant and Equipment: Proceeds before

Intended

Use (Amendments to IAS 16);



Reference to Conceptual Framework (A

mendments to IFRS

3); and



Fees in the “10 per cent” test for Derecognition of

Financial

Liabilities (Amendments to IFRS 9

Other new standards and amendments that

are effective for

annual periods beginning after 1 January 20

23, with earlier

application permitted, are set out below.

Effective 1 January 2023



IFRS 17 Insurance Contracts (Amend

ments to IFRS 17

Insurance Contracts);



Classification of Liabilities as Current or Non-cu

rrent

(Amendments to IAS 1);



Deferred Tax related to Assets

and Liabilities arising from a

Single Transaction (Amendmen

ts to IAS 12);



Definition of Accounting Estimates

(Amendments to IAS 8)

and



Disclosure of Accounting Policie

s (Amendments to IAS 1 and

IFRS Practice Statement 2).

NWM Group is assessing the effect of adopting these s

tandards

and amendments on its financial statemen

ts but does not

expect the effect to be material.

o the f

inancial st

ements

NWM Group

Annu

al Report an

d Accounts 202

115

1 Net interest income

2021

2020

£m

Loans to banks - amortised cost

Loans to customers - amortised cost

207

277

Amounts due from holding company and fe

llow subsidiaries

—

Other financial assets

168

Interest receivable

343

531

Balances with banks

Customer deposits

Amounts due to holding company and fellow subsi

diaries

169

282

Other financial liabilities

194

Interest payable

335

591

Net interest income

(60)

Interest income on financial instruments measured

at amortised cost and debt instruments cl

assified as FVOCI is measured u

sing

the effective interest rate which allocates the in

terest income or interest expense over

the expected life of the asset or liabili

ty at

the rate that exactly discounts all estimated future cash flo

ws to equal the instru

ment's initial carrying amount. Calculati

on of the

effective interest rate takes into

account fees payable or receivable that are

an integral part of the instrument's yield, p

remiums or

discounts on acquisition or issue, early redemption fe

es and transaction costs. All contractual

terms of a financial instrument are

considered when estimating future cash flows.

For accounting policy information se

e Accounting policies note 2.

2 Non-interest income

2021

2020

£m

Net fees and commissions

158

Income from trading activities

Foreign exchange

191

425

Interest rate

(17)

648

Credit

Changes in fair value of own de

bt attributable to own credit risk

- debt securities in issue and d

erivative liabilities

(24)

Equities and other

—

263

1,088

Other operating income

Loss on redemption of own debt

(26)

(16)

Operating lease and other rental income

Changes in fair value of financial assets and liabilities des

ignated at fair value through profit or loss

(1)

(8)

(54)

Hedge ineffectiveness

(10)

(5)

Profit/(loss) on disposal of amortised cost assets

(2)

Loss on disposal of fair value th

rough other comprehensive inc

ome assets

(1)

(13)

Dividend income

Profit/(loss) on disposal of subsidiaries and associates

—

Other income

(2)

(28)

Total

393

1,218

(1)

Including related derivatives.

(2)

Includes income from activities other than banking.

For accounting policy information se

e Accounting policies note 2.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

116

3 Operating expenses

2021

2020

£m

Wages, salaries and other staff c

osts

358

476

Temporary and contract costs

Social security costs

Bonus awards

Pension costs

- defined benefit schemes (see

Note 5)

- defined contribution schemes

Staff costs

498

670

Premises and equipment

110

107

Depreciation and amortisation

Other administrative expenses

(1,2)

522

629

Administrative expenses

652

761

1,150

1,431

(1)

Includes recharges from other NatWest Group ent

ities, mainly NWB Plc which provides the majority of shared services (including technology) and operational processes.

(2)

Includes litigation and other regulatory costs. Further details are p

rovided in Note 20.

For accounting policy information se

e Accounting policies note 4.

The average number of persons e

mployed, rounded to the nearest hundred, in continuing ope

rations during the year, excluding

temporary staff, was 1,900 (202

0 – 3,600). The number of persons employed by NWM G

roup in continuing operations at 31

December 2021, excluding temporary staff, was

as follows:

2021

2020

1,000

1,100

USA

300

India

—

100

Poland

—

300

Rest of the World

300

Total

(1)

1,600

2,100

(1)

During the year, as part of the transformation programme, the front office and support functions ope

rating models were reorganised to focus on NatWest Group’s customers and

some roles have been transferred from NWM Group t

o NatWest Holdings Limited.

Bonus awards

The following tables analyse NWM Group's bonus

awards.

2021

2020

Change

£m

Non-deferred cash awards

(1)

(25)

Deferred cash awards

Deferred share awards

(53)

Total deferred bonus awards

(14)

Total bonus awards

(2)

(14)

2021

2020

Reconciliation of bonus awards to income statement

charge

£m

Bonuses awarded

Less: deferral of charge for amounts a

warded for current year

(30)

(38)

Income statement charge for amoun

ts awarded in current year

Add: current year charge for amounts deferred f

rom prior years

Less: forfeiture of amounts deferred from

prior years

(11)

(4)

Income statement charge for amoun

ts deferred from prior years

Income statement charge for bonus aw

ards

(2)

(1)

Non-deferred cash awards are limited to £2,000 for a

ll employees.

(2)

Excludes other performance related compensat

ion.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

117

4 Segmental analysis

Reportable operating segments

The reportable operating segments are as follows:

NatWest Markets

offers its customers global market access,

providing them with trading, risk

management and financing

solutions through its trading hubs in London, Ams

terdam,

Singapore and Stamford and sales off

ices across key locations

in the UK, EU, US and Asia.

Central items & other

includes corporate functions and other

activity not managed in the Nat

West Markets segment. In 2021

and 2020, this substantially comprised of litig

ation and conduct

costs.

NatWest

Central items

Markets

& other

Total

2021

£m

Interest receivable

343

—

343

Interest payable

(335)

—

(335)

Net fees and commissions

158

—

158

Other non-interest income

243

(

235

Total income

409

(

401

Depreciation and amortisation

(20)

—

(20)

Other operating expenses

(1,137)

(1,130)

Impairment release

—

Operating loss

(713)

(

(714)

2020

Interest receivable

529

531

Interest payable

(591)

—

(591)

Net fees and commissions

—

Other non

interest income

1,081

1,119

Total income

1,118

1,158

Depreciation and amortisation

(25)

—

(

25)

Other operating expenses

(1,292)

(114)

(1,406)

Impairment losses

(40)

(2)

(

42)

Operating loss

(239)

(

76)

(315)

Total revenue (1

)

2021

2020

Central

NatWest

items

NatWest

items

Markets

& other

Total

Markets

& other

Total

£m

Total

848

(8)

840

1,995

2,036

(1)

Total revenue comprises interest receivable, fees and commissions receivable, income from trad

ing activities and other operating income.

31 December

2021

2020

Analysis of net fees and commissions

£m

Fees and commissions receivable

- Lending and financing

- Brokerage

Underwriting fees

127

183

- Other

Total

262

386

Fees and commissions payable

(104)

(287)

Net fees and commissions

158

2021

2020

Central

NatWest

items

NatWest

items

Markets

& other

Total

Markets

& other

Total

Total assets and liabilities

£m

Assets

203,010

203,011

273,124

273,138

Liabilities

195,560

(1)

195,559

263,773

263,796

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

118

4 Segmental analysis continu

Geographical segments

The geographical analysis in the tables below has been co

mpiled on the basis of location of of

fice where the transactions are

recorded.

USA

Europe

RoW

Total

2021

£m

Total revenue

594

132

840

Interest receivable

262

343

Interest payable

(269)

(2)

(

62)

(2)

(335)

Fees and commissions receivable

168

—

262

Fees and commissions payable

(236)

(104)

Income from trading activities

190

263

Other operating income

(27)

(3)

—

(28)

Total income

101

149

401

Operating (loss)/profit before tax

(802)

(714)

Total assets

158,100

21,823

20,668

2,420

203,011

Total

liabilities

158,137

23,330

12,820

1,272

195,559

Contingent liabilities and commitments

6,482

—

5,450

11,950

2020

Total revenue

1,405

211

291

129

2,036

Interest receivable

418

—

531

Interest payable

(488)

—

(103)

—

(591)

Fees and commissions receivable

191

103

386

Fees and commissions payable

(208)

(31)

(

42)

(6)

(287)

Income from trading activities

923

170

(15)

1,088

Other operating income

(22)

(2)

Total income

709

180

146

123

1,158

Operating (loss)/profit before tax

(313)

(84)

(315)

Total assets

225,345

25,452

20,108

2,233

273,138

Total liabilities

223,405

26,942

12,332

1,117

263,796

Contingent liabilities and commitments

6,768

—

6,299

—

13,067

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

119

5 Pensions

Defined contribution schemes

NWM Group sponsors a number of defined con

tribution pension

schemes in different territories, which new employee

s are

offered the opportunity to join.

Defined benefit schemes

NWM Group sponsors a number of pension sche

mes in the UK

and overseas, including the AA

and NatWest Markets (NWM)

sections of the NatWest Group Pension Fund whic

h operate

under UK trust law and are managed

and administered on

behalf of their members in accordance with the

terms of the

trust deed, the scheme rules and UK legislation.

Pension fund trustees are appointed to operate eac

h fund and

ensure benefits are paid in accordance with the sche

me rules

and national law. The trustees are the

legal owner of a

scheme’s assets, and have a duty to act in the best in

terests of

all scheme members.

The schemes generally provide a pension of one-si

xtieth of final

pensionable salary for each year of service

prior to retirement

up to a maximum of 40 years and a

re contributory for current

members. These have been close

d to new entrants for over ten

years, although current members continue to buil

d up

additional pension benefits, currently subject

to 2% maximum

annual salary inflation, while they remain employed by NW

Group.

The corporate trustee is NatWest Pension Trus

tee Limited (the

Trustee), a wholly owned subsidiary of NWB Plc. T

he Board of

the Trustee comprises four member trus

tee directors selected

from eligible active staff, deferr

ed and pensioner members who

apply and six appointed by Nat

West Group. Under UK

legislation, a defined benefit pensi

on scheme is required to

meet the statutory funding objec

tive of having sufficient and

appropriate assets to cover its liabilities (

the pensions that have

been promised to members).

Investment strategy

The assets of the AA section, which is typical of othe

r group

schemes, represent 78% of all p

lan assets at 31 December 2021

(2020 – 77% of plan assets) and

are invested as shown below.

The AA and NWM sections employ both physical

and derivative

instruments to achieve a desired asset class expos

ure and to

reduce the schemes’ interest rate, inflation and currency risk.

This means that the net funding positions a

re considerably less

sensitive to changes in market conditions than

the value of the

assets or liabilities in isolation.

In particular, the Trustee hedges

movements in interest rates and inflation.

Swaps have been executed at prevailing

market rates and

within standard market bid/offer spreads with a num

ber of

counterparty banks, including NWB Plc.

2021

2020

Major classes of plan

assets as

a percentage of total pl

an assets

Quoted

Unquoted

Tota

Quoted

Unquoted

Total

of the AA sectio

Equities

2.4

0.6

3.0

2.1

1.1

3.2

Index linked bonds

40.8

—

40.8

39.0

—

39.0

Government bonds

4.3

—

4.3

5.2

—

5.2

Corporate and other bonds

15.5

10.1

25.6

20.0

11.0

31.0

Real estate

—

2.0

—

1.9

Derivatives

—

6.5

—

5.8

Cash and other assets

—

17.8

—

13.9

63.0

37.0

100.0

66.3

33.7

100.0

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

120

5 Pensions continued

The schemes do not invest dire

ctly in NWM Group but can have exposure to NWM

Group. The trustees are responsible f

ensuring that indirect investments in NWM G

roup do not exceed the 5% regulato

ry limit.

AA section

All schemes (3)

Present

value

Net

value

Asset

Net

Fair

of defined

pension

Fair

of defined

ceiling/

pension

value of

benefit

(asset)/

value of

benefit

minimum

(asset)/

plan assets

obligation (1)

liability

plan assets

obligation (1)

funding

(2)

liability

Changes in value of net pension (asset)/li

ability

£m

At 1 January 2020

1,088

825

(263)

1,419

1,116

(

208)

Currency translation and other adjustments

—

(9)

—

(9)

Income statement

(4)

Statement of comprehensive income

107

114

148

(13)

Contributions by employer

—

(2)

—

(11)

Contributions by plan participants and other scheme

members

Benefits paid

(44)

—

(68)

—

Transfers to/from fellow subsidiaries

—

(4)

—

(4)

At 1 January 2021

1,164

906

(258)

1,503

1,219

(

201)

Currency translation and other adjustments

(1)

—

(

11)

(13)

—

Income statement

Net interest expense

(4)

(1)

Current service cost

—

(3)

Statement of comprehensive income

Return on plan assets excluding recognised inte

rest income

—

(21)

—

(18)

Experience gains and losses

—

Effect of changes in actuarial

financial assumptions

—

(28)

—

(35)

—

(35)

Effect of changes in demographic assumptions

—

Asset ceiling adjustments

—

(6)

(

(16)

(37)

(

12)

(6)

(36)

Contributions by employer

—

(1)

—

(7)

Benefits paid

(48)

—

(65)

—

Transfers to/from fellow subsidiaries

—

At 31 December 2021

1,153

855

(298)

1,473

1,153

(

240)

(1)

Defined benefit obligations are subject to annual va

luation by independent actuaries.

(2)

In recognising the net surplus or deficit of a pension s

cheme, the funded status of each scheme is adjusted to reflect any minimum funding requirement imposed on the sponsor and

any ceiling on the amount that the sponsor has an unconditiona

l right to recover from a scheme.

(3)

Includes the NWM Section which has a net pension asset of

nil at 31 December 2021 (2020: net pension asset of nil). This scheme has plan assets of £287 million, a defined benefit

obligation of £208 million and an asset ceiling of £8

0 million (2020: £308 million, £225 million and £83 million respectively).

(4)

NWM Group expects to make contributions to the AA s

ection of £2.2 million and to the NWM section of £4.5 million in 2022.

All schemes

2021

2020

Amounts recognised on the balance sheet

£m

Fund assets at fair value

1,473

1,503

Present value of fund liabilities

1,153

1,219

Funded status

320

284

Asset ceiling/minimum funding

240

201

2021

2020

Net pension asset/(liability) com

prises

£m

Net assets of schemes in surplu

s (included in Other assets, Note 1

306

264

Net liabilities of schemes in deficit (included in Othe

r liabilities, Note 20)

(66)

(63)

240

201

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

121

5 Pensions continued

Funding and contributions by NWM Group

In the UK, the trustees of defined benefit pension sc

hemes are

required to perform funding valu

ations at least every three

years. The trustees and the sponsoring com

pany, with the

support of the Scheme Actuary, agree the assum

ptions used to

value the liabilities and determi

ne future funding requirements.

The funding assumptions incor

porate a margin for prudence

over and above the expected cost of providing the bene

fits

promised to members, taking into accou

nt the sponsor’s

covenant and the investment st

rategy of the scheme. Similar

arrangements apply in the other territories w

here NWM Group

sponsors defined benefit pension schemes.

The triennial funding valuation of

the AA and NWM sections as

at 31 December 2020 was completed during 2021. T

his

determined the funding level to be 1

08% and 111% respectively,

based on pension liabilities of £1

,071 million and £267 million.

No further deficit contributions

are due.

The key assumptions used to determine the fundin

g liabilities

were the discount rate, which is determined base

d on a gilt

yield curve plus 0.4% per annu

m, and mortality assumptions,

which result in life expectancies of 28

.3/30.1 years for

males/females who are currently age 60

and 30.2/31.8 years

from age 60 for males/females who are cur

rently aged 40.

Accounting assumptions

Placing a value on NWM Group’s define

d benefit pension

schemes’ liabilities requires NWM Group’s man

agement to

make a number of assumptions, with

the support of

independent actuaries. The ultimate cost of the def

ined benefit

obligations depends upon actu

al future events and the

assumptions made are unlikely

to be exactly borne out in

practice, meaning the final cost may be hi

gher or lower than

expected.

The most significant assumptions use

d for the AA section are shown below:

Principal IAS 19 a

ctuarial assumptions

2021

2020

Discount rate

1.8

1.4

Inflation assumption (RPI)

3.3

2.9

Rate of increase in salaries

1.8

Rate of increase in deferred pensions

2.9

2.2

Rate of increase in pensions in paymen

2.9

2.8

Lump sum conversion rate at re

tirement

Longevity at age 60:

years

Current pensioners

Males

27.9

28.2

Females

29.7

29.8

Future pensioners, currently aged 40

Males

29.5

Females

31.1

31.5

Discount rate

The IAS 19 valuation uses a single discount rate s

et by

reference to the yield on a baske

t of ‘high quality’ sterling

corporate bonds.

Significant judgment is required when se

tting the criteria for

bonds to be included in the baske

t of bonds that determines 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 sha

pe of the yield

curve at long durations: a constant credit spread rela

tive to

gilts is assumed. Sensitivity to the main assu

mptions is

presented below.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

122

5 Pensions continued

The table below shows how th

e present value of the net pension asset of t

he AA section would change if the key assump

tions used

were changed independently. In practice t

he variables have a degree of cor

relation and do not move completely in isola

tion.

(Decrease)/

Increase in

increase in

net pension

value of

(obligations)/

assets

liabilities

assets

2021

£m

0.25% increase in interest rates/discount rate

(55)

(35)

(20)

0.25% increase in inflation

0.25% increase in credit spreads

—

(35)

Longevity increase of one year

—

(37)

0.25% additional rate of increase

in pensions in payment

—

(32)

Increase in equity values of 10%

(1)

—

2020

0.25% increase in interest rates/discount rate

(55)

(47)

(8)

0.25% increase in inflation

0.25% increase in

credit spreads

—

(47)

Longevity increase of one year

—

(43)

0.25% additional rate of increase

in pensions in payment

—

(36)

Increase in equity values of 10%

(1)

—

(1)

Includes both quoted and private equity.

The funded status is most sensitive to move

ments in credit spreads and longevity. The table b

elow shows the combined chan

ge in

the funded status of the AA section as a result of

larger movements in these assumptions,

assuming no changes in other

assumptions.

Change in life expecta

ncies

-2 years

-1 years

No change

+1 year

+2 years

2021

£m

Change in credit spreads

+50 bps

135

102

(4)

No change

—

(37)

(76)

-50 bps

(39)

(82)

(127)

(172)

2020

Change in

credit spreads

+50 bps

159

124

No change

—

(43)

(86)

-50 bps

(2)

(50)

(99)

(149)

(201)

The defined benefit obligation i

s attributable to the different classes of A

A section members in the following propor

tions:

2021

2020

Membership category

Active members

0.2

2.8

Deferred members

56.2

64.1

Pensioners and dependants

43.6

33.1

100.0

The experience history of the AA s

ection is shown below:

2021

2020

History of defined benefit schemes

£m

Fair value of plan assets

1,153

1,164

Present value of plan obligations

855

906

Net surplus

298

258

Experience gains/(losses) on plan liabilities

(12)

Experience gains/(losses) on plan assets

Actual return on plan assets

118

Actual return on plan assets

3.2%

10.8%

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

123

6 Auditor’s remuneration

Amounts payable to the NWM Group’s audito

rs for statutory audit and other services are set

out below:

2021

2020

£m

Fees payable for:

- the audit of the NWM Group’s annual accoun

6.4

6.6

the audit of NWM Plc’s subsidiaries

2.9

3.0

- audit-related assurance service

0.6

Total audit and audit-related as

surance services fees

9.9

10.2

Corporate finance services

0.3

0.1

Total other services

0.3

0.1

Fees payable to the auditor for non-audit service

s are disclosed in the consolidated fin

ancial statements of NatWest Group pl

7 Tax

2021

2020

£m

Current tax

Credit/(charge) for the year

171

(92)

Over/(under) provision in respect of prior yea

(36)

172

(128)

Deferred tax

Credit for the year

150

UK tax rate change impact

(1)

(21)

(22)

Net increase/(decrease) in the car

rying value of deferred tax assets in respect

of UK and Netherlands

losses

(22)

Over provision in respect of prior years

(2)

Tax credit/(charge) for the year

223

(12)

(1)

It was announced in the UK Government’s budget on 3 March 2021 that the main UK corporation tax rate will increase f

rom 19% to 25% from 1 April 2023. This legislative change

was enacted on 10 June 2021.

(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 credit differs from the expected tax c

redit, computed by applying the standa

rd rate of UK corporation tax of 19%

(2020 – 19%), as follows:

2021

2020

£m

Expected tax credit

136

Losses and temporary differen

ces in year where no deferred tax asset recognised

(18)

(1)

Foreign profits taxed at other rates

(5)

(12)

Items not allowed for tax:

- losses on disposal and write-downs

—

(2)

UK bank levy

(3)

(6)

- regulatory and legal actions

(1)

(20)

- other disallowable items

(7)

(18)

Non-taxable items

Unrecognised losses brought forward and utilised

(Decrease)/increase in the carrying value of defer

red tax assets in respect of:

- UK losses

(9)

(22)

- Netherlands losses

—

Banking surcharge

Tax on paid-in equity

UK tax rate change impact

(21)

(22)

Adjustments in respect of prior ye

ars

(26)

Actual tax credit/(charge)

223

(12)

For accounting policy information se

e Accounting policies note 7.

Judgment: tax contin

gencies

NWM Group’s corporate income

tax credit 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 wi

th the

tax authorities in a number of jurisdictions. N

WM Group recognises

anticipated tax liabilities based on all available e

vidence and,

where appropriate, in the light of external advice. Any dif

ference between the final outco

me and the amounts provided will af

fect

current and deferred corporate income tax cha

rges in the period when the matter is

resolved.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

124

7 Tax continued

Deferred tax

NWM Group

NWM Plc

2021

2020

2021

2020

£m

Deferred tax asset (included in Other assets, Note 1

(48)

(2)

—

(2)

Deferred tax liability (included i

n Other liabilities, Note 20)

374

417

352

380

Net deferred tax liability

326

415

352

378

Net deferred tax liability/(asset) comprised:

NWM Group

Accelerated

losses

capital

Expense

Financial

carried

Pension

allowances

provisions

instruments

forward

Other

Tota

£m

At 1 January 2020

399

(39)

132

(75)

500

Acquisitions and disposals of su

bsidiaries

—

Charge/(credit) to

income statement:

(142)

(4)

(116)

Charge/(credit) to other compre

hensive income

—

(8)

Currency translation and other adjustments

—

(1)

At 31 December 2020

260

(23)

158

(62)

415

Charge/(credit) to

income statement

(1)

(2)

(5)

(43)

(1)

(51)

Charge/(credit) to other compre

hensive income

—

(4)

(53)

—

(39)

Currency translation and other adjustments

—

At 31 December 2021

259

(29)

100

(104)

326

NWM Plc

Tax

Accelerated

losses

capital

Expense

Financial

carried

Pension

llowances

provisions

instruments

forward

Other

Tota

£m

At 1 January 2020

388

(

39)

117

(75)

(2)

462

Acquisitions and disposals of su

bsidiaries

—

(Credit)/charge to

income statement

—

(144)

(5)

(114)

Charge/(credit) to other compre

hensive income

(1)

—

(7)

Currency translation and other adjustments

—

(1)

At 31 December 2020

246

(

23)

142

(62)

(4)

378

Charge/(credit) to

income statement

(2)

Charge/(credit) to other compre

hensive income

—

(4)

(53)

—

(39)

At 31 December 2021

250

(

29)

(56)

(2)

352

Deferred tax assets in respect of unus

ed tax losses are recognised if the losse

s can be used to offset probable future

taxable profits

after taking into account the ex

pected reversal of other temporary diffe

rences. Recognised deferred tax assets in respec

t of tax

losses are analysed below.

2021

2020

£m

UK tax losses carried forward

- NWM Plc

Total

Overseas tax losses carried for

ward

- NWM N.V.

—

104

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

125

7 Tax continued

Critical accounting policy: Deferred tax

The deferred tax liability of £374 million at 31 Decembe

r 2021

(2020 – liability of £417 million) includes a defe

rred tax asset on

losses of £56 million. The def

erred tax asset recognised on UK

and overseas tax losses is recognised to the exten

t that it is

probable that there will be future taxable profits to

recover it.

Judgment

- NWM Group has considered the carrying value of

deferred tax assets and manage

ment considers that sufficient

taxable profits will be generated in future yea

rs to recover the

remaining deferred tax asset.

Estimate

– These estimates ar

e partly based on forecast

performance beyond the horizon for management’s det

ailed

plans. They have regard to inhe

rent uncertainties, such as

climate change and the impact of C

OVID. The deferred tax

asset in NWM Plc is supported by way of future reversin

taxable temporary differences

on which deferred tax liabilities

are recognised at 31 December 2

021.

UK tax losses

Under UK tax rules, tax losses can be carrie

d forward

indefinitely. As the recognised tax losses in NWM

Plc arose

prior to 1 April 2015, credit in future periods is given ag

ainst

25% of profits at the main rate of

UK corporation tax, excluding

the Banking Surcharge 8% rate

introduced by The Finance (No.

2) Act 2015.

It was announced in the UK Government’s budget o

n 3 March

2021 that the main UK corpora

tion tax rate will increase from

19% to 25% from 1 April 2023. T

his legislative change was

enacted on 10 June 2021

. NWM Group’s closing deferred tax

assets and liabilities have therefore been recalcul

ated taking

into account this change of rat

e and the applicable period the

deferred tax assets and liabilities

are expected to crystallise. As

a result, the net deferred tax liability pos

ition in NWM Group

has increased by £25 million, w

ith a £21 million tax charge

included in the income stateme

nt (refer to reconciling item

above), and a £4 million tax charge included in other

comprehensive income.

It was subsequently announced in the UK Govern

ment’s budget

on 27 October 2021 that the U

K banking surcharge will

decrease from 8% to 3% from 1 April 2023

. This legislative

change was substantively enacted on 2 Feb

ruary 2022. Had

this rate reduction been substantively e

nacted as at the

balance sheet date, the estimate

d rate change impact would

not have been material.

NWM Plc

- NWM Plc expects th

at the balance of recognised

deferred tax asset at 31 December 202

1 of £56 million (2020 -

£62 million) in respect of tax losse

s amounting to £254 million

will be recovered by the end of 2

027. The movement in the

current financial year reflects a £1

3 million decrease in the

carrying value of the deferred tax asset, offse

t by a £7 million

increase due to the UK tax rate change imp

act. Of the losses

remaining, £5,311 million have not been recognised in

the

deferred tax balance at 31 Dec

ember 2021; such losses will be

available to offset 25% of future taxable profits in

excess of

those forecast in the closing defe

rred tax asset.

Overseas tax losses

NWM N.V.

– A deferred tax asset of £48 million has been

recognised in respect of previously

unrecognised tax losses and

credits of £187 million of total tax losses and credi

ts of £2,785

million carried forward at 31 Dece

mber 2021. NWM N.V. Group

expects the deferred tax asset to be utilised

against future

taxable profits by the end of 202

6. NWM N.V. Group’s Dutch

fiscal unit has reported taxable profits in the period since

the

adoption of the new business model and

repurposing of NWM

N.V.’s banking license in 2019. In addition, NatWes

t Group

strategic review of NWM Group has been la

rgely completed in

2021, which has removed material uncertainties around t

future business of NWM N.V.. As a result, NWM N.V.

Group now

considers it to be probable, based on its 5 ye

ar budget forecast,

that future taxable profit will be available agains

t which the tax

losses and tax credits can be partially utilised.

NWM N.V. Group’s evaluation o

f alternative assumptions

revealed that the recognition of the deferred tax asset is hi

ghly

sensitive to the significant assumptions used in t

he assessment

and therefore subject to high estimation unce

rtainty. Due to the

uncertainty associated with the underlying fo

recast of probable

taxable income, the final outcome of the utilis

ation of the

deferred tax asset may vary si

gnificantly. This can lead to a

material increase or decrease of the deferred tax assets

depending on the result of the s

trategic decisions made in 2021

and to be made in future periods.

Unrecognised deferred tax

Deferred tax assets of £3,340 million (2020

- £3,078 million)

have not been recognised in res

pect of tax losses and other

deductible temporary difference

s carried forward of £12,125

million (2020 - £12,171 million) in jurisdicti

ons where doubt

exists over the availability of future tax

able profits. Of these

losses and other deductible temporary diffe

rences, £77 million

expire within five years and £4,288

million thereafter. The

balance of tax losses and other

deductible temporary

differences carried forward has no expiry date.

There are no unrecognised def

erred tax liabilities in respect of

retained earnings of overseas subsidia

ries and held-over gains

on the incorporation of certain overseas branche

8 Profit/(loss) dealt with in

the accounts of NWM Plc

As permitted by section 408(3) of the Companies Act 200

6, no income statement for NWM

Plc has been presented as a primary

financial statement.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

126

9 Financial instruments - classification

The following tables analyse NWM Group’s financial

assets and liabilities in accordance with the c

ategories of financial instruments

in IFRS 9.

NWM Group

Amortised

Other

MFVTPL

FVOCI

cost

sets

Tot

£m

Assets

Cash and balances at central banks

16,645

Trading assets

59,101

Derivatives

(1)

105,550

Settlement balances

2,139

Loans to banks

amortised cost

(2)

962

Loans to customers - amortised cost

7,471

Amounts due from holding company and fe

llow subsidiaries

649

—

731

1,479

Other financial assets

5,590

3,116

8,786

Other assets

878

31 December 2021

165,380

5,590

31,064

977

203,011

Cash and balances at central banks

15,771

Trading assets

68,689

Derivatives

(1)

165,619

Settlement balances

2,296

Loans to banks - amortised cost

(2)

1,003

Loans to customers - amortised cost

8,444

Amounts due from holding company and fe

llow subsidiaries

766

—

754

1,587

Other financial assets

166

6,300

2,575

9,041

Other assets

688

31 December 2020

235,240

6,300

30,843

755

273,138

NWM Group

Held

for

Amortised

Other

trading

DFV

cost

liabilities

Total

£m

Liabilities

Bank deposits

(3)

1,808

Customer deposits

2,268

Amounts due to holding company and fellow subsi

diaries

348

—

5,607

171

6,126

Settlement balances

2,068

Trading liabilities

64,482

Derivatives

(1)

98,497

Other financial liabilities

2,374

16,881

19,255

Other liabilities

998

1,055

31 December 2021

163,327

2,374

28,689

1,169

195,559

Bank deposits

(3)

1,808

Customer deposits

2,618

Amounts due to holding company and fellow subsi

diaries

636

—

7,240

258

8,134

Settlement balances

2,248

Trading liabilities

72,252

Derivatives

(1)

157,332

Other financial liabilities

3,196

14,974

18,170

Other liabilities

1,153

1,234

31 December 2020

230,220

3,196

28,969

1,411

63,796

(1)

Includes net hedging derivative assets of £132 million (2020 - £267

million) and net hedging derivative liabilities of £119 million (2020 - £107 million).

(2)

Includes items in the course of collection from other

banks of £38 million (2020 - £119 milli

on).

(3)

Includes items in the course of transmission to other banks

of £28 mill

ion (2020 - £10 million).

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

127

9 Financial instruments – classification continued

Judgment: classification of financial assets

Classification of financial assets be

tween amortised cost and fair value through other co

mprehensive income requires a degr

ee of

judgment in respect of business models a

nd contractual cashflows.



The business model criteria is as

sessed at a portfolio level to determine whether assets are cl

ssified as held to collect or hel

to collect and sell. Information t

hat is considered in determining the applic

able business model includes the portfolio’s policie

and objectives, how the performance and risks of the p

ortfolio are managed, evaluated

and reported to management; and the

frequency, volume and timing of s

ales in prior periods, sales expectation for future periods,

and the reasons for sales.



The contractual cash flow characteris

tics of financial assets are asses

sed with reference to whether the cash flows rep

resent

solely payments of principle and interest. A le

vel of judgment is made in assessing terms t

hat could change the contrac

tual

cash flows so that it would not meet the co

ndition for solely payments of principle a

nd interest, including contingent and

leverage features, non-recours

e arrangements and features that could m

odify the time value of money.

For accounting policy information se

e Accounting policies notes 8, 1

1, 12 and 14.

Amounts due from/to holding c

ompany and fellow subsidiaries are as below:

NWM Group

2021

2020

Holding

Fellow

Holding

Fellow

company

subsidiaries

Total

company

subsidiaries

Total

£m

Assets

Trading assets

252

397

649

542

224

766

Loans to banks

amortised cost

—

612

—

624

Loans to customers - amortised cost

113

119

112

130

Other assets

—

Amounts due from holding company and fe

llow

subsidiaries

365

1,114

1,479

654

933

1,587

Derivatives

(1)

407

529

936

594

774

1,368

Liabilities

Bank deposits

amortised cost

—

120

—

145

Customer deposits - amortised cos

—

155

—

144

Trading liabilities

—

348

—

636

Other financial liabilities - subo

rdinated liabilities

1,464

—

1,464

1,753

—

1,753

MREL instruments issued to NatWest Grou

p plc

3,858

—

3,858

5,181

—

5,181

Other liabilities

—

181

—

275

Amounts due to holding company and fellow subsi

diaries

5,322

804

6,126

6,934

1,200

8,134

Derivatives

(1)

658

339

997

1,120

425

1,545

(1)

Intercompany derivatives are included within d

erivative classification on the balance sheet.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

128

9 Financial instruments - classification continued

The following tables show the bank’s fin

ancial assets and financial liabilities in accordance wi

th the categories of financial

instruments in IFRS 9.

NWM Plc

Amortised

Other

MFVTPL

FVO

cost

assets

Total

£m

Assets

Cash and balances at central banks

12,294

Trading assets

41,222

Derivatives

(1)

103,042

Settlement balances

795

Loans to banks - amortised cost

(2)

712

Loans to customers - amortised cost

6,810

Amounts due from holding company and fe

llow subsidiaries

2,965

3,646

112

6,723

Other financial assets

4,650

3,014

7,743

Investment in group undertakings

2,481

Other assets

732

31 December 2021

147,308

4,650

27,271

3,325

182,554

Cash and balances at central banks

11,736

Trading assets

52,169

Derivatives

(1)

164,104

Settlement balances

1,084

Loans to banks - amortised cost

(2)

701

Loans to customers - amortised cost

7,477

Amounts due from holding company and fe

llow subsidiaries

3,459

3,970

177

7,606

Other financial assets

161

5,347

2,535

8,043

Investment in group undertakings

2,600

Other assets

562

31 December 2020

219,893

5,347

27,503

3,339

256,082

NWM Plc

Held

for

Amortised

Other

trading

DFV

cost

liabilities

Total

£m

Liabilities

Bank deposits

(3)

1,808

Customer deposits

1,510

Amounts due to holding company and fellow subsi

diaries

3,335

7,471

172

10,978

Settlement balances

1,028

Trading liabilities

47,119

Derivatives

(1)

95,096

Other financial liabilities

1,321

15,556

16,877

Other liabilities

774

789

31 December 2021

145,550

1,321

27,388

946

175,205

Bank deposits

(3)

1,762

Customer deposits

1,469

Amounts due to holding company and fellow subsi

diaries

5,375

10,393

421

16,189

Settlement balances

604

Trading liabilities

56,916

Derivatives

(1)

153,754

Other financial liabilities

1,792

13,578

15,370

Other liabilities

842

866

December 2020

216,045

1,792

27,830

1,263

246,930

(1)

Includes net hedging derivative assets of £132 million (2020 - £266

million) and net hedging derivative liabilities of £119 million (2020 - £107 million).

(2)

Includes items in the course of collection from other

banks of £23 million (2020 - £118 milli

on).

(3)

Includes items in the course of transmission to other banks

of £28 mill

ion (2020 - £11 million).

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

129

9 Financial instruments - classification continued

Amounts due from/to holding c

ompany and fellow subsidiaries are as below:

NWM Plc

2021

2020

Holding

Fellow

Holding

llow

company

subsidiaries

Subsidiaries

Total

company

subsidiaries

Subsidiaries

Total

£m

Assets

Trading assets

252

397

,316

2,965

542

224

2,693

3,459

Loans to banks - amortised cost

—

480

998

1,478

—

519

1,024

1,543

Loans to customers - amortised cost

—

1,121

1,126

—

1,487

1,492

Settlement balances

—

546

—

222

Other financial assets

—

496

—

713

Other assets

—

112

—

145

177

Amounts due from holding company and fe

llow subsidiaries

252

969

,502

6,723

542

780

6,284

7,606

Derivatives

(1)

407

529

,845

2,781

594

774

2,056

3,424

Liabilities

Bank deposits - amortised cost

—

119

170

—

132

240

372

Customer deposits - amortised cos

—

151

1,421

1,572

—

144

2,098

2,242

Trading liabilities

—

348

2,987

3,335

—

636

4,739

5,375

Settlement balances

—

397

—

830

Other financial liabilities - subo

rdinated liabilities

1,464

—

1,464

1,753

—

1,753

MREL instruments issued to NatWest Grou

p plc

3,858

—

3,858

5,181

—

5,181

Other liabilities

—

169

182

—

270

166

436

Amounts due to holding company and fellow subsi

diaries

5,322

787

,869

10,978

6,934

1,182

8,073

16,189

Derivatives

(1)

658

339

,240

3,237

1,120

425

2,782

4,327

(1)

Intercompany derivatives are included within d

erivative classification on the balance sheet.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

130

9 Financial instruments - classification continued

Interest rate benchmark reform

The NatWest Group IBOR programme su

ccessfully delivered the conversion of

the vast majority of the IBOR exposures

to risk free

rates (RFR) in advance of the ce

ssation date. This encompasses loans, deposits, capi

tal instruments and derivatives, which have

been converted using fallback provisions, switch p

rovisions or as part of market-wide con

version events in the case of deriv

atives

subject to clearing. These instruments will conver

t at the first repricing date post cess

ation.

The total amount of exposure for NWM G

roup at 31 December 2021 subject to above conver

sion provisions is £1,904 million

assets, £425 million of liabilities, £72

6 million of loan commitments and £460.8 billion of derivative notionals. T

he exposure for NWM

Plc at 31 December 2021 subject to above conversio

n provisions is £1,91

2 million of assets, £916 million of liabilities, £720

million of

loan commitments and £456.4 billion of deri

vative notionals.

Despite the significant conversion le

vels achieved, certain instruments

remain in discussion with customers

and counterparties to

achieve consensual conversion.

If consensual conversion is not achieved thes

e instruments will default to synthetic LIBOR in li

with relevant legislation.

