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Financial instruments - valuation | 6 Months Ended
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Jun. 30, 2024
Financial instruments - classification |
Financial instruments - valuation | 8. Financial instruments - valuation Disclosures relating to the control environment, valuation techniques and related aspects pertaining to financial instruments measured at fair value are included in NatWest Group plc’s 2023 Annual Report Form 20-F. Valuation, sensitivity methodologies and inputs at 30 June 2024 are consistent with those described in Note 11 to NatWest Group plc’s 2023 Annual Report Form 20-F. Fair value hierarchy The table below shows the assets and liabilities held by NatWest Group split by fair value hierarchy level. Level 1 are considered the most liquid instruments, and level 3 the most illiquid, valued using expert judgment and hence carry the most significant price uncertainty. ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | 30 June 2024 | ​ | 31 December 2023
​ |  | Level 1 |  | Level 2 |  | Level 3 | ​ | Total |  | Level 1 |  | Level 2 |  | Level 3 | ​ | Total
​ | ​ | £m | ​ | £m | ​ | £m | ​ | £m | ​ | £m | ​ | £m | ​ | £m | ​ | £m
Assets |  |  |  |  |  | ​ | ​ |  |  |  |  |  |  | ​ | ​ |
Trading assets |  | ​ |  | ​ |  | ​ | ​ | ​ |  |  |  |  |  | ​ | ​ |
Loans |  | — |  | 26,008 |  | 230 | ​ | 26,238 |  | — |  | 33,388 |  | 209 | ​ | 33,597
Securities |  | 15,097 |  | 4,639 |  | — | ​ | 19,736 |  | 8,447 |  | 3,493 |  | 14 | ​ | 11,954
Derivatives |  | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate | ​ | — | ​ | 40,364 | ​ | 561 | ​ | 40,925 | ​ | 1 | ​ | 43,912 | ​ | 650 | ​ | 44,563
Foreign exchange | ​ | — | ​ | 26,314 | ​ | 132 | ​ | 26,446 | ​ | — | ​ | 34,096 | ​ | 65 | ​ | 34,161
Other | ​ | — | ​ | 74 | ​ | 69 | ​ | 143 | ​ | — | ​ | 72 | ​ | 108 | ​ | 180
Other financial assets |  | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Loans |  | — |  | 352 |  | 416 | ​ | 768 |  | — |  | 108 |  | 657 | ​ | 765
Securities |  | 17,969 |  | 9,690 |  | 248 | ​ | 27,907 |  | 17,848 |  | 10,536 |  | 258 | ​ | 28,642
Total financial assets held at fair value |  | 33,066 |  | 107,441 |  | 1,656 | ​ | 142,163 |  | 26,296 |  | 125,605 |  | 1,961 | ​ | 153,862
As a % of total fair value assets | ​ | 23 | % | 76 | % | 1 | % | — | ​ | 17 | % | 82 | % | 1 | % | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Liabilities |  | ​ | ​ | ​ | ​ | ​ | ​ | ​ |  |  |  |  |  | ​ | ​ |
Trading liabilities |  | ​ | ​ | ​ | ​ | ​ | ​ | ​ |  |  |  |  |  | ​ | ​ |
Deposits |  | — |  | 44,151 |  | — | ​ | 44,151 |  | — |  | 43,126 |  | 1 | ​ | 43,127
Debt securities in issue |  | — |  | 307 |  | — | ​ | 307 |  | — |  | 706 |  | — | ​ | 706
Short positions |  | 7,843 |  | 1,864 |  | 2 | ​ | 9,709 |  | 7,936 |  | 1,865 |  | 2 | ​ | 9,803
Derivatives |  | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate | ​ | — | ​ | 34,698 | ​ | 440 | ​ | 35,138 | ​ | — | ​ | 38,044 | ​ | 439 | ​ | 38,483
Foreign exchange | ​ | — | ​ | 25,374 | ​ | 67 | ​ | 25,441 | ​ | — | ​ | 33,528 | ​ | 58 | ​ | 33,586
Other | ​ | — | ​ | 119 | ​ | 151 | ​ | 270 | ​ | — | ​ | 138 | ​ | 188 | ​ | 326
