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2021 Annual Report
and Accounts
National
Westminster
Bank Plc
Strategic report
NWB Group
Annual Report and Accounts 2021
2
Presentation of information
National Westminster Bank Plc (‘NWB Plc’) is a wholly-owned
subsidiary of NatWest Holdings Limited (‘NWH Ltd’ or ‘the
intermediate holding company’). The term ‘NWB Group’ or ‘we’
refers to NWB Plc and its subsidiary and associated
undertakings. The term ‘NWH Group’ refers to NWH Ltd and its
subsidiary and associated undertakings. NatWest Group plc is
‘the ultimate holding company’. The term ‘NatWest Group’
refers to NatWest Group plc and its subsidiary and associated
undertakings.
NWB Plc publishes its financial statements in pounds sterling
(‘£’ or ‘sterling’). The abbreviations ‘£m’ and ‘£bn’ represent
millions and thousands of millions of pounds sterling (‘GBP’),
respectively, and references to ‘pence’ represent pence where
amounts are denominated in sterling. Reference to ‘dollars’ or
‘$’ are to United States of America (‘US’) dollars. The
abbreviations ‘$m’ and ‘$bn’ represent millions and thousands
of millions of dollars, respectively. The abbreviation ‘€’
represents the ‘euro’, and the abbreviations ‘€m’ and ‘€bn’
represent millions and thousands of millions of euros,
respectively.
Description of business
The principal entities under NWH Ltd are National Westminster
Bank Plc (which wholly owns Coutts & Company and Ulster
Bank Limited), The Royal Bank of Scotland plc and Ulster Bank
Ireland DAC (UBIDAC).
Principal activities and operating segments
NWB Group serves customers across the UK with a range of
retail and commercial banking products and services. A wide
range of personal products are offered including current
accounts, credit cards, personal loans, mortgages and wealth
management services. NWB Plc is the main provider of shared
services for NatWest Group. This includes the provision of
treasury services on behalf of the ring-fenced bank and
NatWest Group.
The reportable operating segments are as follows:
Retail
Banking
serves personal customers in the UK and
includes Ulster Bank customers.
Private Banking
serves UK-connected, high net worth,
individuals and their business interests.
Commercial Banking
serves start-up, SME, commercial and
corporate customers in the UK.
Central items & other
includes corporate functions, such as
NatWest Group treasury, finance, risk management,
compliance, legal, communications and human resources. NWB
Plc is the main provider of shared services and treasury
activities for NatWest Group. The services are mainly provided
to NWH Group, however, in certain instances, where permitted,
services are also provided to the wider NatWest Group
including the non ring-fenced business.
Performance overview
Financial performance in a challenging environment
NWB Group profit for the year was £2,907 million compared
with £536 million in 2020, driven by net impairment releases
reflecting the continued low levels of realised losses, together
with increased income, partly offset by additional operating
expenses. Total income increased by £314 million compared
with 2020 reflecting strong growth in mortgage balances and
margin improvement, combined with a recovery in
transactional banking fee income, partly offset by reduced
commercial lending volumes.
Operating expenses increased by £15 million compared with
2020 reflecting increased litigation and conduct costs, and a
non-repeat of PPI provision releases in 2020, offset by a
reduction in strategic costs. The cost income ratio decreased
from 69.1% to 66.9%. Net impairment release of £813 million
reflects the continued low level of realised losses. Total
impairment provisions reduced by £1.2 billion to £2.5 billion in
the year, which resulted in a reduction in the ECL coverage
ratio from 1.33% at 31 December 2020 to 0.85%.
Robust balance sheet with strong capital levels
Total assets increased by £45.0 billion to £434.6 billion
compared with £389.5 billion at 31 December 2020. This
included net increases in loans to customers of £15.4 billion
primarily driven by growth in retail mortgages, together with
increases of £38.2 billion in cash and balances at central banks,
partly offset by decrease in corporate lending due to targeted
sector reductions and UK Government support scheme
repayments.
Customer deposits increased by £35.8 billion as COVID-19
related restrictions resulted in lower customers spend.
The CET1 ratio decreased by 170 basis points in the year to
16.1% due to a £1.5 billion decrease in CET1 capital and a £0.7
billion decrease in RWAs. The CET1 decrease reflects the
attributable profit in the period of £2.6 billion, offset by the
following items: dividends paid of £1.6 billion; foreseeable
charges of £1.4 billion; a £0.6 billion decrease in the IFRS 9
transitional adjustment on expected credit losses; and other
reserve movements.
Page
Strategic report
Presentation of information
2
Description of business
2
Principal activities and operating
segments
2
Performance overview
2
Stakeholder engagement and s.172(1)
ssstatstatement
3
Board of directors and secretary
4
Top and emerging risks
5
Financial review
6
Risk and capital management
9
Report of the directors
76
Statement of directors’ responsibilities
82
Financial statements
83
Risk factors
167
Forward-looking statements
187
Stakeholder engagement and s.172(1) statement
NWB Group
Annual Report and Accounts 2021
3
This statement describes how the directors have had regard to
the matters set out in section 172(1) (a) to (f) of the Companies
Act 2006 (section 172) when performing their duty to promote
the success of the company.
Board engagement with stakeholders
The Board reviews and confirms its key stakeholder groups for
the purposes of section 172 annually. For 2021, they remained
customers, colleagues, communities, investors, regulators and
suppliers. Examples of how the Board has engaged with key
stakeholders, including the impact on principal decisions, can
be found in this statement and on page 80 (corporate
governance statement)
.
Supporting effective Board discussions and
decision-making
NatWest Group’s purpose –
championing potential, helping
people, families and businesses to thrive
- continues to
influence Board discussions and decision-making.
Board and Committee terms of reference reinforce the
importance of considering both NatWest Group’s purpose and
the matters set out in section 172. The Board and Committee
paper template includes a section for authors to explain how
the proposal or update aligns with NatWest Group’s purpose
and a separate section for them to include an assessment of
the relevant stakeholder impacts for the directors to consider.
Directors are mindful that it is not always possible to achieve
an outcome which meets the requirements, needs and/or
expectations of all stakeholders who are, or may be, impacted.
For decisions which are particularly challenging or complex, an
additional page was introduced to the Board and Committee
paper template in 2021 which provides directors with further
information to support purposeful decision-making. This
additional page uses Blueprint for Better Business as a base
and is aligned to NatWest Group’s broader purpose framework.
Principal decisions
Principal decisions are those decisions taken by the Board that
are material, or of strategic importance, to the company, or are
significant to the company’s key stakeholders.
This statement describes an example of a principal decision
taken by the Board during 2021. Further information on the
Board’s principal activities can be found in the corporate
governance statement on pages 76 to 81.
Key
A – Likely long-term consequences
B – Employee interests
C – Relationships with customers, suppliers and others
D – The impact on community and environment
E – Maintaining a reputation for high standards of business
conduct
F – Acting fairly between members of the company
Case Study – Approving capital distributions
Factors considered: A C
What was the decision-making process
?
During 2021, the Board approved an interim dividend. The
Board received comprehensive papers from management and
its decision was informed by 2021 capital plans as well as
regular updates on NWB Plc’s financial and capital positions.
The Board Risk Committee also reviewed all capital
distributions proposals in advance of Board consideration and
recommended them to the Board for approval
How did the directors fulfil their duties under section 172? How
were stakeholder interests considered?
In taking decisions, the directors were mindful of their duties
under section 172. The dividend proposal included a
stakeholder overview which set out relevant stakeholder
impacts and considerations.
How was NatWest Group’s purpose considered as part of the
decision?
The Board is aware that in taking decisions on capital
distributions, it also needs to consider the financial implications
of those decisions in terms of continuing to support customers
and maintaining financial stability.
Actions and outcomes
The Board approved an interim dividend of £1.6 billion which
was paid on 30 July 2021, payable to NWH Ltd as the sole
shareholder.
Further details on how NatWest Group engages with its
stakeholders can be found in the NatWest Group 2021 Annual
Report and Accounts and at natwestgroup.com.
Board of directors and secretary
NWB Group
Annual Report and Accounts 2021
4
Approval of Strategic report
The Strategic report for the year ended 31 December 2021 set
out on pages 2 to 75 was approved by the Board of directors
on 17 February 2022.
By order of the Board
Jan Cargill
Chief Governance Officer and Company Secretary
17 February 2022
Chairman
Howard Davies
Executive directors
Alison Rose (CEO)
Katie Murray (CFO)
Non-executive directors
Francesca Barnes
Robert Gillespie
Graham Beale
Yasmin Jetha
Ian Cormack
Mike Rogers
Patrick Flynn
Mark Seligman
Morten Friis
Lena Wilson
Board and committees
Chairman
Howard Davies
Nominations (Chairman
)
Executive directors
Alison Rose
Katie Murray
Independent non-executive directors
Francesca Barnes
Graham Beale
Senior Independent Director
Audit, Nominations, Risk
Ian Cormack
Audit, Remuneration, Risk
Patrick Flynn
Audit (Chairman), Nominations, Risk
Morten Friis
Risk (Chairman), Audit, Nominations
Robert Gillespie
Remuneration (Chairman), Audit, Nominations, Risk
Yasmin Jetha
Mike Rogers
Remuneration
Mark Seligman
Audit, Nominations, Remuneration
Lena Wilson
Remuneration, Risk
Chief Governance Officer and Company Secretary
Jan Cargill
Auditor
Ernst & Young LLP
Chartered Accountants and Statutory Auditor
25 Churchill Place
London E14 5EY
Registered office and Head office
250 Bishopsgate
London, EC2M 4AA
Telephone: +44 (0)20 7085 5000
Other principal offices
Ulster Bank Limited
11-16 Donegall
Square East,
Belfast, Co
Antrim, BT1
5UB,
Northern Ireland
Coutts & Company
440 Strand
London WC2R 0QS
Lombard North Central PLC
250 Bishopsgate
London EC2M 4AA
National Westminster Bank Plc
Registered in England No. 929027
For additional detail on the activities of the Committees above,
refer to the Report of the directors
Key:
Audit
member of the Audit Committee
Nominations
member of the Nominations Committee
Remuneration
member of the Performance and
Remuneration Committee
Risk
member of the Board Risk Committee
Top and emerging risks
NWB Group
Annual Report and Accounts 2021
5
A continuous process is used to identify and manage NatWest Bank’s top and emerging risks. These are risks that could have a
significant negative impact on the ability to operate or meet strategic objectives.
External
Climate Related Risks
NatWest Bank and its customers may face significant climate-related risks, including those arising from
the transition to a net zero economy. These risks are receiving increasing regulatory, political and
societal scrutiny, both in the UK and internationally. There are significant uncertainties as to the extent
and timing of the manifestation of the physical risks of climate change, such as more extreme and
frequent weather events and reductions in biodiversity. Embedding climate risk into the risk framework
and adapting NatWest Bank’s operations and business strategy to address the risks is in line with the
purpose-led strategy.
Competitive
Environment
NatWest Bank operates in markets that are highly competitive, raising the threat of a loss of market
share, reduced revenue and lower profitability. The risks mainly relate to changes in regulation,
developments in financial technology (including digital currency), new entrants to the market and
changes in customer behaviour. NatWest Bank closely monitors the competitive environment and
adapts strategy as appropriate to deliver innovative and compelling propositions for customers.
COVID-19
The COVID-19 crisis could impede NatWest Bank’s ability to meet its targets and deliver its purpose-led
strategy. Despite delivery of a mass vaccination programme in the UK, uncertainty remains around the
future evolution of the virus and the ultimate impact of the pandemic on NatWest Bank and its
customers. Key mitigation measures to manage the uncertainty include scenario analysis, stress testing
and active portfolio management including the adjustment of risk appetite.
Cyber Threats
The threat from cyber attacks is constant both directly to businesses such as NatWest Bank and to
others in the supply chain. As cyber attacks evolve and become more sophisticated, NatWest Bank
continues to invest in additional capability and controls designed to defend against the evolving
threats. There is a sustained focus on managing the impact of the attacks and maintaining the
availability of services for NatWest Bank’s customers.
Economic and
Political Risks
NatWest Bank is exposed to economic and political risks in the markets in which it operates. Economic
uncertainty remains high due to a combination of inflationary pressures including supply chain frictions
and disruption due to new COVID-19 variants. A range of complementary approaches is used to
mitigate these risks including scenario analysis and stress testing. NatWest Bank continues to monitor
geopolitical risks alongside domestic political risk including those in relation to the UK’s withdrawal
from the European Union and a Scottish independence referendum. In the longer term, demographic
change, high levels of debt and inequality could all have financial impacts. As a result, these risks are
closely monitored and strategic plans are adapted as appropriate.
Regulatory, Legal &
Conduct Risks
NatWest Bank is subject to extensive laws and regulations and expects government and regulatory
intervention in the financial services industry to remain high for the foreseeable future. NatWest Bank
implements new regulatory requirements, where applicable, and incorporates the implications of
related changes in its strategic and financial plans. However, changes in laws or regulations, or failure
by NatWest Bank to comply with these, may adversely affect NatWest Bank’s business, results of
operations and outlook.
Internal
Data Management
NatWest Bank’s operations and strategy are highly dependent on the accuracy and effective use of
data. Failure to have current, high-quality data and/or the ineffective use of such data could result in a
failure to deliver NatWest Bank’s strategy including reducing costs and meeting customer expectations.
NatWest Bank is focused on delivering a long-term data strategy alongside control and policy
framework enhancements governing data usage.
Internal Change Risk
The implementation of NatWest Bank’s purpose-led strategy involves execution, operational and
people risks. NatWest Bank continues to manage and implement change in line with its strategic plans
while assessing execution risks and taking appropriate mitigating action. In addition, NatWest Bank
continues to monitor and strengthen its control environment including in relation to financial crime,
through robust governance and controls frameworks.
People risk
NatWest Bank’s success depends on its ability to attract, retain and develop highly skilled and qualified
personnel, including senior management, directors and key employees in a highly competitive market
and under internal cost reduction pressures. A combination of strategic workforce planning, including
in relation to critical role resource and retention of specific skills, and close monitoring of staff turnover
levels and colleague wellbeing are key mitigants.
Third-party suppliers
Operational risks arise from NatWest Bank’s reliance on third-party suppliers to provide a range of
services, including information technology. While the ineffective management of these risks could
adversely affect NatWest Bank, significant resources and planning have been devoted to mitigate the
risks including the implementation of robust risk controls.
Financial review
NWB Group
Annual Report and Accounts 2021
6
Summary consolidated income statement for the year ended 31 December 2021
Year ended
Retail
Private
Commercial
Central items
31 December
31 December
Banking
Banking
Banking
& other
2021
2020
Variance
£m
£m
£m
£m
£m
£m
£m
%
Net interest income
3,541
461
2,171
(171)
6,002
5,810
192
3
Non-interest income
345
263
1,040
1,619
3,267
3,145
122
4
Total income
3,886
724
3,211
1,448
9,269
8,955
314
4
Operating expenses
(1,917)
(513)
(1,892)
(1,877)
(6,199)
(6,184)
(15)
—
Profit/(loss) before impairment
releases/(losses)
1,969
211
1,319
(429)
3,070
2,771
299
11
Impairment releases/(losses)
23
53
737
—
813
(2,169)
2,982
(137)
Operating profit/(loss)
1,992
264
2,056
(429)
3,883
602
3,281
545
Tax charge
(976)
(66)
(910)
1,379
Profit for the year
2,907
536
2,371
442
Key metrics and ratios
2021
2020
Cost:income ratio (%)
66.9
69.1
Loan impairment rate
(1)
(0.28)
0.79
CET1 ratio (%)
16.1
17.8
Leverage ratio (%)
3.8
4.7
Risk weighted assets (RWAs) (£bn)
86.2
86.9
Loan:deposit ratio (%)
83
89
(1)
Loan impairment rate is the loan impairment charge divided by gross customer loans.
NWB Group reported a profit of £2,907 million compared with
£536 million in 2020, driven by a net impairment release of £813
million, reflecting the continued low levels of realised losses,
together with an increase in total income of £314 million, partly
offset by an increase in operating expenses of £15 million.
Total income
increased by £314 million, or 4%, to £9,269 million
compared with £8,955 million in 2020.
Net interest income
increased by £192 million, or 3%, to £6,002
million compared with £5,810 million in 2020, reflecting strong
growth in mortgage balances and margin improvement,
partially offset by reduced commercial lending volumes.
Non-interest income
increased by £122 million, or 4%, to £3,267
million compared with £3,145 million in 2020.
Net fees and commissions increased by £98 million to £1,482
million, primarily reflecting a recovery in transactional banking
fee income driven by the UK economy and one off intragroup
fees received.
Other operating income increased by £24 million to £1,785
million compared with £1,761 million in 2020, reflecting:

£94 million higher income from hedging activities, reflecting
interest rate volatility and fair value movements;

non-repeat of a £58 million loss on the acquisition of a
mortgage portfolio from Metro Bank plc in 2020;

an increase of £7 million in gain from bonds disposal to £120
million; and

an additional £30 million of income from the recharging of
costs to other NatWest Group entities, principally reflecting
the impact of organisational restructure activity; offset by

losses of £117 million incurred upon the partial redemption
of debt instruments and a £44 million incurred upon sale of
properties.
Operating expenses
increased by £15 million to £6,199 million,
compared with £6,184 million in 2020, reflecting:

a non-repeat PPI provision releases in 2020 of £171 million;

an overall increase in conduct and litigation charges in 2021;
offset by,

overall cost reductions in 2021 following property exits.
Net impairment release
of £813 million reflected the continued
low levels of realised losses. Total impairment provisions
reduced by £1.2 billion to £2.5 billion in the year, which resulted
in a reduction in the ECL coverage ratio from 1.33% at 31
December 2020 to 0.85%.
Financial review continued
NWB Group
Annual Report and Accounts 2021
7
Segmental performance
Retail Banking
Operating profit was £1,992 million, compared with £653 million
in 2020.
Net interest income increased by £427 million to £3,541 million
compared with £3,114 million in 2020, reflecting a £11.8 billion
balance growth in mortgages and margin improvement.
Non-interest income increased by £73 million to £345 million,
compared with £272 million in 2020, primarily driven by the
non-repeat of losses on the acquisition of a mortgage portfolio
from Metro Bank plc and one-off other non-interest income in
2020. Net fees and commissions remained stable, as higher
transactional-related fee income was offset by the annualised
impact of regulatory changes on fee income.
Operating expenses decreased by £147 million to £1,917 million
compared with £2,064 million in 2020, primarily reflecting a
reduced headcount resulting from continued digitalisation and
automation, combined with lower property and technology
related costs. A PPI net provision release of £171 million in 2020
was partly offset by an overall reduction of £155 million in
conduct provision charges in 2021.
An impairment release of £23 million primarily reflected ECL
provision releases in the non-default portfolio.
Loans to customers increased by £12.1 billion to £164.5 billion,
reflecting strong gross new mortgage lending.
Customer deposits increased by £13.4 billion to £152.1 billion as
UK Government schemes combined with Covid 19 related
restrictions resulted in lower customer spend.
Private Banking
Operating profit was £264 million compared with £159 million
in 2020.
Net interest income decreased by £5 million to £461 million in
2021, as strong balance growth was offset by reduced deposit
returns in a low interest rate environment.
Non-interest income increased by £12 million to £263 million in
2021, reflecting a £4 million increase in net fees and
commissions driven by growth in assets, combined with a non-
repeat of a £6 million loss in other non-interest income in 2020.
Operating expenses increased by £61 million to £513 million in
2021, principally due to investment in digital infrastructure and
growth propositions, and the non-repeat of a conduct provision
release in 2020.
A net impairment release of £53 million in 2021 mainly reflected
ECL provision releases in non-default portfolios.
Loans to customers increased by £1.4 billion to £17.7 billion,
driven by continued strong mortgage lending growth.
Customer deposits increased by £6.8 billion to £37.1 billion,
reflecting strong personal and commercial inflows as UK
Government restrictions resulted in clients continuing to build
and retain liquidity.
Commercial Banking
Operating profit was £2,056 million, compared with a loss of
£153 million in 2020.
Net interest income decreased by £131 million to £2,171 million,
compared with £2,302 million in 2020, due to reduced deposits
returns in a low interest rate environment and lower lending
volumes.
Non-interest income increased by £106 million to £1,040 million,
primarily reflecting an increase in net fees and commissions,
due to a recovery in transactional banking fee income in the
second half of 2021 driven by the UK economy and £30 million
of one-off intragroup fees received.
Operating expenses decreased by £119 million to £1,892
million, compared with £2,011 million primarily reflecting cost
efficiencies and headcount reduction. Litigation and conduct
costs increased by £38 million.
An impairment release of £737 million primarily reflects ECL
provision releases related to the improved economic outlook
with Stage 3 defaults remaining at low levels.
Loans to customers decreased by £2.5 billion to £77.1 billion,
reflecting net revolving credit facility repayments of £0.6 billion
and UK Government support scheme repayments of £1.0
billion. The remaining decrease is primarily due to targeted
sector reductions, partially offset by £0.9 billion reduction in
impairment provisions.
Customer deposits increased by £6.3 billion to £124.5 billion as
customers continued to build and retain liquidity.
Central items & other
Operating loss was £429 million in 2021 compared with £57
million in 2020.
Total income decreased by £168 million to £1,448 million in
2021, compared with £1,616 million in 2020. Losses of £117
million incurred upon the partial redemption of debt
instruments and £44 million incurred upon the sale of
properties, were partially offset by higher treasury related
income.
Operating expenses increased by £220 million to £1,877 million,
compared with £1,657 million in 2020, primarily reflecting
litigation and conduct charges. In 2021, £1,463 million of the
total expenses were recovered through service charges which
are presented within non-interest income.
Financial review continued
NWB Group
Annual Report and Accounts 2021
8
Segmental performance
continued
Summary consolidated balance sheet as at 31 December 2021
2021
2020
Variance
£m
£m
£m
%
Assets
Cash and balances at central banks
101,213
62,983
38,230
61
Derivatives
2,460
3,288
(828)
(25)
Loans to banks - amortised cost
4,182
3,344
838
25
Loans to customers - amortised cost
286,971
271,581
15,390
6
Amounts due from holding companies and fellow subsidiaries
3,519
3,305
214
6
Other financial assets
29,031
37,995
(8,964)
(24)
Other assets
7,187
7,043
144
2
Total assets
434,563
389,539
45,024
12
Liabilities
Bank deposits
22,831
14,871
7,960
54
Customer deposits
329,440
293,605
35,835
12
Amounts due to holding companies and fellow subsidiaries
45,136
37,559
7,577
20
Derivatives
4,119
6,552
(2,433)
(37)
Other financial liabilities
7,251
10,383
(3,132)
(30)
Subordinated liabilities
211
1,230
(1,019)
(83)
Notes in circulation
904
1,012
(108)
(11)
Other liabilities
3,934
4,435
(501)
(11)
Total liabilities
413,826
369,647
44,179
12
Total equity
20,737
19,892
845
4
Total liabilities and equity
434,563
389,539
45,024
12
Total assets
increased by £45.0 billion to £434.6 billion at 31
December 2021, compared with £389.5 billion at 31 December
2020.
Cash and balances at central banks
increased by £38.2 billion
to £101.2 billion, compared with £63.0 billion at 31 December
2020, driven by a strong deposit growth and £7.0 billion net
drawdown on the Term Funding Scheme with additional
incentives for SMEs (TFSME). This was offset by £2.8 billion
payment to Metro Bank plc for acquisition of loan portfolio.
Loans to banks – amortised cost
increased by £0.8 billion to
£4.2 billion, compared with £3.3 billion at 31 December 2020,
mainly representing an increase in USD balances as part of
treasury activities.
Loans to customers
increased by £15.4 billion to £287.0 billion,
compared with £271.6 billion at 31 December 2020, driven by:

£13.0 billion mortgage growth as a result of strong gross
new lending;

£4.3 billion net increase in relation to Treasury repo activity;

£1.2 billion decrease in impairment provisions; offset by

£2.4 billion decrease in commercial lending primarily
reflecting targeted sector reductions and UK Government
support scheme repayments of £0.6 billion.
Amounts due from holding companies and fellow subsidiaries
increased by £0.2 billion to £3.5 billion, compared with £3.3
billion at 31 December 2020, reflecting a increase of inter-
company balances with entities outside the ring-fenced bank.
Other financial assets
decreased by £9.0 billion to £29.0 billion,
primarily reflecting bond maturities of £6.9 billion and reduced
fair value of the remaining bond portfolio of £2.0 billion due to
changes in interest and FX rates.
Bank deposits
increased by £8.0 billion to £22.8 billion, driven
by a net £7.0 billion drawdown of the TFSME facility and £0.9
billion increase in repo balances.
Customer deposits
increased by £35.8 billion to £329.4 billion,
reflecting:

£26.4 billion growth in deposits as customers continued to
build and retain liquidity in light of economic uncertainty;
and

£9.4 billion increase in repos facing customers.
Amounts due to holding companies and fellow subsidiaries
increased by £7.6 billion to £45.1 billion, compared with £37.5
billion at 31 December 2020, reflecting debt issuance.
Derivative liabilities
decreased by £2.4 billion to £4.1 billion,
compared with £6.6 billion at 31 December 2020, driven by
interest rate changes and sterling FX rate appreciation.
Other financial liabilities
decreased by £3.1 billion to £7.3 billion,
compared with £10.4 billion at 31 December 2020, driven by
settlement of amount payable to Metro Bank plc for the
acquisition of its mortgage book in December 2020.
Subordinated liabilities
decreased by £1.0 billion to £0.2 billion,
compared with £1.2 billion at 31 December 2020, driven by
maturities of debt instruments.
Other liabilities
decreased by £0.5 billion to £3.9 billion,
compared with £4.4 billion at the 31 December 2020, due to
£0.4 billion in leasing liabilities reflecting surrender of property
leasehold.
Total equity
increased by £0.8 billion to £20.7 billion, compared
with £19.9 billion at 31 December 2020. The increase reflects
attributable profit of £2.9 billion, offset by dividends paid to NW
Holdings and decrease in cash flow hedging reserve.
Risk and capital management
NWB Group
Annual Report and Accounts 2021
9
Presentation of information
Where marked as audited in the section header, certain
information in the Risk and capital management section (pages
9 to 75) is within the scope of the Independent auditor’s report.
Risk and capital management is generally conducted on an
overall basis within NatWest Group such that common policies,
procedures, frameworks and models apply across NatWest
Group. Therefore, for the most part, discussion on these
qualitative aspects reflects those in NatWest Group as relevant
for the businesses and operations in NWB Group.
Update on COVID-19
While the immediate disruption diminished during the year, the
ongoing impacts of the global pandemic remained a significant
focus for risk management in 2021 and uncertainty in the
operating environment continued. NWB Group remained
committed to supporting its customers while operating safely
and soundly in line with its strategic objectives.
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 NWB Group’s portfolios for
some time. NWB Group anticipates increased default levels in
2022 as a result.
While the direct impact on NWB Group’s operational risk
profile reduced, NWB Group continued to closely monitor the
second-order impacts on its transformation agenda, with a
significant focus on managing resource to protect key
regulatory deliveries. The continued evolution of NWB 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 sheet and prudent approach
to risk management, NWB Group remains well placed to
withstand these aftershocks as well as providing support to
customers when they need it most.
Risk management framework
Introduction
NWB Group operates under NatWest Group’s enterprise-wide
risk management framework, which is centred around the
embedding of a strong risk culture. The framework ensures
the governance, capabilities and methods are in place to
facilitate risk management and decision-making across the
organisation.
The framework ensures that NWB Group’s principal risks –
which are detailed in this section – are appropriately
controlled and managed. It sets out the standards and
objectives for risk management as well as defining the division
of roles and responsibilities.
This seeks to ensure a consistent approach to risk
management across NWB Group. It aligns risk management
with NWB Group’s overall strategic objectives.
The framework, which is designed and maintained by NatWest
Group’s independent Risk function, is owned by the NatWest
Group Chief Risk Officer. It is reviewed and approved annually
by the NatWest Group Board. The framework incorporates risk
governance, NatWest Group’s three lines of defence operating
model and the Risk function’s mandate.
Risk appetite, supported by a robust set of principles, policies
and practices, defines the levels of tolerance for a variety of
risks and provides a structured approach to risk-taking within
agreed boundaries.
While all NWB Group colleagues are responsible for managing
risk, the Risk function provides oversight and monitoring of risk
management activities, including the implementation of the
framework and adherence to its supporting policies, standards
and operational procedures. The Chief Risk Officer plays an
integral role in providing the Board with advice on NWB
Group’s risk profile, the performance of its controls and in
providing challenge where a proposed business strategy may
exceed risk tolerance.
In addition, there is a process to identify and manage top risks,
which are those that could have a significant negative impact
on NWB Group’s ability to meet 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
Presentation of information
9
Update on COVID-19
9
Risk management framework
Introduction
9
Culture
10
Governance
11
Risk appetite
13
Identification and measurement
14
Mitigation
14
Testing and monitoring
14
Stress testing
14
Credit risk
Definition and sources of risk
18
Governance and risk appetite
18
Identification and measurement
18
Mitigation
18
Assessment and monitoring
19
Problem debt management
19
Forbearance
21
Impairment, provisioning and write-offs
21
Significant increase in credit risk and asset lifetimes
24
Economic loss drivers and UK economic uncertainty
25
Measurement uncertainty and ECL sensitivity analysis
30
Measurement uncertainty and ECL adequacy
32
Banking activities
33
Capital, liquidity and funding risk
Definition and sources
58
Capital, liquidity and funding risk management
59
Key points
60
Minimum requirements
61
Measurements
61
Non-traded market risk
66
Pension risk
70
Compliance & conduct risk
71
Financial crime risk
71
Climate risk
72
Operational risk
73
Model risk
74
Reputational risk
75
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
10
Risk management framework continued
Culture
Risk culture is at the heart of NWB Group’s risk management
framework and its risk management practice. The 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 employees 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 plays in daily work.

Understand the risks associated with individual roles.

Align decision-making to NWB Group’s risk appetite.

Consider risk in all actions and decisions.

Escalate risks and issues early; taking action to 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 embedded in NatWest
Group’s Critical People Capabilities and are clearly aligned to
the core values of “serving customers”, “working together”,
“doing the right thing” and “thinking long term”. These act as
an effective basis for a strong risk culture because the Critical
People Capabilities form the basis of all recruitment and
selection processes.
Training
Enabling employees to have the capabilities and confidence to
manage risk is core to NatWest Group’s learning strategy.
NatWest Group offers a wide range of learning, both technical
and behavioural, across the risk disciplines. This training can be
mandatory, role-specific or for personal development.
Mandatory learning for all staff is focused on keeping
employees, customers and NatWest Group safe. This is easily
accessed online and is assigned to each person according to
their role and business area. The system allows monitoring at
all levels to ensure completion.
Our Code
NatWest Group’s conduct guidance, Our Code, provides
direction on expected behaviour and sets out the standards of
conduct that support the values. The code explains the effect of
decisions that are taken and describes the principles that must
be followed.
These principles cover conduct-related issues as well as wider
business activities. They focus on desired outcomes, with
practical guidelines to align the values with commercial
strategy and actions. The embedding of these principles
facilitates sound decision-making and a clear focus on good
customer outcomes.
Where appropriate, if conduct falls short of NatWest Group’s
required standards, the accountability review process is used to
assess how this should be reflected in pay outcomes for the
individuals concerned. The NatWest Group remuneration policy
ensures that the remuneration arrangements for all employees
reflect the principles and standards prescribed by the PRA
rulebook and the FCA handbook. Any employee falling short of
the expected standards would also be subject to internal
disciplinary policies and procedures. If appropriate, the relevant
authority would be notified.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
11
Risk management framework continued
Governance
Committee structure
The diagram shows NWB Group’s risk committee structure in 2021 and the main purposes of each committee.
(1)
The NatWest Group Chief Executive Officer also performs the role of NWB Plc Chief Executive Officer.
(2)
The NatWest Group Chief Risk Officer also performs the role of NWB Plc Chief Risk Officer.
(3)
The NatWest Group Chief Financial Officer also performs the role of NWB Plc Chief Financial Officer.
(4)
The Executive Risk Committee is chaired by the NWB Plc Chief Executive Officer and supports her in discharging risk management accountabilities.
(5)
The Executive Committee is chaired by the NWB Plc Chief Executive Officer and supports her in discharging her individual accountabilities in accordance
with the authority delegated to her by the NWB Plc Board.
(6)
The Asset & Liability Management Committee is chaired by the NWB Plc Chief Financial Officer and supports her in discharging her individual accountabilities relating to treasury
and balance sheet management.
Exe
cut
ive
Ri
sk
Commit
tee
(4)
Supports the CEO in reviewing
and challenging all material risk
and control matters. Approves
the risk management
framework and oversees its
implementation. Reviews and
recommends the cascade of
material risk appetite to
subsidiary businesses
.
Exe
cut
ive
Commit
tee
(5)
NWB Plc Board
Considers material risks and approves, as appropriate, actions recommended by the Board Risk Committee.
Monitors performance against risk appetite. Reviews and approves risk appetite measures for capital adequacy,
liquidity & funding, earnings volatility, cyber security and strategic and operational resilience
.
Boa
rd
Ris
k Co
mmitte
e
Provides oversight and advice
to the Board on current and
future risk exposures, future
risk profile and risk appetite.
Oversees the effectiveness of
the risk management
framework within NWB Plc and
(with the Audit Committee) the
system of internal controls
required to manage risk
.
Aud
it
Commit
tee
Assists the Board in carrying out
its accounting, internal control
and financial reporting
responsibilities. Reviews the
effectiveness of the system of
internal controls relating to
financial management and
compliance with financial
reporting, asset safeguarding
and accounting standards
.
Ass
et
& L
iab
ili
ty
Man
age
men
t Co
mmitte
e
(6
)
Business and function risk committees
Risk committees review and monitor all risks, providing guidance, recommendations and
decisions on risks affecting the businesses and functions.
Supports the CEO in discharging
her individual accountabilities,
reflecting the authority delegated
to her by the NWB Plc Board.
Reviews, challenges and debates
all aspects of NWB Plc, including
strategic, financial, capital, risk
and operational issues. Supports
the CEO in forming
recommendations to the Board
and committees.
Supports the CFO in overseeing
the effective management of NWB
Plc’s current and future balance
sheets, ensuring they operate
within risk appetite, policies and
chosen business strategy as well
as comply with regulatory and
legal requirements
.
Risk committees review and monitor all risks, providing guidance,
recommendations and decisions on risks affecting the businesses and functions
.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
12
Risk management framework continued
Risk management structure
The diagram shows NWB Group’s risk management structure in 2021 and key risk management responsibilities.
(1)
Double Independent Non-Executive Directors.
(2)
The NatWest Group Chief Executive Officer also performs the role of NWB Chief Executive Officer.
(3)
The NatWest Group Chief Risk Officer also performs the role of NWB Chief Risk Officer.
(4)
The NWB Chief Risk Officer reports directly to the NWB Chief Executive Officer. There is a further secondary reporting line to the chair of the Board Risk Committee and a right
of access to the Committee, including the deputy chair.
(5)
The Risk function is independent of the customer-facing franchises and support functions. Its structure is divided into three parts (Directors of Risk, Specialist Risk Directors and
Chief Operating Officer) to facilitate effective management of the risks facing NWB. Risk committees in the customer businesses and key functional risk committees oversee risk
exposures arising from management and business activities and focus on ensuring that these are adequately monitored and controlled. The directors of Risk (Retail Banking;
Commercial Banking; Financial & Strategic Risk; Non-Financial Risk and Compliance & Conduct) as well as the Director, Financial Crime Risk NatWest Holdings; the Chief Risk
Officer, Coutts & Company and the Chief Operating Officer report to the NWB Chief Risk Officer
.
NWB
Chief
Execut
ive Of
ficer
NatWest Group
Chief Risk Officer
Director of Risk, Commercial Banking
Design and delivery of Commercial Banking risk strategy and service proposition. Oversight
of risk management across Commercial Banking.
Design and delivery of Restructuring strategy and service proposition
.
Director of Compliance & Conduct
Design and delivery of compliance & conduct strategy and service
proposition. Provides specialist technical advice to the Directors of Risk
responsible for business oversight.
Chief Operating Officer
Centralised support for the risk management function and model risk oversight.
Director, Financial Crime Risk NatWest Holdings
Design and delivery of financial crime strategy and service proposition, oversight of
financial crime risk management. Provides specialist technical advice to the
Directors of Risk responsible for business oversight.
Director of Financial & Strategic Risk
Centralised oversight of financial and strategic risks across NWB, specialist advice on
top and emerging risks and responsibility for model development.
Chief Risk Officer, Coutts & Company
Design and delivery of the Coutts & Company risk strategy and service proposition.
Oversight of risk management (including Compliance) across Coutts & Company.
NWB
Chief Risk Officer
Director of Risk, Retail Banking
Design and delivery of Retail Banking risk strategy and service proposition. Oversight of
risk management across Retail Banking. Supports the Ringfenced DINEDs
(1)
through the
identification, documentation, resolution and escalation of any potential ring-fencing conflicts of
interest relating to decisions made by the Ringfenced and Group Chief Risk Officer.
NatWest Group
Chief Executive Officer
Director of Non-Financial Risk
Centralised oversight of non-financial risk across NWB, including framework design
and development. Provides specialist advice on risk culture and risk appetite matters
to the Directors of Risk responsible for business oversight.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
13
Risk management framework continued
Three lines of defence
NatWest Group uses the industry-standard three lines of
defence model to articulate accountabilities and responsibilities
for managing risk. This supports the embedding of effective risk
management throughout the organisation.
First line of defence
The first line of defence incorporates most roles in NatWest
Group, including those in the customer-facing franchises,
Technology and Services as well as support functions such as
Human Resources, Legal and Finance.
The first line of defence is empowered to take risks within the
constraints of the risk management framework and policies as
well as the risk appetite statements set by NatWest Group and
measures set by the Board.
The first line of defence is responsible for managing its direct
risks. With the support of specialist functions 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 continuous
monitoring activities to confirm that NatWest Group engages in
permissible and sustainable risk-taking activities.
The second line of defence advises on, monitors, challenges,
approves, escalates and reports on the risk-taking activities of
the first line, ensuring that these are within the constraints of
the risk management framework and policies as well as the risk
appetite statements set by NatWest Group and measures set by
the Board.
Third line of defence
The third line of defence is the Internal Audit function and is
independent of the first and second lines.
The third line of defence is responsible for providing
independent and objective assurance to the Board, its
subsidiary legal entity boards and executive management on
the adequacy and effectiveness of key internal controls,
governance and the risk management in place to monitor,
manage and mitigate the key risks to NatWest Group and its
subsidiary companies achieving their objectives.
The third line of defence executes its duties freely and
objectively in accordance with the Chartered Institute of
Internal Auditors’ Code of Ethics and International Standards.
Risk appetite
Risk appetite defines the type and aggregate level of risk NWB
Group is willing to accept in pursuit of its strategic objectives
and business plans. Risk appetite supports sound risk taking,
the promotion of robust risk practices and risk behaviours, and
is calibrated annually.
For certain principal risks, risk capacity defines the maximum
level of risk NWB Group can assume before breaching
constraints determined by regulatory capital and liquidity
requirements, the operational environment, and from a conduct
perspective. Establishing risk capacity helps determine where
risk appetite should be set, ensuring there is a buffer between
internal risk appetite and NWB Group’s ultimate capacity to
absorb losses.
Risk appetite framework
The risk appetite framework supports effective risk
management by promoting sound risk-taking through a
structured approach, within agreed boundaries. It also ensures
emerging risks and risk-taking activities that might be out of
appetite are identified, assessed, escalated and addressed in a
timely manner.
To facilitate this, a detailed annual review of the framework is
carried out. The review includes:

Assessing the adequacy of the framework when compared
to internal and external expectations.

Ensuring the framework remains effective and acts as a
strong control environment for risk appetite.

Assessing the level of embedding of risk appetite across the
organisation.
The Board approves the risk appetite framework annually.
Establishing risk appetite
In line with NatWest Group’s risk appetite framework, risk
appetite is maintained across NWB Group through risk appetite
statements. These are in place for all principal risks and
describe the extent and type of activities that can be
undertaken.
Risk appetite statements consist of qualitative statements of
appetite supported by risk limits and triggers that operate as a
defence against excessive risk-taking. Risk measures and their
associated limits are an integral part of the risk appetite
approach and a key part of embedding risk appetite in day-to-
day risk management decisions. A clear tolerance for each
principal risk is set in alignment with business activities.
The annual process of reviewing and updating risk appetite
statements is completed alongside the business and financial
planning process. This ensures that plans and risk appetite are
appropriately aligned.
The Board sets risk appetite for all principal risks to help ensure
NWB Group is well placed to meet its priorities and long-term
targets even in challenging economic environments. This
supports NWB Group in remaining resilient and secure as it
pursues its strategic business objectives.
NWB Group’s risk profile is frequently reviewed and monitored.
Management focus is concentrated on all principal risks as well
as the top and emerging risk issues which may correlate to
them. Risk profile relative to risk appetite is reported regularly
to senior management and the Board.
NatWest Group policies directly support the qualitative aspects
of risk appetite. They define the qualitative expectations,
guidance and standards that stipulate the nature and extent of
permissible risk taking and are consistently applied across
NatWest Group and its subsidiaries.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
14
Risk management framework continued
Identification and measurement
Identification and measurement within the risk management
process comprise:

Regular assessment of the overall risk profile, incorporating
market developments and trends, as well as external and
internal factors.

Monitoring of the risks associated with lending and credit
exposures.

Assessment of trading and non-trading portfolios.

Review of potential risks in new business activities and
processes.

Analysis of potential risks in any complex and unusual
business transactions.
The financial and non-financial risks that NWB Group faces are
detailed in its Risk Directory. This provides a common risk
language to ensure consistent terminology is used across NWB
Group. The Risk Directory is subject to annual review to ensure
it continues to fully reflect the risks that NWB Group faces.
Mitigation
Mitigation is a critical aspect of ensuring that risk profile
remains within risk appetite. Risk mitigation strategies are
discussed and agreed within NWB Group.
When evaluating possible strategies, costs and benefits, residual
risks (risks that are retained) and secondary risks (those that
arise from risk mitigation actions themselves) are also
considered. Monitoring and review processes are in place to
evaluate results. Early identification, and effective management
of changes in legislation and regulation are critical to the
successful mitigation of compliance and conduct risk. The
effects of all changes are managed to ensure the timely
achievement of compliance. Those changes assessed as having
a high or medium-high impact are managed more closely.
Emerging 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 analysis, including
the stress testing of exposures, is also carried out.
Testing and monitoring
Targeted risk processes and controls – including controls within
the scope of Section 404 of the Sarbanes-Oxley Act 2002 – are
subject to independent testing and monitoring.
This activity is carried out to confirm to both internal and
external stakeholders – including the Board, senior
management, the customer-facing franchises, Internal Audit
and NWB Group’s regulators – that such processes and
controls are being correctly implemented and operate
adequately and effectively. A consistent testing and monitoring
methodology is in place across NWB Group.
Testing and monitoring activity focuses on processes and
controls relating to credit risk, financial crime risk, operational
resilience, and compliance and conduct risk. However, a range
of controls and processes relating to other risk types is also
subject to testing and monitoring activity as deemed
appropriate within the context of a robust control environment.
The NatWest Group Risk Testing & Monitoring Forum assesses
and validates the annual plan as well as the ongoing
programme of reviews.
Stress testing
Stress testing – capital management
Stress testing is a key risk management tool and a fundamental
component of NatWest Group’s approach to capital
management. It is used to quantify and evaluate the potential
impact of specified changes to risk factors on the financial
strength of NatWest Group, including its capital position.
Stress testing includes:

Scenario testing, which examines the impact of a
hypothetical future state to define changes in risk factors.

Sensitivity testing, which examines the impact of an
incremental change to one or more risk factors.
The process for stress testing consists of four broad stages:
Define
scenarios

Identify macro and NatWest Group-
specific vulnerabilities and risks.

Define and calibrate scenarios to
examine risks and vulnerabilities.

Formal governance process to agree
scenarios.
Assess
impact

Translate scenarios into risk drivers.

Assess impact to current and projected
P&L and balance sheet across NatWest
Group.
Calculate
results and
assess
implications

Aggregate impacts into overall results.

Results form part of the risk
management process.

Scenario results are used to inform
NatWest Group’s business and capital
plans.
Develop and
agree
management
actions

Scenario results are analysed by subject
matter experts. Appropriate
management actions are then
developed.

Scenario results and management
actions are reviewed by the relevant
Executive Risk Committees and Board
Risk Committees, and agreed by the
relevant Boards.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
15
Risk management framework continued
Stress testing is used widely across NatWest Group. The
diagram below summarises key areas of focus.
Specific areas that involve capital management include:

Strategic financial and capital planning – by assessing the
impact of sensitivities and scenarios on the capital plan and
capital ratios.

Risk appetite – by gaining a better understanding of the
drivers of, and the underlying risks associated with, risk
appetite.

Risk monitoring – by monitoring the risks and horizon
scanning events that could potentially affect NatWest
Group’s financial strength and capital position.

Risk mitigation – by identifying actions to mitigate risks, or
those that could be taken, in the event of adverse changes
to the business or economic environment. Key risk
mitigating actions are documented in NatWest Group’s
recovery plan.
Capital sufficiency – going concern forward-looking view
Going concern capital requirements are examined on a
forward-looking basis – including as part of the annual
budgeting process – by assessing the resilience of capital
adequacy and leverage ratios under hypothetical future states.
These assessments include assumptions about regulatory and
accounting factors (such as IFRS 9). They incorporate
economic variables and key assumptions on balance sheet and
P&L drivers, such as impairments, to demonstrate that NatWest
Group and its operating subsidiaries maintain sufficient capital.
A range of future states are tested. In particular, capital
requirements are assessed:

Based on a forecast of future business performance, given
expectations of economic and market conditions over the
forecast period.