The level of exposures without explicit o

r agreed conversion provisions as of 31

December 2021 is as follows:

NWM Group

Rates subject t

o IBOR reform

GBP LIBOR

USD IBOR (1

)

Other

IBOR

Total

2021

£m

Trading assets

—

152

Loans to banks - amortised cost

—

Loans to customers - amortised cost

1,390

—

1,426

Other financial assets

120

730

—

850

Bank deposits

—

Customer deposits

—

Trading liabilities

166

—

197

Other financial liabilities

—

Subordinated liabilities

—

Amounts due to holding company and fellow subsi

diaries

—

2,700

—

2,700

Loan commitments

(3)

133

1,506

—

1,639

Derivatives notional (£bn)

3.6

1,141.0

—

1,144.6

For the notes to this table refer to page 132

At 31 December 2021 NWM Group held certain cu

rrency swaps with both legs subject to IBO

R r

eform, for which only the

GBP

LIBOR leg has an explicit or agreed conve

rsion provisions as of 31 Dece

mber 2021, but not the entire contract. These include

currency swaps of GBP LIBOR of £8

.4 billion, USD IBOR £7.9 billion and Other IBOR £0

.5 billion; currency swaps of USD IBOR of

£117.1 billion, GBP LIBOR £91.9

billion and Other IBOR £25.2 billion; currency s

waps of EUR LIBOR of £0.1

billion and GBP LIBOR

£0.1 billion; currency swaps of O

ther IBOR of £0.4 billion and USD IBOR £0.4 billion.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

131

9 Financial instruments - classification continued

NWM Group

Rates subject to IBOR reform

GBP LIBOR

USD IBOR (1)

EURIBOR (2)

Other IBOR

Total

2020

£m

Trading assets

348

484

Loans to banks - amortised cost

—

Loans to customers - amortised cost

1,017

1,266

566

2,855

Other financial assets

1,504

266

304

—

2,074

Bank deposits

—

367

—

107

474

Customer deposits

—

Trading liabilities

414

269

739

Other financial liabilities

—

361

314

763

Subordinated liabilities

—

268

—

268

Amounts due to holding company and fellow subsi

diaries

—

3,890

2,823

—

6,713

Loan commitments

(3)

1,163

1,811

5,253

—

8,227

Derivatives notional (£bn)

1,309.0

1,359.9

2,345.3

288.9

5,303.1

For the notes to this table refer to page 132

At 31 December 2020 NWM Group held currency swa

ps with corresponding legs subject

to IBOR reform of GBP LIBOR of £5.2

billion, USD IBOR £2.0 billion, EURIBO

R £2.9 billion and Other IBO

R £0.3 billion. Currency swaps of USD IBOR of £23

1.7 billion, GBP

LIBOR £98.5 billion, EURIBOR £

85.8 billion and Other IBOR £47.4

billion. Currency swaps of EURIBOR of £

5.1 billion with GBP

LIBOR £2.3 billion, USD IBOR £1.8

billion and Other IBOR £1.0 billion. Currency swaps of

Other IBOR of £2.2 billion,

EURIBOR £0.7

billion, USD IBOR £1.2 billion and Other IBO

R £0.3 billion.

Additionally, NWM Group held

basis swaps for GBP LIBOR of £97 billion, USD IBO

R of £81 billion, EURIBOR of £49 billion and Other

IBOR of £10 billion.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

132

9 Financial instruments - classification continued

NWM Plc

Rates subject t

o IBOR reform

GBP LIBOR

USD IBOR (1

)

Other IBOR

Total

2021

£m

Trading assets

—

149

Loans to banks - amortised cost

—

Loans to customers - amortised cost

1,287

—

1,323

Other financial assets

120

730

—

850

Amounts due from holding company and fe

llow subsidiaries

—

Bank deposits

—

Customer deposits

—

Trading liabilities

166

—

197

Other financial liabilities

—

Subordinated liabilities

—

Amounts due to holding company and fellow subsi

diaries

—

2,700

—

2,700

Loan commitments

(3)

1,448

—

1,476

Derivatives notional (£bn)

3.5

1,140.9

—

1,144.4

At 31 December 2021 NWM Plc held certain cu

rrency swaps with both legs subject to IBO

R reform, for which only the GBP LIB

leg has an explicit or agreed conversion

provisions as of 31 December 2021, but not t

he entire contract. These include cur

rency

swaps of GBP LIBOR of £8.6 billion, US

D IBOR of £8.0 billion and Other IBOR of £0.6 billion; c

urrency swaps of USD IBOR of

£117.2

billion, GBP LIBOR of £91.9 billion and Other

IBOR of £25.3 billion; currency swaps of

EURIBOR of £0.2 billion with GBP LIBO

R of

£0.2 billion; currency swaps of O

ther IBOR of £0.3 billion with USD IBOR of £0.3 billion.

NWM Plc

Rates subject to IBOR reform

GBP LIBOR

USD IBOR (1)

EURIBOR (2)

Other IBOR

Total

2020

£m

Trading assets

348

482

Loans to banks - amortised cost

—

Loans to customers - amortised cost

903

1,130

185

—

2,218

Other financial assets

1,504

266

254

—

2,024

Amounts due from holding company and fe

llow subsidiaries

—

1,107

477

1,584

Bank deposits

—

367

—

107

474

Customer deposits

—

Trading liabilities

409

269

733

Other financial liabilities

—

361

314

763

Subordinated liabilities

—

268

—

268

Amounts due to holding company and fellow subsi

diaries

499

3,890

2,823

528

7,740

Loan commitments

(3)

1,071

1,690

469

—

3,230

Derivatives notional (£bn)

1,035.0

1,359.2

1,707.9

195.8

4,297.9

(1)

In 2021 the FCA declared that USD IBOR will be n

on-representative post 30 June 2023; at the time of publishing NWM Plc’s Annual Report & Accounts, this date was expected to

be 31 December 2021.

(2)

In 2021 management concluded that EU

IBOR is not expected to be significantly reformed further and therefore any uncertainty due to interest benchmark rate reform for

EURIBOR has ended. 31 December 2020 data includes

EURIBOR exposure as subject to reform.

(3)

Certain loan commitments are multi-currency facilities. Wh

ere 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 a

lloc

ated to the currency with the larg

est drawn amount.

At 31 December 2020 NWM Plc held currency s

waps with corresponding legs subjec

t to IBOR reform of GBP LIBOR of £5.2 bi

llion,

USD IBOR of £2.0 billion, EURIBOR of £

2.9 billion and Other IBOR of £0.3 billion. Currency sw

aps of USD IBOR of £231.9 billion,

GBP LIBOR of £98.6 billion, EURIBOR of £

85.8 billion and Other IBOR of £47

.4 billion. Currency swaps of EURIBOR of

£5.1 billion

and GBP LIBOR of £2.3 billion, USD IBOR of £1.8

billion and Other IBOR of £1

billion. Currency swaps of Other IBOR of £2

.2 billion,

EURIBOR of £0.7 billion, USD IBOR of £

1.2 billion and Other IBOR of £0.3 billon.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

133

9 Financial instruments - classification continued

Additionally, NWM Plc held basis

swaps for GBP LIBOR of £79.3 billion, USD IBOR of £8

0.6 billion, EURIBOR of £39.2

billion and

Other IBOR of £9.7 billion.

AT1 Issuances

NWM Plc has issued certain capital instruments (AT

1) under which reset clauses are linked

to IBOR rates subject to refor

m. Where

under the contractual terms of the inst

rument the coupon subject to IBOR rates and are sho

wn in Note 21. As part of its capital

management activities NWM Plc has acquired

an equity instrument ($250 million EURIBOR) issu

ed by its subsidiary. EURIBOR has

been reformed however this instru

ment has been reported within the scope of

the IBOR reform in 2020 in invest

ment in group

undertakings.

Financial instruments – financial assets and liabiliti

es that can be o

ffset

The tables below present information on financi

al assets and liabilities that are offse

t on the balance sheet under IFRS or subject to

enforceable master netting agre

ements together with financial collateral

received or given.

NWM Group

Instruments which

can be offset

Potential to

offset not recognised by IFRS

Net amount

after the

Effect of

effect of

master

netting

Instruments

netting

agreements and

outside

IFRS

Balance

and similar

Cash

and related

netting

Balance

Gross

offset

sheet

agreements

collatera

Sec

urities

collateral

agreements

sheet total

2021

£m

Derivative assets

104,691

—

104,691

(84,226)

(15,282)

(2,428)

2,755

859

105,550

Derivative liabilities

97,733

—

97,733

(84,226)

(10,304)

(1,070)

2,133

764

98,497

Net position

6,958

—

6,958

—

(4,978)

(1,358)

622

7,053

Trading reverse repos

44,529

(24,422)

20,107

(900)

—

(19,136)

635

20,742

Trading repos

42,664

(24,422)

18,242

(900)

—

(17,341)

1,147

19,389

Net position

1,865

—

1,865

—

(1,795)

(512)

1,353

Non trading reverse repos

332

—

332

—

(331)

347

Non trading repos

522

—

522

—

(522)

—

522

Net position

(190)

—

(190)

—

191

(175)

2020

Derivative assets

164,766

—

164,766

(

135,711)

(20,174

)

(5,053)

3,828

853

165,619

Derivative liabilities

156,754

—

156,754

(

135,711)

(15,523

)

(2,487)

3,033

578

157,332

Net position

8,012

—

8,012

—

(4,651

)

(2,566)

795

275

8,287

Trading reverse repos

43,907

(24,866)

19,041

(929)

—

(18,039)

363

19,404

Trading repos

42,202

(24,866)

17,336

(929)

—

(16,407)

—

1,700

19,036

Net position

1,705

—

1,705

—

(1,632)

(1,337)

368

Non trading reverse repos

1,899

—

1,899

—

(1,899)

—

1,899

Non trading repos

200

—

200

—

(200)

—

200

Net position

1,699

—

1,699

—

(1,699)

—

1,699

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

134

9 Financial instruments - classification continued

NWM Plc

Instruments which

can be offset

Potential to

offset not recognised by IFRS

Net amount

after the

Effect of

effect of

master

netting

Instruments

netting

agreements and

outside

IFRS

Balance

and

similar

Cash

and related

netting

Balance

Gross

offset

sheet

reements

collateral

Securities

llateral

agreements

sheet total

2021

£m

Derivative assets

106,616

(4,361)

102,255

(83,716)

(14,121)

(1,979)

2,439

787

103,042

Derivative liabilities

100,191

(5,751)

94,440

(83,716)

(

8,069)

(764)

1,891

656

95,096

Net position

(1)

6,425

1,390

7,815

—

(6,052)

(1,215)

548

131

7,946

Trading reverse repos

21,970

(13,071)

8,899

(580)

—

(8,319)

—

347

9,246

Trading repos

16,865

(13,071)

3,794

(580)

—

(3,214)

—

1,146

4,940

Net position

5,105

—

5,105

—

(5,105)

—

(799)

4,306

Non trading reverse repos

332

—

332

—

(331)

347

Non trading repos

522

—

522

—

(522)

—

522

Net position

(190)

—

(190)

—

191

(175)

2020

Derivative assets

167,067

(3,801)

163,266

(135,490)

(19,291)

(5,003)

3,482

838

164,104

Derivative liabilities

159,329

(6,186)

153,143

(135,490)

(13,284)

(1,641)

2,728

611

153,754

Net position

(1)

7,738

2,385

10,123

—

(6,007

)

(3,362)

754

227

10,350

Trading reverse repos

24,951

(13,972)

10,979

(604)

—

(

10,373)

11,071

Trading repos

18,200

(13,972)

,228

(604)

—

(3,624)

—

1,700

5,928

Net position

6,751

—

6,751

—

(6,749)

(1,608)

5,143

Non trading reverse repos

1,898

—

1,898

—

(1,898)

—

1,898

Non trading repos

200

—

200

—

(200)

—

200

Net position

1,698

—

1,698

—

(1,698)

—

1,698

(1)

The net IFRS offset balance of £1,390 million (2020 - £2,385 million) relates t

o variation margin netting reflected on other balance sheet lines.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

135

10 Financial instruments - valuation

Critical accounting policy: Fair val

ue - financial

instruments

Financial instruments classified as mand

atory fair value

through profit or loss; held-for-trading; des

ignated fair value

through profit or loss and fair v

alue through other

comprehensive income are rec

ognised in the financial

statements at fair value. All derivatives are

measured at fair

value.

Fair value is the price that would be received to sel

l an asset or

paid to transfer a liability in an orderly transaction

between

market participants at the mea

surement date. A fair value

measurement considers the characteris

tics of the asset or

liability and the assumptions that a market partici

pant would

consider when pricing the asse

t or liability.

NWM Group manages some portfolios of fin

ancial assets and

financial liabilities based on its net exposu

re to either market or

credit risk. In these cases, the fair value is

derived from the net

risk exposure of that portfolio with por

tfolio level adjustments

applied to incorporate bid-offer s

preads, counterparty credit

risk, and funding costs (see ‘Valuation Adjust

ments’).

Where the market for a financial instrumen

t is not active, fair

value is established using a valuation technique. These

valuation techniques involve a degree of estim

ation, the extent

of which depends on the instrument’s co

mplexity and the

availability of market-based data. The complexity and

uncertainty in the financial instrumen

t’s fair value is

categorised using the fair value hierarchy.

For accounting policy information se

e Accounting policies notes

8 and 14.

Page

Financial instrument

Critical accounting policy: Fair value

135

Valuation

Fair value hierarchy

(D)

136

Valuation techniques

(D)

Inputs to valuation models

(D)

136

Valuation control

(D)

137

Key areas of judgment

(D)

137

Tables of assets and liabilities split by fair value

hierarchy level

(T)

138

Valuation adjustments

Table of fair value adjustments made

(T)

140

Funding valuation adjustments (FVA)

(D)

140

Credit valuation adjustments

(CVA)

(D)

140

Bid-offer

(D)

Product and deal specific

(D)

140

Own credit

(D)

140

Level 3 additional information

Level 3 ranges of unobservable i

nputs

(D)

141

Table of level 3 instruments, valuation

techniques and inputs

(T)

141

Level 3 sensitivities

(D)

143

Alternative assumptions

(D)

143

Other considerations

(D)

143

Table of high and low range of fair value of

level 3 assets and liabilities

(T)

143

Movement in Level 3 assets and liabilities

over the reporting period

(D)

144

Table of the movement in level 3

assets and liabilities

144

Fair value of financial instruments me

asured

at amortised cost

Table showing the fair value

of financial instruments

measured at amortised cost on the balance s

heet

(T)

145

(D) = Descripti

ve; (T) = Table

Notes to the fin

ancial state

ments continue

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10 Financial instruments – valuation continued

Fair value hierarchy

Financial instruments carried at f

air 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 ca

nnot be made at a

global product level as a single product type c

an be in more

than one level. For example, a si

ngle name corporate credit

default swap could be in level 2 or level 3 dependi

ng on the

level of market activity for the re

ferenced entity

Level 1 – instruments valued usi

ng unadjusted quoted prices in

active and liquid markets, for id

entical financial instruments.

Examples include government bonds, listed e

quity shares and

certain exchange-traded derivatives.

Level 2 - instruments valued usi

ng valuation techniques that

have observable inputs. Observable inputs a

re those that are

readily available with limited adjus

tments required. Examples

include most government agency

securities, investment-grade

corporate bonds, certain mortgage products - includin

g CLOs,

most bank loans, repos and rev

erse repos, state and municipal

obligations, most notes issued, ce

rtain money market securities,

loan commitments and most OT

C derivatives.

Level 3 - instruments valued usi

ng a valuation technique where

at least one input which could have a significan

t effect on the

instrument’s valuation, is not base

d on observable market data.

Examples include non-derivativ

e instruments which trade

infrequently, certain syndicated and comme

rcial mortgage

loans, private equity, and derivatives with unobserv

able model

inputs.

Valuation techniques

NWM Group derives the fair value of

its instruments differently

depending on whether the instrument is a non-mo

delled or a

modelled product.

Non-modelled products

are valued directly from a price input,

typically on a position-by-position basis. Examples inclu

equities and most debt securities

Non-modelled products can fall into any fair value levelling

hierarchy depending on the obs

ervable market activity,

liquidity, and assessment of val

uation 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 sectio

Modelled products

valued using a pricing model range in

complexity from comparatively

vanilla products such as interest

rate swaps and options (e.g. inte

rest rate caps and floors)

through to more complex derivatives (e.g. bal

ance guarantee

swaps).

For modelled products the fair value is derived using the

model

and the appropriate model inputs or

parameters, as opposed

from a cash price equivalent. M

odel inputs are taken either

directly or indirectly from available data, where so

me inputs

are also modelled.

Fair value classification of modelled instruments is eithe

r level 2

or level 3, depending on the product/

model combination, the

observability and quality of input paramete

rs and other factors.

All these must be assessed to c

lassify a position. The modelled

product is assigned to the lowest fair value hierarc

hy level of

any significant input used in that valuation.

Most derivative instruments, for

example vanilla interest rate

swaps, foreign exchange swaps and liquid single n

ame credit

derivatives, are classified as level 2

. This is because they are

vanilla products valued using standard m

arket models and with

observable inputs. Level 2 prod

ucts range from vanilla to more

complex products, where more complex pro

ducts remain

classified as level 2 due to the materiality of any un

observable

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, incorpor

ating both

funding and credit risk. Values between and beyond

available

data points are obtained by int

erpolation and extrapolation.

The principal inputs to these valuation techniques

are as

follows:

Bond prices - quoted prices are gene

rally available for

government bonds, certain corporate securities,

and some

mortgage-related products.

Credit spreads - these express the return require

d over a

benchmark rate or index to compensate for

the referenced

credit risk. Where available, thes

e are derived from the price of

credit default swaps or other cr

edit-based instruments, such as

debt securities. When direct price

s are not available; credit

spreads are determined with reference to available prices of

entities with similar characteris

tics.

Interest rates - these are principally based on in

terest rate

swap prices referencing benchmark interest rates. Be

nchmark

rates include Interbank Offered Rates (IBOR)

and the Overnight

Index Swap (OIS) rate, including SONIA (Sterlin

g Overnight

Interbank Average Rate). Other quoted interest

rates may also

be used from both the bond, and futures marke

ts.

Foreign currency exchange rates - there are obser

vable prices

both for spot and forward contracts and futures in

the world's

major currencies.

Equity and equity index prices - quoted prices a

re generally

readily available for equity share

s listed on the world's major

stock exchanges and for major indices on such sha

res.

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 va

riables are observed

to move together. Variables that move in the s

ame direction

show positive correlation; those that m

ove in opposite

directions are negatively correl

ated.

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 diff

ers from that of an

instrument that cannot be prepaid. When valui

ng prepayable

instruments, the value of this pre

payment option is considered.

Recovery rates/loss given defa

ult - these are used as an input

to valuation models and reserv

es for asset-backed securities

and other credit products as an indicator of se

verity of losses

on default. Recovery rates are prima

rily sourced from market

data providers, the value of the underlying collate

ral, or

inferred from observable credit spreads.

Notes to the fin

ancial state

ments continue

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10 Financial instruments – valuation continued

Valuation control

NWM Group's control environment for the dete

rmination of the

fair value of financial instruments includes for

malised

procedures for the review and validation of fair values. T

his

review is performed by an independent

price verification (IPV)

team.

IPV is a key element of the control envi

ronment. Valuations are

first performed by the business which entered in

to the

transaction. These valuations are then reviewed by

the IPV

team, independent of those trading the financi

al instruments, in

light of available pricing evidence

Independent pricing data is collated from a range of sou

rces.

Each source is reviewed for quality and the independen

t data

applied in the IPV processes using a formalise

d input quality

hierarchy. Consensus services are one sou

rce of independent

data and encompass interest rate, currency, credi

t, 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 exce

eds defined

thresholds, an adjustment is made to bring the valu

ation to

within the independently calcul

ated fair value range.

IPV takes place at least monthly, for all fair value f

inancial

instruments. The IPV control inclu

des 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 liquidi

ty and

valuation uncertainty of an inst

rument and forms part of the

information considered when de

termining fair value hierarchy

classifications.

Initial fair value level classification of a fin

ancial instrument is

carried out by the IPV team. These

initial classifications are

subject to senior management review. P

articular attention is

paid to instruments transferring fro

m one level to another, new

instrument classes or products,

instruments where the

transaction price is significantly diff

erent from the fair value

and instruments where valuation uncertain

ty is high.

Valuation Committees are made u

p of valuation specialists and

senior business representatives f

rom various functions and

oversee pricing, reserving and valuations issues. T

hese

committees meet monthly to review an

d ratify any

methodology changes. The Executive Valuation Com

mittee

meets quarterly to address key material an

d subjective

valuation issues, to review items

escalated by Valuation

Committees and to discuss other relevant indust

ry matters.

The Group model risk policy se

ts the policy for model

documentation, testing and review. Governa

nce 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 Ris

Policy.

Key areas of judgment

Over the years the business ha

s simplified, with most products

classified as level 1 or 2 of the fair value hier

archy. However,

the diverse range of products h

istorically traded by NWM

Group means some products remain classifi

ed as level 3. Level

3 indicates a significant level of

pricing uncertainty, where

expert judgment is used. As su

ch, 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 judgmen

t 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 v

olumes of

trading can be seen, but for an over the counte

r (OTC)

derivative, assessing the liquidity of

the market with no central

exchange is more challenging.

A key related matter is where a market moves fr

om liquid to

illiquid or vice versa. Where this movement is conside

temporary, the fair value level is

not changed. For example, if

there is little market trading in a product on a repo

rting date

but at the previous reporting date and during the in

tervening

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 transfe

rs between levels

are driven by genuine changes

in market liquidity and do not

reflect short term or seasonal e

ffects. Material movements

between levels are reviewed quarterly by the B

usiness and IPV.

The breadth and depth of the IPV data allows fo

r a rules-based

quality assessment to be made of

market activity, liquidity, and

pricing uncertainty, which assists with the process of alloc

ation

to an appropriate level. Where s

uitable independent pricing

information is not readily available, the quality assess

ment will

result in the instrument being ass

essed as level 3.

Notes to the fin

ancial state

ments continue

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10 Financial instruments – valuation continued

The table below shows the asse

ts and liabilities held by NWM Group split by fair value hier

archy level. Le

vel 1 are considered the

most liquid instruments, and level 3

the most illiquid, valued using expert judgmen

t and hence carry the most significant price

uncertainty.

NWM Group

2021

2020

Level 1

Level 2

Level 3

otal

Level 1

Level 2

evel 3

Total

£m

Assets

Trading assets

Loans

—

33,425

721

34,146

—

39,249

225

39,474

Securities

19,563

5,371

24,955

21,535

7,599

29,215

Derivatives

—

104,484

1,066

105,550

—

164,296

1,323

165,619

Amounts due from holding company

and fellow subsidiaries

—

649

—

649

—

766

—

766

Other financial assets

Loans

—

118

137

—

Securities

4,507

988

5,533

5,107

1,247

6,374

Total financial assets held at fair value

24,070

144,936

1,964

170,970

26,642

213,178

1,720

241,540

As a % of total fair value assets

14%

85%

11%

88%

Liabilities

Amounts due to holding company and

fellow subsidiaries

—

348

—

348

—

636

—

636

Trading liabilities

Deposits

—

38,542

38,544

—

44,058

44,065

Debt securities in issue

—

974

—

974

—

1,408

—

1,408

Short positions

20,508

4,455

24,964

19,045

7,734

—

26,779

Derivatives

—

97,883

614

98,497

—

156,384

948

157,332

Other financial liabilities

Deposits

—

568

—

568

—

796

—

796

Debt securities in issue

—

1,103

—

1,103

—

1,607

—

1,607

Subordinated liabilities

—

703

—

703

—

793

—

793

Total financial liabilities held at fair value

20,508

144,576

617

165,701

19,045

213,416

955

233,416

As a % of total fair value liabilities

12%

88%

92%

Notes to the fin

ancial state

ments continue

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10 Financial instruments – valuation continued

NWM Plc

2021

2020

Level 1

Level 2

Level 3

otal

Level 1

Level 2

evel 3

Total

£m

Assets

Trading assets

Loans

—

19,115

652

19,767

—

27,749

208

27,957

Securities

16,272

5,165

21,455

16,640

7,494

24,212

Derivatives

—

102,052

990

103,042

—

162,878

1,226

164,104

Amounts due from holding company

and fellow subsidiaries

—

2,965

—

2,965

—

3,459

—

3,459

Other financial assets

Loans

—

118

137

—

Securities

3,942

614

4,592

4,709

694

5,416

Total financial assets held at fair value

20,214

129,930

1,814

151,958

21,349

202,295

1,596

225,240

As a % of total fair value assets

13%

86%

90%

Liabilities

Amounts due to holding company and

fellow subsidiaries

—

3,335

—

3,335

—

5,375

—

5,375

Trading liabilities

Deposits

—

22,856

22,858

—

29,988

29,995

Debt securities in issue

—

974

—

974

—

1,408

—

1,408

Short positions

18,908

4,378

23,287

17,955

7,558

—

25,513

Derivatives

—

94,513

583

95,096

—

152,839

915

153,754

Other financial liabilities

Deposits

—

Debt securities in issue

—

875

—

875

—

1,372

—

1,372

Subordinated liabilities

—

371

—

371

—

420

—

420

Total financial liabilities held at fair value

18,908

127,377

586

146,871

17,955

198,960

922

217,837

As a % of total fair value liabilities

13%

87%

92%

(1)

Transfers between levels are deemed to have occurred at t

he beginning of the quarter in which the instrument was transferred.

(2)

For an analysis of debt securities held at mandatory fair value through prof

it or loss by issuer as well as ratings and derivatives, by type and contract, refer to Risk and capital

management – Credit risk.

Notes to the fin

ancial state

ments continue

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10 Financial instruments – valuation continued

Valuation adjustments

When valuing financial instruments in the tradin

g book,

adjustments are made to mid-market valua

tions to cover bid-

offer spread, funding and credit risk. These adjust

ments are

presented in the table below:

NWM Group

2021

£m

2020

£m

Funding

–

FVA

121

Credit

–

CVA

389

388

Bid

–

Offer

122

Product and deal specific

120

172

649

803

NWM Plc

2021

£m

2020

£m

Funding

–

FVA

140

Credit

–

CVA

283

275

Bid

–

Offer

118

Product and deal specific

120

172

557

705

There was a reallocation of FVA to CVA during

the period

following an update to the risk manageme

nt of certain

exposures. The net decrease across CVA an

d FVA was driven

by reduced exposures, due to increases in interest

rates and

trade exit activity. The reduction in bid-off

er and product deal

specific reserves followed reduced risk due to trade exi

t activity

and LIBOR cessation.

Funding valuation adjustments (FVA)

FVA represents an estimate of the adjustmen

t that a market

participant would make to incorporate funding cos

ts and

benefits that arise in relation to derivative exposures. FVA is

calculated as a portfolio level adjustment and can result i

either a funding charge (positive) or funding benefit (

negative).

Funding levels are applied to estimated poten

tial future

exposures. For uncollateralised derivatives, the e

xposure

reflects the future valuation of the deriv

ative. For collateralised

derivatives, the exposure reflects the difference bet

ween the

future valuation of the derivativ

e 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 manage

d by a credit and

market risk hedging process, and the

refore movements in CVA

are partially offset by trading revenue

on the hedges.

The CVA is calculated on a portfolio basis refle

cting an

estimate of the amount a third party would cha

rge to assume

the credit risk.

Collateral held under a credit support agreemen

t is factored

into the CVA calculation. In such cases

where NWM Group

holds collateral against counterparty exposu

res, CVA is held to

the extent that residual risk remains.

Bid-offer

Fair value positions are required to be marked to e

xit,

represented by bid (long positions) or offer (short pos

itions)

levels. Non-derivative positions

are typically marked directly to

bid or offer prices. However de

rivative exposures are adjusted

to exit levels by taking bid-offer

reserves calculated on a

portfolio basis. The bid-offer approach is b

ased on current

market spreads and standard market bucketing of

risk.

Bid-offer spreads vary by maturity and risk type to ref

lect

different spreads in the market.

For positions where there is no

observable quote, the bid-offer spreads are wi

dened in

comparison to proxies to reflect reduced li

quidity or

observability.

Netting is applied on a portfolio basis to refle

ct the value at

which NWM 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 i

s applied where the asset and

liability positions are managed as a portfolio for risk an

reporting purposes.

Product and deal specific

On initial recognition of financial assets and lia

bilities valued

using valuation techniques which have

a significant

dependence on information othe

r 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 ove

r the life of the

transaction; when market data becomes observable; o

r when

the transaction matures or is close

d out as appropriate. On 31

December 2021, net gains of £7

1 million (2020 - £63 million)

were carried forward. During the y

ear, net gains of £103 million

(2020 - £75 million) were deferr

ed and £94 million (2020 - £100

million) were recognised in the i

ncome statement.

Where system generated valuations do not accur

ately recover

market prices, manual valuation adjustmen

ts are applied either

at a position or portfolio level. Manual adjustmen

ts are subject

to the scrutiny of independent c

ontrol teams and are subject to

monthly review by senior management.

Own Credit

NWM Group considers the effec

t of its own credit standing

when valuing financial liabilities recorded a

t fair value. Own

credit spread adjustments are made when valuing issued deb

held at fair value, including issue

d structured notes. An own

credit adjustment is applied to positions where it is

believed

that counterparties would consi

der NWM Group’s

creditworthiness when pricing trades.

Notes to the fin

ancial state

ments continue

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10 Financial instruments – valuation continued

Level 3 additional information

For illiquid assets and liabilities, classifie

d as level 3, additional information is provide

d on the valuation techniques used a

nd price

sensitivity of the products to those inputs. This is to en

able the reader to gauge the level of un

certainty that arises from positions

with significant unobservable in

puts or modelling parameters.

Level 3 ranges of unobservable inputs

The table below provides additional information on level 3 ins

ruments and inputs. This shows the valuation techni

que used for the

fair value calculation, the unob

servable input or inputs and input range.

NWM Group

2021

2020

Financial instrument

Valuation technique

Unobservable

inputs

Units

Low

High

Low

High

Trading assets and Other financi

al assets

Loans

Price-based

Price

—

106

—

105

Discount cash flow

Credit spreads

bps

102

119

Discount cash flow

Discount margin

bps

Debt securities

Price-based

Price

—

240

—

232

Equity Shares

Price-based

Price

GBP

—

30,378

—

27,737

Price

—

112

Net asset valuation

Fund NAV

120

Derivative assets and liabilities

Credit derivatives

Credit d

erivative pricing

Credit spreads

bps

635

500

Option pricing

Correlation

(

15)

(50)

Volatility

108

Upfront points

—

100

—

100

Recovery rate

—

Interest rate & FX

Option pricin

Correlation

(50)

100

(50)

100

derivatives

Volatility

Constant

prepayment rate

Mean reversion

—

Basis volatility

bps

Inflation volatility

Inflation rate

Equity derivatives

Option pricing

Correlation

—

(53)

(1)

Valuation: for private equity investments, values may b

e estimated by looking at past prices of similar stocks and from valuation statements where valuations are usually derived

from earnings measures such as EBITDA or net asset value (NAV). Similarly for equity or b

ond fund investments, prices may be estimated from valuation or credit statements using

NAV or similar measures.

(2)

NWM Group does not have any material liabilities measured

at fair value that are issued with an inseparable third party credit enhancement.

Notes to the fin

ancial state

ments continue

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10 Financial instruments – valuation continued

NWM Plc

2021

2020

Financial instrument

Valuation technique

Unobservable

inputs

Units

Low

High

Low

High

Trading assets and Other financi

al assets

Loans

Price-based

Price

—

106

—

105

Discount cash flow

Credit spreads

bps

102

119

Discount cash flow

Discount margin

bps

Debt securities

Price-based

Price

—

240

—

232

Equity Shares

Price-based

Price

GBP

—

4,793

—

4,897

Price

—

Net asset valuation

Fund NAV

120

Derivative assets and

liabilities

Credit derivatives

Credit d

erivative pricing

Credit spreads

bps

635

500

Option pricing

Correlation

(15)

(95)

(50)

Volatility

108

Upfront points

—

100

—

100

Recovery rate

—

Interest rate & FX

Option pricin

Correlation

(50)

100

(50)

100

derivatives

Volatility

Constant

prepayment rate

Mean reversion

—

Basis volatility

bps

Inflation volatility

Inflation rate

Equity derivatives

Option pricing

Correlation

—

(53)

(1)

Valuation: for private equity investments, values may b

e estimated by looking at past prices of similar stocks and from valuation statements where valuations are usually derived

from earnings measures such as EBITDA or net asset value (NAV). Similarly for equity or b

ond fund investments, prices may be estimated from valuation or credit statements using

NAV or similar measures.

(2)

NWM Plc does not have any material liabilities measured at fair va

lue that are issued with an inseparable third party credit enhancement.

Notes to the fin

ancial state

ments continue

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10 Financial instruments – valuation continued

Level 3 sensitivities

The level 3 sensitivities presente

d below are calculated at a

trade or low-level portfolio basi

s rather than an overall portfolio

basis. As individual sensitivities

are aggregated with no

reflection of the correlated natu

re between instruments, the

overall portfolio sensitivity may not be

accurately reflected. For

example, some portfolios may be negatively cor

related to

others, where a downwards movement in one asse

t would

produce an upwards movement in another. However,

due to

the additive presentation of the above figures this co

rrelation

impact cannot be displayed. As such, the actual poten

tial

downside sensitivity of the total portfolio may be le

ss 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 specif

ied target level of

certainty of 90%.

Alternative assumptions are determined wi

th reference to all

available evidence including consideration of the followin

quality of independent pricing information conside

ring

consistency between different s

ources, 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 holdin

g of position;

and market intelligence.

Other considerations

Whilst certain inputs used to ca

lculate CVA, FVA and own

credit adjustments are not base

d on observable market data,

the uncertainty of these inputs i

s not considered to have a

significant effect on the net valuation of the

related derivative

portfolios and issued debt.

As such, the fair value levelling of the derivative po

rtfolios and

issued debt is not determined by

CVA, FVA or own credit

inputs. In addition, any fair value s

ensitivity driven by these

inputs is not included in the level 3 s

ensitivities presented.

The table below shows the high and low

range of fair value of the level 3 assets an

d liabilities. This range incorporates the range of

fair value inputs as described in the p

revious table.

NWM Group

2021

2020

Level 3

Favourab

Unf

avourable

Level 3

Favourable

Unfavourable

£m

Assets

Trading assets

Loans

721

(10)

225

—

Securities

—

Derivatives

1,066

(110)

1,323

120

(100)

Other financial assets

Loans

118

(10)

Securities

—

1,964

110

(130)

1,720

140

(110)

Liabilities

Trading liabilities

Deposits

—

Short positions

—

Derivatives

614

(30)

948

(40)

Other financial liabilities - debt sec

urities in issue

—

617

(30)

955

(40)

NWM

Plc

2021

2020

Level 3

Favourab

Unf

avourable

Level 3

Favourable

Unfavourable

£m

Assets

Trading assets

Loans

652

(10)

208

—

Securities

—

Derivatives

990

(110)

1,226

100

(90)

Other financial assets

Loans

118

(10)

Securities

—

1,814

100

(130)

1,596

120

(100)

Liabilities

Trading liabilities

Deposits

—

Short positions

—

Derivatives

583

(30)

915

(40)

Other financial liabilities - debt sec

urities in issue

—

586

(30)

922

(40)

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

144

10 Financial instruments – valuation continued

Movement in Level 3 assets and liabilities over the re

porting period

The following table shows the movement in level 3 asse

ts and liabilities in the year.

NWM Group

2021

2020

Trading

Other finan

cial

Total

otal

Trad

ingOther financial

Total

Tot

assets (2)

assets (3)

assets

liabilities

assets (2)

assets (3)

assets

liabilities

£m

At 1 January

1,629

1,720

955

2,415

2,503

1,389

Amounts recorded in the income

statement

(1)

(184)

(28)

(212)

(

117)

192

(14)

178

(68)

Amounts recorded in the statement of co

mprehensive

income

—

Level 3 transfers in

125

—

125

165

—

165

188

Level 3 transfers out

(104)

—

(104)

(168)

(139)

(3)

(142)

(

368)

Purchases/originations

(4)

966

449

1,415

305

441

259

700

128

Settlements/other decreases

(48)

(363)

(411)

(28)

(293)

(153)

(446)

(59)

Sales

(574)

(4)

(578)

(

347)

(1,154)

(88)

(1,242)

(256)

Foreign exchange and other

(2)

—

(2)

(3)

—

At 31 December

1,808

156

1,964

617

1,629

1,720

955

Amounts recorded in the income

statement in respect

of balances held at year end:

- unrealised

(184)

(28)

(212)

(

117)

194

(15)

179

(69)

NWM Plc

2021

2020

Trading

Other finan

cial

Total

otal

Trad

ingOther financial

Total

Tot

assets (2)

assets (3)

assets

liabilities

assets (2)

assets (3)

assets

liabilities

£m

At 1 January

1,512

1,596

922

2,239

2,315

1,361

Amounts recorded in the income

statement

(1)

(189)

(23)

(212)

(

111)

257

(15)

242

(71)

Amounts recorded in the statement of co

mprehensive

income

—

Level 3 transfers in

119

—

119

165

—

165

187

Level 3 transfers out

(102)

—

(102)

(162)

(135)

—

(135)

(362)

Purchases/originations

(4)

912

412

1,324

280

365

106

471

115

Settlements/other decreases

(38)

(328)

(366)

(26)

(229)

—

(229)

(59)

Sales

(554)

(3)

(557)

(

337)

(1,150)

(88)

(1,238)

(248)

Foreign exchange and other

—

(1)

At 31 December

1,660

154

1,814

586

1,512

1,596

922

Amounts recorded in the income

statement in respect

of balances held at year end:

- unrealised

(189)

(23)

(212)

(

111)

257

(14)

243

(72)

(1)

For NWM Group, net losses on trading assets and liabilities of £67 million (2020

– £260 milli

on gains)

were recorded in income from trading activities. Net losses on other

instruments of £28 million (2020

- £14 million losses) were recorded in other operating income and interest income as appropriate. For NWM Plc, net

losses on trading assets and

liabilities of £78 million (2020

– £328 million gains) were recorded in income from trading activities. Net losses on other instruments of £

23 million (2020 - £15 million losses) were

recorded in other operating income and interest income as appropriate.

(2)

Trading assets comprise assets held at fair value in t

rading portfolios.

(3)

(4)

Other financial assets comprise fair value through ot

her

comprehensive income, designated as at fair value through profit or loss and other fa

ir value through profit or loss.

Movement in the period includes new loan originations classified as HT

C&S under IFRS 9 and fair valued through other comprehe

nsive income. 2021 purchases include a new

leveraged finance loan of £450 million. As a result of

its composition and illiquid nature, pricing is based on unobservable

inputs and the judgment of valuation experts.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

145

10 Financial instruments – valuation continued

Fair value of financial instruments measured at amortised cost on the balance sheet

The following table shows the carrying value an

d fair value of financial instrumen

ts measured at amortised cost on the b

alance

sheet:

NWM Group

NWM Plc

Items where

fair value

Fair value

fair value

Fair value

approximates

Carrying

Fair

hierarchy level

approximates

Carrying

Fair

hierarchy level

carrying value

value

Level 2

Level 3

carrying value

value

Level 2

Level 3

2021

£bn

Financial assets

Cash and balances at central banks

16.6

12.3

Settlement balances

2.1

0.8

Loans to banks

0.1

0.9

0.4

0.5

—

0.7

0.3

0.4

Loans to customers

7.5

0.4

7.1

6.8

0.3

6.5

Amounts due from holding company and

fellow subsidiaries

0.7

—

0.7

—

3.6

—

3.6

Other financial assets

securities

3.1

—

3.1

3.0

—

3.0

2020

Financial assets

Cash and balances at central banks

15.8

11.7

Settlement balances

2.3

1.1

Loans to banks

0.1

0.9

0.3

0.6

0.1

0.6

0.1

0.5

Loans to customers

8.4

1.9

6.5

7.5

7.4

1.9

5.5

Amounts due from holding company and

fellow subsidiaries

0.8

—

0.8

0.2

3.7

—

3.7

Other financial assets - securities

2.6

—

2.6

2.5

2.6

—

2.6

NWM Group

NWM Plc

Items where

fair value

Fair value

fair value

Fair value

approximates

Carrying

Fair

hierarchy level

approximates

Carrying

Fair

hierarchy level

carrying value

value

Level 2

Level 3

carrying value

value

Level 2

Level 3

2021

£bn

Financial liabilities

Bank deposits

1.8

—

1.8

—

1.8

Customer deposits

—

2.2

—

2.2

—

1.5

—

1.5

Amounts due to holding company and

fellow subsidiaries

—

5.6

5.7

5.4

0.3

0.1

7.4

7.5

5.4

2.1

Settlement balances

2.1

1.0

Other financial liabilities

Debt securities in issue

16.6

16.8

13.9

2.9

15.5

15.7

13.2

2.5

Subordinated liabilities

0.3

0.4

—

2020

Financial liabilities

Bank deposits

1.8

—

1.8

—

1.8

Customer deposits

0.1

2.5

2.6

—

2.6

—

1.5

1.4

—

1.4

Amounts due to holding company and

fellow subsidiaries

0.1

7.1

7.2

7.1

0.1

0.9

9.5

9.6

7.1

2.5

Settlement balances

2.2

0.6

Other financial liabilities

Debt

securities in issue

14.7

15.0

9.4

5.6

13.5

13.8

8.6

5.2

Subordinated liabilities

0.3

0.4

—

0.1

—

The assumptions and methodol

ogies underlying the calculation

of fair values of financial instru

ments at the balance sheet date

are as follows:

Short-term financial instruments

For certain short-term financial instruments: c

ash and balances

at central banks, items in the course of colle

ction from other

banks, settlement balances, items in the c

ourse of transmission

to other banks, customer dema

nd deposits and notes in

circulation, carrying value is de

emed a reasonable

approximation of fair value.