Other financial liabilities |  | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Debt securities in issue |  | — |  | 1,636 |  | 3 | ​ | 1,639 |  | — |  | 1,605 |  | 3 | ​ | 1,608
Other deposits |  | — |  | 1,626 |  | 23 | ​ | 1,649 |  | — |  | 1,280 |  | — | ​ | 1,280
Subordinated liabilities |  | — |  | 229 |  | — | ​ | 229 |  | — |  | 237 |  | — | ​ | 237
Total financial liabilities held at fair value | ​ | 7,843 | ​ | 110,004 | ​ | 686 | ​ | 118,533 | ​ | 7,936 | ​ | 120,529 | ​ | 691 | ​ | 129,156
As a % of total fair value liabilities |  | 7 | % | 92 | % | 1 | % | — |  | 6 | % | 93 | % | 1 | % | ​
​
(1) | Level 1 - Instruments valued using unadjusted quoted prices in active and liquid markets, for identical financial instruments. Examples include government bonds, listed equity shares and certain exchange-traded derivatives.
Level 2 - Instruments valued using valuation techniques that have observable inputs. Observable inputs are those that are readily available with limited adjustments required. Examples include most government agency securities, investment-grade corporate bonds, certain mortgage products - including CLOs, most bank loans, repos and reverse repos, state and municipal obligations, most notes issued, certain money market securities, loan commitments and most OTC derivatives. Level 3 - Instruments valued using a valuation technique where at least one input which could have a significant effect on the instrument’s valuation, is not based on observable market data. Examples include non-derivative instruments which trade infrequently, certain syndicated and commercial mortgage loans, private equity, and derivatives with unobservable model inputs.
(2) | Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instrument was transferred.
(3) | For an analysis of debt securities held at mandatorily fair value through profit or loss by issuer as well as ratings and derivatives, by type and contract, refer to Risk and capital management – Credit risk.
​ 8. Financial instruments – valuation continued Valuation adjustments When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, funding and credit risk. These adjustments are presented in the table below. For further information refer to the descriptions of valuation adjustments within ‘Financial instruments – valuation’ on pages 85-96 of NatWest Group plc’s 2023 Annual Report Form 20-F. ​
​ | ​ | ​ | ​ | ​
​ | ​ | 30 June | ​ | 31 December
​ | ​ | 2024 | ​ | 2023
​ |  | £m |  | £m
Funding - FVA |  | 125 |  | 132
Credit - CVA |  | 220 |  | 236
Bid - Offer |  | 75 |  | 86
Product and deal specific |  | 149 |  | 103
Total |  | 569 |  | 557
​
- | Valuation reserves comprising credit valuation adjustments (CVA), funding valuation adjustment (FVA), bid-offer and product and deal specific reserves, increased to £569 million at 30 June 2024 (31 December 2023 – £557 million).
- | The movements in FVA and CVA were driven by a reduction in exposure as interest rates increased. The decrease in bid-offer was driven by overall risk reduction over the period. Product and deal specific increased following valuation adjustments on specific trades.