Based on a forecast of future business performance under
adverse economic and market conditions over the forecast
period. Scenarios of different severity may be examined.
The examination of capital requirements under both normal
and adverse economic and market conditions enables NatWest
Group to determine whether its projected business
performance meets internal plans and regulatory capital
requirements.
The potential impact of normal and adverse economic and
market conditions on capital requirements is assessed through
stress testing, the results of which are not only used widely
across NatWest Group but also by the regulators to set specific
capital buffers. NatWest Group takes part in stress tests run by
regulatory authorities to test industry-wide vulnerabilities under
crystallising global and domestic systemic risks.
Stress and peak-to-trough movements are used to help assess
the amount of capital NatWest Group needs to hold in stress
conditions in accordance with the capital risk appetite
framework.
Internal assessment of capital adequacy
An internal assessment of material risks is carried out annually
to enable an evaluation of the amount, type and distribution of
capital required to cover these risks. This is referred to as the
Internal Capital Adequacy Assessment Process (ICAAP). The
ICAAP consists of a point-in-time assessment of exposures and
risks at the end of the financial year together with a forward-
looking stress capital assessment. The ICAAP is approved by
the Board and submitted to the PRA.
The ICAAP is used to form a view of capital adequacy
separately to the minimum regulatory requirements. The ICAAP
is used by the PRA to assess NatWest Group’s specific capital
requirements through the Pillar 2 framework.
Capital allocation
NatWest Group has mechanisms to allocate capital across its
legal entities and businesses. These aim to optimise the use of
capital resources taking into account applicable regulatory
requirements, strategic and business objectives and risk
appetite. The framework for allocating capital is approved by
the CFO with support from the Asset & Liability Management
Committee.
Governance
Capital management is subject to substantial review and
governance. The Board approves the capital plans, including
those for key legal entities and businesses as well as the results
of the stress tests relating to those capital plans.
Stress testing – liquidity
Liquidity risk monitoring and contingency planning
A suite of tools is used to monitor, limit and stress test the risks
on the balance sheet. Limit frameworks are in place to control
the level of liquidity risk, asset and liability mismatches and
funding concentrations. Liquidity risks are reviewed at
significant legal entity and business levels daily, with
performance reported to the Asset & Liability Management
Committee on a regular basis. Liquidity Condition Indicators are
monitored daily. This ensures any build-up of stress is detected
early and the response escalated appropriately through
recovery planning.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
16
Risk management framework continued
Internal assessment of liquidity
Under the liquidity risk management framework, NatWest
Group maintains the Internal Liquidity Adequacy Assessment
Process. This includes assessment of net stressed liquidity
outflows under a range of severe but plausible stress scenarios.
Each scenario evaluates either an idiosyncratic, market-wide or
combined stress event as described in the table below.
Type
Description
Idiosyncratic
scenario
The market perceives NatWest Group to be
suffering from a severe stress event, which
results in an immediate assumption of
increased credit risk or concerns over
solvency.
Market-wide
scenario
A market stress event affecting all participants
in a market through contagion, potential
counterparty failure and other market risks.
NatWest Group is affected under this scenario
but no more severely than any other
participants with equivalent exposure.
Combined
scenario
This scenario models the combined impact of
an idiosyncratic and market stress occurring
at once, severely affecting funding markets
and the liquidity of some assets.
NatWest Group uses the most severe outcome to set the
internal stress testing scenario which underpins its internal
liquidity risk appetite. This complements the regulatory liquidity
coverage ratio requirement.
Stress testing – recovery and resolution planning
The NatWest Group recovery plan explains how NatWest Group
and its subsidiaries – as a consolidated group – would identify
and respond to a financial stress event and restore its financial
position so that it remains viable on an ongoing basis.
The recovery plan ensures risks that could delay the
implementation of a recovery strategy are highlighted and
preparations are made to minimise the impact of these risks.
Preparations include:

Developing a series of recovery indicators to provide early
warning of potential stress events.

Clarifying roles, responsibilities and escalation routes to
minimise uncertainty or delay.

Developing a recovery playbook to provide a concise
description of the actions required during recovery.

Detailing a range of options to address different stress
conditions.

Appointing dedicated option owners to reduce the risk of
delay and capacity concerns.
The plan is intended to enable NatWest Group to maintain
critical services and products it provides to its customers,
maintain its core business lines and operate within risk appetite
while restoring NatWest Group’s financial condition. It is
assessed for appropriateness on an ongoing basis and is
updated annually. The plan is reviewed and approved by the
Board prior to submission to the PRA each year. Individual
recovery plans are also prepared for NatWest Holdings Limited,
NatWest Markets Plc, RBS International (Holdings) Limited,
Ulster Bank Ireland DAC and NatWest Markets N.V.. These
plans detail the recovery options, recovery indicators and
escalation routes for each entity.
Fire drill simulations of possible recovery events are used to
test the effectiveness of NatWest Group and individual legal
entity recovery plans. The fire drills are designed to replicate
possible financial stress conditions and allow senior
management to rehearse the responses and decisions that may
be required in an actual stress event. The results and lessons
learnt from the fire drills are used to enhance NatWest Group’s
approach to recovery planning.
Under the resolution assessment part of the PRA rulebook,
NatWest Group is required to carry out an assessment of its
preparations for resolution, submit a report of the assessment
to the PRA and publish a summary of this report.
Resolution would be implemented if NatWest Group was
assessed by the UK authorities to have failed and the
appropriate regulator put it into resolution. The process of
resolution is owned and implemented by the Bank of England
(as the UK resolution authority). A multi-year programme is in
place to further develop resolution capability in line with
regulatory requirements.
Stress testing – market risk
Non-traded market risk
Non-traded exposures are reported to the PRA on a quarterly
basis. This provides the regulator with an overview of NatWest
Group’s banking book interest rate exposure. The report
includes detailed product information analysed by interest rate
driver and other characteristics, including accounting
classification, currency and counterparty type.
Scenario analysis based on hypothetical adverse scenarios is
performed on non-traded exposures as part of the Bank of
England and European Banking Authority stress test exercises.
NatWest Group also produces an internal scenario analysis as
part of its financial planning cycles.
Non-traded exposures are capitalised through the ICAAP. This
covers gap risk, basis risk, credit spread risk, pipeline risk,
structural foreign exchange risk, prepayment risk, equity risk
and accounting volatility risk. The ICAAP is completed with a
combination of value and earnings measures. The total non-
traded market risk capital requirement is determined by adding
the different charges for each sub risk type. The ICAAP
methodology captures at least ten years of historical volatility,
produced with a 99% confidence level. Methodologies are
reviewed by NatWest Group Model Risk and the results are
approved by the NatWest Group Technical Asset & Liability
Management Committee.
Non-traded market risk stress results are combined with those
for other risks into the capital plan presented to the Board. The
cross-risk capital planning process is conducted once a year,
with a planning horizon of five years. The scenario narratives
cover both regulatory scenarios and macroeconomic scenarios
identified by NatWest Group.
Vulnerability-based stress testing begins with the analysis of a
portfolio and expresses its key vulnerabilities in terms of
plausible, vulnerability scenarios under which the portfolio
would suffer material losses. These scenarios can be historical,
macroeconomic or forward-looking/hypothetical. Vulnerability-
based stress testing is used for internal management
information and is not subject to limits. The results for relevant
scenarios are reported to senior management.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
17
Risk management framework continued
Internal scenarios
During 2021, NatWest Group continuously refined and reviewed
a series of internal scenarios – benchmarked against the Bank
of England’s illustrative scenario – as the impact of COVID-19
evolved, including actual and potential effects on economic
fundamentals. These scenarios included:

The impact of travel restrictions, social distancing policies,
self-isolation and sickness on GDP, employment and
consumer spending.

The impacts on business investment in critical sectors.

The effect on house prices, commercial real estate values
and major project finance.

The effect of government interventions such as the Job
Retention Scheme and the Coronavirus Business Interruption
Loan Scheme.
Applying the macro-scenarios to NatWest Group’s earnings,
capital, liquidity and funding positions did not result in a breach
of any regulatory thresholds.
Internal scenarios were also used to assess the potential
impacts of severe weather events on NatWest Group’s
operations in the UK and India.
Regulatory stress testing
In 2021, NatWest Group participated in the regulatory stress
tests conducted by the Bank of England following their
suspension in 2020 as a result of COVID-19. The scenario was
hypothetical in nature and does not represent a forecast of
NatWest Group’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 European Union on 31 December 2020, only
relevant European subsidiaries of NatWest Group will take part
in the European Banking Authority stress tests going forward.
NatWest Group itself will not participate.
NatWest Group also took part in the Bank of England’s Climate
Biennial Exploratory Scenario (CBES). This exercise was
designed to assess the resilience of 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 which the transition to a
net-zero emissions economy gets underway with carbon taxes
and associated policies intensifying gradually), Late Action (in
which the transition is delayed until 2031, with a sudden
increase in the intensity of carbon taxes and climate policy
leading to a recession) and No Additional Action (in which no
new climate policies are introduced and the physical impacts of
climate change are most severe). The Bank of England is
expected to publish aggregate findings in 2022 though, given
the exploratory nature of the exercise, it will not use CBES to
set capital requirements.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
18
Credit risk
Definition
(audited)
Credit risk is the risk that customers and counterparties fail to
meet their contractual obligation to settle outstanding amounts.
Sources of risk
(audited)
The principal sources of credit risk for NWB Group are lending
and related undrawn commitments. Derivatives and securities
financing and debt securities are also a source of credit risk,
primarily related to Treasury activities for NWB Group. NWB
Group is also exposed to settlement risk through foreign
exchange and payments activities.
Governance
(audited)
The Credit Risk function provides oversight and challenge of
frontline credit risk management activities. Governance
activities include:

Defining credit risk appetite measures for the management
of concentration risk and credit policy to establish the key
causes of risk in the process of providing credit and the
controls that must be in place to mitigate them.

Approving and monitoring operational limits for business
segments and credit limits for customers.

Oversight of the first line of defence to ensure that credit
risk remains within the appetite set by the Board and that
controls are being operated adequately and effectively.

Assessing the adequacy of expected credit loss (ECL)
provisions including approving key IFRS 9 inputs (such as
significant increase in credit risk (SICR) thresholds) and any
necessary in-model and post model adjustments through
NatWest Group and business unit provisions and model
committees.

Development and approval of credit grading models.
Risk appetite
Credit risk appetite aligns to the strategic risk appetite set by
the Board and is set and monitored through risk appetite
frameworks tailored to the Group’s Personal and Wholesale
segments.
Personal
The Personal credit risk appetite framework sets limits that
control the quality and concentration of both existing and new
business for each relevant business segment. These risk
appetite measures consider the segments’ ability to grow
sustainably and the level of losses expected under stress. Credit
risk is further controlled through operational limits specific to
customer or product characteristics.
Wholesale
For Wholesale credit, the framework has been designed to
reflect factors that influence the ability to operate within risk
appetite. Tools such as stress testing and economic capital are
used to measure credit risk volatility and develop links between
the framework and risk appetite limits.
Four formal frameworks are used, classifying, measuring and
monitoring credit risk exposure across single name, sector and
country concentrations and product and asset classes with
heightened risk characteristics.
The framework is supported by a suite of transactional
acceptance standards that set out the risk parameters within
which businesses should operate.
Credit policy standards are in place for both the Wholesale and
Personal portfolios. They are expressed as a set of mandatory
controls.
Identification and measurement
Credit stewardship
(audited)
Risks are identified through relationship management and
credit stewardship of customers and portfolios. Credit risk
stewardship takes place throughout the customer relationship,
beginning with the initial approval. It includes the application of
credit assessment standards, credit risk mitigation and
collateral, ensuring that credit documentation is complete and
appropriate, carrying out regular portfolio or customer reviews
and problem debt identification and management.
Asset quality
(audited)
All credit grades map to an asset quality (AQ) scale, used for
financial reporting. This AQ scale is based on Basel probability
of defaults. Performing loans are defined as AQ1-AQ9 (where
the probability of default (PD) is less than 100%) and defaulted
non-performing loans as AQ10 or Stage 3 under IFRS 9 (where
the PD is 100%). Loans are defined as defaulted when the
payment status becomes 90 days past due, or earlier if there is
clear evidence that the borrower is unlikely to repay, for
example bankruptcy or insolvency.
Counterparty credit risk
Counterparty credit risk arises from the obligations of
customers under derivative and securities financing
transactions.
NWB Group mitigates counterparty credit risk through
collateralisation and netting agreements, which allow amounts
owed by NWB Group to a counterparty to be netted against
amounts the counterparty owes NWB Group.
Mitigation
Mitigation techniques, as set out in the appropriate credit
policies and transactional acceptance standards, are used in
the management of credit portfolios across NWB Group. These
techniques mitigate credit concentrations in relation to an
individual customer, a borrower group or a collection of related
borrowers. Where possible, customer credit balances are
netted against obligations. Mitigation tools can include
structuring a security interest in a physical or financial asset,
the use of credit derivatives including credit default swaps,
credit-linked debt instruments and securitisation structures, and
the use of guarantees and similar instruments (for example,
credit insurance) from related and third parties. Property is
used to mitigate credit risk across a number of portfolios, in
particular residential mortgage lending and commercial real
estate (CRE).
The valuation methodologies for collateral in the form of
residential mortgage property and CRE are detailed below.
Residential mortgages
– NWB Group takes collateral in the form
of residential property to mitigate the credit risk arising from
mortgages. NWB Group values residential property individually
during the loan underwriting process, either by obtaining an
appraisal by a suitably qualified appraiser (for example Royal
Institution of Chartered Surveyors (RICS)) or using a statistically
valid model.
In both cases, a sample of the valuation outputs
are periodically reviewed by an independent RICS qualified
appraiser. NWB Group updates residential property values
quarterly using the Office for National Statistics House Price
Index.
The current indexed value of the property is a component of
the ECL provisioning calculation.
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Annual Report and Accounts 2021
19
Credit risk continued
Commercial real estate valuations
– NWB Group has an
actively managed panel of chartered surveying firms that cover
the spectrum of geography and property sectors in which NWB
Group takes collateral. Suitable RICS registered valuers for
particular assets are typically contracted through a service
agreement to ensure consistency of quality and advice.
Valuations are generally commissioned when an asset is taken
as security; a material increase in a facility is requested; or a
default event is anticipated or has occurred. In the UK, an
independent third-party market indexation is applied to update
external valuations once they are more than a year old and
every three years, a formal independent valuation review is
commissioned.
Assessment and monitoring
Practices for credit stewardship – including credit assessment,
approval and monitoring as well as the identification and
management of problem debts – differ between the Personal
and Wholesale portfolios.
Personal
Personal customers are served through a lending approach
that entails offering a large number of small-value loans. To
ensure that these lending decisions are made consistently, NWB
Group analyses internal credit information as well as external
data supplied by credit reference agencies (including historical
debt servicing behaviour of customers with respect to both
NWB Group and other lenders). NWB Group then sets its
lending rules accordingly, developing different rules for
different products.
The process is then largely automated, with each customer
receiving an individual credit score that reflects both internal
and external behaviours and this score is compared with the
lending rules set. For relatively high-value, complex personal
loans, including some residential mortgage lending, specialist
credit managers make the final lending decisions. These
decisions are made within specified delegated authority limits
that are issued dependent on the experience of the individual.
Underwriting standards and portfolio performance are
monitored on an ongoing basis to ensure they remain adequate
in the current market environment and are not weakened
materially to sustain growth.
The actual performance of each portfolio is tracked relative to
operational limits. The limits apply to a range of credit risk-
related measures including projected credit default rates across
products and the loan-to-value (LTV) ratio of the mortgage
portfolios. Where operational limits identify areas of concern
management action is taken to adjust credit or business
strategy.
Wholesale
Wholesale customers – including corporates, banks and other
financial institutions – are grouped by industry sectors and
geography as well as by product/asset class and are managed
on an individual basis. Customers are aggregated as a single
risk when sufficiently interconnected.
A credit assessment is carried out before credit facilities are
made available to customers. The assessment process is
dependent on the complexity of the transaction. Credit
approvals are subject to environmental, social and governance
risk policies which restrict exposure to certain highly carbon
intensive industries as well as those with potentially heightened
reputational impacts. Customer specific climate risk
commentary is now mandatory.
In response to COVID-19, a new framework was introduced to
categorise clients in a consistent manner across the Wholesale
portfolio, based on the effect of COVID-19 on their financial
position and outlook in relation to the sector risk appetite. This
framework has been retained and updated to consider viability
impacts beyond those directly related to COVID-19 and
classification via the framework is now mandatory and must be
refreshed annually. The framework extends to all Wholesale
borrowing customers and supplements the Risk of Credit Loss
framework in assessing whether customers exhibit a SICR, if
support is considered to be granting forbearance and the time
it would take for customers to return to operating within
transactional acceptance standards. Tailored approaches were
also introduced for business banking, commercial real estate
and financial institution customers.
For lower risk transactions below specific thresholds, credit
decisions can be approved through self-sanctioning within the
business. This process is facilitated through an auto-decision
making system, which utilises scorecards, strategies and policy
rules. Such credit decisions must be within the approval
authority of the relevant business approver.
For all other transactions credit is only granted to customers
following joint approval by an approver from the business and
the credit risk function or by two credit officers. The joint
business and credit approvers act within a delegated approval
authority under the Wholesale Credit Authorities Framework
Policy. The level of delegated authority held by approvers is
dependent on their experience and expertise with only a small
number of senior executives holding the highest approval
authority. Both business and credit approvers are accountable
for the quality of each decision taken, although the credit risk
approver holds ultimate sanctioning authority.
Transactional acceptance standards provide detailed
transactional lending and risk acceptance metrics and
structuring guidance. As such, these standards provide a
mechanism to manage risk appetite at the
customer/transaction level and are supplementary to the
established credit risk appetite.
Credit grades and loss given default (LGD) are reviewed and if
appropriate reapproved annually. The review process assesses
borrower performance, including reconfirmation or adjustment
of risk parameter estimates; the adequacy of security;
compliance with terms and conditions; and refinancing risk.
Problem debt management
Personal
Early problem identification
Pre-emptive triggers are in place to help identify customers
that may be at risk of being in financial difficulty. These triggers
are both internal, using NWB Group’s data, and external using
information from credit reference agencies. Proactive contact is
then made with the customer to establish if they require help
with managing their finances. By adopting this approach, the
aim is to prevent a customer’s financial position deteriorating
which may then require intervention from the Collections and
Recoveries teams.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
20
Credit risk continued
Personal customers experiencing financial difficulty are
managed by the Collections team. If the Collections team is
unable to provide appropriate support after discussing suitable
options with the customer, management of that customer
moves to the Recoveries team.
If at any point in the collections
and recoveries process, the customer is identified as being
potentially vulnerable, the customer will be separated from the
regular process and supported by a specialist team to ensure
the customer receives appropriate support for their
circumstances.
Collections
When a customer exceeds an agreed limit or misses a regular
monthly payment the customer is contacted by NWB Group and
requested to remedy the position. If the situation is not
regularised then, where appropriate, the Collections team will
become more involved and the customer will be supported by
skilled debt management staff who endeavour to provide
customers with bespoke solutions. Solutions include short-term
account restructuring, refinance loans and forbearance which
can include interest suspension and ‘breathing space’. In the
event that an affordable/sustainable agreement with a customer
cannot be reached, the debt will transition to the Recoveries
team. For provisioning purposes, under IFRS 9, exposure to
customers managed by the Collections team is categorised as
Stage 2 and subject to a lifetime loss assessment, unless it is 90
days past due or has an interest non-accrual status, in which
case it is categorised as Stage 3.
Recoveries
The Recoveries team will issue a notice of intention to default to
the customer and, if appropriate, a formal demand, while also
registering the account with credit reference agencies where
appropriate. Following this, the customer’s debt may then be
placed with a third-party debt collection agency, or alternatively
a solicitor, in order to agree an affordable repayment plan with
the customer. An option that may also be considered, is the sale
of unsecured debt. Exposures subject to formal debt recovery
are defaulted and, under IFRS 9, categorised as Stage 3.
Wholesale
Early problem identification
Each segment and sector have defined early warning indicators
to identify customers experiencing financial difficulty, and to
increase monitoring if needed. Early warning indicators may be
internal, such as a customer’s bank account activity, or
external, such as a publicly-listed customer’s share price. If
early warning indicators show a customer is experiencing
potential or actual difficulty, or if relationship managers or credit
officers identify other signs of financial difficulty, they may
decide to classify the customer within the Risk of Credit Loss
framework.
Risk of Credit Loss framework
The framework focuses on Wholesale customers whose credit
profiles have deteriorated materially since origination. Expert
judgment is applied by experienced credit risk officers to classify
cases into categories that reflect progressively deteriorating
credit risk to NWB Group. There are two classifications in the
framework that apply to non-defaulted customers – Heightened
Monitoring and Risk of Credit Loss. For the purposes of
provisioning, all exposures subject to the framework are
categorised as Stage 2 and subject to a lifetime loss assessment.
The framework also applies to those customers that have met
NWB Group’s default criteria (AQ10 exposures). Defaulted
exposures are categorised as Stage 3 impaired for provisioning
purposes.
Heightened Monitoring customers are performing customers
that have met certain characteristics, which have led to
significant credit deterioration. Collectively, characteristics
reflect circumstances that may affect the customer’s ability to
meet repayment obligations. Characteristics include trading
issues, covenant breaches, material PD downgrades and past
due facilities. Heightened Monitoring customers require pre-
emptive actions (outside the customer’s normal trading
patterns) to return or maintain their facilities within NWB
Group’s current risk appetite prior to maturity.
Risk of Credit Loss customers are performing customers that
have met the criteria for Heightened Monitoring and also pose a
risk of credit loss to NWB Group in the next 12 months should
mitigating action not be taken or not be successful.
Once classified as either Heightened Monitoring or Risk of Credit
Loss, a number of mandatory actions are taken in accordance
with policies. Actions include a review of the customer’s credit
grade, facility and security documentation and the valuation of
security. Depending on the severity of the financial difficulty and
the size of the exposure, the customer relationship strategy is
reassessed by credit officers, by specialist credit risk or
relationship management units in the relevant business, or by
Restructuring.
Agreed customer management strategies are regularly
monitored by both the business and credit teams. The largest
Risk of Credit Loss exposures are regularly reviewed by a Risk
of Credit Loss forum. The forum members are experienced
credit, business and restructuring specialists. The purpose of the
forum is to review and challenge the strategies undertaken for
customers that pose the largest risk of credit loss to NWB
Group.
Appropriate corrective action is taken when circumstances
emerge that may affect the customer’s ability to service its debt
(refer to Heightened Monitoring characteristics). Corrective
actions may include granting a customer various types of
concessions. Any decision to approve a concession will be a
function of specific appetite, the credit quality of the customer,
the market environment and the loan structure and security. All
customers granted forbearance are classified Heightened
Monitoring as a minimum.
Other potential outcomes of the relationship review are to:
remove the customer from the Risk of Credit Loss framework,
offer additional lending and continue monitoring, transfer the
relationship to Restructuring if appropriate, or exit the
relationship.
The Risk of Credit Loss framework does not apply to problem
debt management for business banking customers. These
customers are, where necessary, managed by specialist
problem debt management teams, depending on the size of
exposure or by the business banking recoveries team where a
loan has been impaired.
Restructuring
Where customers are categorised as Risk of Credit Loss and the
lending exposure is above £1 million, relationships are supported
by the Restructuring team. The objective of Restructuring is to
protect NWB Group’s capital. Restructuring does this by working
with corporate and commercial customers in financial difficulty
to help them understand their options and how their
restructuring or repayment strategies can be delivered.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
21
Credit risk continued
Helping the customer return to financial health and restoring a
normal banking relationship is always the preferred outcome,
however, where a solvent outcome is not possible, insolvency
may be considered as a last resort.
Restructuring will always aim to recover capital fairly and
efficiently. Throughout Restructuring’s involvement, the
mainstream relationship manager will remain an integral part of
the customer relationship. Restructuring’s work helps NWB
Group remain safe and sustainable, contributing to its ability to
champion potential.
Forbearance
(audited)
Forbearance takes place when a concession is made on the
contractual terms of a loan/debt in response to a customer’s
financial difficulties.
The aim of forbearance is to support and restore the customer
to financial health while minimising risk. To ensure that
forbearance is appropriate for the needs of the customer,
minimum standards are applied when assessing, recording,
monitoring and reporting forbearance.
A credit exposure may be forborne more than once, generally
where a temporary concession has been granted and
circumstances warrant another temporary or permanent
revision of the loan’s terms.
Loans are reported as forborne until they meet the exit criteria
as detailed in the appropriate regulatory guidance. These
include being classified as performing for two years since the
last forbearance event, making regular repayments and the
loan/debt being less than 30 days past due.
Types of forbearance
Personal
In the Personal portfolio, forbearance may involve payment
concessions and loan rescheduling (including extensions in
contractual maturity) and capitalisation of arrears. Forbearance
support is provided for both mortgages and unsecured lending.
Wholesale
In the Wholesale portfolio, forbearance may involve covenant
waivers, amendments to margins, payment concessions and
loan rescheduling (including extensions in contractual maturity),
capitalisation of arrears, and debt forgiveness or debt-for-equity
swaps.
Monitoring of forbearance
Personal
For Personal portfolios, forborne loans are separated and
regularly monitored and reported while the forbearance
strategy is implemented, until they exit forbearance.
Wholesale
In the Wholesale portfolio, customer PDs and facility LGDs are
reassessed prior to finalising any forbearance arrangement. The
ultimate outcome of a forbearance strategy is highly dependent
on the co-operation of the borrower and a viable business or
repayment outcome. Where forbearance is no longer
appropriate, NWB Group will consider other options such as the
enforcement of security, insolvency proceedings or both,
although these are options of last resort.
Provisioning requirements on forbearance are detailed in the
Provisioning for forbearance section.
Credit grading models
Credit grading models is the collective term used to describe all
models, frameworks and methodologies used to calculate PD,
exposure at default (EAD), LGD, maturity and the production of
credit grades.
Credit grading models are designed to provide:

An assessment of customer and transaction characteristics.

A meaningful differentiation of credit risk.

Accurate internal default rate, loss and exposure estimates
that are used in the capital calculation or wider risk
management purposes.
Impairment, provisioning and write-offs
(audited)
In the overall assessment of credit risk, impairment provisioning
and write-offs are used as key indicators of credit quality.
NWB Group’s IFRS 9 provisioning models, which use existing
Basel models as a starting point, incorporate term structures
and forward-looking information. Regulatory conservatism
within the Basel models has been removed as appropriate to
comply with the IFRS 9 requirement for unbiased ECL estimates.
Five key areas may materially influence the measurement of
credit impairment under IFRS 9 – two of these relate to model
build and three relate to model application:

Model build:

The determination of economic indicators that have most
influence on credit loss for each portfolio and the severity
of impact (this leverages existing stress testing models
which are reviewed annually).

The build of term structures to extend the determination of
the risk of loss beyond 12 months that will influence the
impact of lifetime loss for exposures in Stage 2.

Model application:

The assessment of the SICR and the formation of a
framework capable of consistent application.

The determination of asset lifetimes that reflect
behavioural characteristics while also representing
management actions and processes (using historical data
and experience).

The choice of forward-looking economic scenarios and
their respective probability weights
Refer to Accounting policies 11 for further details.
IFRS 9 ECL model design principles
(audited)
Modelling of ECL for IFRS 9 follows the conventional approach
to divide the estimation of credit losses into its component parts
of PD, LGD and EAD.
To meet IFRS 9 requirements, the PD, LGD and EAD parameters
differ from their Pillar 1 internal ratings based counterparts in
the following aspects:

Unbiased – material regulatory conservatism has been
removed from IFRS 9 parameters to produce unbiased
estimates.

Point-in-time – IFRS 9 parameters reflect actual economic
conditions at the reporting date instead of long-run average
or downturn conditions.

Forward-looking – IFRS 9 PD estimates and, where
appropriate, EAD and LGD estimates reflect forward-looking
economic conditions.

Lifetime measurement – IFRS 9 PD, LGD and EAD are
provided as multi-period term structures up to exposure
lifetimes instead of over a fixed one-year horizon.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
22
Credit risk continued
IFRS 9 requires that at each reporting date, an entity shall
assess whether the credit risk on an account has increased
significantly since initial recognition. Part of this assessment
requires a comparison to be made between the current lifetime
PD (i.e. the PD over the remaining lifetime at the reporting date)
and the equivalent lifetime PD as determined at the date of
initial recognition.
For assets originated before IFRS 9 was introduced, comparable
lifetime origination PDs did not exist. These have been
retrospectively created using the relevant model inputs
applicable at initial recognition.
PD estimates
Personal models
Personal PD models use the Exogenous, Maturity and Vintage
(EMV) approach to model default rates. The EMV approach
separates portfolio default risk trends into three components:
vintage effects (quality of new business over time), maturity
effects (changes in risk relating to time on book) and exogenous
effects (changes in risk relating to changes in macro-economic
conditions). The EMV methodology has been widely adopted
across the industry because it enables forward-looking
economic information to be systematically incorporated into PD
estimates.
Wholesale models
Wholesale PD models use a point-in-time/through-the-cycle
framework to convert one-year regulatory PDs into point-in-
time estimates that reflect economic conditions at the reporting
date. The framework utilises credit cycle indices (CCIs) for a
comprehensive set of region/industry segments. Further detail
on CCIs is provided in the Economic loss drivers section.
One year point-in-time PDs are extended to forward-looking
lifetime PDs using a conditional transition matrix approach and
a set of econometric forecasting models.
LGD estimates
The general approach for the IFRS 9 LGD models is to leverage
corresponding Basel LGD models with bespoke adjustments to
ensure estimates are unbiased and, where relevant, forward-
looking.
Personal
Forward-looking information has only been incorporated for the
secured portfolios, where changes in property prices can be
readily accommodated. Analysis has shown minimal impact of
economic conditions on LGDs for the other Personal portfolios.
Wholesale
Forward-looking economic information is incorporated into LGD
estimates using the existing CCI framework. For low default
portfolios, including sovereigns and banks, loss data is too
scarce to substantiate estimates that vary with economic
conditions. Consequently, for these portfolios, LGD estimates
are assumed to be constant throughout the projection horizon.
EAD estimates
Personal
The IFRS 9 Personal modelling approach for EAD is dependent
on product type.

Revolving products use the existing Basel models as a basis,
with appropriate adjustments incorporating a term structure
based on time to default.

Amortising products use an amortising schedule, where a
formula is used to calculate the expected balance based on
remaining terms and interest rates.

There is no EAD model for Personal loans. Instead, debt flow
(i.e. combined PD x EAD) is modelled directly.
Analysis has indicated that there is minimal impact on EAD
arising from changes in the economy for all Personal portfolios
except mortgages. Therefore, forward-looking information is
only incorporated in the mortgage EAD model (through forecast
changes in interest rates).
Wholesale
For Wholesale, EAD values are projected using product specific
credit conversion factors (CCFs), closely following the product
segmentation and approach of the respective Basel model.
However, the CCFs are estimated over multi-year time horizons
and contain no regulatory conservatism or downturn
assumptions.
No explicit forward-looking information is incorporated, on the
basis of analysis showing the temporal variation in CCFs is
mainly attributable to changes in exposure management
practices rather than economic conditions.
Governance and post model adjustments
(audited)
The IFRS 9 PD, EAD and LGD models are subject to NWB
Group’s model risk policy that stipulates periodic model
monitoring, periodic re-validation and defines approval
procedures and authorities according to model materiality.
Various post model adjustments were applied where
management judged they were necessary to ensure an
adequate level of overall ECL provision. All post model
adjustments were subject to formal approval through
provisioning governance, and were categorised as follows
(business level commentary is provided below):

Deferred model calibrations – ECL adjustments where PD
model monitoring indicated that actual defaults were below
estimated levels but where it was judged that an implied
ECL release was not supportable due to the influence of
government support schemes. As a consequence, any
potential ECL release was deferred and retained on the
balance sheet.

Economic uncertainty – ECL adjustments primarily arising
from uncertainties associated with multiple economic
scenarios (also for 2020) and credit outcomes as a result of
the effect of COVID-19 and the consequences of
government support schemes. In both cases, management
judged that additional ECL was required until further credit
performance data became available on the behavioural and
loss consequences of COVID-19.

Other adjustments – ECL adjustments where it was judged
that the modelled ECL required to be amended.
Post model adjustments will remain a key focus area of NWB
Group’s ongoing ECL adequacy assessment process. A holistic
framework has been established including reviewing a range of
economic data, external benchmark information and portfolio
performance trends, particularly with more observable
outcomes from the unwinding of COVID-19 support schemes. A
key part of the assessment is also understanding the current
levels of ECL coverage (portfolio by portfolio) against pre-
COVID-19 levels, recognising changes in franchise
portfolio/sector mix.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
23
Credit risk continued
ECL post model adjustments
(audited)
The table below shows ECL post model adjustments.
Retail Banking
Wholesale
Mortgages
Other
Commercial
Other
Total
2021
£m
£m
£m
£m
£m
Deferred model calibrations
48
80
51
—
179
Economic uncertainty
46
80
285
5
416
Other adjustments
26
—
2
—
28
Total
120
160
338
5
623
Of which:
- Stage 1
8
5
10
—
23
- Stage 2
99
134
328
5
566
- Stage 3
13
21
—
—
34
2020
Deferred model calibrations
19
8
11
—
38
Economic uncertainty
62
64
387
9
522
Other adjustments
12
—
15
—
27
Total
93
72
413
9
587
Of which:
- Stage 1
17
6
28
—
51
- Stage 2
70
64
385
9
528
- Stage 3
6
2
—
—
8

While in aggregate the post model adjustments have only
seen a modest increase since 31 December 2020, the shifts
across and within categories are more notable. These
reflect:

A modest reduction in the judgmental uncertainty post
model adjustments in the Wholesale portfolios, which was
directionally in line with the portfolio quality and some
reduction in uncertainty about recovery in affected sectors
in the economy.

In the Retail Banking portfolio, to reflect a risk that default
levels were being unsustainably suppressed due to the
various temporary government led support schemes (with
the sustainability requiring further outcome data),
management effected a hold back of further modelled
releases judgmentally through the deferred model
calibrations category.

Retail Banking
– The post model adjustment for deferred
model calibrations increased to £128 million from £27
million at 31 December 2020. This reflected management’s
continued judgment that the implied ECL decreases that
continued to manifest themselves through the standard PD
model monitoring process during the year, were not fully
supportable. Management retained this view on the basis
that underlying portfolio performance is believed to be
underpinned by government support schemes and further
outcome data is required on the level of default
suppression.

The post model adjustment for economic uncertainty
remained elevated at £126 million. The total included an
ECL uplift of £22 million on a subset of customers who had
accessed payment holiday support where their risk profile
was identified as relatively high risk. In addition, NWB Group
continued to retain a holdback of a modelled ECL release of
£55 million, again due to the delayed default emergence
reflective of the various customer support schemes (£12
million related to mortgages and £43 million related to
unsecured lending). The year end overlay position also
included an ECL uplift on buy-to-let mortgages of £10
million to mitigate the risk of a disproportionate credit
deterioration in challenging economic circumstances.

Other judgmental overlays increased due to the
introduction of a new post model adjustment of £11 million
to capture the impact of potential cladding risk in the
portfolio.

Commercial Banking
– The post model adjustment for
economic uncertainty reduced from £387 million to £285
million during the year. It included an overlay of £251
million reflecting continued concern that the unprecedented
nature of COVID-19 might indicate that default level may be
higher in future periods above that currently expected. In
addition, it reflected a risk that government support
schemes during COVID-19 could have suppressed defaults
that may materialise in future periods above expected
default levels. The reduction during the year was mainly
due to a sustained improvement in underlying credit metrics
which resulted in a decrease in Stage 2 assets and reduced
levels of uncertainty around economic outcome.

The post model adjustment for deferred model calibrations
on the business banking portfolio increased to £51 million
during the year. This reflected management’s judgment that
the continued beneficial modelling impact, and implied ECL
decrease, remained unsupportable while portfolio
performance was being underpinned by the various support
schemes.

Other
– The post model adjustments held in other
businesses were for similar reasons as those described
above.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
24
Credit risk continued
Exposures that are considered significantly credit deteriorated
since initial recognition are classified in Stage 2 and assessed
for lifetime ECL measurement (exposures not considered
deteriorated carry a 12 month ECL). NWB Group has adopted a
framework to identify deterioration based primarily on relative
movements in lifetime PD supported by additional qualitative
backstops. The principles applied are consistent across NWB
Group and align to credit risk management practices, where
appropriate.
The framework comprises the following elements:

IFRS 9 lifetime PD assessment (the primary driver)
– on
modelled portfolios, the assessment is based on the relative
deterioration in forward-looking lifetime PD and is assessed
monthly. To assess whether credit deterioration has
occurred, the residual lifetime PD at balance sheet date
(which PD is established at date of initial recognition (DOIR))
is compared to the current PD. If the current lifetime PD
exceeds the residual origination PD by more than a
threshold amount, deterioration is assumed to have
occurred and the exposure transferred into Stage 2 for a
lifetime loss assessment. For Wholesale, a doubling of PD
would indicate a SICR subject to a minimum PD uplift of
0.1%. For Personal portfolios, the criteria vary by risk band,
with lower risk exposures needing to deteriorate more than
higher risk exposures, as outlined in the following table:

Qualitative high-risk backstops
– the PD assessment is
complemented with the use of qualitative high-risk
backstops to further inform whether significant
deterioration in lifetime risk of default has occurred. The
qualitative high-risk backstop assessment includes the use
of the mandatory 30+ days past due backstop, as
prescribed by IFRS 9 guidance, and other features such as
forbearance support, Wholesale exposures managed within
the Risk of Credit Loss framework, and adverse credit
bureau results for Personal customers. Where a Personal
customer was granted a payment holiday (also referred to
as a payment deferral) in response to COVID-19, they were
not automatically transferred into Stage 2. However, a
subset of Personal customers who had accessed payment
holiday support, and where their risk profile was identified
as relatively high risk, were collectively migrated to Stage 2
(if not in Stage 2 already). Any support provided beyond
completion of the second payment holiday was considered
forbearance.

Persistence (Personal and business banking customers only)
– the persistence rule ensures that accounts which have met
the criteria for PD driven deterioration are still considered to
be significantly deteriorated for three months thereafter.
This additional rule enhances the timeliness of capture in
Stage 2. The persistence rule is applied to PD driven
deterioration only.
Significant increase in credit risk (SICR)
(audited)
The criteria are based on a significant amount of empirical
analysis and seek to meet three key objectives:

Criteria effectiveness – the criteria should be effective in
identifying significant credit deterioration and prospective
default population.

Stage 2 stability – the criteria should not introduce
unnecessary volatility in the Stage 2 population.

Portfolio analysis – the criteria should produce results which
are intuitive when reported as part of the wider credit
portfolio.
Provisioning for forbearance
(audited)
Personal
The methodology used for provisioning in respect of Personal
forborne loans will differ depending on whether the loans are
performing or non-performing and which business is managing
them due to local market conditions.
Granting forbearance will only change the arrears status of the
loan in specific circumstances, which can include capitalisation
of principal and interest in arrears, where the loan may be
returned to the performing book if the customer has
demonstrated an ability to meet regular payments and is likely
to continue to do so.
The loan would continue to be reported as forborne until it
meets the exit criteria set out by the appropriate regulatory
guidance.
Additionally, for some forbearance types, a loan may be
transferred to the performing book if a customer makes
payments that reduce loan arrears below 90 days (Retail
Banking collections function).
For ECL provisioning, all forborne but performing exposures
are categorised as Stage 2 and are subject to a lifetime loss
provisioning assessment. Where the forbearance treatment
includes the cessation of interest on the customer balance (i.e.
non-accrual), this will be treated as a Stage 3 default.
For non-performing forborne loans, the Stage 3 loss
assessment process is the same as for non-forborne loans.
In the absence of any other forbearance or SICR triggers,
customers granted COVID-19 related payment holidays were
not considered forborne. However, any support provided
beyond completion of a second payment holiday is considered
forbearance.
Wholesale
Provisions for forborne loans are assessed in accordance with
normal provisioning policies. The customer’s financial position
and prospects – as well as the likely effect of the forbearance,
including any concessions granted, and revised PD or LGD
gradings – are considered in order to establish whether an
impairment provision increase is required.
Wholesale loans granted forbearance are individually credit
assessed in most cases. Performing loans subject to
forbearance treatment are categorised as Stage 2 and subject
to a lifetime loss assessment.
Personal
risk bands
PD bandings (based
on residual lifetime
PD calculated at
DOIR)
PD deterioration
threshold criteria
Risk band A
<0.762%
PD@DOIR + 1%
Risk band B
<4.306%
PD@DOIR + 3%
Risk band C
>=4.306%
1.7 x PD@DOIR
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
25
Credit risk continued
Forbearance may result in the value of the outstanding debt
exceeding the present value of the estimated future cash flows.
This difference will lead to a customer being classified as non-
performing.
In the case of non-performing forborne loans, an individual loan
impairment provision assessment generally takes place prior to
forbearance being granted. The amount of the loan impairment
provision may change once the terms of the forbearance are
known, resulting in an additional provision charge or a release
of the provision in the period the forbearance is granted.
The transfer of Wholesale loans from impaired to performing
status follows assessment by relationship managers and credit.
When no further losses are anticipated and the customer is
expected to meet the loan’s revised terms, any provision is
written-off or released and the balance of the loan returned to
performing status. This is not dependent on a specified time
period and follows the credit risk manager’s assessment.
Customers seeking COVID-19 related support, including
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 considered to have been granted
forbearance.
Asset lifetimes
(audited)
The choice of initial recognition and asset duration is another
critical judgment in determining the quantum of lifetime losses
that apply.

The date of initial recognition reflects the date that a
transaction (or account) was first recognised on the balance
sheet; the PD recorded at that time provides the baseline
used for subsequent determination of SICR as detailed
above.

For asset duration, the approach applied (in line with IFRS 9
requirements) is:

Term lending – the contractual maturity date, reduced for
behavioural trends where appropriate (such as, expected
prepayment and amortisation).