Loans to banks and customers

In estimating the fair value of net loans to custo

mers and banks

measured at amortised cost, NWM Group’s loans

are

segregated into appropriate portfolios

reflecting the

characteristics of the constituent loans. Two p

rincipal methods

are used to estimate fair value:

(a)

Contractual cash flows are discounted using a

market

discount rate that incorporates the cur

rent spread for the

borrower or where this is not obse

rvable, the spread for

borrowers of a similar credit standing. This met

hod is used

for portfolios where counterpar

ties have external ratings:

institutional and corporate lend

ing.

(b)

Expected cash flows (unadjusted for c

redit losses) are

discounted at the current offer rate for the same or simil

products.

Debt securities and subordinated liabili

ties

Most debt securities are valued

using quoted prices in active

markets or from quoted prices of similar financi

al instruments

in active markets. Fair values of the remaining po

pulation are

determined using market standard valu

ation techniques, such

as discounted cash flows, adjusting for own credi

t spreads

where appropriate.

Bank and customer deposits

Fair values of deposits are estima

ted using discounted cash

flow valuation techniques.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

146

11 Financial instruments - maturity analy

sis

Remaining maturity

The following table shows the r

esidual maturity of financial instruments, based on c

ontractual date of maturity:

NWM Group

2021

2020

Less than

More than

Total

Less than

More than

Total

12 months

£m

Assets

Cash and balances at central banks

16,645

—

16,645

15,771

—

15,771

Trading assets

40,206

18,895

59,101

41,736

26,953

68,689

Derivatives

34,423

71,127

105,550

46,232

119,387

165,619

Settlement balances

2,139

—

2,139

2,296

—

2,296

Loans to banks - amortised cost

714

248

962

891

112

1,003

Loans to customers

amortised cost

3,707

3,764

7,471

4,535

3,909

8,444

Amounts due from holding company and fe

llow subsidiaries

(1)

705

675

1,380

1,295

225

1,520

Other financial assets

3,848

4,938

8,786

3,152

5,889

9,041

Liabilities

Bank deposits

1,244

564

1,808

1,294

514

1,808

Customer deposits

2,161

107

2,268

2,526

2,618

Amounts due to holding company and fellow subsi

diaries

(2)

1,571

4,384

5,955

942

6,934

7,876

Settlement balances

2,068

—

2,068

2,248

—

2,248

Trading liabilities

41,548

22,934

64,482

45,033

27,219

72,252

Derivatives

34,606

63,891

98,497

47,138

110,194

157,332

Other financial liabilities

8,715

10,540

19,255

8,310

9,860

18,170

Lease liabilities

NWM Plc

2021

2020

Less than

More than

Less than

More than

12 months

Total

12 months

Total

£m

Assets

Cash and balances at central banks

12,294

—

12,294

11,736

—

11,736

Trading assets

22,355

18,867

41,222

29,985

22,184

52,169

Derivatives

34,259

68,783

103,042

46,739

117,365

164,104

Settlement balances

795

—

795

1,084

—

1,084

Loans to banks - amortised cost

464

248

712

589

112

701

Loans to customers

amortised cost

3,641

3,169

6,810

4,440

3,037

7,477

Amounts due from holding company and fe

llow subsidiaries

(1)

3,862

2,749

6,611

4,720

2,709

7,429

Other financial assets

3,092

4,651

7,743

2,632

5,411

8,043

Liabilities

Bank deposits

1,244

564

1,808

1,248

514

1,762

Customer deposits

1,448

1,510

1,406

1,469

Amounts due to holding company and fellow subsi

diaries

(2)

5,407

5,399

10,806

6,714

9,054

15,768

Settlement balances

1,028

—

1,028

604

—

604

Trading liabilities

24,204

22,915

47,119

30,794

26,122

56,916

Derivatives

34,547

60,549

95,096

47,670

106,084

153,754

Other financial liabilities

7,109

9,768

16,877

6,513

8,857

15,370

Lease liabilities

(1)

Amounts due from holding company and fellow subsidiaries relating to non-financial

instrum

ents of £9

9 million (2020 – £67 million) for NWM Group and £112 million (2020 - £177

million) for NWM Plc have been excluded f

rom the tables.

(2)

Amounts due to holding company and fellow subsidiaries relating t

o non-financial instruments of £171 millio

n (2020

- £258 million) for NWM Group and £172 million (2020 - £421

million) for NWM Plc have been excluded f

rom the tables.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

147

11 Financial instruments - maturity analy

sis

continued

Assets and liabilities by contractual cash flows up to 20

years

The tables below show the contractual undiscoun

ted cash flows

receivable and payable, up to a period of 20 y

ears, including

future receipts and payments of interest of financial

assets and

liabilities by contractual maturity. The

balances in the following

tables do not agree directly with the consolida

ted balance

sheet, as the tables include all cash flows rel

ating to principal

and future coupon payments, p

resented on an undiscounted

basis. The tables have been prepared on the f

ollowing basis:

Financial assets have been reflected in the time b

and of the

latest date on which they could be repaid, unless e

arlier

repayment can be demanded by NWM G

roup. Financial

liabilities are included at the earliest date on which

the

counterparty can require repay

ment, regardless of whether or

not such early repayment results in a pe

nalty. If repayment is

triggered by, or is subject to, specific

criteria such as market

price hurdles being reached, the asse

t is included in the time

band that contains the latest date on

which it can be repaid,

regardless of early repayment. The

liability is included in the

time band that contains the earlie

st possible date on which the

conditions could be fulfilled, without consi

dering the probability

of the conditions being met.

For example, if a s

tructured note

is automatically prepaid when an equity index excee

ds a

certain level, the cash outflow

will be included in the less than

three months’ period whatever the level of

the index at the

year end.

The settlement date of debt secu

rities in issue, issued by certain

securitisation vehicles consolid

ated by NWM Group depends on

when cash flows are received from the securitise

d assets.

Where these assets are prepayable, the timing of t

he cash

outflow relating to securities assumes that each

asset will be

prepaid at the earliest possible date. As t

he repayments of

assets and liabilities are linked,

the repayment of assets in

securitisations is shown on the

earliest date that the asset can

be prepaid, as this is the basis use

d for liabilities.

The principal amounts of financial liabilities th

at are repayable

after 20 years or where the counterparty has no righ

t to

repayment of the principal, are excluded from the ta

ble along

with interest payments after 20 years.

The maturity of guarantees and com

mitments is based on the

earliest possible date they would be drawn in o

rder to evaluate

NWM Group’s liquidity position.

MFVTPL assets of £165 billion (202

0 - £235 billion) for NWM

Group, £147 billion (2020 - £22

0 billion) for NWM Plc, HFT

liabilities of £163 billion (2020 - £23

0 billion) for NWM Group

and £145 billion (2020 - £216 billion) for NWM Plc

have been

excluded from the following tables.

NWM Group

3 months

months

3 years

5 years

10 years

20 years

2021

£m

Assets by contractual maturity up to 20 ye

ars

Cash and balances at central banks

16,645

—

Derivatives held for hedging

—

Settlement balances

2,139

—

Loans to banks - amortised cost

691

—

Loans to customers - amortised cost

1,689

2,094

2,830

660

327

Amounts due from holding company and fe

llow subsidiaries

(1)

459

100

Other financial assets

(2)

1,872

1,986

2,885

335

560

732

Finance lease

23,557

4,121

5,823

1,007

916

926

2021

Liabilities by contractual maturity up to 20 ye

ars

Bank deposits

825

421

566

—

Customer deposits

1,279

876

Amounts due to holding company and fellow subsi

diaries

(3)

1,057

166

3,743

—

195

—

Settlement balances

2,068

—

Derivatives held for hedging

—

Other financial liabilities

2,948

5,541

5,405

4,368

345

546

Lease

liabilities

—

8,181

7,024

9,855

4,472

559

565

Guarantees and commitments notional amoun

Guarantees

(4)

595

—

Commitments

(5)

9,921

—

10,516

—

For notes to the above table ref

er to page 149.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

148

11 Financial instruments - maturity analy

sis continued

NWM Group

0-3 months

3-12 months

3 years

3-5 years

5-10 years

10-

20 years

2020

£m

Assets by contractual maturity up to 20 ye

ars

Cash and

balances at central b

anks

15,771

—

Derivatives held for hedging

137

—

Settlement balances

2,296

—

Loans to banks - amortised cost

876

—

110

Loans to customers - amortised cost

1,476

3,139

2,541

872

262

126

Amounts due from holding company and fe

llow subsidiaries

(1)

528

Other financial assets

(2)

1,439

2,004

2,871

908

882

525

Finance lease

22,440

5,211

5,580

1,814

1,168

892

2020

Liabilities by contractual maturity up to 20 ye

ars

Bank deposits

458

819

498

—

Customer deposits

1,664

863

Amounts due to holding company and fellow subsi

diaries

(3)

103

204

5,181

889

204

—

Settlement balances

2,248

—

Derivatives held for hedging

—

(1)

—

Other financial liabilities

2,419

5,931

5,371

3,371

463

195

Other liabilities- notes in circulation

Lease liabilities

6,896

7,831

11,247

4,317

689

217

Guarantees and commitments notional amoun

Guarantees

(4)

638

—

Commitments

(5)

11,348

—

11,986

—

NWM Plc

0-3 months

3-12 months

1-3 years

3-5 years

5-10 years

10-20 years

2021

£m

Assets by contractual maturity up to 20 ye

ars

Cash and balances at central banks

12,294

—

Derivatives held for hedging

—

Settlement balances

795

—

Loans to banks - amortised cost

452

—

Loans to customers - amortised cost

1,630

2,087

2,478

454

323

Amounts due from holding company and fe

llow subsidiaries

(1)

1,396

1,327

549

222

Other financial assets

(2)

1,790

1,556

2,640

247

530

696

Finance lease

—

18,418

3,738

6,519

1,251

1,078

846

2021

Liabilities by contractual maturity up to 20 ye

ars

Bank deposits

825

421

566

—

Customer deposits

826

619

Amounts due to holding company and fellow subsi

diaries

(3)

2,367

197

4,047

—

416

—

Settlement balances

1,028

—

Derivatives held for hedging

—

Other financial liabilities

2,522

4,365

5,291

4,364

189

148

Lease liabilities

—

7,570

5,618

10,010

4,445

606

151

Guarantees and commitments notional

amount

Guarantees

(4)

197

—

Commitments

(5)

6,152

—

6,349

—

For notes to the above table ref

er to the following page.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

149

11 Financial instruments - maturity analy

sis continued

NWM Plc

0-3 months

3-12 months

1-3 years

5 years

5-10 years

-20 years

2020

£m

Assets by contractual maturity up to 20 ye

ars

Cash and balances at central banks

11,736

—

Derivatives held for hedging

137

—

Settlement balances

1,084

—

Loans to banks - amortised cost

574

—

110

Loans to customers - amortised cost

1,412

3,090

2,091

483

256

127

Amounts due from holding company and fe

llow subsidiaries

(1)

1,029

738

1,209

689

220

Other financial

assets

(2)

1,429

1,490

2,723

778

765

498

Finance lease

—

17,317

5,382

6,165

1,977

1,248

820

2020

Liabilities by contractual maturity up to 20 ye

ars

Bank deposits

456

775

498

—

Customer deposits

878

529

Amounts due to holding company and fellow subsi

diaries

(3)

1,67

365

6,379

889

427

—

Settlement balances

604

—

Derivatives held for hedging

—

(1)

—

Other financial liabilities

2,086

4,458

5,049

3,276

307

195

Lease liabilities

—

5,698

6,133

12,086

4,214

735

198

Guarantees and commitments notional amoun

Guarantees

(4)

195

—

Commitments

(5)

6,678

—

6,873

—

(1)

Amounts due from holding company and fellow subsidiaries relating to non-financial

instrum

ents have b

een excluded from the tables.

(2)

Other financial assets excludes equity shares.

(3)

Amounts due to holding company and fellow subsidiaries relating t

o non-financial instruments have been excluded from the tables.

(4)

NWM Group is only called upon to satisfy a guaran

tee when the guaranteed party fails to meet its obligations. NWM Group expects most guarantees it provides to exp

ire unused.

(5)

NWM Group has given commitments to provide funds t

o customers under undrawn formal facilities, credit lines and other commitments to lend subject to certain conditions being

met by the counterparty. NWM Group does not expect all facilities to be drawn, and some may laps

e before drawdown.

12 Trading assets and liabili

ties

Trading assets and liabilities comprise asse

ts and liabilities held at fair value in trading portfol

ios.

NWM Group

NWM Plc

2021

2020

2021

2020

Assets

£m

Loans

Reverse repos

20,742

19,404

9,246

11,071

Collateral given

11,990

18,459

9,332

15,389

Other loans

1,414

1,611

1,189

1,497

Total loans

34,146

39,474

19,767

27,957

Securities

Central and local government

- UK

6,919

4,184

6,919

4,184

3,329

5,149

145

498

- Other

10,929

16,436

10,929

16,390

Financial institutions and Cor

porate

3,778

3,446

3,462

3,140

Total securities

24,955

29,215

21,455

24,212

Total

59,101

68,689

41,222

52,169

Liabilities

Deposits

Repos

19,389

19,036

4,940

5,928

Collateral received

17,619

23,226

16,386

22,267

Other deposits

1,536

1,803

1,532

1,800

Total deposits

38,544

44,065

22,858

29,995

Debt securities in issue

974

1,408

974

1,408

Short positions

24,964

26,779

23,287

25,513

Total

64,482

72,252

47,119

56,916

For accounting policy information se

e Accounting policies note 8.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

150

13 Derivatives

NWM Group uses derivatives as part of its

trading activities or to manage its own risk such

as interest rate, foreign excha

nge, or

credit risk.

NWM Group

2021

2020

Notional

Assets

Liabilities

Notional

ssets

Liabilities

£bn

£m

£bn

£m

Exchange rate contracts

3,162

38,546

39,275

3,331

52,524

54,863

Interest rate contracts

8,601

66,850

58,879

10,412

112,926

102,073

Credit derivatives

154

343

161

388

Equity and commodity contracts

—

105,550

98,497

165,619

157,332

NWM Plc

2021

2020

Notional

Assets

Liabilities

Notional

Assets

Liabilities

£bn

£m

Exchange rate contracts

3,169

38,692

39,427

3,362

53,182

55,514

Interest rate contracts

7,383

64,196

55,335

8,606

110,753

97,850

Credit derivatives

154

334

161

382

Equity and commodity contracts

—

103,042

95,096

164,104

153,754

For accounting policy information se

e Accounting policies 8 and 14.

Refer to Note 9 for amounts due

from/to fellow NatWest Group subsidiaries.

NWM Group applies hedge accounting to

reduce the accounting

mismatch caused in the income statement by u

sing derivatives

to hedge the following risks: inte

rest rate, foreign exchange and

net investment in foreign operations.

NWM Group’s interest rate hedging relates to the

management

of NWM Group’s non-trading structural interest

rate risk, caused

by the mismatch between fixed interest

rates and floating

interest rates on its financial ins

truments. NWM Group manages

this risk within approved limits. Re

sidual risk positions are

hedged with derivatives, principally interest rate sw

aps.

Suitable larger fixed rate financial instruments a

re subject to fair

value hedging; the remaining exposure, where possible, is

hedged by derivatives designated as cash flow hedges.

Cash flow hedges of interest rate risk relate to exposu

res to the

variability in future interest payments and

receipts due to the

movement of benchmark interest rates on fo

recast transactions

and on financial assets and financial lia

bilities. This variability in

cash flows is hedged by interest rate swaps, whic

h convert

variable cash flows into fixed. For these cash flow hed

relationships, the hedged items are actual and fo

recast variable

interest rate cash flows arising f

rom financial assets and

financial liabilities with interest rates linked to the relev

ant

benchmark rates, most notably LIBO

R, EURIBOR, SONIA and

the Bank of England Official Bank Rate. The v

ariability in cash

flows due to movements in the

relevant benchmark rate is

hedged; this risk component is identified using

the risk

management systems of NWM Group and e

ncompasses the

majority of cash flow variability risk.

Fair value hedges of interest rate risk invol

ve interest rate

swaps transforming the fixed interest rate risk in fin

ancial assets

and financial liabilities to floating. The hedged

risk is the risk of

changes in the hedged item’s fair value att

ributable to changes

in the benchmark interest rate

risk component of the hedged

item. The significant benchmarks identified as risk co

mponents

are LIBOR, EURIBOR and SONIA. The

se risk components are

identified using the risk management systems of NW

M Group

and encompass the majority of the hedged item’s fai

r value risk.

NWM Group hedges the exchange rate risk of i

ts net investment

in foreign currency denominated operations with cur

rency

borrowings and forward foreign exchange c

ontracts. NWM

Group reviews the value of the investmen

ts’ net assets,

executing hedges where appropriate to reduce t

he sensitivity of

capital ratios to foreign exchange rate movement.

Hedge

accounting relationships will be designated whe

re required.

Exchange rate risk also arises in NWM Grou

p where payments

are denominated in currencies other than the fu

nctional

currency. Residual risk positions are hedged wit

h forward

foreign exchange contracts, fixing the exc

hange 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

NWM Group determines that there is an adequa

te level of

offsetting between the hedged item and hed

ging instrument at

inception and on an ongoing basis.

This is achieved by

comparing movements in the fair value of the ex

pected highly

probable forecast interest cash f

lows/fair value of the hedged

item attributable to the hedged risk with movements i

n the fair

value of the expected changes in cash flows fr

om the hedging

interest rate swap. Hedge effectiveness is asse

ssed on a

cumulative basis over a time period management

determines to

be appropriate. NWM Group use

s either the actual ratio

between the hedged item and hedging inst

rument(s) or one that

minimises hedge ineffectiveness to establish the he

dge ratio for

hedge accounting. Hedge ineffe

ctiveness is measured and

recognised in the income statement

as it arises.

IBOR reform - NWM Group in the y

ear continued to apply, for

relationships directly affected b

y interest rate benchmark

reform, Interest Rate Benchmark Reform Amen

dments to IAS 39

and IFRS 7 issued September 20

19 (“Phase 1 relief”) and

Interest Rate Benchmark Refor

m – Phase 2 Amendments to IAS

39 and IFRS 7 issued August 202

0 (“Phase 2 relief”).

Significant transitions in the year we

re the GBP, JPY and CHF

derivatives subject to cash flow and fair v

alue hedging

transitioned as part of the Liquidity Cle

aring House ‘big bang’

conversion in December 2021. The

swaps were restructured to

reprice off the appropriate risk free rate from the nex

t repricing

date post 31 December 2021 plus a spread adjustmen

t. All

impacted hedge accounting relationships ha

d their designations

updated to reflect this transition.

USD cash flow and fair value he

dges of interest rate risk that

mature past 30 June 2023 continue

to be directly affected by

interest rate benchmark reform.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

151

13 Derivatives continued

Included in the table below are

derivatives held for hedging as

follows:

NWM Group

2021

2020

Changes in fa

Changes in fair

value used for

hedge

Notional

Assets

iabilities

ineffectiveness

(1)

Notiona

Assets

Liabilities

ineffect

iveness (1)

£bn

£m

£bn

£m

Fair value hedging

- interest rate contracts

15.9

179

156

(173)

14.8

392

170

Cash flow hedging

interest rate contracts

4.8

(188)

5.6

288

—

- exchange rate contracts

1.1

109

1.2

107

(

Net investment hedging

- exchange rate contracts

0.3

—

22.1

222

324

(360)

21.6

681

277

100

Clearing house settlements

(90)

(205)

(414)

(170)

132

119

267

107

NWM Plc

2021

2020

Changes in fa

Changes in fair

value used for

hedge

Notional

Assets

Liabilities

ineffectiveness

(1)

Notiona

Assets

Liabilities

ineffectiveness (1)

£bn

£m

£bn

£m

Fair value hedging

Interest rate contracts

15.8

174

156

(170)

14.7

383

170

Cash flow hedging

Interest rate contracts

4.8

(188)

5.6

288

—

Exchange rate contracts

1.1

109

1.2

107

(3)

Net investment hedging

Exchange rate contracts

0.3

—

22.0

217

324

(357)

21.5

672

277

Clearing house settlements

(85)

(205)

(406)

(170)

132

119

266

107

(1)

The change in fair value per hedge ineffectiveness

includes instruments that were derecognised in the year.

The notional of hedging instruments fo

r NWM Group affected by interest rate benchmark

reform is as follows:

2021

2020

£bn

Fair value hedging

- EURIBOR

(1)

—

6.8

GBP LIBOR

—

0.3

- USD LIBOR

(2)

3.9

7.2

- Other currency LIBOR

—

1.0

Cash flow hedging

- EURIBOR

(1)

—

0.1

GBP LIBOR

—

5.1

- USD LIBOR

(2)

0.9

(1)

In 2021 management concluded that EURIBOR is not expected to be significantly ref

ormed further and therefore any uncertainty due to interest benchmark rate reform for

EURIBOR has ended.

(2)

In 2021 the FCA declared that USD LIBOR will be non-

representative post 30 June 2023; at the time of preparing the 2020 disclosures this date was expected to be 31 December

2021.

(3)

The notional of hedging instruments for NWM plc affected b

y interest rate benchmark reform were as above (2020: Fair value hedging £0.1 billion notional less).

(4)

The notional of £1 billion cross currency derivative

contracts in cash flow hedge relationships will convert to repricing using the relevant risk-free rate at the first repricing date post

cessation.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

152

13 Derivatives continued

The following table shows the period in which

notional of the hedging contract ends:

NWM Group

3 months

12 months

3 years

5 years

10 years

20 years

20+ years

Total

2021

£bn

Fair value hedging

Hedging assets - interest rate risk

0.1

0.7

2.1

0.2

—

0.1

3.3

Hedging liabilities - interest rate risk

1.5

1.6

5.5

2.8

1.0

0.2

—

12.6

Cash flow hedging

Hedging assets - interest rate risk

0.4

0.5

1.0

1.6

1.3

—

4.8

Average fixed interest rate (%)

2.64

0.26

0.95

0.87

0.66

—

0.91

Hedging liabilities

exchange rate risk

—

0.9

0.2

—

1.1

Net investment hedging

Exchange rate risk

0.3

—

0.3

2020

Fair value hedging

Hedging assets - interest rate risk

—

0.5

2.0

0.3

—

0.1

0.2

3.1

Hedging liabilities - interest rate risk

—

0.3

8.0

2.7

0.7

—

11.7

Cash flow hedging

Hedging assets - interest rate risk

0.5

0.2

1.5

2.5

0.9

—

5.6

Average fixed interest rate (%)

2.11

3.31

2.27

1.55

0.90

—

1.75

Hedging assets - exchange rate

risk

—

0.1

—

0.1

Hedging liabilities - exchange rate risk

—

0.9

0.2

—

1.1

Net investment hedging

Exchange rate risk

—

NWM Plc

3 months

12 months

3 years

5 years

10 years

20 years

20+ years

Total

2021

£bn

Fair value hedging

Hedging assets - interest rate risk

0.1

0.7

2.1

0.2

—

0.1

3.3

Hedging liabilities - interest rate risk

1.5

1.6

5.4

2.8

1.0

0.2

—

12.5

Cash flow hedging

Hedging assets - interest rate risk

0.4

0.5

1.0

1.6

1.3

—

4.8

Average fixed interest rate (%)

2.64

0.26

0.95

0.87

0.66

—

0.91

Hedging liabilities - exchange rate risk

—

0.9

0.2

—

1.1

Net investment hedging

Exchange rate risk

0.3

—

0.3

2020

Fair value hedging

Hedging assets - interest rate risk

—

0.5

2.0

0.3

—

0.1

0.2

3.1

Hedging liabilities - interest rate risk

—

0.3

7.9

2.7

0.7

—

11.6

Cash flow hedging

Hedging assets - interest rate risk

0.5

0.2

1.5

2.5

0.9

—

5.6

Average fixed interest rate (%)

2.11

3.31

2.27

1.55

0.90

—

1.75

Hedging assets - exchange rate

risk

—

0.1

—

0.1

Hedging liabilities - exchange rate risk

—

0.9

0.2

—

1.1

Net investment hedging

Exchange

rate risk

—

For cash flow hedging of exchange rate risk, the a

verage foreign exchange rates applic

able across the relationships were

USD/GBP 1.22 (2020: 1

.22),

JPY/GBP 132.93

(2020: 132.93), JPY/EUR: n/a

(2020: 12

0.21) and CNH/GBP 8.74 (2020

: n/a) for the

main currencies hedged.

For net investment hedging of e

xchange risk, the average foreign exchange r

ates applicable were AED/USD 3.67 (20

20: n/a) and

USD/GBP 1.32 (2020: n/a) for the main cur

rencies hedged.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

153

13 Derivatives continued

The table below analyses assets and liabilities includi

ng intercompany, subject to hedging de

rivatives:

2021

2020

Impact

Change in

Impact

Change in

Carrying

fair value

Carrying

fair value

value (CV)

hedged

used as a

value (CV)

hedged

used as a

of hedged

items

basis to

of hedged

items

basis to

assets and

included

determine

assets and

included

determine

liabilities

in CV

ineffectiveness

(1)

liabilities

in CV

ineffectiveness (1)

NWM Group

£m

Fair value hedging – interest rate

Loans to banks and customers -

amortised cost

—

Other financial assets - securities

3,353

(61)

3,165

152

Total

3,386

(61)

3,198

152

Other financial liabilities -

debt securities in issue

14,604

231

13,245

322

(139)

Subordinated liabilities

102

104

(3)

Total

14,706

234

13,349

327

(142)

Cash flow hedge – interest rate

Loans to banks and customers -

amortised cost

4,648

172

5,068

(50)

Other financial assets

securities

159

571

(5)

Total

4,807

178

5,639

(55)

Cash flow hedge – exchange r

ate

Loans to banks and customers

amortised cost

—

112

Other financial assets - securities

—

Total

—

142

Other financial liabilities

debt securities in issue

1,036

(1)

1,036

Total

1,036

(1)

1,036

NWM Plc

Fair value hedging – interest rate

Loans to banks and customers

amortised cost

—

Other financial assets - securities

3,353

(61)

3,165

152

Total

3,386

(61)

3,198

152

Other financial liabilities

debt securities in issue

14,604

231

13,245

322

(139)

Total

14,604

231

13,245

322

(139)

Cash flow hedge – interest rate

Loans to banks and customers -

amortised cost

4,648

172

5,068

(50)

Other financial assets - securities

159

571

(5)

Total

4,807

178

5,639

(55)

Cash flow hedge – exchange r

ate

Loans to banks and customers

amortised cost

—

112

Other financial assets - securities

—

Total

—

142

Other

financial liabilities

debt securities in issue

1,036

(1)

1,036

Total

1,036

(1)

1,036

(1)

The change in fair value per hedge ineffectiveness

includes instruments that were derecognised in the year.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

154

13 Derivatives continued

The following risk exposures for NWM Group will

be affected by interest rate benchma

rk reform (notional, hedge adjustment):

2021

2020

Hedged

Notional

adjustment

Notional

djustment

£bn

£m

£bn

£m

Fair value hedging

EURIBOR

(1)

—

6.8

(85)

- GBP LIBOR

—

0.3

(8)

- USD LIBOR

(2)

4.1

7.2

(89)

- Other currency LIBOR

—

1.0

—

Cash flow hedging

EURIBOR

(1)

—

0.1

- GBP LIBOR

—

2.5

(30)

- USD LIBOR

(2)

0.9

(16)

0.9

(51)

- BOE base rate

(3)

—

2.6

(126)

(1)

In 2021 management concluded that EURIBOR is not expected to be significantly ref

ormed further and therefore any uncertainty due to interest benchmark rate reform for

EURIBOR has ended.

(2)

In 2021 the FCA declared that USD LIBOR will be non-

representative post 30 June 2023; at the time of preparing the 2020 disclosures this date was expected to be 31 December

2021.

(3)

Hedge relationships subject to reform are those whe

re either the hedged item or the hedging instrument is subject to the IBOR reform.

(4)

The above risk exposures for NWM Plc were the sa

me as above (2020: Fair value hedging £0.1 billion notional and £5 million Hedged adjustment less).

(5)

Notional of £150 million GBP LIBOR hedged items will convert to

repricing off SONIA at the first repricing date post cessation in NWM Plc.

The following table shows a pre

-tax analysis of the cash flow hedge reserve and foreign exc

hange hedge reserve:

NWM Group

2021

2020

Cash flow

Foreign

exchange

Cash flow

Foreign exchange

hedge reserve

£m

Continuing

Interest rate risk

(37)

—

229

—

Foreign exchange risk

(4)

De-designated

Interest rate risk

111

—

Foreign exchange risk

—

(141)

—

(150)

Total

(133)

277

(146)

NWM Plc

2021

2020

Cash flow

Foreign excha

nge

Cash flow

Foreign exchange

hedge reserve

£m

Continuing

Interest

rate risk

(37)

—

229

—

Foreign exchange risk

(4)

—

designated

Interest rate risk

111

—

Foreign exchange risk

—

Total

277

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

155

13 Derivatives continued

NWM Group

2021

2020

Foreign

Cash

flow

exchange

Cash flow

exchange

hedge reserve

£m

Amount recognised in equity

Interest rate risk

(207)

—

Foreign exchange risk

—

(31)

Total

(207)

(31)

Amount transferred from equity

to earnings

Interest rate risk to net interest income

—

Interest rate risk to non-interest inco

—

Foreign exchange risk to net interest inco

—

Foreign exchange risk to non-interest income

—

Foreign exchange risk to operating expenses

—

Total

—

NWM Plc

2021

2020

Foreign

Cash flow

exchange

Cash flow

exchange

hedge reserve

hedge

reserve

hedge reserve

£m

Amount recognised in equity

Interest rate risk

(208)

—

Foreign exchange risk

—

Total

(208)

—

Amount transferred from equity

to earnings

Interest rate risk to net interest income

—

Interest rate risk to non-interest inco

—

Foreign exchange risk to net interest inco

—

Foreign exchange risk to non-interest income

—

Foreign exchange risk to operating expenses

—

Total

—

Hedge ineffectiveness recognised in othe

r operating income in continuing operations co

mprised:

NWM Group

2021

2020

£m

Fair value hedging

Gains/(losses) on the hedged items attributable to the hed

ged risk

173

(53)

(Losses)/gains on the hedging instruments

(173)

Fair value hedging ineffectiveness

—

(11)

Cash flow hedging

Interest rate risk

(10)

Cash flow hedging ineffectiveness

(10)

Total

(10)

(5)

The main sources of ineffectiveness

for interest rate risk hedge accounting relationships a

re:



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 inte

rest rate (fair value hedge);



Differences in the repricing basis between the hedging i

nstrument and hedged cash flows (cas

h flow hedge); and



Upfront present values on the hedging derivative

s where hedge accounting relationships ha

ve been designated after the tr

ade

date (cash flow hedge and fair value hedge).

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

156

14 Loan impairment provisions

Loan exposure and impairment metri

The table below summarises loans and rel

ated credit impairment measures within the

scope of ECL framework.

NWM Group

NWM Plc

December

31 December

2021

2020

2021

2020

£m

Loans - amortised cost

- Stage 1

8,301

7,799

7,444

6,819

- Stage 2

147

1,566

104

1,253

- Stage 3

171

Of which: individual

162

Of which: collective

- Inter-Group

731

755

2,605

3,039

Total

9,278

10,291

10,214

11,210

ECL provisions

(1)

- Stage 1

- Stage 2

- Stage 3

132

Of which: individual

124

Of which: collective

- Inter-Group

—

Total

194

ECL provision coverage

(2)

- Stage 1 (%)

0.07

0.15

0.08

0.16

- Stage 2 (%)

2.04

3.13

1.92

0.96

- Stage 3 (%)

75.76

77.19

59.02

65.66

- Inter-Group (%)

—

0.13

0.04

0.16

Total

0.98

2.02

0.58

1.08

Impairment (releases)/losses

ECL (release)/charge

- Stage 1

(14)

(2)

(11)

- Stage 2

(11)

—

- Stage 3

(9)

(12)

(11)

(13)

Of which: individual

(6)

(3)

(8)

(4)

Of which: collective

(3)

(9)

(3)

(9)

Third party

(34)

(22)

- Inter-Group

(1)

Total

(35)

(23)

Amounts written off

Of which: individual

(1)

NWM Group’s intercompany assets were classified as Stage 1. The

ECL for these loans was £0.2 million at 31 December 2021.

(2)

ECL provisions coverage is calculated as total ECL provisions divided by t

hird party loans – amortised cost and FVOCI.

(3)

The table shows gross loans only and excludes amounts that are outside th

e scope of the ECL framework. Refer to page 76 for Financial instruments within the scope of the IFRS 9

ECL framework for further details. Other financial a

ssets within the scope of the IFRS 9 ECL framework were cash and balances at central banks totalling £16.6 billion (2020 – £15.8

billion) and debt securities of £8.4 billion (2020 – £8.7 billion).

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

157

14 Loan impairment provisions continu

Credit risk enhancement and mi

tigation

For information on Credit risk enhance

ment and mitigation held

as security, refer to Risk and capital managemen

t – Credit risk

enhancement and mitigation section.

Critical accounting policy: Loan impairmen

provisions

Accounting policies note 9 sets out how the ex

pected loss

approach is applied. At 31 December 2021

, customer loan

impairment provisions amounted to £84 million (202

0 - £194

million). A loan is impaired whe

n there is objective evidence that

the cash flows will not occur in

the manner expected when the

loan was advanced. Such evidence includes, chan

ges in the

credit rating of a borrower, the failure to make p

ayments in

accordance with the loan agree

ment, significant reduction in the

value of any security, breach of limits o

r 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 e

stimated future cash

flows at the loan's original effective inte

rest rate.

The measurement of credit impairment unde

r the IFRS expected

loss model depends on management’s

assessment of any

potential deterioration in the cr

editworthiness of the borrower,

its modelling of expected performance and the ap

plication of

economic forecasts. All three elements require judgments

that

are potentially significant to the estimate of impair

ment losses.

For further information and sen

sitivity analysis, refer to Risk and

capital management – Measurement unce

rtainty and ECL

sensitivity analysis section.

IFRS 9 ECL model design prin

ciples

Refer to Credit risk – IFRS 9 ECL model design pri

nciples 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 s

cenarios section for further

details.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

158

15 Other financial assets

NWM Group

Debt securities

Central and

local government

Other

Equity

Other

debt

Total

Loans

Total

2021

£m

Mandatory fair value through profit or loss

—

Fair value through other comprehensive income

360

3,357

884

794

5,395

136

5,590

Amortised cost

—

3,116

—

3,116

Total

360

3,357

884

3,911

8,512

137

8,786

2020

Mandatory fair value through profit or loss

—

166

Fair value through other comprehensive income

212

3,372

1,691

891

6,166

119

6,300

Amortised cost

—

2,575

—

2,575

Total

212

3,372

1,691

3,550

8,825

124

9,041

NWM Plc

Debt securities

Central and

local government

Other

Equity

Other

debt

Total

oans

Total

2021

£m

Mandatory fair value through profit or loss

—

Fair value through other comprehensive income

3,209

794

459

4,548

4,650

Amortised cost

—

3,014

—

3,014

Total

3,209

794

3,474

7,563

137

7,743

2020

Mandatory fair value through profit or loss

—

161

Fair value through other comprehensive income

108

3,298

1,497

376

5,279

5,347

Amortised cost

—

2,535

—

2,535

Total

108

3,298

1,497

2,995

7,898

8,043

During 2020 NWM Group dispose

d of SABB shares valued at £383

million, and a dividend of £15 million was received in the ye

ar.

Dividends on FVOCI equity shares include

£4 million (2020: £5 million) in relation to

the equity holding in OTC Derivative Limit

ed.

For accounting policy information se

e Accounting policies note 8.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

159

16 Investments in group undertakings

Investments in group undertakings a

re carried at cost less impairment losses. Move

ments during the year were as follows:

NWM Plc

2021

2020

£m

At 1 January

2,600

2,905

Currency translation and other adjustments

(20)

Additional investments in Group undertakings

(4)

—

Disposals

—

(97)

Impairment of investments

(1)

(95)

(250)

At 31 December

2,481

2,600

(1)

Net of impairment reversals.

The 2021 impairment charge consists primarily of im

pairment of NatWest Markets plc’s in

vestments in RBS Asia Financial Se

rvices

Limited and RBS Holdings NV. T

he impairment of investments in 2020 was related mainly to RB

S Netherlands Holdings BV. £4

million additional investment was driven by f

air value hedge designations on existing US

D denominated investments. The 20

disposal was due to the liquidation of RB

S Bank (Polska) S.A. in August 202

NatWest Markets plc’s subsidiaries are

assessed for potential impairment of investment b

ased on NAV. Fair value measureme

nt for

this purpose was categorised a

s Level 3 of the fair value hierarchy.

The principal subsidiary undertakings of the com

pany are shown below. Their capital consist

s of ordinary shares and additi

onal

Tier 1 notes which are unlisted. A

ll of these subsidiaries are included in NWM Group’s consoli

dated financial statements and

have

an accounting reference date of 3

1 December.

Nature of business

Country of incorporation and

principal area of operation

Group

interest

NatWest Markets Securities Inc.

Broker dealer

100%

NatWest Markets N.V.

Banking

Netherlands

100%

For accounting policy information se

e Accounting policies note 15.

Full information on all related undertakings is inclu

ded in Note 3

17 Other assets

NWM Group

NWM Plc

2021

2020

2021

2020

£m

Property, plant and equipment

106

Pension schemes in net surplus (Note 5)

306

264

306

264

Assets of disposal groups

—

Accrued income

Tax recoverable

332

221

330

207

Deferred tax (Note 7)

—

Other assets

Total

878

688

732

562

18 Other financial liabilities

NWM Group

NWM Plc

2021

2020

2021

2020

£m

Customer deposits - designated as at fair value t

hrough profit or loss

568

796

—

Debt securities in issue

- designated as at fair value through profit or loss

1,103

1,607

875

1,372

- amortised cost

16,621

14,662

15,512

13,482

Subordinated liabilities

designated as at fair value through profit o

r loss

703

793

371

420

- amortised cost

260

312

Total

19,255

18,170

16,877

15,370

For accounting policy information se

e Accounting policies notes 8 and 13.

Notes to the fin

ancial state

ments continue

NWM Group

Annu

al Report an

d Accounts 202

160

19 Subordinated liabilities

NWM Group

NWM Plc

2021

2020

2021

2020

£m

Dated loan capital

919

1,009

371

420

Undated loan capital

Total

963

1,105

415

516

(1)

Excludes amounts due to holding company and fellow subsidiaries of £1,464 million (2020 – £1

,753 million) for both NWM Group and NWM Plc which are analysed in the tables

below.

The following tables analyse NWM Plc third p

arty subordinated liabilities:

Capital

2021

2020

Dated loan capital

treatment

£m

€300 million floating rate notes

2022

(3)

Tier 2

252

268

€145.6 million floating rate notes 20

(3)

Tier 2

119

152

Total

371

420

(1)

In the event of certain changes in tax laws, dat

ed loan capital issues may be redeemed in whole, but not in part, at the option of the issuer, at the principal amount thereof plus

accrued interest, subject to prior regulatory approva

(2)

Except as stated above, claims in respect of NWM Plc’s dated loan capital a

re subordinated to the claims of other creditors. None of NWM Plc’s dated loan capital is secured.