​ ​ 8. Financial instruments – valuation continued Level 3 sensitivities The table below shows the high and low range of fair value of the level 3 assets and liabilities. ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | 30 June 2024 | ​ | 31 December 2023
​ | ​ | Level 3 | ​ | Favourable | ​ | Unfavourable | ​ | Level 3 | ​ | Favourable | ​ | Unfavourable
​ |  | £m |  | £m |  | £m |  | £m |  | £m |  | £m
Assets | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Trading assets | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Loans |  | 230 |  | — |  | — |  | 209 |  | — |  | —
Securities |  | — |  | — |  | — |  | 14 |  | — |  | —
Derivatives |  | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate |  | 561 |  | 20 |  | (20) |  | 650 |  | 20 |  | (20)
Foreign exchange |  | 132 |  | 10 |  | (10) |  | 65 |  | — |  | —
Other |  | 69 |  | — |  | — |  | 108 |  | 10 |  | (10)
Other financial assets |  | ​ |  | ​ |  | ​ |  | ​ |  | ​ |  | ​
Loans |  | 416 |  | — |  | (10) |  | 657 |  | — |  | (40)
Securities |  | 248 |  | 20 |  | (40) |  | 258 |  | 20 |  | (50)
Total financial assets held at fair value |  | 1,656 |  | 50 |  | (80) |  | 1,961 |  | 50 |  | (120)
​ |  | ​ |  |  |  | ​ |  |  |  |  |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Trading liabilities |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | — |  | — |  | — |  | 1 |  | — |  | —
Short positions |  | 2 |  | — |  | — |  | 2 |  | — |  | —
Derivatives |  | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate |  | 440 |  | 10 |  | (10) |  | 439 |  | 10 |  | (10)
Foreign exchange |  | 67 |  | — |  | — |  | 58 |  | — |  | —
Other |  | 151 |  | 10 |  | (10) |  | 188 |  | 10 |  | (10)
Other financial liabilities | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Debt securities in issue |  | 3 |  | — |  | — |  | 3 |  | — |  | —
Other deposits |  | 23 |  | — |  | (20) |  | — |  | — |  | —
Total financial liabilities held at fair value |  | 686 |  | 20 |  | (40) | ​ | 691 |  | 20 |  | (20)
​ Alternative assumptions Reasonably plausible alternative assumptions of unobservable inputs are determined based on a specified target level of certainty of 90%. Alternative assumptions are determined with reference to all available evidence including consideration of the following: quality of independent pricing information considering consistency between different sources, variation over time, perceived tradability or otherwise of available quotes; consensus service dispersion ranges; volume of trading activity and market bias (e.g. one-way inventory); day 1 profit or loss arising on new trades; number and nature of market participants; market conditions; modelling consistency in the market; size and nature of risk; length of holding of position; and market intelligence. 8. Financial instruments – valuation continued Movement in level 3 assets and liabilities The following table shows the movement in level 3 assets and liabilities. ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | Other | ​ | Other | ​ | ​ | ​ | ​ | ​ | Other | ​ | Other | ​ | ​
​ | ​ | Derivatives | ​ | trading | ​ | financial | ​ | Total | ​ | Derivatives | ​ | trading | ​ | financial | ​ | Total
​ | ​ | assets | ​ | assets (2) | ​ | assets (3) | ​ | assets | ​ | liabilities | ​ | liabilities (2) | ​ | liabilities | ​ | liabilities
​ |  | £m |  | £m |  | £m |  | £m |  | £m |  | £m |  | £m |  | £m
At 1 January 2024 |  | 823 |  | 223 |  | 915 |  | 1,961 |  | 685 |  | 3 |  | 3 |  | 691
Amounts recorded in the income statement (1) |  | (70) |  | 2 |  | 5 |  | (63) |  | (28) |  | — |  | — |  | (28)
Amount recorded in the statement of comprehensive income |  | — |  | — |  | (13) |  | (13) |  | — |  | — |  | — |  | —