Revolving facilities – for Personal portfolios (except credit
cards), asset duration is based on behavioural life and this is
normally greater than contractual life (which would typically
be overnight). For Wholesale portfolios, asset duration is
based on annual customer review schedules and will be set
to the next review date.
In the case of credit cards, the most significant judgment is to
reflect the operational practice of card reissuance and the
associated credit assessment as enabling a formal re-
origination trigger. As a consequence, a capped lifetime
approach of up to 36 months is used on credit card balances. If
the approach was uncapped the ECL impact is estimated at
approximately £60 million (2020 – £85 million). However, credit
card balances originated under the 0% balance transfer
product, and representing approximately 13% of performing
card balances, have their ECL calculated on a behavioural
lifetime approach as opposed to being capped at a maximum
of three years.
The capped approach reflects NWB Group’s practice of a
credit-based review of customers prior to credit card issuance
and complies with IFRS 9. Benchmarking information indicates
that peer UK banks use behavioural approaches in the main for
credit card portfolios with average durations between three
and ten years. Across Europe, durations are shorter and are, in
some cases, as low as one year.
Economic loss drivers
(audited)
Introduction
The portfolio segmentation and selection of economic loss
drivers for IFRS 9 follow closely the approach used in stress
testing. To enable robust modelling the forecasting models for
each portfolio segment (defined by product or asset class and
where relevant, industry sector and region) are based on a
selected, small number of economic factors, (typically three to
four) that best explain the temporal variations in portfolio loss
rates. The process to select economic loss drivers involves
empirical analysis and expert judgment.
The most material economic loss drivers are shown in the table
below.
Portfolio
Economic loss drivers
UK retail
mortgages
UK unemployment rate, sterling swap
rate, UK house price index, UK household
debt to income
UK retail
unsecured
UK unemployment rate, sterling swap
rate, UK household debt to income
UK large
corporates
World GDP, UK unemployment rate,
sterling swap rate, stock price index
UK commercial
UK GDP, UK unemployment rate, sterling
swap rate
UK commercial
real estate
UK GDP, UK commercial property price
index, sterling swap rate, stock price index
(1)
This is not an exhaustive list of economic loss drivers but shows the most material
drivers for the most significant portfolios.
Economic scenarios
At 31 December 2021, the range of anticipated future
economic conditions was defined by a set of four internally
developed scenarios and their respective probabilities. In
addition to the base case, they comprised upside, downside
and extreme downside scenarios. The scenarios primarily
reflected a range of outcomes for the path of COVID-19 as well
as recovery, and the associated effects on labour and asset
markets.
The four scenarios were deemed appropriate in capturing the
uncertainty in economic forecasts and the non-linearity in
outcomes under different scenarios. The scenarios were
developed to provide sufficient coverage across potential
changes in unemployment, asset price and the degree of
permanent damage to the economy, around which there are
pronounced levels of uncertainty at this stage.
Upside
– This scenario assumes a very strong recovery through
2022 as consumers dip into excess savings built up over the
last two years. The labour market remains resilient, with the
unemployment rate falling below pre-COVID-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 performance.
Base case
– COVID-19 related risks remain contained. After a
strong recovery in 2021, the growth moderates in 2022. Most
of the furloughed workers can go back to their existing job or
find a new job very quickly, with the unemployment rate
reaching 4.1% by the end of 2022. Inflation initially increases
but retreats over 2022. Interest rates are raised, starting in
early 2022. There is a gradual cool down in the housing market
but activity is still at healthy levels.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
26
Credit risk continued
Downside
– This scenario assumes a reversal in recovery as
inflation build up leads to a lessening 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 with
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 labour 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 similar to that as at 31
December 2020. Previously, NWB Group used five discrete
scenarios to characterise the distribution of risks in the
economic outlook. For 2021, the four scenarios were deemed
appropriate in capturing the uncertainty in economic forecasts
and the non-linearity in outcomes under different scenarios.
These four scenarios were developed to provide sufficient
coverage across potential rises in unemployment, inflation,
asset price falls and the degree of permanent damage to the
economy, around which there remains pronounced levels of
uncertainty.
The tables and commentary below provide details of the key
economic loss drivers under the four scenarios.
The main macroeconomic variables for each of the four
scenarios used for ECL modelling are set out in the main
macroeconomic variables table below. The compound annual
growth rate (CAGR) for GDP is shown. It also shows the five-
year average for unemployment and the Bank of England base
rate. The house price index and commercial real estate figures
show the total change in each asset over five years.
Economic loss drivers
(audited)
Main macroeconomic variables
2021
2020
Extreme
Extreme
Upside
Base case
Downside
downside
Upside
Base case
Downside
downside
Five-year summary
%
%
%
%
%
%
%
%
UK
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 - average
1.5
0.8
0.7
(0.5)
0.2
—
(0.1)
(0.5)
Commercial real estate price - total change
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
NWB Group’s approach to IFRS 9 multiple economic scenarios
(MES) involves selecting a suitable set of discrete scenarios to
characterise the distribution of risks in the economic outlook
and assigning appropriate probability weights. The scale of the
economic impact of COVID-19 and the range of recovery paths
necessitates a change of approach to assigning probability
weights from that used in recent updates. Prior to 2020, GDP
paths for NWB Group’s scenarios were compared against a set
of 1,000 model runs, following which a percentile in the
distribution was established that most closely corresponded to
the scenario.
Instead, NWB Group has subjectively applied probability weights,
reflecting expert views within NWB Group. The probability
weight assignment was judged to present good coverage to the
central scenarios and the potential for a robust recovery on the
upside and exceptionally challenging outcomes on the
downside. A 30% weighting was applied to the upside scenario,
a 45% weighting applied to the base case scenario, a 20%
weighting applied to the downside scenario and a 5% weighting
applied to the extreme downside scenario. NWB Group assessed
the downside risk posed by COVID-19 to be diminishing over the
course of 2021, with the vaccination roll-out and positive
economic data being observed since the gradual relaxing of
lockdown restrictions. NWB Group therefore judged it was
appropriate to apply a higher probability to upside-biased
scenarios than at 31 December 2020. However, compared to 31
December 2020, the base case has a higher weight reflecting
reduction in uncertainty as the path of economy recovery
became clearer.
The 25% weighting to the two downside scenarios gives
appropriate consideration to the threats posed to the recovery,
including inflation, supply and COVID-19-related risks. Balanced
against that is the adaptability of the UK economy to successive
waves of COVID-19, and the resilience of labour and asset
markets. The potential for further better than expected
outcomes is reflected in the 30% probability weighting applied to
the upside scenario.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
27
Credit risk continued
Economic loss drivers
75
80
85
90
95
100
105
110
115
Q4 2019
Q4 2020
Q4 2021
Q4 2022
Q4 2023
Q4 2024
Q4 2025
Q4 2026
Upside
Base
Downside
Extreme downside
UK gross domestic product
-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 2020
Q4 2021
Q4 2022
Q4 2023
Q4 2024
Q4 2025
Q4 2026
Upside
Base
Downside
Extreme downside
Bank of England base rate
%
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
28
Credit risk continued
Economic loss drivers
(audited)
Annual figures
GDP - annual growth
Extreme
Unemployment rate - annual average
Extreme
Upside
Base case
Downside
downside
Upside
Base case
Downside
downside
%
%
%
%
%
%
%
%
2021
7.0
7.0
7.0
7.0
2021
4.6
4.6
4.6
4.6
2022
8.1
5.0
1.5
(3.6)
2022
3.5
4.1
5.1
8.3
2023
2.1
1.6
2.4
4.1
2023
3.3
4.0
5.2
8.8
2024
1.2
0.9
1.6
1.2
2024
3.4
4.1
4.7
6.6
2025
1.2
1.3
1.4
1.4
2025
3.4
4.2
4.5
5.2
2026
1.2
1.5
1.6
1.5
2026
3.6
4.2
4.5
4.9
House price index - four quarter growth
Extreme
Commercial real estate price - four quarter growth
Extreme
Upside
Base case
Downside
downside
Upside
Base case
Downside
downside
%
%
%
%
%
%
%
%
2021
6.9
6.9
6.9
6.9
2021
8.4
8.4
8.4
8.4
2022
7.9
1.6
(2.9)
(20.4)
2022
10.2
4.4
(2.7)
(29.8)
2023
4.2
1.6
(0.2)
(2.6)
2023
3.4
1.9
4.2
17.2
2024
3.1
2.9
1.7
13.0
2024
1.7
0.2
1.7
5.2
2025
3.0
2.7
3.0
4.7
2025
0.6
(0.8)
0.3
3.5
2026
3.0
2.7
3.0
3.6
2026
(0.8)
(0.8)
(0.2)
3.2
Bank of England base rate - annual average
Extreme
Upside
Base case
Downside
downside
%
%
%
%
2021
0.10
0.10
0.10
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
Extreme
Downside
downside
Downside
downside
%
Quarter
%
Quarter
%
Quarter
%
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 management continued
NWB Group
Annual Report and Accounts 2021
29
Credit risk continued
Use of the scenarios in Personal lending
Personal lending follows a discrete scenario approach. The PD
and LGD values for each discrete scenario are calculated using
product specific econometric models. Each account has a PD
and LGD calculated as probability weighted averages across
the suite of economic scenarios.
Use of the scenarios in Wholesale lending
The Wholesale lending ECL methodology is based on the
concept of credit cycle indices (CCIs). The CCIs represent,
similar to the exogenous component in Personal, all relevant
economic loss drivers for a region/industry segment
aggregated into a single index value that describes the loss
rate conditions in the respective segment relative to its long-run
average. A CCI value of zero corresponds to loss rates at long-
run average levels, a positive CCI value corresponds to loss
rates below long-run average levels and a negative CCI value
corresponds to loss rates above long-run average levels.
The four economic scenarios are translated into forward-
looking projections of CCIs using a set of econometric models.
Subsequently the CCI projections for the individual scenarios
are averaged into a single central CCI projection according to
the given scenario probabilities. The central CCI projection is
then overlaid with an additional mean reversion assumption i.e.
that after reaching their worst forecast position the CCIs start
to gradually revert to their long-run average of zero.
Finally, ECL is calculated using a Monte Carlo approach by
averaging PD and LGD values arising from many CCI paths
simulated around the central CCI projection.
The rationale for the Wholesale approach is the long-standing
observation that loss rates in Wholesale portfolios tend to follow
regular cycles. This allows NWB Group to enrich the range and
depth of future economic conditions embedded in the final ECL
beyond what would be obtained from using the discrete macro-
economic scenarios alone.
Business banking, while part of the Wholesale segment, for
reporting purposes, utilises the Personal lending rather than the
Wholesale lending methodology.
UK economic uncertainty
Treatment of COVID-19 relief mechanisms
Use of COVID-19 relief mechanisms (for example, payment
holidays, CBILS and BBLS) does not automatically merit
identification of SICR and trigger a Stage 2 classification in
isolation. However, a subset of Personal customers who had
accessed payment holiday support, and where their risk profile
was identified as relatively high risk continue to be collectively
migrated into Stage 2 (if not already captured by other SICR
criteria).
For Wholesale customers, NWB Group continues to provide
support, where appropriate, to existing customers. Those who
are deemed either (a) to require a prolonged timescale to
return to within NWB Group’s risk appetite, (b) not to have
been viable pre-COVID-19, or (c) not to be able to sustain their
debt once COVID-19 is over, will trigger a SICR and, if
concessions are sought, be categorised as forborne, in line with
regulatory guidance. Payment holiday extensions beyond an
aggregate of 12 months in an 18 month period to cover
continuing COVID-19 business interruption are categorised as
forbearance, including for customers where no other SICR
triggers are present.
In February 2021, the British Business Bank announced details
of Pay As You Grow (PAYG) options for borrowers of BBLS.
The scheme options include the extension of lending terms,
periods of reduced repayments and six month payment
holidays. PAYG options are a feature of BBLS rather than a
concession granted by NWB Group. It is therefore not
automatically considered significant credit deterioration and a
Stage 2 trigger. NWB Group relies on both customer
attestations and existing credit monitoring procedures to
identify significant financial difficulty. Should signs of financial
stress be identified, a review is performed. If credit
deterioration is confirmed, existing problem debt management
journeys are followed and forbearance (if a concession is
granted) is marked in line with existing processes. This will
result in Stage 2 transfer.
Model monitoring and enhancement
The severe economic impact from COVID-19 and the ensuing
government support schemes have disrupted the normal
relationships between key economic loss drivers and credit
outcomes. While most government support schemes have now
been phased out and economic conditions are 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 monitoring shows general
overprediction across all key portfolios, i.e., observed default
rates still at or even below pre-COVID-19 levels despite
increased PD estimates from a deterioration in several key
economic variables. Model recalibrations to adjust for this
overprediction have been deferred based on the judgment that
default rate actuals are distorted due to government support.
In addition, to account for residual model uncertainty and the
risk of eventual default emergence hitherto supressed by
government support, lag assumptions of up to 12 months are
applied in the models. These assumptions are consistent with
and unchanged from previous disclosures in 2021, although
their effective impact gradually reduces over time.
Industry sector detail – Wholesale only
The economic impact of COVID-19 is highly differentiated by
industry sector, with hospitality and other contact-based
leisure, service, travel and passenger transport activities
significantly more affected than the overall economy. On the
other hand, the corporate and commercial econometric
forecasting models used in Wholesale are sector agnostic.
Sector performance was monitored throughout the year and
additional post model adjustments were recognised where a
risk of higher than expected future default levels, including their
timing and value, was identified.
Scenario sensitivity – Personal only
For the Personal lending portfolio, the forward-looking
components of the IFRS 9 PD models continue to be modified,
leveraging existing econometric models used in stress testing to
ensure that PDs appropriately reflect the forecasts for
unemployment and house prices in particular.
Additionally, post model ECL adjustments were made in
Personal to account for known model weaknesses pre-dating
COVID-19, pending the systematic re-development of the
underlying models.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
30
Credit risk continued
Government guarantees
In April 2021, the UK government launched the Recovery Loan
Scheme, replacing previous support schemes which are now
closed. Consistent with CBILS and the Coronavirus Large
Business Interruption Loan Scheme (CLBILS), the government
guarantee is 80%. NWB Group recognises lower LGDs for these
lending products as a result, with 0% applied to the
government-guaranteed part of the exposure. NWB Group does
not directly adjust the measurement of PD due to the
government guarantee and continues to move exposures into
Stage 2 and Stage 3 where a significant deterioration in credit
risk or a default is identified.
Measurement uncertainty and ECL sensitivity
analysis
(audited)
The recognition and measurement of ECL is complex and
involves the use of significant judgment and estimation,
particularly in times of economic volatility and uncertainty. This
includes the formulation and incorporation of multiple forward-
looking economic conditions into ECL to meet the measurement
objective of IFRS 9. The ECL provision is sensitive to the model
inputs and economic assumptions underlying the estimate.
The focus of the simulations is on ECL provisioning
requirements on performing exposures in Stage 1 and Stage 2.
The simulations are run on a stand-alone basis and are
independent of each other; the potential ECL impacts reflect
the simulated impact at 31 December 2021. Scenario impacts
on SICR should be considered when evaluating the ECL
movements of Stage 1 and Stage 2. In all scenarios the total
exposure was the same but exposure by stage varied in each
scenario.
Stage 3 provisions are not subject to the same level of
measurement uncertainty – default is an observed event as at
the balance sheet date. Stage 3 provisions therefore have not
been considered in this analysis.
The impact arising from the base case, upside, downside and
extreme downside scenarios has been simulated. These
scenarios are three of the four discrete scenarios used in the
methodology for Personal multiple economic scenarios as
described in the Economic loss drivers section. In the
simulations, NWB Group has assumed that the economic macro
variables associated with these scenarios replace the existing
base case economic assumptions, giving them a 100%
probability weighting and therefore serving as a single
economic scenario.
These scenarios have been applied to all modelled portfolios in
the analysis below, with the simulation impacting both PDs and
LGDs. Modelled post model adjustments present in the
underlying ECL estimates are also sensitised in line with the
modelled ECL movements, but those that were judgmental in
nature, primarily those for deferred model calibrations and
economic uncertainty, were not (refer to the Governance and
post model adjustments section). As expected, the scenarios
create differing impacts on ECL by portfolio and the impacts
are deemed reasonable. In this simulation, it is assumed that
existing modelled relationships between key economic variables
and loss drivers hold, but in practice other factors would also
have an impact, for example, potential customer behaviour
changes and policy changes by lenders that might impact on
the wider availability of credit.
NWB Group’s core criterion to identify a SICR is founded on PD
deterioration, as discussed above. Under the simulations, PDs
change and result in exposures moving between Stage 1 and
Stage 2 contributing to the ECL impact
.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
31
Credit risk continued
Measurement uncertainty and ECL sensitivity analysis
(audited)
Extreme
2021
Actual
Base case
Upside
Downside
downside
Stage 1 modelled exposure
(£m)
Retail Banking - mortgages
143,958
144,252
145,324
139,977
117,222
Retail Banking - unsecured
5,830
5,869
6,051
5,467
4,739
Wholesale - property
17,911
17,955
17,988
17,861
16,500
Wholesale - non-property
75,807
76,213
76,396
75,931
66,891
Stage 1 modelled ECL
(£m)
Retail Banking - mortgages
11
10
9
12
19
Retail Banking - unsecured
92
89
89
86
77
Wholesale - property
17
16
20
16
15
Wholesale - non-property
85
87
85
87
74
Stage 2 modelled exposure
(£m)
Retail Banking - mortgages
8,676
8,382
7,310
12,657
35,412
Retail Banking - unsecured
2,345
2,306
2,123
2,707
3,435
Wholesale - property
2,082
2,038
2,006
2,133
3,494
Wholesale - non-property
13,466
13,060
12,877
13,342
22,382
Stage 2 modelled ECL
(£m)
Retail Banking - mortgages
122
120
106
141
323
Retail Banking - unsecured
356
356
339
388
454
Wholesale - property
70
67
62
70
126
Wholesale - non-property
546
524
517
529
776
Stage 1 and Stage 2 modelled exposure
(£m)
Retail Banking - mortgages
152,634
152,634
152,634
152,634
152,634
Retail Banking - unsecured
8,175
8,175
8,174
8,174
8,174
Wholesale - property
19,993
19,993
19,994
19,994
19,994
Wholesale - non-property
89,273
89,273
89,273
89,273
89,273
Stage 1 and Stage 2 modelled ECL
(£m)
Retail Banking - mortgages
133
130
115
153
342
Retail Banking - unsecured
448
445
428
474
531
Wholesale - property
87
83
82
86
141
Wholesale - non-property
631
611
602
616
850
Stage 1 and Stage 2 coverage
(%)
Retail Banking - mortgages
0.09%
0.09%
0.08%
0.10%
0.22%
Retail Banking - unsecured
5.48%
5.44%
5.24%
5.80%
6.50%
Wholesale - property
0.44%
0.42%
0.41%
0.43%
0.71%
Wholesale - non-property
0.71%
0.68%
0.67%
0.69%
0.95%
0
Reconciliation to Stage 1 and Stage 2 ECL
(£m)
ECL on modelled exposures
1,299
1,269
1,227
1,329
1,864
ECL on non-modelled exposures
37
37
37
37
37
Total Stage 1 and Stage 2 ECL
1,336
1,306
1,264
1,366
1,901
Variance – (lower)/higher to actual total Stage 1 and Stage 2
ECL
(30)
(72)
30
565
(1)
Variations in future undrawn exposure values across the scenarios are modelled, however the exposure position reported is that used to calculate modelled ECL as at 31 December
2021 and therefore does not include variation in future undrawn exposure values.
(2)
Reflects ECL for all modelled exposure in scope for IFRS 9. The analysis excludes non-modelled portfolios and exposure relating to bonds and cash.
(3)
All simulations are run on a stand-alone basis and are independent of each other, with the potential ECL impact reflecting the simulated impact as at 31 December 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 NWB Group 2020 Annual Report and Accounts for 2020 comparatives
.

During 2021, both the Stage 2 size and overall modelled ECL
reduced as a result of the improved economic outlook and
scenario weightings, together with stable portfolio
performance. Judgmental ECL post model adjustments,
although reduced, continued to reflect residual economic
uncertainty with the expectation of increased defaults later in
2022 and beyond, now representing 25% of total ECL (2020 –
10%). These combined factors, in conjunction with a less
severe suite of economics in the 2021 extreme downside
scenario, contributed to a smaller range of ECL sensitivities
at 31 December 2021 compared to the 2020 year end.

If the economics were as negative as observed in the
extreme downside, total Stage 1 and Stage 2 ECL was
simulated to increase by £0.6 billion (approximately 42%). In
this scenario, Stage 2 exposure increased significantly and
was the key driver of the simulated ECL rise. The movement
in Stage 2 balances in the other simulations was less
significant.

In the Wholesale portfolios, the outcome range of scenarios,
except for the extreme downside, was relatively narrow. This
was due to the combined effect of the assumption that
government support schemes will delay defaults, mean
reversion of CCIs and that only in the extreme downside
CCIs do credit conditions deteriorate beyond their year-end
starting point
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
32
Credit risk continued
Single factor sensitivity
In addition to scenario sensitivity, NWB Group uses single factor
analysis to support its evaluation and governance. This covers
changes such as the variation of an individual input parameter
(economic or credit) or a change of scenario weightings. The
application of single factor analysis recognises the limitation
that it is not normal for one single factor to vary in isolation,
but can help identify possible risks in the credit portfolios.
At 31 December 2021, NWB Group considered the effect of
moving the unemployment peak in the base case from 4.1% to
7.5% in 2022 but without changing expectations in subsequent
years. This had the effect of increasing ECL requirement by
approximately 4.5% and 2.5% for the UK Retail and Wholesale
portfolios respectively. The lower effect on Wholesale portfolio
reflected that unemployment is not a significant loss driver for
property exposures nor some of NWB Group’s specialised
lending areas.
Measurement uncertainty and ECL
adequacy
The improvement in the economic outlook and scenarios used
in the IFRS 9 MES framework in 2021 resulted in a release of
modelled ECL. Given that continued uncertainty remains due to
COVID-19 despite the improved economic outlook, NWB Group
utilised a framework of quantitative and qualitative measures to
support the directional change and levels of ECL coverage,
including economic data, credit performance insights and
problem debt trends. This was particularly important for
consideration of post model adjustments.
As government support schemes continued to conclude during
2021, NWB Group anticipates further credit deterioration 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 2021.
There are a number of key factors that could drive further
downside to impairments, through deteriorating economic and
credit metrics and increased stage migration as credit risk
increases for more customers.
A key factor would be a more adverse deterioration in GDP
and unemployment in the economies in which NWB Group
operates, but also, among others:

The ongoing trajectory of lockdown restrictions 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 government support
schemes in terms of their ability to defray customer defaults
is yet to be proven over an extended period.

The impact on customer affordability in the event of
sustained inflationary pressures.

The level of revenues lost by corporate clients and pace of
recovery of those revenues may affect NWB Group’s clients’
ability to service their borrowing, especially in those sectors
most exposed to the effects of COVID-19.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
33
Credit risk – Banking activities
Introduction
This section details the credit risk profile of NWB Group’s banking activities.
Refer to Accounting policies note 11 and Note 13 to the financial statements for policies and critical judgments relating to
impairment loss determination.
Financial instruments within the scope of the IFRS 9 ECL framework
(audited)
Refer to Note 9 to the financial statements for balance sheet analysis of financial assets that are classified as amortised cost or fair
value through other comprehensive income (FVOCI), the starting point for IFRS 9 ECL framework assessment.
Financial assets
31 December 2021
31 December 2020
Gross
ECL
Net
Gross
ECL
Net
£bn
£bn
£bn
£bn
£bn
£bn
Balance sheet total gross amortised cost and FVOCI
423.6
379.0
In scope of IFRS 9 ECL framework
422.4
377.8
% in scope
100%
100%
Loans to customers - in scope - amortised cost
289.2
2.4
286.8
275.4
3.7
271.7
Loans to customers - in scope - FVOCI
0.2
—
0.2
—
—
—
Loans to banks - in scope - amortised cost
4.2
—
4.2
3.3
—
3.3
Total loans - in scope
293.6
2.4
291.2
278.7
3.7
275.0
Stage 1
264.6
0.2
264.4
217.6
0.4
217.2
Stage 2
26.0
1.0
25.0
57.9
2.0
55.9
Stage 3
3.0
1.2
1.8
3.2
1.3
1.9
Other financial assets - in scope - amortised cost
102.9
—
102.9
65.2
—
65.2
Other financial assets - in scope - FVOCI
25.9
—
25.9
33.9
—
33.9
Total other financial assets - in scope
128.8
—
128.8
99.1
—
99.1
Stage 1
128.6
—
128.6
98.1
—
98.1
Stage 2
0.2
—
0.2
1.0
—
1.0
Stage 3
—
—
—
—
—
—
Out of scope of IFRS 9 ECL framework
1.2
na
1.2
1.2
na
1.2
Loans to customers - out of scope - amortised cost
0.1
na
0.1
(0.2)
na
(0.2)
Loans to banks - out of scope - amortised cost
—
na
—
—
na
—
Other financial assets - out of scope - amortised cost
1.1
na
1.1
1.4
na
1.4
Other financial assets - out of scope - FVOCI
—
na
—
—
na
—
na = not applicable
The assets outside the scope of IFRS 9 ECL framework were as
follows:

Settlement balances, items in the course of collection, cash
balances and other non-credit risk assets of £0.7 billion (2020
– £0.6 billion). These were assessed as having no ECL unless
there was evidence that they were defaulted.

Fair value adjustments on loans hedged by interest rate
swaps, where the underlying loan was within the IFRS 9 ECL
scope of £0.1 billion (2020 – £0.1 billion).

NWB Group originated securitisations, where ECL was
captured on the underlying loans of £0.4 billion (2020 – £0.4
billion).
In scope assets also include an additional £2.6 billion (2020 –
£2.7 billion) of inter-Group assets not shown in table above.
Contingent liabilities and commitments
In addition to contingent liabilities and commitments disclosed in
Note 27 to the financial statements, reputationally-committed
limits are also included in the scope of the IFRS 9 ECL
framework. Total
contingent liabilities (including financial
guarantees) and commitments within IFRS 9 ECL scope of £84.6
billion (2020 – £81.5 billion) comprised Stage 1 £78.5 billion
(2020 – £65.1 billion); Stage 2 £5.6 billion (2020 – £15.7 billion);
and Stage 3 £0.5 billion (2020 – £0.7 billion).
The ECL relating to off balance sheet exposures was £0.1 billion
(2020 – £0.1 billion). The total ECL in the remainder of the credit
risk section of £2.5 billion included ECL for both on and off
balance sheet exposures.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
34
Credit risk – Banking activities continued
Segment
analysis
–
portfolio
summary
(audited)
The table below shows gross loans and ECL, by segment and stage, within the scope of the IFRS 9 ECL framework.
Retail
Private
Commercial
Central
items
Banking
Banking
Banking
& other
Total
2021
£m
£m
£m
£m
£m
Loans - amortised cost and FVOCI
Stage 1
153,151
16,969
63,325
31,211
264,656
Stage 2
11,019
942
13,951
91
26,003
Stage 3
1,385
263
1,337
—
2,985
Inter-Group
(1)
2,555
2,555
165,555
18,174
78,613
33,857
296,199
ECL provisions
(2)
Stage 1
112
11
95
13
231
Stage 2
479
27
588
11
1,105
Stage 3
641
37
489
—
1,167
Inter-Group
1
1
1,232
75
1,172
25
2,504
ECL provisions coverage
(3)
Stage 1 (%)
0.07
0.06
0.15
0.04
0.09
Stage 2 (%)
4.35
2.87
4.21
12.09
4.25
Stage 3 (%)
46.28
14.07
36.57
—
39.10
Inter-Group (%)
0.04
0.04
0.74
0.41
1.49
0.08
0.85
Impairment (releases)/losses
ECL (release)/charge
(4)
Stage 1
(329)
(45)
(619)
(2)
(995)
Stage 2
144
(15)
(162)
3
(30)
Stage 3
162
7
44
—
213
Inter-Group
(1)
(1)
(23)
(53)
(737)
—
(813)
Amounts written-off
170
6
212
—
388
For the notes to this table refer to the following page.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
35
Credit risk – Banking activities continued
Segment analysis – portfolio summary
(audited)
Retail
Private
Commercial
Central
items
Banking
Banking
Banking
& other
Total
2020
£m
£m
£m
£m
£m
Loans - amortised cost and FVOCI
Stage 1
124,894
14,682
52,291
25,708
217,575
Stage 2
27,860
1,880
28,014
110
57,864
Stage 3
1,336
285
1,633
—
3,254
Inter-Group
(1)
2,685
2,685
154,090
16,847
81,938
28,503
281,378
ECL provisions
(2)
Stage 1
111
30
214
10
365
Stage 2
731
67
1,247
15
2,060
Stage 3
596
37
652
—
1,285
Inter-Group
2
2
1,438
134
2,113
27
3,712
ECL provisions coverage
(3)
Stage 1 (%)
0.09
0.20
0.41
0.04
0.17
Stage 2 (%)
2.62
3.56
4.45
13.64
3.56
Stage 3 (%)
44.61
12.98
39.93
—
39.49
Inter-Group (%)
0.07
0.07
0.93
0.80
2.58
0.10
1.33
Impairment (releases)/losses
ECL (release)/charge
(4)
Stage 1
(28)
25
(75)
9
(69)
Stage 2
526
60
1,242
11
1,839
Stage 3
169
15
211
2
397
Third party
(6)
667
100
1,378
22
2,167
Inter-Group
2
2
667
100
1,378
24
2,169
Amounts written-off
282
4
231
—
517
(1)
NWB Group's intercompany assets are classified in Stage 1.
(2)
Includes £3 million (2020 – £5 million) related to assets classified as FVOCI.
(3)
ECL provisions coverage is calculated as ECL provisions divided by loans - amortised cost and FVOCI. It is calculated on third party loans and total ECL provisions.
(4)
Includes a £1 million
charge (2020 –
£9 million charge) related
to other financial assets,
of which a £2
million release (2020
– £2 million charge)
related to assets classified
as FVOCI;
and a £13 million release (2020 – £13 million charge) related to contingent liabilities
(5)
The
table
shows
gross
loans
only
and
excludes
amounts
that
are
outside
the
scope
of
the
ECL
framework.
Refer
to
the
Financial
instruments
within
the
scope
of
the
IFRS
9
ECL
framework section
for
further
details.
Other financial
assets
within
the
scope of
the
IFRS
9
ECL framework
were
cash
and balances
at
central
banks
totalling £100.6
billion
(2020
–
£62.0 billion) and debt securities of £28.2 billion (2020 – £37.1 billion).
(6)
The stage allocation of the ECL charge was aligned to the stage transition approach that underpins the analysis in the Flow statement section.
(7)
Intercompany
impairment
charges
are
shown
in
Central
items
&
other.
In
Note
4
to
the
financial
statements
-
Segmental
analysis
-
they
are
shown
in
the
segments
where
the
charges are booked.

Stage 1 and Stage 2 ECL reduced significantly during 2021,
with sustained improvement in underlying risk metrics
mainly due to the improved economic outlook and
underpinned by various government support schemes.

The Stage 2 population reduced reflecting lower underlying
PDs, resulting in migration of cases back into Stage 1.
However, the Stage 2 population remained above pre-
COVID-19 levels.

Stage 3 loans and ECL balances reduced, mainly due to
write-off, repayment of defaulted debt and portfolio sale of
defaulted debt. To date, the various COVID-19 related
government support schemes have mitigated new flows into
default. It is expected that defaults will increase as the effect
of the various government support schemes unwinds.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
36
Credit risk – Banking activities continued
Segmental loans and impairment metrics
(audited)
The table below shows gross loans and ECL provisions, by days past due, by segment and stage, within the scope of the ECL
framework.
Gross loans
ECL provisions (2)
Stage 2 (1)
Stage 2 (1)
Not
1-30
>30
Not
1-30
>30
Stage 1
past due
DPD
DPD
Total
Stage 3
Total
Stage 1
past due
DPD
DPD
Total
Stage 3
Total
2021
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Retail Banking
153,151
9,967
691
361
11,019
1,385
165,555
112
419
31
29
479
641
1,232
Private Banking
16,969
880
26
36
942
263
18,174
11
27
—
—
27
37
75
Personal
13,753
136
23
11
170
225
14,148
5
1
—
—
1
19
25
Wholesale
3,216
744
3
25
772
38
4,026
6
26
—
—
26
18
50
Commercial Banking
63,325
13,015
384
552
13,951
1,337
78,613
95
558
20
10
588
489
1,172
Central items & other
31,211
91
—
—
91
—
31,302
13
11
—
—
11
—
24
Total loans
264,656
23,953
1,101
949
26,003
2,985
293,644
231
1,015
51
39
1,105
1,167
2,503
Of which:
Personal
166,904
10,103
714
372
11,189
1,610
179,703
117
420
31
29
480
660
1,257
Wholesale
97,752
13,850
387
577
14,814
1,375
113,941
114
595
20
10
625
507
1,246
2020
Retail Banking
124,894
26,536
845
479
27,860
1,336
154,090
111
624
55
52
731
596
1,438
Private Banking
14,682
1,851
17
12
1,880
285
16,847
30
66
—
1
67
37
134
Personal
12,176
113
17
11
141
250
12,567
6
2
—
—
2
18
26
Wholesale
2,506
1,738
—
1
1,739
35
4,280
24
64
—
1
65
19
108
Commercial Banking
52,291
27,274
494
246
28,014
1,633
81,938
214
1,196
35
16
1,247
652
2,113
Central items & other
25,708
110
—
—
110
—
25,818
10
15
—
—
15
—
25
Total loans
217,575
55,771
1,356
737
57,864
3,254
278,693
365
1,901
90
69
2,060
1,285
3,710
Of which:
Personal
137,070
26,649
862
490
28,001
1,586
166,657
117
626
55
52
733
614
1,464
Wholesale
80,505
29,122
494
247
29,863
1,668
112,036
248
1,275
35
17
1,327
671
2,246
For the notes to this table refer to the following page.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
37
Credit risk – Banking activities continued
Segmental loans and impairment metrics
(audited)
The table below shows ECL and ECL provisions coverage, by days past due, by segment and stage, within the scope of the ECL
framework.
ECL provisions coverage
ECL
Stage 2 (1,2)
Total
Not
>30
(release) /
Amounts
Stage 1
past due
1-30 DPD
DPD
Total
Stage 3
Total
charge
written-off
2021
%
%
%
%
%
%
%
£m
£m
Retail Banking
0.07
4.20
4.49
8.03
4.35
46.28
0.74
(23)
170
Private Banking
0.06
3.07
—
—
2.87
14.07
0.41
(53)
6
Personal
0.04
0.74
—
—
0.59
8.44
0.18
2
3
Wholesale
0.19
3.49
—
—
3.37
47.37
1.24
(55)
3
Commercial Banking
0.15
4.29
5.21
1.81
4.21
36.57
1.49
(737)
212
Central items & other
0.04
12.09
—
—
12.09
—
0.08
1
—
Total loans
0.09
4.24
4.63
4.11
4.25
39.10
0.85
(812)
388
Of which:
Personal
0.07
4.16
4.34
7.80
4.29
40.99
0.70
(21)
173
Wholesale
0.12
4.30
5.17
1.73
4.22
36.87
1.09
(791)
215
2020
Retail Banking
0.09
2.35
6.51
10.86
2.62
44.61
0.93
667
282
Private Banking
0.20
3.57
—
8.33
3.56
12.98
0.80
100
4
Personal
0.05
1.77
—
—
1.42
7.20
0.21
(5)
—
Wholesale
0.96
3.68
—
100.00
3.74
54.29
2.52
105
4
Commercial Banking
0.41
4.39
7.09
6.50
4.45
39.93
2.58
1,378
231
Central items & other
0.04
13.64
—
—
13.64
—
0.10
22
—
Total loans
0.17
3.41
6.64
9.36
3.56
39.49
1.33
2,167
517
Of which:
Personal
0.09
2.35
6.38
10.61
2.62
38.71
0.88
662
282
Wholesale
0.31
4.38
7.09
6.88
4.44
40.23
2.00
1,505
235
(1)
30 DPD – 30 days past due, the mandatory 30 days past due backstop as prescribed by IFRS 9 for a SICR.
(2)
ECL provisions on contingent liabilities and commitments are included within the Financial assets section so as not to distort ECL coverage ratios.

Retail Banking
– Balance sheet growth during 2021 was
mainly due to mortgages. In line with the market, mortgage
demand was strong during the year, supported by the
extension of the stamp duty holiday and overall
improvements in economic conditions. The improved
economic outlook captured in the updated MES scenarios,
including a more positive forecast on unemployment levels,
resulted in reduced account level PDs. Unsecured lending
balances decreased as customer spend and demand for
borrowing were subdued as a result of COVID-19
restrictions, particularly in the first quarter of 2021. Lending
criteria were cautiously relaxed during 2021 to support
growing demand as lockdown restrictions eased.

Portfolio performance remained stable, for further details
refer to the Personal portfolio section. Arrears levels in both
the mortgage and unsecured portfolios remained low
overall. However, a small number of customers who utilised
their full payment holiday, did migrate into late arrears
during the second half of the year. With COVID-19 payment
holidays complete, this trend stabilised by the year end and
new inflows to arrears were below pre-COVID-19 levels.

ECL in Stage 2 decreased due to migrations back into Stage
1, following the effects of improving economic scenarios
during 2021 and continued stable portfolio performance
supporting improved risk metrics. However, the ECL
coverage on remaining Stage 2 exposures increased simply
due to the relative underlying risk profile of the remaining
Stage 2 exposures. The various COVID-19 related customer
support schemes (for example, loan repayment holidays,
government job retention scheme) mitigated actual portfolio
deterioration in the short-term, with the arrears levels and
flows into Stage 3 yet to be materially affected. Total ECL
coverage reduced further in the fourth quarter of 2021,
overall mirroring the positive trajectory of the COVID-19
vaccinations, labour market trends and portfolio
performance, whilst maintaining coverage for the key
portfolios above pre-COVID-19 levels given the persisting
sources of uncertainty, including the Omicron variant and
inflationary pressures on customers.

Commercial Banking
– Balance sheet reduction was mainly
as a result of repayments of both COVID-19 government
lending schemes and conventional borrowing where
demand was lower, particularly in the second half of the
year. Strategic reduction was achieved in high risk sectors.

The improved economic outlook, including significant
increases in GDP and commercial real estate valuations,
resulted in lower IFRS 9 PDs. Consequently, compared to
2020, a smaller proportion of the exposures exhibited a
SICR, which resulted in a migration of assets from Stage 2
into Stage 1. As a result, the ECL requirement reduced.

Reflecting the continued level of uncertainty caused by
COVID-19, management judged that certain ECL post model
adjustments remained necessary, refer to the Governance
and post model adjustments section for further details. The
increase in Stage 2 exposures that were past due greater
than 30 days was mainly due to the commencement of
repayments of government scheme debt with some
borrowers failing to meet scheduled repayments. The lower
coverage of this population was driven by the guaranteed
nature of government support schemes. Conventional bank
debt did not result in a significant increase in past due
balances.

The various COVID-19 related customer support schemes
and economic recovery continued to mitigate against flows
into default. The reduction in coverage in Stage 1 and Stage
2 was mainly due to the decrease in ECL during 2021,
primarily as a result of the improved economic outlook.
There was a reduction in Stage 3 coverage as balances
reduced and were not replaced by new flows, write-offs of
existing debt were also higher in the year. Coverage
remained above pre-COVID-19 levels. The loss rate was
significantly lower than in the prior year.

Other
– The reasons for the increased ECL requirement
were similar to those described above.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
38
Credit risk – Banking activities continued
Sector analysis – portfolio summary
(audited)
The table below shows financial assets and off-balance sheet exposures gross of ECL and related ECL provisions, impairment and
past due by sector, asset quality and geographical region.
Personal
Wholesale
Total
Credit
Other
Mortgages (1)
cards
personal
Total
Property
Corporate
FI
Sovereign
Total
2021
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Loans by geography
169,181
3,016
7,506
179,703
21,074
55,148
33,302
4,417
113,941
293,644
- UK
169,181
3,016
7,506
179,703
20,479
49,974
29,056
3,446
102,955
282,658
- RoI
—
—
—
—
5
578
112
—
695
695
- Other Europe
—
—
—
—
237
2,642
1,026
479
4,384
4,384
- RoW
—
—
—
—
353
1,954
3,108
492
5,907
5,907
Loans by stage and asset
quality
(2)
169,181
3,016
7,506
179,703
21,074
55,148
33,302
4,417
113,941
293,644
Stage 1
159,228
2,215
5,461
166,904
18,645
42,018
32,710
4,379
97,752
264,656
- AQ1
3,010
—
374
3,384
764
828
2,166
2,324
6,082
9,466
- AQ2
—
—
—
—
1,789
643
25,150
401
27,983
27,983
- AQ3
2,037
—
—
2,037
2,074
2,885
631
1,506
7,096
9,133
- AQ4
80,144
37
339
80,520
2,925
8,266
3,527
36
14,754
95,274
- AQ5
67,170
664
878
68,712
4,512
12,515
635
-
17,662
86,374
- AQ6
3,151
751
2,441
6,343
4,517
10,942
430
16
15,905
22,248
- AQ7
3,260
693
1,017
4,970
1,735
5,184
112
89
7,120
12,090
- AQ8
177
66
365
608
308
686
57
7
1,058
1,666
- AQ9
279
4
47
330
21
69
2
-
92
422
Stage 2
8,921
734
1,534
11,189
2,038
12,172
567
37
14,814
26,003
- AQ1
5
—
—
5
56
46
—
—
102
107
- AQ2
—
—
—
—
113
—
—
—
113
113
- AQ3
14
—
—
14
-
94
—
—
94
108
- AQ4
2,541
1
78
2,620
31
723
14
35
803
3,423
- AQ5
3,463
54
89
3,606
247
2,143
287
—
2,677
6,283
- AQ6
977
179
667
1,823
643
3,553
163
—
4,359
6,182
- AQ7
556
375
288
1,219
583
3,590
36
1
4,210
5,429
- AQ8
941
97
299
1,337
258
1,509
65
1
1,833
3,170
- AQ9
424
28
113
565
107
514
2
—
623
1,188
Stage 3
1,032
67
511
1,610
391
958
25
1
1,375
2,985
- AQ10
1,032
67
511
1,610
391
958
25
1
1,375
2,985
Loans past due analysis
(3,4)
169,181
3,016
7,506
179,703
21,074
55,148
33,302
4,417
113,941
293,644
- Not past due
167,180
2,932
6,868
176,980
20,211
53,632
33,267
4,414
111,524
288,504
- Past due 1-30 days
877
21
96
994
427
653
32
2
1,114
2,108
- Past due 31-89 days
377
19
59
455
212
390
1
1
604
1,059
- Past due 90-180 days
245
16
51
312
67
174
—
—
241
553
- Past due >180 days
502
28
432
962
157
299
2
—
458
1,420
Loans - Stage 2
8,921
734
1,534
11,189
2,038
12,172
567
37
14,814
26,003
- Not past due
7,989
709
1,405
10,103
1,719
11,532
563
36
13,850
23,953
- Past due 1-30 days
626
12
76
714
112
272
3
—
387
1,101
- Past due 31-89 days
306
13
53
372
207
368
1
1
577
949
For the notes to this table refer to page 41.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
39
Credit risk – Banking activities continued
Sector analysis – portfolio summary
(audited)
Personal
Wholesale
Total
Credit
Other
Mortgages (1)
cards
personal
Total
Property
Corporate
FI
Sovereign
Total
2021
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Weighted average life*
- ECL measurement (years)
8
2
5
5
5
6
3
—
6
6
Weighted average 12 months
PDs*
- IFRS 9 (%)
0.11
5.14
2.77
0.30
0.88
1.91
0.16
0.15
1.13
0.64
- Basel (%)
0.70
3.28
3.29
0.85
1.34
1.81
0.14
0.16
1.16
0.97
ECL provisions by geography
311
209
737
1,257
218
973
43
12
1,246
2,503
- UK
311
209
737
1,257
201
846
38
12
1,097
2,354
- RoI
—
—
—
—
—
9
3
—
12
12
- Other Europe
—
—
—
—
17
68
1
—
86
86
- RoW
—
—
—
—
—
50
1
—
51
51
ECL provisions by stage
311
209
737
1,257
218
973
43
12
1,246
2,503
- Stage 1
22
48
47
117
17
79
6
12
114
231
- Stage 2
123
115
242
480
70
520
35
—
625
1,105
- Stage 3
166
46
448
660
131
374
2
—
507
1,167
ECL provisions coverage (%)
0.18
6.93
9.82
0.70
1.03
1.76
0.13
0.27
1.09
0.85
- Stage 1 (%)
0.01
2.17
0.86
0.07
0.09
0.19
0.02
0.27
0.12
0.09
- Stage 2 (%)
1.38
15.67
15.78
4.29
3.43
4.27
6.17
—
4.22
4.25
- Stage 3 (%)
16.09
68.66
87.67
40.99
33.50
39.04
8.00
—
36.87
39.10
ECL (release)/charge
- Third party
(45)
(8)
32
(21)
(278)
(513)
(1)
1
(791)
(812)
Amounts written-off
5
55
113
173
111
99
5
—
215
388
Other financial assets
by asset quality
(2)
—
—
—
—
—
10
6,502
122,284
128,796
128,796
- AQ1-AQ4
—
—
—
—
—
10
6,342
122,282
128,634
128,634
- AQ5-AQ8
—
—
—
—
—
—
160
2
162
162
Off-balance sheet
13,481
11,809
6,907
32,197
10,175
38,097
3,390
734
52,396
84,593
Loan commitments
13,481
11,809
6,851
32,141
9,888
36,326
3,310
734
50,258
82,399
Financial guarantees
—
—
56
56
287
1,771
80
—
2,138
2,194
Off-balance sheet
by asset quality
(2)
13,481
11,809
6,907
32,197
10,175
38,097
3,390
734
52,396
84,593
- AQ1-AQ4
12,165
207
5,485
17,857
7,276
21,673
2,487
586
32,022
49,879
- AQ5-AQ8
1,313
11,366
1,411
14,090
2,882
16,180
902
148
20,112
34,202
- AQ9
—
4
3
7
4
37
1
—
42
49
- AQ10
3
232
8
243
13
207
—
—
220
463
*Not within audit scope.
For the notes to this table refer to page 41.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
40
Credit risk – Banking activities continued
Sector analysis – portfolio summary
(audited)
Personal
Wholesale
Total
Credit
Other
Mortgages (1)
cards
personal
Total
Property
Corporate
FI
Sovereign
Total
2020
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Loans by geography
156,005
2,908
7,744
166,657
22,980
56,647
28,812
3,597
112,036
278,693
- UK
156,005
2,908
7,744
166,657
22,344
50,947
24,896
2,828
101,015
267,672
- RoI
—
—
—
—
6
774
232
—
1,012
1,012
- Other Europe
—
—
—
—
231
2,973
997
318
4,519
4,519
- RoW
—
—
—
—
399
1,953
2,687
451
5,490
5,490
Loans by stage and asset
quality
(2)
156,005
2,908
7,744
166,657
22,980
56,647
28,812
3,597
112,036
278,693
Stage 1
130,738
1,772
4,560
137,070
14,665
34,846
27,444
3,550
80,505
217,575
- AQ1
2,937
—
634
3,571
1,227
1,017
59
1,633
3,936
7,507
- AQ2
5,780
—
—
5,780
1,697
216
23,007
845
25,765
31,545
- AQ3
267
—
—
267
1,495
2,726
243
912
5,376
5,643
- AQ4
88,586
17
522
89,125
2,382
7,073
2,998
105
12,558
101,683
- AQ5
26,323
653
783
27,759
2,797
8,346
636
1
11,780
39,539
- AQ6
1,528
579
1,879
3,986
2,287
5,985
256
2
8,530
12,516
- AQ7
4,978
483
531
5,992
1,257
4,603
205
42
6,107
12,099
- AQ8
110
37
161
308
1,305
4,150
38
8
5,501
5,809
- AQ9
229
3
50
282
218
730
2
2
952
1,234
Stage 2
24,244
1,058
2,699
28,001
7,748
20,707
1,361
47
29,863
57,864
- AQ1
14
—
8
22
54
46
—
—
100
122
- AQ2
41
—
—
41
—
—
—
—
—
41
- AQ3
13
—
—
13
103
176
1
—
280
293
- AQ4
5,221
3
38
5,262
894
1,825
350
39
3,108
8,370
- AQ5
15,232
106
198
15,536
2,458
5,684
484
1
8,627
24,163
- AQ6
1,616
247
1,288
3,151
2,490
5,688
242
7
8,427
11,578
- AQ7
471
531
465
1,467
1,383
5,390
236
—
7,009
8,476
- AQ8
840
140
422
1,402
242
1,472
46
—
1,760
3,162
- AQ9
796
31
280
1,107
124
426
2
—
552
1,659
Stage 3
1,023
78
485
1,586
567
1,094
7
—
1,668
3,254
- AQ10
1,023
78
485
1,586
567
1,094
7
—
1,668
3,254
Loans past due analysis
(3,4)
156,005
2,908
7,744
166,657
22,980
56,647
28,812
3,597
112,036
278,693
- Not past due
153,825
2,819
7,058
163,702
22,172
55,410
28,797
3,562
109,941
273,643
- Past due 1-30 days
992
20
134
1,146
294
722
8
35
1,059
2,205
- Past due 31-89 days
479
19
98
596
94
164
4
—
262
858
- Past due 90-180 days
274
14
53
341
152
14
—
—
166
507
- Past due >180 days
435
36
401
872
268
337
3
—
608
1,480
Loans - Stage 2
24,244
1,058
2,699
28,001
7,748
20,707
1,361
47
29,863
57,864
- Not past due
23,150
1,029
2,470
26,649
7,528
20,191
1,356
47
29,122
55,771
- Past due 1-30 days
711
18
133
862
128
362
4
—
494
1,356
- Past due 31-89 days
383
11
96
490
92
154
1
—
247
737
For the notes to this table refer to the following page.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
41
Credit risk – Banking activities continued
Sector analysis – portfolio summary
(audited)
Personal
Wholesale
Total
Credit
Other
Mortgages (1)
cards
personal
Total
Property
Corporate
FI
Sovereign
Total
2020
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Weighted average life*
- ECL measurement (years)
8
2
5
5
4
6
4
—
5
5
Weighted average 12 months
PDs*
- IFRS 9 (%)
0.56
6.58
4.95
0.85
4.19
3.83
0.34
0.06
2.85
1.67
- Basel (%)
0.77
3.34
3.87
0.95
1.96
2.65
0.18
0.14
1.78
1.28
ECL provisions by geography
353
277
834
1,464
626
1,566
47
7
2,246
3,710
- UK
353
277
834
1,464
595
1,384
39
7
2,025
3,489
- RoI
—
—
—
—
—
13
1
—
14
14
- Other Europe
—
—
—
—
23
93
2
—
118
118
- RoW
—
—
—
—
8
76
5
—
89
89
ECL provisions by stage
353
277
834
1,464
626
1,566
47
7
2,246
3,710
- Stage 1
21
42
54
117
86
144
11
7
248
365
- Stage 2
181
180
372
733
304
989
34
—
1,327
2,060
- Stage 3
151
55
408
614
236
433
2
—
671
1,285
ECL provisions coverage (%)
0.23
9.53
10.77
0.88
2.72
2.76
0.16
0.19
2.00
1.33
- Stage 1 (%)
0.02
2.37
1.18
0.09
0.59
0.41
0.04
0.20
0.31
0.17
- Stage 2 (%)
0.75
17.01
13.78
2.62
3.92
4.78
2.50
—
4.44
3.56
- Stage 3 (%)
14.76
70.51
84.12
38.71
41.62
39.58
28.57
—
40.23
39.49
ECL (release)/charge
- Third party
147
155
360
662
410
1,049
41
5
1,505
2,167
Amounts written-off
9
69
204
282
21
213
1
—
235
517
Other financial assets
by asset quality
(2)
—
—
—
—
—
10
6,585
92,507
99,102
99,102
- AQ1-AQ4
—
—
—
—
—
10
6,484
92,502
98,996
98,996
- AQ5-AQ8
—
—
—
—
—
—
101
5
106
106
Off-balance sheet
10,707
10,632
8,506
29,845
9,370
38,580
2,858
891
51,699
81,544
- Loan commitments
10,704
10,632
8,468
29,804
9,073
36,762
2,762
890
49,487
79,291
- Financial guarantees
3
—
38
41
297
1,818
96
1
2,212
2,253
Off-balance sheet
by asset quality
(2)
10,707
10,632
8,506
29,845
9,370
38,580
2,858
891
51,699
81,544
- AQ1-AQ4
10,570
118
6,901
17,589
6,590
20,958
2,083
714
30,345
47,934
- AQ5-AQ8
133
10,288
1,580
12,001
2,737
17,175
774
177
20,863
32,864
- AQ9
—
5
10
15
7
62
1
—
70
85
- AQ10
4
221
15
240
36
385
—
—
421
661
*Not within audit scope.
(1)
Includes a portion of Private Banking lending secured against residential real estate, in line with ECL calculation methodology. Private Banking mortgages are reported in UK,
reflecting the country of lending origination.
(2)
AQ bandings are based on Basel PDs and mapping is as follows:
Internal asset quality band
Probability of default range
Indicative S&P rating
AQ1
0% - 0.034%
AAA to AA
AQ2
0.034% - 0.048%
AA to AA-
AQ3
0.048% - 0.095%
A+ to A
AQ4
0.095% - 0.381%
BBB+ to BBB-
AQ5
0.381% - 1.076%
BB+ to BB
AQ6
1.076% - 2.153%
BB- to B+
AQ7
2.153% - 6.089%
B+ to B
AQ8
6.089% - 17.222%
B- to CCC+
AQ9
17.222% - 100%
CCC to C
AQ10
100%
D
£0.2 billion (2020 – £0.2 billion) AQ10 Personal balances primarily relate to loan commitments, the drawdown of which is effectively prohibited.
(3)
30 DPD – 30 days past due, the mandatory 30 days past due backstop prescribed by IFRS 9 for a SICR.
(4)
Days past due – Personal products: at a high level, for amortising products, the number of days past due is derived from the arrears amount outstanding and the monthly
repayment instalment. For credit cards, it is based on payments missed, and for current accounts the number of continual days in excess of borrowing limit. Wholesale products: the
number of days past due for all products is the number of continual days in excess of borrowing limit
.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
42
Credit risk – Banking activities continued
Sector analysis – portfolio summary
(audited)
The table below shows ECL by stage, for the Personal portfolios and key sectors of the Wholesale portfolios that continue to be
affected by COVID-19.
Loans - amortised cost and FVOCI
Off-balance sheet
ECL provisions
Loan
Contingent
Stage 1
Stage 2
Stage 3
Total
commitments
liabilities
Stage 1
Stage 2
Stage 3
Total
2021
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Personal
166,904
11,189
1,610
179,703
32,141
56
117
480
660
1,257
Mortgages
159,228
8,921
1,032
169,181
13,481
—
22
123
166
311
Credit cards
2,215
734
67
3,016
11,809
—
48
115
46
209
Other personal
5,461
1,534
511
7,506
6,851
56
47
242
448
737
Wholesale
97,752
14,814
1,375
113,941
50,258
2,138
114
625
507
1,246
Property
18,645
2,038
391
21,074
9,888
287
17
70
131
218
Financial institutions
32,710
567
25
33,302
3,310
80
6
35
2
43
Sovereign
4,379
37
1
4,417
734
—
12
—
—
12
Corporate
42,018
12,172
958
55,148
36,326
1,771
79
520
374
973
Of which:
Airlines and aerospace
584
471
36
1,091
1,107
52
1
30
8
39
Automotive
4,640
1,206
31
5,877
2,617
48
8
28
8
44
Health
2,503
864
78
3,445
449
2
6
38
22
66
Land transport and logistics
3,183
663
35
3,881
2,322
59
4
42
10
56
Leisure
2,747
3,036
199
5,982
1,192
46
8
159
87
254
Oil and gas
916
110
33
1,059
610
419
1
6
23
30
Retail
4,562
1,057
142
5,761
3,676
297
7
23
51
81
Total
264,656
26,003
2,985
293,644
82,399
2,194
231
1,105
1,167
2,503
2020
Personal
137,070
28,001
1,586
166,657
29,804
41
117
733
614
1,464
Mortgages
130,738
24,244
1,023
156,005
10,704
3
21
181
151
353
Credit cards
1,772
1,058
78
2,908
10,632
—
42
180
55
277
Other personal
4,560
2,699
485
7,744
8,468
38
54
372
408
834
Wholesale
80,505
29,863
1,668
112,036
49,487
2,212
248
1,327
671
2,246
Property
14,665
7,748
567
22,980
9,073
297
86
304
236
626
Financial institutions
27,444
1,361
7
28,812
2,762
96
11
34
2
47
Sovereign
3,550
47
—
3,597
890
1
7
—
—
7
Corporate
34,846
20,707
1,094
56,647
36,762
1,818
144
989
433
1,566
Of which:
Airlines and aerospace
518
831
30
1,379
1,160
49
2
24
17
43
Automotive
3,804
1,601
147
5,552
2,998
49
15
51
13
79
Health
1,512
1,905
76
3,493
386
6
8
90
26
124
Land transport and logistics
2,218
1,465
99
3,782
2,406
83
6
81
26
113
Leisure
2,393
4,288
205
6,886
1,023
55
16
270
91
377
Oil and gas
919
85
32
1,036
1,041
255
3
5
22
30
Retail
4,411
1,870
142
6,423
4,063
390
13
81
75
169
Total
217,575
57,864
3,254
278,693
79,291
2,253
365
2,060
1,285
3,710
Wholesale forbearance
(audited)
The table below shows Wholesale forbearance, Heightened Monitoring and Risk of Credit Loss by sector. Personal forbearance is
disclosed in the Personal portfolio section. This table show current exposure but reflects risk transfers where there is a guarantee
by another customer
Property
FI
Other corporate
Total
2021
£m
£m
£m
£m
Forbearance (flow)
373
25
2,816
3,214
Forbearance (stock)
562
32
4,279
4,873
Heightened Monitoring and Risk of Credit Loss
646
65
3,410
4,121
2020
Forbearance (flow)
678
48
3,153
3,879
Forbearance (stock)
724
48
3,447
4,219
Heightened Monitoring and Risk of Credit Loss
748
109
3,663
4,520
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
43
Credit risk – Banking activities continued
Sector analysis – portfolio summary
(audited)

Loans by geography
– In Personal, exposures continued to
be concentrated in the UK and heavily weighted to
mortgages. Balance sheet growth during the year was
mainly in mortgages. Unsecured lending balances were
subdued as noted previously. In Wholesale, exposures were
mainly in the UK. Balance sheet reduction was primarily due
to repayments of both COVID-19 government lending
schemes and conventional borrowing where demand was
lower. Strategic reduction was achieved in high risk sectors.