(3)

Interest on all floating rate subordinated notes is calculated by reference to market rates.

Capital

2021

2020

Undated loan capital

treatment

£m

£31 million 7.38% notes (not cal

lable)

Tier 2

£21 million 6.20% notes (callable March 2022)

Tier 2

£16 million 5.63% (callable Sept

ember 2026)

Tier 2

£19 million 5.63% notes (callable June 2

032)

Tier 2

Total

(1)

The Company can satisfy interest payment obligations by iss

uing ordinary shares to appointed Trustees to enable them, on selling these shares, to settle the interest payment.

(2)

Except as stated above, claims in respect of NWM Plc’s undated loan capital a

re subordinated to the claims of other creditors. None of NWM Plc’s undated loan capital is secured.

(3)

In the event of certain changes in tax laws, undat

ed loan capital issues may be redeemed in whole, but not in part, at the option of NWM Plc, at the principal amount thereof plus

accrued interest, subject to prior regulatory approva

Capital

2021

2020

Third party redemptions in the period

(values as at date of transaction)

treatment

£m

US$125.6 million floating rate notes 202

Tier 2

—

€15 million 6.00% notes 2020

Tier 2

—

€145.6 million floating rate dated notes 202

3 (partial redemption)

Tier 2

—

£31 million 7.38% notes (partial

redemption)

Tier 2

—

£19 million 5.63% notes (partial

redemption)

Tier 2

—

Total

108

(1) There were no third party issuances in 2021

or 2020.

The following tables analyse intercompany subo

rdinated liabilities:

NWM Group and

Bank

2021

2020

£m

Dated loan capital

1,019

1,093

Undated loan capital

445

440

Preference shares

—

220

Total

1,464

1,753

Capital

2021

2020

Dated loan capital

treatment

£m

€950 million 3.26% (redeemable Marc

h 2024)

Tier 2

823

889

US$250 million subordinated notes 202

Tier 2

196

204

1,019

1,093

Undated loan capital

US$600 million floating rate perpetual notes (call

able every 5 years from 201

Tier 2

445

440

Preference shares

US$300 million 7.25% Series H (callable anyti

me)

Tier 1

—

220

Redemptions in the period

(values as at date of

transaction)

US$389 million 6.10% notes 2023

Tier 2

—

285

US$300 million 7.25% series H (callable

anytime)

Tier 1

220

—

220

285

Notes to the fin

ancial state

ments continue

NWM Gr

oup

Annual Report and Accou

nts 202

161

20 Other liabilities

NWM

Group

NWM Plc

2021

2020

2021

2020

£m

Lease liabilities

Provisions for liabilities and charges

342

448

220

238

Retirement benefit liabilities (No

te 5)

Accruals

123

108

Deferred income

Current tax

Deferred tax (Note 7)

374

417

352

380

Other liabilities

1,055

1,234

789

866

NWM Group

Litigation and

other regulatory

Other (1)

Total

Provisions for liabilities and charges

£m

At 1 January 2021

334

114

448

Currency translation and other movements

—

(13)

Charge to income statement

Releases to income statement

(72)

(12)

(84)

Provisions utilised

(38)

(48)

(86)

At 31 December 2021

262

342

NWM Plc

Litigation and

other regulatory

Other (1)

Total

Provisions for liabilities and charges

£m

At 1 January 2021

158

238

Currency translation and other movements

—

(10)

Charge to income statement

Releases to income statement

(2)

(7)

(9)

Provisions utilised

(19)

(32)

(51)

At 31 December 2021

166

220

(1)

Materially comprises provisions relating to restructuring costs.

For accounting policy information se

e Accounting policies note 6.

Critical accounting policy: Provisi

ons for liabilities

The key judgment is involved in determining whet

her a present obligation exists. There is ofte

n a high degree of uncertainty and

judgment is based on the specific facts and circu

mstances relating to individual events in dete

mining whether there is a prese

obligation. Judgment is also involved in esti

mation of the probability, timing and amount of a

ny outflows. Where NWM Group can

look to another party such as an insurer

to pay some or all of the expenditure requi

red to settle a provision, any reimbu

rsement is

recognised when, and only whe

n, it is virtually certain that it will be received.

Estimates

Provisions are liabilities of uncertain timin

g or amount and are recognised when

there is a present obligation as

a result

of a past event, the outflow of e

conomic benefit is probable and the outflow c

an be estimated reliably. Any difference betw

een the

final outcome and the amounts provided will aff

ect the reported results in the period w

hen the matter is resolved.



Litigation and other regulatory: NWM G

roup is engaged in various legal proceedings, b

oth in the UK and in overseas

jurisdictions, including the US. For fu

rther information in relation to legal proceedings

and discussion of the associated

uncertainties, refer to Note 25.



Other provisions: These materially c

omprise provisions for onerous contracts a

nd restructuring costs. Onerous co

ntract

provisions comprise an estimate of the costs involve

d in fulfilling the terms and condi

tions of contracts net of any expected

benefits to be received. Redundancy and restructu

ring provisions comprise the estimated cost

of restructuring, including

redundancy costs where an obligation exists.

Notes to the fin

ancial state

ments continue

NWM Gr

oup

Annual Report and Accou

nts 202

162

21 Share capital and reserves

Number of shares

2021

2020

2021

2020

Allotted, called up and fully pai

£m

000s

Ordinary shares of £1

400

399,517

Non-cumulative preference shares of US$0.0

—

12,000

Ordinary shares

No ordinary shares were issued during 2021

or 2020.

In 2021, NWM plc paid ordinary dividends of £1 billio

n (2020 –

Nil).

Paid-in equity

Comprises equity instruments i

ssued by NWM Plc other than

those legally constituted as sha

res.

Additional Tier 1 instruments iss

ued by NWM Plc having the

legal form of debt are classified

as equity under IFRS. The

coupons on these instruments

are non-cumulative and payable

at NWM Plc’s discretion.

2021

£m

Additional Tier 1

instruments

US$950 million

7.9604% instru

ments callable

August 2025

749

155

749

US$200 million

5.540% instrum

ents callable Au

gust 2025

155

904

Capital recognised for regulatory purposes canno

t be

redeemed without Prudential Regulation Autho

rity consent. This

includes ordinary shares, preference shares and addition

al Tier

instruments.

On 30 September 2021, NWM Plc redeemed all 12

,000,000

Non-cumulative preference shares of US$0.0

1 in issue,

following approval from the Board of Directors and the

Prudential Regulation Authority

Reserves

NWM Plc optimises capital efficie

ncy by maintaining reserves in

subsidiaries, including regulated e

ntities. Certain preference

shares and subordinated debt

are also included within

regulatory capital. The remittance of rese

rves to the parent or

the redemption of shares or subordinated capit

al by regulated

entities may be subject to maintaining the capi

tal resources

required by the relevant regulator.

For accounting policy information se

e Accounting policies note

13.

Notes to the fin

ancial state

ments continue

NWM Gr

oup

Annual Report and Accou

nts 202

163

22 Structured entities

A structured entity (SE) is an e

ntity that has been designed

such that voting or similar rights are not the dominan

t 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 mean

s of contractual arrangements.

SEs are usually established for a specific, limited pur

pose, they

do not carry out a business or trade and typically h

ave no

employees. They take a variety of le

gal forms - trusts,

partnerships and companies - and fulfil m

any different

functions. As well as being a key e

lement of securitisations, SEs

are also used in fund managem

ent activities to segregate

custodial duties from the fund manageme

nt advice.

Consolidated structured entities

Securitisations

In a securitisation, assets, or interests in a pool of asse

ts, are

transferred generally to an SE which then is

sues liabilities to

third party investors. The majority of se

curitisations are

supported through liquidity facilities or other c

redit

enhancements. The NWM Group arranges securitis

ations to

facilitate client transactions an

d undertakes own-asset

securitisations to sell or to fund portfolios of f

inancial assets.

NWM Group also acts as an underwriter an

d depositor in

securitisation transactions in bo

th client and proprietary

transactions. NWM Group’s involvement i

n client securitisations

takes a number of forms. It may

: sponsor or administer a

securitisation programme; provide liquidity facili

ties or

programme-wide credit enhancement; and purch

ase securities

issued by the vehicle.

Covered debt programme

NWM Group has assigned cert

ain loans to customers and othe

debt instruments to bankruptcy remote limite

d liability

partnerships to provide security

for issues of debt securities by

NWM Group. NWM Group retains all of the

risks and rewards of

these assets and continues to r

ecognise them. The partnerships

are consolidated by the NWM Group and the

related covered

debt included within other financial lia

bilities. At 31 December

2021, £698 million (2020 - £1,064 million) of lo

ans and other

debt instruments provided security for £626 million (20

20 –

£1,085 million) debt securities in issue and other bor

rowing by

NWM Plc and NWM Group.

Lending of own issued securities

NWM Plc has issued, retained, and lent debt se

curities under

securities lending arrangements

. Under standard terms in the

UK and US markets, the recipient h

as an unrestricted right to

sell or re-pledge collateral, subje

ct to returning equivalent

securities on maturity of the transaction.

NWM

Plc retains all of

the risks and rewards of own is

sued liabilities lent under such

arrangements and does not recognise the

At 31 December

2021, £1,494 million (2020 - £1

,893 million) of secured own

issued liabilities have been retained and le

nt under securities

lending arrangements. At 31 Dece

mber 2021, £1,564 million

(2020 - £2,029

million) of loans and other debt instruments

provided security for secured own issued liabili

ties that have

been retained and lent under securities lending arr

angements.

Unconsolidated structured entitie

NWM Group’s interests in unconsolidated st

ructured entities are analysed below.

2021

2020

Asset backed

Investment

Asset backed

Investment

securitisation

funds

securitisation

funds

vehicles

and oth

Total

vehicles

nd other

Total

£m

Trading assets and derivatives

Trading assets

490

117

607

319

365

Derivative assets

251

269

441

457

Derivative liabilities

(170)

(

(171)

(319)

(21)

(340)

Total

571

134

705

441

482

Non trading assets

Loans to customers

1,680

1,704

1,376

145

1,521

Other financial assets

2,681

379

3,060

2,409

170

2,579

Total

4,361

403

4,764

3,785

315

4,100

Liquidity facilities/loan commitments

1,402

1,475

1,481

132

1,613

Maximum exposure

6,334

610

6,944

5,707

488

6,195

Notes to the fin

ancial state

ments continue

NWM Gr

oup

Annual Report and Accou

nts 202

164

23 Asset transfers

Transfers that do not qualify for

derecognition

NWM Group enters into securiti

es financing, reverse

repurchase and total return agreements in

accordance with

normal market practice which includes the provision of

additional collateral if necessary

. Under standard terms in the

UK and US markets, the recipient h

as an unrestricted right to

sell or repledge collateral, subject to returning e

quivalent

securities on maturity of the transaction.

Securities sold under repurchase

transactions and transactions

with the substance of securities repurc

hase agreements are not

derecognised if the NWM Group retains substan

tially all the

risks and rewards of ownership. T

he fair value (and carrying

value) of securities transferred under such transac

tions

included on the balance sheet, are set out below. All of

these

securities could be sold or repledged by the holde

For accounting policy information se

e Accounting policies note

11.

NWM Group

NWM Plc

2021

2020

2021

2020

The following assets have failed derecognition

(1)

£m

Trading assets

13,084

20,526

9,034

12,614

Other financial assets

677

104

552

104

13,761

20,630

9,586

12,718

(1)

Associated liabilities were £13,706 million for the NWM Group (2020 - £20,541 million) and £

9,523 million for NWM Plc (2020 - £12,660 million).

Assets pledged as collateral

NWM Group pledges collateral

with its counterparties in respect of derivative

liabilities and bank and stock borrowings.

NWM Group

NWM Plc

2021

2020

2021

2020

Assets pledged against liabilitie

£m

Trading assets

23,544

28,426

20,886

26,067

Other financial assets

(1)

1,252

2,557

601

1,453

24,796

30,983

21,487

27,520

(1)

Includes pledges for stock borrowing.

The following table analyses as

sets that have been transferred but have failed

the derecognition rules under IFRS 9 and ther

efore

continue to be recognised on NWM Plc’s balance sheet.

2021

2020

Asset type

£m

Loans and other debt instrume

nts - covered debt programme

(1)

698

746

Loans and other debt instrume

nts - own issued retained lent se

curities

(2)

1,564

2,029

(1)

The associated liabilities for covered debt programme were £

626 milli

on (2020 - £8

57 million).

(2)

The associated own issued securities that were retained and

lent under securities lending arrangements were £1,494 million (2020 - £1,893 million).

Notes to the fin

ancial state

ments continue

NWM Gr

oup

Annual Report and Accou

nts 202

165

24 Capital resources

Regulatory capital for NWM Plc legal enti

ty is assessed against minimum require

ments that are set out under the Capital

Requirements Regulation.

Transitional arrangemen

ts on the phasing in of end-point capi

tal resources are set by the PRA.

The capital resources under the

PRA transitional basis for NWM Plc are se

t out below.

2021

2020

Shareholders’ equity

£m

Shareholders’ equity

7,349

9,152

Other equity instruments

(904)

6,445

8,248

Regulatory adjustments and deductions

Own credit

Defined benefit pension fund adjustment

(202)

(174)

Cash flow hedging reserve

(46)

(201)

Prudential valuation adjustments

(227)

(251)

Expected losses less impairments

(11)

(1)

Instruments of financial sector

entities where the institution has

a significant investment

(1,685)

(1,624)

Adjustments under IFRS 9 transitional arrangements

Foreseeable ordinary dividends

(250)

(500)

(2,373)

(2,701)

CET1 capital

4,072

5,547

Additional Tier 1 (AT1) capital

Qualifying instruments and related sh

are premium

904

Qualifying instruments and related sh

are premium subject to phase out

—

219

904

1,123

Tier 1 deductions

Instruments of financial sector

entities where the institution has

a significant investment

(221)

(237)

Tier 1 capital

4,755

6,433

Qualifying Tier 2 capital

Qualifying instruments and related sh

are premium

1,490

1,704

Tier 2 deductions

Instruments of financial sector

entities where the institution has

a significant investment

(401)

(406)

Other regulatory adjustments

(375)

(384)

Tier 2 capital

1,115

1,320

Total regulatory capital

5,870

7,753

In the management of capital re

sources, NWM Plc is governed

by NatWest Group's policy to maintain a strong c

apital base

and to utilise it efficiently throughout its activities to op

timise

the return to shareholders while maintaining a prudent

relationship between the capital base and the un

derlying risks

of the business. In carrying out this policy, Na

tWest Group has

regard to the supervisory requirements of the PRA. The P

uses capital ratios as a measure

of capital adequacy in the UK

banking sector, comparing a bank's capital resou

rces with its

risk-weighted assets (the assets and off-balance

sheet

exposures are weighted to refle

ct the inherent credit and other

risks); by international agreement, the Pillar 1 capi

tal ratios,

excluding capital buffers, should be not less than 8

% with a

Common Equity Tier 1 component of not les

s than 4.5%. NWM

Plc has complied with the PRA’s capital requiremen

throughout the year. NWM Plc is also subje

ct to a Pillar 2

requirement.

Subsidiaries and sub-groups wi

thin NWM Group, principally

banking entities, are subject to various individual

regulatory

capital requirements in the UK and overseas. Fu

rthermore, the

payment of dividends by subsidiaries and the abili

ty of

members of NatWest Group to lend money to othe

r members

of NatWest Group is subject to restrictions such

as local

regulatory or legal requirements

, the availability of reserves

and financial and operating per

formance.

Notes to the fin

ancial state

ments continue

NWM Gr

oup

Annual Report and Accou

nts 202

166

25 Memorandum items

Contingent liabilities and commitments

The amounts shown in the table

below are intended only to provide an indication of the volu

me of business outstanding at 3

December 2021. Although the NWM Group is exposed to

credit risk in the event of a custome

r’s failure to meet its obligations

, the

amounts shown do not, and are

not intended to, provide any indication of NW

M Group’s expectation of future losses.

For accounting policy information se

e Accounting policies note 6.

NWM Group

NWM Plc

2021

2020

2021

2020

£m

Contingent liabilities and commitments

Guarantees and assets pledged as collateral security

595

638

197

195

Other contingent liabilities

110

137

109

136

Standby facilities, credit lines and other co

mmitments

11,245

12,292

7,363

7,534

11,950

13,067

7,669

7,865

(1)

In the normal course of business, NWM Plc guarante

es specified third party liabilities of certain subsidiaries; it also gives undertakings that individual subsidiaries will fulfil their

obligations to third parties under contractual or ot

her arrangements which are excluded from the table above.

Banking commitments and contingent obligations, whic

h have

been entered into on behalf of customers and fo

r which there

are corresponding obligations from customers, are no

t included

in assets and liabilities. NWM Group’s

maximum exposure to

credit loss, in the event of its obligation c

rystallising and all

counterclaims, collateral or security proving valuele

ss, is

represented by the contractual nominal amoun

t of these

instruments included in the table

above. These commitments

and contingent obligations are subject to NWM G

roup’s normal

credit approval processes.

Guarantees - NWM Group gives guarantee

s on behalf of

customers. A financial guarantee

represents an irrevocable

undertaking that NWM Group

will meet a customer’s specified

obligations to a third party if the cus

tomer fails to do so. The

maximum amount that NWM G

roup could be required to pay

under a guarantee is its principal amount as in the t

able above.

NWM Group expects most guarantees it provides to ex

pire

unused.

Other contingent liabilities - the

se include standby letters of

credit, supporting customer debt issues and contin

gent

liabilities relating to customer trading activities su

ch as those

arising from performance and customs bonds, w

arranties and

indemnities.

Standby facilities and credit line

s - under a loan commitment

NWM Group agrees to make funds available to

a customer in

the future. Loan commitments, which are usu

ally 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 com

mercial standby

facilities and credit lines, liquidit

y facilities to commercial paper

conduits and unutilised overdraft facilities.

Other commitments - these include documen

tary credits, which

are commercial letters of credit providing for p

ayment by NWM

Group to a named beneficiary against prese

ntation of specified

documents, forward asset purchases, forward deposi

ts placed

and undrawn note issuance and revolving underw

riting

facilities, and other short-term trade rel

ated transactions.

Risk-sharing arrangements

During 2019 NWM Plc and NWM N.V. established limi

ted risk-

sharing arrangements that facilitated the s

mooth provision of

services to NatWest Markets’ c

ustomers. The arrangements

include:



The provision of a funded guarantee of up

to £1.0 billion by

NWM Plc to NWM N.V. that limits NWM N.V.’s ex

posure to

large individual customer credits to 10% of NWM N.V.’s

capital. Funding is provided by NWM Plc deposits pl

aced

with NWM N.V. of not less than the guaranteed

amount.

31 December 2021, the deposit

s amounted to £0.8 billion

and the guarantee fees in the y

ear were £5.5 million.



The provision of funded and unfunded guarantees by

NWM

Plc in respect of NWM N.V.’s Legacy po

rtfolio. At 31

December 2021 the exposure at default covered

by the

guarantees was approximately £0

.2 billion (of which £37

million was cash collateralised). Fees of £

6.6 million in

relation to the guarantees were recognised in the yea

Indemnity deed



In April 2019, NWM Plc and NWB Plc e

ntered into a cross

indemnity agreement for losses

incurred within the entities

in relation to business transferred to or fro

m the ring-

fenced bank under the NatWest Group’s structural re-

organisation. Under the agreement, N

WM Plc is indemnified

by NWB Plc against losses relating to the NWB Plc

transferring businesses and ring-fenced bank obligati

ons

and NWB Plc is indemnified by

NWM Plc against losses

relating to NWM Plc transferring businesse

s and non ring-

fenced bank obligations with eff

ect from the relevant

transfer date.

Contractual obligations for future expenditure not provided for in the accounts

The following table shows contractual obligations fo

r future expenditure not provided for in th

e accounts at the year end.

NWM Group

2021

2020

£m

Contracts to purchase goods or services

(1)

Of which due within 1 year: £2 million (2020 - £3 million).

Notes to the fin

ancial state

ments continue

NWM Gr

oup

Annual Report and Accou

nts 202

167

25 Memorandum items continued

Litigation and regulatory matters

NWM Plc and its subsidiary and associated u

ndertakings (NWM

Group) are party to legal proce

edings and involved in

regulatory matters, including as the subject of investi

gations

and other regulatory and governmental ac

tion (Matters) in the

United Kingdom (UK), the United States (US), the

European

Union (EU) and other jurisdictions.

NWM Group recognises a provis

ion for a liability in relation to

these Matters when it is probable that an outflo

w of economic

benefits will be required to settle an obligation resul

ting from

past events, and a reliable estimate can be made of

the amount

of the obligation.

In many of these Matters, it is n

ot possible to determine

whether any loss is probable, or to estimate reli

ably the amount

of any loss, either as a direct consequence of the relev

ant

proceedings and regulatory matters or as

a result of adverse

impacts or restrictions on NWM

Group’s reputation, businesses

and operations. Numerous legal and factual issue

s may need to

be resolved, including through potentially leng

thy discovery and

document production exercises and deter

mination of important

factual matters, and by addressing novel or unset

tled legal

questions relevant to the proceedings in question, before

liability can reasonably be estima

ted for any claim. NWM Group

cannot predict if, how, or when such claims will be resolved o

what the eventual settlement, damages, fine, penal

ty or other

relief, if any, may be, particularly for claims that are a

t an early

stage in their development or where clai

mants seek substantial

or indeterminate damages.

There are situations where NW

M Group may pursue an

approach that in some instances le

ads to a settlement

agreement. This may occur in order to

avoid the expense,

management distraction or reputational implic

ations of

continuing to contest liability, or in order to

take account of the

risks inherent in defending claims or regulato

ry matters, even

for those Matters for which NWM Group believes

it has credible

defences and should prevail on the merits. The unce

rtainties

inherent in all such Matters affect the amount a

nd timing of

any potential outflows for both Matters with

respect to which

provisions have been established and other contingen

liabilities. It is not practicable to provide an

aggregate estimate

of potential liability for our legal proceedin

gs 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 th

an or less than

the aggregate provision that NWM G

roup has recognised.

Where (and as far as) liability cannot be re

asonably estimated,

no provision has been recognised. NWM G

roup expects that in

future periods, additional provis

ions, settlement amounts and

customer redress payments will be nece

ssary, in amounts that

are expected to be substantial in some inst

ances. Please refer

to Note 20 for information on ma

terial provisions.

We have provided information below on

the procedural history

of certain Matters, where we be

lieve appropriate, to aid the

understanding of the Matter.

For a discussion of certain risks associated

with NWM Group’s

litigation and regulatory matters, s

ee the Risk factor relating to

legal, regulatory and governmental actio

ns and investigations

set out on page 198.

Litigation

Residential mortgage-backed securities (RMBS) litigation in

the US

NatWest Markets Securities Inc. (NWMSI) and cer

tain affiliates

continue to defend RMBS-relate

d claims in the US in which the

plaintiff, the Federal Deposit Insurance Co

rporation (FDIC),

alleges that certain disclosures made in connecti

on with the

relevant offerings of RMBS contained materi

ally false or

misleading statements and/or omissions reg

arding the

underwriting standards pursuant to which

the mortgage loans

underlying the RMBS were issued. In Q4 2021, N

WMSI settled

RMBS claims by the State of New Mexico for an

amount that

was covered by an existing provision. In

addition, NWMSI

previously agreed to settle a purported RMB

S class action

entitled New Jersey Carpenters Health Fun

d v. Novastar

Mortgage Inc. et al. for US$55.3 million. This was

paid into

escrow pending court approval of the se

ttlement, which was

granted in March 2019, but whic

h remains the subject of an

appeal by a class member who

does not want to participate in

the settlement.

London Interbank Offered Rate (LIBOR) and other rates

litigation

NWM Plc and certain other members of NatWes

t Group,

including NatWest Group plc, are defendants in a

number of

class actions and individual claims pendin

g in the United States

District Court for the Southern District of New Yo

rk (SDNY)

with respect to the setting of LI

BOR and certain other

benchmark interest rates. The complaints allege th

at the NWM

Group defendants and other panel banks violate

d various

federal laws, including the US c

ommodities and antitrust laws,

and state statutory and common law, as well as con

tracts, by

manipulating LIBOR and prices of

LIBOR-based derivatives in

various markets through various

means.

Several class actions relating to USD LIBO

R, as well as more

than two dozen non-class actions concernin

g USD LIBOR, are

part of a co-ordinated proceeding in the SDNY.

In December

2021, the United States Court of Appeals for the Second Ci

rcuit

(US Court of Appeals), reversing a Dece

mber 2016 decision of

the SDNY, held that plaintiffs in

these cases have adequately

asserted the court’s personal jurisdiction ove

r NWM Plc and

other non-US banks, including with respec

t to antitrust class

action claims on behalf of over-the-counter plain

tiffs and

exchange-based purchaser plaintiffs. In the

same decision, the

appellate court affirmed the SD

NY’s prior decision that plaintiffs

who purchased LIBOR-based in

struments from third parties (as

opposed to the defendants) lack antitrust standin

g to pursue

such claims. The appellate court remanded these m

atters to

the SDNY for further proceedings in light of its

rulings. A

separate appeal concerning th

e SDNY’s dismissal of a fraud

class action on behalf of lender plaintiffs remains pendin

g in the

US Court of Appeals. In March

2020, NWM Group defendants

finalised a settlement resolving the class ac

tion on behalf of

bondholder plaintiffs (those who held bon

ds issued by non-

defendants on which interest was paid from 20

07 to 2010 at a

rate expressly tied to USD LIBOR).

The amount of the settlement (which was covered

by an

existing provision) has been paid into escr

ow pending court

approval of the settlement.

The non-class claims filed in th

e SDNY include claims that the

FDIC is asserting on behalf of certain failed US

banks. In July

2017, the FDIC, on behalf of 39 of those failed US

banks,

commenced substantially similar claims against NWM Plc,

NatWest Group plc and others in the Hi

gh Court of Justice of

England and Wales. The action alleges collu

sion with regard to

the setting of USD LIBOR and that the defendants b

reached UK

and European competition law, as well as asserting com

mon

law claims of fraud under US law. T

he defendant banks

consented to a request by the

FDIC for discontinuance of the

claim in respect of 20 failed US banks, leaving 19 failed US

banks as claimants. The UK pr

oceedings are at the disclosure

stage.

Notes to the fin

ancial state

ments continue

NWM Gr

oup

Annual Report and Accou

nts 202

168

25 Memorandum items continued

Litigation and regulatory matters

In addition, there are two class actions rela

ting to JPY LIBOR

and Euroyen TIBOR. The first class action, which rela

tes to

Euroyen TIBOR futures contracts, was dismisse

d by the SDNY

in September 2020 on jurisdictional and other

grounds, and the

plaintiffs have commenced an appeal to

the US Court of

Appeals. The second class action, which rela

tes to other

derivatives allegedly tied to JPY

LIBOR and Euroyen TIBOR,

was dismissed by the SDNY in relation to NWM Plc

and other

NWM Group companies in Septe

mber 2021. That dismissal may

be the subject of a future appeal.

In addition to the above, five other class ac

tion complaints were

filed against NWM Group defendants in the

SDNY, each relating

to a different reference rate. In February 2017

, the SDNY

dismissed the case relating to Euribor for lack of perso

nal

jurisdiction and in August 2019, the S

DNY dismissed the case

relating to Pound Sterling for various reasons. Plain

tiffs’

appeals in both cases remain pe

nding. In July 2019, the SDNY

dismissed the case relating to the Singapo

re Interbank Offered

Rate and Singapore Swap Offer Rate (‘S

IBOR / SOR’) but in

March 2021, the US Court of Appeals reve

rsed the SDNY’s

decision, such that the case has

returned to the SDNY, where it

is the subject of a further motion to dismiss. In

the class action

relating to the Australian Bank B

ill Swap Reference Rate, the

SDNY in February 2020 declined to dismiss the

amended

complaint as against NWM Plc

and certain other defendants,

but dismissed it as to other members of N

WM Group (including

NatWest Group plc). The claims against non-dis

missed

defendants (including NWM Plc) are now p

roceeding in

discovery. In June 2021, NWM Plc and the plain

tiffs in the Swiss

Franc LIBOR class action finalis

ed a settlement resolving that

case. The amount of the settlement (which

was covered by an

existing provision) has been paid into escr

ow pending court

approval of the settlement.

NWM Plc is also named as a def

endant in a motion to certify a

class action relating to LIBOR in the Tel Aviv Dis

trict Court in

Israel. NWM Plc filed a motion for cancellatio

n of service

outside the jurisdiction, which was g

ranted in July 2020. The

claimants appealed that decision and in Nove

mber 2020 the

appeal was refused and the claim dismissed by

the Appellate

Court. The claim could in futur

e be recommenced depending

on the outcome of an appeal to Israel’s Supre

me Court in

respect of dismissal of the substantive case agains

t banks that

had a presence in Israel.

In January 2019, a class action

antitrust complaint was filed in

the SDNY alleging that the defendants (USD ICE LIBOR p

anel

banks and affiliates) have conspired to supp

ress USD ICE

LIBOR from 2014 to the present by submitti

ng incorrect

information to ICE about their borrowing costs. The def

endants

include NatWest Group plc, NWM Plc, NWMSI

and NWB Plc.

The defendants made a motion to dismiss this case, w

hich was

granted by the court in March 20

20. One plaintiff sought to

appeal the dismissal, but on 14 February 202

2, the US Court of

Appeals dismissed the appeal b

ecause that plaintiff lacks

standing to maintain the appeal.

In August 2020, a complaint was f

iled in the United States

District Court for the Northern

District of California by several

United States consumer borrowers against the USD IC

E LIBOR

panel banks and their affiliates, alleging

that the normal

process of setting USD ICE LIBO

R amounts to illegal price-

fixing, and also that banks in the United States have ille

gally

agreed to use LIBOR as a component of price in

variable

consumer loans. The NatWest Group defendants a

re NatWest

Group plc, NWM Plc, NWMSI and NWB Plc. The pl

aintiffs seek

damages and to prevent the enf

orcement of LIBOR-based

instruments through injunction. Defe

ndants have filed a motion

to dismiss, which remains pending.

FX litigation

NWM Plc, NWMSI and/or NatWe

st Group plc are defendants in

several cases relating to NWM Plc’s foreign exc

hange (FX)

business. In 2015, NWM Plc pai

d US$255 million to settle the

consolidated antitrust class acti

on filed in the SDNY on behalf

of persons who entered into over-the-counte

r FX transactions

with defendants or who traded FX inst

ruments on exchanges.

In 2018, some members of the settlement class who

opted out

of that class action settlement filed their own non-class

complaint in the SDNY asserting antitrust claims a

gainst NWM

Plc, NWMSI and other banks. Those

opt-out claims are

proceeding in discovery.

In April 2019, some of the sam

e claimants in the opt-out case

described above, as well as othe

rs, served proceedings (which

are ongoing) in the High Court of Ju

stice of England and Wales,

asserting competition claims ag

ainst NWM Plc and several

other banks. The claim was transferred from

the High Court of

Justice of England and Wales in December 2021 an

d registered

in the Competition Appeal Trib

unal in January 2022.

An FX-related class action, on behalf of ‘consu

mers and end-

user businesses’, is proceeding in the SDNY against N

WM Plc

and others. Plaintiffs have filed a motion fo

r class certification,

which defendants are opposing

In May 2019, a cartel class action was filed in the Fede

ral Court

of Australia against NWM Plc and four other ba

nks on behalf of

persons who bought or sold currency through FX spots o

forwards between 1 January 200

8 and 15 October 2013 with a

total transaction value exceeding AUD $0.5 millio

n. The

claimant has alleged that the banks, including NWM

Plc,

contravened Australian competition law by sh

aring information,

coordinating conduct, widening s

preads and manipulating FX

rates for certain currency pairs during this period. Nat

West

Group plc and NWMSI have been named in the action as ‘o

ther

cartel participants’, but are not respondents. The claim

was

served in June 2019 and, after a number of interlocu

tory

pleading disputes, NWM Plc is preparing its defence

In July and December 2019, two se

parate applications seeking

opt-out collective proceedings orders we

re filed in the UK

Competition Appeal Tribunal against NatWes

t Group plc, NWM

Plc and other banks. Both appli

cations have been brought on

behalf of persons who, between 18

December 2007 and 31

January 2013, entered into a re

levant FX spot or outright

forward transaction in the EEA with a relevant fin

ancial

institution or on an electronic communica

tions network. A

hearing to determine class certif

ication and which of the

applications should be permitted to represent the class

took

place in July 2021 and judgment is awaited.

In November 2020, proceedings were iss

ued in the High Court

of Justice of England and Wales against NWM Plc by a cl

aimant

who sought an account of profits and/or da

mages in respect of

alleged historical FX trading misc

onduct. The claim was served

on NWM Plc in March 2021 and discontinued in

December

2021.

Two motions to certify FX-relat

ed class actions were filed in the

Tel Aviv District Court in Israel i

n September and October 2018,

and were subsequently consolidated into one motion. The

consolidated motion to certify, which n

ames The Royal Bank of

Scotland plc (now NWM Plc) and several other banks

defendants, was served on NW

M Plc in May 2020. NWM Plc has

filed a motion challenging the pe

rmission to serve the

consolidated motion outside the Israeli juris

diction, which

remains pending.

Notes to the fin

ancial state

ments continue

NWM Gr

oup

Annual Report and Accou

nts 202

169

25 Memorandum items continued

Litigation and regulatory matters

In December 2021, a claim was

issued in the Netherlands

against NatWest Group plc, NWM Plc and NWM N.

V. by

Stichting FX Claims, seeking a declar

ation from the court that

anti-competitive FX market conduct descri

bed in decisions of

the European Commission of 16 May 2

019 is unlawful, along

with unspecified damages. The c

laimant has indicated that it

may seek to amend its claim to also refer to the Dece

mber

2021 decision by the EC (described below under “F

oreign

exchange related investigations”

). A hearing is scheduled for

June 2022.

Certain other foreign exchange transaction

related claims have

been or may be threatened. NWM Group cannot p

redict

whether all or any of these claims will be pu

rsued.

Government securities antitrust litigation

NWMSI and certain other US broke

r-dealers are defendants in

a consolidated antitrust class ac

tion pending in the SDNY on

behalf of persons who transacte

d in US Treasury securities or

derivatives based on such instruments, including futu

res and

options. The plaintiffs allege that defendants rig

ged the US

Treasury securities auction bidding process to

deflate prices at

which they bought such securities and colluded to inc

rease the

prices at which they sold such se

curities to plaintiffs. The

complaint was dismissed in Ma

rch 2021. Plaintiffs have filed an

amended complaint, which defe

ndants are again seeking to

have dismissed.

Class action antitrust claims commenced in Ma

rch 2019 are

pending in the SDNY against NWM Plc, NW

MSI and other banks

in respect of Euro-denominated bonds issued by

European

central banks (EGBs). The complaint alleges a co

nspiracy

among dealers of EGBs to widen the bid-ask spreads

they

quoted to customers, thereby increasing the prices

customers

paid for the EGBs or decreasing the p

rices at which customers

sold the bonds. The class consists of those wh

o purchased or

sold EGBs in the US between 20

07 and 2012. The defe

ndants

filed a motion to dismiss this m

atter, which was granted by the

court in respect of NWM Plc and NWMSI in July 2

020. Plaintiffs

have filed an amended complai

nt which defendants are seeking

to have dismissed.

Swaps antitrust litigation

NWM Plc, NWMSI and NatWest Group plc,

as well as a number

of other interest rate swap dealers, are defe

ndants in several

cases pending in the SDNY alleging violations of the U

antitrust laws in the market for

interest rate swaps. There is a

consolidated class action complaint on behalf of persons

who

entered into interest rate swaps with the defendants, as

well as

non-class action claims by thre

e swap execution facilities

(TeraExchange, Javelin, and trueEx). The pl

aintiffs allege that

the swap execution facilities would have s

uccessfully

established exchange-like trading of interest rate sw

aps if the

defendants had not unlawfully conspired to p

revent that from

happening through boycotts and other means. Disco

very in

these cases is complete, and the

plaintiffs’ motion for class

certification remains pending.

In June 2021, a class action antitrust complaint w

as filed

against a number of credit default swap dealers in Ne

w Mexico

federal court on behalf of persons who, fr

om 2005 onwards,

settled credit default swaps in the United States by

reference to

the ISDA credit default swap auction protocol. The com

plaint

alleges that the defendants conspired to manipul

ate that

benchmark through various means in violation of t

he antitrust

laws and the Commodity Exch

ange Act. The defendants

include several NatWest Group companies, includin

g NatWest

Group plc. Defendants are seeking dismiss

al.

Odd lot corporate bond trading antitrust litigation

In October 2021, the SDNY gra

nted defendants’ motion to

dismiss the class action antitrust com

plaint alleging that, from

August 2006 onwards various sec

urities dealers, including

NWMSI, conspired artificially to widen sp

reads for odd lots of

corporate bonds bought or sold in the United Sta

tes secondary

market and to boycott electronic trading platfor

ms that would

have allegedly promoted pricing compe

tition in the market for

such bonds. Plaintiffs have com

menced an appeal of the

dismissal.

Spoofing litigation

In December 2021, three substantially s

imilar class actions

complaints were filed in federal court in the United S

tates

against NWM Plc and NWMSI alle

ging Commodity Exchange

Act and common law unjust enrichment clai

ms arising from

manipulative trading known as

spoofing. The complaints refer

to NWM Plc’s December 2021 spoofing-rela

ted guilty plea

(described below under “US inv

estigations relating to fixed-

income securities”) and purport to asser

t claims on behalf of

those who transacted in US Treasury se

curities and futures and

options on US Treasury securities between 20

08 and 2018.

The three complaints are pending in the United St

ates District

Court for the Northern District

of Illinois.

Madoff

NWM N.V. is a defendant in two actions f

iled by the trustee for

the bankruptcy estates of Bernard L. Mad

off and Bernard L.

Madoff Investment Securities L

LC, in bankruptcy court in New

York, which together seek to clawback more than U

S$298

million that NWM N.V. allegedly received fro

m certain Madoff

feeder funds and certain swap counterpa

rties. The claims were

previously dismissed, but as a re

sult of an August 2021 decision

by the US Court of Appeals, the

y will now proceed in the

bankruptcy court subject to NWM N.V.’s legal and factu

defences.

Interest rate hedging products and similar litigation

NWM Group continues to deal with a small number of

active

litigation claims in the UK relating to the allege

d mis-selling of

interest rate hedging products.

Separately, NWM Plc is defending claims file

d in France by two

French local authorities relating to structu

red interest rate

swaps. NWM N.V. is also a defendant in one of the clai

ms. The

plaintiffs allege, among other things, that the sw

aps are void

for being illegal transactions, th

at they were mis-sold, and that

information / advisory duties were breached. B

oth claims have

been remitted from the Supreme Court to the Court of

Appeal.

EUA trading litigation

NWM Plc was a named defendant in civil p

roceedings before

the High Court of Justice of England an

d Wales brought in 2015

by ten companies (all in liquidation) (the ‘Li

quidated

Companies’) and their respective l

iquidators (together, ‘the

Claimants’). The Liquidated Companies previously

raded in

European Union Allowances (E

UAs) in 2009 and were alleged

to be VAT defaulting traders within (or otherwise connected

to)

EUA supply chains of which N

WM Plc was a party.

In March 2020, the court held that NWM Plc

and Mercuria

Energy Europe Trading Limited (‘Mercuria’) were lia

ble for

dishonestly assisting and knowingly being

a party to fraudulent

trading during a seven busines

s day period in 2009.