Level 3 transfers in |  | 7 |  | — |  | — |  | 7 |  | 1 |  | — |  | 23 |  | 24
Level 3 transfers out |  | (2) |  | (14) |  | (258) |  | (274) |  | (2) |  | (1) |  | — |  | (3)
Purchases/originations | ​ | 82 | ​ | 25 | ​ | 23 | ​ | 130 | ​ | 67 | ​ | 1 | ​ | — | ​ | 68
Settlements/other decreases |  | (38) |  | (7) |  | — |  | (45) |  | (29) |  | — |  | — |  | (29)
Sales |  | (40) |  | — |  | (2) |  | (42) |  | (34) |  | (1) |  | — |  | (35)
Foreign exchange and other adjustments |  | — |  | 1 |  | (6) |  | (5) |  | (2) |  | — |  | — |  | (2)
At 30 June 2024 |  | 762 |  | 230 |  | 664 |  | 1,656 |  | 658 |  | 2 |  | 26 |  | 686
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Amounts recorded in the income statement in respect of balances held at period end - unrealised |  | 116 |  | — |  | 4 |  | 120 |  | 123 |  | — |  | — |  | 123
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
At 1 January 2023 |  | 1,007 |  | 396 |  | 930 |  | 2,333 |  | 975 |  | 1 |  | — |  | 976
Amounts recorded in the income statement (1) |  | (52) |  | (28) |  | — |  | (80) |  | (84) |  | — |  | — |  | (84)
Amount recorded in the statement of comprehensive income |  | — |  | — |  | 12 |  | 12 |  | — |  | — |  | — |  | —
Level 3 transfers in |  | 4 |  | — |  | (72) |  | (68) |  | 6 |  | 1 |  | — |  | 7
Level 3 transfers out |  | (2) |  | (32) |  | — |  | (34) |  | (5) |  | — |  | — |  | (5)
Purchases/originations | ​ | 86 | ​ | 6 | ​ | 68 | ​ | 160 | ​ | 89 | ​ | — | ​ | — | ​ | 89
Settlements/other decreases |  | (20) |  | (4) |  | — |  | (24) |  | (27) |  | — |  | — |  | (27)
Sales |  | (92) |  | (58) |  | (25) |  | (175) |  | (54) |  | — |  | — |  | (54)
Foreign exchange and other adjustments |  | (1) |  | (3) |  | (15) |  | (19) |  | (5) |  | — |  | — |  | (5)
At 30 June 2023 |  | 930 |  | 277 |  | 898 |  | 2,105 |  | 895 |  | 2 |  | — |  | 897
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Amounts recorded in the income statement in respect of balances held at period end - unrealised |  | (52) |  | (28) |  | (1) |  | (81) |  | (84) |  | — |  | — |  | (84)
​
(1) | There were £40 million net losses on trading assets and liabilities (30 June 2023 – £4 million net losses) recorded in income from trading activities. Net gains on other instruments of £5 million (30 June 2023 – nil) were recorded in other operating income and interest income as appropriate.
(2) | Other trading assets and other trading liabilities comprise assets and liabilities held at fair value in trading portfolios.
(3) | Other financial assets comprise fair value through other comprehensive income, designated as at fair value through profit or loss and other fair value through profit or loss.
​ 8. Financial instruments – valuation continued Fair value of financial instruments measured at amortised cost on the balance sheet The following table shows the carrying value and fair value of financial instruments carried at amortised cost on the balance sheet. ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | ​ |  | ​ |  | ​ |  | ​ |  | ​ | ​ | Items where fair value
​ | ​ | Carrying | ​ | ​ | ​ | Fair value hierarchy level | ​ | approximates
​ | ​ | value | ​ | Fair value | ​ | Level 1 | ​ | Level 2 | ​ | Level 3 | ​ | carrying value
30 June 2024 | ​ | £bn | ​ | £bn | ​ | £bn | ​ | £bn | ​ | £bn | ​ | £bn
Financial assets |  | ​ |  | ​ |  | ​ |  | ​ |  | ​ | ​ | ​
Cash and balances at central banks |  | 115.8 | ​ | 115.8 | ​ | — | ​ | — | ​ | — | ​ | 115.8
Settlement balances | ​ | 6.3 | ​ | 6.3 | ​ | — | ​ | — | ​ | — | ​ | 6.3
Loans to banks |  | 6.0 | ​ | 6.0 | ​ | — | ​ | 1.3 | ​ | 0.8 | ​ | 3.9