Loans by asset quality (based on Basel II PD)
– In the
Personal portfolio, the majority of exposures were in AQ4
and AQ5 within mortgages. Overall, Personal asset quality
improved slightly, with migration in assets from AQ4 to AQ5
in mortgages offset by migration from AQ9 into better
quality bands. As expected, mortgage exposures had a
higher proportion in AQ1-AQ4 than unsecured borrowing. In
other Personal, the relatively high level of exposures in
AQ10 reflected that impaired assets can be held on the
balance sheet, with commensurate ECL provision, for up to
six years after default. Across the Wholesale portfolio, the
asset quality band distribution differed, reflecting the diverse
nature of the sectors. Asset quality improvement was
observed across most sectors as the economy recovered
from the effects of COVID-19. The reduction in AQ10
exposure in property was largely due to a portfolio sale of
commercial real estate exposure.

Loans by stage
– In both Wholesale and Personal, the
improved economic outlook resulted in reduced IFRS 9 PDs
compared to 2020. This, alongside continued benign credit
performance of the portfolio, resulted in a smaller proportion
of accounts exhibiting a SICR and thereby an associated
migration of exposures from Stage 2 into Stage 1. In the
absence of any other forbearance or SICR triggers,
customers granted COVID-19 related payment holidays
were not considered forborne and did not result in an
automatic trigger into Stage 2. However, a subset of
Personal customers who had accessed payment holiday
support, and where their risk profile was identified as
relatively high, continued to be collectively migrated into
Stage 2. In Wholesale, BBLS customers granted PAYG
options, including the extension of lending terms, periods of
reduced repayments and six month payment holidays, were
not automatically considered significantly credit
deteriorated. PAYG options are a feature of BBLS rather
than a concession granted by NWB Group.

Loans – Past due analysis
– The various COVID-19 related
customer support schemes (capital repayment holidays,
government job retention scheme, government supported
lending schemes) are mitigating actual portfolio
deterioration in the short-term, although there have been
some small increases in past due exposures.

Weighted average 12 months PDs
– In Personal, the Basel II
point-in-time PDs improved slightly during 2021. The
forward-looking IFRS 9 PDs reduced significantly during
2021 reflecting the improved economics. PD reductions
were most evident in Personal mortgages due to benign
arrears performance (catalysed by COVID-19 support
schemes) combined with the improved economic outlook,
which is connected to the need for collective SICR migration
and judgmental post model adjustments. In Wholesale, the
Basel II PDs were based on a through-the-cycle approach
and decreased less than the forward-looking IFRS 9 PDs
which reduced, reflecting the improved economic outlook.

ECL provision by geography
– In line with the point relating
to loans by geography above, the vast majority of ECL
related to exposures in the UK.

ECL provisions by stage
– Stage 1 and Stage 2 provisions
reduced reflecting the improved economic outlook. As
outlined above, Stage 3 provisions have yet to be materially
affected, underpinned by the various customer support
schemes noted previously.

ECL provisions coverage
– Overall provisions coverage
reduced, mainly due to the improvement in economic
outlook and scenario weightings. The base economic
scenario improved reflecting the faster than expected
vaccination roll-out, better than expected actual economic
data and strong government support. Stage 2 coverage
increased during the period for some portfolios and notably
on certain Wholesale sectors due to the inclusion of the
recovery risk overlay and lower Stage 2 balances.

The ECL charge and loss rate
– Reflecting the improved
economic outlook, the impairment charge was significantly
lower, with a material reduction in the annualised loss rate.

Loans by residual maturity
– In mortgages, as expected, the
vast majority of exposures were greater than five years. In
unsecured lending – cards and other – exposures were
concentrated in less than five years. In Wholesale, with the
exception of financial institutions where lending was
concentrated in less than one year, the majority of lending
was for residual maturity of one to five years, with some
greater than five years in line with lending under the
government support schemes.

Other financial assets by asset quality
– Consisting almost
entirely of cash and balances at central banks and debt
securities, held in the course of treasury related
management activities, these assets were mainly within the
AQ1-AQ4 bands.

Off-balance sheet exposures by asset quality
– In Personal,
undrawn exposures were reflective of available credit lines
in credit cards and current accounts. Additionally, the
mortgage portfolio had undrawn exposures, where a formal
offer had been made to a customer but had not yet drawn
down; the value increased in line with the pipeline of offers.
There was also a legacy portfolio of flexible mortgages
where a customer had the right and ability to draw down
further funds. The asset quality was aligned to the wider
portfolio. In Wholesale, undrawn exposures declined in line
with muted credit demand, with customers repaying
revolving credit and working capital facilities to optimise
liquidity. In addition, sector appetite adjustments in high risk
sectors reduced off-balance sheet exposures to these
sectors.

Wholesale forbearance
– Customers seeking COVID-19
related support, including 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
considered to have been granted forbearance. Customers
seeking a payment holiday extension beyond an aggregate
of 12 months in an 18 month period were considered to
have been granted forbearance and were classed as
heightened monitoring. This classification did not apply to
customers with BBLS taking a PAYG payment holiday
option. For Wholesale, forbearance flow decreased in the
second half of 2021 following the lifting of most COVID-19
restrictions. The leisure sector represented the largest share
of forbearance flow throughout 2021 due to disruption
caused by the periodic presence of COVID-19 restrictions
and resultant consumer uncertainty. Payment holidays and
covenant waivers were the most common forms of
forbearance granted.

Heightened Monitoring and Risk of Credit Loss
–
Inflows
decreased during 2021 compared to 2020. The reduction in
value was mainly due to the lower number of inflows as well
as a small number of high value customers who moved out
of the framework as economic conditions improved. While
noting the reduced flows into Heightened Monitoring and
Risk of Credit Loss and the improved stock position, the
volume and value of cases remained higher than pre-
COVID-19 levels. The sector breakdown of exposures
remained consistent with prior periods.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
44
Credit risk – Banking activities continued
Credit risk enhancement and mitigation
(audited)
The table below shows exposures of modelled portfolios within the scope of the ECL framework and related credit risk
enhancement and mitigation (CREM).
Gross
Maximum credit risk
CREM by type
CREM coverage
Exposure post CREM
exposure
ECL
Total
Stage 3
Financial (1)
Property
Other (2)
Total
Stage 3
Total
Stage 3
2021
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
Financial assets
Cash and balances at central banks
100.6
—
100.6
—
—
—
—
—
—
100.6
—
Loans - amortised cost
(3)
293.6
2.4
291.2
1.9
37.3
195.1
19.0
251.4
1.7
39.8
0.2
Personal
(4)
179.7
1.2
178.5
1.0
1.0
168.2
—
169.2
0.9
9.3
0.1
Wholesale
(5)
113.9
1.2
112.7
0.9
36.3
26.9
19.0
82.2
0.8
30.5
0.1
Debt securities
28.2
—
28.2
—
—
—
—
—
—
28.2
—
Total financial assets
422.4
2.4
420.0
1.9
37.3
195.1
19.0
251.4
1.7
168.6
0.2
Contingent liabilities and
commitments
Personal
(6,7)
32.2
0.1
32.1
0.2
0.5
2.1
—
2.6
—
29.5
0.2
Wholesale
52.4
—
52.4
0.3
1.3
4.7
3.1
9.1
—
43.3
0.3
Total off-balance sheet
84.6
0.1
84.5
0.5
1.8
6.8
3.1
11.7
—
72.8
0.5
Total exposure
507.0
2.5
504.5
2.4
39.1
201.9
22.1
263.1
1.7
241.4
0.7
2020
Financial assets
Cash and balances at central banks
62.0
—
62.0
—
—
—
—
—
—
62.0
—
Loans - amortised cost
(3)
278.6
3.6
275.0
2.0
33.8
181.6
18.4
233.8
1.7
41.2
0.3
Personal
(4)
166.6
1.4
165.2
1.0
0.3
155.7
—
156.0
0.9
9.2
0.1
Wholesale
(5)
112.0
2.2
109.8
1.0
33.5
25.9
18.4
77.8
0.8
32.0
0.2
Debt securities
37.1
—
37.1
—
—
—
—
—
—
37.1
—
Total financial assets
377.7
3.6
374.1
2.0
33.8
181.6
18.4
233.8
1.7
140.3
0.3
Contingent liabilities and
commitments
Personal
(6,7)
29.8
—
29.8
0.2
—
0.9
—
0.9
—
28.9
0.2
Wholesale
51.7
0.1
51.6
0.5
1.1
4.0
3.6
8.6
—
43.0
0.5
Total off-balance sheet
81.5
0.1
81.4
0.7
1.1
4.9
3.6
9.5
—
71.9
0.7
Total exposure
459.2
3.7
455.5
2.7
34.9
186.5
22.0
243.3
1.7
212.2
1.0
(1)
Includes cash and securities collateral.
(2)
Includes guarantees, charges over trade debtors, other asset finance related physical collateral as well as the amount by which credit risk exposure is reduced through netting
arrangements, mainly cash management pooling, which give NWB Group a legal right to set off the financial asset against a financial liability due to the same counterparty.
(3)
NWB Group holds collateral in respect of individual loans – amortised cost to banks and customers. This collateral includes mortgages over property (both personal and
commercial); charges over business assets such as plant and equipment, inventories and trade debtors; and guarantees of lending from parties other than the borrower. NWB
Group obtains collateral in the form of securities in reverse repurchase agreements. Collateral values are capped at the value of the loan.
(4)
Stage 3 mortgage exposures have relatively limited uncovered exposure reflecting the security held. On unsecured credit cards and other personal borrowing, the residual
uncovered amount reflects historical experience of continued cash recovery post default through ongoing engagement with customers.
(5)
Stage 3 exposures post credit risk enhancement and mitigation in Wholesale mainly represent enterprise value and the impact of written down collateral values; an individual
assessment to determine ECL will consider multiple scenarios and in some instances allocate a probability weighting to a collateral value in excess of the written down value.
(6)
£0.2 billion (2020 – £0.2 billion) Personal Stage 3 balances primarily relate to loan commitments, the draw down of which is effectively prohibited.
(7)
The Personal gross exposure value includes £11.4 billion (2020 – £9.5 billion) in respect of pipeline mortgages where a committed offer has been made to a customer but where the
funds have not yet been drawn down. When drawn down, the exposure would be covered by a security over the borrower’s property
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
45
Credit risk – Banking activities continued
Personal portfolio
(audited)
Disclosures in the Personal portfolio section include drawn exposure (gross of provisions).
2021
2020
Retail
Private
Retail
Private
Banking
Banking
Total
Banking
Banking
Total
Personal lending
£m
£m
£m
£m
£m
£m
Mortgages
157,027
12,210
169,237
145,275
10,345
155,620
Of which:
Owner occupied
143,969
10,712
154,681
132,564
9,091
141,655
Buy-to-let
13,058
1,498
14,556
12,711
1,253
13,964
Interest only - variable
2,427
4,714
7,141
2,816
4,203
7,019
Interest only - fixed
12,471
5,707
18,178
11,879
4,509
16,388
Mixed
(1)
7,447
—
7,447
5,979
—
5,979
Impairment provisions
(2)
303
7
310
343
5
348
Other personal lending
(3)
8,585
1,937
10,522
8,610
1,546
10,156
Impairment provisions
(2)
927
18
945
1,091
18
1,109
Total personal lending
165,612
14,147
179,759
153,885
11,891
165,776
Mortgage LTV ratios
- Total portfolio
55%
59%
55%
58%
58%
58%
- Stage 1
55%
59%
55%
56%
58%
56%
- Stage 2
54%
59%
54%
68%
62%
68%
- Stage 3
50%
64%
53%
55%
64%
56%
- Buy-to-let
51%
57%
52%
53%
56%
53%
- Stage 1
51%
58%
52%
52%
56%
52%
- Stage 2
52%
55%
52%
61%
59%
61%
- Stage 3
52%
53%
52%
57%
53%
56%
Gross new mortgage lending
(4)
34,161
2,790
36,951
29,734
2,078
31,812
Of which:
Owner occupied
32,555
2,509
35,064
28,827
1,860
30,687
Weighted average LTV
66%
65%
66%
69%
66%
69%
Buy-to-let
1,606
281
1,887
907
218
1,125
Weighted average LTV
62%
65%
63%
63%
62%
63%
Interest only - variable rate
12
811
823
69
1,053
1,122
Interest only - fixed rate
2,284
1,532
3,816
1,439
675
2,114
Mixed
(1)
2,186
—
2,186
1,600
—
1,600
Mortgage forbearance
Forbearance flow
229
16
245
393
46
439
Forbearance stock
789
3
792
876
15
891
Current
495
—
495
423
13
436
1-3 months in arrears
110
2
112
277
—
277
>3 months in arrears
184
1
185
176
2
178
(1)
Includes accounts which have an interest only sub-account and a capital and interest sub-account to provide a more comprehensive view of interest only exposures.
(2)
Retail Banking excludes a non-material amount of provisions held on relatively small legacy portfolios.
(3)
Comprises unsecured lending except for Private Banking, which includes both secured and unsecured lending. It excludes loans that are commercial in nature.
(4)
Retail Banking excludes additional lending to existing customers.

The mortgage portfolio grew strongly during 2021, assisted
by the UK stamp duty reduction.

LTV ratios improved as high demand increased house prices
during the year.

The existing mortgage stock and new business were closely
monitored against agreed risk appetite parameters. These
included LTV ratios, buy-to-let concentrations, new-build
concentrations and credit quality. Lending criteria were
cautiously relaxed during the year as demand returned and
economic conditions improved.

Demand for mortgages was mostly within owner occupier
mortgages, consequently there has been a reduction in the
proportion of interest only and buy-to-let mortgages.

In the Retail Banking mortgage portfolio, 38% of the stock of
lending was in Greater London and the South East (2020 –
38%). The weighted average LTV for these regions was 54%
(2020 – 55%) compared to all regions 55%.

Forbearance flows and arrears levels remained low relative
to historic norms, with customers able to utilise payment
holidays during the first half of the year.

Unsecured lending overall reduced during the year as
demand was subdued with lower levels of consumer
spending.

As noted previously, the improved economic outlook
including a more positive forecast on unemployment and
house prices, resulted in reduced ECL.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
46
Credit risk – Banking activities continued
Personal portfolio
(audited)
Mortgage LTV distribution by stage
The table below shows gross mortgage lending and related ECL by LTV band for Retail Banking. Mortgage lending not within the
scope of IFRS 9 ECL reflected portfolios carried at fair value.
Mortgages
ECL provisions
ECL provisions coverage (2)
Not
Of which:
within
gross
IFRS 9
new
Stage 1
Stage 2
Stage 3
ECL scope
Total
lending
Stage 1
Stage 2
Stage 3
Total (1)
Stage 1
Stage 2
Stage 3
Total
2021
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
%
%
%
%
≤50%
52,817
3,390
421
—
56,628
5,521
6
42
85
133
—
1.2
20.2
0.2
>50% and
≤70%
64,362
3,919
353
—
68,634
12,024
10
49
56
115
—
1.3
15.9
0.2
>70% and
≤80%
23,260
1,167
72
—
24,499
10,716
3
17
10
30
—
1.5
13.9
0.1
>80% and
≤90%
5,822
236
18
60
6,136
4,846
—
8
3
11
—
3.4
16.7
0.2
>90% and
≤100%
1,080
55
8
—
1,143
1,053
—
5
2
7
—
9.1
25.0
0.6
>100%
13
17
5
—
35
—
—
2
2
4
—
11.8
40.0
11.4
Total with LTVs
147,354
8,784
877
60
157,075
34,160
19
123
158
300
—
1.4
18.0
0.2
Other
10
1
1
—
12
1
—
—
—
—
—
—
—
—
Total
147,364
8,785
878
60
157,087
34,161
19
123
158
300
—
1.4
18.0
0.2
2020
≤50%
42,193
3,585
348
112
46,238
4,026
3
29
63
95
—
0.8
18.2
0.2
>50% and
≤70%
50,853
6,102
334
31
57,320
8,845
6
49
50
105
—
0.8
14.9
0.2
>70% and
≤80%
18,979
8,922
99
8
28,008
10,835
7
47
16
70
—
0.5
16.0
0.2
>80% and
≤90%
7,669
5,326
36
6
13,037
5,037
3
46
7
56
—
0.9
18.5
0.4
>90% and
≤100%
363
122
9
2
496
832
—
4
2
6
0.1
3.3
24.8
1.3
>100%
47
92
17
2
158
—
—
6
5
11
—
6.5
29.4
7.0
Total with LTVs
120,104
24,149
843
161
145,257
29,575
19
181
143
343
—
0.7
16.9
0.2
Other
14
3
1
—
18
159
—
—
—
—
—
1.3
20.7
1.0
Total
120,118
24,152
844
161
145,275
29,734
19
181
143
343
—
0.7
16.9
0.2
(1)
Excludes a non-material amount of provisions held on relatively small legacy portfolios.
(2)
ECL provisions coverage is ECL provisions divided by mortgages
.

ECL coverage rates increased through the LTV bands
with Retail Banking having only limited exposures in the
highest LTV bands. The relatively high coverage level in
the lowest LTV band for Retail Banking included the
effect of time-discounting on expected recoveries and
reflects a modelling approach that captures losses
expected from both repossession and also other
recovery action.

The improved economic outlook resulted in decreased
account level IFRS 9 PDs. Consequently, compared to the
2020 year end, a lower proportion of accounts exhibited
a SICR with an associated migration of exposures from
Stage 2 into Stage 1.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
47
Credit risk – Banking activities continued
Personal portfolio
(audited)
Mortgage LTV distribution by region
The table below shows gross mortgage lending by LTV band for Retail Banking, by geographical region.
Weighted
≤50%
50%≤80%
80%≤100%
>100%
Total
average LTV
Other
Total
2021
£m
£m
£m
£m
£m
%
£m
£m
South East
11,897
17,824
879
1
30,601
53
3
30,604
Greater London
11,891
16,248
1,463
1
29,603
54
3
29,606
Scotland
2,026
4,462
428
1
6,917
58
—
6,917
North West
5,215
8,408
633
2
14,258
54
1
14,259
South West
5,566
8,364
495
1
14,426
53
2
14,428
West Midlands
3,797
7,127
546
1
11,471
56
1
11,472
East of England
6,678
11,365
814
1
18,858
55
1
18,859
Rest of the UK
9,559
19,336
1,961
24
30,880
57
2
30,882
Total
56,629
93,134
7,219
32
157,014
55
13
157,027
2020
South East
9,608
16,523
2,333
3
28,467
56
4
28,471
Greater London
11,444
14,006
1,617
2
27,069
53
4
27,073
Scotland
1,371
4,124
836
—
6,331
62
—
6,331
North West
3,625
8,532
1,320
1
13,478
59
2
13,480
South West
4,512
8,140
873
3
13,528
56
3
13,531
West Midlands
2,869
6,605
1,242
4
10,720
60
1
10,721
East of England
5,630
9,869
1,569
2
17,070
57
1
17,071
Rest of the UK
7,178
17,529
3,744
143
28,594
61
3
28,597
Total
46,237
85,328
13,534
158
145,257
58
18
145,275
Commercial real estate (CRE)*
The CRE portfolio comprises exposures to entities involved in the development of, or investment in, commercial and residential
properties (including house builders but excluding housing associations, construction and the building materials sub-sector). The
sector is reviewed regularly by senior executive committees. Reviews include portfolio credit quality, capital consumption and
control frameworks.
2021
2020
By sub-sector
£m
£m
Investment
Residential
(1)
2,980
2,790
Office
(2)
1,664
1,886
Retail
(3)
2,144
2,253
Industrial
(4)
1,718
1,689
Mixed/other
(5)
936
1,924
9,442
10,542
Development
Residential
(1)
1,295
1,796
Office
(2)
68
82
Retail
(3)
21
93
Industrial
(4)
35
67
Mixed/other
(5)
15
20
1,434
2,058
Total
(6)
10,876
12,600
*Not within audit scope
(1)
Properties including houses, flats and student accommodation.
(2)
Properties including offices in central business districts, regional headquarters and business parks.
(3)
Properties including high street retail, shopping centres, restaurants, bars and gyms.
(4)
Properties including distribution centres, manufacturing and warehouses.
(5)
Properties that do not fall within the other categories. Mixed generally relates to a mixture of retail/office with residential.
(6)
99% (2020 – 99%) of the total exposure relates to the UK
.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
48
Credit risk – Banking activities continued
Commercial real estate
(audited)
CRE LTV distribution by stage
The table below shows CRE current exposure and related ECL by LTV band.
Current exposure (gross of provisions) (1,2)
ECL provisions
ECL provisions coverage (4)
Not within
IFRS
Stage
Stage
Stage
9 ECL
Stage
Stage
Stage
Stage
Stage
Stage
1
2
3
scope (3)
Total
1
2
3
Total
1
2
3
Total
2021
£m
£m
£m
£m
£m
£m
£m
£m
£m
%
%
%
%
≤50%
3,955
232
13
—
4,200
1
4
3
8
—
1.7
23.1
0.2
>50% and
≤70%
2,851
108
29
—
2,988
2
1
17
20
0.1
0.9
58.6
0.7
>70% and
≤100%
266
21
25
—
312
1
—
11
12
0.4
—
44.0
3.9
>100%
205
4
19
—
228
—
1
12
13
—
25.0
63.2
5.7
Total with LTVs
7,277
365
86
—
7,728
4
6
43
53
0.1
1.6
50.0
0.7
Total portfolio average LTV
(%)
50%
49%
76%
—
50%
—
—
—
—
—
—
—
—
Other
(5)
1,485
194
35
—
1,714
3
9
13
25
0.2
4.7
37.1
1.5
Development
(6)
1,271
125
38
—
1,434
2
2
20
24
0.2
1.6
52.6
1.7
Total
10,033
684
159
—
10,876
9
17
76
102
0.1
2.5
47.8
0.9
2020
≤50%
2,824
2,505
19
—
5,348
29
80
5
114
1.0
3.2
26.3
2.1
>50% and
≤70%
1,658
1,466
130
—
3,254
25
48
47
120
1.5
3.3
36.2
3.7
>70% and
≤100%
110
116
52
—
278
1
7
26
34
0.9
6.0
50.0
12.2
>100%
34
37
60
—
131
2
2
23
27
5.9
5.4
38.3
20.6
Total with LTVs
4,626
4,124
261
—
9,011
57
137
101
295
1.2
3.3
38.7
3.3
Total portfolio average LTV
(%)
47%
47%
80%
—
47%
—
—
—
—
—
—
—
—
Other
(5)
1,163
307
39
22
1,531
3
28
32
63
0.3
9.1
82.1
4.2
Development
(6)
735
1,207
111
5
2,058
11
41
47
99
1.5
3.4
42.3
4.8
Total
6,524
5,638
411
27
12,600
71
206
180
457
1.1
3.7
43.8
3.6
(1)
Comprises gross lending, interest rate hedging derivatives and other assets carried at fair value that are managed as part of the overall CRE portfolio.
(2)
The exposure in Stage 3 mainly relates to legacy assets.
(3)
Includes exposures relating to non-modelled portfolios and other exposures carried at fair value, including derivatives.
(4)
ECL provisions coverage is ECL provisions divided by current exposure.
(5)
Relates mainly to business banking, rate risk management products and unsecured corporate lending.
(6)
Relates to the development of commercial and residential properties. LTV is not a meaningful measure for this type of lending activity.

Overall
– The majority of the CRE portfolio was located and
managed in the UK. Business appetite and strategy was
aligned across NWB Group.

2021 trends
– The continued reduction in the real estate
exposure was a consequence of active portfolio
management to rebalance the size and composition of the
CRE portfolio. In addition, customer appetite to borrow was
muted, particularly amongst larger customers. At a sub-
sector level, the residential market had a positive out-turn
over the year; the retail sector exhibited mixed
performance in line with changing consumer habits; the
industrial market performed very strongly; with uncertainty
continuing in the office sub-sector as occupiers moved to a
more flexible way of working.

Credit quality
– NWB Group entered the COVID-19 period
with a conservatively positioned CRE portfolio, which
helped to mitigate the effect of COVID-19. The majority of
the defaults during 2021 were in the retail sector,
particularly in the fashion-led shopping centre sub-sector.
NWB Group completed a strategic sale of a portfolio of
these loans during 2021. Customers experienced reduced
rent collections during COVID-19 albeit rental payments
have now normalised. Outside of retail, there was limited
distress as noted, uncertainty still remains, particularly in
relation to the office sub-sector and the portfolio continues
to be actively reviewed and managed.

Risk appetite
– Lending appetite was gradually and
selectively increased by sub-sector, particularly towards the
end of 2021, albeit these remain below pre-COVID-19
levels.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
49
Credit risk – Banking activities continued
Flow statements
(audited)
The flow statements that follow show the main ECL and related
income statement movements. They also show the changes in
ECL as well as the changes in related financial assets used in
determining ECL. Due to differences in scope, exposures may
differ from
those reported in other tables, principally in relation
to exposures in Stage 1 and Stage 2. These differences do not
have a material ECL effect. Other points to note:

Financial assets include treasury liquidity portfolios,
comprising balances at central banks and debt securities, as
well as loans. Both modelled and non-modelled portfolios are
included.

Stage transfers (for example, exposures moving from Stage
1 into Stage 2) are a key feature of the ECL movements,
with the net re-measurement cost of transitioning to a worse
stage being a primary driver of income statement charges.
Similarly, there is an ECL benefit for accounts improving
stage.

Changes in risk parameters shows the reassessment of the
ECL within a given stage, including any ECL overlays and
residual income statement gains or losses at the point of
write-off or accounting write-down.

Other (P&L only items) includes any subsequent changes in
the value of written-down assets (for example, fortuitous
recoveries) along with other direct write-off items such as
direct recovery costs. Other (P&L only items) affects the
income statement but does not affect balance sheet ECL
movements.

Amounts written-off represent the gross asset written-
down against accounts with ECL, including the net asset
write-down for any debt sale activity.

There were flows from Stage 1 into Stage 3 including
transfers due to unexpected default events. The small
number of write-offs in Stage 1 and Stage 2 reflect the
effect of portfolio debt sales and also staging at the start of
the analysis period.

The effect of any change in post model adjustments during
the year is typically reported under changes in risk
parameters, as are any effects arising from changes to the
underlying models. Refer to the section on Governance and
post model adjustments for further details.

All movements are captured monthly and aggregated.
Interest suspended post default is included within Stage 3
ECL with the movement in the value of suspended interest
during the year reported under currency translation and
other adjustments
.
Stage 1
Stage 2
Stage 3
Total
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
NWB Group total
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2021
303,032
365
60,326
2,060
3,272
1,285
366,630
3,710
Currency translation and other adjustments
(1,635)
—
(89)
—
99
(8)
(1,625)
(8)
Inter-Group transfers
105
—
—
—
—
—
105
—
Transfers from Stage 1 to Stage 2
(27,543)
(125)
27,543
125
—
—
—
—
Transfers from Stage 2 to Stage 1
47,879
971
(47,879)
(971)
—
—
—
—
Transfers to Stage 3
(268)
(1)
(1,841)
(197)
2,109
198
—
—
Transfers from Stage 3
110
15
895
120
(1,005)
(135)
—
—
Net re-measurement of ECL on stage transfer
(816)
704
256
144
Changes in risk parameters
(250)
(404)
93
(561)
Other changes in net exposure
67,273
72
(11,617)
(331)
(940)
(81)
54,716
(340)
Other (P&L only items)
(1)
1
(55)
(55)
Income statement (releases)/charges
(995)
(30)
213
(812)
Amounts written-off
—
—
(1)
(1)
(388)
(388)
(389)
(389)
Unwinding of discount
—
—
(53)
(53)
At 31 December 2021
388,953
231
27,337
1,105
3,147
1,167
419,437
2,503
Net carrying amount
388,722
26,232
1,980
416,934
At 1 January 2020
270,693
223
19,954
518
3,184
1,281
293,831
2,022
2020 movements
32,339
142
40,372
1,542
88
4
72,799
1,688
At 31 December 2020
303,032
365
60,326
2,060
3,272
1,285
366,630
3,710
Net carrying amount
302,667
58,266
1,987
362,920
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
50
Credit risk – Banking activities continued
Flow statements
(audited)
Stage 1
Stage 2
Stage 3
Total
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Retail Banking - mortgages
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2021
118,490
21
24,415
181
849
143
143,754
345
Currency translation and other adjustments
—
—
—
—
8
8
8
8
Transfers from Stage 1 to Stage 2
(9,662)
(3)
9,662
3
—
—
—
—
Transfers from Stage 2 to Stage 1
23,063
143
(23,063)
(143)
—
—
—
—
Transfers to Stage 3
(15)
—
(454)
(15)
469
15
—
—
Transfers from Stage 3
10
—
248
17
(258)
(17)
—
—
Net re-measurement of ECL on stage transfer
(138)
104
7
(27)
Changes in risk parameters
(1)
(3)
38
34
Other changes in net exposure
14,564
—
(2,116)
(21)
(189)
(12)
12,259
(33)
Other (P&L only items)
(2)
1
(19)
(20)
Income statement (releases)/charges
(141)
81
14
(46)
Amounts written-off
—
—
—
—
(4)
(4)
(4)
(4)
Unwinding of discount
—
—
(20)
(20)
At 31 December 2021
146,450
22
8,692
123
875
158
156,017
303
Net carrying amount
146,428
8,569
717
155,714
At 1 January 2020
118,299
11
7,697
58
816
128
126,812
197
2020 movements
191
10
16,718
123
33
15
16,942
148
At 31 December 2020
118,490
21
24,415
181
849
143
143,754
345
Net carrying amount
118,469
24,234
706
143,409

Despite the strong portfolio growth during 2021, ECL levels
for mortgages reduced during the same period. The
decrease in ECL was primarily a result of reduced PDs and
LGDs reflecting the improved economic outlook and stable
portfolio performance. This resulted in lower levels of SICR
identification and ECL requirement.

More specifically, the reduced PDs alongside muted
portfolio deterioration resulted in a net migration of assets
from Stage 2 into Stage 1, with an associated decrease
from lifetime ECL to a 12 month ECL.

With various customer support schemes available and the
revised economic outlook, Stage 3 ECL remained stable as
new inflows remaining subdued. The relatively small ECL
cost for net re-measurement on stage transfer included the
effect of risk targeted ECL adjustments, when previously in
Stage 2. Refer to the Governance and post model
adjustments section for further details.

Write-off occurs once the repossessed property has been
sold and there is a residual shortfall balance remaining
outstanding. This would typically be within five years from
default but can be longer. Given the moratorium on
repossession activity until later in 2021, write-offs remained
at a subdued level.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
51
Credit risk – Banking activities continued
Flow statements
(audited)
Stage 1
Stage 2
Stage 3
Total
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Retail Banking - Personal cards
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2021
1,676
41
1,071
178
83
55
2,830
274
Currency translation and other adjustments
—
—
—
—
(1)
—
(1)
—
Transfers from Stage 1 to Stage 2
(747)
(39)
747
39
—
—
—
—
Transfers from Stage 2 to Stage 1
867
118
(867)
(118)
—
—
—
—
Transfers to Stage 3
(13)
—
(64)
(28)
77
28
—
—
Transfers from Stage 3
—
—
7
4
(7)
(4)
—
—
Net re-measurement of ECL on stage transfer
(73)
151
20
98
Changes in risk parameters
(16)
(53)
6
(63)
Other changes in net exposure
313
16
(143)
(59)
(28)
(1)
142
(44)
Other (P&L only items)
1
(1)
2
2
Income statement (releases)/charges
(72)
38
27
(7)
Amounts written-off
—
—
—
—
(55)
(55)
(55)
(55)
Unwinding of discount
—
—
(4)
(4)
At 31 December 2021
2,096
47
751
114
69
45
2,916
206
Net carrying amount
2,049
637
24
2,710
At 1 January 2020
2,108
31
907
99
90
64
3,105
194
2020 movements
(432)
10
164
79
(7)
(9)
(275)
80
At 31 December 2020
1,676
41
1,071
178
83
55
2,830
274
Net carrying amount
1,635
893
28
2,556

The overall decrease in ECL was mainly due to the
reduction in Stage 2 ECL reflecting the improved economic
outlook and stable portfolio performance, causing PDs to
decrease. This resulted in reduced levels of SICR
identification and ECL requirement.

More specifically, the reduced PDs alongside muted
portfolio deterioration resulted in a net migration of assets
from Stage 2 into Stage 1, with an associated decrease
from lifetime ECL to a 12 month ECL.

Cards balances remained broadly consistent with the 2020
year end. In line with industry trends in the UK, credit card
balances decreased during the first half of the year but then
increased as lockdown restrictions eased and borrowing
demand increased.

With various customer support schemes available and the
improved economic outlook, Stage 3 inflows remained
subdued and therefore Stage 3 ECL movement was
minimal.

Charge-off (analogous to partial write-off) typically occurs
after 12 missed payments.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
52
Credit risk – Banking activities continued
Flow statements
(audited)
Stage 1
Stage 2
Stage 3
Total
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Retail Banking - other personal unsecured
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2021
2,668
49
2,802
372
479
398
5,949
819
Currency translation and other adjustments
—
—
—
—
2
2
2
2
Transfers from Stage 1 to Stage 2
(1,376)
(33)
1,376
33
—
—
—
—
Transfers from Stage 2 to Stage 1
1,640
137
(1,640)
(137)
—
—
—
—
Transfers to Stage 3
(7)
—
(280)
(100)
287
100
—
—
Transfers from Stage 3
3
5
78
49
(81)
(54)
—
—
Net re-measurement of ECL on stage transfer
(112)
135
90
113
Changes in risk parameters
(15)
(40)
50
(5)
Other changes in net exposure
708
12
(762)
(70)
(65)
(22)
(119)
(80)
Other (P&L only items)
1
—
3
4
Income statement (releases)/charges
(114)
25
121
32
Amounts written-off
—
—
—
—
(112)
(112)
(112)
(112)
Unwinding of discount
—
—
(14)
(14)
At 31 December 2021
3,636
43
1,574
242
510
438
5,720
723
Net carrying amount
3,593
1,332
72
4,997
At 1 January 2020
4,295
53
1,792
206
476
405
6,563
664
2020 movements
(1,627)
(4)
1,010
166
3
(7)
(614)
155
At 31 December 2020
2,668
49
2,802
372
479
398
5,949
819
Net carrying amount
2,619
2,430
81
5,130

The overall decrease in ECL was mainly due to the
reduction in Stage 2 ECL reflecting the improved economic
outlook and stable portfolio performance, causing PDs to
decrease. This resulted in reduced levels of SICR
identification and ECL requirement.

More specifically, the reduced PDs alongside muted
portfolio deterioration resulted in a net migration of assets
from Stage 2 into Stage 1, with an associated decrease
from lifetime ECL to a 12 month ECL.

In line with industry trends in the UK, unsecured balances
reduced, amplifying the ECL reductions within the portfolio.
This has stabilised as UK lockdown restrictions have eased
and borrowing demand increased.

With various customer support schemes available and the
improved economic outlook, Stage 3 inflows remained
subdued and therefore Stage 3 ECL movement was
minimal.

Write-off occurs once recovery activity with the customer
has been concluded or there are no further recoveries
expected, but no later than six years after default.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
53
Credit risk – Banking activities continued
Flow statements
(audited)
Stage 1
Stage 2
Stage 3
Total
Commercial Banking - commercial
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
real estate
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2021
10,675
66
6,721
241
499
195
17,895
502
Currency translation and other adjustments
(4)
—
(3)
—
—
(11)
(7)
(11)
Inter-group transfers
—
—
—
—
—
—
—
—
Transfers from Stage 1 to Stage 2
(1,929)
(12)
1,929
12
—
—
—
—
Transfers from Stage 2 to Stage 1
4,993
144
(4,993)
(144)
—
—
—
—
Transfers to Stage 3
(14)
—
(237)
(12)
251
12
—
—
Transfers from Stage 3
15
2
63
6
(78)
(8)
—
—
Net re-measurement of ECL on stage transfer
(115)
27
20
(68)
Changes in risk parameters (model inputs)
(88)
(53)
(11)
(152)
Other changes in net exposure
823
15
(1,926)
(42)
(318)
(5)
(1,421)
(32)
Other (P&L only items)
—
—
—
—
Income statement (releases)/charges
(188)
(68)
4
(252)
Amounts written-off
—
—
—
—
(106)
(106)
(106)
(106)
Unwinding of discount
—
—
(1)
(1)
At 31 December 2021
14,559
12
1,554
35
248
85
16,361
132
Net carrying amount
14,547
1,519
163
16,229
At 1 January 2020
14,714
20
1,456
17
403
157
16,573
194
2020 movements
(4,039)
46
5,265
224
96
38
1,322
308
At 31 December 2020
10,675
66
6,721
241
499
195
17,895
502
Net carrying amount
10,609
6,480
304
17,393

Stage 1 and Stage 2 ECL reduced significantly due to the
improvement in the economic outlook, causing both PDs
and LGDs to decrease.

The updated economics also resulted in a migration of
assets from Stage 2 into Stage 1 as improved underlying
PDs meant assets no longer met Stage 2 criteria.

Flows into Stage 3 remained low as government support
schemes combined with the economic recovery, suppressed
a higher level of flows into Stage 3.

The reduction in Stage 3 balances was largely a result of a
portfolio sale of non-performing exposure.

Performing exposure reduced due to repayments of existing
borrowing with lower appetite for new lending to replace it.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
54
Credit risk – Banking activities continued
Flow statements
(audited)
Stage 1
Stage 2
Stage 3
Total
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Commercial Banking - business banking
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2021
10,164
34
1,764
121
189
132
12,117
287
Currency translation and other adjustments
—
—
—
—
—
1
—
1
Transfers from Stage 1 to Stage 2
(2,856)
(11)
2,856
11
—
—
—
—
Transfers from Stage 2 to Stage 1
2,142
121
(2,142)
(121)
—
—
—
—
Transfers to Stage 3
(63)
—
(402)
(24)
465
24
—
—
Transfers from Stage 3
10
2
28
7
(38)
(9)
—
—
Net re-measurement of ECL on stage transfer
(113)
141
31
59
Changes in risk parameters
(9)
(19)
6
(22)
Other changes in net exposure
(75)
(2)
(383)
(23)
(27)
(4)
(485)
(29)
Other (P&L only items)
—
—
(30)
(30)
Income statement (releases)/charges
(124)
99
3
(22)
Amounts written-off
—
—
—
—
(27)
(27)
(27)
(27)
Unwinding of discount
—
—
(8)
(8)
At 31 December 2021
9,322
22
1,721
93
562
146
11,605
261
Net carrying amount
9,300
1,628
416
11,344
At 1 January 2020
5,123
24
623
37
188
147
5,934
208
2020 movements
5,041
10
1,141
84
1
(15)
6,183
79
At 31 December 2020
10,164
34
1,764
121
189
132
12,117
287
Net carrying amount
10,130
1,643
57
11,830

At a total level, exposure decreased with reduction mainly
due to the repayment of government scheme debt.

The updated economics resulted in an improvement in
underlying credit metrics resulting in migration of exposure
from Stage 2 into Stage 1 with a consequential reduction
from lifetime ECL to a 12 month ECL calculation. However,
the transfer of exposure from Stage 1 into Stage 2
outweighed the positive migration and was largely related
to customers with government scheme borrowing.

Flows of defaulted exposure into Stage 3, although
relatively low, were mainly a result of government scheme
lending rather than conventional debt. This was reflected in
the lower ECL associated with the Stage 3 transfers.

The portfolio continued to benefit from cash recoveries post
write-off, which are reported as other (P&L only items).
Write-off occurs once recovery activity with the customer
has been concluded or there are no further recoveries
expected, but no later than five years after default.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
55
Credit risk – Banking activities continued
Flow statements
(audited)
Stage 1
Stage 2
Stage 3
Total
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Financial
assets
ECL
Commercial Banking - other
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2021
30,382
114
20,576
885
917
325
51,875
1,324
Currency translation and other adjustments
(221)
—
(60)
—
62
9
(219)
9
Inter-group transfers
105
—
—
—
—
—
105
—
Transfers from Stage 1 to Stage 2
(5,446)
(23)
5,446
23
—
—
—
—
Transfers from Stage 2 to Stage 1
10,820
273
(10,820)
(273)
—
—
—
—
Transfers to Stage 3
(76)
—
(350)
(20)
426
20
—
—
Transfers from Stage 3
27
6
468
37
(495)
(43)
—
—
Net re-measurement of ECL on stage transfer
(239)
129
88
(22)
Changes in risk parameters
(97)
(217)
(16)
(330)
Other changes in net exposure
1,736
27
(3,480)
(104)
(219)
(41)
(1,963)
(118)
Other (P&L only items)
2
(1)
6
7
Income statement (releases)/charges
(307)
(193)
37
(463)
Amounts written-off
—
—
—
—
(79)
(79)
(79)
(79)
Unwinding of discount
—
—
(5)
(5)
At 31 December 2021
37,327
61
11,780
460
612
258
49,719
779
Net carrying amount
37,266
11,320
354
48,940
At 1 January 2020
39,836
73
6,926
95
1,033
354
47,795
522
2020 movements
(9,454)
41
13,650
790
(116)
(29)
4,080
802
At 31 December 2020
30,382
114
20,576
885
917
325
51,875
1,324
Net carrying amount
30,268
19,691
592
50,551

The decrease in ECL across Stage 1 and Stage 2 was
primarily due to improvement in the economic outlook,
causing both PDs and LGDs to reduce.