Notes to the fin

ancial state

ments continue

NWM Gr

oup

Annual Report and Accou

nts 202

170

25 Memorandum items continued

Litigation and regulatory matters

In October 2020, the High Court quantified tot

al damages

against NWM Plc and Mercuria

at £45 million plus interest and

costs, and permitted the defendants to appeal to

the Court of

Appeal. In May 2021 the Court of A

ppeal set aside the High

Court’s judgment and ordered that a retrial t

ake place before a

different High Court judge. The claimants have soug

permission from the Supreme Court to appeal. The Cou

rt of

Appeal also dismissed an appeal by Mercu

ria against the

finding by the High Court that N

WM Plc and Mercuria were

both vicariously liable. Mercuria has sought pe

rmission from the

Supreme Court to appeal that decision.

US Anti-Terrorism Act litigation

NWM N.V. and certain other financial institu

tions are

defendants in several actions filed by a number of

US nationals

(or their estates, survivors, or he

irs), most of whom are or were

US military personnel, who were

killed or injured in attacks in

Iraq between 2003 and 2011. NWM Plc is also

a defendant in

some of these cases.

According to the plaintiffs’ allegations, the def

endants are liable

for damages arising from the attacks because they allegedly

conspired with Iran and certain Iranian banks

to assist Iran in

transferring money to Hezbollah and the Iraqi te

rror cells that

committed the attacks, in violation of the US Anti-Ter

rorism

Act, by agreeing to engage in ‘stripping’ of transac

tions

initiated by the Iranian banks so that the I

ranian nexus to the

transactions would not be detected.

The first of these actions was filed in the United S

tates District

Court for the Eastern District of New York in Nove

mber 2014.

In September 2019, the district court dismissed t

he case,

finding that the claims were def

icient for several reasons,

including lack of sufficient allegations as to

the alleged

conspiracy and causation. The plaintiff

s are appealing the

decision to the US Court of Appeals. Another action, filed i

n the

SDNY in 2017, was dismissed in March 2019

on similar

grounds, but remains subject to appeal to the US Cou

rt of

Appeals. Other follow-on actions that are subst

antially similar

to the two that have now been dismisse

d are pending in the

same courts.

Securities underwriting litigation

NWMSI is an underwriter defen

dant in securities class actions

in the US in which plaintiffs gene

rally allege that an issuer of

public securities, as well as the underwriters of the sec

urities

(including NWMSI), are liable to purchasers for

misrepresentations and omissions made i

n connection with the

offering of such securities.

1MDB litigation

A claim for a material sum has

been issued, but not served,

recently in Malaysia by 1MDB against Cout

ts & Co Ltd for

alleged losses in connection wit

h the 1MDB fund. Coutts & Co

Ltd is a company registered in

Switzerland and is in wind-down

following the announced sale of its business asse

ts in 2015.

Regulatory matters (including investigations)

NWM Group’s financial condition can be

affected by the actions

of various governmental and regulatory au

thorities in the UK,

the US, the EU and elsewhere. NWM Group companies ha

engaged, and will continue to engage, in discussions wi

relevant governmental and reg

ulatory authorities, including in

the UK, the US, the EU and elsewhere, on

an ongoing and

regular basis, and in response to infor

mal and formal inquiries

or investigations, regarding operational, sys

tems and control

evaluations and issues including those

related to compliance

with applicable laws and regulations, includi

ng consumer

protection, investment advice, business

conduct,

competition/anti-trust, VAT recovery, anti-bribe

ry, anti-money

laundering and sanctions regime

NWM Group companies have be

en providing information

regarding a variety of matters, including, fo

r example, offering

of securities, the setting of benchmark rates and

derivatives trading, conduct in the foreign e

xchange market,

product mis-selling and various issue

s relating to the issuance,

underwriting, and sales and trading of fixed-i

ncome securities,

including structured products and government securi

ties, some

of which have resulted, and oth

ers of which may result, in

investigations or proceedings.

Any matters discussed or identif

ied during such discussions and

inquiries may result in, among

other things, further inquiry or

investigation, other action bein

g taken by governmental and

regulatory authorities, increased costs being i

ncurred by NWM

Group, remediation of systems and controls, public

or private

censure, restriction of NWM Group’s business acti

vities and/or

fines. Any of the events or circumstances

mentioned in this

paragraph or below could have a m

aterial adverse effect on

NWM Group, its business, authorisations and licence

reputation, results of operations or the price of securities issu

by it, or lead to material additional provisions

being taken.

NWM Group is co-operating fully

with the matters described

below.

US investigations relating to fixed-income securities

In December 2021, NWM Plc pl

ed guilty in the United States

District Court for the District of Connecticut to one cou

nt of

wire fraud and one count of secu

rities fraud in connection with

historical spoofing conduct by former empl

oyees in US

Treasuries markets between January 2008 and May 20

14 and,

separately, during approximately

three months in 2018.

The 2018 trading occurred duri

ng the term of a non-

prosecution agreement (NPA) be

tween NWMSI and the United

States Attorney's Office for the District of Conne

cticut (USAO

CT), under which non-prosecution was co

nditioned on NWMSI

and affiliated companies not en

gaging in criminal conduct

during the term of the NPA. The relevant t

rading in 2018 was

conducted by two NWM traders in Singapore an

d breached

that NPA.

The plea agreement reached with the US Dep

artment of

Justice and the USAO CT resolves

both the spoofing conduct

and the breach of the NPA.

Notes to the fin

ancial state

ments continue

NWM Gr

oup

Annual Report and Accou

nts 202

171

25 Memorandum items continued

Litigation and regulatory matters

As required by the resolution a

nd sentence imposed by the

court, NWM Plc is subject to a three-year period of

probation

and has paid a US$25.2 million criminal fine, a

pproximately

US$2.8 million in criminal forfeiture and app

roximately US$6.8

million in restitution out of exist

ing provisions. The plea

agreement also imposes an ind

ependent corporate monitor. In

addition, NWM Plc has committed to co

mpliance programme

reviews and improvements and

agreed to reporting and co-

operation obligations.

Other material adverse collateral consequence

s may occur as

a result of this matter, as furthe

r described in the Risk factor

relating to legal, regulatory and

governmental actions and

investigations set out on page

198.

Foreign exchange related investigations

In recent years, NWM Plc paid significant penal

ties to resolve

investigations into its FX business by

the FCA, the Commodity

Futures Trading Commission, the US Dep

artment of Justice, the

Board of Governors of the Fede

ral Reserve System, the

European Commission (EC) and others. In Decembe

r 2021, the

EC announced that a settlement had been re

ached with

NatWest Group plc, NWM Plc and other banks in

relation to its

investigation into past breaches

of competition law regarding

spot foreign exchange trading.

NatWest Group plc and NWM

Plc were fined EUR 32.5 million in total relating t

o conduct that

took place between 2011 and 201

2. The fine was covered by

existing provisions. This concludes

the EC’s investigations into

NatWest Group’s past spot foreign exchange trading

activity.

FCA investigation into NatWest Group’s compliance with the

Money Laundering Regulations 2007

Following an FCA investigation, commenced in 201

7, into

potential breaches of the UK Money Laundering Regul

ations

2007 (‘MLR 2007

’), NWB Plc pled guilty in October 2021 to

three offences under regulation 45

(1) of the MLR 2007 for

failure to comply with regulation 8(1) between 7 Nove

mber

2013 and 23 June 201

6, and regulations 8(3) and 14(1) between

8 November 2012 and 23 June 20

16. These regulations

required the firm to determine, conduct and demons

trate risk

sensitive due diligence and ongoing monit

oring of its

relationships with its customers f

or the purposes of preventing

money laundering. The offences

relate to operational

weaknesses between 2012 and 2

016, during which period NWB

Plc did not adequately monitor the accoun

ts of a UK

incorporated customer. In December 2021, NWB Plc w

as fined

£264.8 million, incurred a confiscation order and w

as ordered

to pay costs. This was met by NWB Plc fro

m existing provisions,

with a small additional provisio

n taken in Q4 2021.

Systematic Anti-Money Laundering Programme assessment

In December 2018, the FCA commenced a Systematic A

nti-

Money Laundering Programme

assessment of NatWest Group.

In August 2019, the FCA instru

cted NatWest Group to appoint a

Skilled Person under section 166 of the Financial

Services and

Markets Act 2000 to provide assurance on financi

al crime

governance arrangements in relation to two financial c

rime

change programmes. The Skilled Person’s final re

port was

received in January 2022.

26 Analysis of the net investment in business interests

NWM Group

NWM Plc

2021

2020

2021

2020

£m

Net assets sold

—

288

—

274

Loss on disposal of net

assets

—

(5)

—

(5)

Sale of subsidiaries and associates

—

Profit on sale of subsidiaries

—

Net inflow of cash in respect of disposals

358

269

Net inflow of cash

358

269

Notes to the fin

ancial state

ments continue

NWM Gr

oup

Annual Report and Accou

nts 202

172

27 Analysis of changes in finan

cing during the year

NWM Group

Share capita

l, share

premium

and

paid in equity

Subordinated liabilities

MREL

2021

2020

2021

2020

2021

2020

£m

At 1 January

3,063

2,858

3,156

5,181

5,120

Redemption of subordinated liabilities

(316)

(409)

Interest on subordinated liabilities

(62)

(139)

Maturity/redemption of MRELs

(1,082)

Interest on MRELs

(152)

(191)

Net cash outflow from financing

—

(378)

(548)

(1,234)

(191)

Effects of foreign exchange

—

(78)

(115)

(6)

Changes in fair value of subordinated liabili

ties and MRELs

(61)

(119)

Loss on sale of subordinated liabilities and MRELs

—

Interest on subordinated liabilities

and MRELs

138

144

191

Loss on redemption of own debt

—

Redemption of preference shar

187

—

At 31 December

3,250

3,063

2,427

2,858

3,857

5,181

NWM Plc

Share capita

l, share

premium

and paid in

equity

Subordinated liabilities

MREL

2021

2020

2021

2020

2021

2020

£m

At 1 January

3,063

2,269

2,610

5,181

5,120

Redemption of subordinated liabilities

(315)

(398)

Interest on subordinated liabilities

(24)

(117)

Maturity/redemption of MRELs

(1,082)

—

Interest on

MRELs

(152)

(191)

Net cash outflow from financing

—

(339)

(515)

(1,234)

(191)

Effects of foreign exchange

—

(71)

(115)

(6)

Changes in fair value of subordinated liabili

ties and MRELs

(28)

(119)

Loss on sale of subordinated liabilities and MRELs

—

Interest on subordinated liabilities

and MRELs

116

144

191

Loss on redemption of own debt

—

Redemption of preference shar

187

—

At 31 December

3,250

3,063

1,879

2,269

3,857

5,181

28 Analysis of cash and cash equivalents

In the cash flow statement, cash and cash equiv

alents comprises

cash, loans to banks and treasury bills with an o

riginal maturity

of less than three months that are readily conve

rtible to known amounts of cash and subject

to insignificant risk of change in value.

NWM

Group

NWM Plc

2021

2020

2021

2020

£m

At 1 January

cash

15,771

12,729

11,736

9,953

- cash equivalents

10,609

14,314

9,549

13,005

26,380

27,043

21,285

22,958

Net decrease in cash and cash equivalents

(1,130)

(663)

(2,071)

(1,673)

At 31 December

25,250

26,380

19,214

21,285

Comprising:

Cash and balances at central banks

16,645

15,771

12,294

11,736

Trading assets

7,130

9,055

4,711

7,540

Other financial assets

173

Net loans to banks including int

ragroup balances

(1)

1,459

1,381

2,193

1,836

Cash and cash equivalents

25,250

26,380

19,214

21,285

(1)

NWM Group includes cash collateral posted with bank

counterparties in respect of derivative liabilities of £4,286 million (2020 - £7,427 million), and NWM Plc includes cash collateral

posted with bank counterparties in respect of derivative liabilities

of £3,561 million (2020 - £6,974 million).

Certain members of NatWest Group are

required by law or regulation to m

aintain balances with the central banks in the

jurisdictions in which they operate. Natwest M

arkets N.V. had mandatory rese

rve deposits with De Nederlandsche Bank N.V

of €60

million (2020 - €81 million).

Notes to the fin

ancial state

ments continue

NWM Gr

oup

Annual Report and Accou

nts 202

173

29 Directors' and key management remuneration

2021

2020

Directors' remuneration

£000

Non-executive directors emoluments

394

368

Chairman and executive directors emoluments

2,268

1,877

2,662

2,245

Amounts receivable under LTIP

s, share option and other plans

271

269

Total

2,933

2,514

The total emoluments and amounts receivable under

long-term incentive plans and share op

tion plans of the highest paid director

were £1,662,000

(2020 - £1,428,000).

No directors accrued benefits under defined bene

fit schemes or defined contribution sche

mes during 2021 and 2020

The executive directors may pa

rticipate in NatWest Group’s long-te

rm incentive plans, executive share option and sha

resave

schemes. Where directors of the B

ank are also directors of NatWest Group, details of thei

r share interests can be found in the

2021

Annual Report and Accounts of the NatWest

Group, in line with regulations applying to Nat

West Group as a premium listed

company.

Compensation of key managemen

The aggregate remuneration of directors and o

ther members of key management duri

ng the year was as follows:

2021

2020

£000

Short term benefits

15,245

16,922

Post employment benefits

595

278

Share based payments

703

2,789

16,543

19,989

30 Transactions with directors and key management

At 31 December 2021, amount

s outstanding in relation to transactions, arrangemen

ts and agreements entered in

to by authorised

institutions in NatWest Group, as

defined in UK legislation, were £4

93,712 in respect of loans to one director of the co

mpany at any

time during the financial period (2020

- £59,894).

For the purposes of IAS 24 Related pa

rty disclosures, key management co

mprises directors of the company and mem

bers of the

Executive Committee. Amounts in the table belo

w are attributed to each person at thei

r highest level of NatWest Group key

management.

2021

2020

£000

Loans to customers - amortised cost

494

Customer deposits

1,743

765

Key management has banking relationships with N

atWest Group entities which are ente

red into in the normal course of busine

and on substantially the same terms, including in

terest rates and security, as for comp

arable transactions with other persons

of a

similar standing or, where applicable, with other em

ployees. These transactions did not i

nvolve more than the normal risk of

repayment or present other unfavourable fea

tures. Key management had no reportable

transactions or balances with the ho

lding

company.

Notes to the fin

ancial state

ments continue

NWM Gr

oup

Annual Report and Accou

nts 202

174

31 Related parties

UK Government

The UK government through HM Treasury is the u

ltimate

controlling party of NatWest Gr

oup plc. The UK Government’s

shareholding is managed by UK Gove

rnment Investments

Limited, a company wholly own

ed by the UK Government. As a

result the UK government and UK Government cont

rolled

bodies are related parties of the Group.

At 31 December 2021, HM Treasury’s holding in N

atWest

Group’s ordinary shares was 52.9

6%.

NWM Group enters into transactions with many of t

hese

bodies. Transactions include the

payment of: taxes principally

UK corporation tax (refer to Note 7

) and value added tax;

national insurance contributions; local autho

rity rates; and

regulatory fees and levy; toget

her with banking transactions

such as loans and deposits unde

rtaken in the normal course of

banker-customer relationships.

Bank of England facilities

NWM Group may participate in a number of schemes o

perated

by the Bank of England in the normal course of busine

ss.

Members of NWM Group that a

re UK authorised institutions are

required to maintain non-interest bearing (cash

ratio) deposits

with the Bank of England amou

nting to 0.406% of their average

eligible liabilities in excess of £6

00 million. They also have

access to Bank of England reserve accounts: ste

rling current

accounts that earn interest at the B

ank of England base rate.

Other related parties

(a)

In their roles as providers of finance, NWM

Group

companies provide development and other type

s of capital

support to businesses. These

investments are made in the

normal course of business. In some instances

, the

investment may extend to ownership or con

trol over 20% or

more of the voting rights of the investee company.

(b)

In accordance with IAS 24, transactions or

balances

between NWM Group entities that have been eli

minated on

consolidation are not reported.

t Group

entities, mainly NWB Plc which provides the

majority of

shared services (including technology) and oper

ational

processes.

(d) The captions in the primary financial statements of

the

parent company include amounts attributable

subsidiaries. These amounts have bee

n disclosed in

aggregate in the relevant notes

to the financial statements.

Other net income/(expenses) represents the s

hare of post-

tax results of associates and joint ventures, p

rofit (or loss)

on disposal of subsidiaries, associates and join

t ventures,

and gains on acquisitions.

The table below discloses transactions be

tween NWM Group and fellow subsidiaries of

NatWest Group.

2021

2020

£m

Interest receivable

—

Interest payable

(169)

(282)

Fees and commissions receivable

Fees and commissions payable

(1)

(4)

Other administrative expenses

(33)

(13)

(173)

(286)

NWM N.V. loan purchases via NWM Plc

In Q4 2021 NWM N.V. started purchasing loans on

to the banking book as part of a larger initi

ative to increase its risk and po

rtfolio

diversity. NWM N.V. has identified a list of lo

ans it wishes to purchase which NWM Plc has purc

hased from market participants on

behalf of NWM N.V.. NWM N.V. subseque

ntly purchased the loans at the same price f

or which NWM Plc had purchased them for

and paid a fee to NWM Plc in re

spect of each loan purchased. As at 31 Decembe

r 2021, loans of €24

million have moved onto

NWM N.V. balance sheet.

32 Ultimate holding company

NWM Group’s ultimate holding company is NatWest G

roup plc which is incorporated in the Un

ited Kingdom and registered in

Scotland.

As at 31 December 2021, NatWest Group plc he

ads the largest group in which NWM Gr

oup is consolidated. Copies of the

consolidated accounts may be obtained from Leg

al, Governance & Re

gulatory Affairs, NatWest Group plc, Gogarburn, PO B

1000, Edinburgh EH12 1HQ,

the

Registrar of Companies or at natwestgroup.com.

Following placing and open offe

rs by NatWest Group plc in December 2008 and April 200

9, the UK Government, through HM

Treasury, currently holds

52.96% of the issued o

rdinary share capital of the holding com

pany and was therefore the NWM Group’s

ultimate controlling party.

33 Post balance sheet events

On 17 February 2022, the NWM Plc B

oard approved an interim dividend of £250

million, or £0.625

per share, to be declared and

payable to NatWest Group plc on 18 February 202

2. There has been no adjustment to the 31

ecember 2021 statutory financial

statements. For regulatory reporting purposes, a £250

million foresee

able dividend deduction has been applied to the y

ear-end

regulatory capital position.

Other than as disclosed in the accounts, there h

ave been no other significant eve

nts between 31 December 2021

and the date of

approval of these accounts whic

h would require a change to or additional

disclosure.

Notes to the fin

ancial state

ments continue

NWM Gr

oup

Annual Report and Accou

nts 202

175

34 Related undertakings

Legal entities and activities at 31 December 2021

In accordance with the Companies

Act 2006, NWM Plc’s related undertakin

gs and the accounting treatment for each

are listed

below. All undertakings are wholly-owned by NWM Plc o

r subsidiaries of NWM Plc and are co

nsolidated by reason of contractual

control (Section 1162(2) CA 200

6), unless otherwise indicated. NWM Group interest refers t

o ordinary shares of equal values

and

voting rights unless further ana

lysis is provided in the notes. Ac

tivities are classified in accordance with Annex I to the Ca

pital

Requirements Directive (“CRD IV”) and the definitions in A

ticle 4 of the Capital Requirements Re

gulation.

The following table details active related undertakin

gs incorporated in the UK which are 100% owned by NWM Group

and fully consolidated for accounting purposes

Regulatory

Entity name

Activity

treat

ment

Notes

280 Bishopsgate

Finance Ltd

INV

(1)

Care Homes 1 Lt

(1)

Care Homes 2 Lt

(1)

Care Homes 3 Lt

(1)

Care Homes Hol

dings Ltd

(1)

Churchill Manag

ement Ltd

(1)

Desertlands En

tertainment Ltd

(1)

Distant Planet P

roductions Lt

(1)

Lombard Corpor

ate Finance (6)

Ltd

(1)

Lombard Corpor

ate Finance (7)

Ltd

(1)

Lombard Corpor

ate Finance (11)

Ltd

(1)

Lombard Corpor

ate Finance (15)

Ltd

(1)

Nanny McPhee

Productions L

(1)

NatWest Mark

ets Secretarial Se

rvices Ltd

(1)

NatWest Mark

ets Secured Fun

ding LLP

(9)

P of A Produc

tions Ltd

(1)

Patalex Product

ions Ltd

(1)

Patalex V Produ

ctions Ltd

(1)

Price Productio

ns Ltd

(1)

Priority Sites Inv

estments Ltd

(1)

Priority Sites L

INV

(

Entity name

Activity

Regulatory

Notes

treatment

Property Ventur

e Partners Ltd

INV

(2)

R.B. Equipment L

easing Ltd

(1)

R.B. Leasing (Ap

ril) Ltd

(1)

R.B. Leasing Co

mpany Ltd

(2)

R.B.S. Special

Investments Ltd

(1)

RB Investment

s 3 Ltd

OTH

(1)

RBOS (UK) Ltd

(1)

RBS Manage

ment Services (UK

) Ltd

(1)

RBS Mezzanin

e Ltd

(2)

RBS Property De

velopments L

(2)

RBS Property V

entures Inves

tments Ltd

(2)

RBSM Capital Lt

(2)

RBSSAF (12) L

(1)

RoboScot Equity

Ltd

(2)

Royal Bank Inv

estments Ltd

(2)

Royal Bank Ve

ntures Investme

nts Ltd

(2)

West Register (Ho

tels Number 3)

Ltd

INV

(2)

West Register (Pro

perty Invest

ments) Ltd

(2)

West Register (Re

alisations) L

INV

(2)

Winchcombe Fi

nance Ltd

(1)

The following table details active related undertakin

gs incorporated outside the UK which are 100% owned by NWM

Group and fully consolidated for accounting purposes

Regulatory

Entity name

Activity

treatment

Notes

AA Merchant S

ervices B.V.

(

Alcover A.G.

(23)

Alternative Inv

estment Fund B.

(6)

Candlelight Acqu

isition LLC

(3)

Coutts & Co Lt

(

22)

Coutts General Pa

rtner (Cayma

n) V Ltd

(19)

Financial Asset S

ecurities Cor

(

KEB Investor

s, L.P.

(15)

NatWest Mark

ets Group Hol

dings Corporat

ion

(3)

NatWest Mark

ets N.V.

(

NatWest Mark

ets Securities In

INV

(3)

NatWest Mark

ets Securities

Japan Ltd

INV

(7)

R.B. Leasing B

DA One Ltd

(

25)

Random Proper

ties Acquisition Co

rp. III

INV

(3)

RBS Acceptance

Inc.

(3)

Regulatory

Entity name

Activity

treatment

Notes

RBS Americas P

roperty Corp.

(3)

RBS Asia Finan

cial Services Lt

(7)

RBS Assessoria

Ltd

(12)

RBS Commerci

al Funding Inc.

(3)

RBS Employme

nt (Guernsey)

Ltd

(21)

RBS Financial P

roducts Inc.

(3)

RBS Group (Aus

tralia) Pty Ltd

(10)

RBS Holdings I

II (Australia) Pty

Ltd

(10)

RBS Holdings N.

(6)

RBS Holdings USA

Inc.

(3)

RBS Hollandsch

e N.V.

(6)

RBS Investment

s (Ireland) Ltd

(4)

RBS Netherlan

ds Holdings B.

(6)

RBS Nominees (

Ireland) Ltd

(4)

RBS Nominees (N

etherlands)

B.V.

(6)

The following table details active related undertakin

gs incorporated in the UK where NWM Group ownership is less

than 100%

Activity

Accounting

Regulatory

Group

Notes

Entity name

treatment

Higher Broug

hton (GP) Ltd

AHC

(18)

Higher Broug

hton Partnershi

p LP

AHC

(16)

Accounting

Regulatory

Group

Entity name

Activity

treatment

Notes

NatWest Mark

ets Secured

Funding (LM) Lt

(9)

RBS Sempra Co

mmodities LLP

(2)

Notes to the fin

ancial state

ments continue

NWM Gr

oup

Annual Report and Accou

nts 202

176

34 Related undertakings continued

The following table details active related undertakin

gs incorporated outside the UK where NWM Group ownership i

less than 100%

Accounting

Regulatory

Group

Entity name

Activity

treatment

Notes

Eris Finance S.

R.L.

(14)

German Public S

ector

Finance B.V.

EAJV

(17)

Herge Holding

B.V.

(24)

Lunar Funding V

III Ltd

(5)

Lunar Luxembour

g SA

(26)

Lunar Luxembour

g Series

2019- 04

(26)

Lunar Luxembour

g Series

2019- 05

(26)

Accounting

Regulatory

Group

Entity name

Activity

treatment

Notes

Lunar Luxembour

g Series

2020- 01

(26)

Lunar Luxembour

g Series

2020- 02

(26)

Maja Finance S

.R.L.

(14)

Natwest Secur

ed Funding DAC

(13)

Sempra Energy

Trading LLC

(3)

Thames Asse

t Global

Securitization No

.1 Inc.

(11)

The following table details related undertakin

gs that are not active (actively being dissolved)

Accounting

Regulatory

Group

Entity name

treatment

Notes

Lombard Corpor

ate Finance (13)

Ltd

100

(1)

Morar ICC Insu

rance Ltd

100

(20)

Accounting

Regulatory

Group

Entity name

treatment

Notes

RBSSAF (6) Lt

100

(1)

West Register

Hotels (Holding

s) Ltd

100

(2)

The following table details related undertakin

gs that are dormant

Accounting

Regulatory

Group

Entity name

treatment

Notes

Buchanan Hol

dings Ltd

100

(1)

Marigold Nomin

ees Ltd

100

(1)

Mulcaster Stre

et Nominees L

100

(8)

N.C. Head Offic

e Nominees Lt

100

(2)

Accounting

Regulatory

Group

Entity name

treatment

Notes

Project & Expo

rt Finance (No

minees) Ltd

100

(1)

RBOS Nominee

s Ltd

100

(1)

Sixty Seven No

minees Ltd

100

(1)

The Royal Ban

k of Scotland (

1727) Ltd

100

(2)

The following table details the overseas branches of NWM Group

Subsidiary

Geographic location

Coutts & Co Lt

Switzerland

France, Germ

any, Italy

Republic of

Ireland, Spai

n, Sweden

NatWest Mark

ets N.V.

United Kingdom

Subsidiary

Geographic location

Germany, Hong

Kong, Japan, S

ingapore

NatWest Mark

ets Plc

Turkey, Unite

d Arab Emirates

Notes to the fin

ancial state

ments continue

NWM Gr

oup

Annual Report and Accou

nts 202

177

34 Related undertakings continued

Key:

Banking and fi

nancial institut

ion

Credit ins

titution

INV

Investment (shar

es or prope

rty) holding com

pany

Service compa

Trustee

OTH

Other

Deconsolida

ted

Full consolida

tion

Pro-rata consoli

dation

AHC

Asso

ciate held at co

EAJV

Equity accounting – join

t venture

Investment a

ccounting

Not consolidate

Notes

Registered add

resses

Country of incor

poration

(1)

250 Bishopsgate, Lo

ndon, EC2M

4AA

(2)

RBS Gogarburn, 1

75 Glasgow Ro

ad, Edinbur

gh, EH12 1HQ

(3)

251, Little Falls

Drive, Wilmin

gton, DE, 1980

USA

(4)

Ulster Bank He

ad Office, Bloc

k B Central P

ark, Leopardsto

wn, Dublin 18, D

18 N153

RoI

(5)

Grand Pavilio

n Commercial C

entre, 802 West B

ay Road, P.O.

Box 31119

Cayma

n Islands

(6)

Claude Debu

ssylaan 94, Amst

erdam, 1082 MD

Netherlands

(7)

Level 54, Hope

well Centre, 183 Qu

een'

s Road East

Hong Ko

(8)

Royal Bank Hou

se, 71 Bath St

reet, St Helier,

JE4 8PJ

Jersey

(9)

1 Bartholomew L

ane London EC

2N 2AX

(10)

Ashurst L26, 181

William Stre

et, Melbou

rne, VIC, 3000

Australia

(11)

114 West 47th St

reet, New Yo

rk, 10036

USA

(12)

254, 13th Floor,

Rua Boa Vista,

Sao Paulo,

01014-907

Brazil

(13)

5 Harbourmast

er Place, Dublin

1, D01 E

7E8

RoI

(14)

Via Vittorio Alfi

eri 1, Conegli

ano TV, IT

-TN 31015

Italy

(15)

Clarendon Hou

se, Two Chur

ch Street, Suite

104, Reid Str

eet, Hamilton, HM

Bermuda

(16)

Cornwall Buil

dings, 45-51 N

ewhall Street,

Birmingham,

West Midlan

ds, B3 3QR

(17)

De entree 99 -197,

1101HE

Amsterdam Zui

doost

Netherlands

(18)

Inpartnership Lt

d, 35 St Paul'

s Square, Birmin

gham, West M

idlands, B3 1QX

(19)

c/o Maples Co

rporate Service

s Ltd, PO Box

309, 121 So

uth Church Str

eet, George Tow

n, Grand Cay

man, KY1-1

104

Cayman I

slands

(20)

PO Box 384, T

he Albany, Sout

h Esplanade, St P

eter Port, G

Y1 4NF

Guernsey

(21)

Regency Court,

Glategny Espla

nade, St Pe

ter Port, GY1

3AP

Guernsey

(22)

Schuetzengass

se 4, CH-8001

Zurich

Switzerland

(23)

Tirolerweg 8, Zu

g, CH- 6300

Switzerland

(24)

Verlengde Poo

lseweg 16, Br

eda, 4818

Netherlands

(25)

Victoria Place, 5

th Floor, 31 Vi

ctoria Street, H

amilton, HM 1

Bermuda

(26)

46A Avenue J.F. K

ennedy 1855

Luxembourg

Non-IFRS m

easures

NWM Gr

oup

Annual Report and Accou

nts 202

178

NWM Group prepares its financial statemen

ts in accordance generally accepted accountin

g principles (GAAP). This documen

contains a number of adjusted or alternati

ve performance measures, also known

as non-GAAP or non-IFRS performance

measures. These measures are adjusted fo

r certain items which management

believe are not representative of the un

derlying

performance of the business and which distort period

-on-period comparison. These non-IFRS

financial measures are not mea

sures

within the scope of IFRS and ar

e not a substitute for IFRS measures. The

se measures include:



Management analysis of the operating expenses sho

ws strategic costs and litigation and cond

uct costs in separate lines on

pages 38. These amounts are included in staff, pre

mises and equipment and other administ

rative expenses in the statutory

analysis. The use of the other e

xpenses performance measure i

n non-statutory analysis aims to remove mo

re volatile items

within strategic costs and litigation and conduct cos

ts.



Funded assets are defined as total assets less

derivative assets. This measure allows review of balance s

heet trends exclusive

of the volatility associated with derivative fai

r values.



Management view of income by busines

s before revenue share and excluding own credi

t adjustments and asset

disposals/strategic risk reduction. This measure is used t

o show underlying income generatio

n in NWM excluding the impact of

disposal losses and own credit adjust

ments.



Revenue share refers to income gene

rated by NatWest Markets products from custome

rs that have their primary relationshi

with other NatWest Group segments, a proportion of whic

h is shared between NatWest Mark

ets and those segments.



Asset disposals/strategic risk reduction includes the costs of ex

iting positions, which includes changes in c

arrying value to align

to the expected exit valuation, and the impac

t of risk reduction transactions entered into

as part of the optimisation of the

entity’s capital usage, following the st

rategic announcements of 14

February 2020.



Own credit adjustments are applied to positions where i

t is believed that the counte

rparties would consider NWM

Group’s

creditworthiness when pricing trades. The fai

r value of certain issued debt securities, inclu

ding structured notes, is adjusted to

reflect the changes in own credit spreads and

the resulting gain or loss recognised in incom

Operating expenses analysis

Non-statutory analysis

Year ended

31 December 2021

31 December 2020

Litigation

Other

Statutory

Litigation

Other

Statutory

Strategic

and conduct

operating

Strategic

and conduct

operating

Operating expenses

costs

expenses

costs

expenses

Staff expenses

135

—

363

498

121

—

549

670

Premises and equipment

—

110

—

107

Other administrative expenses

(17)

467

522

134

444

629

Depreciation and amortisation

—

Total

248

(17)

919

1,150

191

134

1,106

1,431

Risk Factors

NWM Gr

oup

Annual Report and Accou

nts 202

179

Principal Risks and Uncertainties

Set out below are certain risk factors

that could adversely affect NWM Group’s

future results, its financial cond

ition and

prospects and cause them to be

materially different from what i

s forecast

or expected, and directly or indirectly

impact the value of its securitie

s in issue.

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 on its

own of

all potential risks and uncertainties

facing

NWM Group. The COVID-19 pa

ndemic

may exacerbate any of the risks

described below.

Economic and political risk

The impact of the COVID-19 pandemic

and related uncerta

inties continue to

affect the UK, global economies and

financial markets and NWM Grou

p’s

customers, as well as its competitive

environment, which may continue t

have an adverse effect on NWM

Group.

In many countries, including the U

(NWM Group’s most significant market),

the COVID-19 pandemic has, at times,

resulted in the imposition of strict social

distancing measures, restrictions on non-

essential activities and travel

quarantines, in an attempt to slow the

spread and reduce the impact of the

COVID-19 pandemic.

Despite widespread COVID-19

vaccination within the geographical

regions in which NWM Group o

perates,

the proliferation of COVID-19 variants

continues to affect the UK and global

economies. Further waves of inf

ection or

the spread of new strains may resu

lt in

renewed restrictions in affected countries

and regions. As a result, significant

uncertainties remain as to how long the

impact of the COVID-19 pandemic will

last, and how it will continue to affect the

global economy.

In response to the COVID-19 pandemic,

central banks, governments, regulators

and legislatures in the UK and e

lsewhere

have offered unprecedented levels of

support and various schemes to assist

impacted businesses and individuals. This

has included forms of financial

assistance

and legal and regulatory initiative

s. Many

of these support schemes have now been

curtailed. However, uncertainty remains

as to the impact of the ending or

tapering of these schemes and

the

repayment of the loans involved on

customers, the economic environmen

and NWM Group. Moreover, it is

unclear

as to how any further measures, s

uch as

rising interest rates and inflation, may

affect NWM Group’s business and

performance.

The COVID-19 pandemic has prompted

many changes that may prove to be

permanent shifts in customer be

haviour

and economic activity, such as changes

in spending patterns and significantly

more people working from home. The

changes may have long-lasting impacts

on asset prices, the economic

environment and its customers’ financial

needs.

Uncertainties relating to the COVID-19

pandemic has made reliance o

analytical models, planning and

forecasting for NWM Group more

complex, and may result in uncertainty

impacting the risk profile of NWM Group

and/or that of the wider bankin

industry. The medium and long-term

implications of the COVID-19 pandemic

for NWM Group customers, and the UK

and global economies and financial

markets remain uncertain.

Any of the above may have a negative

impact on NWM Group.

NWM Group faces continued econ

omic

and political risks and uncertainty in

the UK and global markets.

The value of NWM Group’s financial

instruments may be materially affected

by market risk, including as a res

ult of

market fluctuations. Market volatility,

illiquid market conditions and di

sruptions

in the credit markets may mak

e it

extremely difficult to value certain of

NWM Group’s financial instruments,

particularly during periods of market

displacement. This could cause a decline

in the value of NWM Group’s financial

instruments. This may have an adverse

effect on NWM Group’s results of

operations in future periods, or cause

inaccurate carrying values for ce

rtain

financial instruments. Similarly, NWM

Group trades a considerable amoun

t of

financial instruments (including

derivatives) and volatile market

conditions could result in a signifi

cant

decline in NWM Group’s net trading

income or result in a trading los

In addition, financial markets are

susceptible to severe events evi

denced

by rapid depreciation in asset values,

which may be accompanied by a

reduction in asset liquidity. Unde

r these

extreme conditions, hedging and other

risk management strategies may not be

as effective at mitigating trading 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 partic

ipants

simultaneously and on a large scale,

increasing NWM Group’s count

erparty

risk. NWM Group’s risk management and

monitoring processes seek

to quantify

and mitigate NWM Group’s exposure to

extreme market moves. Howeve

r, severe

market events have historically bee

difficult to predict and NWM Group could

realise significant losses if extreme

market events were to occur.

The outlook for the global economy over

the medium-term remains uncertain due

to a number of factors including: the

COVID-19 pandemic, societal inequalities

and changes, trade barriers and the

increased possibility and/or continuation

of trade wars, widespread political

instability (including as a result

populism and nationalism, which may

lead to protectionist policies, state and

privately sponsored cyber and terroris

acts or threats, efforts to destabilis

regimes or armed conflict), changes in

inflation and interest rates (including

negative interest rates), supply chain

disruption, climate, environmental, social

and other sustainability-related risks and

global regional variations in the impact

and responses to these factors.

These conditions could be worsened by a

number of factors including macro-

economic deterioration, increased

instability in the global financial sy

stem

and concerns relating to further financial

shocks or contagion (for example, due to

economic concerns in emerging

markets), market volatility or fluctuations

in the value of the pound sterling, new o

extended economic sanctions, volatility in

commodity prices or concerns regarding

sovereign debt. This may be

compounded by the changing

demographics of the populations in the

markets that NWM Group serves,

increasing inequalities, or rapid change

to the economic environment due

to the

adoption of technology and artificial

intelligence. Any of the above

developments could adversely impact

NWM Group directly (for example, as a

result of credit losses) or indirectly (for

example, by impacting global economic

growth and financial markets and NWM

Group’s clients and their banking needs).

In addition, NWM Group is exp

osed 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.

Risk Factors con

tinued

NWM Gr

oup

Annual Report and Accou

nts 202

180

Furthermore, unfavourable political,

military or diplomatic events, inclu

ding

secession movements or the exit of othe

member states from the EU, armed

conflict, pandemics and widespread

public health crises (including the c

urrent

COVID-19 pandemic and any future

epidemics or pandemics), state and

privately sponsored cyber and terroris

acts or threats, and the responses

them by governments and markets,

could negatively affect the busi

ness and

performance of NWM Group, including as

a result of the indirect effect on regional

or global trade and/or NWM Gr

oup’s

customers.

NatWest Group faces political uncertainty

in Scotland as a result of a poss

ible

second Scottish independence

referendum. Independence may

impact

NWM Group since NatWest Group plc

and other NatWest Group entiti

(including NWM Plc) are incorporated in

Scotland. Any changes to Scotl

and’s

relationship with the UK or the EU would

impact the environment in which

NatWest Group and its subsidiaries

operate, and may require furthe

changes to NatWest Group (including

NWM Group’s structure), indepe

ndently

or in conjunction with other mandatory

or strategic structural and organisational

changes which, any of which could

adversely impact NWM Group.

Any of the above may have a negative

effect on NWM Group.

Continuing uncertaint

y regarding the

effects and exten

t of the UK’s post

Brexit divergence from EU laws and

regulation, and NWM Group’s post

Brexit EU operating model m

continue to adversely affect

NWM

Group and its operating environm

ent.

The UK ceased to be a member of the

EU and the European Economic Area

(‘EEA’) on 31 January 2020 (‘B

rexit’) and

the 2020 EU-UK Trade and Cooperation

Agreement (‘TCA’) ended the transition

period on 31 December 2020. T

he TCA

provides for free trade between the UK

and EU with zero tariffs and quotas on

all goods that comply with the

appropriate rules of origin, with minimal

coverage. However, for financial

services, UK-incorporated financi

services providers no longer have EU

passporting rights and there is no mutual

recognition regime. Financial se

rvices

may largely be subject to individual

equivalence decisions by relevant

regulators. A number of temporary

equivalence decisions have been made

that cover certain services offered by

NWM Group. The EU’s equivalence

regime does not cover most lending and

deposit taking, and determinations in

respect of third countries have not, to

date, covered the provision of most

investment services. In addition,

equivalence determinations do not

guarantee permanent access rights and

can be withdrawn with short notice. T

TCA is 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, which has yet to be

signed. In late 2021 the European

Commission proposed draft legis

lation

that would require non-EU firms to

establish a branch or subsidiary

in the

EU before providing “banking se

rvices”

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” i

n the EU.