Loans to customers | ​ | 379.3 | ​ | 372.4 | ​ | — | ​ | 25.2 | ​ | 347.2 | ​ | —
Other financial assets - securities |  | 23.9 | ​ | 23.9 | ​ | 4.9 | ​ | 10.7 | ​ | 8.3 | ​ | —
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
31 December 2023 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Financial assets |  | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Cash and balances at central banks |  | 104.3 | ​ | 104.3 | ​ | — | ​ | — | ​ | — | ​ | 104.3
Settlement balances |  | 7.2 | ​ | 7.2 | ​ | — | ​ | — | ​ | — | ​ | 7.2
Loans to banks | ​ | 6.9 | ​ | 7.0 | ​ | — | ​ | 2.2 | ​ | 0.6 | ​ | 4.2
Loans to customers |  | 381.4 | ​ | 373.2 | ​ | — | ​ | 27.5 | ​ | 345.7 | ​ | —
Other financial assets - securities | ​ | 21.7 | ​ | 21.6 | ​ | 4.0 | ​ | 6.6 | ​ | 11.0 | ​ | —
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
30 June 2024 |  | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Financial liabilities |  | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Bank deposits |  | 25.6 |  | 25.6 |  | — |  | 17.5 |  | 3.7 | ​ | 4.4
Customer deposits |  | 433.0 |  | 432.6 |  | — |  | 29.9 |  | 49.8 | ​ | 352.9
Settlement balances |  | 7.1 |  | 7.1 |  | — |  | — |  | — | ​ | 7.1
Other financial liabilities | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
- debt securities in issue | ​ | 55.0 | ​ | 55.0 | ​ | — | ​ | 45.0 | ​ | 10.0 | ​ | —
Subordinated liabilities |  | 5.8 |  | 5.8 |  | — |  | 5.8 | ​ | — | ​ | —
Notes in circulation | ​ | 3.3 | ​ | 3.3 | ​ | — | ​ | — | ​ | — | ​ | 3.3
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
31 December 2023 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Financial liabilities |  | ​ |  | ​ |  | ​ |  | ​ |  | ​ | ​ | ​
Bank deposits | ​ | 22.2 |  | 22.3 |  | — |  | 15.4 |  | 2.7 | ​ | 4.2
Customer deposits |  | 431.4 |  | 431.0 |  | — |  | 30.7 |  | 48.8 | ​ | 351.5
Settlement balances |  | 6.6 |  | 6.6 |  | — |  | — |  | — | ​ | 6.6
Other financial liabilities |  | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
- debt securities in issue | ​ | 52.2 |  | 52.2 | ​ | — | ​ | 41.7 | ​ | 10.5 | ​ | —
Subordinated liabilities | ​ | 5.5 | ​ | 5.4 | ​ | — | ​ | 5.4 | ​ | — | ​ | —
Notes in circulation |  | 3.2 | ​ | 3.2 | ​ | — | ​ | — | ​ | — | ​ | 3.2
​ ​ 8. Financial instruments – valuation continued The assumptions and methodologies underlying the calculation of fair values of financial instruments at the balance sheet date are as follows: ​ Short-term financial instruments For certain short-term financial instruments: cash and balances at central banks, items in the course of collection from other banks, settlement balances, items in the course of transmission to other banks, customer demand deposits and notes in circulation, carrying value is deemed a reasonable approximation of fair value. ​ Loans to banks and customers In estimating the fair value of net loans to customers and banks measured at amortised cost, NatWest Group’s loans are segregated into appropriate portfolios reflecting the characteristics of the constituent loans. Two principal methods are used to estimate fair value: contractual cash flows and expected cash flows. ​ Debt securities and subordinated liabilities Most debt securities are valued using quoted prices in active markets or from quoted prices of similar financial instruments in active markets. For the remaining population, fair values are determined using market standard valuation techniques, such as discounted cash flows. ​ Bank and customer deposits Fair value of deposits is estimated using discounted cash flow valuation techniques.

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