The updated economics also resulted in the migration of
assets from Stage 2 into Stage 1 with a consequential
decrease from a lifetime ECL to a 12 month ECL
calculation.

For flows into Stage 3, defaults remained suppressed,
reflecting both the effect of increased liquidity from
government customer support schemes and the improving
economic environment.

Other changes in net exposure decreased following the
commencement of repayments of government scheme debt
and strategic reduction in high risk sectors.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
56
Credit risk – Banking activities continued
Stage 2 decomposition – arrears status and contributing factors
The tables below show Stage 2 decomposition for the Personal and Wholesale portfolios.
UK mortgages
Credit cards
Other
Total
Loans
ECL
Loans
ECL
Loans
ECL
Loans
ECL
2021
£m
£m
£m
£m
£m
£m
£m
£m
Personal
Currently >30 DPD
298
7
8
4
39
12
345
23
Currently <=30 DPD
8,623
116
726
111
1,495
230
10,844
457
- PD deterioration
1,760
41
433
80
765
137
2,958
258
- PD persistence
2,476
30
214
18
605
75
3,295
123
- Other driver (adverse credit, forbearance etc)
4,387
45
79
13
125
18
4,591
76
Total Stage 2
8,921
123
734
115
1,534
242
11,189
480
2020
Personal
Currently >30 DPD
298
14
8
4
57
21
363
39
Currently <=30 DPD
23,946
167
1,050
176
2,642
351
27,638
694
- PD deterioration
11,165
127
685
133
1,784
291
13,634
551
- PD persistence
9,106
21
277
26
761
47
10,144
94
- Other driver (adverse credit, forbearance etc)
3,675
19
88
17
97
13
3,860
49
Total Stage 2
24,244
181
1,058
180
2,699
372
28,001
733

The improved economic outlook, including forecast
increases in unemployment, resulted in decreased account
level IFRS 9 PDs during the year. Consequently, compared to
2020, a smaller proportion of accounts exhibited significant
PD deterioration causing Stage 2 exposures to decrease
significantly and increase the proportion of cases in Stage 2
for other reasons.

During the year, a subset of customers who had accessed
payment holiday support and where their risk profile was
identified as relatively high risk, were collectively migrated
into Stage 2. For mortgages, in Retail Banking,
approximately £0.7 billion of exposures were collectively
migrated from Stage 1 into Stage 2. The impact of collective
migrations on unsecured lending was much more limited.
Property
Corporate
Financial institutions
Other
Total
Loans
ECL
Loans
ECL
Loans
ECL
Loans
ECL
Loans
ECL
2021
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Wholesale
Currently >30 DPD
198
2
346
7
1
—
1
—
546
9
Currently <=30 DPD
1,840
68
11,826
513
566
35
36
—
14,268
616
- PD deterioration
585
38
8,421
412
489
33
1
—
9,496
483
- PD persistence
107
7
426
28
5
—
1
—
539
35
- Other driver (forbearance, RoCL etc)
1,148
23
2,979
73
72
2
34
—
4,233
98
Total Stage 2
2,038
70
12,172
520
567
35
37
—
14,814
625
2020
Wholesale
Currently >30 DPD
89
4
148
11
1
—
—
—
238
15
Currently <=30 DPD
7,659
300
20,559
978
1,360
34
47
—
29,625
1,312
- PD deterioration
6,921
268
17,697
878
1,279
32
7
—
25,904
1,178
- PD persistence
131
4
493
16
6
—
—
—
630
20
- Other driver (forbearance, RoCL etc)
607
28
2,369
84
75
2
40
—
3,091
114
Total Stage 2
7,748
304
20,707
989
1,361
34
47
—
29,863
1,327

The improved economic outlook, including upgrades in GDP
and commercial real estate valuations, resulted in a
reduction of IFRS 9 PDs. Consequently, compared to 2020,
a large proportion of exposure no longer exhibited a SICR
and migrated back into Stage 1 resulting in a reduction in
Stage 2 exposure.

PD deterioration remained the primary trigger for
identifying a SICR and Stage 2 treatment, although there
was also an increase in arrears and other drivers.

The increase in arrears was partially a result of the
commencement of payments on government scheme debt.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
57
Credit risk – Banking activities continued
Stage 2 decomposition by a significant increase in credit risk trigger
UK mortgages
Credit cards
Other
Total
2021
£m
%
£m
%
£m
%
£m
%
Personal trigger
(1)
PD movement
2,010
22.5
440
59.9
796
51.9
3,246
29.0
PD persistence
2,486
27.9
214
29.2
606
39.5
3,306
29.5
Adverse credit bureau recorded with credit reference agency
3,124
35.0
45
6.1
58
3.8
3,227
29.0
Forbearance support provided
134
1.5
2
0.3
22
1.4
158
1.4
Customers in collections
67
0.8
2
0.3
12
0.8
81
0.7
Collective SICR and other reasons
(2)
1,065
11.9
31
4.2
36
2.3
1,132
10.1
Days past due >30
35
0.4
—
—
4
0.3
39
0.3
8,921
100
734
100
1,534
100
11,189
100
2020
Personal trigger
(1)
PD movement
11,455
47.2
692
65.4
1,838
68.1
13,985
50.0
PD persistence
9,106
37.6
277
26.2
762
28.2
10,145
36.2
Adverse credit bureau recorded with credit reference agency
2,420
10.0
37
3.5
37
1.4
2,494
8.9
Forbearance support provided
100
0.4
1
0.1
7
0.3
108
0.4
Customers in collections
113
0.5
1
0.1
11
0.4
125
0.4
Collective SICR and other reasons
(2)
1,045
4.3
50
4.7
44
1.6
1,139
4.1
Days past due >30
5
—
—
—
—
—
5
—
24,244
100
1,058
100
2,699
100
28,001
100

The improved economic outlook, including a more optimistic
forecast for unemployment, resulted in decreased account
level IFRS 9 PDs. Consequently, compared to 2020, a smaller
proportion of accounts exhibited significant PD deterioration
at 31 December 2021.

Since the 2020 year end, large populations of Stage 2 were
migrated into Stage 1 reflecting continued reductions in PDs
as a result of the improved economic outlook alongside
stable portfolio performance during the year.

However, a subset of customers who had accessed payment
holiday support, and where their risk profile was identified
as relatively high risk, were collectively migrated into Stage
2. In Retail Banking (primarily mortgages), approximately
£0.7 billion of exposures were collectively migrated from
Stage 1 into Stage 2. The effect of collective migrations on
unsecured lending was much more limited. PD movement
made up a smaller proportion of Stage 2 for UK mortgages
than at the 2020 year end, supporting the use of the
collective SICR migration approach described above.
Property
Corporate
FI
Other
Total
2021
£m
%
£m
%
£m
%
£m
%
£m
%
Wholesale trigger
(1)
PD movement
622
30.6
8,548
70.3
491
86.6
1
2.7
9,662
65.3
PD persistence
107
5.3
426
3.5
5
0.9
1
2.7
539
3.6
Risk of Credit Loss
544
26.7
1,920
15.8
53
9.3
34
91.9
2,551
17.2
Forbearance support provided
68
3.3
346
2.8
4
0.7
—
—
418
2.8
Customers in collections
21
1.0
66
0.5
—
—
—
—
87
0.6
Collective SICR and other reasons
(2)
539
26.4
767
6.3
14
2.5
1
2.7
1,321
8.9
Days past due >30
137
6.7
99
0.8
—
—
—
—
236
1.6
2,038
100
12,172
100
567
100
37
100
14,814
100
2020
Wholesale trigger
(1)
PD movement
6,993
90.3
17,778
85.8
1,280
94.1
7
14.9
26,058
87.3
PD persistence
131
1.7
494
2.4
6
0.4
—
—
631
2.1
Risk of Credit Loss
220
2.8
1,461
7.1
53
3.9
40
85.1
1,774
5.9
Forbearance support provided
22
0.3
71
0.3
3
0.2
—
—
96
0.3
Customers in collections
24
0.3
94
0.5
—
—
—
—
118
0.4
Collective SICR and other reasons
(2)
341
4.4
746
3.6
19
1.4
—
—
1,106
3.7
Days past due >30
17
0.2
63
0.3
—
—
—
—
80
0.3
7,748
100
20,707
100
1,361
100
47
100
29,863
100
(1)
The table is prepared on a hierarchical basis from top to bottom, for example, accounts with PD deterioration may also trigger backstop(s) but are only reported under PD
deterioration.
(2)
Includes customers where a PD assessment cannot be undertaken due to missing PDs.

PD deterioration continued to be the primary trigger of
migration of exposures from Stage 1 into Stage 2. As the
economic outlook improved during 2021, there was a
reduction in cases triggered into Stage 2 exposure.

Moving exposures on to the Risk of Credit Loss framework
remained an important backstop indicator of a SICR.

There was a decrease in flows on to the Risk of Credit Loss
framework. However, the exposures classified under Stage
2 other driver increased over the period as less exposures
were captured under the Stage 2 PD deterioration. At a
total level, exposure on the Risk of Credit Loss framework
remained above pre-COVID-19 levels.

PD persistence related to the business banking portfolio
only.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
58
Capital, liquidity and funding risk
NWH Group continually ensures a comprehensive approach is
taken to the management of capital, liquidity and funding,
underpinned by frameworks, risk appetite and policies, to
manage and mitigate capital, liquidity and funding risks. The
framework ensures the tools and capability are in place to
facilitate the management and mitigation of risk ensuring the
Group operates within its regulatory requirements and risk
appetite.
Definitions
(audited)
Regulatory capital consists of reserves and instruments issued
that are available, have a degree of permanency and are
capable of absorbing losses. A number of strict conditions set by
regulators must be satisfied to be eligible as capital.
Capital adequacy risk is the risk that there is or will be
insufficient capital and other loss absorbing
debt
instruments to
operate effectively including meeting minimum regulatory
requirements, operating within Board approved risk appetite
and supporting its strategic goals.
Liquidity consists of assets that can be readily converted to cash
within a short timeframe at a reliable value. Liquidity risk is the
risk of being unable to meet financial obligations as and when
they fall due.
Funding consists of on-balance sheet liabilities that are used to
provide cash to finance assets. Funding risk is the risk of not
maintaining a diversified, stable and cost-effective funding base.
Liquidity and funding risks arise in a number of ways, including
through the maturity transformation role that banks perform.
The risks are dependent on factors such as:

Maturity profile;

Composition of sources and uses of funding;

The quality and size of the liquidity portfolio;

Wholesale market conditions; and

Depositor and investor behaviour.
Sources of risk
(audited)
Capital
The eligibility of instruments and financial resources as
regulatory capital is laid down by applicable regulation. Capital
is categorised by applicable regulation under two tiers (Tier 1
and Tier 2) according to the ability to absorb losses on either a
going or gone concern basis, degree of permanency and the
ranking of absorbing losses. There are three broad categories of
capital across these two tiers:

CET1 capital - CET1 capital must be perpetual and capable
of unrestricted and immediate use to cover risks or losses as
soon as these occur. This includes ordinary shares issued
and retained earnings.

Additional Tier 1 (AT1) capital - This is the second type of
loss absorbing capital and must be capable of absorbing
losses on a going concern basis. These instruments are
either written down or converted into CET1 capital when the
CET1 ratio falls below a pre-specified level.

Tier 2 capital - Tier 2 capital is the bank entities’
supplementary capital and provides loss absorption on a
gone concern basis. Tier 2 capital absorbs losses after Tier
capital. It typically consists of subordinated debt securities
with a minimum maturity of five years at the point of
issuance.
Minimum requirement for own funds and eligible liabilities
(MREL)
In addition to capital, other specific loss absorbing instruments,
including senior notes issued by NWB Plc, may be used to cover
certain gone concern capital requirements which, is referred to
as MREL. Gone concern refers to the situation in which
resources must be available to enable an orderly resolution, in
the event that the Bank of England (BoE) deems that NWB
Group has failed or is likely to fail.
Liquidity
Liquidity risk within NWB Plc is managed as part of the UK
Domestic Liquidity Sub-Group (UK DoLSub), which is regulated
by the PRA and comprises NWH Group’s four licensed deposit
taking UK banks: National Westminster Bank Plc, The Royal
Bank of Scotland plc, Coutts & Company, and Ulster Bank
Limited. On 3 May 2021, the Ulster Bank Limited business
transferred to National Westminster Bank Plc. Ulster Bank
Limited was removed from the UK DoLSub effective 1 January
2022. The planned removal of the Ulster Bank Limited license
remains subject to regulatory applications and approvals.
NWH Group maintains a prudent approach to the definition of
liquidity resources. NWH Group manages its liquidity to ensure it
is always available when and where required, taking into
account regulatory, legal and other constraints.
Liquidity resources are divided into primary and secondary
liquidity as follows:

Primary liquid assets include cash and balances at central
banks, Treasury bills and other high quality government and
US agency bonds.

Secondary liquid assets are eligible as collateral for local
central bank liquidity facilities. These assets include own-
issued securitisations or whole loans that are retained on
balance sheet and pre-positioned with a central bank so that
they may be converted into additional sources of liquidity at
very short notice.
Funding
NWB Plc maintains a diversified set of funding sources, including
customer deposits, wholesale deposits and term debt issuance.
NWB Plc also retains access to central bank funding facilities.
For further details on capital constituents and the regulatory
framework covering capital, liquidity and funding requirements,
please refer to the NatWest Group Pillar 3 Report 2021 on page
8. For MREL refer to page 10.
Managing capital requirements: regulated entities
In line with paragraph 135 of IAS 1 ‘Presentation of Financial
Statements’, NWB Group manages capital having regard to
regulatory requirements. Regulatory capital is monitored and
reported on an individual regulated bank legal entity basis
(‘bank entities’), as relevant in the jurisdiction for large
subsidiaries of NatWest Group. NatWest Group itself is
monitored and reported on a consolidated basis.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
59
Capital, liquidity and funding risk continued
Capital management
Capital management is the process by which the bank entities
ensure that they have sufficient capital and other loss-absorbing
instruments to operate effectively including meeting minimum
regulatory requirements, operating within Board-approved risk
appetite, maintaining credit ratings and supporting strategic
goals.
Capital management is critical in supporting the bank entities’
businesses and is also considered at Group level. It is enacted
through a NatWest Group-wide end to end framework.
Capital planning is integrated into NWB Group’s wider annual
budgeting process and is assessed and updated at least
monthly. This is summarised below. Other elements of capital
management, including risk appetite and stress testing, are set
out on pages 13 and 14.
Capital planning is one of the tools that NWB Group uses to
monitor and manage capital risk on a going and gone concern
basis, including the risk of excessive leverage.
Liquidity risk management
NWH Group manages its liquidity risk taking into account
regulatory, legal and other constraints to ensure sufficient
liquidity is available where required to cover liquidity stresses.
The size of the liquidity portfolio held in the UK DoLSub is
determined by referencing NWH Group’s liquidity risk appetite.
NWH Group retains a prudent approach to setting the
composition of the liquidity portfolio, which is subject to internal
policies and limits over quality of counterparty, maturity mix and
currency mix.
NWB Plc manages the majority of the UK DoLSub’s liquidity
portfolio under the responsibility of the NatWest Group
Treasurer.
Funding risk management
NWB Group manages funding risk through a comprehensive
framework which measures and monitors the funding risk on
the balance sheet.
The asset and liability types broadly match. Customer deposits
provide more funding than customer loans utilise.
Produce
capital plans

Capital plans are produced for NWB
Group, its key operating entities and its
businesses over a five year planning
horizon under expected and stress
conditions. Stressed capital plans are
produced to support internal stress testing
in the ICAAP for regulatory purposes.

Shorter term forecasts are developed
frequently in response to actual
performance, changes in internal and
external business environment and to
manage risks and opportunities.
Assess
capital
Adequacy

Capital plans are developed to maintain
capital of sufficient quantity and quality to
support NWB Group’s business, its
subsidiaries and strategic plans over the
planning horizon within approved risk
appetite, as determined via stress testing,
and minimum regulatory requirements.

Capital resources and capital requirements
are assessed across a defined planning
horizon.

Impact assessment captures input from
across NWB Group including from
businesses.
Inform capital
actions

Capital planning informs potential capital
actions including buy backs, redemptions,
dividends and new issuance to external
investors or via internal transactions.

Decisions on capital actions will be
influenced by strategic and regulatory
requirements, risk appetite, costs and
prevailing market conditions.

As part of capital planning, NatWest Group
will monitor its portfolio of issued capital
securities and assess the optimal blend
and most cost effective means of
financing.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
60
Capital, liquidity and funding risk continued
Key points
CET1 Ratio
Th
e CET1 ratio decreased 170 basis points over the period due to a £1.5 billion
decrease in CET1 capital and a £0.7 billion decrease in RWAs. The CET1 decrease
reflects the attributable profit in the period of £2.6 billion, offset by the following items:

dividends paid of £1.6 billion;

foreseeable charges of £1.4 billion;

a £0.6 billion decrease in the IFRS 9 transitional adjustment on expected credit
losses; and

other reserve movements.
RWA
Total RWAs decreased by £0.7 billion during 2021 driven by a £0.7 billion reduction in
credit risk due to repayments and expired facilities of £2.4 billion in Commercial
Banking. The transfer-in of Ulster Bank limited business in Q2 2021 resulted in the
offsetting increases in credit risk of £1.6 billion.
Leverage
CRR leverage ratio decreased by c.90 basis points driven by a £50.1 billion increase in
the leverage exposure due to an increase in cash and balances at central banks and a
£1.6 billion decrease in Tier 1 capital
.
Liquidity portfolio
The liquidity portfolio increased by £13.6 billion to £192.6 billion with primary liquidity
increasing by £23.6 billion to £123.7 billion. The increase in primary liquidity was
mainly driven by customer deposits, TFSME funding received and cash proceeds from
new issuances.
This is offset by the TFSME repayment, buy back of shares owned by
the UK Government, pension fund contributions, liability management exercise,
increase in lending and the purchase of additional mortgages. Secondary liquidity is
lower due to TFSME funding received, monthly repayments on underlying assets offset
with new England & Wales Pool creation.
Liquidity coverage ratio
The DoLSub Liquidity Coverage Ratio (LCR) increased during the year to 169% driven
by an increase in the liquidity portfolio offset by a lower level of increased net
outflows.
The increased liquidity portfolio was primarily driven by significant growth in
customer deposits which outstripped growth in customer lending during the year.
NSFR
The net stable funding ratio (NSFR) for FY 2021 was 151% compared to 144% in prior
year.
The increase is mainly due to deposits growth.
2021 £86.2bn
2020 17.8%
2021
16.1%
2020 £86.9bn
2021
3.8%
2020
4.7%
2020 £179.0bn
2021 £192.6bn
2020
152%
2021
169%
2021
151%
2020
144%
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
61
Capital, liquidity and funding risk continued
Minimum requirements
Capital adequacy ratios
The bank entities are subject to minimum capital requirements relative to RWAs. The table below summarises the minimum ratios
of capital to RWAs that the UK bank entities are expected to have to meet.
(1)
In response to COVID-19, many countries reduced their CCyB rates. In December 2021, the Financial Policy Committee announced an increase in the UK CCyB rate from 0% to 1%.
This rate will come into effect from December 2022 in line with the 12 month implementation period. The CBI continues to maintain the rate at 0% with an announcement of a
gradual increase of the CCyB expected in 2022.
(2)
The minimum requirements do not include any capital that the bank entities may be required to hold as a result of the Pillar 2 assessment
.
Leverage ratio
Following the publication of the new UK leverage ratio framework on 8 October 2021, NWB Plc will be expected to manage their
leverage ratio at the same level as firms in scope from 1 January 2022 and will be subject to the minimum requirement from 1
January 2023.
Liquidity and funding ratios
The table below summarises the minimum requirements for key liquidity and funding metrics, under the relevant legislative
framework. NWB Plc is a member of the UK DoLSub which is presented below.
(1)
Net Stable Funding ratio (NSFR) reported in line with CRR2 regulations finalised in June 2019. Following the publication of PS22/21 on 14 October 2021 a binding NSFR minimum
requirement of 100% will be effective from 1 January 2022.
Measurement
Capital, RWAs and leverage
The table below sets out the key Capital and leverage ratios on a PRA transitional basis. Refer to Note 26 on the consolidated
accounts for a more detailed breakdown of regulatory capital.
2021
2020
Capital adequacy ratios
%
%
CET1
(1)
16.1
17.8
Tier 1
18.6
20.2
Total
22.0
23.9
Capital
£m
£m
CET1
(1)
13,924
15,424
Tier 1
16,039
17,590
Total
18,945
20,765
Risk-weighted assets
Credit risk
72,716
73,445
Counterparty credit risk
574
576
Market risk
53
18
Operational risk
12,874
12,843
Total RWAs
86,217
86,882
Leverage
Tier 1 capital
(£m)
16,039
17,590
Leverage exposure (£m)
(2)
426,681
376,527
Leverage ratio (%)
(1)
3.8
4.7
(1)
Includes an IFRS 9 transitional adjustment of £0.4 billion (2020 - £1.0 billion). Excluding this adjustment, the CET1 ratio would be 15.7% (2020 – 16.6%) and the leverage ratio would
be 3.7% (2020 – 4.4%). The amended article for the prudential treatment of software assets was implemented in December 2020. Excluding this adjustment, the CET1 ratio would be
15.8% (2020 – 17.3%) and the leverage ratio would be 3.7% (2020 – 4.5%).
(2)
Leverage exposure is broadly aligned to the accounting value of on and off-balance sheet exposures albeit subject to specific adjustments for derivatives, securities financing
positions and off-balance sheet exposures
.
Type
CET1
Total Tier 1
Total capital
Minimum capital requirements
4.5%
6.0%
8.0%
Capital conservation buffer
2.5%
2.5%
2.5%
Countercyclical capital buffer
(1)
—
—
—
Total
(2)
7.0%
8.5%
10.5%
Type
Liquidity coverage ratio (LCR)
100%
Net stable funding ratio (NSFR)
(1)
—
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
62
Capital, liquidity and funding risk continued
Liquidity key metrics
Liquidity within NWB Plc is managed and regulated as part of the UK DoLSub. The table below sets out the key liquidity and related
metrics for the UK DoLSub.
2021
UK DoLSub
Liquidity coverage ratio
(1)
169%
Stressed outflow coverage
(2)
195%
Net stable funding ratio
(3)
151%
2020
Liquidity coverage ratio
(1)
152%
Stressed outflow coverage
(2)
168%
Net stable funding ratio
(3)
144%
(1)
The published LCR excludes Pillar 2 add-ons. NatWest Group calculates the LCR using its own interpretations of the EU LCR Delegated Act, which may change over time and may
not be fully comparable with those of other financial institutions.
(2)
NatWest Group’s stressed outflow coverage (SOC) is an internal measure calculated by reference to liquid assets as a percentage of net stressed contractual and behavioural
outflows over three months under the worst of three severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination of both as per ILAAP. This
assessment is performed in accordance with PRA guidance.
(3)
Following the publication of PS 22/21 on 14 October 2021, a binding Net Stable Funding Ratio (NSFR) minimum requirement of 100% will be effective from January 2022.
Leverage exposure
The leverage exposure is based on the CRR delegated act.
2021
2020
Leverage
£m
£m
Cash and balances at central banks
101,210
62,878
Derivatives
2,547
3,438
Financial assets
314,852
306,946
Other assets
7,502
7,341
Total assets
426,111
380,603
Derivatives
- netting and variation margin
(2,782)
(3,882)
- potential future exposures
1,405
1,386
Securities financing transactions gross up
146
191
Undrawn commitments
25,448
22,857
Regulatory deductions and other adjustments
(1,769)
(666)
Exclusion of core UK-group exposure
(21,878)
(23,962)
Leverage exposure
426,681
376,527
Liquidity portfolio
(audited)
The table below shows the liquidity portfolio by product, with primary liquidity aligned to internal stressed outflow coverage and
regulatory Liquidity coverage ratio (LCR) categorisation. Secondary liquidity comprises assets eligible for discount at central banks,
which do not form part of the liquid asset portfolio for LCR or internal stressed outflow purposes.
31 December 2021
31 December 2020
UK DoLSub (1)
NWB Plc
UK DoLSub
NWB Plc
£m
£m
£m
£m
Cash and balances at central banks
136,154
100,934
86,575
61,944
AAA to AA- rated governments
21,123
21,123
35,875
35,875
A+ and lower rated governments
—
—
—
—
Government guaranteed issuers, PSEs and GSEs
174
174
141
141
International organisations and MDBs
1,466
1,466
2,154
2,154
Level 1 bonds
22,763
22,763
38,170
38,170
LCR level 1 eligible assets
158,917
123,697
124,745
100,114
LCR level 2 eligible assets
—
—
—
—
Non-LCR eligible assets
—
—
—
—
Primary liquidity
158,917
123,697
124,745
100,114
Secondary liquidity
(2)
76,573
68,939
88,774
78,916
Total liquidity value
235,490
192,636
213,519
179,030
(1)
The UK DoLSub comprises NatWest Holdings Group’s four licensed deposit-taking UK banks: NWB Plc, RBS plc, Coutts and Company and Ulster Bank Limited. Ulster Bank Limited
was removed from the UK DoLSub effective 1 January 2022.
(2)
Comprises assets eligible for discounting at the Bank of England and other central banks.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
63
Capital, liquidity and funding risk continued
Funding sources
(audited)
2021
2020
Short-term
Long-term
Short-term
Long-term
less than
more than
less than
more than
1 year
1 year
Total
1 year
1 year
Total
£m
£m
£m
£m
£m
£m
Bank deposits
Repos
7,132
—
7,132
6,270
—
6,270
Other bank deposits
3,699
12,000
15,699
3,601
5,000
8,601
10,831
12,000
22,831
9,871
5,000
14,871
Customer deposits
Repos
14,541
—
14,541
5,167
—
5,167
Personal
176,510
674
177,184
157,157
942
158,099
Corporate
116,983
18
117,001
110,459
21
110,480
Non-bank financial institutions
20,714
—
20,714
19,848
11
19,859
328,748
692
329,440
292,631
974
293,605
Other financial liabilities
(1)
Debt securities in issue
Commercial papers and certificates of deposit
3,399
—
3,399
3,291
—
3,291
Covered bonds
53
2,833
2,886
53
2,967
3,020
Securitisations
—
867
867
—
772
772
3,452
3,700
7,152
3,344
3,739
7,083
Subordinated liabilities
88
123
211
313
917
1,230
Amounts due to holding company and fellow
subsidiaries
(2)
Bank and customer deposits
35,749
525
36,274
29,940
401
30,341
Internal MREL
33
5,654
5,687
26
3,882
3,908
Subordinated liabilities
13
3,060
3,073
18
3,291
3,309
35,795
9,239
45,034
29,984
7,574
37,558
Total funding
378,914
25,754
404,668
336,143
18,204
354,347
Of which: available in resolution
(3)
8,761
8,138
(1)
Excludes settlement balances of nil (2020 – £3,297 million) and derivative cash collateral of £99 million (2020 – £3 million).
(2)
Amounts due to holding companies and fellow subsidiaries relating to non-financial instruments of £102 million (2020 - £1 million) have been excluded from the table.
(3)
Eligible liabilities (as defined in the Banking Act 2009 as amended from time to time) that meet the eligibility criteria set out in the regulations, rules, policies, guidelines, or
statements of the Bank of England including the Statement of Policy published by the Bank of England in June 2018.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
64
Capital, liquidity and funding risk continued
Contractual maturity
(audited)
The table shows the residual maturity of third party financial instruments, based on contractual date of maturity of NWB Group’s
banking activities, including third party and intercompany hedging derivatives. Mandatory fair value through profit or loss
(MFVTPL) assets and held-for-trading (HFT) liabilities have been excluded from the maturity analysis due to their short-term nature
and are shown in total in the table below.
Banking activities
Less than
6 months
More than
MFVTPL
1 month
1-3 months
3-6 months
- 1 year
Subtotal
1-3 years
3-5 years
5 years
Total
and HFT
Total
2021
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Cash and balances at central banks
101,213
—
—
—
101,213
—
—
—
101,213
—
101,213
Derivatives
3
1
4
10
18
72
17
6
113
2,347
2,460
Loans to banks - amortised cost
2,646
183
1,338
6
4,173
9
—
—
4,182
—
4,182
Loans to customers - amortised
cost
(1)
35,774
17,651
13,310
13,977
80,712
37,905
29,182
141,597
289,396
—
289,396
Personal
3,536
1,941
2,758
5,222
13,457
19,370
18,011
128,497
179,335
—
179,335
Corporate
21,894
6,814
3,771
4,859
37,338
18,214
10,781
12,949
79,282
—
79,282
NBFI
10,344
8,896
6,781
3,896
29,917
321
390
151
30,779
—
30,779
Other financial assets
780
1,056
356
2,322
4,514
4,693
6,075
13,523
28,805
226
29,031
Total financial assets
140,416
18,891
15,008
16,315
190,630
42,679
35,274
155,126
423,709
2,573
426,282
2020
Total financial assets
89,911
15,432
15,621
16,853
137,817
47,488
39,034
154,680
379,019
3,763
382,782
2021
Bank deposits excluding repos
3,699
—
—
—
3,699
—
12,000
—
15,699
—
15,699
Bank repos
5,671
1,461
—
—
7,132
—
—
—
7,132
—
7,132
Customer repos
3,532
11,009
—
—
14,541
—
—
—
14,541
—
14,541
Customer deposits excluding repos
307,014
4,256
1,611
1,326
314,207
674
4
14
314,899
—
314,899
Personal
173,293
1,055
1,351
811
176,510
674
—
—
177,184
—
177,184
Corporate
113,622
2,655
245
461
116,983
—
4
14
117,001
—
117,001
NBFI
20,099
546
15
54
20,714
—
—
—
20,714
—
20,714
Derivatives
1
1
—
8
10
31
14
16
71
4,048
4,119
Other financial liabilities
840
1,442
1,019
151
3,452
2,833
289
578
7,152
99
7,251
CPs and CDs
790
1,442
1,016
151
3,399
—
—
—
3,399
—
3,399
Covered bonds
50
—
3
—
53
2,833
—
—
2,886
—
2,886
Securitisations
—
—
—
—
—
—
289
578
867
—
867
Bank deposits
—
—
—
—
—
—
—
—
—
66
66
Customer deposits
—
—
—
—
—
—
—
—
—
33
33
Subordinated liabilities
—
—
2
86
88
—
—
123
211
—
211
Notes in circulation
904
—
—
—
904
—
—
—
904
—
904
Lease liabilities
24
42
63
74
203
170
128
507
1,008
—
1,008
Total financial liabilities
321,685
18,211
2,695
1,645
344,236
3,708
12,435
1,238
361,617
4,147
365,764
2020
Total financial liabilities
296,027
7,851
4,316
2,454
310,648
2,096
7,751
2,174
322,669
6,382
329,051
(1)
Loans to customers excludes £2,425 million (2020 - £3,591 million) of impairment provisions.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
65
Capital, liquidity and funding risk continued
Encumbrance
(audited)
NWB Group evaluates the extent to which assets can be
financed in a secured form (encumbrance), but certain asset
types lend themselves more readily to encumbrance. The
typical characteristics that support encumbrance are an ability
to pledge those assets to another counterparty or entity
through operation of law without necessarily requiring prior
notification, homogeneity, predictable and measurable cash
flows, and a consistent and uniform underwriting and collection
process. Retail assets including residential mortgages and
credit card receivables display many of these features.
NWB Group categorises its assets into four broad groups, those
that are:

Already encumbered and used to support funding currently
in place through own-asset securitisations, covered bonds
and securities repurchase agreements.

Pre-positioned with central banks as part of funding
schemes and those encumbered under such schemes.

Ring-fenced to meet regulatory requirements, where NWB
Group has in place an operational continuity in resolution
(OCIR) investment mandate wherein the PRA requires
critical service providers to hold segregated liquidity buffers
covering at least 50% of their annual fixed overheads.

Not currently encumbered. In this category, NWB Group has
in place an enablement programme which seeks to identify
assets capable of being encumbered and to identify the
actions to facilitate such encumbrance whilst not affecting
customer relationships or servicing
Balance sheet encumbrance - third party
Encumbered as a result of
Unencumbered
transactions with counterparties
assets not pre-positioned
other than central banks
Pre-positioned
Collateral
with central banks
Covered
SFT,
& encumbered
ring-fenced
bonds and
Derivatives
assets held at
to meet reg
Readily
Other
Cannot
Total
securitisations
& similar
Total
central bank
requirement
available
available
be used
third
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Total
party (9)
2021
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
Cash and balances at central
banks
—
2.6
2.6
—
—
98.6
—
—
98.6
101.2
Derivatives
—
—
—
—
—
—
—
2.5
2.5
2.5
Loans to banks - amortised cost
—
0.1
0.1
—
—
3.8
0.1
0.2
4.1
4.2
Loans to customers - amortised
cost
8.3
1.8
10.1
109.6
—
47.9
76.6
42.8
167.3
287.0
- residential mortgages
8.3
—
8.3
109.6
—
38.9
11.3
—
50.2
168.1
- credit cards
—
—
—
—
—
2.7
0.3
—
3.0
3.0
- personal loans
—
—
—
—
—
3.9
2.2
1.1
7.2
7.2
- other
—
1.8
1.8
—
—
2.4
62.8
41.7
106.9
108.7
Other financial assets
—
13.2
13.2
—
2.0
13.2
0.2
0.4
13.8
29.0
Other assets
—
—
—
—
—
—
1.7
5.5
7.2
7.2
Total assets
8.3
17.7
26.0
109.6
2.0
163.5
78.6
51.4
293.5
431.1
Amounts due from holding companies and fellow subsidiaries
3.5
434.6
2020
Total assets
10.0
17.0
27.0
114.6
2.1
113.5
78.8
50.2
242.5
386.2
Amounts due from holding companies and fellow subsidiaries
3.3
389.5
(1)
Covered bonds and securitisations include securitisations, conduits and covered bonds.
(2)
Repos and other secured deposits, cash, coin and nostro balance held with the Bank of England as collateral against deposits and notes in circulation are included here rather than
within those positioned at the central bank as they are part of normal banking operations. Securities financing transactions (SFT) include collateral given to secure derivative
liabilities.
(3)
Total assets encumbered as a result of transactions with counterparties other than central banks are those that have been pledged to provide security and are therefore not
available to secure funding or to meet other collateral needs.
(4)
Assets pre-positioned at the central banks include loans provided as security as part of funding schemes and those encumbered under such schemes.
(5)
Ring-fenced to meet regulatory requirement includes assets ring fenced to meet operational continuity in resolution (OCIR) investment mandate.
(6)
Readily available for encumbrance: including assets that have been enabled for use with central banks but not pre-positioned; cash and high quality debt securities that form part of
NWB Group’s liquidity portfolio and unencumbered debt securities.
(7)
Other assets that are capable of being encumbered are those assets on the balance sheet that are available for funding and collateral purposes but are not readily realisable in their
current form. These assets include loans that could be prepositioned with central banks but have not been subject to internal and external documentation review and diligence
work.
(8)
Cannot be used includes:
a.
Derivatives, reverse repurchase agreements and trading related settlement balances.
b.
Non-financial assets such as intangibles, prepayments and deferred tax.
c.
Loans that cannot be pre-positioned with central banks based on criteria set by the central banks, including those relating to date of origination and level of documentation.
d.
Non-recourse invoice financing balances and certain shipping loans whose terms and structure prohibit their use as collateral
(9)
In accordance with market practice, NWB Group employs securities recognised on the balance sheet, and securities received under reverse repo transactions as collateral for repos.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
66
Non-traded market risk
Definition
(audited)
Non-traded market risk is the risk to the value of assets or
liabilities outside the trading book, or the risk to income, that
arises from changes in market prices such as interest rates,
foreign exchange rates and equity prices, or from changes in
managed rates.
Sources of risk
(audited)
The key sources of NWB Group’s non-traded market risk are
interest rate risk, credit spread risk and foreign exchange risk.
Each of these risk types are largely managed separately. For
detailed qualitative and quantitative information on each of
them, refer to the separate sub-sections following the VaR table
below.
Key developments in 2021

As inflationary pressures increased in 2021, market
expectations regarding the future path of interest rates
changed. The five-year sterling overnight index interest rate
swap rate rose from -0.01% at 31 December 2020 to 1.05%
at 31 December 2021. The corresponding ten-year rate
rose from 0.16% to 0.95%. At 31 December 2021 market
rates implied several increases in the UK base rate from
0.25%; at 31 December 2020 they had implied potential cuts
to the rate from 0.1%.

Sterling strengthened against the euro to 1.19 at 31
December 2021 from 1.11 at 31 December 2020. Structural
foreign currency exposures decreased, in sterling equivalent
terms, over the year.
Governance
(audited)
Responsibility for identifying, measuring, monitoring and
controlling market risk arising from non-trading activities lies
with the relevant business. Oversight is provided by the
independent Risk function.
Risk positions are reported regularly to the NatWest Holdings
Executive Risk Committee and the NatWest Holdings Board Risk
Committee, as well as to the NatWest Holdings Asset & Liability
Management Committee. Market risk policy statements set out
the governance and risk management framework.
Risk appetite
NWB Group’s qualitative appetite is set out in the non-traded
market risk appetite statement.
Its quantitative appetite is expressed in terms of exposure
limits. NWB Group’s limit framework comprises value-at-risk
(VaR), stressed value-at-risk (SVaR), sensitivities and earnings-
at-risk limits. The limits are reviewed to reflect changes in risk
appetite, business plans, portfolio composition and the market
and economic environments.
To ensure approved limits are not breached and that NWB
Group remains within its risk appetite, triggers have been set
such that if exposures exceed a specified level, action plans are
developed and implemented.
For further information on risk appetite and risk controls, refer
to page
13.
Measurement
(audited)
Non-traded internal VaR (1-day 99%)
The following table presents one-day internal banking book VaR at a 99% confidence level, split by risk type. VaR values for each
year are calculated based on one-day values for each of the 12 month-end reporting dates.
VaR metrics are explained on page 67. Each of the key risk types are discussed in greater detail in their individual sub-sections
following this table.
2021
2020
Average
Maximum
Minimum
Period end
Average
Maximum
Minimum
Period end
£m
£m
£m
£m
£m
£m
£m
£m
Interest rate
11.2
16.6
4.1
11.9
14.4
19.2
10.5
11.1
Credit spread
80.6
89.4
74.2
79.5
96.2
114.8
60.7
93.6
Structural foreign exchange risk
25.7
26.4
24.4
24.4
—
—
—
—
Equity
0.9
1.0
0.4
1.0
—
—
—
—
Pipeline risk
(1)
0.5
1.1
0.3
1.1
0.4
0.7
0.2
0.4
Diversification
(2)
(35.6)
(38.3)
(9.8)
(10.3)
Total
83.3
93.8
75.5
79.6
101.2
116.8
64.3
94.8
(1)
Pipeline risk is the risk of loss arising from personal customers owning an option to draw down a loan – typically a mortgage – at a committed rate, where interest rate changes
may result in greater or fewer customers than anticipated taking up the committed offer.
(2)
NWB Group benefits from diversification across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation
between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.

The year-on-year reduction in credit spread VaR and total
non-traded VaR was driven by a smaller FVOCI bond
portfolio.

Period-end VaR reflects the completion of the transition from
LIBOR to risk-free benchmarks.

During 2021 structural foreign exchange risk was included in
the calculation of non-traded VaR.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
67
Non-traded market risk continued
Interest rate risk
Non-traded interest rate risk (NTIRR) arises from the provision
to customers of a range of banking products with differing
interest rate characteristics. When aggregated, these products
form portfolios of assets and liabilities with varying degrees of
sensitivity to changes in market interest rates. Mismatches can
give rise to volatility in net interest income as interest rates vary.
NTIRR comprises the following three primary risk types:

Gap risk – arises from the timing of rate changes in non-
trading book instruments. The extent of gap risk depends on
whether changes to the term structure of interest rates occur
consistently across the yield curve (parallel risk) or
differentially by period (non-parallel risk).

Basis risk – captures the impact of relative changes in
interest rates for financial instruments that have similar
tenors but are priced using different interest rate indices, or
on the same interest rate indices but with different tenors.

Option risk – arises from option derivative positions or from
optional elements embedded in assets, liabilities and/or off-
balance sheet items, where NWB Group or its customer can
alter the level and timing of their cash flows. Option risk also
includes pipeline risk.
To manage exposures within its risk appetite, NWB Group
aggregates its interest rate positions and hedges its residual
exposure, primarily with interest rate swaps.
Structural hedging aims to reduce gap risk and the sensitivity of
earnings to interest rate shocks. It also provides some protection
against prolonged periods of falling rates. Structural hedging is
explained in greater detail below, followed by information on
how NWB Group measures NTIRR from both an economic value-
based and an earnings-based perspective.
Structural hedging
NWB Group has a significant pool of stable, non and low
interest-bearing liabilities, principally comprising equity and
money transmission accounts. NatWest Group has a policy of
hedging these balances, either by investing directly in longer-
term fixed-rate assets (primarily fixed-rate mortgages) or by
using interest rate swaps, in order to provide a consistent and
predictable revenue stream from these balances.
At 31 December 2021, NWB Group’s structural hedge had a
notional of £152 billion (compared to £122 billion at 31
December 2020) with an average life of approximately three
years.
Interest rate risk measurement
NTIRR can be measured from either an economic value-based
or earnings-based perspective, or a combination of the two.
Value-based approaches measure the change in value of the
balance sheet assets and liabilities including all cash flows.
Earnings-based approaches measure the potential impact on
the income statement of changes in interest rates over a defined
horizon, generally one to three years.
NWB Group uses VaR as its value-based approach and
sensitivity of net interest earnings as its earnings-based
approach.
These two approaches provide complementary views of the
impact of interest rate risk on the balance sheet at a point in
time. The scenarios employed in the net interest earnings
sensitivity approach may incorporate assumptions about how
NWB Group and its customers will respond to a change in the
level of interest rates. In contrast, the VaR approach measures
the sensitivity of the balance sheet at a point in time. Capturing
all cash flows, VaR also highlights the impact of duration and
repricing risks beyond the one-to-three-year period shown in
earnings sensitivity calculations.
Value-at-risk
VaR is a statistical estimate of the potential change in the
market value of a portfolio (and, thus, the impact on the income
statement) over a specified time horizon at a given confidence
level. NWB Group’s standard VaR metrics – which assume a
time horizon of one trading day and a confidence level of 99% –
are based on interest rate repricing gaps at the reporting date.
Daily rate moves are modelled using observations from the last
500 business days. These incorporate customer products plus
associated funding and hedging transactions as well as non-
financial assets and liabilities. Behavioural assumptions are
applied as appropriate.
The non-traded interest rate risk VaR metrics for NWB Group’s
retail and commercial banking activities are included in the
banking book VaR table above. The VaR captures the risk
resulting from mismatches in the repricing dates of assets and
liabilities.
It also includes any mismatch between the maturity profile of
external hedges and NWB Group’s target maturity profile for the
hedge.
Sensitivity of net interest earnings
Net interest earnings are sensitive to changes in the level of
interest rates, mainly because maturing structural hedges are
replaced at higher or lower rates and changes to coupons on
managed rate customer products do not match changes in
market rates of interest or central bank policy rates.
Earnings sensitivity is derived from a market-implied forward
rate curve, which will incorporate expected changes in central
bank policy rates such as the Bank of England base rate. A
simple scenario is shown that projects forward earnings over a
12-month period based on the 31 December 2021 balance
sheet. An earnings projection is derived from the market-implied
rate curve, which is then subject to interest rate shocks. The
difference between the market-implied projection and the shock
gives an indication of underlying sensitivity to interest rate
movements.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
68
Non-traded market risk continued
The sensitivity of net interest earnings table below shows the
expected impact of an immediate upward or downward change
of 25 basis points and an upward change of 100 basis points to
all interest rates.
Reported sensitivities should not be considered a forecast of
future performance in these rate scenarios. Actions that could
reduce interest earnings sensitivity include changes in pricing
strategies on customer loans and deposits as well as hedging.
Management action may also be taken to stabilise total income
also taking into account non-interest income.
2021
2020
+25
-25 basis
+100
+25
-25 basis
+100
basis
points with
basis
basis
points with
basis
points
no floor
points
points
floor at 0%
points
Shifts in yield curve
£m
£m
£m
£m
£m
£m
12-month interest earnings sensitivity
207
(196)
767
229
(21)
771

The increase in sensitivity to the downward 25-basis-point
rate shift mainly relates to the removal of the assumed 0%
floor (or prevailing negative rate). At 31 December 2020,
interest rates were low or even negative in some cases.
Flooring interest rates meant that the impact of the
downward shock was significantly reduced.

The reduction in sensitivity to the upward 25-basis-point
and 100-basis-point rate shifts reflects the higher level of
interest rates at 31 December 2021 compared to 31
December 2020. As interest rates rise from very low levels,
the expected pass-through to customer savings rates
increases. Thus, the income benefit associated with rate
rises is reduced.
Sensitivity of fair value through other comprehensive income (FVOCI) to interest rate movements.
NWB Group holds most of the bonds in its liquidity portfolio at fair value. Valuation changes that are not hedged (or not in effective
hedge accounting relationships) are recognised in FVOCI reserves.
Interest rate swaps are used to implement the structural hedging programme and to hedge some personal and commercial lending
portfolios, primarily fixed-rate mortgages. Changes in the valuation of swaps that are in effective cash flow hedge accounting
relationships are recognised in cash flow hedge reserves.
The table below shows the sensitivity of FVOCI reserves and cash flow hedge reserves to a parallel shift in all rates. In this analysis,
interest rates have not been floored at zero. Cash flow hedges are assumed to be fully effective and interest rate hedges of bonds
in the liquidity portfolio are also assumed to be subject to fully effective hedge accounting. Hedge accounting ineffectiveness would
result in some deviation from the results below, with some gains or losses recognised in P&L instead of reserves. Hedge
ineffectiveness P&L is monitored, and the effectiveness of cash flow and fair value hedge relationships is regularly tested in
accordance with IFRS requirements. Note that a movement in the FVOCI reserve would have an impact on CET1 capital but a
movement in the cash flow hedge reserve would not be expected to do so. Volatility in both reserves affects tangible net asset
value.
2021
2020
+25
-25
+100
-100
+25
-25
+100
-100
basis
basis
basis
basis
basis
basis
basis
basis
points
points
points
points
points
points
points
points
Parallel shifts in yield curve
£m
£m
£m
£m
£m
£m
£m
£m
FVOCI reserves
(28)
27
(116)
102
(27)
25
(114)
86
Cash flow hedge reserves
(10)
11
(33)
53
129
(129)
512
(521)
Total
(38)
38
(149)
155
102
(104)
398
(435)

The main driver of change in NWB Group’s cash flow hedge reserve sensitivity is the increase in interest rate swaps that form
part of the structural hedge. The increase in the hedge was driven by higher customer deposits during the COVID-19
pandemic.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
69
Non-traded market risk continued
Credit spread risk
Credit spread risk arises from the potential adverse economic
impact of a change in the spread between bond yields and
swap rates, where the bond portfolios are accounted at FVOCI.
NWB Group’s bond portfolios primarily comprise high-quality
securities maintained as a liquidity buffer to ensure it can
continue to meet its obligations in the event that access to
wholesale funding markets is restricted. Additionally, other high-
quality bond portfolios are held for collateral purposes and to
support payment systems.
Credit spread risk is monitored daily through sensitivities and
VaR measures. The dealing authorities in place for the bond
portfolios further mitigate the risk by imposing constraints by
duration, asset class and credit rating. Exposures and limit
utilisations are reported to senior management on a daily basis.
Foreign exchange risk
Non-traded foreign exchange risk arises from three main
sources:

Structural foreign exchange rate risk – arises from the
capital deployed in foreign subsidiaries, branches and joint
arrangements and related currency funding where it differs
from sterling.