Uncertainty remains as to whet

her

“banking services” will also include

investment products. Furthermore,

failure to extend existing equivalence

determinations, exemptions an

derogations in relation to regulations

such as margin and clearing re

gulations

or capital regulations, may hav

e a

negative impact on customer

engagement and/or may significantly

negatively impact the operating model

and business operations of NW

M Group.

NatWest Group continues to ev

aluate its

post Brexit EU operating model, making

adaptations as necessary. NatWest

Group also co

ntinues to assess

where

NatWest Group com

panies can

tain

bilateral regulatory

permissions to

facilitate intragroup transactions

and/or

to permit busi

ness to conti

nue from its

UK entities, transferring what cannot be

continued to be rendered from the UK to

an EEA

subsidiary or branch, w

here

permitted. 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

intend to move EEA business to an EEA

licensed subsidiary or branch. T

here is a

risk that these EEA licenses may

not be

granted or may be withdrawn, and

where these permissions are not

obtained, further changes to NatWest

Group’s operating model may be

required or some business may need to

be ceased. In addition, failure to obtain

required regulatory permissions or

licences in one part of NatWest Group

may impact other parts of NatWes

Group adversely. 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, would allow NatWest

Group to continue to serve EEA

customers from both the ring-fenced and

non-ring-fenced banking entitie

s. As

described in ‘

NWM Group has been in a

period of significant structural and other

change, including as a result of NatWest

Group’s purpose-led strategy (i

ncluding

the NWM Refocusing) and may

continue

to be subject to significant struct

ural and

other change

’, NWM Group expects that

NatWest Group’s Transfer Business will

be transferred from the ring-fenced

subgroup of NatWest Group to NWM

Group. 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 greater

than expected costs. The changes to

NatWest Group’s and NWM Group’s

operating model have been costly and

further changes to its business

operations, product offering an

customer engagement could result in

further costs and operating co

mplexity.

Any of the above could, in turn,

negatively impact NWM Group.

The long-term effects of Brexit and the

uncertainty regarding NWM Gr

oup’s EU

operating model may have a ne

gative

impact on NWM Group’s busines

s. These

may be exacerbated by wider global

macro-economic trends and events,

particularly COVID-19 pandemic related

uncertainties, which may significantly

impact NWM Group and its customers

and counterparties who are themselves

dependent on trading with the EU or

personnel from the EU. They may

exacerbate the global macro-ec

onomic

impacts on the UK, the Republic of

Ireland (‘ROI’) and the rest of the

EU/EEA.

Significant uncertainties remain as to the

extent to which EU/EEA laws will diverge

from UK law (including bank regulation),

whether and what equivalence

determinations will be made by the

various regulators, whether the propose

EEA licensed subsidiary is granted a

banking licence, whether banking

services will be harmonised across

the

EEA and, therefore, what the respective

legal and regulatory arrangements will

be, under which NWM Group and its

subsidiaries will operate. This divergence

could lead to further market

fragmentation. These risks and

uncertainties may require costly changes

to NWM Group’s EU operating model.

The legal and political uncertainty, and

any actions taken as a result of this

uncertainty, as well as the approach

taken by regulators and new or amende

rules, could have a significant adverse

impact on NWM Group’s busines

ses,

non-UK operations and/or legal entity

structure, including attendant operating,

compliance and costs, level of

Risk Factors con

tinued

NWM Gr

oup

Annual Report and Accou

nts 202

181

impairments, capital requirements,

changes to intragroup arrangements,

increased complexity, regulatory

environment and tax implications and as

a result may adversely impact NWM

Group’s profitability, competitive position,

business model and product off

ering.

Changes in interest rates ha

ve affected

and will continue to affect

NWM

Group’s business and results.

NWM Group is affected by intere

st rate

risk. Monetary policy has been

accommodative in recent years including

initiatives implemented by the Bank of

England and HM Treasury, such as the

Term Funding Scheme with additional

incentives for SMEs (‘TFSME’), which

have helped to support demand at a time

of pronounced fiscal tightening and

balance sheet repair. However, ma

rket

expectations are currently that

benchmark interest rates such as UK

base rate, could begin to rise furthe

r and

faster than had been anticipated

previously and that this could be

accompanied by other measures

reverse accommodative policy, such as

quantitative tightening.

While increases in medium term swap

rates may support the yield of NWM

Group’s equity structural hedge, s

harp

rises could have macroeconomic ef

fects

that lead to adverse outcomes for the

business or customers. For example, they

could lead to generally weaker

than

expected growth, or even contr

acting

GDP, reduced business confide

nce and

higher levels of unemployment or

underemployment, all of which could

have an adverse effect on NWM Group’s

business, results of operations and

outlook. Conversely, decreases in interest

rates and/or continued sustained low,

zero or negative interest rates would be

expected to put pressure on N

Group’s interest income and pr

ofitability.

Unexpected moves in interest rates will

also affect valuations of assets and

liabilities that are recognised at

fair value

on the balance sheet. Changes in these

valuations may be adverse. Un

expected

movements in spreads between ke

benchmark rates could have adverse

impacts and also adversely affect NWM

Group’s financial position. Finally,

changes in interest rates and inflation

may adversely affect the income from

NWM Group’s dealing activity.

Changes in foreign currency ex

change

rates may affect NWM Gr

oup’s results

and financial position.

Decisions of major central banks

(including the Bank of England, the

European Central Bank and the US

Federal Reserve) and political o

r market

events which are outside NWM Group’s

control, may lead to sharp and

sudden

variations in foreign exchange rates.

As part of NatWest Group’s strategy,

NWM Group is now the markets business

for NatWest Group, and is enga

ged

principally in offering risk management,

trading solutions and debt financing to

financial institutions and UK and

European corporate customers. NWM

Group entities issue instruments in

foreign currencies that assist in meeting

their respective capital and/or

MREL

requirements. In addition, NWM

Plc has

exposure to foreign exchange

movements from the provision of foreign

currency products to its clients and

particularly to euro movements via its

subsidiary, NWM NV, USD via it

subsidiary NWMSI in addition to

further

investments in other currencies in

overseas operations. In its day-to-day

operations, NWM Group maintains

policies and procedures designed to

manage the impact of exposures to

fluctuations in currency rates.

Nevertheless, changes in curre

ncy rates,

particularly in the sterling-US dollar and

euro-sterling exchange rates, c

adversely affect the value of assets,

liabilities (including the total am

ount of

MREL-eligible instruments), foreign

exchange dealing activity, income and

expenses, RWAs and hence the reported

earnings and financial condition of NWM

Group.

HM Treasury (or UKGI on its behalf)

could exercise a significant degree o

influence over NatWest Group and

NWM Group is controlled by NatWest

Group.

In its March 2021 Budget, the UK

Government announced its intention to

continue the process of privatisation of

NatWest Group plc and to carry

out a

programme of sales of NatWest Group

plc ordinary shares with the obj

ective of

selling all of its remaining shares in

NatWest Group plc by 2025-2026. A

s a

result of a directed buyback of NatWest

Group plc shares by NatWest Group plc

from UK Government Investments

Limited (‘UKGI’) in March 2021, sales of

NatWest Group plc shares by UKGI by

accelerated bookbuild in May 2021

and

purchases made under NatWest Group

plc’s on-market buyback program

announced in July 2021, as at 11

February 2022, the UK Government held

50.94% of the issued share capital with

voting rights of NatWest Group plc. In

addition to the £750 million on-market

buyback announced on 18 February

2022,

NatWest Group may participate in

further directed or on-market buybacks

in the future. The timing, extent and

continuation of UKGI’s sell-dow

ns is

uncertain, which could result in a

prolonged period of increased price

volatility on NatWest Group plc’

s ordinary

shares.

HM Treasury has indicated that it intends

to respect the commercial decisions of

NatWest Group and that NatWest Group

entities (including NWM Group)

will

continue to have its own independent

board of directors and management

team determining their own str

ategy.

However, for as long as HM Tr

easury

remains NatWest Group plc’s, as the

largest single shareholder, and UKGI (as

manager of HM Treasury’s shareholding)

could exercise a significant degree of

influence over the election of directo

and appointment of senior management,

NatWest Group’s (includi

ng NW

Group’s) capital stra

tegy, dividend policy,

remuneration policy

or the c

onduct of

NatWest Group’s operations, amongst

others. HM Treasury or UKGI’s app

roach

depends on government policy, which

could change, including as a result of a

general election. 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 could in turn have an adverse

effect on the governance or bu

siness

strategy of NWM

Group.

In addition, NWM Plc is a wholly owned

subsidiary of NatWest Group pl

c, and

NatWest Group plc therefore c

ontrols

NWM Group’s board of directors,

corporate policies and strategic directio

The interests of NatWest Group plc as an

equity holder and as NWM Group’s

parent may differ from the interests of

NWM Group or of potential inve

stors in

NWM Group’s securities.

Strategic risk

NWM Group has been in a per

iod of

significant structura

l and other change,

including as a result of NatWest

Group’s purpose-led strategy (including

the NWM Refocusing) and may

continue to be

subject to significant

structural and other

change.

In February 2020, NatWest Gro

announced its ‘purpose-led strategy’,

which is focused on becoming

purpose-led business designed to

champion potential, and to help

individuals, families and businesses

thrive. This strategy has require

d, and

continues to require, changes i

n NWM

Group’s business, including an increased

focus on serving NatWest Group’s

corporate and institutional customer

base. To date, NWM Group has

implemented this strategy through its

‘NWM Refocusing’ initiative by simplifying

its operating model and technology

platform, as well as reducing its cost

base and capital requirements. The

implementation of the NWM Refocusing

Risk Factors con

tinued

NWM Gr

oup

Annual Report and Accou

nts 202

182

has been a complex process and

although substantial progress has been

made, the risk remains that this strategy

may not result in the contemplated

business outcome.

On 27 January 2022, NatWest Group

announced that, in order to further

support its customers’ growth ambitions

and deliver on the next phase

of its

strategy, it is evolving its Commercial,

NatWest Markets and RBS Inter

national

businesses to form a single franchise to

best support its customers across

the full

non-personal customer lifecycle. T

transition is expected to begin over the

coming months and be effe

ctive from

July 2022. Any of

the above may result in

material execution, commercial and

operational (including compliance

with

the UK ring-fencing regime) ris

ks for

NWM Group and NWM Group may

continue to be subject to significant

structural and other change.

As part of the NWM Refocusing, NWM

Group has directed resources t

emphasising and growing product

capability in the areas of impor

tance to

NatWest Group’s corporate and

institutional customers, includin

g the

Fixed Income and Capital Markets

businesses, and has refocused i

ts Rates

business to best serve its core customers.

As a result of focusing further on

NatWest Group core corporate

customers, NWM Group’s pros

pects are

becoming further dependent on the

success and strategy of NatWest Group.

In addition, to improve efficie

ncies and

best serve customers, including in light of

Brexit planning, NWM Group expects

that

certain assets, liabilities, transac

tions

and activities of NatWest Group

(including NatWest Group’s We

stern

European corporate portfolio, principally

including term funding and revolving

credit facilities) (the ‘Transfer Busines

s’),

will be transferred from the rin

g-fenced

subgroup of NatWest Group to NWM

Group on a rolling basis, subjec

t to

certain regulatory and custome

requirements. The timing and quantum

of such transfers remains uncertain and

NWM Group can give no assurance as t

the full impact of such transactions on its

go-forward results of operations. A

s a

result, NWM Group’s business, results of

operations and outlook could be

adversely affected.

NWM Group’s ability to serve its

customers may be diminished by

the

changed business strategy as a result of

the NWM Refocusing. In addition,

customer reactions to the changed

nature of NWM Group’s business

model

may be more adverse than expected and

previously anticipated revenue and

profitability levels (including, fo

r example,

in relation to income from the Rates

business) may not be achieved in the

timescale envisaged or at all. An adverse

macroeconomic environment, including

due to the COVID-19 pandemic,

heightened inflation and rising interest

rates, continued political and regulatory

uncertainty, market volatility and/or

strong market competition may also pose

significant challenges to the achie

vement

of the anticipated targets and g

oals of

the NWM Refocusing.

As part of the NWM Refocusing, NWM

Group has accepted a number of

financial, capital and operational targets

and expectations, which entail further

reductions to its wider cost base

. In

addition to requiring cost reductions

within NWM Group, this could affe

ct the

cost and scope of NatWest Group’s

provision of services to NWM Group,

which individually or collectively may

impact NWM Group’s competitive

position and its ability to meet its other

targets.

The financial, operational and capital

targets and expectations envisaged by

the NWM Refocusing may not b

e met or

maintained in the timeframes expected

or at all. In addition, targets and

expectations for NWM Group are based

on management plans, projections and

models, and are subject to a number of

key assumptions and judgments, any of

which may prove to be inaccurate. The

significant scale and scope of the

changes implemented (and those

that

remain to be implemented) as a result of

the NWM Refocusing may continue to

entail operational, IT system, culture,

conduct, business and financial risks to

NWM Group.

The NWM Refocusing requires NWM

Group to meet cost reduction t

argets,

including through head-count re

ductions

and redirecting investment fro

m certain

business areas to others, which could

affect NWM Group’s long-term

prospects, product offering or

competitive position and its ability to

meet its other targets and commitments.

A significant proportion of the cost

savings are dependent on simpl

ification

of the IT systems and therefore may not

be realised in full if IT capabilitie

s are not

delivered in line with assumptions. T

hese

risks are expected to continue to last fo

at least the medium term.

The NWM Refocusing is expected to

result in, and the refocused NWM Group

continues to face,

increased pe

ople risk

through the loss of key staff, the

recalibration of roles and loss of

institutional knowledge. This, combined

with the prolonged COVID-19 pandemic,

continues to impact NWM Group’s

culture and morale. The remaining p

arts

of the NWM Refocusing and other

structural changes may continue to be

resource-intensive and disruptive, and

may divert management resources. In

addition, the scale of changes that have

been concurrently implemented require

the implementation and application of

robust governance and controls

frameworks and robust IT syste

ms.

There is a risk that NWM Grou

p may not

be successful in maintaining such

governance and control frameworks and

IT systems. Moreover, whether the NWM

Refocusing and further structural

changes are successful will depend on

how the NWM resulting business is

perceived by NWM Group’s custome

rs,

regulators, rating agencies, stake

holders

and the wider market, how it impacts its

business, and NWM Group’s ability to

retain employees required to deli

ver its

go-forward strategic priorities.

NWM Group has implemented a sha

red

services model and entered into revenue

share agreements with some entities

within NatWest Group’s ring-fenced sub-

group (including NatWest Bank Plc, T

Royal Bank of Scotland Plc and Ulster

Bank Ireland DAC). NWM Group

therefore relies directly or indirec

tly on

NatWest Group entities to provide

services to itself and its clients. A failure

of NWM Group to receive these services

(on a cost-effective basis or at all) may

result in operational risk. See,

‘

Operational risks (including reli

ance on

third party suppliers and outsourcing of

certain activities) are inherent i

n NWM

Group’s businesses

’.

The changed nature of NWM Group’s

business may also adversely affect the

credit rating assigned to NWM

Plc and

certain of its subsidiaries (including NWM

NV) or any of their respective debt

securities, which could adversely

affect

the availability and cost of funding for

NWM Group and negatively impact NWM

Group’s liquidity position.

Each of the risks identified in this

risk

factor, individually or collectively could

adversely impact NWM Group’s products

and services offering or office locations,

reputation with customers or busines

model and adversely impact NWM

Group’s ability to deliver its strategy and

the anticipated benefits thereof and meet

its targets and guidance. Any of

the

above could in turn have a material

adverse effect on NWM Group’s business

results of operations and outlook.

While NWM Group has made substantial

progress in implementing the NWM

Refocusing, aspects of the NWM

Refocusing and other structural changes

that are still to be implemented

entail

further execution, commercial,

operational and other risks. As a result,

there is a risk that the NWM Re

focusing

and other structural change m

ay not be

successful, or that the business resulting

Risk Factors con

tinued

NWM Gr

oup

Annual Report and Accou

nts 202

183

from the NWM Refocussing and

other

structural changes may not be a viable,

competitive or profitable busines

Trends relating to the COVID-19

pandemic may adversely affect NWM

Group’s strategy and impair its ability

to meet its tar

gets and strategic

objectives.

The trajectory of the COVID-19

pandemic’s impact on the UK a

nd global

economy and NWM Group remain

uncertain. If trends relating to t

COVID-19 pandemic negatively

impact

the UK and global economy, NWM Group

may be unable to meet its financial,

capital and operational targets and

expectations.

Whilst NWM Group, as part of N

atWest

Group, remains committed to its c

ost

reduction targets, achieving the

planned

reductions in an environment affe

cted by

the COVID-19 pandemic may be more

challenging and may require additional

savings to be made in a manner that

may increase certain operational risks

and could impact productivity and

competitiveness within NWM Group and

which may have an adverse effe

ct on

NWM Group.

It is uncertain as to how the broader

macroeconomic business envir

onment

and societal norms may be impacted by

the COVID-19 pandemic, causing

significant wider societal changes. For

example, one of the most notable e

ffects

of the COVID-19 pandemic has

been its

disproportionate impact on the most

vulnerable groups of society an

concerns about systemic racial biases

and social inequalities.

In addition, the COVID-19 pand

emic has

accelerated existing economic

trends

that may radically change the way

businesses are run and people live

their

lives. These trends include digitalisation,

decarbonisation, automation, e-

commerce and agile working, e

ach of

which has resulted in significant market

volatility in asset prices. There is also

increased investor, regulatory and

customer scrutiny regarding how

businesses address these changes

and

related climate, environmental, s

ocial,

governance 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. Any failure or delay by

NWM Group to successfully adapt its

business strategy and to establish and

maintain effective governance,

procedures, systems and controls in

response to these changes, and to

manage emerging climate,

environmental, social and other

sustainability-related risks and

opportunities, may have a material

adverse impact on NWM Group’s

reputation, business, results of

operations, outlook and the value

NWM Group’s securities. See als

o, ‘

—

Any failure by NWM Group to impl

ement

effective and compliant climate chang

resilient systems, controls and procedures

could adversely affect NWM Group’s

ability to manage climate-relate

d risks

’

and ‘

— A failure to adapt NWM Group’s

business strategy, governance,

procedures, systems and controls t

manage emerging sustainability-related

risks and opportunities may have a

material adverse effect on NWM G

roup,

its reputation, business, results of

operations and outlook

’.

The COVID-19 pandemic may also result

in unexpected developments or c

hanges

in financial markets, the fiscal, tax and

regulatory frameworks and cons

umer

customer and corporate client be

haviour,

which could intensify competition in the

financial services industry. This could

negatively impact NWM Group if it is not

able to adapt or compete effe

ctively.

Financial resilience risk

NWM Group may not meet

the targets

it communicate

s, generate returns or

implement its strategy effectively.

As part of NatWest Group’s pur

pose-led

strategy and the NWM Refocusing, NWM

Group has set a number of internal and

external financial, capital and operational

targets including in respect of: balance

sheet and cost reductions, CET1 ratio

targets (for NWM Plc and NWM

N.V.),

MREL targets, leverage ratio targets (fo

NWM Plc and NWM N.V.), targets in

relation to local regulation, funding plans

and requirements, employee

engagement, diversity and incl

usion as

well as ESG (including climate

and

sustainable funding and financing

targets) and customer satisfaction

targets.

NWM Group’s ability to meet its targets

and to successfully implement its

strategy is subject to various internal and

external factors and risks. These i

nclude

but are not limited to, the impa

ct of the

COVID-19 pandemic, client and staff

behaviour and actions, market,

regulatory, economic and political

factors, developments relating to

litigation, governmental actions

investigations and regulatory matters,

and operational risks and risks

relating to

NWM Group’s business model and

strategy (including risks associated with

climate, environmental, social,

governance and other sustainability-

related issues) and the NWM Refocus

ing.

See also, ‘

NWM Group has been in a

period of significant structural and other

change, including as a result of NatWest

Group’s purpose-led strategy (i

ncluding

the NWM Refocusing) and may

continue

to be subject to significant struct

ural and

other change

’.

A number of factors, including the

economic and other effects of the

COVID-19 pandemic, may impact NWM

Plc and NWM NV’s ability to m

aintain

their current CET1 ratio targets,

including impairments, the extent of

organic capital generation or the

reduction of RWAs. NWM Plc may incur

disposal losses as part of the process

exiting positions to reduce RWAs. Some

of these losses may be recognis

ed ahead

of the actual disposals and the

losses

overall may be higher than currently

anticipated.

NWM Group’s ability to meet its planned

reductions in annual costs may vary

considerably from year to year.

Furthermore, the focus on meeting

balance sheet and cost reduction targets

may result in limited investment in other

areas which could affect NWM Group’s

long-term product offering or competitive

position and its ability to meet its other

targets, including those related to

customer satisfaction.

In addition, challenging trading

conditions may have an adverse impact

on NWM Group’s business and may

adversely affect its ability to ac

hieve its

targets and execute its strateg

There is a risk that NWM Grou

p’s

strategy may not be successfu

lly

executed, that it will not meet its targets

and expectations, or that it will

not be a

viable, competitive or profitable

banking

business.

NWM Plc and/or its regulated

subsidiaries may not meet th

prudential regulatory requirement

s for

capital.

NWM Group is required by regulators in

the UK, the EU and other jurisd

ictions in

which it undertakes regulated

activities

to maintain adequate financial resources.

Adequate capital provides NWM Group

with financial flexibility in the face

turbulence and uncertainty in the global

economy and specifically in its core UK

operations.

NWM Plc’s target CET1 ratio is

based on

regulatory requirements, intern

modelling and risk appetite (including

under stress). NWM NV’s target

CET1

ratio is based on expected regulatory

requirements, internal modelling and risk

appetite (including under stress). As at 31

December 2021, NWM Plc’s solo CET1

ratio was 17.9%. NWM Plc’s current

capital strategy is based on the

management of RWAs and other capital

management initiatives (including the

reduction of RWAs and the periodic

payment of dividends to NatWes

t Group

plc, NWM Plc’s parent company).

Risk Factors con

tinued

NWM Gr

oup

Annual Report and Accou

nts 202

184

Other factors that could influence NWM

Plc and NWM NV’s CET1 ratios include

amongst other things (See also, ‘

NWM

Group has been in a period of sig

nificant

structural and other change, including as

a result of NatWest Group’s purpose-led

strategy (including the NWM Refocusing)

and may continue to be subject t

significant structural and other

change

’):



a depletion of NWM Plc or NWM

NV’s capital resources through

losses (which would in turn

impact retained earnings) and

may result from revenue attrition

or increased liabilities, sustained

periods of low interest rates,

reduced asset values resulting in

write-downs or reserve

adjustments, impairments,

changes in accounting policy,

accounting charges or foreign

exchange movements;



a change in the quantum of NWM

Plc’s or NWM NV’s RWAs,

stemming from exceeding targ

RWA levels, the NWM Refocusing,

regulatory adjustments (for

example, from additional marke

risk backtesting exceptions),

foreign exchange movements or

a failure in internal controls or

procedures to accurately

measure and report RWAs. An

increase in RWAs would lead to a

reduction in the CET1 ratio (and

increase the amount of internal

MREL required for NWM Plc);



changes in prudential regulatory

requirements including the Total

Capital Requirement for NWM Plc

(as regulated by the Prudential

Regulation Authority (‘PRA’)) or

NWM NV (as regulated by the De

Nederlandsche Bank

(‘DNB’)),

including Pillar 2 requirements

and regulatory buffers as well as

any applicable

scalars;



further developments of

prudential regulation (for

example, finalisation of Basel 3

standards),

which will impact

various areas including the

approach to calculating credit

risk, market risk, leverage ratio

capital floors and operational risk

RWAs, as well as continued

regulatory uncertainty on the

details thereto;



further losses (including as a

result of extreme one-off

incidents such as cyberattack,

fraud or conduct issues) would

deplete capital resources and

place downward pressure on the

CET1 ratio;



the timing of planned liquidation,

disposal and/or capital releases of

capital optimisation activity

legacy entities owned by NWM

Plc and NWM

Management actions taken under a

stress scenario may affect, among o

ther

things, NWM Group’s product o

ffering, its

credit ratings, its ability to operate its

businesses and pursue its current

strategies and strategic opportunities,

any of which may negatively impact

investor confidence and the value of

NWM Group’s securities. See als

o, ‘—

NWM Plc and/or its regulated subsidiaries

may not manage their capital, li

quidity or

funding effectively which could t

rigger the

execution of certain management actions

or recovery options

’ and ‘

NatWest G

roup

(including NWM Group) may be

come

subject to the application of UK statutory

stabilisation or resolution powers which

may result in, among other actions, the

write-down or conversion of NWM Group

entities’ Eligible Liabilities

’.

NWM Group is reliant on acc

ess to the

capital markets to meet its funding

requirements, both directly throu

wholesale markets, and indirec

tly

through its parent (NatWest Gro

up) for

the subscription to its internal

capital

and MREL. The inability to do so ma

adversely affect NWM Group.

NatWest Markets Plc’s funding plan

currently anticipates that in 2022

, it will

issue £4-5 billion of public benchmark

issuance in order to meet its ne

ar-term

debt refinancing and funding

requirements, based on its curre

nt and

anticipated business activities. NWM

Group therefore has significant

anticipated funding requirements and is

reliant on frequent access to the capital

markets for funding, at a cost that can

be passed through to its customers. Such

access entails execution risk, r

egulatory

risk, risk of reduced commercial activi

ty,

risk of loss of market confidenc

e in the

NWM Group if it cannot finance its

activities and risk a ratings downgrade,

which could be impeded by a n

umber of

internal or external factors, including,

those referred to above in ‘

NWM G

roup

faces continued economic and p

olitical

risks and uncertainty in the UK and global

markets

’, ‘

Continuing uncertainty

regarding the effects and extent of the

UK’s post Brexit divergence from E

U laws

and regulation, and NWM Group’s post

Brexit EU operating model may conti

nue

to adversely affect NWM Group

and its

operating environment

’, ‘

Any reduction in

the credit rating and/or outlooks assig

ned

to NatWest Group plc, any of its

subsidiaries (including NWM Plc or NWM

Group subsidiaries) or any of their

respective debt securities could adve

rsely

affect the availability of funding for NWM

Group, reduce NWM Group’s liquidity

position and increase the cost of funding

’

and ‘

NWM Group is exposed to the risk of

various litigation matters, regul

atory and

governmental actions and investigat

ions

as well as remedial undertakings, the

outcomes of which are inherently difficult

to predict, and which could have an

adverse effect on NWM Group

’.

In addition, NWM Plc receives capital and

funding from NatWest Group pl

c. NWM

Plc has set target levels for different tiers

of capital and for the internal minimum

requirements for own funds and eligible

liabilities (‘MREL’), as percenta

ges of its

RWAs. The level of capital and f

unding

required for NWM Plc to meet its internal

targets is therefore a function of

the level

of RWAs and its leverage exposure in

NWM Plc and this may vary over time.

NWM Plc’s internal MREL comprises

the

regulatory value of capital instru

ments

and loss-absorbing senior funding issu

by NWM Plc to its parent, NatW

est Group

plc, in all cases with a residual maturi

of at least one year. The Bank

of England

has identified that the preferred

resolution strategy for NatWest Group is

as a single point of entry. As a

result,

only NatWest Group plc is able to issue

Group MREL eligible liabilities to third-

party investors, using the procee

ds to

fund the internal capital and MREL

targets and/or requirements of its

operating entities, including NWM Plc.

NWM Plc is therefore dependent not only

on NatWest Group plc to fund its internal

capital targets, but also on NatWes

Group plc’s ability to source appropri

ate

funding. NWM Plc is also dependent on

NatWest Group plc to continue to fund

NWM Plc’s internal MREL targets over

time and its ability to issue and maintai

sufficient amounts of external MREL

liabilities to support this. In turn, NWM Plc

is required to fund the internal capital

and MREL requirements of its

subsidiaries.

Any inability of NWM Group to

adequately access the capital

markets, to

manage its balance sheet in line with

assumptions in its funding plan

s, or to

issue internal capital and MREL may

adversely affect NWM Group, such that

NWM Group may not constitute

a viable

banking business and/or NWM Plc or

NWM NV may fail to meet their

respective regulatory capital and/or

MREL requirements (at present, NWM NV

does not yet have its own MREL

requirements) (see also, ‘

The effects of

the COVID-19 pandemic could affect

NWM Group’s ability to access sources of

liquidity and funding, which may result in

higher funding costs and failure to comply

with regulatory capital, funding and

leverage requirements

’).

Risk Factors con

tinued

NWM Gr

oup

Annual Report and Accou

nts 202

185

NWM Group may not be able to

adequately access sources of liqu

idity

and funding.

NWM Group is required to access

sources of liquidity and funding through

deposits and wholesale funding

, including

debt capital markets and trading

liabilities such as repurchase

agreements. As at 31 December 202

NWM Group held £4.1 billion in deposits

from banks and customers. The level of

deposits and wholesale funding

may

fluctuate due to factors outside

NWM

Group’s control. These factors include:

loss of investor confidence (including in

individual NWM Group entities

or the UK

banking sector or the banking

sector as

a whole), sustained low or negative

interest rates, government support,

increasing competitive pressures f

bank funding or the reduction or

cessation of deposits and other funding

by counterparties, any of which could

result in a significant outflow of deposits

or reduction in wholesale funding within

a short period of time. See also, ‘

NWM

Group has significant exposure to

counterparty and borrower risk

’.

An inability to grow, roll-over, or any

material decrease in, NWM Group’s

deposits, short-term wholesale

funding

and short-term liability financing could,

particularly if accompanied by one of the

other factors described above, materially

affect NWM Group’s ability to satisfy its

liquidity needs.

NWM Group engages from time to time

in ‘fee based borrow’ transactions

whereby collateral (such as government

bonds) is borrowed from count

erparties

on an unsecured basis in return for a fee.

This borrowed collateral may be use

d by

NWM Group to finance parts of its

balance sheet, either in its repo f

inancing

business, derivatives portfolio or more

generally across its balance she

et. If

such ‘fee based borrow’ transactions a

unwound whilst used to support the

financing of parts of NWM Group

balance sheet, then unsecured f

unding

from other sources would be required

replace such financing. There is a risk

that NWM Group would be unable to

replace such financing on acceptable

terms or at all, which could adversely

affect its liquidity position and have an

adverse effect on NWM Group. In

addition, because ‘fee base borrow’

transactions are conducted off-balance

sheet (due to the collateral being

borrowed) investors may find it more

difficult to gauge NWM Group’s

creditworthiness, which may be

affected

if these transactions were to be unwound

in a stress scenario. Any lack of

perceived lack of creditworthiness may

adversely affect NWM Group.

The effects of the COVID-19 pandemic,

current economic uncertainties and any

significant market volatility, could affect

NWM Group’s ability to access s

ources of

liquidity and funding, which may resu

lt in

higher funding costs and failure to

comply with regulatory capital, fu

nding

and leverage requirements.

As a result,

NWM Group and its subsidiaries c

ould be

required to adapt their funding

plans.

This could exacerbate funding and

liquidity risk, which could have

negative effect on NWM Group.

As at 31 December 2021, NWM Group

reported a liquidity coverage ratio of

205%. If its liquidity position were to

come under stress and if NWM Group is

unable to raise funds through deposits or

wholesale funding sources on acc

eptable

terms or at all, its liquidity position could

be adversely affected. This wo

uld mean

that NWM Group might be una

ble to:

meet deposit withdrawals on d

emand or

satisfy buy back requests, repay

borrowings as they mature, mee

t its

obligations under committed fin

ancing

facilities, comply with regulatory

funding

requirements, undertake certain capital

and/or debt management activities, or

fund new loans, investments and

businesses. NWM Group may ne

ed to

liquidate unencumbered assets to meet

its liabilities, including disposals of assets

not previously identified for disposal to

reduce its funding commitment

s or

trigger the execution of certain

management actions or recovery

options. This could also lead to

higher

funding costs and/or changes to NWM

Group’s funding plans. In a time

reduced liquidity or market stress

, NWM

Group may be unable to sell some of its

assets or may need to sell assets at

depressed prices, which in eithe

r case

could negatively affect NWM Group’s

results.

NWM Group entities independently

manage liquidity risk on a stand-alone

basis, including through holding their

own liquidity portfolios. They have

restricted access to liquidity or funding

from other NatWest Group entities. NWM

Group entities’ management of their own

liquidity portfolios and the structure of

capital support are subject to opera

tional

and execution risk.

The effects of the

COVID-19 pandemic

could affect NWM Group’s ability to

access sources of liquidity and funding,

which may result in higher funding

costs and failure to comply with

regulatory capital, funding and

leverage requirements.

The COVID-19 pandemic has at times

caused significant market volatility.

Should further market volatility arise

from COVID-19 pandemic-related

uncertainties and the impact o

n capital

and RWAs, NWM Group and its

subsidiaries may be required to adapt

their funding plans in order to satisfy

their respective capital and funding

requirements, which may have

negative impact on NWM Group. In

addition, impairments or other losses

well as increases to capital deductions

may result in a decrease to NWM Plc’s

capital base, and/or that of its

subsidiaries. If NatWest Group Plc is

unable to issue securities externally as

planned, this may have a negative

impact on NWM Plc’s current and

forecasted MREL position, particularly if

NatWest Group plc is unable to

downstream capital and/or fun

ding to

NWM Plc.

Furthermore, significant fluctuation in

foreign currency exchange rat

es may

affect capital deployed in NWM Plc’s

foreign subsidiaries, branches and joint

arrangements, securities issued

by NWM

Plc and/or its subsidiaries in foreign

currencies or the respective val

ues of

assets, liabilities, income, RWAs, capital

base, expenses and reported earnings.

In addition, increased income as a result

of higher levels of customer flow activity

and balance sheet growth (as a result

increases in

corporate deposits

and

derivative valuations) may not

sustained in

the future.

Furthermore,

market volatility may result in increases

to leverage e

xposure.

Any downgrading to the credit ratings

and/or outlooks assigned to NWM Group,

its subsidiaries and their respective debt

securities as a result of the economic

impact of the COVID-19 pandemic could

exacerbate funding and liquidity risk,

which could have a negative ef

fect on

NWM Group.

NWM Plc and/or its regulated

subsidiaries may not manage their

capital, liquidity or funding effectively

which could trigger the execution of

certain mana

gement actions or

recovery options.

Under the EU Bank Recovery a

Resolution Directives I and II (‘BRRD’), as

implemented in the UK, NatWest Group

must maintain a recovery plan

acceptable to its regulator, such that

breach of NWM Plc’s applicable

capital

or leverage, li

uidity

r funding

requirements would trigge

r consideration

of NWM Plc’s

recovery plan, and in turn

may prompt consideration of NatWest

Group’s recovery plan. If, under stresse

conditions, the liquidity, capital or

leverage ratio were to decline, there are

a range of recovery management actions

(focused on risk reduction and mitigation)

that NWM Plc could undertake that may

or may not be sufficient to restore

adequate liquidity, capital and leverage

ratios. Additional management options

relating to existing capital issua

nces,

asset or business disposals, capital

payments and dividends from NWM Plc

Risk Factors con

tinued

NWM Gr

oup

Annual Report and Accou

nts 202

186

to its parent, could also be unde

rtaken to

support NWM Plc’s capital and

leverage

requirements.

NatWest Group may also address

shortage of capital in NWM Plc by

providing parental support to NWM Plc.

NatWest Group’s (and NWM Plc’s)

regulator may also request that NWM

Group carry out additional capital

management actions. The Bank of

England has identified single point-of-

entry as the preferred resolution strategy

for NatWest Group. However, under

certain conditions set forth in the BRRD,

as the UK resolution authority, the Bank

of England also has the power to execute

the ‘bail-in’ of certain securities of

NWM

Group without further action at NatWest

Group level.

Any capital management actions taken

under a stress scenario may affe

ct,

among other things, NWM Group’s

product offering, credit ratings, ability

operate its businesses and pursue its

current strategies and strategic

opportunities as well as negative

impacting investor confidence and the

value of NWM Group’s securities. See

also, ‘—

NatWest Group (including NWM

Group) may become subject to the

application of UK statutory stabil

isation or

resolution powers which may re

sult in,

among other actions, the write-down or

conversion of NWM Group entities’

Eligible Liabilities

’. In addition, if NWM Plc

or NWM NV’s liquidity position were to

adversely affected, this may require

unencumbered assets to be liquidated or

may result in higher funding costs, which

may adversely impact NWM Group’s

operating performance.

Any reduction in the cre

dit rating

and/or outlooks assigned to Na

tWest

Group plc, any of its subsidiar

ies

(including NWM Plc or NWM

Group

subsidiaries) or any of their r

espective

debt securities could adversel

y affect

the availability of funding for NWM

Group, reduce NWM Group’s liquidity

position and increase the cost o

funding.

Rating agencies regularly review

NatWest Group plc, NWM Plc and other

NatWest Group entity credit rat

ings and

outlooks, which could be negative

affected by a number of factors that can

change over time, including: the

credit

rating agency’s assessment of NWM

Group’s strategy and management’s

capability; its financial condition including

in respect of profitability, asset quality,

capital, funding and liquidity; th

e level of

political support for the industrie

s in

which NWM Group operates; the

implementation of structural reform; the

legal and regulatory frameworks

applicable to NWM Group’s legal

structure; business activities and the

rights of its creditors; changes i

n rating

methodologies; changes in the relative

size of the loss-absorbing buffers

protecting bondholders and deposito

rs;

the competitive environment, political

and economic conditions in NWM

Group’s key markets (including the

impact of the COVID-19 pandemic and

any further Scottish independence

referendum); any reduction of the UK’s

sovereign credit rating and ma

rket

uncertainty.

In addition, credit ratings agencie

s are

increasingly taking into accoun

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.

Any reductions in the credit ratings of

NatWest Group plc, NWM Plc or of

certain other NatWest Group entities,

including, in particular, downgr

ades

below investment grade, or a

deterioration in the capital markets’

perception of NWM Group’s financial

resilience could significantly aff

ect NWM

Group’s access to money markets,

reduce the size of its deposit base and

trigger additional collateral or other

requirements in derivatives con

tracts and

other secured funding arrangements or

the need to amend such arrangements,

which could adversely affect NWM

Group’s (and, in particular, NWM Plc’s)

cost of funding and its access to capital

markets which could limit the range of

counterparties willing to enter into

transactions with NWM Group (

and, in

particular, with NWM Plc). This could in

turn adversely impact NWM Group’s

competitive position and threaten its

prospects in the short to medium-term.

NWM Group operates in marke

ts that

are highly competitive, with incr

easing

competitive pressures and techn

ology

disruption.

The markets in which NWM Group

operates are highly competitive, and

competition may intensify in response to

various changes. These include: e

volving

customer behaviour, technological

changes (including digital currencie

stablecoins and the growth of digital

banking, such as from fintech e

ntrants),

competitor behaviour, new entrants to

the market, industry trends resulting in

increased disaggregation or un

bundling

of financial services, the impact of

regulatory actions and other factors.

Innovations such as biometrics, artificial

intelligence, the cloud, blockchain,

cryptocurrencies and quantum

computing may also rapidly facilitate

industry transformation.

Increasingly many of the products and

services offered by NWM Group are, and

will become, more technology intensive.

NWM Group’s ability to develop

such

services (which also comply with

applicable and evolving regulati

ons) has

become increasingly important to

retaining and growing NWM Group’s

client businesses across its geo

graphical

footprint. There can be no cert

ainty that

NWM Group’s innovation strategy (which

includes investment in its IT capability

intended to improve its core

infrastructure and client interfac

capabilities as well as investments and

partnerships with third party te

chnology

providers) will be successful or that it will

allow NWM Group to continue to grow

such services in the future.