Non-trading book foreign exchange rate risk – arises from
customer transactions and profits and losses that are in a
currency other than the functional currency.

Forecast earnings or costs in foreign currencies – NWB
Group hedges forward some foreign currency forecast
expenses.
Structural foreign exchange exposures arise from investments
in foreign subsidiaries, branches and associates and their
related currency funding. These exposures are assessed and
managed to predefined risk appetite levels under delegated
authority agreed by the CFO with support from the Asset &
Liability Management Committee. NatWest Group seeks to limit
the potential volatility impact on its CET1 ratio from exchange
rate movements by maintaining a structural open currency
position. Gains or losses arising from the retranslation of net
investments in overseas operations are recognised in equity
reserves and reduce the sensitivity of capital ratios to foreign
exchange rate movements primarily arising from the
retranslation of non-sterling denominated RWAs. Sensitivity is
minimised where, for a given currency, the ratio of the
structural open position to RWAs equals the CET1 ratio.
The sensitivity of the NatWest Group ratio to exchange rates is
monitored monthly and reported to the Asset & Liability
Management Committee at least quarterly. NWB Plc also
monitors the sensitivity of its CET1 ratio to exchange rate
movements against a risk limit monthly.
Foreign exchange exposures arising from customer transactions
are sold down by businesses on a regular basis in line with
NatWest Group policy.
Foreign exchange risk
(audited)
The table below shows structural foreign currency exposures.
2021
2020
Net investments
Net
Structural
Net investments
Net
Structural
in foreign
investment
foreign currency
in foreign
investment
foreign currency
operations
hedges
exposures
operations
hedges
exposures
£m
£m
£m
£m
£m
£m
Euro
473
(470)
3
295
(275)
20
Other non-sterling
449
(159)
290
437
(129)
308
Total
922
(629)
293
732
(404)
328

The increases in net investments in foreign operations and
net investment hedges mainly related to an increased
investment in NatWest Bank Plc's Frankfurt branch

Changes in foreign currency exchange rates affect equity in
proportion to structural foreign currency exposure. For
example, a 5% strengthening or weakening in foreign
currencies against sterling would result in a gain or loss of
£15 million in equity, respectively.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
70
Pension risk
Definition
Pension risk is the risk to NWB Group caused by its contractual
or other liabilities to, or with respect to, a pension scheme
(whether established for its employees or those of a related
company or otherwise). It is also the risk that NWB Group will
make payments or other contributions to, or 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
NWB Group has exposure to pension risk through its defined
benefit schemes worldwide. The Main section of The NatWest
Group Pension Fund (the Main section) is the largest source of
pension risk as NatWest Bank Plc is the principal employer to
the Main section with £52.0 billion of assets and £42.0 billion of
liabilities at 31 December 2021 (2020 – £51.3 billion of assets
and £43.9 billion of liabilities). Refer to Note 5 to the financial
statements, for further details on NWB Group’s pension
obligations, including sensitivities to the main risk factors.
Pension scheme liabilities vary with changes in long-term
interest rates and inflation as well as with pensionable salaries,
the longevity of scheme members and legislation. Pension
scheme assets vary with changes in interest rates, inflation
expectations, credit spreads, exchange rates, and equity and
property prices. NWB Group is exposed to the risk that the
schemes’ assets, together with future returns and additional
future contributions, are estimated to be insufficient to meet
liabilities as they fall due. In such circumstances, NWB Group
could be obliged (or might choose) to make additional
contributions to the schemes or be required to hold additional
capital to mitigate this risk.
Key developments in 2021

There were no material changes to NWB Group’s exposure
to pension risk during the year, and the overall position of
the main defined benefit schemes that NWB Group sponsors
has improved.

The triennial actuarial valuation for the Main section, with an
effective date of 31 December 2020, was completed on 14
December 2021. As the Main section was in surplus at this
date, no deficit repair contributions were required, although
there was a small increase in the level of contributions in
relation to ongoing accrual of benefits.

In line with the Memorandum of Understanding signed with
the Trustee of the Main section in April 2018, a £500 million
lump sum contribution was paid into the Main section,
following the share buyback in 2021.

Following the changes to Ulster Bank Limited, it no longer
participates in any of NWB Group’s defined benefit pension
schemes. In particular, NatWest Bank Plc assumed
responsibility as Principal Employer and the only participating
employer in The Ulster Bank Pension Scheme in Northern
Ireland. This will not affect NWB Group’s overall exposure to
the Scheme.

As part of the transition of framework components to align to
the requirements of the NatWest Group enterprise-wide risk
management framework, an updated pension risk policy and
risk appetite statement were developed in 2021.
Governance
Chaired by the Chief Financial Officer, the NatWest Group Asset
& Liability Management Committee is a key component of
NatWest Group’s approach to managing pension risk. It
considers the pension impact of the capital plan for NatWest
Group and reviews performance of NatWest Group’s material
pension funds (including those sponsored by NWB Group) and
other issues material to NatWest Group’s pension strategy. It
also considers investment strategy proposals from the Trustee
of the Main section.
For further information on governance, refer to page 11.
Risk appetite
NWB Group maintains an independent view of the risk inherent
in its pension funds. NWB Group has an annually reviewed
pension risk appetite statement incorporating defined metrics
against which risk is measured.
Policies and standards are in place to provide formal controls
for pension risk reporting, modelling, governance and stress
testing. A pension risk policy, which sits within the NatWest
Group enterprise-wide risk management framework, is also in
place and is subject to associated framework controls.
Monitoring and measurement
Pension risk is monitored by the NWH Group Executive Risk
Committee and the NatWest Group Board Risk Committee by
way of the monthly Risk Management Report.
NatWest Group also undertakes stress tests on its material
defined benefit pension schemes each year. These tests are also
used to satisfy the requests of regulatory bodies such as the
Bank of England.
The stress testing framework includes pension risk capital
calculations for the purposes of the Internal Capital Adequacy
Assessment Process as well as additional stress tests for a
number of internal management purposes. The results of the
stress tests and their consequential impact on NWB Group’s
balance sheet, income statement and capital position are
incorporated into NWB Group’s and overall NatWest Group
stress test results.
NatWest Bank Plc is the principal employer of the Main section
and could be required to fund any deficit that arises.
Mitigation
Following risk mitigation measures taken by the Trustee in
recent years, the Main section is now well protected against
interest rate and inflation risks and is being run on a low
investment risk basis with relatively small equity risk
exposure.
The Main section also uses derivatives to manage the
allocation of the portfolio to different asset classes and to
manage risk within asset classes.
The potential impact of climate change is one of the factors
considered in managing the assets of the Main section. The
Trustee monitors the risk to its investments from changes in the
global economy and invests, where return justifies the risk, in
sectors that reduce the world’s reliance on fossil fuels, or that
may otherwise promote environmental benefits. Further details
regarding the Main section Trustee’s approach to managing
climate change risk can be found in its Responsible Ownership
Policy and its net zero commitment. The Trustee has reported in
line with the Task Force on Climate-related Financial
Disclosures in its Annual Report and Accounts.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
71
Compliance & conduct risk
Definition
Compliance risk is the risk that the behaviour of NatWest Group
towards customers fails to comply with laws, regulations, rules,
standards and codes of conduct. Such a failure may lead to
breaches of regulatory requirements, organisational standards
or customer expectations and could result in legal or regulatory
sanctions, material financial loss or reputational damage.
Conduct risk is the risk that the conduct of NatWest Group and
its subsidiaries and its staff towards customers – or in the
markets in which it operates – leads to unfair or inappropriate
customer outcomes and results in reputational damage,
financial loss or both.
Sources of risk
Compliance and conduct risks exist across all stages of NatWest
Group’s relationships with its customers and arise from a variety
of activities including product design, marketing and sales,
complaint handling, staff training, and handling of confidential
inside information.
Key developments in 2021

Risk appetite statements and measures were updated with
an enhanced focus to provide better visibility of key risks
across NatWest Group.

Delivered a digital platform to facilitate risk-based rules
mapping to regulatory obligations. This will enable more
efficient management of regulatory compliance matters and
support intelligent risk taking.

Continued collaboration across NatWest Group to deliver
good customer outcomes with a focus on enhancing
forbearance strategies.

There was ongoing monitoring and mitigation of elevated
conduct risks resulting from the phased withdrawal from the
Republic of Ireland including data-driven risk profile
reporting.

Oversight and management of major compliance
programmes including work to upgrade NatWest Group’s
internal ratings based approach for credit risk in order to
build better outcomes for customers.
Governance
NatWest Group defines appropriate standards of compliance
and conduct and ensures adherence to those standards through
its risk management framework. Relevant compliance and
conduct matters are escalated through Executive Risk
Committee and Board Risk Committee.
Risk appetite
Risk appetite for compliance and conduct risks is set at Board
level. Risk appetite statements articulate the levels of risk that
legal entities, businesses and functions work within when
pursuing their strategic objectives and business plans.
A range of controls is operated to ensure the 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
NatWest Group. Examples of these include the Complaints
Management Policy, Client Assets & Money Policy, and Product
Lifecycle Policy as well as policies relating to customers in
vulnerable situations, cross-border activities and market abuse.
Continuous monitoring and targeted assurance is carried out as
appropriate.
Monitoring and measurement
Compliance and conduct risks are measured and managed
through continuous assessment and reporting to NatWest
Group’s senior risk committees and at Board level. The
compliance and conduct risk framework facilitates the
consistent monitoring and measurement of compliance with
laws and regulations and the delivery of consistently good
customer outcomes. The first line of defence is responsible for
effective risk identification, reporting and monitoring, with
oversight, challenge and review by the second line. Compliance
and conduct risk management is also integrated into NatWest
Group’s strategic planning cycle.
Mitigation
Activity to mitigate the most-material compliance and conduct
risks is carried out across NatWest Group with specific areas of
focus in the customer- facing businesses and legal entities.
Examples of mitigation include consideration of customer needs
in business and product planning, targeted training, complaints
management, as well as independent monitoring activity.
Internal policies help support a strong customer focus across
NatWest Group.
Financial crime risk
Definition
Financial crime risk is presented by criminal activity in the form
of money laundering, terrorist financing, bribery and corruption,
sanctions and tax evasion, as well as fraud risk management.
Sources of risk
Financial crime risk may be presented if NWB Group’s
customers, employees or third parties undertake or facilitate
financial crime, or if NWB Group’s products or services are used
to facilitate such crime. Financial crime risk is an inherent risk
across all lines of business.
Key developments in 2021

While work continues to enhance the control environment
relating to financial crime risk, operational weaknesses
between 2012 and 2016 resulted in the inadequate
monitoring of a UK incorporated customer. NatWest Group
co-operated fully with the regulator’s investigation into this
case and, in October 2021, NWB Plc pleaded guilty to three
breaches of the Money Laundering Regulations 2007.

Significant investment continued to be made to support
delivery of the multi-year transformation plan across
financial crime risk management.

Enhancements were made to technology and data analytics
to improve the effectiveness of systems used to monitor
customers and transactions.

A new financial crime and fraud goal was introduced for
NatWest Group’s most senior 150 employees to further
embed financial crime risk management culture, behaviours,
and accountabilities.
Governance
The NatWest Group Financial Crime Executive Steering Group,
which is jointly chaired by the NatWest Group Chief Risk Officer
and the NatWest Group Chief Administrative Officer, is the core
governance committee for financial crime (excluding fraud). It
oversees financial crime risk management, operational
performance, and transformation matters including decision-
making and escalations to NatWest Group Executive Risk
Committee, NatWest Group Board Risk Committee and NatWest
Group Executive Committee.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
72
Financial crime risk continued
Risk appetite
There is no appetite to operate in an environment where
systems and controls do not enable the identification,
assessment, monitoring, management and mitigation of financial
crime risk. NWB Group’s systems and controls must be
comprehensive and proportionate to the nature, scale and
complexity of its businesses. There is no tolerance to
systematically or repeatedly breach relevant financial crime
regulations and laws.
NWB Group operates a framework of preventative and detective
controls designed to mitigate the risk that it could facilitate
financial crime. These controls are supported by a suite of
policies, procedures and guidance to ensure they operate
effectively.
Monitoring and measurement
Financial crime risks are identified and reported through
continuous risk management and regular reporting to NatWest
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, relevant policies,
systems, processes and controls are used to mitigate and
manage financial crime risk. This includes the use of dedicated
screening and monitoring systems and controls to identify
people, organisations, transactions and behaviours that may
require further investigation or other actions. Centralised
expertise is available to detect and disrupt threats to NWB
Group and its customers. Intelligence is shared with law
enforcement, regulators and government bodies to strengthen
national and international defences against those who would
misuse the financial system for criminal motives.
Climate risk
Definition
Climate risk is the threat of financial loss or adverse non-
financial impacts associated with climate change and the
political, economic and environmental responses to it.
Sources of risk
Physical risks may arise from climate and weather-related
events such as heatwaves, droughts, floods, storms and sea
level rises. They can potentially result in financial losses,
impairing asset values and the creditworthiness of borrowers.
NWB Group could be exposed to physical risks directly by the
effects on its property portfolio and, indirectly, by the impacts
on the wider economy as well as on the property and business
interests of its customers.
Transition risks may arise from the process of adjustment
towards a low-carbon economy. Changes in policy, technology
and sentiment could prompt reassessment of customers’
financial risk and may lead to falls in the value of a large range
of assets. NWB Group could be exposed to transition risks
directly through the costs of adaptation within economic sectors
and markets as well as supply chain disruption leading to
financial impacts on it and its customers. Potential indirect
effects include the erosion of NWB Group’s competitiveness,
profitability, or reputation damage.
Key developments in 2021

A principles-based climate risk policy was approved by the
NatWest Group Board Risk Committee and introduced in
April 2021.

In December 2021, the NatWest Group Board approved a
number of first-generation quantitative climate risk appetite
measures. These will enable reporting of climate risk appetite
and link business-as-usual risk management to NatWest
Group’s strategic goals and priorities.

NatWest Group participated in the Bank of England’s Climate
Biennial Exploratory Scenario (CBES) exercise. In doing so,
NatWest Group’s capabilities regarding climate scenario
analysis were strengthened in 2021 with increased coverage
across the balance sheet.

A new Climate Centre of Excellence was established to
provide strategic horizon scanning, guidance and specialist
climate expertise across NatWest Group.

Wholesale credit risk: qualitative assessment of climate risk
was made mandatory for the majority of the Wholesale
portfolio. This was supported by enhancements to
Transaction Acceptance Standards (TAS) criteria, with the
inclusion of sector-specific climate considerations for the
heightened risk sectors and generic climate considerations
for all other TAS documents.

Personal credit risk: operational measures were developed.
These will help to monitor the performance of the Personal
mortgage portfolio.
Governance
The NatWest Group Board is responsible for monitoring and
overseeing climate-related risk within NatWest Group’s overall
business strategy and risk appetite. The potential impact,
likelihood and preparedness of climate-related risk is reported
regularly to the NatWest Group Board Risk Committee and the
NatWest Group Board.
The NatWest Group Chief Risk Officer shares accountability with
the NatWest Group CEO under the Senior Managers and
Certification Regime for identifying and managing the financial
risks arising from climate change. This includes ensuring that
the financial risks from climate change are adequately reflected
in risk management frameworks, and that NatWest Group can
identify, measure, monitor, manage, and report on its exposure
to these risks.
The Climate Change Executive Steering Group is responsible for
overseeing the direction of and progress against NatWest
Group’s climate-related commitments. During 2021, the
Executive Steering Group focused on overseeing the NatWest
Group Climate Change Programme (GCCP), which was tasked
with continuing to deliver both NatWest Group’s climate strategy
and the climate-related mandatory change agenda. The GCCP
will close and transition activity into business-as-usual
operations across NatWest Group’s franchises and functions.
The Executive Steering Group will continue to supervise
strategic implementation and delivery, supported by the Climate
Centre of Excellence.
Risk appetite
NatWest Group’s ambition is to be a leading bank in the UK in
helping to address climate change. The climate ambition is
underpinned by activity to reduce the climate impact of
financing activity by at least 50% by 2030 and to do what is
necessary to achieve alignment with the 2015 Paris Agreement.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
73
Climate risk continued
Work continued in 2021 to integrate climate-related risk into the
risk management framework, including the development of
appropriate risk appetite metrics. In December 2021, the
NatWest Group Board approved the adoption of three first-
generation climate risk appetite measures into the enterprise-
wide risk management framework, for integration into business-
as-usual risk management.
Combined with franchise specific operational limits, this suite of
metrics will enable reporting of climate risk appetite to senior
risk management forums and links risk management to NatWest
Group’s strategic goals and priorities.
Monitoring and measurement
NatWest Group has focused on developing the capabilities to
use scenario analysis to identify the most material climate risks
and opportunities for its customers, seeking to harness insights
to inform risk management practices and maximise the
opportunities arising from a transition to a low carbon economy.
Scenario analysis allows NatWest Group to test a range of
possible future climate pathways and understand the nature
and magnitude of the risks they present. The purpose of
scenario analysis is not to forecast the future but to understand
and prepare to manage risks that could arise.
In 2021, activity was dominated by the Bank of England’s CBES
exercise. NatWest Group applied three climate scenarios to
quantify climate risk across its balance sheet, including the full
portfolio of wholesale customers and its entire UK commercial
real estate and residential (retail) mortgage portfolio.
NatWest Group regularly considers existing and emerging
regulatory requirements related to climate change. It continues
to participate in several industry-wide initiatives to develop
consistent risk measurement methodologies. NatWest Group is a
founding signatory of the United Nations Environment
Programme Finance Initiative Principles for Responsible
Banking, which aims to promote sustainable finance around the
globe. In addition, NatWest Group is also represented on the
Climate Financial Risk Forum established by the PRA and FCA
to shape the financial service industry’s response to the
challenges posed by climate risk.
Operational risk
Definition
Operational risk is the risk of loss resulting from inadequate or
failed internal processes, people and systems, or external
events. It arises from day-to-day operations and is relevant to
every aspect of the business.
Sources of risk
Operational risk may arise from a failure to manage operations,
systems, transactions and assets appropriately. This can take
the form of human error, an inability to deliver change
adequately or on time, the non-availability of technology
services, or the loss of customer data. Systems failure, theft of
NWB Group property, information loss and the impact of
natural, or man-made, disasters – as well as the threat of cyber
attacks – are sources of operational risk. Operational risk can
also arise from a failure to account for changes in law or
regulations or to take appropriate measures to protect assets.
Key developments in 2021

Aligned to the implementation of the enterprise-wide risk
management framework, a new operational risk policy was
approved in April 2021. The new policy sets out the
qualitative expectations, guidance and standards that
stipulate the nature and extent of permissible risk-taking for
operational risk.

Operational risk appetite was enhanced using a quantitative
modelling approach to determine a meaningful quantitative
expression of the maximum level of operational risk NWB
Group is willing to accept.

Oversight of NWB Group’s transformation agenda –
particularly in relation to the second-order impacts of
COVID-19 – remained a significant area of focus with activity
being closely monitored and managed to protect key
regulatory deliveries.

There was also a continued focus on operational resilience to
ensure planning, controls and operational activities remained
robust and appropriate, with continuing attention on the
potential operational risks arising from changes in working
practices.

The security threat and the potential for cyber-attacks on
NWB Group and its supply chain continue to be closely
monitored. During 2021, there was further investment in
NWB Group’s defences in response to the evolving threat.
There was also continuing focus on assuring the security of
the supply chain.

There was sustained focus on reducing the risks associated
with data use, particularly in terms of assuring data quality.
This was aligned to the NWB Group data strategy, designed
to identify and implement enhancements to the effective use
of data across NWB Group.
Governance
The risk governance arrangements in place for operational risk
are aligned to the requirements set out in the Board approved
enterprise-wide risk management framework and are consistent
with achieving safety, soundness and sustainable risk outcomes.
Aligned to this, a strong operational risk management function
is vital to support NWB Group’s ambitions to serve its customers
better. Improved management of operational risk against
defined appetite is vital for stability and reputational integrity.
Risk appetite
Operational risk appetite supports effective management of all
operational risks. It expresses the level and types of operational
risk NWB Group is willing to accept to achieve its strategic
objectives and business plans. NWB Group’s operational risk
appetite statement encompasses the full range of operational
risks faced by its legal entities, businesses and functions.
Mitigation
The Control Environment Certification (CEC) process is a half-
yearly self-assessment by the CEOs of NatWest Group’s
principal businesses, functions and legal entities. It provides a
consistent and comparable view on the adequacy and
effectiveness of the internal control environment.
CEC covers material risks and the underlying key controls,
including financial, operational and compliance controls, as well
as supporting risk management frameworks. The CEC
outcomes, including forward-looking assessments for the next
two half-yearly cycles and progress on control environment
improvements, are reported to the NatWest Group Audit
Committee and Board Risk Committee. They are also shared
with external auditors.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
74
Operational risk continued
The CEC process helps to ensure compliance with the NatWest
Group Policy Framework, Sarbanes-Oxley 404 requirements
concerning internal control over financial reporting, and certain
requirements of the UK Corporate Governance Code.
Risks are mitigated by applying key preventative and detective
controls, an integral step in the risk assessment methodology
which determines residual risk exposure. Control owners are
accountable for the design, execution, performance and
maintenance of key controls. Key controls are regularly
assessed for adequacy and tested for effectiveness. The results
are monitored and, where a material change in performance is
identified, the associated risk is re-evaluated.
Monitoring and measurement
Risk and control assessments are used 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 NWB Group’s Risk Directory. Risk
assessments are refreshed at least annually to ensure they
remain relevant and capture any emerging risks and also
ensure risks are reassessed.
The process is designed to confirm that risks are effectively
managed in line with risk appetite. Controls are tested at the
appropriate frequency to verify that they remain fit-for-purpose
and operate effectively to reduce identified risks.
NWB Group uses the standardised approach to calculate its
Pillar 1 operational risk capital requirement. This is based on
multiplying three years’ average historical gross income by
coefficients set by the regulator based on business line. As part
of the wider Internal Capital Adequacy Assessment Process an
operational risk economic capital model is used to assess Pillar
2A, which is a risk-sensitive add-on to Pillar 1. The model uses
historical loss data (internal and external) and forward-looking
scenario analysis to provide a risk-sensitive view of NWB
Group’s Pillar 2A capital requirement.
Scenario analysis is used to assess how severe but plausible
operational risks will affect NWB Group. It provides a forward-
looking basis for evaluating and managing operational risk
exposures.
Refer to the Capital, liquidity and funding risk section for
operational risk capital requirement figures.
Operational resilience
NWB Group manages and monitors operational resilience
through its risk and control assessment methodology. This is
underpinned by setting and monitoring risk indicators and
performance metrics for key business services. Progress
continues on the response to regulator expectations on
operational resilience, with involvement in a number of industry-
wide operational resilience forums. This enables a more holistic
view of the operational resilience risk profile and the pace of
ongoing innovation and change, both internally and externally.
Event and loss data management
The operational risk event and loss data management process
ensures NWB Group captures and records operational risk
financial and non-financial events that meet defined criteria.
Loss data is used for regulatory and industry reporting and is
included in capital modelling when calculating economic capital
for operational risk. The most serious events are escalated in a
simple, standardised process to all senior management, by way
of a Group Notifiable Event Process.
All financial impacts associated with an operational risk event
are reported against the date they were recorded in NWB
Group’s financial accounts. A single event can result in multiple
losses (or recoveries) that may take time to crystallise. Losses
and recoveries with a financial accounting date in 2021 may
relate to events that occurred, or were identified in, prior years.
NWB Group purchases insurance against specific losses and to
comply with statutory or contractual requirements.
Model risk
Definition
Model risk is the potential for adverse consequences arising
from inaccurate financial assessments or decisions made as a
result of incorrect or misused model outputs and reports. NWB
Group defines a model as a quantitative method, system, or
approach that applies statistical, economic, financial,
accounting, mathematical or data science theories, techniques
and assumptions to process input data into quantitative
estimates.
Sources of risk
NWB Group uses a variety of models in the course of its
business activities. Examples include the use of model outputs to
support customer decisioning, measuring and assessing risk
exposures (including credit, market, and climate risk), as well as
calculating regulatory capital and liquidity requirements.
Key developments in 2021

Improvements to models were made in 2021 resulting in a
reduction of out-of-appetite models across NWB Group.
Enhancements to models will continue in 2022.

Embedding and enhancement of the Model Risk frameworks.
Governance
A governance framework is in place to ensure policies and
processes relating to models are appropriate and effective. Two
roles are key to this – Model Risk Owners and Model Risk
Officers. Model Risk Owners are responsible for model approval
and ongoing performance monitoring. Model Risk Officers, in
the second line, are responsible for oversight, including ensuring
that models are independently validated prior to use and on an
ongoing basis aligned to the model’s risk rating.
The NatWest Group Model Risk Oversight Committee provides a
direct escalation route to the NatWest Group Executive Risk
Committee and, where applicable, onwards to the NatWest
Group Board Risk Committee.
Risk appetite
Model risk appetite is set in order to limit the level of model risk
that NWB Group is willing to accept in the course of its business
activities. It is approved by the NWB Group Executive Risk
Committee. Business areas are responsible for monitoring
performance against appetite and remediating models outside
appetite.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2021
75
Model risk continued
Risk controls
Policies and procedures related to the development, validation,
approval, implementation and use and ongoing monitoring of
models are in place to ensure adequate control across the
lifecycle of an individual model. Validation of material models is
conducted by an independent risk function comprised of skilled,
well-informed subject matter experts. This is completed for new
models or amendments to existing models and as part of an
ongoing periodic programme to assess model performance. The
frequency of periodic validation is aligned to the risk rating of
the model. The independent validation focuses on a variety of
model features, including modelling approach, the nature of the
assumptions used, the model’s predictive ability and complexity,
the data used in the model, its implementation and its
compliance with regulation.
Risk monitoring and measurement
The level of risk relating to an individual model is assessed
through a model risk rating. A quantitative approach is used to
determine the risk rating of each model, based on the model’s
materiality and validation rating. This approach provides the
basis for model risk appetite measures and enables model risk
to be robustly monitored and managed across NWB Group.
Ongoing performance monitoring is conducted by 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 being used consistently with
their intended purpose. This allows timely action to be taken to
remediate poor model performance and/or any control gaps or
weaknesses.
Risk mitigation
By their nature – as approximations of reality – model risk is
inherent in the use of models. It is managed by refining or
redeveloping models where appropriate – either due to changes
in market conditions, business assumptions or processes – and
by applying adjustments to model outputs (either quantitative or
based on expert opinion). Enhancements may also be made to
the process within which the model output is used in order to
further limit risk levels.
Reputational risk
Definition
Reputational Risk is defined as the risk of damage to
stakeholder trust due to negative consequences arising from
internal actions or external events.
Sources of risk
Reputational risks originate from internal actions and external
events. The three primary drivers of reputational risk have been
identified as: failure in internal execution; a conflict between
NWB Group’s values and the public agenda; and contagion
(when NWB Group’s reputation is damaged by failures in the
wider financial sector).
Key developments in 2021

Reputation risk registers were introduced at NatWest Group
level in order to enhance monitoring of the most material
reputational risks.

An updated reputational risk appetite statement was
introduced with a specific focus on public trust.

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 lower carbon
economy.
Governance
A reputational risk policy supports reputational risk
management across NWB Group. Reputational risk committees
review relevant issues at an individual business or entity level,
while the Reputational Risk Committee – which has delegated
authority from the Executive Risk Committee – opines on cases,
issues, sectors and themes that represent a material
reputational risk. The NatWest Group Board Risk Committee
oversees the identification and reporting of reputational risk.
The NatWest Group Sustainable Banking Committee has a
specific focus on environmental, social and ethical issues.
Risk appetite
NWB Group manages and articulates its appetite for
reputational risk through a qualitative reputational risk appetite
statement and quantitative measures. NWB Group seeks to
identify, measure and manage risk exposures arising from
internal actions and external events. This is designed to ensure
that stakeholder trust is retained. However, reputational risk is
inherent in NWB Group’s operating environment and public trust
is a specific factor in setting reputational risk appetite.
Monitoring and measurement
Relevant internal and external factors are monitored through
regular reporting to the reputational risk committees at business
or entity level and escalated, where appropriate, to the NatWest
Group Reputational Risk Committee, NatWest Group Board Risk
Committee or the NatWest Group Sustainable Banking
Committee.
Mitigation
Standards of conduct are in place across NatWest Group
requiring strict adherence to policies, procedures and ways of
working to ensure business is transacted in a way that meets –
or exceeds – stakeholder expectations.
External events that could cause reputational damage are
identified and mitigated through NatWest Group’s top and
emerging risks process as well as through the NatWest Group
and franchise-level risk registers.
NatWest Group has in recent years been the subject of
investigations and reviews by a number of regulators and
governmental authorities, some of which have resulted in past
fines, settlements and public censure. Refer to the Litigation and
regulatory matters section of Note 27 to the consolidated
financial statements for details of material matters currently
affecting NatWest Group.
Report of the directors
NWB Group
Annual Report and Accounts 2021
76
The directors present their report together with the audited
accounts for the year ended 31 December 2021.
Other information incorporated into this report by reference
can be found at:
Page/Note
Stakeholder engagement and s.172(1) statement
3
Board of directors and secretary
4
Financial review
6
Segmental analysis
Note 4
Share capital and reserves
Note 22
Post balance sheet events
Note 35
Risk factors
167
NWB Group structure
National Westminster Bank Plc (‘NWB Plc’) is a wholly-owned
subsidiary of NatWest Holdings Limited (‘NWH Ltd’ or ‘the
intermediate holding company’). NatWest Bank Group (‘NWB
Group’) comprises NWB Plc and its subsidiary and associated
undertakings. NatWest Holdings Group (‘NWH Group’)
comprises NWH Ltd and its subsidiary and associated
undertakings. NatWest Group plc is ‘the ultimate holding
company’. The term ‘NatWest Group’ comprises NatWest
Group plc and its subsidiary and associated undertakings.
NatWest Group plc is incorporated in the United Kingdom and
has its registered office at 36 St Andrew Square, Edinburgh,
EH2 2YB.
Details of NWB Plc’s principal subsidiary undertakings and their
activities are shown in Note 33 on the accounts. A full list of
NWB Plc’s related undertakings is shown in Note 36 on the
accounts.
The financial statements of NatWest Group plc can be obtained
from Legal, Governance & Regulatory Affairs, Gogarburn,
Edinburgh, EH12 1HQ, the Registrar of Companies or at
natwestgroup.com.
Activities
NWB Group is engaged principally in providing a wide range of
banking and other financial services.
Results and dividends
The profit attributable to the ordinary shareholders of NWB Plc
for the year ended 31 December 2021 was £2,793 million
compared with a profit of £380 million for the year ended 31
December 2020, as set out in the consolidated income
statement on page 95.
No ordinary shares were issued during 2021 or 2020.
In 2021, NWB Plc paid an ordinary dividend of £1.6 billion to
NWH Ltd (2020 – nil).
Employees
At 31 December 2021, NWB Group employed 51,900 people
(excluding temporary staff). Details of related costs are
included in Note 3 on the consolidated accounts. NWB Plc
employs the majority of NWB Group UK customer-facing staff,
with costs recharged. NWB Plc also provides the majority of
shared services (including technology) and operational
processes under Intra-Group Agreements.
References to ‘colleagues’ in this report mean all members of
the workforce (for example, contractors, agency workers).
Corporate Governance statement
For the financial year ended 31 December 2021 NWB Plc has
again chosen to report against the Wates Corporate
Governance Principles for Large Private Companies, published
by the Financial Reporting Council (FRC) in December 2018
and available on the FRC website (the Wates Principles).
The disclosures below explain how NWB Plc has applied the
Wates Principles in the context of its corporate governance
arrangements.
1. Purpose and leadership
NatWest Group’s purpose is established by the NatWest Group
plc Board, promoted across NatWest Group and cascaded to
subsidiaries including NWB Plc. In February 2020, and following
an extensive period of stakeholder engagement, the NatWest
Group plc Board approved NatWest Group’s purpose and
strategy.
NatWest Group’s purpose is ‘we champion potential, helping
people, families and businesses to thrive’. It has continued to
inform and drive NatWest Group’s response to the COVID-19
pandemic, acting as an important point of reference during
Board discussions, debate and decision-making.
The Board received its annual purpose update in December
2021 which summarised progress in becoming a purpose-led
bank against the three purpose focus areas of Enterprise,
Learning and Climate. It highlighted the progress to date on
embedding purpose and delivering against public commitments
and the key areas of focus for 2022 as well as an update on
stakeholders’ perception of NatWest Group and its purpose
aligned to the Blueprint for Better Business framework.
NatWest Group’s strategy is set and approved by the NatWest
Group plc Board. The board of directors of NWH Ltd (the
Board) reviews and sets the strategic direction of the NWH
Group and, as appropriate, the strategies for each of its
businesses, within the parameters set by the NatWest Group
plc Board. The Board also oversees the execution of NWH
Group strategy and holds executive management to account
for its delivery.
Further information on NatWest Group’s progress against its
purpose and strategy can be found in the NatWest Group 2021
Annual Report and Accounts.
The Board assesses and monitors culture in several ways.
During 2021 it received:

a presentation on the Banking Standards Board (now the
Financial Services Culture Board) 2020 Survey Annual
Report and its review of the embedding of purpose in
NatWest Group;

Colleague Advisory Panel reports which provided feedback
on topics discussed in meetings. These included wellbeing
support for colleagues, Retail Banking strategy, purpose,
remuneration and the wider workforce, climate and ways of
working;

One Bank Transformation Programme spotlights on
Organisation, Skills & Culture which covered new ways of
working, colleague journeys, colleague experience, career
development, skills and capability, learning, wellbeing and
inclusion;

Insights from the colleague opinion surveys conducted in
April and September 2021. Key measures included culture,
purpose, building capability, inclusion, engagement and
leadership;

a Culture Spotlight which provided an update on work to
refresh the NatWest Group’s values as well as an overview
of cultural strengths, behavioural weaknesses, operating
model and future culture;

Culture measurement reports which included insights and
metrics to allow the Board to assess culture and understand
future priorities. The reports used the Blueprint for Better
Business framework to report progress highlighting both
positive trends and areas for improvement; and