In addition, certain of NWM Group’s

current or future competitors may be

more successful in implementing

innovative technologies for delivering

products or services to their clients.

These competitors may be bette

r able to

attract and retain clients and key

employees, may have better IT sys

tems,

and may have access to lower cost

funding and/or be able to attract deposits

or provide investment-banking se

rvices

on more favourable terms than NWM

Group. Although NWM Group invests in

new technologies and participates in

industry and research-led initiatives

aimed at developing new techn

ologies,

such investments may be insufficient or

ineffective, especially given NWM

Group’s focus on its cost savin

gs targets.

This may limit additional investment in

areas such as financial innovation and

could therefore affect NWM Gr

oup’s

offering of innovative products

technologies for delivering products or

services to clients and its comp

etitive

position. NWM 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. T

development of innovative products

depends on NWM Group’s abilit

y to

produce underlying high quality data,

failing which its ability to offer innovative

products may be compromised.

If NWM Group is unable to offer

competitive, attractive and innovative

products that are also profitable and

timely, it will lose share, incur losse

s on

some or all of its activities and l

ose

opportunities for growth. In this

context,

NWM Group is investing in the

automation of certain solutions

and

interactions within its customer-facing

businesses, including through artificial

intelligence. Such initiatives may

result in

operational, reputational and conduct

risks if the technology used is de

fective,

inadequate or is not fully integr

ated into

NWM Group’s current solutions

. There

can be no certainty that such initiatives

will deliver the expected cost savings and

investment in automated proces

ses will

Risk Factors con

tinued

NWM Gr

oup

Annual Report and Accou

nts 202

187

likely also result in increased short-term

costs for NWM Group.

In addition, NatWest Group’s purpose-led

strategy, as well as employee

remuneration constraints,

may also have

an impact on NWM Group’s ability to

compete effectively and intensifie

competition from incumbents,

challengers and new entrants could

affect NWM Group’s ability to p

rovide

satisfactory returns. Moreover, activist

investors have increasingly become

engaged and interventionist in recent

years, which may pose a threat to

NatWest Group’s strategic initiatives.

Furthermore, continued consolidation o

technological or other developments in

certain sectors of the financial se

rvices

industry could result in NWM 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

negatively affect NWM Group.

NWM Group may be adversely af

fected

if NatWest Group fails to mee

t the

requirements of regulat

ory stress tests.

NatWest Group is subject to annual

stress tests by its regulator in t

he UK and

is also subject to stress tests by

European regulators with respect to

NWM NV and Ulster Bank Ireland DAC.

Stress tests are designed to ass

ess 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 tes

reveal that a bank’s existing regulatory

capital buffers are not sufficient to

absorb the impact of the stress, then it is

possible that NatWest Group and/or

NWM Group may need to take action to

strengthen their capital positions.

Failure by NatWest Group to me

et its

quantitative and qualitative requirements

of the stress tests set forth by its UK

regulators or those elsewhere may result

in: NatWest Group’s regulators

requiring

NatWest Group to generate additional

capital, reputational damage, increased

supervision and/or regulatory sanctions

and/or loss of investor confidenc

The impact of the COVID-19 pandemic

on the credit quality of NWM Gr

oup’s

counterparties may negatively impact

NWM Group.

The effects of the COVID-19 pandemic

have adversely affected the credit quality

of some of NWM Group’s borrowers and

other counterparties, and government

support schemes may delay the

effects

of defaults by such counterpartie

s. As

government support schemes reduce

defaults are expected to rise wi

th more

customers moving from IFRS 9 Stage 2

to Stage 3. As a result, NWM Group may

continue to experience elevated

exposure to credit risk and demands on

its funding, and the long-term effe

cts

remain uncertain. If borrowers or

counterparties face increasing levels

debt and default or suffer deterioration in

credit, this increases impairment

charges, write-downs, regulato

expected loss and impacts credit

reserves. An increase in drawings u

pon

committed credit facilities may also

increase NWM Plc’s and/or its

subsidiaries’ RWAs. If NWM Gro

experiences losses and a reduction in

future profitability, this is likely to affect

the recoverable value of fixed assets,

including deferred taxes, which may lead

to further write-downs.

Any of the above may have a negative

impact on NWM Group.

NWM Group has significant e

xposure

to counterparty a

nd borrower risk.

NWM NV, a subsidiary of NWM Plc, has a

portfolio of loans and loan commitments

to Western European corporate

customers. As a result, through the NWM

NV business and NWM Group’s other

activities, NWM Group has exposu

re 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 NWM Group’s business

es. These

risks may be concentrated for those

businesses for which client income is

heavily weighted towards a spe

cific

geographic region, industry or c

lient

base. Furthermore, these risks increase

due to the expected transfer of NatWest

Group’s Transfer Business from its ring-

fenced subgroup to NWM Group (see

‘

NWM Group has been in a period of

significant structural and other

change,

including as a result of NatWest G

roup’s

purpose-led strategy (including the NWM

Refocusing) and may continue to be

subject to significant structural and other

change

’).

Credit risk may arise from a va

riety of

business activities, including, but not

limited to: extending credit to clients

through various lending commitments;

entering into swap or other derivative

contracts under which counterparties

have obligations to make payme

nts to

NWM Group (including un-collateralised

derivatives); providing short or long-

term

funding that is secured by physical or

financial collateral whose value may at

times be insufficient to fully cov

er the

loan repayment amount; posting margin

and/or collateral and other commitments

to clearing houses, clearing agencies

exchanges, banks, securities firms an

other financial counterparties; and

investing and trading in securitie

s and

loan pools, whereby the value

of these

assets may fluctuate based on realised or

expected defaults on the underlying

obligations or loans. See also, ‘

Risk and

capital management — Credit R

isk

’. Any

negative developments in the activities

listed above may negatively impact NWM

Group’s clients and credit expos

ures,

which may, in turn, adversely impact

NWM Group’s profitability.

The credit quality of NWM Group’s

borrowers and other counterparties may

be affected by a deterioration in

prevailing economic and marke

conditions (including those cause

d by the

COVID-19 pandemic) and by changes in

the legal and regulatory landscape in the

UK and countries where NWM Group is

exposed to credit risk (including the

extent of the UK’s post-Brexit divergence

from EU laws and regulation). The

could worsen borrower and counterparty

credit quality or impact the enforcement

of contractual rights over security,

increasing credit risk.

Concerns about, or a default by

, a

financial institution could lead to

significant liquidity problems and loss

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 may

lead to market-wide liquidity problems

and losses for NWM Group. In addition,

the value of collateral may be correlated

with the probability of default by the

relevant counterparty (‘wrong way risk’),

which would increase NWM Group’s

potential loss. This systemic risk may also

adversely affect financial intermediaries,

such as clearing agencies, clea

ring

houses, banks, securities firms and

exchanges with which NWM Group

interacts on a daily basis. See also, ‘—

NWM Group is reliant on access

to the

capital markets to meet its funding

requirements, both directly thro

ugh

wholesale markets, and indirectl

y through

its parent (NatWest Group) for the

subscription to its internal capital

and

MREL. The inability to do so may

adversely affect NWM Group

’.

As a result of the above, adverse

changes in borrower and counte

rparty

credit risk may cause accelerate

impairment charges under IFRS 9

increased repurchase demands, higher

costs, additional write-downs and losses

for NWM Group and an inability to

engage in routine funding transactions.

NWM Group has applied an inte

rnal

analysis of multiple economic s

cenarios

(MES) together with the determi

nation of

Risk Factors con

tinued

NWM Gr

oup

Annual Report and Accou

nts 202

188

specific overlay adjustments to

inform its

IFRS 9 ECL (Expected Credit L

oss).

The recognition and measurement of

ECL is complex and involves the us

e 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. T

ECL provision is sensitive to the

model

inputs and economic assumptions

underlying the estimate. See al

so, ‘

Risk

and Capital Management — Credit Risk

’.

The assumptions and judgments use

d in

the MES and ECL assessment at 31

December 2021 may not prove to be

adequate resulting in incremental ECL

provisions for the NWM Group. As

government support schemes reduce

defaults are expected to rise wi

th more

ECLs cases moving from Stage 2 to

Stage 3.

NWM Group is exposed to the financial

industry, including sovereign debt

securities, banks, financial inter

mediation

providers (including providing f

acilities to

financial sponsors and funds, backed by

assets or investor commitments) and

securitised products (typically senior

lending to special purpose vehicles

backed by pools of financial asse

ts). Due

to NWM Group’s exposure to the

financial industry, it also has exposure to

shadow banking entities (i.e., entities

which carry out banking activities outside

a regulated framework). NWM

Group is

requi

red to

identify

and m

onitor its

exposure to

shadow ba

nking e

ntities,

implement and maintain an internal

framework for the identification,

management, control and mitigation of

the risks associated with exposure to

shadow banking entities, and ensu

effective reporting and governance in

respect of such exposure. If NWM Group

is unable to properly identify and monitor

its shadow banking exposure, maintain

an adequate framework, or ensure

effective reporting and governance in

respect of shadow banking exposure,

this may adversely affect the business

results of operations and outlook of

NWM

Group.

NWM Group could incur losses or be

required to maintain higher levels of

capital as a result of limitatio

ns or

failure of various models.

Given the complexity of NWM Group’s

business, strategy and capital

requirements, NWM 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

anticipate capital and funding

requirements (including to facilitate

NatWest Group’s mandated stre

testing). In addition, NWM Group utilises

models for valuations, credit approvals,

calculation of loan impairment charges

on an IFRS 9 basis, financial repor

ting

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’)). NWM Group’s models,

and the

parameters and assumptions on which

they are based, are periodically reviewed

and updated to maximise their accuracy.

As models analyse scenarios based on

assumed inputs and a conceptual

approach, model outputs theref

ore

remain uncertain. Failure of mo

dels

(including due to errors in model desi

gn)

or new data inputs (including non-

representative data sets), for example, to

accurately reflect changes in the

micro

and macroeconomic environme

nt in

which NWM Group operates (for example

to account for the impact of the

COVID-

19 pandemic), to capture risks and

exposures at the subsidiary level, and to

update for changes to NWM Group’s

current business model or operations, or

for findings of deficiencies by NatWest

Group (and in particular, NWM Group’s)

regulators (including as part of NatWest

Group’s mandated stress testin

g) may

render some business lines uneconomic,

result in increased capital requirements,

may require management action or may

subject NWM Group to regulatory

sanction. NWM Group may also face

adverse consequences as a result of

actions based on models that a

re poorly

developed, implemented or used, models

that are based on inaccurate or

compromised data or as a result of the

modelled outcome being misun

derstood,

or by such information being u

sed for

purposes for which it was not de

signed.

NWM Group’s financial statement

s 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, expens

es,

exposures and RWAs. While esti

mates,

judgments and assumptions tak

e 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 the u

se of

complex models).

The accounting policies deemed critical

to NWM Group’s results and fin

ancial

position, based upon materiality

and

significant judgments and estimates,

which include loan impairment

provisions, are set out in ‘

Critical

accounting policies and key sources of

estimation uncertainty

’. New ac

counting

standards and interpretations that have

been issued by the International

Accounting Standards Board but which

have not yet been adopted by NWM

Group are discussed in ‘

Future

Accounting Developments

’.

Changes in accounting standa

rds may

materially impact NWM Group’s

financial results.

Changes in accounting standards or

guidance by accounting bodies or in

the

timing of their implementation, whether

immediate or foreseeable, could result in

NWM Group having to recognis

additional liabilities on its balance

sheet,

or in further write-downs or impairments

to its assets and could also signif

icantly

impact the financial results, condition

and prospects of NWM Group.

NWM Group’s trading assets a

mounted

to £59.1 billion as at 31 December 2021

The valuation of financial instruments,

including derivatives, measured at fair

value can be subjective, in particular

where models are used which include

unobservable inputs. Generally, to

establish the fair value of these

instruments, NWM Group relies on

quoted market prices or, where the

market for a financial instrument is no

sufficiently credible, internal valuation

models that utilise observable market

data. In certain circumstances, the data

for individual financial instruments or

classes of financial instruments utilised

by such valuation models may not be

available or may become unavailable due

to prevailing market conditions. In these

circumstances, NWM Group’s internal

valuation models require NWM

Group to

make assumptions, judgments and

estimates to establish fair value, which

are complex and often relate to matters

that are inherently uncertain. Any of

these factors could require NWM Group

to recognise fair value losses which m

have an adverse effect on NWM Group’s

income generation and financial position.

NatWest Group (including NWM Gr

oup)

may become subject to the

application

of UK statutory st

abilisation or

resolution powers which may resu

lt in,

among other act

ions, the write-down

or conversion of NWM Group en

tities’

Eligible Liabilities.

HM Treasury, the Bank of Engl

and and

the PRA and FCA (together, the

‘Authorities’) are granted subst

antial

powers to resolve and stabilise UK-

incorporated financial institutions. Five

stabilisation options exist: (i) transfer of

all of the business of a relevant entity o

the shares of the relevant entit

y 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

Risk Factors con

tinued

NWM Gr

oup

Annual Report and Accou

nts 202

189

part of the assets, rights or liabilities of

the relevant entity to one or more asset

management vehicles for management

the transferor’s

assets, righ

ts or

liabilities; (iv)

he write-

down, conversion,

transfer, modification, or suspe

sion of

the relevant entity’s equity, capital

instruments and liabilities (‘Eligible

Liabilities’); and (v) temporary public

ownership of the relevant entity

. These

tools may be applied to NatWes

t Group

plc as the parent company or to NWM

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, the

re 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. Similar powers may also be

exercised with respect to NWM

NV in the

Netherlands by the relevant Dutch

regulatory

authorities.

Under the UK Banking Act, the

Authorities are generally requir

ed to

have regard to specified objectives in

exercising the powers provided for by

the Banking Act. One of the obje

ctives

(which is required to be balance

d as

appropriate with the other spe

cified

objectives) refers to the protection and

enhancement of the stability of the

financial system of the UK. Mor

eover, the

‘no creditor worse off’ safeguard

contained in the Banking Act (which

provides that creditors’ losses in

resolution should not exceed thos

e that

would have been realised in an

insolvency of the relevant instit

ution)

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 of NatWest

Group (including NWM Group), which

may depend on factors outside of NWM

Group’s control. Moreover, the

Banking

Act provisions remain untested

practice.

If NatWest Group is at or is approaching

the point of non-viability such that

regulatory intervention is require

d, there

may correspondingly be an adverse

effect on the business, results of

operations and outlook of NWM Group.

NatWest Group is subject to Ba

nk of

England and PRA oversight in respect

of resolution, and NatWest Group cou

be adversely affected should the

Bank

of England deem NatWest Grou

p’s

preparations to be inadequate.

NatWest Group is subject to regulatory

oversight by the Bank of Engla

nd and the

PRA, and is required (under the

PRA

rulebook) to carry out an asses

sment of

its preparations for resolution, s

ubmit a

report of the assessment to the PRA, and

disclose a summary of this rep

ort. The

initial report was submitted to the PRA

on 30 September 2021 and the B

ank of

England’s assessment of NatWest

Group’s preparations is schedule

d to be

released on 10 June 2022 although the

Bank of England may provide fe

edback

before then.

NatWest Group has dedicated significan

resources towards the preparation of

NatWest Group for a potential re

solution

scenario. However, if the Bank of

England assessment identifies a

significant gap in NatWest Grou

p’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 which

came into effect on 1 January 20

22,

NatWest Group may be required to take

action to enhance its preparations to be

resolvable, resulting in additional cost

and the dedication of additional

resources. These actions may have an

impact on NatWest Group (and NWM

Group) as, depending on the Bank of

England’s assessment, potential action

may include, but is not limited t

resulting in restrictions on maxi

mum

individual and aggregate exposures, a

requirement to dispose of specifie

assets, a requirement to change le

gal 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 NWM Group’s) strategic

plans and have an adverse effect on the

financial position of NWM Group or may

result in reputational damage a

nd/or loss

of investor confidence.

Climate and sustainability-relat

ed risks

NWM Group and its customers fa

significant climate-related ris

ks,

including in transitioning to a net z

ero

economy, which may adversely impact

NWM Group.

Climate-related risks and uncertainties

are continuing to receive increasing

regulatory, judicial, political and societal

scrutiny.

Financial and non-financial risk

s from

climate change arise through p

hysical

and transition risks. Furthermor

e, NWM

Group may also face a variety of

climate-related legal risks, both physical

and transition, from potential lit

igation

and conduct liability. See also, ‘

NWM

Group may be subject to potential

climate, environmental and other

sustainability-related litigation,

enforcement proceedings, invest

igations

and conduct risk

’.

There are significant uncertaint

ies as to

the extent and timing of the

manifestation of the physical risks of

climate change, such as more se

vere

and frequent extreme weather events,

(flooding, subsidence, heat wave

s and

long-lasting wildfires), rising sea levels,

biodiversity loss and resource scarcity.

Damage to NWM customers’ properties

and operations could disrupt bus

iness,

impair asset values and negativ

ely

impact the creditworthiness of customers

leading to increased default rates,

delinquencies, write-offs and impairment

charges in NWM Group’s portfolios. In

addition, NWM Group premises and

operations, or those of its critical

outsourced functions may experience

damage or disruption leading t

increased costs and negatively

affecting

NatWest Group’s business continuity an

reputation.

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. The timing, content a

implementation of the specific policies

and proposals remain uncertain.

Widespread transition to a net zero

economy across all sectors of the

economy and markets in which N

Group operates will be require

d to meet

the goals of the 2015 Paris Agree

ment,

the UK’s Net Zero Strategy and the

Glasgow Climate Pact of 2021. The

impact of the extensive commercial,

technological, policy and regulatory

changes required to achieve transitio

remains uncertain, but it is expected to

be significant and may be disruptive

across the global economy and ma

rkets,

especially if these changes do not occur

in an orderly or timely manner or are no

effective in reducing emissions

sufficiently. Some sectors such as

property, energy (including oil and gas),

Risk Factors con

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Annual Report and Accou

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190

mining, infrastructure, transport

(including automotive and aviation) and

agriculture are expected to be

particularly impacted. The timing and

pace of the transition to a net zero

economy is also uncertain and may be

near term, gradual and orderly or

delayed, rapid and disorderly, or the

combination of these.

Climate-related risks may be drivers of

several different risk categories

simultaneously and may exacerbate

existing risks, including credit risk,

operational risk (business continuity),

market risk (both traded and non-traded),

liquidity and funding risk (for example, net

cash outflows or depletion of liquidity

buffers).

If NWM Group fails, to adapt its busines

and operating model in a timely manner

to the climate-related risks and

opportunities and changing regulatory

and market expectations, or to

appropriately identify, measure, manage

and mitigate climate change related

physical, transition and legal ris

ks and

opportunities that NWM Group,

its

customers and value chain face, NWM

Group’s reputation, business, operations

or value chain and results of op

erations

and outlook may be impacted adversely.

NatWest Group’s purpose-led str

ategy

includes climate change as one of

its

three areas of focu

s. This is likely to

require material chan

ges to the

business and operating model of NWM

Group which entails significant

execution risk.

In February 2020, NatWest Gro

announced its ambition to become a

leading bank on climate in the UK,

helping to address the climate challenge

by setting itself the challenge to at least

halve the climate impact of its f

inancing

activity by 2030 and intending to do what

is necessary to achieve alignment with

the 2015 Paris Agreement. In a

ddition, in

April 2021, NatWest Group by joining the

Net Zero Banking Alliance 'Business

Ambition to 1.5C', stated its ambition to

reach net zero by 2050.

Furthermore, as

part of its efforts to support the transitio

to a net zero economy, NatWes

t Group

has also announced its ambitions to

phase out of coal for UK and n

on UK

customers who have UK coal production,

coal fired generation and coal re

lated

infrastructure

by 1 October 2024, with a

full global phase out by 1 January 2030;

to plan to stop financing new customer

relationships with corporate cus

tomers

who explore for, extract or produce

coal

or operate unabated coal powered

plants; and that it would not provide

services to existing customers who are

increasing coal mining activity by

exploring for new coal, developing new

coal mines or increasing thermal coal

production.

To achieve its 2030 and 2050 a

mbitions,

NatWest Group has also announced other

climate ambitions, targets and

commitments, and going-forward it m

also announce other climate ambitions,

targets and commitments, including

science-based targets to be validated by

the Science Based Target Initia

tive.

Making the changes necessary to

achieving these ambitions may

materially

affect NWM Group’s business and

operations and may require significant

reductions to its financed emissions and

to its exposure to customers that do no

align with a transition to a net zero

economy or do not have a credible

transition plan. Increases in lending and

financing activities may wholly or

partially offset some or all of these

reductions, which may increase the

extent of changes and reductio

necessary. It is anticipated that achieving

these reductions, together with

the active

management of climate-related risks and

other regulatory, policy and market

changes, are likely to necessitate

material and accelerated changes to

NWM Group’s business, operating model

and existing exposures (potentially on

accelerated timescales and outside of

risk appetite) which may have a material

adverse effect on NWM Group’s ability to

achieve its financial targets and gener

ate

sustainable returns.

NWM Group’s ability to contribute to

achieving NatWest Group’s climate-

related ambitions, targets and

commitments through its own specif

targets will depend to a large extent on

many factors and uncertainties beyond

NWM Group’s control. These include the

macroeconomic environment, the e

xtent

and pace of climate change, including

the timing and manifestation of physical

and transition risks, the effectiveness

actions of governments, legislat

ors,

regulators, businesses, investors,

customers and other stakeholders to

adapt and/or mitigate the impact of

climate-related risks, changes in

customer behaviour and demand, the

challenges related with the

implementation and integration of

adoption policy tools, changes in the

available technology for mitigation and

adaptation, the availability of accurate,

verifiable, reliable, consistent and

comparable data. See also, ‘

atWest

Group’s purpose-led strategy includes

climate change as one of its three areas

focus. This is likely to require material

changes to the business and operating

model of NWM Group which entail

significant execution risk

’ and ‘

There are

significant challenges in relation

climate-related data due to quality and

other limitations, lack of standar

disation,

consistency and incompleteness which

amongst other factors contribute to the

significant uncertainties inheren

t in

accurately modelling the impact of

climate-related risks

’.

These internal and external factors and

uncertainties will make it challenging for

NatWest Group to meet its climate

ambitions, targets and commitments and

for NWM Group to contribute to these

and there is a significant risk that all or

some of them will not be achieved.

Any delay or failure by NWM Group’s to

contribute to setting, making pr

ogress

against or meeting NatWest Gr

oup’s

climate-related ambitions, targets and

commitments through its own specif

targets may have a material adverse

impact on NWM Group, its reputation,

business, results of operations, outlook,

market and competitive position and m

increase the climate-related ris

ks NWM

Group faces.

Any failure by NWM Group to

implement effective and compliant

climate change resilient system

controls and procedures could

adversely affect NWM Group’s a

bility

to manage climate-relat

ed risks.

The prudential regulation of climate-

related risks is an important driver in

how NWM Group develops its ri

appetite for financing activities or

engaging with counterparties that do not

align with a transition to a net zero

economy or do not have a credible

transition plan.

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 (the ‘SS 3

/19’) with

particular focus on the manage

ment of

financial risks from climate cha

nge with

respect to governance, risk management,

scenario analysis and disclosure

Following the submission of initial plans by

UK banks in October 2019, in July 2

020

the PRA issued a ‘Dear CEO’ letter

requiring firms to embed fully their

approaches to managing climate-related

financial risks by the end of 2021

. In

response, on 8 October 2020, NatWest

Group provided the PRA with an update

to its original plan noting that the C

OVID-

19 pandemic had disrupted some

elements of NatWest Group’s origin

al plan

and, as a result, the updated plan would

require additional operating cycle

reaching into 2022 and beyond to prove

embedding. Subsequently the PRA issue

its ‘Climate Change Adaptation Re

port’ in

October 2021 advising firms of

the need

to continue to refine and innovate w

ays to

further integrate the financial risks

from

climate change within risk man

agement

Risk Factors con

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Annual Report and Accou

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191

practices and it restated that by

the end

of 2021, firms should be able to

demonstrate that the expectations s

et out

in SS3/19 have been implemente

d and

embedded throughout the firm

s’

organisation as fully as possible.

January 2022, NatWest Group provided

the PRA with an update on how it has

addressed the commitments made in its

October 2020 plan, noting the delivery of

a 1st generation, largely qualita

tive in

nature, approach to supervisor

requirements.

In June 2021, the Bank of Engla

launched its 2021 Bie

nnial Exploratory

Scenario (‘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 ch

ange under

three climate scenarios. NatWest Group

delivered its CBES submission to the PRA

in October 2021. The Bank of England

has since announced that the CBES is

likely to include a second round over

February and March 2022, which is likely

to be largely qualitative in natu

re.

The Bank of England guidance

for the

CBES confirmed that it is exploratory in

nature and not intended to be us

ed to set

capital requirements. In the

aforementioned ‘Climate Change

Adaptation Report 2021’, the Bank of

England confirmed that over the coming

year it will undertake further analysis to

explore enhancements to the r

egulatory

capital frameworks as they relate to

climate related financial risk. To suppo

this work, the Bank of England will put

out a ‘Call for Papers’ and host a

Research Conference on the interaction

between climate change and capital in

Q4 2022. Informed by these ste

ps and

internal analysis, the Bank of England is

expected to publish a follow-up repo

rt on

the use of capital including on the role of

any future scenario exercises by the end

of 2022. It is therefore likely that in the

coming years financial institutions,

including NatWest Group (including NW

Group), may be required to hol

additional capital to enhance th

eir

resilience against systemic and/or

institution specific vulnerabilitie

s to

climate-related financial risks, which

could, in turn, negatively impact NWM

Group.

Any failure of NWM Group to fully and

timely embed climate-related risk

s 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 have

a material and adverse impact on NWM

Group’s regulatory compliance, prudential

capital requirements, liquidity position,

reputation, business, results of operations

and outlook.

There are significant challenges in

relation to climate-relat

ed data due to

quality and other limitations, la

ck of

standardisation, consistency an

incompleteness which amongst

other

factors contribute t

o the significant

uncertainties inherent in acc

urately

modelling the impact of climate

-related

risks.

Meaningful reporting of climate-related

risks and opportunities and their

potential impacts and related metrics

depend on access to accurate, reliable,

consistent and comparable climate-

related data from counterparti

es or

customers. These may not be ge

nerally

available or, if available, may n

ot be

accurate, verifiable, reliable, consistent,

or comparable. Any failure of NWM

Group to incorporate climate-related

factors into its counterparty and

customer data sourcing and

accompanying analytics, or to

develop

accurate, reliable, consistent and

comparable counterparty and cu

stomer

data, may have a material adve

rse

impact on NWM Group’s ability

prepare meaningful reporting of cli

mate-

related risks and opportunities, its

regulatory compliance, reputation,

business and its competitive pos

ition.

In the absence of other sources,

reporting of financed emissions by

financial institutions, including NWM

Group, is necessarily based therefore on

aggregated information developed by

third parties that may be prepared in an

inconsistent way using different

methodologies, interpretations, or

assumptions. Accordingly, our climate-

related disclosures use a great

er number

and level of assumptions and es

timates

than many of our financial disclosu

res.

These assumptions and estimate

s are

highly likely to change over time

, and,

when coupled with the longer ti

frames used in these climate 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 counterpa

rty

or customer. There may also be data

gaps, particularly for private co

mpanies,

that are filled using proxy data, such as

sectoral averages, again developed in

different ways. As a result, our climate

related disclosures may be ame

nded,

updated or restated in the future

as the

quality and completeness of our data and

methodologies continue to improve.

These data quality challenges, gaps and

limitations could have a material impact

on NWM Group’s ability to mak

e effective

business decisions about climate risks

and opportunities, including risk

management decisions, comply with

disclosure requirements and our ability to

monitor and report our progress in

meeting our ambitions, targets and

commitments.

Significant risks, uncertainties a

variables are inherent in the asses

sment,

measurement and mitigation of climate-

related risks. These include dat

a quality

gaps and limitations mentioned above,

the pace at which climate science

greenhouse gas accounting standards

and various emissions reduction solutions

develop. In addition, there is a significant

uncertainty about how climate c

hange

and the transition to a net zero economy

will unfold over the coming decades an

affect how and when climate-re

lated

risks will manifest. These timeframes are

considerably longer than NWM Group’s

historical strategic, financial, re

silience

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 e

conomic

outcomes and impacts. Climate-related

risks present significant methodological

challenges due to their forward-looking

nature, the lack and/or quality

historical testing capabilities, lack of

standardisation and incomplete

ness 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 de

pend 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, they rather

explore the possible implications

of different judgments and

assumptions by considering a

series of scenarios;



climate scenarios do not provid

a comprehensive description of all

possible future outcomes;



lack of specialist expertise in

banks such that NWM 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 the impact of climate-

related risks on financial assets

which will evolve rapidly in the

coming y

ears;



the number of variables and

forward- looking nature of

climate scenarios which makes

Add

nal

mat

Risk Factors con

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Annual Report and Accou

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them challenging to back test and

benchmark;



the significant uncertainty as to

how the climate will evolve ove

time, how and when

overnme

nts,

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 therefore it may be

challenging to report on the

whole balance sheet with regard

to emissions.

Accordingly, these risks and

uncertainties coupled with signific

antly

longer timeframes make the ou

tputs of

climate-related risk modelling, including

emissions reductions targets an

pathways, inherently more unc

ertain

than outputs modelled for traditional

financial planning cycles based on

historical financial information.

Capabilities within NWM Group to

appropriately assess, model and mana

climate-related risks and the su

itability of

the assumptions required to model and

manage climate-related risks

appropriately are developing. Even when

those capabilities are develope

d, 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 have a material adverse impact on

NWM Group’s regulatory compliance,

reputation, business, results of operations

and outlook.

A failure to adapt NWM Group’s

business strategy, governance,

procedures, systems and controls to

manage emerging sustainability-

related risks and opportunities may

have a material adverse effect o

NWM Group, its reputation, business,

results of operations and out

look.

Investors, customers, international

organisations, regulators and other

stakeholders are increasingly focusing on

identification, measurement,

management and mitigation of

‘sustainability-related’ risks and

opportunities such as environme

ntal (

including biodiversity and loss of natu

ral

capital); social (including diversity and

inclusion, the living wage, fair taxation

and value chains); and governance

(including board diversity, ethics,

executive compensation and

management structure) related risks and

opportunities and on long term

sustainable value creation.

Financial institutions, including NWM

Group, are directly and indirectly

exposed to multiple types of

environmental and biodiversity-related

risk through their activities, including risk

of default by clients. Additionally, there is

a growing need to move from safeguards

and interventions that focus on reducing

negative impacts on environment and

biodiversity towards those that focus

increasing positive impact on

environment and biodiversity and nature-

based solutions. In 2021, NatWe

st Group

(including NWM Group) accordingly

classified ‘Biodiversity and Nature Loss’

as an emerging risk for NatWest G

roup

(including NWM Group) within its Risk

Management Framework. This is an

evolving and complex area which

requires collaborative approaches with

partners, stakeholders and peers to help

measure and mitigate negative i

mpacts

of financing activities on the

environment, biodiversity and n

ature as

well as supporting the growing

sector of

nature-based solutions, habitat

restoration and biodiversity markets.

NatWest Group, including NWM Group, is

in the early stages of developing its

approach and NatWest Group, including

NWM Group, recognises the need for

more progress.

There is also increased investor,

regulatory and customer scruti

regarding how businesses addre

ss social

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 which may impact NWM

Group’s employees, customers, and their

business activities or the communities in

which they operate. There is also

growing attention on the need for a 'just

transition' and “energy justice” – in

recognition that the transition to a net

zero economy should not

disproportionally affect the most

disadvantaged members of socie

ty.

The

increased focus on these issues

may

create reputational and other risks

for

financial institutions, including NWM

Group. In addition to climate-related

risks, sustainability-related risks (i) may

also adversely affect economic

activity,

asset pricing and valuations of issu

ers’

securities and, in turn, the wider financial

system; (ii) may impact economic

activities directly (for example through

lower corporate profitability or the

devaluation of assets) or indire

ctly (for

example through macro-financial

changes); (iii) may also affect the viabili

or resilience of business models over the

medium to longer term, particu

larly those

business models most vulnerable to

sustainability-related risks; (iv) c

trigger further losses stemming directly

or indirectly from legal claims (liability

risks) and reputational damage as a

result of the public, customers,

counterparties and/or investors

associating the NWM Group or

its

customers with adverse sustainability-

related issues; and (v) intersect with and

further complexity and challenge to

achieving our purpose-led strategy

including climate ambitions, targets and

commitments. Together with climate-

related risks, these risks may combine to

generate even greater adverse e

ffects on

our business.

Furthermore, sustainability-related risks

may be drivers of several different risk

categories simultaneously and may

exacerbate the risks described he

rein,

including credit risk, operationa

l risk

(business continuity), market risk (both

traded and non-traded), liquidit

y and

funding risk (for example, net cash

outflows or depletion of liquidity

buffers).

Accordingly, any failure or delay

NWM Group to successfully adapt its

business strategy and to establish and

maintain effective governance,

procedures, systems and controls in

response to these issues, and to manage

these emerging sustainability-r

elated

risks and opportunities may have a

material adverse impact NWM Group’s

reputation, liquidity position, business

results of operations, outlook and the

value of NWM Group’s securities.

Any reduction in the ESG ratings of

NatWest Group (including NWM Gr

oup)

or NWM Group could have a negat

ive

impact on NatWest Group’s (including

NWM Group) or NWM Group’s

reputation and on investors’ risk

appetite and customers’ willingness to

deal with NatWest Group (incl

uding

NWM Group) or NWM Group.

ESG ratings from agencies and data

providers which rate how NatWest Group

(including NWM Group) or NWM Group

manage environmental, social and

governance risks are increasingly

influencing investment decisions

or being

used as a basis to label financial

products and services as green or

sustainable.

ESG ratings are (i) unsolicited; (ii) subjec

to the assessment and interpretation by

Risk Factors con

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Annual Report and Accou

nts 202

193

the ESG rating agencies; (iii) provided

without warranty; (iv) not a spo

nsorship,

endorsement, or promotion of N

atWest

Group (including NWM Group)

or NWM

Group by the relevant rating agency

; and

(v) may depend on many factor

s some of

which are beyond NatWest Group’s

and/or NWM Group’s control (e.g. any

change in rating methodology). Any

reduction in the ESG ratings of NatWest

Group (including NWM Group)

could

have a negative impact on NW

M Group’s

reputation and could influence investors’

risk appetite for NWM Group’s and/or its

subsidiaries’ securities, particularly ESG

securities and could affect a cu

stomer’s

willingness to deal with NWM Group.

Increasing levels of climate,

environmental and sustainabil

ity-

related laws, regulation and oversight

may adversely affect NWM Gr

oup’s

business and expose NWM Group to

increased costs of compliance,

regulatory sanction a

nd reputational

damage.

There are an increasing number of EU,

UK and other regulatory and legislative

initiatives to address issues around

climate, environmental and sustainability

risks and opportunities and to promote

the transition to a net zero economy. As

a result, an increasing number of laws,

regulations, legislative actions are likely

to affect the financial sector and the real

economy, including proposals, guidance,

policy and regulatory initiatives many of

which have been introduced or

amended

recently and are subject to further

changes.

Many of these initiatives are focuse

d on

developing standardized definitions for

green and sustainable criteria of assets

and liabilities, integrating climat

e 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 NWM

Group and its associated credit

, market

and financial risk profile. They could also

impact NWM Group’s recognition of its

climate and sustainable funding and

financing activity and may adversel

affect NWM Group’s ability to ac

hieve its

climate strategy and climate and

sustainable funding and financing

ambitions.

In addition, NatWest Group and its

subsidiaries are and will be sub

ject to

increasing entity wide climate-re

lated

and other non-financial disclosure

requirements. pursuant to the

recommendations of the Task Force on

Climate-related Financial Disclosure

(‘TCFD’) and under other regimes

. From

February 2022, NatWest Group will be

required to provide enhanced cli

mate-

related disclosures consistent with the

TCFD recommendations to comply wi

the FCA Policy Statement on the ne

Listing Rules (PS 20/17) that require

commercial companies with a UK

premium listing – such as NatWe

st Group

- to make climate related disclos

ures,

consistent with TCFD, on a ‘comply or

explain’ basis. The FCA is proposing to

expand this requirement to a wider

scope of listed issuers which w

ould

include NatWest Group’ subsidiaries –

including NWM Group - as it moves

towards mandatory TCFD reporting

across the UK economy by 2025 (See

also, ‘

There are significant challenges i

relation to climate-related data due to

quality and other limitations, lack of

standardisation, consistency and

incompleteness which amongst other

factors contribute to the signific

ant

uncertainties inherent in accurately

modelling the impact of climate-related

risks.

’)

In addition, NWM Group’s EU su

bsidiaries

and branches are and will continue to be

subject to an increasing array of the

EU/EEA climate and sustainability-related

legal and regulatory requirements. These

requirements may be used as the

basis

for UK laws and regulations (such as the

UK Green Taxonomy) or regarded by

investors and regulators as best practice

standards whether or not they apply to

UK businesses. Any divergence between

UK, EU/EEA and US climate and

sustainability-related legal and regulatory

requirements may result in NWM Group

not meeting investors’ expectations, may

increase the cost of doing business

and

may restrict access of NWM Group’s UK

business to the EU/EEA market.

NatWest Group (including NWM Group) is

also participating in various vol

untary

carbon reporting and other standa

setting initiatives for disclosing climate

and sustainability-related information,

many of which have differing objec

tives

and methodologies and are at diffe

rent

stages of development in terms of how

they apply to financial institutions.

Compliance with these developing and

evolving climate and sustainability-

related requirements is likely to require

NWM Group to implement significant

changes to its business models, pro

duct

and other governance, internal controls

over financial reporting, disclosure

controls and procedures, modelling

capability and risk management sys

tems,

which may increase the cost of doing

business, entail additional chan

ge risk

and compliance costs.

Failure to implement and comply

with

these legal and regulatory requirements

or emerging best practice expec

tations

may have a material adverse effe

ct on

NWM Group’s regulatory compliance and

may result in regulatory sanction,

reputational damage and investor

disapproval each of which could have an

adverse effect on NWM Group’s business

results of operations and outlook.

NWM Group may be subject to

potential climate, environment

al and

other sustainability-related litigat

ion,

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 NWM

Group, may through their business

activities face increasing litigati

on,

conduct, enforcement and contrac

liability risks related to climate c

hange,

environmental degradation and other

social, governance and sustain

ability-

related issues.

These risks may arise, for example, from

claims pertaining to: (i) failures to meet

obligations, targets or commitments

relating to or to disclose accurately or

provide updates on material clima

and/or sustainability related risk

s or

otherwise provide appropriate disclosure

to investors, customers, counterparties

and other stakeholders; (ii) conduct, mis-

selling and other customer prote

ction

type claims; (iii) marketing that portrays

products, securities, activities o

r policies

as producing positive climate,

environmental or sustainable outcomes

to an extent that may not the case

; (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’

fiduciary duties, for example by financing

various carbon-intensive,

environmentally harmful or otherwise

highly exposed assets, companies, and

industries; (vi) changes in unde

rstanding

of what constitutes positive climate,

environmental or sustainable outcomes

as a result of developing climate scie

nce,

leading to discrepancy between curren

product offerings and investor and/or

market and/or broader stakeholder

expectations; (vi) any weakness

es or

failures in specific systems or p

rocesses

associated particularly with climate,

environmental or sustainability linke

products, including any failure in timely

implementation, onboarding and/or

updating of such systems or process

es;

or (vii) counterparties, collaborators and

third parties in NWM Group’s value chain

action who act, or fail to act or

undertake due diligence or apply

appropriate risk management a

product governance in a manner that

Risk Factors con

tinued

NWM Gr

oup

Annual Report and Accou

nts 202

194

impacts Natwest 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

NWM Group for financing or contributing

to climate change and environ

mental

degradation 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 climate scie

nce

develops and societal understanding of

climate science increases and deepens,

courts, regulators and enforcement

authorities may apply the then current

understandings of climate related

matters retrospectively when asse

ssing

claims about historic conduct or dealings

of financial institutions, including NWM

Group.

These potential litigation, conduct,

enforcement and contract liability risks

may have a material adverse effe

ct on

NatWest Group’s ability to achieve its

strategy, including its climate ambition,

and they could have an adverse

effect on

NWM Group’s reputation, business

financial results, position and prospects,

results of operations and outlook.

Operational and IT resilience r

isk

Operational risks (including reliance on

third party suppliers and outso

urcing of

certain activities) are inherent in NWM

Group’s businesses.

Operational risk is the risk of los

resulting from inadequate or failed

internal processes, procedures,

people or

systems, or from external events,

including legal risks. NWM Group

operates in a number of countries,

offering a diverse range of products and

services supported directly or indirectly

by third party suppliers. As a resu

lt,

operational risks or losses can arise from

a number of internal or external factors

(including financial crime and fraud), for

which there is now greater scrutiny by

third parties on NWM Group’s

compliance with financial crime

requirements; see ‘

NWM Group i

exposed to the risk of various litigati

matters, regulatory and governmental

actions and investigations as wel

l as

remedial undertakings, the outcomes of

which are inherently difficult to predict,

and which could have an adverse effect

on NWM Group

’). These risks are also

present when NWM Group relies on

third-party suppliers or vendors to

provide services to it or its clients, as is

increasingly the case as NWM Group

outsources certain activities, including

with respect to the implementation of

new technologies, innovation and

responding to regulatory and market

changes.

Operational risks continue to b

heightened as a result of the NWM

Refocusing, NatWest Group’s purpose-led

strategy, NWM Group’s current c

ost-

reduction measures

and conditions

affecting the financial services i

ndustry

generally (including the COVID-19

pandemic and other geo-political

developments) and in particula

r the legal

and regulatory uncertainty res

ulting

therefrom. It is unclear as to how the

future ways of working may ev

olve,

including in respect of how working

practices may develop, or how N

Group will evolve to best serve its

customers. Any of the above may place

significant pressure on NWM Group’s

ability to maintain effective internal

controls and governance frameworks.

In recent years, NWM Group has

materially increased its dependence on

NatWest Bank Plc for numerous critical

services and operations, including

without limitation, property, fin

ance,

accounting, treasury, risk, regulatory

compliance and reporting, human

resources, and certain other support and

administrative functions. A failu

re by

NatWest Bank Plc to adequately supply

these services may expose NWM Group

to critical business failure risk, increased

costs and other liabilities. These and any

increases in the cost of these se

rvices

may adversely impact NWM Group’s

business, results of operations and

outlook.

The effective management of operational

risks is critical to meeting customer

service expectations and retaining and

attracting client business. Although NWM

Group has implemented risk controls and

mitigation actions, with resources and

planning having been devoted t

o mitigate

operational risk, such measures may not

be effective in controlling each of

the

operational risks faced by NWM Group.

Ineffective management of such risks

could adversely affect NWM Group.

NWM Group is subject to increasingly

sophisticated and frequent

cyberattacks.

NWM Group experiences a con

stant

threat from cyberattacks across the

entire NatWest Group (including NWM

Group) and against NatWest Gr

oup and

NWM Group’s supply chain, reinforcing

the importance of due diligence of

working relationship with, the third

parties on which NWM Group re

lies.

NWM 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 mo

sophisticated, NWM Group is re

quired to

continue to invest in additional capability

designed to defend against eme

rging

threats. In 2021, NWM Group a

nd 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 global financial services indus

try. The

focus is to manage the impact of

the

attacks and sustain availability of

services for NWM Group’s customers.

NWM Group continues to invest

significant resources in the development

and evolution of cyber security controls

that are designed to minimise t

potential effect of such attacks.

Hostile attempts

are made

third

parties to

gain access

to, int

roduce

malware (including

ransomware) into

and exploit vulnerabilities of NWM

Group’s IT systems. NWM Group has

information and cyber security c

ontrols

in place to minimise the impact of any

attack, 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 all

attacks in the future. See also, ‘

NWM

Group’s operations are highly dependent

on its complex IT systems (inclu

ding those

that enable remote working) and any IT

failure could adversely affect NWM

Grou

p’.

Any failure in NWM Group’s

cybersecurity policies, procedures or

controls, may result in significant

financial losses, major

business

disruption, inability

to deliver

custom

services, or loss

of data or ot

her sensitive

information (including as a result of an

outage) and may cause associated

reputational damage. Any of the

factors could increase costs (including

costs relating to notification of, or

compensation for clients and cre

dit

monitoring), result in regulatory

investigations or sanctions being imposed

or may affect NWM Group’s ability to

retain and attract clients. Regulators in

the UK, US, Europe and Asia continue to

recognise cybersecurity as an i

mportant

systemic risk to the financial sec

tor 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

notification of them, as appropr

iate.

Additionally, third parties may also

fraudulently attempt to induce

employees, customers, third party

providers or othe

r users w

ho have

access to NWM

Group’s

system

s to

disclose sensi

tive information in

order to

gain access

to NWM Group’s d

ata or that

of NWM Group’s clients or employe

es.

Risk Factors con

tinued

NWM Gr

oup

Annual Report and Accou

nts 202

195

Cybersecurity and information s

ecurity

events can derive from groups or factors

such as: internal or external threat

actors, human error, fraud or malice on

the part of NWM Group’s employee

s or

third parties, including third par

providers, or may result from accidental

technological failure.

NWM Group expects greater regulatory

engagement, supervision and

enforcement to continue at a high level

in relation to its overall resilienc

e to

withstand IT and 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 could negatively

impact NWM Group. Due to NWM

Group’s reliance on technology and the

increasing sophistication, frequency and

impact of cyberattacks, such attacks

may adversely impact NWM Group.

In accordance with the Data Protection

Act 2018 and the European Uni

Withdrawal Act 2018, the Data

Protection, Privacy and Electro

nic

Communications (Amendments Etc.) (EU

Exit) Regulations 2019, as ame

nded 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, NWM Group is required to

ensure it implements timely appropri

ate

and effective organisational and

technological safeguards against

unauthorised or unlawful access

to data

of NWM Group, its clients and its

employees. In order to meet this

requirement, NWM Group relies on the

effectiveness

of its internal

policies,

controls and p

rocedures to

prote

ct the

confidentiality, integrity

nd availability of

information held on its IT systems,

networks and devices as well as with

third parties with whom NWM 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.

NWM Group operations and str

ategy

are highly dependent on the a

ccuracy

and effective use of data.

NWM Group relies on the effective

use of

accurate data to support, monitor,

evaluate, manage and enhance its

operations and deliver its strategy. T

availability of current, complete, detailed,

accurate and, wherever possible

machine-readable customer segment

and sub-sector data, together with

appropriate governance and

accountability for data, is fast be

coming

a critical strategic asset, which is subjec

to increased regulatory focus. Failu

re to

have that d

ata or

the ineffectiv

e use,

governance or control of

hat d

ata could

result in

a failure to manage and

report

important risks and o

pportunities or

satisfy customers’ expectations including

the inability to deliver innovativ

products and services. This could also

result in a failure to deliver NWM Group’s

strategy and could place NWM

Group at

a competitive disadvantage by

increasing

its costs, inhibiting its efforts to reduce

costs or its ability to improve its sys

tems,

controls and processes which c

ould

result in a failure to deliver NWM Group’s

strategy. These data weaknesses

and

limitations, or the unethical or

inappropriate use of data, and/or non-

compliance with customer data

protection laws could give rise to, for

example, conduct and litigation risks and

increased risk of operational events,

losses or other adverse consequence

due to inappropriate models, systems,

processes, decisions or other

actions.

Any of the above may lead to ke

business processes being negatively

impacted by inappropriately managed

data, which could lead to material

financial, customer and regulatory

impacts.

NWM Group relies on attract

ing,

retaining, developing and

remunerating diverse senior

management and skilled person

nel

(such as market tra

ding specialists),

and is required to maintain go

employee relations.

NWM Group’s success depends on its

ability to attract, retain, through creating

an inclusive environment, and de

velop

and remunerate highly skilled and

qualified diverse personnel, incl

uding

senior management, directors, ma

rket

trading specialists and key employee

especially for technology and data

focused roles, in a highly compe

titive

market, in an era of strategic change

and under internal cost reducti

pressures.

The inability to compensate employe

competitively and/or any reduc

tion of

compensation as a result of the impact of

the NWM Refocusing, the perception that

following the Refocusing NWM

Group

may not be a viable or competitive

business, heightened regulatory

oversight

of banks and the increasing scrutiny of,

and (in some cases) restrictions placed

upon, employee compensation

arrangements (in particular those

banks in receipt of government

support

such as NatWest Group), negative

economic developments or other factors,

could have an adverse effe

ct on NWM

Group’s ability to hire, retain and engage

well qualified employees, es

pecially at a

senior level, which could have an

adverse effect on financial position and

prospects of NWM Group.

This increases 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

diverse candidates for key management

and non-executive roles, including non-

executive directors with the right skills,

knowledge and experience, or i

ncrease

the number of departures of existing

employees. Moreover, a failure to foster

a diverse and inclusive workforce

may

have an adverse impact on NWM

Group’s employee engagement and

the

formulation and execution of its s

trategy,

and could also have a negative e

ffect on

its reputation with customers, investors

and regulators. The NWM Refo

cusing has

also reduced NWM Group’s ability to

engage in succession planning f

or critical

roles given the recent reduction in

headcount. This has placed increased

risk on employee turnover within revenue

generating areas.

Sustained periods of remote working

may also negatively affect workf

orce

morale. Whilst NWM Group has

taken

measures seeking to maintain t

he health,

wellbeing and safety of its employe

es,

these measures may be ineffective.

Some of NWM Group’s employe

es are

represented by employee repres

entative

bodies, including trade unions and works

councils. Engagement with its employees

and such bodies is important to N

Group in maintaining good em

ployee

relations. Any breakdown of the

relationships could have an adverse

effect on NWM Group.

NWM Group’s operations are highly

dependent on its complex IT systems

(including those that enable r

emote

working) and any IT failure could

adversely affect NWM Group.

NWM Group’s operations are hi

ghly

dependent on the ability to proces

s a

very large number of transactions

efficiently and accurately while

complying with applicable laws and

regulations. The proper functioning of

NatWest Group’s (including NWM

Group’s) transactional and payment

systems, financial crime, fraud

systems

and controls, risk management, credit

analysis and reporting, accounting,

customer service and other IT sys

tems

(some of which are owned and operated

by other entities in NatWest Group or

third parties), is critical to NWM Group’s

operations.

Individually or collectively, any critical

system failure, material loss of service

availability or material breach of data

security could cause serious damage to

Risk Factors con

tinued

NWM Gr

oup

Annual Report and Accou

nts 202

196

NWM Group’s ability to provide services

to its clients, which could result in

reputational damage, significant

compensation costs or regulatory

sanctions (including fines resulting from

regulatory investigations) or a breach of

applicable regulations and could affec

t its

regulatory approvals, competiti

position, business and brands, which

could undermine its ability to attract and

retain customers. This risk is heightened

as most of NWM Group’s emplo

yees

continue to work remotely, as it

outsources certain functions and as it

continues to innovate and offer new

digital solutions to its clients as a result of

the trend towards online and digital

product offerings (see also ‘

Group’s current policy is that most

employees will work remotely

majority of

the time. This may adversely affect NWM

Group’s ability to maintain effectiv

internal controls

’).

In 2021, NWM 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). As part of the NWM

Refocusing, NWM Group also continues

to develop and enhance digital se

rvices

for its customers and seeks to improve

its competitive position through

enhancing controls and procedures and

strengthening the resilience of se

rvices

including cyber security.

Any failure of

these investment and rationalisation

initiatives to achieve the expected

results, due to cost challenges

otherwise, could negatively affec

t NWM

Group’s operations, its reputation and

ability to retain or grow its client business

or adversely impact its competitive

position, thereby negatively impacting

NWM Group. See also, ‘

— NW

M Group

has been in a period of significant

structural and other change, including as

a result of NatWest Group’s purpose-led

strategy (including the NWM Refocusing)

and may continue to be subject t

significant structural and other

change

’.

Remote working may adverse

ly affect

NWM Group’s ability to maintain

effective internal contr

ols.

From March 2020 to September 2021,

many of NWM Group’s employe

worked exclusively on a remot

e basis.

Following the lifting of government

restrictions, NWM Group will implement a

new hybrid working policy whereby

many employees may work remotely the

majority of the time in the ordinary

course of their roles.

Remote working arrangements for NWM

Group employees continues to place

heavy reliance on the IT systems that

enable remote working and increased

exposure to fraud, conduct, ope

rational

and other risks and may place additional

pressure on NWM 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 activiti

es, and

compliance with regulatory req

uirements

and expectations, including requirements

to: meet threshold conditions fo

regulated activities; ensure the ability

oversee functions (including any

outsourced functions); ensure no

detriment is caused to customers; and

ensure no increased risk of fina

ncial

crime. See also, ‘

A failure in NWM

Group’s risk management framework

could adversely affect NWM Group,

including its ability to achieve its st

rategic

objectives

’. Moreover

the IT sys

tems

that enable remote working interface

with third-party systems, and NWM

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 relate

reputational damage, significant

compensation costs, regulatory sanctions

and/or a breach of applicable

regulations. See also, ‘

NWM Gr

oup’s

operations are highly dependent on its

complex IT systems (including those that

enable remote working) and any IT failure

could adversely affect NWM Group

’.

Sustained periods of remote working

may also negatively affect workplace

morale. Whilst NWM Group has

taken

measures seeking to maintain t

he health,

wellbeing and safety of its employe

during the COVID-19 pandemic, these

measures may be ineffective.

Operational difficulties as a result of the

COVID-19 pandemic, which may affec

NWM Group’s external stakeholders

(including clients), may result in

challenges in managing daily cash and

liquidity. As a result of remote working,

compliance and conduct risk may also be

heightened both as a result of internal

and external factors.

Any of the above could impair NWM

Group’s ability to hire, retain and engage

well-qualified employees, espec

ially at a

senior level, which in turn may adversely

impact NWM Group’s ability to se

rve its

clients efficiently, and impact productivity

across NWM Group. This could

adversely

affect NWM Group’s reputation and

competitive position and its ability to

grow its business.

A failure in NWM Group’s risk

management fr

amework could

adversely affect NWM Group, including

its ability to achieve its strat

egic

objectives.

Risk management is an integral

part of

all of NWM Group’s activities and

includes the definition and monitoring of

NWM Group’s risk appetite and reporting

on NWM Group’s risk exposure and the

potential impact thereof

on N

WM Group’s

financial condition.

Risk management is

highly dependent on

the use an

effectiveness

of internal stress tests and

models and ineffective risk management

may arise from a wide variety of factors,

including lack of transparency or

incomplete risk reporting, unidentified

conflicts or misaligned incentive

s, lack of

accountability control and governance,

incomplete risk monitoring (including

trade surveillance) and failures of

systems to properly process all relevant

data, risks related to unanticipa

ted

behaviour or performance in algorithmic

trading and management or ins

ufficient

challenges or assurance processes

Failure to manage risks effe

ctively could

adversely impact NWM Group’s

reputation or its relationship with its

regulators, clients, shareholders

or other

stakeholders.

In addition, financial crime risk

management is dependent on the use

and effectiveness of financial crime

assessment, systems and contr

ols. Weak

or ineffective financial crime proce

sses

and controls may risk NatWest Group

inadvertently facilitating financial crime

which may result in regulatory

investigation, sanction, litigation and

reputational damage. Financial crime

continues to evolve, whether through

fraud, scams, cyber-attacks or other

criminal activity. NatWest Group (and

NWM Group) has made and continues to

make significant, multi-year inve

stments

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.

NWM Group’s financial crime controls

are operated by NatWest Group on

behalf of NWM Group.

NWM Group’s operations are in

herently

exposed to conduct risks, which include

business decisions, actions or re

ward

mechanisms that are not responsive to

or aligned with NWM Group’s re

gulatory

obligations, client needs or do not refle

NWM 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, th

possibility of mis-selling of financial

Risk Factors con

tinued

NWM Gr

oup

Annual Report and Accou

nts 202

197

products and mishandling of customer

complaints. Some of these risks have

materialised in the past and ineffe

ctive

management and oversight of conduct

risks may lead to further remediation an

regulatory intervention or enforce

ment.

NWM Group’s businesses are also

exposed to risks from employee

misconduct including non-compliance

with policies and regulations, ne

gligence

or fraud (including financial crimes and

fraud), any of which could resul

t in

regulatory fines or sanctions and se

rious

reputational or financial harm t

o NWM

Group.

These risks may be exacerbate

d as most

of NWM Group’s employees continue to

work remotely, which places additional

pressure on NWM Group’s ability to

maintain effective internal controls and

governance frameworks.

NWM Group is 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 mi

tigate

conduct risk and expects to continue to

invest in its risk management framework.

However, such efforts may not insu

late

NWM Group from future instances of

misconduct and no assurance can be

given that NWM Group’s strategy and

control framework will be effe

ctive. See

also, ‘

NWM Group has been in a period of

significant structural and other

change,

including as a result of NatWest G

roup’s

purpose-led strategy (including the NWM

Refocusing) and may continue to be

subject to significant structural and other

change

’. Any failure in NWM Group’s risk

management framework could negatively

affect NWM Group and its financ

ial

condition through reputational and

financial harm and may result in the

inability to achieve its strategic objectives

for its clients, employees and wider

stakeholders.

NWM Group’s operations are subject to

inherent reputat

ional risk.

Reputational risk relates to stakeholder

and public perceptions of NWM Group

arising from an actual or perceived

failure to meet stakeholder expec

tations,

including with respect to the NWM

Refocusing and related targets, due to

any events, behaviour, action or inaction

by NWM Group, its employees or those

with whom NWM Group is associated.

See also, ‘

NWM Group’s businesses are

subject to substantial regulation and

oversight, which are constantly evolving

and may adversely affect NWM G

roup’

This includes brand damage, which may

be detrimental to NWM Group’s busine

ss,

including its ability to build or s

ustain

business relationships with clients, and

may cause low employee morale,

regulatory censure or reduced acces

s to,

or an increase in the cost of, funding.

Reputational risk may arise whenever

there is a material lapse in standards of

integrity, compliance, customer or

operating efficiency and may adversely

affect NWM Group’s ability to att

ract and

retain clients. In particular, NWM Group’s

ability to attract and retain clients may

be adversely

affected by, amon

gst

others: negative public o

inion

resulting

from

the ac

tual or

perceived manner in

which NWM Group or any other member

of NatWest Group conducts or modifies

its business activities and operations,

media coverage (whether accurate or

otherwise), employee misconduct, NWM

Group’s financial performance, IT

systems failures or cyberattack

s, data

breaches, financial crime and fraud, the

level of direct and indirect government

support for NatWest Group plc, or the

actual or perceived practices in the

banking and financial industry in general,

or a wide variety of other

factors.

Modern technologies, in particul

ar online

social networks and other broadcast

tools that facilitate communication with

large audiences in short timeframes and

with minimal costs, may also significan

tly

increase and accelerate the impact of

damaging information and allegations.

Although NWM Group has implemented a

Reputational Risk Policy to improve the

identification, assessment and

management of customers and clients,

transactions, products and issu

es, which

represent a reputational risk, N

Group cannot be certain that it will be

successful in avoiding damage to its

business from reputational risk.

Legal, regulatory and conduct

risk

NWM Group’s businesses are

subject to

substantial regulation and oversight,

which are constant

ly evolving and may

adversely affect NWM Group.

NWM Group is subject to extensi

ve laws,

regulations, corporate governa

nce

practice and disclosure requirements,

administrative actions and policies in

each jurisdiction in which it operates.

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. N

WM Group

expects government and regulatory

intervention in the financial service

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 mann

er in

which the business of financial services is

conducted. Amongst others, me

asures

have included:

enhanced c

apital, liquidity

and funding requi

rements,

implementation of

the UK ring-f

encing

regime, implementation and

strengthening of the recovery a

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 require

ments,

restrictions on the compensation of

senior management and other

employees, enhanced data prot

ection

and IT resilience requirements, financial

market infrastructure reforms (including

enhanced regulations in respec

t of the

provision of ‘i

vestment service

s and

activities’), enhanced

regulations

respect of

he provision

of ‘inves

tment

services and activities’, and increased

regulatory focus in certain areas,

including conduct, consumer pr

otection,

competition and disputes regimes, anti-

money laundering, anti-corruption, anti-

bribery, anti-tax evasion, payment

systems, sanctions and anti-terrorism

laws and regul

ations.

In addition, there is significant oversight

by competition authorities of the

jurisdictions in which NWM Gro

operates. The competitive landscape for

banks and other financial institu

tions in

the UK, EU/EEA 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 ke

areas. Competition authorities,

including

the CMA, are currently also looking a

and focusing more on how they can

support competition and innovation in

digital markets. Recent regulatory

changes, proposed or future

developments and heightened leve

ls 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 op

erating

costs, and have impacted, and

will

continue to impact, product offerings and

business models.

Risk Factors con

tinued

NWM Gr

oup

Annual Report and Accou

nts 202

198

For example, NWM Group is required to

ensure operational continuity in

resolution; the steps required to ensure

such compliance entail significant costs,

and also impose significant operational,

legal and execution risk. Material

consequences could arise should NWM

Group be found to be non-compliant with

these regulatory requirements. Such

changes may also result in an increased

number of regulatory investigat

ions and

proceedings and have increased the

risks

relating to NWM Group’s ability to

comply with the applicable body of

rules

and regulations in the manner and within

the timeframes required.

Other areas in which, and examples of

where, governmental policies, r

egulatory

and accounting changes and increased

public and regulatory scrutiny could ha

an adverse impact (some of which could

be material) on NWM Group inclu

de, but

are not limited to:



general changes in governmen

central bank, regulatory or

competition policy, or changes in

regulatory regimes that may

influence investor decisions in the

jurisdictions in which NWM Gro

operates;



rules relating to foreign

ownership, expropriation,

nationalisation and confiscation of

assets;



new or increased regulations

relating to customer data

protection as well as IT controls

and resilience, including the UK

Data Protection Framework and

the impact of the Court of Justice

of the EU (CJEU) decision (known

as Schrems II), in which the CJ

ruled that the Privacy Shield (an

EU/US data transfer mechanism)

is now invalid, leading to more

onerous due diligence

requirements for the Group prior

to sending personal data of its EU

customers and employees to non-

EEA countries, including the UK

and the US;



the introduction of, and change

to, taxes, levies or fees applicable

to NWM Group’s operations, such

as the imposition of a financial

transaction tax, introduction of

global minimum tax rules,

changes in the scope and

administration of the Bank Levy

changes in tax rates, increases in

the bank corporation tax

surcharge in the UK, restrictions

on the tax deductibility of intere

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 consultation

paper (CP21/13)) 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 NWM 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” 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 U

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 leve

ls 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 op

erating

costs, and have impacted, and

will

continue to impact, product offerings and

business models. Any of these

developments (including any failure to

comply with new rules and regulations)

could also have a significant impact on

NWM Group’s authorisations and

licences, the products and servi

ces that

NWM Group may offer, its reputation and

the value of its assets, NWM Gr

oup’s

operations or legal entity structu

re, and

the manner in which NWM Gro

conducts its business. Material

consequences could arise should NWM

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 NWM

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

NWM

Group to comply with such laws, rules

and regulations, may adversely affe

NWM Group’s business, results of

operations and outlook. In addition,

uncertainty and insufficient internation

regulatory coordination as enhanced

supervisory standards are developed and

implemented may adversely aff

ect NWM

Group’s ability to engage in effe

ctive

business, capital and risk management

planning.

NWM Group is exposed to the

risk of

various litigation matters, re

gulatory

and governmental actions and

investigations as well as remedial

undertakings, the outcomes of which

are inherently difficult to predict

, and

which could have an adverse eff

ect on

NWM Group.

NWM Group’s operations are di

verse and

complex and it operates in legal and

regulatory environments that expose it

potentially significant legal proce

edings,

and civil and criminal regulatory

and

governmental actions. NWM Group has

resolved a number of legal and

regulatory actions over the pas

t several

years but continues to be, and may in

the future be, involved in such actions in

the US, the UK, Europe and oth

jurisdictions.

NWM Group is currently, has re

cently

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, relating to, among othe

matters, 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

compliance issues. Legal and regulatory

actions are subject to many

uncertainties, and their outcom

es,

including the timing, amount of fines,

damages or settlements or the form of

any settlements, which may be ma

terial

and in excess of any related provisions,

are often difficult to predict, particularly

in the early stages of a case or

investigation.

Risk Factors con

tinued

NWM Gr

oup

Annual Report and Accou

nts 202

199

NWM Group’s expectation for r

esolution

may change and substantial additional

provisions and costs may be recognised in

respect of any m

atter.

The resolution of significant

investigations include NWM Plc’

December 2021 spoofing-relate

d guilty

plea in the United States, which involves

a three-year period of probation, an

independent corporate monitor, and

commitments to compliance programme

reviews and improvements and

reporting

obligations, as well as approximately

US$35 million in fines and restitution. For

additional information relating to these

and other legal and regulatory

proceedings and matters to which NWM

Group is currently exposed, see

‘

Litigation and regulatory matters

’ at

Note 25 to the consolidated ac

counts.

The recent guilty plea, other recently

resolved matters in the United States,

and adverse outcomes or resolution of

current or future legal or regulatory

actions, could increase the risk of greater

regulatory and third party scrut

iny and

could have material collateral

consequences for NWM Group’s

business

and result in restrictions or limi

tations on

NWM Group’s operations.

These may include the effective

or actual

disqualification from carrying on certain

regulated activities and conseq

uences

resulting from the need to reapply f

various important licences or obtain

waivers to conduct certain existing

activities of NWM Group, partic

ularly but

not solely in the US, which may take a

significant period of time and the results

of which are uncertain. Disqualif

ication

from carrying on any activities,

whether

automatically as a result of the resolution

of a particular matter or as a resu

lt of

the failure to obtain such licenc

es or

waivers could adversely impact NWM

Group’s business, in particular in the US.

This in turn and/or any fines, settlement

payments or penalties could ad

versely

impact NWM Group’s reported financial

results and condition, capital p

osition or

reputation. Similar consequence

s could

result from legal or regulatory actions

relating to other parts of NatWes

t Group.

Failure to comply with undertakings made

by NWM Group to its regulators, or the

conditions of probation resulting from the

spoofing-related guilty plea, may

result in

additional measures or penalties being

taken against NWM Group.

NWM Group may not effec

tively

manage the tra

nsition of LIBOR and

other IBOR rat

es to alternative risk-

free rates.

UK and international regulators are

driving the transition from the us

e of

interbank offer rates (‘IBORs’), including

LIBOR, to alternative rates, pri

marily 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 use

d its powers

under the UK Benchmarks Reg

ulation

(‘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 LIBO

under certain circumstances w

here

contracts have not pro-actively

transitioned onto alternative ra

tes.

However, the FCA has been clear that

the solutions provided under UK BMR

and the Critical Benchmarks Act are not

permanent and cannot be guaranteed

after the end of 2022 (and for JPY the

FCA has confirmed that Art23A

LIBOR

will no longer be available after the end

of 2022). This framework and its lack of

permanence may expose NatWest

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 onto

alternative rates and, depending on the

notice given for any further restrictions,

this transition may need to be completed

very quickly; and (ii) mis-match

between positions in cleared derivatives

and the exposures they are he

dging

where those exposures are per

mitted to

make use of Art23A LIBOR, as the FCA

has chosen not to permit the use

Art23A LIBOR for cleared derivatives.

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

been clear that this is only to support the

rundown of back book USD LIBOR

exposures, and that no new contracts

should reference these USD LIBO

tenors after 31 December 2021, other

than in a very limited range of

circumstances. NatWest Group will

continue to have ongoing expos

ure to

the remaining USD LIBOR tenors up until

they cease at the end of June 20

23.

Natwest Group had significant

exposures

to IBORs and has actively sought to

transition away from these during 202

in accordance with regulatory

expectations and milestones. Transition

measures have included the pro-active

development of new products on using

alternative rates, primarily but not

exclusively RFRs rather than LIBOR, pro-

actively restructuring existing L

IBOR

exposures so that they cease to

reference LIBOR and instead ref

erence

alterative rates and embedding language

into contracts that allows for the

automatic conversion to alternative rates

when LIBOR ceases to be available. The

main Central Counterparty Clearing

houses (CCPs) conducted mass

conversion exercises in December 2021

covering GBP, JPY, CHF and EUR LIBO

cleared derivatives to fully trans

ition all

outstanding LIBOR exposure to the

relevant RFR. Key Natwest Group

entities, along with many of their major

counterparties, have already a

dhered to

the ISDA IBOR fall-backs supplement and

protocol which establishes a cle

ar,

industry accepted, contractual process to

manage the transition from IBORs to

RFRs for non-cleared derivative products.

These transition efforts have involved

extensive engagement with cus

tomers,

industry working groups and regulators,

to seek deliver transition in a transparent

and ec

onom

ically

propr

iate

manne

Any economic i

pacts will be de

pendent

on, amongst other things, the

establishment of deep and liquid RFR

markets, the establishment of clear and

consistent market conventions

for all

replacement products, as well as

counterparties’ willingness to ac

cept, and

transition to, these conventions.

Furthermore, certain IBOR obligations

may not be able to be pro-active

changed which could, depending on

any

over-arching legislative transition

frameworks, potentially result i

fundamentally different economic

outcomes than originally intended. The

uncertainties around the manne

r of

transition to RFRs, and the ong

oing

broader acceptance and use of RFRs

across the market, expose NWM Group,

its clients and the financial service

industry more widely to risks.

Examples of these risks may include: (i)

legal (including litigation) risks relating to

documentation for new and the

majority

of existing transactions (including, bu

not limited to, 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 impacted

IBORs that may impact NWM Group’s

performance, including its cost of funds,

and its risk management related financi

models; (iii) pricing, interest rate

settlement risks, such as chang

es to

benchmark rates could impact pricing,

interest rate or settlement mechanisms

on certain instruments; (iv) operational

risks due to the requirement to adapt IT

systems, trade reporting infrastructu

and operational processes, as

well as

ensuring compliance with restrictions on

new USD LIBOR usage after December

Risk Factors con

tinued

NWM Gr

oup

Annual Report and Accou

nts 202

200

2021; (v) conduct and litigation

risks

arising from communication regarding

the potential impact on customers, and

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 stat

es and the

EU, the UK has not provided a cle

ar and

robust safe harbour to protect against

litigation and potential liability arising out

of the switch to ‘synthetic LIBOR’.

Notwithstanding all efforts to date, un

til

the transition away from LIBOR onto

alternative rates has been fully

completed and there is greater

experience of how RFRs are adopted

across different products and c

ustomer

groups, it remains difficult to de

termine

to what extent the changes will affect

the NWM Group, or the costs of

implementing any relevant remedial

action. Uncertainty as to the nature and

extent of such potential changes, the

take up of alternative reference rates or

other reforms, may adversely af

fect

financial instruments originally

referencing LIBOR as the benchmarks.

The implementation of any alternative

RFRs may be impossible or impracticable

under the existing terms of cert

ain

financial instruments and could have an

adverse effect on the value of, return on

and trading market for, certain f

inancial

instruments and on the NWM Group’s

profitability.

Changes in tax legislation or f

ailure to

generate future taxa

ble profits may

impact the recoverability of c

ertain

deferred tax assets rec

ognised by

NWM Group.

In accordance with the accounting

policies set out in the section ‘

Critical

accounting policies and key sources of

estimation uncertainty

’, NWM 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 change

s 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 £104 million as at 3

December 2021. Changes to the

treatment of certain deferred tax assets

may impact NWM Group’s capital

position. In addition, NWM 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 diff

materially from the amounts pr

ovided

depending on the ultimate resol

ution of

such matters.

orwa

d-lo

king st

ent

NWM Gr

oup

Annual Report and Accou

nts 202

201

Cautionary statement regarding forw

ard-looking statements

Certain sections in this docume

nt contain ‘forward-looking

statements’ as that term is defined in the United Sta

tes Private

Securities Litigation Reform Act of 19

95, such as statements

that include the words ‘expect’, ‘e

stimate’, ‘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 t

hese expressions. In

particular, this document include

s forward-looking targets and

guidance relating to financial performance measures, suc

h as

income growth, operating expense

, cost reductions, impairment

loss rates, balance sheet reduction, including the reduc

tion of

RWAs, CET1 ratio (and key drivers of the CET1 r

atio, including

timing, impact and details), Pillar 2 and other regul

atory buffer

requirements and MREL and non-financial pe

rformance

measures, such as climate and ESG-related pe

rformance

ambitions, targets and metrics, including in

relation to initiatives

to transition to a net zero economy, Climate and Sus

tainable

Funding and Financing (CSFF) and fin

anced emissions. In

addition, this document includes

forward-looking statements

relating, but not limited to: the COVID-19 pandemic

and its

impact on NWM Group; planned cost re

ductions, disposal losses

and strategic costs; implementation of NatWest G

roup’s, NWM

Group’s strategy and other strategic priorities (includin

g in

relation to investment programmes relating to di

gital

transformation of their operations and services and ino

rganic

opportunities); the timing and outcome of litigation

and

government and regulatory investigations; funding pl

ans and

credit risk profile; managing its capital position; liquidity

ratio;

portfolios; net interest margin; and drive

rs related thereto;

lending and income growth, product share and g

rowth in target

segments; impairments and write-downs; rest

ructuring and

remediation costs and charges; NWM Group’s ex

posure to

political risk, economic assumptions and

risk, climate,

environmental and sustainability risk, operational

risk, conduct

risk, financial crime risk, cyber,

data and IT risk and credit

rating risk and to various types of market

risk, including interest

rate risk, foreign exchange rate risk and commodity an

d equity

price risk; customer experience, including our Net

Promotor

Score (NPS); employee engagement and gender

balance in

leadership positions.

Limitations inherent to forward-looking s

tatements

These statements are based on current plans, expect

ations,

estimates, targets and projections, and are subjec

t to significant

inherent risks, uncertainties and other factors, both e

xternal and

relating to NatWest Group’s and NWM Group’s st

rategy or

operations, which may result in NWM G

roup being unable to

achieve the current plans, expectations, estimates,

targets,

projections and other anticipat

ed outcomes expressed or

implied by such forward-looking statements. In

addition, certain

of these disclosures are dependent on choices

relying on key

model characteristics and assumptions and a

re subject to

various limitations, including assumptions and es

timates made

by management. By their natur

e, certain of these disclosures

are only estimates and, as a res

ult, actual future results, gains

or losses could differ materially from those that ha

ve been

estimated. Accordingly, undue

reliance should not be placed on

these statements. The forward-looking statements con

tained in

this document speak only as of the date we make the

m and we

expressly disclaim any obligation or under

taking to update or

revise any forward-looking stat

ements contained herein,

whether to reflect any change in our expecta

tions with regard

thereto, any change in events, conditions or ci

rcumstances on

which any such statement is based, or otherwise, excep

t to the

extent legally required.

Important factors that could affect the actual outco

me of the

forward-looking statements

We caution you that a large number of importan

t factors could

adversely affect our results or our ability to imple

ment our

strategy, cause us to fail to mee

t our targets, predictions,

expectations and other anticipated outcomes or affe

ct the

accuracy of forward-looking statements describe

d in this

document. These factors include

, but are not limited to, those

set forth in the risk factors and the other uncertai

nties described

in NatWest Markets Plc’s Annual Repo

rt and its other public

filings. The principal risks and uncertainties tha

t could adversely

NWM Group’s future results, its f

inancial condition and

prospects and cause them to be

materially different from what

is forecast or expected, include, but are no

t limited to: economic

and political risk (including in respect of: the impac

t of the

COVID-19 pandemic on NWM

Group and its customers; political

and economic risks and uncertainty in the UK and glob

markets; uncertainty regarding the effe

cts of Brexit; changes in

interest rates and foreign currency exchange rates

; and HM

Treasury’s ownership of NatWest Group plc); st

rategic risk

(including in respect of: the imple

mentation of NatWest Group’s

and NWM Group’s strategy and NWM Group’s

ability to achieve

its targets; the effect of the CO

VID-19 pandemic on NWM

Group’s strategic objects and targets); fina

ncial resilience risk

(including in respect of: NWM G

roup’s ability to meet targets;

the competitive environment; counterpa

rty risk; prudential

regulatory requirements for capital and MREL; fun

ding and

liquidity risk; changes in the credit ratings; the adequ

acy of

NatWest Group’s resolution plans; the requiremen

ts of

regulatory stress tests; model ri

sk; sensitivity to accounting

policies, judgments, assumptions

and estimates; changes in

applicable accounting standards; and the applica

tion of UK

statutory stabilisation or resolution powers); climate

and

sustainability risk (including in re

spect of: risks relating to

climate change and the transitioning to a net ze

ro economy; the

implementation of NatWest Group’s and NWM

Group’s climate

change strategy and climate change resilient sys

tems, controls

and procedures; climate-related data and model

risk; the failure

to adapt to emerging climate, environmental and sust

ainability

risks and opportunities; changes in ES

G ratings; increasing

levels of climate, environmental and sustain

ability related

regulation and oversight; and climate, environmen

tal and

sustainability related litigation, e

nforcement proceedings and

investigations); operational and IT resilience risk (includi

ng in

respect of: operational risks (including reliance on

third party

suppliers); cyberattacks; the accuracy and eff

ective use of data;

complex IT systems (including those that enable rem

ote

working); attracting, retaining and developing senio

management and skilled personnel; NWM G

roup’s risk

management framework; and reputational risk);

and legal,

regulatory and conduct risk (including in respect of: the

impact

of substantial regulation and ove

rsight; compliance with

regulatory requirements; the outcome of leg

al, regulatory and

governmental actions and inves

tigations; the transition of LIBOR

other IBOR rates to alternative risk-free r

ates;) and changes in

tax legislation or failure to generate future tax

able profits).

Caution about climate and sustainable funding and fin

ancing

(CSFF) information.

Climate and ESG disclosures in this report use a g

reater number

and level of judgments, assumptions a

nd estimates, including

with respect to the classification of climate an

d sustainable

funding and financing activities, than our repo

rting of historical

financial information. These judgments,

assumptions and

estimates are highly likely to change over time, an

d, when

coupled with the longer time fr

ames used in these disclosures,

make any assessment of materiality inhe

rently uncertain. In

addition, our climate risk analys

is and net zero strategy remain

under development, and the data underlying our

analysis and

strategy remain subject to evolution ove

r time. As a result, we

expect that certain climate and ESG disclosures made in

this

report are likely to be amended

, updated, recalculated or

restated in the future. This for

ward-looking statement should be

read together with the ‘Climate-related and othe

r forward-

looking statements and metrics’ of the NatWest

Group 2021

Climate-related Disclosures Report.

The information, statements and opinions contained i

n this

document do not constitute a public offer under any a

pplicable

legislation or an offer to sell or a solicitation of an offe

r to buy

any securities or financial instruments o

r any advice or

recommendation with respect to su

ch securities or other

financial instruments.

NatWest Group plc

36 St Andrew Square

Edinburgh, EH2 2YB

www.natwestgroup.com

NatWest Group plc

2021 Annual Report and Accounts

Designed and produced by

Black Sun Plc.

This Report is printed on

Edixion Offset which has

been independently certified

according to the rules of the

Forest Stewardship Council®

(FSC®).

Printed in the UK by Pureprint,

a CarbonNeutral® company.

Both manufacturing paper mill

and the printer are registered

to the Environmental

Management System ISO

14001:2004 and are Forest

Stewardship Council® (FSC)

chain-of-custody certified.