Board Business Insights Packs which included metrics on
culture, purpose and inclusion
The activities described above have supported the Board in
meeting the Wates Principle 1 requirement to ensure that
purpose, values, strategy and culture are aligned, within the
wider NatWest Group governance structure.
Report of the directors continued
NWB Group
Annual Report and Accounts 2021
77
2. Board composition
The Board has 13
directors comprising the Chairman, two
executive directors and 10 independent non-executive
directors, one of whom is the Senior Independent Director.
The names of the current directors and secretary are shown on
page 4.
The Board considers that the Chairman was independent on
appointment and that all the non-executive directors are
independent. Non-executive director independence and
individual directors’ continuing contribution to NWB Plc are
considered at least annually.
The Board operates a Boardroom Inclusion Policy which
reflects the most recent industry targets and is aligned to the
Inclusion Policy and Principles applying to the wider NatWest
Group. The Boardroom Inclusion policy currently applies to the
Boards of NatWest Group plc, NWH Ltd, RBS plc and NWB Plc.
A copy of the Boardroom Inclusion Policy is available at
natwestgroup.com.
The Boardroom Inclusion Policy’s objectives ensure that the
Board, and any Committee to which it delegates nomination
responsibilities, follows an inclusive process when making
nomination decisions. That includes ensuring that the
nomination process is based on the principles of fairness,
respect and inclusion, that all nominations and appointments
are made on the basis of individual competence, skills and
expertise measured against identified objective criteria and that
searches for Board candidates are conducted with due regard
to the benefits of diversity and inclusion.
Throughout 2021 the Board met the recommendation of the
Parker Review with at least one member of the Board being of
Black, Asian or Minority Ethnic background and it intends to
continue to meet that recommendation.
At the end of 2021 the Board exceeded the recommendation of
the FTSE Women Leaders Review (formerly the Hampton-
Alexander Review) of 33% female representation on the
boards), with 38% of the Board being female.
The role of the Chairman is to lead the Board and ensure its
overall effectiveness. This is distinct and separate from that of
the Chief Executive Officer (CEO) who manages the business
day-to-day.
All directors receive accurate, timely and clear information on
all relevant matters and have access to the advice and services
of the Chief Governance Officer and Company Secretary. In
addition, all directors are able, if necessary, to obtain
independent professional advice at NWB Plc’s expense.
The Senior Independent Director acts as a sounding board for
the Chairman and as an intermediary for other directors when
necessary.
NWH Ltd is the holding company for NatWest Group’s ring-
fenced operations, which include the retail, commercial and
private banking businesses. A common board structure is
operated such that directors of NWH Ltd are also directors of
RBS plc and NWB Plc. Known collectively as the NWH Sub
Group, the boards of these three entities meet concurrently.
The common board structure also applied to Ulster Bank
Limited (UBL) until 29 July 2021 when a change in governance
arrangements was implemented following a transfer of UBL’s
business to NWB Plc. The Chairman, CEO and CFO remain
directors of UBL to facilitate certain transitional arrangements.
An integral part of NatWest Group’s governance arrangements
is the appointment of three double independent non-executive
directors (DINEDs) to the Boards and Board Committees, of the
NWH Sub Group. They are Francesca Barnes, Graham Beale
and Ian Cormack.
The DINEDs are independent in two respects: (i) independent of
management as non-executives; and (ii) independent of the rest
of NatWest Group by virtue of their NWH Sub Group only
directorships.
The DINEDs play a critical role in NatWest Group’s ring-fencing
governance structure, and are responsible for exercising
appropriate oversight of the independence and effectiveness of
the NWH Sub Group’s governance arrangements, including the
ability of each board to take decisions independently. The
DINEDs also have an enhanced role in managing any conflicts
which may arise between the interests of NWB Plc and other
members of NatWest Group.
All NWH Sub Group directors who are not DINEDs are directors
of NatWest Group plc. All DINEDs attend NatWest Group plc
Board meetings in an observer capacity.
The governance arrangements for the Boards and Board
Committees of NatWest Group plc and the NWH Sub Group
have been designed to enable NatWest Group plc to exercise
appropriate oversight and to ensure that, as far as is
reasonably practicable, the NWH Sub Group is able to take
decisions independently of the wider Group.
The Board is structured to ensure that the directors provide
NWB Plc with the appropriate balance of skills, experience,
knowledge and diversity, as well as independence. Given the
nature of NWH Group’s businesses, experience of banking and
financial services is clearly of benefit and the Board has a
number of directors with substantial experience in those areas.
In December the Nominations Committee reviewed, and the
Board approved, a refreshed version of the NatWest Group plc
and NWH Sub Group Board skills matrix.
The Board skills matrix reflects directors’ self-assessment of the
skills and experience they bring to Board discussions, in line
with pre-determined criteria aligned to current and future
strategic priorities, including CEO/senior executive
management; CFO/accountancy; Retail, Commercial and
Private Banking; Financial Markets and Investment Banking;
Environmental, Social and Governance (including climate);
Customer Experience; Technology (infrastructure, cyber);
Digital and Innovation; Transformation; Government /
regulatory / public sector; Risk Management and Broad
Financial Services. The Board skills matrix will continue to be
considered by the Nominations Committee and the Board, at
least once a year.
Board Committees also comprise directors with a variety of
skills and experience so that no undue reliance is placed on any
one individual.
The independent non-executive directors combine broad
business and commercial experience with independent and
objective judgment. They provide constructive challenge,
strategic guidance and specialist advice to the executive
directors and the executive management team and hold
management to account. The balance between non-executive
and executive directors enables the Board to provide clear and
effective leadership across NWH Group’s business activities and
ensures no one individual or small group of individuals
dominates the Board’s decision-making.
Report of the directors continued
NWB Group
Annual Report and Accounts 2021
78
The Board monitors the commitments of the Chairman and
directors and is satisfied that they are able to allocate sufficient
time to enable them to discharge their duties and
responsibilities effectively. Any additional external appointments
require prior Board approval.
Each new director receives a formal induction programme on
joining the Board, which is co-ordinated by the Chief
Governance Officer and Company Secretary and tailored to
suit the requirements of the individual concerned. This includes
visits to NatWest Group’s major businesses and functions and
meetings with directors and senior management. Meetings with
external auditors, counsel and stakeholders are also arranged
as appropriate. No new directors were appointed during 2021.
All new directors receive a copy of the Director Handbook. The
Handbook operates as a consolidated governance support
manual for directors of NatWest Group plc and the NWH Sub
Group, providing both new and current directors with a single
source of information relevant to their role. It covers a range of
topics including NatWest Group’s corporate structure; the
Board and Board Committee operating model; Board policies
and processes and a range of technical guidance on relevant
matters including directors’ duties, conflicts of interest, and the
UK Senior Managers and Certification Regime.
The Handbook
forms part of a wider library of reference materials available
via a resources portal.
The Board is supported in its succession planning activities,
including the recruitment of non-executive directors, by the
Nominations Committee, which is responsible for considering
and making recommendations to the Board in respect of Board
appointments. The Nominations Committee reviews the
structure, size and composition of the Board, and makes
recommendations to the Board in relation to any necessary
changes, having regard to the overall balance of skills,
knowledge, experience and diversity on the Board, the length
of service of the Board as a whole; and the requirement to
keep membership regularly refreshed. The Nominations
Committee considers Board composition and succession
planning at least annually. The NatWest Group plc Group
Nominations and Governance Committee also approves all
appointments to the Board, reflecting NWB Plc’s position as a
subsidiary within NatWest Group.
Evaluation
A review of the effectiveness of the Board, including the
Chairman, individual directors and Board Committees, is
conducted at least annually.
Progress following the 2020 evaluation
A number of actions were progressed during 2021 in response
to the findings of the 2020 internal performance evaluation.
In December 2021 the directors noted the progress made
against the 2020 evaluation actions, which were consistent
across the NatWest Group plc and NWH Sub Group Boards and
are described in more detail on page 110 of the NatWest Group
2021 Annual Report and Accounts.
2021 Performance evaluation
In 2021, the Board and Committee evaluation was externally
facilitated by Independent Board Evaluation (IBE).
Key findings, recommendations and actions were aligned
across NatWest Group plc and the NWH Sub Group and a
summary of the outcomes and actions arising from the 2021
evaluation can be found on page 111 of the NatWest Group
2021 Annual Report and Accounts.
Implementation of the 2021 Board evaluation actions will be
overseen by the Nominations Committee during 2022.
The Chairman met each director individually to discuss their
own performance and continuing professional development and
establish whether each director continues to contribute
effectively to the company’s long-term sustainable success. The
Chairman also shared peer feedback provided to IBE as part of
the evaluation process.
Separately, the Senior Independent Director sought feedback
on the Chairman’s performance from the non-executive
directors, executive directors and other key internal and
external stakeholders and discussed it with the Chairman. This
included peer feedback provided to IBE by directors as part of
the evaluation process.
Directors have access to a wide range of briefing and training
sessions and other professional development opportunities.
Directors undertake the training they consider necessary to
assist them in carrying out their duties and responsibilities. The
non-executive directors discuss professional development
annually
with the Chairman and they participate in scheduled
Board training sessions and other external sessions, as
appropriate. During 2021 the Board training programme
included dedicated sessions on operational resilience, consumer
protection, directors’ duties in resolution, cyber security,
financial crime and climate.
3. Director responsibilities
All directors receive guidance on their statutory duties under
the Companies Act and are supported in the discharge of their
duties by the Chief Governance Officer and Company
Secretary.
Each director has a role profile which clearly articulates their
responsibilities and accountabilities and any additional
regulatory responsibilities and accountabilities are set out in
their statement of responsibilities.
NatWest Group also produces and maintains a document called
‘Our Governance’ which sets out the governance, systems and
controls applicable to NatWest Group plc and the NWH Sub
Group.
Our Governance is made available to all directors and is
reviewed and approved by the Board at least annually.
The Directors’ Conflicts of Interest policy sets out procedures to
ensure that the Board’s management of conflicts of interest
and its powers for authorising certain conflicts are operating
effectively. This includes the management of conflicts that may
arise during Board decisions where the interests of NWB Plc
conflict with the interests of other members of NatWest Group.
Each director is required to notify the Board of any actual or
potential situational or transactional conflict of interest and to
update the Board with any changes to the facts and
circumstances surrounding such conflicts.
Situational conflicts can be authorised by the Board in
accordance with the Companies Act 2006 and the company’s
Articles of Association. The Board considers each request for
authorisation on a case by case basis and has the power to
impose conditions or limitations on any authorisation granted
as part of the process.
NWB Plc maintains a register of directors’ interests and
appointments, which is reviewed annually by the Board, and
there is discussion of directors’ conflicts in Board meetings, as
required.
Report of the directors continued
NWB Group
Annual Report and Accounts 2021
79
The Board
The Board is the main decision-making forum for NWB Plc. The
Board is collectively responsible for the long-term success of
NWB Plc and the delivery of sustainable value to its
shareholders. The Board’s role is to provide leadership of NWB
Plc. It monitors and maintains the consistency of NWB Plc’s
activities within the strategic direction of NatWest Group; it
reviews and approves risk appetite measures (including limits
and triggers) in accordance with the Risk Appetite Framework
and it monitors performance against risk appetite for NWB Plc.
It approves NWB Plc’s key financial objectives and keeps the
capital and liquidity positions of NWB Plc under review. The
Board’s terms of reference include a formal schedule of
matters specifically reserved for the Board’s decision and are
reviewed at least annually. An internal review confirmed the
Board had fulfilled its remit as set out in its terms of reference
during 2021.
The Board held eight
scheduled meetings and continued to
meet largely virtually during 2021. A hybrid meeting was held
in July and in September the full Board was able to meet in
person for the first time since the start of the pandemic.
At each scheduled Board meeting the directors receive reports
from the Chairman, Board Committee Chairmen, CEO, CFO,
Chief Risk Officer and other members of the executive
management team, as appropriate. Other senior executives
attended Board meetings throughout the year to present
reports to the Board. This provided the Board with an
opportunity to engage directly with management on key issues
and supports succession planning.
The Board and Committee paper template includes a
section
for authors to
explain
how the proposal or update
aligns
with NatWest Group’s purpose
and a separate section for
them to include an
assessment
of
the
relevant
stakeholder
impacts
for the directors to consider.
Directors
are mindful that it
is not always possible to achieve an
outcome which meets the requirements, needs
and/or
expectations of all stakeholders
who are, or may be,
impacted.
For decisions which are particularly challenging or
complex, an additional page was introduced to the Board and
Committee paper template in 2021 which
provides directors
with
further
information to support purposeful decision making.
This additional page uses
Blueprint for Better Business as a
base and
is aligned to NatWest Group’s broader purpose
framework.
Board priorities in 2021 included oversight of strategy and
transformation, customer experience, capital management,
financial crime and brand strategy. COVID-19 also remained a
key area of focus for the Board, particularly the support being
provided to customers and colleagues.
Board Committees
The Board has established a number of Board Committees with
particular responsibilities. The Audit, Risk, Performance &
Remuneration, and Nominations Committees of NWH Ltd
operate as committees of each of NWH Ltd, NWB Plc and RBS
plc, with meetings running concurrently. These Board
Committees also held delegated authorities for UBL until 29 July
2021 when a change in governance arrangements was
implemented following a transfer of UBL’s assets to NWB Plc.
On that date each Committee’s authority for UBL was revoked
The Audit Committee
comprises at least three independent
non-executive directors, two of whom are DINEDs. The
Committee assists the Board in discharging its responsibilities in
relation to the disclosure of financial affairs.
It also reviews accounting and financial reporting and
regulatory compliance practices of NWB Plc, NWB Plc’s system
of standards of internal controls, and monitors NWB Plc’s
processes for internal audit and external audit.
The Board Risk Committee
comprises at least four independent
non-executive directors, one of whom is the Chairman of the
Audit Committee and two of whom are DINEDs. It provides
oversight and advice to the Board in relation to current and
potential future risk exposures, future risk profile, and the
approval and effectiveness of NWB Plc’s Risk Management
Framework and (in conjunction with the Audit Committee)
internal controls required to manage risk.
The Performance and Remuneration Committee (RemCo)
comprises at least four independent non-executive directors,
one of whom is a DINED. It assists the NatWest Group plc
Group Performance and Remuneration Committee with the
oversight and implementation of NatWest Group’s
remuneration policy and also considers and makes
recommendations on remuneration arrangements for senior
executives of NWB Plc.
The Nominations Committee
comprises the Chairman, Senior
Independent Director and at least three further independent
non-executive directors. It is responsible for assisting the Board
in the formal selection and appointment of directors. It reviews
the structure, size and composition of the Board, and
membership and chairmanship of Board Committees.
Executive Committee
The Executive Committee
comprises NWB Plc’s most senior
executives and supports the CEO to discharge her individual
accountabilities including matters relating to strategy,
financials, capital, risk, customer and operational issues, and
culture and values.
4. Opportunity and risk
The role of the Board is to promote the long-term sustainable
success of NWB Plc.
The Board held a strategy session with the executive
management team in June 2021. Within the context of a wider
discussion at NatWest Group level, this provided an opportunity
for the Board to assess opportunities and risks to the future
success of the business, the sustainability of the business model
and how its governance contributes to the delivery of its
strategy.
The Board reviews the effectiveness of the risk management
and internal control systems – including the nature and extent
of the risks taken in pursuit of strategic objectives. The Board
also reviews and approves risk appetite for NWB Plc’s principal
risks in accordance with the NatWest Group risk appetite
framework; monitors performance against risk appetite for
NWB Plc; and considers any material risks and approves, as
appropriate, recommended actions escalated by the Board Risk
Committee.
NWB Plc’s risk strategy is informed and shaped by an
understanding of the risk landscape including the principal risks
it takes in carrying out business activities as well as the risks
and uncertainties arising from the external economic, political
and regulatory environments.
NWB Plc complies with NatWest Group’s risk appetite
framework, which is approved annually by the NatWest Group
plc Board. NatWest Group risk appetite is set in line with overall
strategy.
NWB Plc operates within NatWest Group’s integrated risk
management framework. This is centred around the
embedding of a strong risk culture and is designed to ensure
the tools and capability are in place to facilitate sound risk
management and decision-making.
Report of the directors continued
NWB Group
Annual Report and Accounts 2021
80
During 2021, ongoing work to enhance the enterprise-wide risk
management framework continued. The increasing significance
of climate risk, which is categorised as a principal risk,
remained a critical area of focus. Alignment with climate
change regulation is also reported to the NatWest Group
Executive Risk Committee and the NatWest Group Board Risk
Committee.
NWB Plc also complies with the NatWest Group policy
framework. The purpose of the policy framework is to ensure
that NatWest Group establishes and maintains policies that
adequately address the risks inherent in its business activities.
Further information on the NWB Plc risk management
framework including risk culture, risk governance, risk appetite,
risk controls and limits, and risk identification and measurement
can be found in the risk and capital management section of this
report (pages 9 to 75).
5. Remuneration
The NatWest Group remuneration policy provides a consistent
policy across all NatWest Group companies and ensures
compliance with regulatory requirements. The remuneration
policy is aligned with the business strategy, objectives, values
and long-term interests of NWB Plc. The policy supports a
culture where individuals are rewarded for delivering sustained
performance in line with risk appetite and for demonstrating
the right conduct and behaviours.
RemCo reviews remuneration for executives of NWB Plc and
considers reports on the wider workforce including annual pay
outcomes and diversity information. The RemCo helps to
ensure that the remuneration policies, procedures and
practices being applied are appropriate for NWB Plc.
Executive remuneration structures incentivise individuals to
deliver sustainable performance based on strategic objectives
for NatWest Group and the relevant business area.
Performance is assessed against a balanced scorecard of
financial and non-financial measures and variable pay is
subject to deferral as well as malus and clawback provisions to
ensure rewards are justified in the long-term.
The approach to performance management provides clarity for
colleagues on how their contribution links to NatWest Group’s
purpose and colleagues set goals across a balanced scorecard
of measures. NatWest Group continues to ensure employees
are paid fairly for the work they do and are supported by
simple and transparent pay structures in line with industry best
practices. NatWest Group keeps policies and processes under
review to ensure it does so.
This clarity and certainty on how pay is delivered is also
helping to improve colleagues’ financial wellbeing, which is a
core priority in NatWest Group’s wellbeing plans. In the UK,
NatWest Group’s rates of pay continue to exceed the Living
Wage Foundation benchmarks and NatWest Group ensures
employees performing the same role are paid fairly.
NatWest Group ensures that colleagues have an awareness of
the financial and economic factors affecting its performance
through quarterly ‘Results Explained’ communications and
Workplace Live events with the Group CEO and Group CFO.
Further information on the remuneration policy, pay ratios and
employee share plans can be found in the Directors’
remuneration report of the NatWest Group 2021 Annual Report
and Accounts. Gender and Ethnicity Pay Gap information can
be found in the Strategic report section of the NatWest Group
2021 Annual Report and Accounts and at natwestgroup.com,
along with the steps being taken to build an inclusive and
engaged workforce.
6. Stakeholder relationships and engagement
In February 2021 the Board approved its annual objectives and
confirmed the Board’s key stakeholder groups – customers,
colleagues, communities, investors, regulators and suppliers.
The Board’s agenda and engagement plans were structured to
enhance the Board’s understanding of these stakeholders’
views and interests. This in turn has informed Board discussions
and decision-making.
For further information on stakeholder engagement activities
undertaken within NatWest Group which impacted NWH Group,
see pages 14 to 17 and pages 52 to 63 of the NatWest Group
2021 Annual Report and Accounts
Engagement with Colleagues, Suppliers, Customers and
Others
For further details on the Board’s engagement with colleagues,
customers, suppliers and others, and how these stakeholders’
interests have influenced Board discussions and principal
decisions, see page 3 of the Strategic report which includes a
section 172(1) statement and signposts to further information
contained in the NatWest Group 2021 Annual Report and
Accounts.
Additional colleague-related disclosures
Informing and consulting colleagues
The pandemic has drastically altered the working landscape for
everyone, accelerating the evolving relationship between
colleagues and employers. It is now more important than ever
that NatWest Group listens to colleagues and uses this insight
to attract, engage and retain the talent it needs for the future.
The ‘Colleague Listening Strategy’ – which includes colleague
opinion surveys; a Colleague Advisory Panel that connects
colleagues directly with the Board; the ‘Colleague Experience
Squad’, a group of colleagues who volunteer to provide
feedback on colleague products and services; and ‘Workplace’,
NatWest Group’s social media platform – contributes to a
deeper understanding of colleague sentiment. NatWest Group
also tracks metrics and key performance
indicators which can
be benchmarked with sector and high-performing comparisons.
A total of 46,700 colleagues (81%) participated in the
September 2021 ‘Our View’ survey. The results show that
colleague sentiment remains strong, despite the pandemic.
Lead measures in culture, purpose, inclusion and building
capability showed continued and sustained year-on-year
improvement (+1 percentage point each). Across all 15
measured categories, NatWest Group sits an average of 11
percentage points above the Global Financial Services Norm
(GFSN) and five percentage points above the Global High
Performance Norm (GHPN).
Regular interactions with employee representatives such as
trade unions, elected employee bodies and works councils are
a vital means of transparency and engagement for NatWest
Group. These sessions are frequently used to discuss
developments and updates on the progress of strategic
priorities: in 2021, for example, topics included ‘ways of
working’ and ‘health and safety in the context of the
pandemic’. NatWest Group is also committed to respecting
employees’ rights of freedom of association across all of its
business.
Report of the directors continued
NWB Group
Annual Report and Accounts 2021
81
In addition, through the Colleague Advisory Panel (CAP)
established in 2018, colleagues can engage directly with senior
management and the Board on topics which are important to
them, thereby strengthening the voice of colleagues in the
Boardroom. The CAP is made up of 28 colleagues who
represent employee-led networks, talent programmes,
employee representative bodies or are self-nominated. In this
way NatWest Group ensures the panel is diverse, inclusive and
representative of the workforce.
The CAP met with representatives from the Board three times
in 2021 to discuss issues such as wellbeing, remuneration
(including executives and the wider workforce), climate, retail
banking strategy, sustainability and purpose. The CAP
continues to be highly regarded by those who attend and has
proven to be an effective way of establishing two-way dialogue
between colleagues and Board members. In 2022 the Board
intends to review its approach to how the Board engages with
the workforce.
Disability Smart
NatWest Group makes workplace adjustments to support
colleagues with disabilities to succeed.
If a colleague becomes
disabled NatWest Group will, wherever possible, make
adjustments to support them in their existing role or re-deploy
them to a more suitable alternative role.
The NatWest Group Careers site gives comprehensive insights
into NatWest Group jobs, culture, locations and application
processes. It also hosts a variety of blog content to portray
stories of what it is like to work at NatWest Group. The
company also makes sure that candidates can easily request
adjustments or help to complete their application or
assessment.
Internal control over financial reporting
The internal controls over financial reporting for NWB Group
are consistent with those at NatWest Group level. NWB Group
has designed and assessed the effectiveness of its internal
control over financial reporting as of 31 December 2021 based
on the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in the 2013
publication of ‘Internal Control – Integrated Framework’. Any
deficiencies identified are reported to NWB Plc’s Audit
Committee along with management’s remediation plans.
NatWest Group's auditors have audited the effectiveness of
NatWest Group's internal control over financial reporting and
have given an unqualified opinion.
Directors’ interests
Where directors of NWB Plc are also directors of NatWest
Group plc, their interests in the shares of the ultimate holding
company at 31 December 2021 are shown in the Corporate
governance, Annual report on remuneration section of the
NatWest Group 2021 Annual Report and Accounts. None of the
directors held an interest in the loan capital of the ultimate
holding company or in the shares or loan capital of NWB Plc or
any of its subsidiaries, during the period from 1 January 2021
to 17 February 2022.
Directors' indemnities
In terms of section 236 of the Companies Act 2006 (the
‘Companies Act’), Qualifying Third Party Indemnity Provisions
have been issued by the ultimate holding company to its
directors, members of NWB Plc’s Executive Committee,
individuals authorised by the PRA/FCA and certain directors
and/or officers of NatWest Group’s subsidiaries and trustees of
NatWest Group’s pension scheme.
Going concern
NWB Group’s business activities and financial position, the
factors likely to affect its future development and performance
and its objectives and policies in managing the financial risks to
which it is exposed, and its capital are discussed in the
Business review. NWB Group’s regulatory capital resources and
significant developments in 2021, and anticipated future
developments are detailed in the Capital, liquidity and funding
section on pages 58 to 65. This section also describes NWB
Group’s funding and liquidity profile, including changes in key
metrics and the build up of liquidity reserves.
Having reviewed NWB Plc’s principal risks, forecasts,
projections, the potential impact of COVID-19 and other
relevant evidence, the directors have a reasonable expectation
that NWB Plc will continue in operational existence for a period
of 12 months from the date of this report. Accordingly, the
financial statements of NWB Plc have been prepared on a
going concern basis.
Political donations
During 2021, no political donations were made in the UK or EU,
nor any political expenditure incurred in the UK or EU.
Directors’ disclosure to auditors
Each of the directors at the date of approval of this report
confirms that:
(a) so far as the director is aware, there is no relevant audit
information of which NWB Plc’s auditors are unaware; and
(b) the director has taken all the steps that he/she ought to
have taken as a director to make himself/herself aware of any
relevant audit information and to establish that NWB Plc’s
auditors are aware of that information.
This confirmation is given and should be interpreted in
accordance with the provisions of section 418 of the
Companies Act.
Auditors
Ernst & Young LLP (EY LLP) are NWB Plc’s auditors and have
indicated their willingness to continue in office. A resolution to
re-appoint EY LLP as NWB Plc’s auditors will be proposed at
the forthcoming Annual General Meeting.
By order of the Board
Jan Cargill
Chief Governance Officer and Company Secretary
17 February 2022
National Westminster Bank Plc
Is registered in England No. 929027
Statement of directors’ responsibilities
This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 84 to 94.
The directors are responsible for the preparation of the Annual Report and Accounts. The directors are required to prepare Group
financial statements, and as permitted by the Companies Act 2006 have elected to prepare company financial statements, for each
financial year in accordance with UK adopted International Accounting Standards. They are responsible for preparing financial
statements that present fairly the financial position, financial performance and cash flows of NWB Group and NWB Plc. In
preparing those financial statements, the directors are required to:

select suitable accounting policies and then apply them consistently;

make judgments and estimates that are reasonable, relevant and reliable; and

state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained
in the financial statements.

prepare the financial statements on a going concern basis unless it is inappropriate to presume that the company and Group
will continue in business.
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the
financial position of NWB Group and to enable them to ensure that the Annual Report and Accounts complies with the Companies
Act 2006. They are also responsible for safeguarding the assets of NWB Plc and NWB Group and hence for taking reasonable steps
for the prevention and detection of fraud and other irregularities.
Under applicable law and regulations, the directors are also responsible for preparing a Strategic report and Directors’ report, that
comply with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and
financial information included on the company’s website.
The directors confirm that to the best of their knowledge:

the financial statements, prepared in accordance with UK adopted International Accounting Standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss of the Bank and the undertakings included in the consolidation taken
as a whole; and

the Strategic report and Directors’ report (incorporating the Financial review) includes a fair review of the development and
performance of the business and the position of the Bank and the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties that they face.
By order of the Board
Howard Davies
Alison Rose-Slade
Katie Murray
Chairman
Chief Executive Officer
Chief Financial Officer
17 February 2022
Board of directors
Chairman
Executive directors
Non-executive directors
Howard Davies
Alison Rose-Slade
Katie Murray
Francesca Barnes
Graham Beale
Ian Cormack
Patrick Flynn
Morten Friis
Robert Gillespie
Yasmin Jetha
Mike Rogers
Mark Seligman
Lena Wilson
Financial statements
NWB Group
Annual Report and Accounts 2021
83
Page
Independent auditor’s report
84
Consolidated income statement
95
Consolidated statement of comprehensive income
95
Balance sheet
96
Statement of changes in equity
97
Cash flow statement
99
Accounting policies
100
Notes to the financial statements
1
Net interest income
106
2
Non-interest income
106
3
Operating expenses
107
4
Segmental analysis
109
5
Pensions
112
6
Auditor’s remuneration
117
7
Tax
117
8
Profit/(loss) dealt with in the accounts of the Bank
119
9
Financial instruments - classification
120
10
Financial instruments - valuation
126
11
Financial instruments - maturity analysis
133
12
Derivatives
136
13
Loan impairment provisions
143
14
Investment in Group undertakings
144
15
Other financial assets
145
16
Other assets
145
17
Intangible assets
146
18
Property, plant and equipment
147
19
Other financial liabilities
149
20
Subordinated liabilities
149
21
Other liabilities
151
22
Share capital and reserves
152
23
Leases
153
24
Structured entities
155
25
Asset transfers
156
26
Capital resources
157
27
Memorandum items
158
28
Analysis of the net investment in business interests and intangible assets
161
29
Analysis of changes in financing during the year
161
30
Analysis of cash and cash equivalents
161
31
Directors’ and key management remuneration
162
32
Transactions with directors and key management
162
33
Related parties
163
34
Ultimate holding company
163
35
Post balance sheet events
163
36
Related undertakings
164
Independent auditor’s report to the members of
National Westminster Bank Plc
NWB Group
Annual Report and Accounts 2021
84
Opinion
In our opinion:

the financial statements of National Westminster Bank Plc’s (the ‘Bank’) and its subsidiaries (together the ‘Group’) give a true
and fair view of the state of the Group’s and of the Bank’s affairs as at 31 December 2021 and of the Group’s profit for the year
then ended;

the Group financial statements have been properly prepared in accordance with UK adopted international accounting
standards;

the Bank financial statements have been properly prepared in accordance with UK adopted international accounting standards
as applied in accordance with section 408 of the Companies Act 2006; and

the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements (see table below) of the Bank and the Group for the year ended 31 December 2021
which comprise:
Group
Bank

Consolidated balance sheet as at 31 December 2021;

Consolidated income statement for the year then ended;

Consolidated statement of comprehensive income for the year
then ended;

Consolidated
statement
of
changes
in
equity
for
the
year
then
ended;

Consolidated cash flow statement for the year then ended;

Accounting policies;

Related Notes 1 to 36 to the financial statements; and

Risk and capital management section of the Strategic report
identified as ‘audited’.

Balance sheet as at 31 December 2021;

Statement of changes in equity for the year then
ended;

Cash flow statement for the year then ended; and

Related Notes 1 to 36 to the financial statements
including a summary of the significant accounting
policies.
The financial reporting framework that has been applied in their preparation is applicable law and UK adopted international
accounting standards and as regards to the group financial statements, as applied in accordance with section 408 of the
Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements
section of our report. We are independent of the Group and Bank in accordance with the ethical requirements that are relevant to
our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and
we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the
preparation of the financial statements is appropriate. Our evaluation of the directors’ assessment of the Group and Bank’s ability
to continue to adopt the going concern basis of accounting included:

In conjunction with our walkthrough of the Group’s financial close process, we confirmed our understanding of management’s
Going Concern assessment process and also engaged with management early to ensure all key factors were considered in
their assessment;

We evaluated management’s going concern assessment which included reviewing their evaluation of long-term business and
strategic plans, capital adequacy, liquidity and funding positions. It also assessed these positions considering internal stress
tests which included consideration of principal and emerging risks. The Group’s risk profile and risk management practices
were considered including credit risk, market risk, compliance and conduct risk, and operational risk;

We evaluated management’s assessment by considering the Group’s ability to continue in operation and meets its liabilities
in
different scenarios considering the economic impact of COVID-19. We used economic specialists in assessing the
macroeconomic assumptions in the forecast through benchmarking to institutional forecasts, HMT consensus and peer
comparative economic forecasts;

Considered the results of the Bank’s stress testing and Bank of England 2021 solvency stress test, as well as the Group’s results
in the Bank of England Climate Biennial Exploratory Scenario (CBES)
; and

We reviewed the Group’s going concern disclosures included in the annual report in order to assess that the disclosures were
appropriate and in conformity with the reporting standards.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the Group and Bank’s ability to continue as a going concern over the
twelve months from the date when the financial statements are authorised for issue.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of
this report. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the
Group’s ability to continue as a going concern.
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2021
85
An overview of the scope of the Bank and group audits
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope
for each company within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements.
We take into account the size and risk profile of the component and its activities, the organisation of the Group and effectiveness of
group wide controls, changes in the business environment and other factors such as recent internal audit results when assessing
the level of work to be performed at each component. The scoping below is consistent with the prior year.
In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative
coverage of significant accounts in the financial statements, of the five reporting components of the Group, we selected four
components based on size and risk, which represent the principal business units within the Group.
Component
Scope
Key locations
Retail Banking
Full
United Kingdom
Commercial Banking
Full
United Kingdom
Private Banking
Specific
United Kingdom
Central items and other*
Full
United Kingdom, India
*including Services, and Treasury
The table below illustrates the coverage obtained from the work performed by our audit teams. We considered total assets, total
equity and total income to verify we had appropriate overall coverage.
Full scope
(1)
Specific scope
(2)
Other procedures
(3)
Total
Total assets
89%
11%
-
100%
Total equity
86%
12%
2%
100%
Total income
94%
5%
1%
100%
(1)
Full scope: audit procedures on all significant accounts.
(2)
Specific scope: audit procedures on selected accounts.
(3)
Other procedures: considered in analytical procedures and specified procedures, as appropriate.
The audit scope of the specific scope component may not have included testing of all significant accounts within the component,
however, the testing will have contributed to the total coverage of significant accounts tested for the overall Group.
As a result of the continued impact of the COVID-19 outbreak and resulting lockdown restrictions for part of the year in all of the
countries where full or specific scope audit procedures have been performed, we have modified our audit strategy to allow for the
audit to be performed remotely at both the Group and component locations. This approach was supported through remote user
access to the Group’s financial systems and the use of EY software collaboration platforms for the secure and timely delivery of
requested audit evidence.
Involvement with component teams
In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of
the components by us, as the primary audit engagement team, or by component auditors from other EY global network firms
operating under our instruction.
The primary audit engagement team interacted regularly with the component audit teams where appropriate throughout the
course of the audit, which included holding planning meetings, maintaining regular communications on the status of the audits,
reviewing key working papers and taking responsibility for the scope and direction of the audit process. The primary audit team
continued to follow a programme of oversight visits that has been designed to ensure that the Senior Statutory Auditor, or another
Group audit partner, visits all full scope and specific scope locations outside the United Kingdom. During the current year’s audit
cycle, due to continued COVID-19 restrictions, the visits undertaken by the primary audit team were necessarily virtual visits.
These visits involved video call meetings with local management, and discussions on the audit approach with the component team
and any issues arising from their work. The primary team interacted regularly with the component teams and maintained a
continuous and open dialogue with component teams, as well as holding formal closing meetings quarterly, to ensure that the
primary team were fully aware of their progress and results of their procedures. The primary team also reviewed key working
papers and were responsible for the scope and direction of the audit process. This, together with the additional procedures at
Group level, gave us appropriate evidence for our opinion on the Group financial statements.
Climate change
There has been increasing interest from stakeholders as to how climate change will impact companies. The Group has determined
that the most significant future impacts from climate change on its operations will be from credit risk, operational risk, reputational
risk, conduct risk and regulatory compliance risk. These are explained in the required Task Force for Climate related Financial
Disclosures in the Strategic Report, and in the Climate Risk section within the Risk and capital management section, which form
part of the “Other information”. Our procedures on these disclosures consisted solely of considering whether they are materially
inconsistent with the financial statements or our knowledge obtained in the course of the audit or otherwise appear to be
materially misstated.
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2021
86
As explained in the Accounting Policy note, the Group makes use of reasonable and supportable information to make accounting
judgments and estimates, including the observable effect of the physical and transition risks of climate change on the current
creditworthiness of borrowers, asset values and market indicators, as well as their effect on the Group’s competitiveness and
profitability. Many of the impacts arising will be longer term in nature, with an inherent level of uncertainty, and have limited effect
on accounting judgments and estimates for the current period under the requirements of UK adopted international accounting
standards. In the Accounting Policy note, explanation of the impact of certain transition and physical risks were provided for the
key assumptions and significant judgments and estimates.
Our audit effort in considering climate change was focused on ensuring that the effects of material climate risks as disclosed in the
Accounting Policy note have been appropriately reflected in the asset and liability valuations and the nature and timing of future
cash flows. Details of our procedures and results on expected credit loss provisions and impairment of goodwill are included in our
key audit matters below. We also challenged the Directors’ considerations of climate change in their assessment of going concern
and viability and associated disclosures.
Whilst the Group has stated its commitment to the aspirations of the Paris Agreement to achieve net zero emissions by 2050, as
stated above the impacts arising will be longer term in nature, and there is an inherent level of uncertainty in determining the full
future economic impact on their business model, operational plans and customers.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of
resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit
of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2021
87
Risk
Our response to the risk
Expected Credit Loss Provisions
At 31 December 2021 the Group
reported total gross loans of £296 billion
(2020: £281 billion) and £2.5 billion of
expected credit losses (ECL) (2020: £3.7
billion).
Management’s judgments and estimates
are especially subjective due to
significant uncertainty associated with
the assumptions used. Uncertainty
related with the path to recovery from
COVID-19 and the impact of climate
change was considered in our risk
assessment. Aspects with increased
complexity in respect of the timing and
measurement of ECL include:

Staging -
Allocation of assets to stage
1, 2, or 3 on a timely basis using
criteria in accordance with IFRS 9;

Model estimations -
Accounting
interpretations, modelling
assumptions and data used to build
and run the Probability of Default
(‘PD’), Loss Given Default (‘LGD’)
and Exposure at Default (‘EAD’)
models that calculate the ECL;

Economic scenarios -
Inputs,
assumptions and weightings used to
estimate the impact of multiple
economic scenarios particularly
those influenced by COVID-19
including any changes to scenarios
required through 31 December 2021;

Adjustments -
Appropriateness,
completeness and valuation of model
adjustments which represent
approximately 25% of total ECL
including any COVID-19 specific
adjustments due to the ongoing
uncertainty which increases the risk
of management override; and

Individual provisions -
Measurement
of individual provisions including the
assessment of multiple scenarios
considering the impact of COVID-19
on exit strategies, collateral
valuations and time to collect.
Controls testing
- We evaluated the design and operating effectiveness of controls
across the processes relevant to ECL, including the judgments and estimates noted.
These controls, among others, included those over:

the allocation of assets into stages including management’s monitoring of stage
effectiveness;

model governance including monitoring and model validation;

data accuracy and completeness;

credit monitoring;

multiple economic scenarios;

the governance and review of post-model adjustments;

individual provisions; and

production of journal entries and disclosures.
In evaluating the governance process, we observed the executive finance and risk
committee meetings where the inputs, assumptions and adjustments to the ECL
were discussed and approved, among other procedures.
Overall assessment
- We performed an overall assessment of the ECL provision
levels by stage to determine if they were reasonable by considering the overall
credit quality of the Group’s portfolios, risk profile, impact of COVID-19, government
support measures and climate change on the Group’s customers. We also
considered the appropriateness of provisions applied to government supported
lending such as bounce back loans and CBILs which included assessing the
compliance with the eligibility criteria with the involvement of our EY legal
specialists. We performed peer benchmarking where available to assess overall
staging and provision coverage levels. For a higher risk industry, we also assessed
the ECL against an independently developed methodology estimating unsustainable
debt levels.
Based on our assessment of the key judgments we used EY specialists to support
the audit team in the areas of economics, modelling and collateral and business
valuations.
Staging
- We evaluated the criteria used to allocate a financial asset to stage 1, 2 or
3 in accordance with IFRS 9; this included peer benchmarking to assess staging
levels. We recalculated the assets in stage 1, 2 and 3 to assess if they were
allocated to the appropriate stage and performed sensitivity analysis to assess the
impact of different criteria on the ECL and also considered the impact of performing
collective staging downgrades to industries and geographic regions particularly
impacted by climate change.
To test credit monitoring which drives the probability of default estimates used in
the staging calculation, we recalculated the risk ratings for a sample of performing
loans and focused our testing on high risk industries. We also assessed the timing of
the annual review performed by management on each wholesale loan exposure to
evaluate whether it appropriately considered risk factors by considering
independent publicly available information.
Model estimations
- We performed a risk assessment on all models involved in the
ECL calculation to select a sample of models to test. We involved EY modelling
specialists to assist us to test this sample of ECL models by testing the assumptions,
inputs and formulae used. This included a combination of assessing the
appropriateness of model design and formulae, alternative modelling techniques,
recalculating the PD, LGD and EAD, and model implementation. We also considered
the results of the Group’s internal model validation results.
To evaluate data quality, we agreed a sample of ECL calculation data points to
source systems, including balance sheet date data used to run the models and
historic loss data to monitor models. We also tested the ECL data points from the
calculation engine through to the general ledger and disclosures.
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2021
88
Risk
Our response to the risk
Expected Credit Loss Provisions continued
Economic scenarios
- We involved EY economic specialists to assist us in evaluating
the base case and alternative economic scenarios, including evaluating probability
weights and considering contrary evidence by comparing these to other scenarios
from a variety of external sources. This assessment included the latest
developments related to COVID-19 at 31 December 2021. We assessed whether
forecasted macroeconomic variables were complete and appropriate, such as GDP,
unemployment rate, interest rates and the House Price Index. With the support of
our modelling specialists we evaluated the correlation and translation of the
macroeconomic factors to the ECL.
Adjustments
- We tested material post-model adjustments including those which
continued to be applied as a result of COVID-19 uncertainty. With our modelling
specialists, we assessed the risk of bias and the completeness of these adjustments
and their appropriateness by considering the data, judgments, methodology,
sensitivities, and governance of these adjustments as well as considering model
shortcomings.
Individual provisions
- We recalculated and challenged the scenarios, assumptions
and cash flows for a sample of individual provisions including the alternative
scenarios and evaluating probability weights assigned, involving EY valuation
specialists where appropriate. The sample was based on a number of factors,
including higher risk sectors such as commercial real estate, agriculture, oil and
gas, mining, retail, leisure and aviation, and materiality. We considered the impact
COVID-19 and climate change had on collateral valuations and time to collect as
well as whether planned exit strategies remained viable.
Disclosure
- We tested the data flows used to populate the disclosures and
assessed the adequacy of disclosures for compliance with the accounting
standards and regulatory considerations.
Key observations communicated to the NatWest Holdings (NWH) Group Audit Committee (1)
We are satisfied that provisions for the impairment of loans were reasonable and recognised in accordance with IFRS 9. We
highlighted the following matters to the NWH Group Audit Committee:

Overall provision levels were reasonable which also considered available peer information and our understanding of the
credit environment;

Our testing of models and model assumptions identified some instances of over and under estimation. We aggregated these
differences and were satisfied that the overall estimate recorded was reasonable;

The post-model adjustments recorded were within a reasonable range to reflect risk in the portfolios;

We recalculated the staging of retail and wholesale exposures in material portfolios and noted no material differences. We
also performed sensitivity analysis on the staging criteria and noted that substantial changes would be needed to the criteria
to result in a material difference;

For individually assessed impairments, in a few instances we reported judgmental differences in respect of the extent of the
impairment identified, however, none of these differences were considered material; and

There is inherent uncertainty in predicting the longer-term impact of COVID-19, government support schemes and climate
change on the Group’s borrowers, their ability to make payments as they fall due and the recoverability of loans. The Group
should continue to make use of reasonable and supportable information to consider the long and short term impacts of
these matters on accounting judgments and estimates.
Relevant references in the Annual Report and Accounts
Credit Risk section of the Risk and capital management section
Accounting policies
Note 13 to the financial statements
(1)
NWH Audit Committee covers the ring-fenced bank legal entities of NatWest Group, including the Group.
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2021
89
Risk
Our response to the risk
Impairment of investments in group undertakings in the Bank’s financial statements
At 31 December 2021, the Bank has
reported investments in group
undertakings of £2.3 billion (2020: £2.4
billion).
The recognition and carrying value of
investments in group undertakings in the
Bank’s financial statements are based
on estimates of future profitability, which
require significant management
judgment and include the risk of
management bias.
Judgments and especially challenging,
complex and subjective assumptions
that are difficult to audit due to the
forward-looking nature and inherent
uncertainties associated with such
assumptions include:

Revenue forecasts including the
impacts of climate change
which are
impacted by delivery of the Group’s
Strategy;

Cost forecasts
given the intention to
significantly reduce costs over time;

Macroeconomic and model
assumptions
used in the
recoverability and valuation
assessments (discount rates, growth
rates, macroeconomic assumptions,
etc.) including assumptions regarding
the economic consequences of
COVID -19 and other political
developments over an extended
period; and

Disclosure
adequacy including key
assumptions, the sensitivity of
changes to these assumptions as
well as an explanation of the
impairment testing performed.
Controls testing
: We evaluated the design and operating effectiveness of controls
over the preparation and review of the forecasts, and the significant assumptions
(such as discount rate and long-term growth rate) inputs, calculations,
methodologies and judgments used in the value-in-use model. This included testing
controls over the selection of macroeconomic assumptions in addition to controls
over the preparation and review of the revenue and cost projections. In evaluating
the governance processes we reviewed the Board meeting materials and minutes
where forecasts were discussed and approved, and we observed the committee
meetings where the value-in-use model and outcomes were discussed and
approved.
Macroeconomic and model assumptions
: With the support of our internal economic
specialists, we tested whether macroeconomic assumptions, including the continued
impact of COVID-19 as at 31 December 2021, used in the Group’s forecasts were
reasonable by comparing these to other scenarios from a variety of external
sources. We evaluated how the discount rates and long-term growth rates used by
management compared to our ranges which were developed using peer practice,
external market data and calculations performed by our valuation specialists. We
also assessed changes to valuation methodology and benchmarked this against
industry practice with the assistance of our valuation specialists.
Revenue forecasts
: We evaluated the underlying business strategies, comparing to
expected market trends and considering anticipated balance sheet growth. We
obtained an understanding of the Group’s strategy including their consideration of
the impact of climate change, and considered its expected impact on the
forecasts
and
the extent to which decisions had been factored
into
the
forecasts,
where appropriate,
in accordance with the relevant accounting
standards.
We
also
inspected the findings from the review
performed by
management including their own sensitivity analysis of the forecasts.
Cost forecasts
: We tested how previous management forecasts, including the impact
of cost reduction programmes, compared to actual results to evaluate the accuracy
of the forecasting process. We also tested the reasonableness of key performance
indicators against peers with the help of our valuation specialists to assess the
reasonableness of the Group’s cost forecast.
Sensitivity analysis
: We evaluated how management considered alternative
assumptions and performed our own sensitivity and scenario analyses on certain
assumptions such as cost and revenue forecasts, discount rate, long-term growth
rate and other key performance indicators on both the detailed forecasts and on an
overall basis.
Disclosure
: We evaluated the adequacy of disclosures in the financial statements
including the appropriateness of assumptions and sensitivities disclosed. We tested
the data and calculations included in the disclosures.
Key observations communicated to the NWH Group Audit Committee
We are satisfied that management methodologies, judgments and assumptions supporting investments in group undertakings
in
the Bank’s financial statements, were reasonable and in accordance with IFRS. We highlighted the following matters to the
NWH Group Audit Committee:

There is inherent uncertainty in predicting revenue and costs over the five-year forecast period, particularly with respect to
the impact of COVID-19, the achievement of new strategic objectives, execution risk in the planned cost reductions, the
impact of regulatory and climate change developments, and the impact of competition and disruption in banking business
models over an extended period.

Investments in group undertakings:

The directors impaired NWB’s investment in Ulster Bank Limited.
The sensitivity analyses we reviewed, and our independent
procedures supported these assessments. We are satisfied that the disclosures appropriately reflect the sensitivity of the
carrying value of investments in group undertakings to certain reasonable alternative outcomes. As there are a number of
other possible outcomes and it would be impracticable to estimate the effect of all of them, the directors have disclosed the
uncertainty that other possible outcomes within the next financial year could require an adjustment to the carrying amount
of investments in group undertakings.
Relevant references in the Annual Report and Accounts
Accounting policies
Note 9 to the financial statements
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2021
90
Risk
Our response to the risk
Provisions for customer redress, litigation and other regulatory matters
At 31 December 2021, the Group has
reported £0.6 billion (2020: £0.9 billion) of
provisions for liabilities and charges,
including £0.3 billion (2020: £0.4 billion) for
customer redress, litigation and other
regulatory matters as detailed in Note 21 of
the financial statements.
Regulatory scrutiny and the continued
litigious environment give rise to a high level
of management judgment in determining
appropriate provisions and disclosures for
specific customer redress, litigation and other
regulatory matters. Management judgment is
needed to determine whether a present
obligation exists and a provision should be
recorded at 31 December 2021 in
accordance with the accounting criteria set
out under IAS 37.
The most significant areas of judgment are:

Judgment and risk of management bias
-
Auditing the adequacy of these provisions
is complex because judgment is involved
in the selection and use of assumptions in
the estimation of material provisions and
there is a risk of management bias in the
determination of whether an outflow in
respect of identified material customer
redress, litigation and other regulatory
matters is probable and can be estimated
reliably; and

Disclosure
- Judgment is required to
assess the adequacy of disclosures of
provision for contingent liabilities given
the underlying estimation uncertainty in
the provisions, and other uncertainties
and assumptions.
Controls testing
: We evaluated the design and operating effectiveness of
controls over the identification, estimation, monitoring and disclosure of
provisions and other uncertainties and assumptions related to customer
redress, litigation and other regulatory matters considering the potential for
management override of controls. The controls tested, among others, included
those to identify and monitor claims, determine when a provision is required
and to ensure the completeness and accuracy of data used to estimate
provisions.
Examination of regulatory correspondence
: We examined the relevant
regulatory and legal correspondence to assess developments in certain cases.
We also considered regulatory developments to identify actual or possible non-
compliance with laws and regulations that might have a material effect on the
financial statements. For cases which were settled during the period, we
compared the actual outflows with the provision that had been recorded,
considered whether further risk existed, and evaluated the level of disclosures
provided.
Inquiry of legal counsel
: For significant legal matters, we received confirmations
from the Group’s external legal counsel to evaluate the likelihood of the
obligation and management’s estimate of the outflow at year-end. We also
conducted inquiries with internal legal counsel over the existence of the legal
obligations and related provision. We performed a test for unrecorded
provisions to assess if there were cases not considered in the provision estimate
by assessing against external legal confirmations and discussing with internal
counsel.
Testing of assumptions
: Where appropriate, we involved our conduct risk and
forensics specialists to assist us in evaluating the provision for specific customer
redress, litigation and other regulatory matters. We tested the underlying data
and assumptions used in the determination of the provisions recorded, including
expected claim rates, legal costs, and the timing of settlement. We evaluated
the accuracy of management’s historical estimates by comparing the actual
settlement to the provision and considered peer bank settlement in similar
cases. We assessed the reasonableness of the assumptions used by
management by comparing to the results of our independently performed
benchmarking and sensitivity analysis. We also developed our own range of
reasonable alternative estimates and compared them to management’s
provision. We tested utilisations of remaining provisions during the year and
assessed the sufficiency of the remaining provisions yet to be paid for specific
customer redress, litigation and other regulatory matters.
Disclosure
: We evaluated the disclosures provided on customer redress,
litigation and other regulatory matters to assess whether they complied with
accounting standards.
Key observations communicated to the NWH Group Audit Committee
We are satisfied that provisions for customer redress, litigation and other regulatory matters are reasonable and recognised in
accordance with IFRS. We concurred with the recognition, measurement and level of disclosures of provisions relating to
customer redress, litigation and other regulatory matters. We did not identify any material unrecorded provisions. We highlighted
the following matters to the NWH Group Audit Committee:

The level of provisions by their nature incorporates significant judgments to be made and may change as a result of future
developments.

Continued vigilance in assessing conduct risks from the impact of COVID-19, which may not manifest until well after the
pandemic has passed.
Relevant references in the Annual Report and Accounts
Accounting policies
Note 21 and 27 to the financial statements
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2021
91
Risk
Our response to the risk
Pension valuation and net pension balance
The Group operates a number of defined
benefit schemes which in aggregate are
significant in the context of the overall
balance sheet. At 31 December 2021, the
Group reported a net pension liability of £41
million (2020: £55 million) comprising £7
million of schemes in surplus and £48 million
of schemes in deficit (2020: £2 million and
£57 million respectively). The net pension
balance is sensitive to changes in the key
judgments and estimates, which include:

Assumptions
-
Actuarial assumptions and
inputs including discount rate, inflation,
pension payment and longevity to
determine the valuation of retirement
benefit liabilities;

Valuations
-
Pricing inputs and
calibrations for illiquid or complex model-
dependent valuations of certain
investments held by the schemes; and

Augmentation cap
-
Quantification of
trustee’s rights to unilaterally augment
benefits (Augmentation cap) to determine
the recognition of surplus.
Controls testing
-
We evaluated the design and operating effectiveness of
controls over the actuarial assumptions setting process, the data inputs used in
the actuarial calculation and the measurement of the fair value of the schemes’
assets.
Assumptions
-
We involved our actuarial specialists to evaluate the actuarial
assumptions by comparing them to independently obtained third party sources
and market practice. We assessed the impact on pension liabilities due to
changes in financial, demographic and longevity assumptions over the year,
including the continued effects of COVID-19, and whether these were
supported by objective external evidence and rationales.
Valuations
- We involved our valuation specialists to assess the appropriateness
of management’s valuation methodology including the judgments made in
determining significant assumptions used in the valuation of complex and illiquid
pension assets. We tested the fair value of scheme assets by independently
calculating fair value for a sample of the assets held. Our sample included cash,
equity and debt instruments, derivative financial instruments and illiquid assets.
Augmentation cap and equalisation adjustments
- We involved our actuarial
specialists to test the estimation of the augmentation cap including the inputs
used in the calculation. We also assessed the methodology and judgments made
in calculating these estimates and the associated accounting treatment in
accordance with IAS 19 and IFRIC 14.
Disclosure
-
We assessed the adequacy of the disclosures made in the financial
statements, including the appropriateness of the assumptions and sensitivities
disclosed.
Key observations communicated to the NWH Group Audit Committee
We
are
satisfied
that
the
valuation
and
disclosure
of
the
net
pension
balance
are
reasonable
and
in
accordance
with
IFRS.
We
highlighted the following matters to the NWH Group Audit Committee:

Our benchmarking of key actuarial assumptions including the discount rate, inflation, longevity and pension payments
concluded that assumptions were within a reasonable range;

No material differences were identified through our independent valuation testing for a sample of pension assets; and

Management’s estimate of the impact of the augmentation cap was materially consistent with our independent estimate
using our own model.
Relevant references in the Annual Report and Accounts
Accounting policies
Note 5 to the financial statements
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2021
92
Risk
Our response to the risk
IT access management
The IT environment is complex and
pervasive to the operations of the Group
due to the large volume of transactions
processed in numerous locations on a daily
basis with extensive reliance on automated
controls.
Appropriate IT controls are
required to ensure that applications process
data as expected and that changes are
made in an appropriate manner. This risk is
also impacted by the greater dependency
on third parties, increasing use of cloud
platforms, decommissioning of legacy
systems, and migration to new systems.
Such controls contribute to mitigating the
risk of potential fraud or errors as a result
of changes to applications and data.
The Group has implemented user access
management controls across IT applications,
databases and operating systems. We have
identified user access-related deficiencies in
the past and whilst the number of
deficiencies has reduced year over year, the
risk of inappropriate access remains.
We evaluated the design and operating effectiveness of IT general controls over
the applications, operating systems and databases that are relevant to financial
reporting. During our planning and test of design phases, we performed
procedures to determine whether changes in restrictions in different global
locations, as a result of the ongoing global COVID-19 pandemic had caused
material changes in IT processes or controls and observed no such changes
that would result in an increased IT risk.
Controls testing
We tested user access by assessing the controls in place for in-scope
applications, in particular testing the addition and periodic recertification of
users’ access. We continue to focus on key controls enforced by the Group’s
user access management tools, including the completeness of user data,
automated identification of movers and leavers and the adequacy of the overall
control environment. Our testing included the Group’s additional attestation and
leaver checks enhancing its identity and access control environment.
A number of systems are outsourced to third party service providers. For these
systems, we tested IT general controls through evaluating the relevant Service
Organisation Controls reports (where available). This included assessing the
timing of the reporting, the controls tested by the service auditor and whether
they address relevant IT risks. We also tested required complementary user
entity controls performed by management.
Where a SOC report was not
available we identified and reviewed compensating business controls to address
this risk. Several systems have been migrated to a cloud-hosted infrastructure
model, access management processes and controls remain in-house which
formed part of our testing.
Where control deficiencies were identified, we tested remediation activities
performed by management and compensating controls in place and assessed
what additional testing procedures were necessary to mitigate any residual risk.
We also performed a further analysis of access management deficiencies
identified by EY, Management and Internal Audit to revalidate our overall
approach to access management testing.
Key observations communicated to the NWH Group Audit Committee
We are satisfied that IT controls impacting financial reporting are designed and operating effectively. The following matters were
reported to the Group Audit Committee:

We have seen an overall reduction in the number of discrete IT control deficiencies identified compared to prior year.

Improvements
were
made
to
further
standardise
access
management
processes
and
controls
across
the
Group,
which
was
one of the drivers for the reduced number of deficiencies.

Particular
attention
should
continue
to
be
paid
to
controls
over
user
access
management
including
ensuring
the
completeness
and
accuracy
of
the
data
used
to
perform
access
controls.
Where
issues
were
noted
in
relation
to
access
management, these were remediated by
year end or mitigated by compensating
controls. We performed additional testing in
response to deficiencies identified, where required.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the
audit and in forming our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the
economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of
our audit procedures.
We determined materiality for the Group to be £136 million (2020: £144 million), which is 5% (2020: 5%) of profit before tax of the
Group of £3,883 million (2020: £602 million) adjusted for loan impairment releases arising from COVID-19 economic recovery,
normalised loan impairment charges, non-recurring conduct and strategic costs and certain non-recurring transactions. We believe
removing items that would otherwise have a disproportionate impact on materiality reflects the most useful measure for users of
the financial statements and is consistent with the prior year.
The 5% basis used for Group materiality is consistent with the wider
industry and is the standard for listed and regulated entities.
We determined materiality for the Bank to be £136 million (2020: £144 million) which is 0.7% (2020: 0.8%) of equity of the Bank and
is consistent with the prior year. We believe this reflects the most useful measure for users of the financial statements as the
Bank’s primary purpose is to act as a holding company with investments in the Group’s subsidiaries, not to generate operating
profits and therefore a profit based measure is not relevant.
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2021
93
Performance materiality
The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low
level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgment was
that performance materiality was 75% (2020: 50%) of our planning materiality, namely £102 million (2020: £72 million). We have
increased the percentage of performance materiality from the prior year considering that the number and amount of identified
misstatements has decreased and to reflect the continued improvements in the effectiveness of the control environment and other
factors affecting the entity and its financial reporting. Audit work at component locations for the purpose of obtaining audit
coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The
performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole
and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality
allocated to components was £30 million to £91 million (2020: £40 million to £70 million).
Reporting threshold
An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the NWH Group Audit Committee that we would report to them all uncorrected audit differences in excess of £7
million (2020: £7 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view,
warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of
other relevant qualitative considerations in forming our opinion.
Other information
The other information comprises the information included in the Annual Report and Accounts, including the Strategic report,
Report of the directors, Statement of directors’ responsibilities, Risk Factors, and Forward-looking statements, other than the
financial statements and our auditor’s report thereon. The directors are responsible for the other information contained within the
annual report. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise
explicitly stated in this report, we do not express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge obtained in the course of the audit or otherwise appears to be
materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine
whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have
performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:

the information given in the Strategic report and the Report of the directors for the financial year for which the financial
statements are prepared is consistent with the financial statements; and

the Strategic report and Report of the directors have been prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the Group and the Bank and its environment obtained in the course of the audit,
we have not identified material misstatements in the Strategic report or the Report of the directors.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to
you if, in our opinion:

adequate accounting records have not been kept by the Bank, or returns adequate for our audit have not been received from
branches not visited by us; or

the Bank financial statements are not in agreement with the accounting records and returns; or

certain disclosures of directors’ remuneration specified by law are not made; or

we have not received all the information and explanations we require for our audit.
Responsibilities of directors
As explained more fully in the Statement of directors’ responsibilities, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors
determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group and Bank’s ability to continue as a
going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless
the directors either intend to liquidate the Group or the Bank or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a
high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial
statements.
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2021
94
Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our
responsibilities, outlined below, to detect irregularities, including fraud.
The risk of not detecting a material misstatement due to
fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for
example, forgery or intentional misrepresentations, or through collusion. The extent to which our procedures are capable of
detecting irregularities, including fraud is detailed below.
However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the
company and management.

We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that
the most significant are the regulations, licence conditions and supervisory requirements of the Prudential Regulation Authority
(PRA) and the Financial Conduct Authority (FCA); and Companies Act 2006.

We understood how the Group is complying with those frameworks by making inquiries of management, internal audit and
those responsible for legal and compliance matters. We also reviewed correspondence between the Group and regulatory
bodies; reviewed minutes of the Board and Risk Committees; and gained an understanding of the Group’s governance
framework.

We assessed the susceptibility of the Group’s financial statements to material misstatement, including how fraud might occur by
considering the controls established to address risks identified to prevent or detect fraud. We also identified the risks of fraud in
our key audit matters as described above and identified areas that we considered when performing our fraud procedures, such
as cybersecurity, the impact of remote working, implementation of new government supported lending products, and the
appropriateness of sources used when performing confirmation testing on accounts such as cash, loans and securities.

Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations. Our
procedures involved inquiries of legal counsel, executive management, and internal audit. We also tested controls and
performed procedures to respond to the fraud risks as identified in our key audit matters. These procedures were performed by
both the primary team and component teams with oversight from the primary team.

The Group operates in the banking industry which is a highly regulated environment. As such, the Senior Statutory Auditor
considered the experience and expertise of the engagement team to ensure that the team had the appropriate competence
and capabilities, involving specialists where appropriate.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s
website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Other matters we are required to address

Following the recommendation from the NWH Group Audit Committee we were appointed by the Group at its annual general
meeting on 4 May 2016 to audit the financial statements of the Group for the year ending 31 December 2016 and subsequent
financial periods.

The period of total uninterrupted engagement including previous renewals and reappointments is 6 years, covering periods
from our appointment through 31 December 2021.

The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Bank and we remain
independent of the Group and the Bank in conducting the audit.

The audit opinion is consistent with the additional report to the NWH Group Audit Committee.
Use of our report
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to
state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for
the opinions we have formed.
Simon Michaelson (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London, United Kingdom
17 February 2022
Consolidated income statement for the year ended
31 December 2021
NWB Group
Annual Report and Accounts 2021
95
2021
2020
Note
£m
£m
Interest receivable
6,721
6,825
Interest payable
(719)
(1,015)
Net interest income
1
6,002
5,810
Fees and commissions receivable
1,862
1,685
Fees and commissions payable
(380)
(301)
Other operating income
1,785
1,761
Non-interest income
2
3,267
3,145
Total income
9,269
8,955
Staff costs
(2,815)
(2,823)
Premises and equipment
(948)
(1,044)
Other administrative expenses
(1,660)
(1,476)
Depreciation and amortisation
(776)
(841)
Operating expenses
3
(6,199)
(6,184)
Profit before impairment releases/(losses)
3,070
2,771
Impairment releases/(losses)
13
813
(2,169)
Operating profit before tax
3,883
602
Tax charge
7
(976)
(66)
Profit for the year
2,907
536
Attributable to:
Ordinary shareholders
2,793
380
Paid-in equity holders
109
152
Non-controlling interests
5
4
2,907
536
Consolidated statement of comprehensive income
for the year ended 31 December 2021
2021
2020
Note
£m
£m
Profit for the year
2,907
536
Items that do not qualify for reclassification
Remeasurement of retirement benefit schemes
5
(531)
(76)
Tax
158
35
(373)
(41)
Items that do qualify for reclassification
FVOCI financial assets
(96)
47
Cash flow hedges
180
(218)
Currency translation
(22)
7
Tax
(40)
41
22
(123)
Other comprehensive loss after tax
(351)
(164)
Total comprehensive income for the year
2,556
372
Attributable to:
Ordinary shareholders
2,442
216
Paid-in equity holders
109
152
Non-controlling interests
5
4
2,556
372
The accompanying notes on pages 106 to 166, the accounting policies on pages 100 to 105 and the audited sections of the
Financial Review and Risk and capital management on pages 6 to 75 form an integral part of these financial statements
.
Balance sheet as at 31 December 2021
NWB Group
Annual Report and Accounts 2021
96
NWB Group
NWB Plc
2021
2020
2021
2020
Note
£m
£m
£m
£m
Assets
Cash and balances at central banks
9
101,213
62,983
101,210
62,878
Derivatives
12
2,460
3,288
2,547
3,438
Loans to banks - amortised cost
9
4,182
3,344
3,638
2,798
Loans to customers - amortised cost
9
286,971
271,581
255,443
238,366
Amounts due from holding companies and fellow subsidiaries
9
3,519
3,305
27,122
28,176
Securities subject to repurchase agreements
10,813
11,438
10,813
11,438
Other financial assets excluding securities subject to repurchase
agreements
18,218
26,557
17,836
26,168
Other financial assets
15
29,031
37,995
28,649
37,606
Investment in group undertakings
14
—
—
2,319
2,374
Other assets
16
7,187
7,043
5,183
4,967
Total assets
434,563
389,539
426,111
380,603
Liabilities
Bank deposits
9
22,831
14,871
22,829
14,866
Customer deposits
9
329,440
293,605
292,470
255,290
Amounts due to holding companies and fellow subsidiaries
9
45,136
37,559
76,722
69,617
Derivatives
12
4,119
6,552
4,336
6,769
Other financial liabilities
19
7,251
10,383
6,384
9,612
Subordinated liabilities
20
211
1,230
205
1,230
Notes in circulation
904
1,012
904
1,266
Other liabilities
21
3,934
4,435
3,095
3,489
Total liabilities
413,826
369,647
406,945
362,139
Owners’ equity
22
20,727
19,882
19,166
18,464
Non-controlling interests
10
10
—
—
Total equity
20,737
19,892
19,166
18,464
Total liabilities and equity
434,563
389,539
426,111
380,603
Owners’ equity of NWB Plc as at 31 December 2021 includes the profit for the year of £2,752 million (2020 - £722 million).
As permitted by section 408(3) of the Companies Act 2006, the primary financial statements of NWB plc do not include an income
statement or a statement of comprehensive income.
The accompanying notes on pages 106 to 166, the accounting policies on pages 100 to 105 and the audited sections of the
Financial Review and Risk and capital management on pages 6 to 75 form an integral part of these financial statements
.
The accounts were approved by the Board of directors on 17 February 2022 and signed on its behalf by:
Howard Davies
Alison Rose-Slade
Katie Murray
National Westminster Bank Plc
Chairman
Chief Executive Officer
Chief Financial Officer
Registration No. 929027
Statement of changes in equity for the year ended
31 December 2021
NWB Group
Annual Report and Accounts 2021
97
NWB Group
NWB Plc
2021
2020
2021
2020
£m
£m
£m
£m
Called-up share capital - at 1 January and 31 December
1,678
1,678
1,678
1,678
Share premium - at 1 January and 31 December
2,225
2,225
2,225
2,225
Paid-in equity - at 1 January
2,370
2,370
2,370
2,370
Redemption
(934)
—
(934)
—
Issued during the year
941
—
941
—
At 31 December
2,377
2,370
2,377
2,370
Merger reserve - at 1 January
9
167
(140)
(231)
Addition
—
(34)
—
—
Amortisation
5
(124)
51
91
At 31 December
14
9
(89)
(140)
FVOCI reserve - at 1 January
280
250
279
251
Unrealised gains
26
157
28
155
Realised (gains)
(122)
(110)
(122)
(110)
Tax
8
(17)
8
(17)
At 31 December
192
280
193
279
Cash flow hedging reserve - at 1 January
(133)
27
(133)
27
Amount recognised in equity
102
(275)
100
(275)
Amount transferred from equity to earnings
78
57
79
57
Tax
(48)
58
(48)
58
At 31 December
(1)
(133)
(2)
(133)
Foreign exchange reserve - at 1 January
(63)
(70)
(13)
(14)
Retranslation of net assets
(44)
13
(18)
(2)
Foreign currency gains/(losses) on hedges of net assets
22
(5)
15
3
Recycled to profit or loss on disposal businesses
—
(1)
—
—
Tax
—
—
—
—
At 31 December
(85)
(63)
(16)
(13)
Capital redemption reserve -
at 1 January
796
796
796
796
Redemption of preference shares
24
—
24
—
At 31 December
820
796
820
796
Retained earnings - at 1 January
12,720
12,223
11,402
10,924
Profit attributable to ordinary shareholders and other equity owners
2,902
532
2,752
722
Ordinary dividends paid
(1,600)
—
(1,600)
—
Paid-in equity dividends paid
(109)
(152)
(109)
(152)
Remeasurement of retirement benefit schemes
(1)
- gross
(531)
(76)
(545)
(70)
- tax
158
35
159
35
Amortisation of merger reserve
(5)
124
(51)
(91)
Redemption of preference shares
(24)
—
(24)
—
Redemption of paid-in equity
(2)
(18)
—
(18)
—
Share based payments
(3)
4
45
4
45
Shares issued under employee share schemes
10
(11)
10
(11)
At 31 December
13,507
12,720
11,980
11,402
Owners' equity at 31 December
20,727
19,882
19,166
18,464
For the notes to this table refer to the following page.
Statement of changes in equity for the year ended 31 December 2021 continued
NWB Group
Annual Report and Accounts 2021
98
NWB Group
NWB Plc
2021
2020
2021
2020
£m
£m
£m
£m
Non-controlling interests - at 1 January
10
6
—
—
Profit attributable to non-controlling interests
5
4
—
—
Dividends paid
(5)
—
—
—
At 31 December
10
10
—
—
Total equity at 31 December
20,737
19,892
19,166
18,464
Attributable to:
Ordinary shareholders
18,350
17,512
16,789
16,094
Paid-in equity holders
2,377
2,370
2,377
2,370
Non-controlling interests
10
10
—
—
20,737
19,892
19,166
18,464
(1)
Following the purchase of ordinary shares from UKGI in March 2021, NatWest Group contributed £500 million to its main pension scheme in line with the memorandum of
understanding announced on 17 April 2018. After tax relief, this contribution reduced total equity by £365 million.
(2)
The redemption of paid-in equity includes a tax credit of £5 million.
(3)
Share-based payments includes a tax credit of £7 million.
The accompanying notes on pages 106 to 166, the accounting policies on pages 100 to 105 and the audited sections of the
Financial Review and Risk and capital management on pages 6 to 75 form an integral part of these financial statements
.
Cash flow statement for the year ended
31 December 2021
NWB Group
Annual Report and Accounts 2021
99
NWB Group
NWB Plc
2021
2020
2021
2020
Note
£m
£m
£m
£m
Cash flows from operating activities
Operating profit before tax
3,883
602
3,542
689
Adjustments for:
Impairment (releases)/losses
(813)
2,169
(732)
1,934
Amortisation of discounts and premiums of other financial assets
181
213
181
212
Depreciation and amortisation
776
841
594
650
Net impairment (reversals)/charges of investments in Group undertakings
—
—
61
50
Change in fair value taken to profit or loss of other financial assets
1,595
(1,436)
1,595
(1,436)
Change in fair value taken to profit or loss of other financial liabilities and subordinated
liabilities
(420)
237
(418)
237
Elimination of foreign exchange differences
1,120
(758)
1,118
(749)
Other non-cash items
87
146
58
124
Income receivable on other financial assets
(412)
(250)
(412)
(251)
Profit on sale of other financial assets
(120)
(113)
(120)
(113)
Dividends receivable from subsidiaries
—
—
(424)
(489)
Profit on sale of subsidiaries and associates
—
(4)
—
—
Profit on sale of other assets and net assets/liabilities
34
(16)
34
(16)
Loss on redemption of own debt
117
—
117
—
Interest payable on MRELs and subordinated liabilities
315
344
310
339
Charges and releases on provisions
388
189
388
183
Defined benefit pension schemes
173
168
146
136
Net cash flows from trading activities
6,904
2,332
6,038
1,500
Decrease/(increase) in derivative assets
930
(261)
991
(309)
Increase in net loans to banks
(89)
(401)
(155)
(391)
Increase in net loans to customers
(14,511)
(38,384)
(12,741)
(38,781)
(Increase)/decrease in amounts due from holding companies and fellow subsidiaries
(443)
146
5,288
891
(Increase)/decrease in other financial assets
(116)
20
(116)
20
Increase in other assets
(19)
(145)
(16)
(59)
Increase/(decrease) in bank deposits
7,960
(634)
7,963
(621)
Increase in customer deposits
35,835
51,488
28,707
46,592
Increase in amounts due to holding companies and fellow subsidiaries
6,033
14,799
5,426
17,285
(Decrease)/increase in derivative liabilities
(2,433)
1,654
(2,437)
1,756
Decrease in other financial liabilities
(5)
(1,051)
(100)
(1,150)
(Decrease)/increase in notes in circulation
(108)
170
(362)
1,266
Decrease in other liabilities
(1,199)
(672)
(1,121)
(862)
Changes in operating assets and liabilities
31,835
26,729
31,327
25,637
Income taxes (paid)/received
(923)
170
(791)
363
Net cash flows from operating activities
(1)
37,816
29,231
36,574
27,500
Cash flows from investing activities
Sale and maturity of other financial assets
10,272
12,091
9,884
11,702
Purchase of other financial assets
(3,193)
(7,816)
(2,811)
(7,428)
Income received on other financial assets
412
250
412
251
Net movement
in business interests and intangible assets
28
(3,701)
(387)
(3,093)
(353)
Dividends received from subsidiaries
—
—
424
489
Sale of property, plant and equipment
58
319
17
125
Purchase of property, plant and equipment
(876)
(344)
(617)
(176)
Net cash flows from investing activities
2,972
4,113
4,216
4,610
Cash flows from financing activities
Movement in MRELs
1,762
648
1,515
654
Movement in subordinated liabilities
(1,267)
321
(1,267)
321
Dividends paid
(1,714)
(152)
(1,709)
(152)
Issue of paid-in equity
941
—
941
—
Redemption of paid-in equity
(934)
—
(934)
—
Net cash flows from financing activities
(1,212)
817
(1,454)
823
Effects of exchange rate changes on cash and cash equivalents
(979)
621
(984)
641
Net increase in cash and cash equivalents
38,597
34,782
38,352
33,574
Cash and cash equivalents at 1 January
68,048
33,266
67,194
33,620
Cash and cash equivalents at 31 December
30
106,645
68,048
105,546
67,194
(1)
NWB Group includes interest received of £6,623 million (2020 - £6,736 million) and interest paid of £693 million (2020 - £1,092 million), and NWB Plc includes interest received of
£5,937 million (2020 – £6,063 million) and interest paid of £779 million (2020 - £1,345 million).
The accompanying notes on pages 106 to 166, the accounting policies on pages 100 to 105 and the audited sections of the
Financial Review and Risk and capital management on pages 6 to 75 form an integral part of these financial statements
.
Accounting policies
NWB Group
Annual Report and Accounts 2021
100
1. Presentation of financial statements
National Westminster Bank Plc (NWB Plc) is incorporated in the
UK and registered in. England and Wales The financial
statements are presented in the functional currency, pounds
sterling.
NWB Plc consolidated financial statements incorporate the
results of NWB Plc and the entities it controls. Control arises
when NWB Plc has the power to direct the activities of an entity
so as to affect the return from the entity. Control is assessed by
reference to our ability to enforce our will on the other entity,
typically through voting rights. The consolidated financial
statements are prepared under consistent accounting policies.
On the acquisition of a business from a NatWest Group
company, the assets, liabilities and IFRS reserves, such as the
cash flow hedging reserve, are recognised at their inherited
values taken from the consolidated financial statements of
NatWest Group plc and include the accounting history since
initial recognition. The acquirer recognises, in merger reserve,
any difference between the consideration paid and the net
items recognised at inherited values.
Transactions and balances between Group companies are
eliminated in the consolidated financial statements to show only
those transactions and balances external to the Group.
The audited financial statements are set out on pages 95 to 166
and the audited sections of the Risk and capital management
on pages 9 to 75. The directors have prepared the financial
statements on a going concern basis after assessing the
principal risks, forecasts, projections and other relevant
evidence over the twelve months from the date the financial
statements are approved (see the Report of the directors, page
76) and in accordance with UK adopted International
Accounting Standards (IAS). The significant accounting policies
and related judgments are set out below.
Except for certain financial instruments as described in
Accounting policies 10 and 15 and investment property, the
financial statements are presented on a historical cost basis.
Accounting policy changes effective 1 January 2021.
The IASB amended IFRS 16 Leases with “COVID-19
amendments on lease modifications – Amendments to IFRS 16
– Leases (IFRS 16)” The effect of the amendment on NWB
Group’s financial statements is immaterial.
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 through other
comprehensive income and the effective part of any related
accounting hedging instruments. Finance lease income is
recognised at a constant periodic rate of return before tax on
the net investment on the lease. Negative interest on financial
assets is presented in interest payable and negative interest on
financial liabilities is presented in interest receivable.
Other interest relating to financial instruments measured at fair
value is recognised as part of the movement in fair value and is
reported in other operating income.
Fees in respect of services are recognised as the right to
consideration accrues through the performance of each distinct
service obligation to the customer. The arrangements are
generally contractual and the cost of providing the service is
incurred as the service is rendered. The price is usually fixed
and always determinable.
3. Staff costs
Employee costs, such as salaries, paid absences, and other
benefits are recognised over the period in which the employees
provide the related services to NWB Group. Employees may
receive variable compensation in cash, in deferred cash or debt
instruments of NWB Group or in ordinary shares of NatWest
Group plc. NatWest Group operates a number of share-based
compensation schemes (which NWB Group employees are
eligible to) under which it grants awards of NatWest Group plc
shares and share options to its employees. Such awards are
subject to vesting conditions.
Variable compensation that is settled in cash or debt
instruments is charged to the income statement on a straight-
line basis over the period during which services are provided,
taking account of forfeiture and clawback criteria. The value of
employee services received in exchange for NatWest Group plc
shares and share options is recognised as an expense over the
vesting period, subject to deferral. clawback and forfeiture
criteria with a corresponding increase in equity. The fair value
of the instruments granted is based on market prices at the
grant date.
Defined benefit pension scheme
A scheme that defines the benefit an employee will receive on
retirement and is dependent on one or more factors such as
age, salary, and years of service. The net of the recognisable
scheme assets and obligations is reported on the balance sheet
in other assets or other liabilities. The defined benefit obligation
is measured on an actuarial basis. The charge to the income
statement for pension costs (mainly the service cost and the
net interest on the net defined benefit asset or liability) is
recognised in operating expenses.
Actuarial gains and losses (i.e. gains and/or losses on re-
measuring the net defined benefit asset or liability) due to
changes in actuarial measurement assumptions are recognised
in other comprehensive income in full in the period in which
they arise and not subject to recycling to the income statement.
The difference between scheme assets and scheme liabilities,
the net defined benefit asset or liability, is recognised on the
balance sheet if the criteria of the asset ceiling test are met.
This requires the net defined benefit surplus to be limited to the
present value of any economic benefits available to NatWest
Group in the form of refunds from the plan or reduced
contributions to it.
NWB Group will recognise a liability where a minimum funding
requirement exists for any of its defined benefit pension
schemes. This reflects agreed minimum funding and the
availability of a net surplus as determined as described above.
When estimating the liability for minimum funding requirements
NWB Group only include contributions that are substantively or
contractually agreed and do not include discretionary features,
including dividend-linked contributions.
Accounting policies continued
NWB Group
Annual Report and Accounts 2021
101
4. Intangible assets
Intangible assets are identifiable non-monetary assets without
physical substance acquired by NWB Group are stated at cost
less accumulated amortisation and impairment losses.
Amortisation is a method to spread the cost of such assets over
time to the income statement. This is charged to the income
statement over the assets' estimated useful economic lives
using methods that best reflect the pattern of economic
benefits. The estimated useful economic lives are:
Computer software
3 to 12 years
Other acquired intangibles
5 to 10 years
Expenditure on brands is charged to the income statement as
incurred.
Direct costs relating to the development of internal-use
computer software are reported on the balance sheet after
technical feasibility and economic viability have been
established. These direct costs include payroll, the costs of
materials and services, and directly attributable overheads.
Capitalisation of costs ceases when the software can operate
as intended.
During and after development, accumulated costs are reviewed
for impairment against the benefits that the software is
expected to generate.
Costs incurred prior to the establishment of technical feasibility
and economic viability are expensed to the income statement
as incurred, as are all training costs and general overheads.
The costs of licences to use computer software that are
expected to generate economic benefits beyond one year are
also reported on the balance sheet
5. Impairment of non-financial assets
At each balance sheet date, NWB Group assesses whether
there is any indication that its intangible assets or property,
plant and equipment are impaired. If any such indication exists,
NWB Group estimates the recoverable amount of the asset and
compares it to its balance sheet value to calculate if an
impairment loss should be charged to the income statement.
The balance sheet value of the asset is reduced by the amount
of the impairment loss. A reversal of an impairment loss on
intangible assets or property, plant and equipment is
recognised in the income statement provided the increased
carrying value is not greater than it would have been had no
impairment loss been recognised.
The recoverable amount of an asset that does not generate
cash flows that are independent from those of other assets or
groups of assets, is determined as part of the cash-generating
unit to which the asset belongs. A cash-generating unit is the
smallest identifiable group of assets that generates cash inflows
that are largely independent of the cash inflows from other
assets or groups of assets.
6. Property, plant and equipment & investment property
Items of property, plant and equipment except investment
property are stated at cost less accumulated depreciation and
impairment losses. Where an item of property, plant and
equipment comprises major components having different useful
lives, these are accounted for separately.
Depreciation is charged to profit or loss on a straight-line basis
so as to write-off the depreciable amount of property, plant
and equipment (including assets owned and let on operating
leases) over their estimated useful lives. The depreciable
amount is the cost of an asset less its residual value. Freehold
land is not depreciated.
The estimated useful lives of NWB Group’s property, plant and
equipment are:
Freehold buildings
50 years
Long leasehold property (leases
with more than 50 years to run)
50 years
Short leaseholds
unexpired period of
lease
Property adaptation costs
10 to 15 years
Computer equipment
up to 5 years
Other equipment
4 to 15 years
The residual value and useful life of property, plant and
equipment are reviewed at each balance sheet date and
updated for any changes to previous estimates.
Investment property comprises freehold and leasehold
properties that are held to earn rentals or for capital
appreciation or both. Investment property is not depreciated
but is stated at fair value. Fair value is based on current prices
for similar properties in the same location and condition. Any
gain or loss arising from a change in fair value is recognised in
profit or loss. Rental income from investment property is
recognised on a straight-line basis over the term of the lease in
Other operating income. Lease incentives granted are
recognised as an integral part of the total rental income.
7. Foreign currencies
Foreign exchange differences arising on the settlement of
foreign currency transactions and from the translation of
monetary assets and liabilities are reported in income from
trading activities except for differences arising on cash flow
hedges and hedges of net investments in foreign operations
Non-monetary items denominated in foreign currencies that
are stated at fair value are translated into the functional
currency at the foreign exchange rates ruling at the dates the
values are determined. Translation differences are recognised
in the income statement except for differences arising on non-
monetary financial assets classified as fair value through other
comprehensive income.
Income and expenses of foreign subsidiaries and branches are
translated into sterling at average exchange rates unless these
do not approximate the foreign exchange rates ruling at the
dates of the transactions. Foreign exchange differences arising
on the translation of a foreign operation are recognised in
other comprehensive income. The amount accumulated in
equity is reclassified from equity to the income statement on
disposal of a foreign operation.
8. Provisions and contingent liabilities
NWB Group recognises a provision 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 restructuring costs, including the costs of
redundancy, when NWB Group has a constructive obligation.
An obligation exists when NWB Group has a detailed formal
plan for the restructuring and has raised a valid expectation in
those affected either by starting to implement the plan or by
announcing its main features.
NWB Group recognises any onerous cost of the present
obligation under a contract as a provision. An onerous cost is
the unavoidable cost of meeting its contractual obligations that
exceed the expected economic benefits. When NWB Group
intends to vacate a leasehold property or right of use asset, the
asset would be tested for impairment and a provision may be
recognised for the ancillary contractual occupancy costs, such
as rates.
Accounting policies continued
NWB Group
Annual Report and Accounts 2021
102
Contingent liabilities are possible obligations arising from past
events, whose existence will be confirmed only by uncertain
future events, or present obligations arising from past events
that are not recognised because either an outflow of economic
benefits is not probable, or the amount of the obligation cannot
be reliably measured. Contingent liabilities are not recognised
but information about them is disclosed unless the possibility of
any outflow of economic benefits in settlement is remote.
9. Tax
Tax encompassing current tax and deferred tax is recognised
the income statement except when taxable items are
recognised in other comprehensive income or equity . Tax
consequences arising from servicing financial instruments
classified as equity are recognised in the income statement in
line with IAS 12.
Current tax is tax payable or recoverable in respect of the
taxable profit or loss for the year arising in the income
statement, other comprehensive income or equity. Provision is
made for current tax at rates enacted, or substantively
enacted, at the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable
in respect of temporary differences between the carrying
amount of an asset or liability for accounting purposes and the
carrying amount for tax purposes. Deferred tax liabilities are
generally recognised for all taxable temporary differences and
deferred tax assets are recognised to the extent their recovery
is probable.
Deferred tax is not recognised on temporary differences that
arise from initial recognition of an asset or a liability in a
transaction (other than a business combination) that at the time
of the transaction affects neither accounting nor taxable profit
or loss. Deferred tax is calculated using tax rates expected to
apply in the periods when the assets will be realised or the
liabilities settled, based on tax rates and laws enacted, or
substantively enacted, at the balance sheet date.
Deferred tax assets and liabilities are offset where NWB Group
has a legally enforceable right to offset and where they relate
to income taxes levied by the same taxation authority either on
an individual NWB Group company or on NWB Group
companies in the same tax group that intend, in future periods,
to settle current tax liabilities and assets on a net basis or on a
gross basis simultaneously.
Accounting for taxes is judgmental and carries a degree of
uncertainty because tax law is subject to interpretation, which
might be questioned by the relevant tax authority. NWB Group
recognises the most likely current and deferred tax liability or
asset, assessed for uncertainty using consistent judgments and
estimates. Current and deferred tax assets are only recognised
where their recovery is deemed probable, and current and
deferred tax liabilities are recognised at the amount that
represents the best estimate of the probable outcome having
regard to their acceptance by the tax authorities.
10. Financial instruments
Financial instruments are measured at fair value on initial
recognition on the balance sheet. Monetary financial assets are
classified into one of the following subsequent measurement
categories (subject to business model assessment and review of
contractual cash flow for the purposes of sole payments of
principal and interest where applicable):

amortised cost
measured at cost using the effective
interest rate method, less any impairment allowance;

fair value through other comprehensive income (FVOCI)
measured at fair value, using the effective interest rate
method and changes in fair value through other
comprehensive income;

mandatory fair value through profit or loss
measured at
fair value and changes in fair value reported in the income
statement; or

designated at fair value through profit or loss
measured
at fair value and changes in fair value reported in the
income statement.
Classification by business model reflects how NWB Group
manages its financial assets to generate cash flows. A business
model assessment helps to ascertain the measurement
approach depending on whether cash flows result from holding
financial assets to collect the contractual cash flows, from
selling those financial assets, or both
Business model assessment of assets is made at portfolio level,
being the level at which they are managed to achieve a
predefined business objective. This is expected to result in the
most consistent classification of assets because it aligns with
the stated objectives for the portfolio, its risk management,
manager’s remuneration and the ability to monitor sales of
assets from a portfolio.
The contractual terms of a financial asset; any leverage
features; prepayment and extension 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 designated at fair value
through profit or loss (DFV) upon initial recognition if such
designation eliminates, or significantly reduces, accounting
mismatch
.
Equity shares are measured at fair value through profit or loss
unless specifically elected as at fair value through other
comprehensive income (FVOCI).
Upon disposal, the cumulative gains or losses in fair value
through other comprehensive income reserve are recycled to
the income statement for monetary assets and non-monetary
assets (equity shares) the cumulative gains or losses are
transferred directly to retained earnings .
Regular way purchases of financial assets classified as
amortised cost are recognised on the settlement date; all other
regular way transactions in financial assets are recognised on
the trade date.
Financial liabilities are classified into one of following
measurement categories:

amortised cost
measured at cost using the effective
interest rate method;

held for trading
measured at fair value and changes 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 reported in the
income statement except changes in fair value attributable
to the credit risk component recognised in other
comprehensive income when no accounting mismatch
occurs.
11. Impairment: expected credit losses (ECL)
At each balance sheet date each financial asset or portfolio of
financial assets measured at amortised cost or at fair value
through other comprehensive income, issued financial
guarantee and loan commitment (other than those classified as
held for trading) is assessed for impairment. Any change in
impairment is reported in the income statement. Loss
allowances are forward-looking, based on 12-month ECL
where there has not been a significant increase in credit risk
rating, otherwise allowances are based on lifetime expected
losses.
Accounting policies continued
NWB Group
Annual Report and Accounts 2021
103
ECL are a probability-weighted estimate of credit losses. The
probability is determined by the risk of default which is applied
to the cash flow estimates. In the absence of a change in credit
rating, allowances are recognised when there is a reduction in
the net present value of expected cash flows. Following a
significant increase in credit risk, ECL are adjusted from 12
months to lifetime. This will lead to a higher impairment charge.
Judgment is exercised as follows:

Models
–
in certain low default portfolios, Basel parameter
estimates are also applied for IFRS 9.

Non-modelled portfolios
,
mainly in Private Banking, and
Lombard, use a standardised capital requirement under
Basel II. Under IFRS 9, they have bespoke treatments for
the identification of significant increase in credit risk.
Benchmark PDs, EADs and LGDs are reviewed annually for
appropriateness. The ECL calculation is based on expected
future cash flows, which is typically applied at a portfolio
level.

Multiple economic scenarios (MES)
– the central, or base,
scenario is most critical to the ECL calculation, independent
of the method used to generate a range of alternative
outcomes and their probabilities.

Significant increase in credit risk
-
IFRS 9 requires that at
each reporting date, an entity shall assess whether the
credit risk on an account has increased significantly since
initial recognition. Part of this assessment requires a
comparison to be made between the current lifetime PD
(i.e. the current probability of default over the remaining
lifetime) with the equivalent lifetime PD as determined at
the date of initial recognition.
On restructuring where a financial asset is not derecognised,
the revised cash flows are used in re-estimating the credit loss.
Where restructuring causes derecognition of the original
financial asset, the fair value of the replacement asset is used
as the closing cash flow of the original asset.
Where, in the course of the orderly realisation of a loan, it is
exchanged for equity shares or property, the exchange is
accounted for as the sale of the loan and the acquisition of
equity securities or investment property. Where NWB Group’s
acquired interest is in equity shares, relevant polices for
control, associates and joint ventures apply. .
Impaired financial assets are written off and therefore
derecognised from the balance sheet when NWB Group
concludes that there is no longer any realistic prospect of
recovery of part, or all, of the loan. For financial assets that are
individually assessed for impairment, the timing of the write-off
is determined on a case-by-case basis. Such financial assets
are reviewed regularly and write-off will be prompted by
bankruptcy, insolvency, re-negotiation, and similar events.
The typical time frames from initial impairment to write-off for
NWB Group’s collectively assessed portfolios are:

Retail mortgages: write-off usually occurs within five years,
or earlier, when an account is closed, but can be longer
where the customer engages constructively,

Credit cards: the irrecoverable amount is typically written
off after twelve arrears cycles or at four years post default
any remaining amounts outstanding are written off,

Overdrafts and other unsecured loans: write-off occurs
within six years,

Commercial loans: write-offs are determined in the light of
individual circumstances; and Business loans are generally
written off within five years.
12. Derecognition
A financial asset is derecognised (removed from the balance
sheet) when the contractual right to receive cash flows from
the asset has expired or when it has been transferred and the
transfer qualifies for derecognition. Conversely, an asset is not
derecognised in a contract under which NWB Group retains
substantially all the risks and rewards of ownership.
A financial liability is removed from the balance sheet when the
obligation is paid, or is cancelled, or expires. Cancellation
includes the issuance of a substitute instrument on substantially
different terms.
13. Netting
Financial assets and financial liabilities are offset, and the net
amount presented on the balance sheet when, and only when,
NWB Group currently has a legally enforceable right to set off
the recognised amounts and it intends either to settle on a net
basis or to realise the asset and settle the liability
simultaneously. NWB Group is party to a number of
arrangements, including master netting agreements, that give it
the right to offset financial assets and financial liabilities, but
where it does not intend to settle the amounts net or
simultaneously, the assets and liabilities concerned are
presented separately on the balance sheet.
14. Capital instruments
NWB Group classifies a financial instrument that it issues as a
liability if it is a contractual obligation to deliver cash or another
financial asset, or to exchange financial assets or financial
liabilities on potentially unfavourable terms and as equity if it
evidences a residual interest in the assets of NWB Group after
the deduction of liabilities. Incremental costs and related tax
that are directly attributable to an equity transaction are
deducted from equity.
15. Derivatives and hedging
Derivatives are reported on the balance sheet at fair value.
NWB Group uses derivatives to manage its own risk such as
interest rate, foreign exchange, or credit risk or in certain
customer transactions. Not all derivatives used to manage risk
are in hedge accounting relationships (an IFRS method to
reduce accounting mismatch from changes in fair value of the
derivatives reported in the income statement.
Gains and losses arising from changes in the fair value of
derivatives that are not in hedge relationships and derivatives
that are managed together with financial instruments
designated at fair value are included in Other operating
income.
Hedge accounting
NWB Group enters into three types of hedge accounting
relationships (see later). Hedge accounting relationships are
designated and documented at inception in line with the
requirements of IAS 39
Financial instruments – Recognition and
Measurement
. The documentation identifies the hedged item,
the hedging instrument and details of the risk that is being
hedged and the way in which effectiveness will be assessed at
inception and during the period of the hedge.
Accounting policies continued
NWB Group
Annual Report and Accounts 2021
104
Fair value hedge
- the gain or loss on the hedging instrument
and the hedged item attributable to the hedged risk is
recognised in the income statement. Where the hedged item is
measured at amortised cost, the balance sheet amount of the
hedged item is also adjusted.
Cash flow hedge
- the effective portion of the designated hedge
relationship is recognised in other comprehensive income and
the ineffective portion in the income statement. When the
hedged item (forecasted cash flows) results in the recognition
of a financial asset or financial liability, the cumulative gain or
loss is reclassified from equity to the income statement in the
same periods in which the hedged forecasted cash flows affect
the income statement.
Hedge of net investment in a foreign operation
-
In the
hedge of a net investment in a foreign operation, the effective
portion of the designated hedge relationship is recognised in
other comprehensive income. Any ineffective portion is
recognised in profit or loss. Non-derivative financial liabilities as
well as derivatives may be designated as a hedging instrument
in a net investment hedge.
Discontinuation of hedge accounting
Hedge accounting is discontinued if the hedge no longer meets
the criteria for hedge accounting i.e. the hedge is not highly
effective in offsetting changes in fair value or cash flows
attributable to the hedged risk, consistent with the documented
risk management strategy; the hedging instrument expires or is
sold, terminated or exercised; or if hedge designation is
revoked.
For fair value hedging any cumulative adjustment is amortised
to the income statement over the life of the hedged item.
Where the hedge item is no longer on the balance sheet the
adjustment to the hedged item is reported in the income
statement.
For cash flow hedging the cumulative unrealised gain or loss is
reclassified from equity to the income statement when the
hedged cash flows occur or, if the forecast transaction results
in the recognition of a financial asset or financial liability, when
the hedged forecast cash flows affect the income statement.
Where a forecast transaction is no longer expected to occur,
the cumulative unrealised gain or loss is reclassified from equity
to the income statement immediately.
For net investment hedging on disposal or partial disposal of a
foreign operation, the amount accumulated in equity is
reclassified from equity to the income statement.
16. Investment in Group undertakings
NWB Group ’s investments in its Group undertakings
(subsidiaries) are stated at cost less any impairment.
Critical accounting policies and key sources of estimation
uncertainty
The reported results of NWB Group are sensitive to the
accounting policies, assumptions and estimates that underlie
the preparation of its financial statements. The accounting
standards used in the preparation of the financial statements
(see presentation of financial statements above) require the
directors, in preparing NWB Group's financial statements, to
select suitable accounting policies, apply them consistently and
make judgments and estimates that are reasonable and
prudent. In the absence of accounting guidance, standards
used in the preparation of the financial statements require the
directors to develop and apply an accounting policy that
results in relevant and reliable information in the light of the
requirements and guidance in IFRS dealing with similar and
related issues and the IASB's ’Conceptual Framework for
Financial Reporting’.
The judgments and assumptions involved in NWB 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 or models that
differ from those adopted by NWB Group would affect its
reported results. Estimation uncertainty continues to be
affected by the COVID-19 pandemic. The COVID-19 pandemic
continued to cause significant economic and social disruption
during 2021. Key financial estimates are based on
management's latest five-year revenue and cost forecasts.
Measurement of deferred tax and expected credit losses are
highly sensitive to reasonably possible changes in those
anticipated conditions. Other reasonably possible assumptions
about the future include a prolonged financial effect of the
COVID-19 pandemic on the economy of the UK and other
countries or greater economic effect as countries and
companies implement plans to counter climate risks.
How Climate risk affects our accounting judgments and
estimates
NWB Group makes use of reasonable and supportable
information to make accounting judgments and estimates. This
includes information about the observable effects of the
physical and transition risks of climate change on the current
creditworthiness of borrowers, asset values and market
indicators. It also includes the effect on NWB Group’s
competitiveness and profitability. Many of the effects arising
from climate change will be longer term in nature, with an
inherent level of uncertainty
,
and
have limited
effect on
accounting judgments and estimates
for the current period
.
Some physical and transition risks can manifest in the shorter
term. The following items represent the most significant effects:

The classification of financial instruments linked to climate,
or other sustainability indicators: consideration is given to
whether the effect of climate related terms prevent the
instrument cashflows being solely payments of principal and
interest.

The measurement of expected credit loss considers the
ability of borrowers to make payments as they fall due.
Future cashflows are discounted, so long dated cashflows
are less likely to affect current expectations on credit loss.
NWB Group’s assessment of sector specific risks, and
whether additional adjustments are required, include
expectations on the ability of those sectors to meet their
financing needs in the market. Changes in credit
stewardship and credit risk appetite that stem from climate
considerations, such as oil and gas, will directly affect our
positions.

The assessment of asset impairment and deferred tax are
based upon value in use. This represents the value of future
cashflows and uses the Group’s five-year forecast and the
expectation of long term economic growth beyond this
period. The five-year forecast takes account of
management’s current expectations on competitiveness
and profitability, including near term effects on climate
transition risk. The long term growth rate reflects external
indicators which will include market expectations of climate
risk. NWB Group did not consider any additional
adjustments to this indicator.

The use of market indicators as inputs to fair value is
assumed to include current information and knowledge
regarding the effect of climate risk.
Accounting policies continued
NWB Group
Annual Report and Accounts 2021
105
Changes in judgments and assumptions could result in a
material adjustment to those estimates in the next reporting
periods. Consideration of this source of estimation uncertainty
has been set out in the notes below (as applicable).
Critical accounting policy
Note
Deferred tax
7
Fair value - financial instruments
10
Loan impairment provisions
13
Provisions for liabilities and charges
21
Future accounting developments
International Financial Reporting Standards
Effective 1 January 2022

Onerous Contracts – Cost of Fulfilling a Contract
(Amendments to IAS 37);

Property, Plant and Equipment: Proceeds before Intended
Use (Amendments to IAS 16);

Reference to Conceptual Framework (Amendments 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 2023, with earlier
application permitted, are set out below.
Effective 1 January 2023

IFRS 17 Insurance Contracts (Amendments to IFRS 17
Insurance Contracts);

Classification of Liabilities as Current or Non-current
(Amendments to IAS 1);

Deferred Tax related to Assets and Liabilities arising from a
Single Transaction (Amendments to IAS 12);

Definition of Accounting Estimates (Amendments to IAS 8
and

Disclosure of Accounting Policies (Amendments to IAS 1
and IFRS Practice Statement 2).
NWB Group is assessing the effect of adopting these standards
and amendments on its financial statements but does not
expect the effect to be material..
Notes to the financial statements
NWB Group
Annual Report and Accounts 2021
106
1 Net interest income
2021
2020
£m
£m
Balances at central banks
66
43
Loans to banks - amortised cost
53
36
Loans to customers - amortised cost
6,448
6,493
Amounts due from holding companies and fellow subsidiaries
33
2
Other financial assets
121
251
Interest receivable
6,721
6,825
Bank deposits
82
80
Customer deposits
247
452
Amounts due to holding companies and fellow subsidiaries
220
272
Other financial liabilities
137
163
Subordinated liabilities
33
48
Interest payable
719
1,015
Net interest income
6,002
5,810
Interest
income
on
financial
instruments
measured
at
amortised
cost
and
debt
instruments
classified
as
FVOCI
is
measured
using
the
effective
interest
rate
which
allocates
the
interest
income
or
interest
expense
over
the
expected
life
of
the
asset
or
liability
at
the
rate
that
exactly
discounts
all
estimated
future
cash
flows
to
equal
the
instrument's
initial
carrying
amount.
Calculation
of
the
effective interest
rate takes
into
account fees
payable or
receivable
that are
an integral
part
of the
instrument's yield,
premiums or
discounts
on
acquisition
or
issue,
early
redemption
fees
and
transaction
costs.
All
contractual
terms
of
a
financial
instrument
are
considered
when
estimating
future
cash
flows.
Included
in
interest
receivable
is
finance
lease
income
which
is
recognised
at
a
constant periodic rate of return before tax on the net investment.
For accounting policy information see Accounting policies note 2.
2 Non-interest income
2021
2020
£m
£m
Net fees and commissions
(1)
1,482
1,384
Other operating income
Loss on redemption of own debt
(117)
—
Operating lease and other rental income
230
240
Changes in fair value of other financial assets held at mandatory fair value through profit or loss
(2)
5
7
Hedge ineffectiveness
45
(38)
Cost of economic hedging
76
66
Loss on disposal of amortised cost assets
(27)
(20)
Profit on disposal of fair value through other comprehensive income assets
120
113
(Loss)/profit on sale of property, plant and equipment
(3)
(36)
10
Share of loss on associated entities
(6)
(8)
Profit on disposal of subsidiaries and associates
—
4
Other income
(4,5)
1,495
1,387
1,785
1,761
3,267
3,145
(1)
Refer to Note 4 for further analysis.
(2)
Includes instruments that have failed Solely payment of principle and interest testing under IFRS 9.
(3)
Includes £44 million loss on the purchase of freeholds for properties where the Group was the primary leaseholder.
(4)
Includes income from recharging shared services to other NatWest Group subsidiaries and income from activities other than banking.
(5)
2020 includes £58 million loss on acquisition of a £3.0 billion prime UK mortgages portfolio from Metro Bank plc.
For accounting policy information see Accounting policies note 2.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
107
3 Operating expenses
2021
2020
£m
£m
Wages, salaries and other staff costs
2,079
2,110
Temporary and contract costs
206
213
Social security costs
241
236
Pension costs
289
264
- defined benefit schemes (see Note 5)
173
168
- defined contribution schemes
116
96
Staff costs
2,815
2,823
Premises and equipment
(1)
948
1,044
Depreciation and amortisation
(2)
776
841
Other administrative expenses
(3)
1,660
1,476
Administrative expenses
3,384
3,361
6,199
6,184
(1)
2021 includes a cost of £7 million including accelerated depreciation of £28 million (2020 - £144 million including £71 million accelerated depreciation) in relation to the planned
reduction of the property portfolio (2021 – freehold £3 million; leasehold £4 million; 2020 - freehold £1million; leasehold £143 million).
(2)
2021 includes a £36 million charge relating to the reduction in property portfolio, leasehold £29 million and freehold £7 million (2020 - £100 million charge, leasehold £81 million and
freehold £19 million).
(3)
Includes litigation and conduct costs. Further details are provided in Note 21.
NWB Group provides shared services to NatWest Group. Direct costs incurred are recovered through legal entity recharging and
recorded in Other operating income.
For accounting policy information see Accounting policies note 3.
The average number of persons employed in continuing operations, rounded to the nearest hundred, during the year, excluding
temporary staff, was 52,000 (2020 – 51,900). The number of people employed in continued operations at 31 December 2021,
excluding temporary staff was as follows
:
2021
2020
Retail Banking
15,100
15,800
Commercial Banking
8,100
9,100
Private Banking
1,600
1,900
Central items & other
27,100
25,300
Total
51,900
52,100
UK
36,700
37,800
India
13,500
13,100
Poland
1,400
900
Rest of the World
300
300
Total
51,900
52,100
During the year a number of roles transferred from Private Banking into centralised functions. Comparatives have been re-stated.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
108
3 Operating expenses continued
Share-based payments
NWB Group grants share-based awards to employees principally on the following bases:
Award plan
Eligible employees
Nature of award
Vesting conditions (1)
Settlement
Sharesave
UK, Channel Islands,
Gibraltar, Isle of Man,
Poland and India.
Option to buy shares
under employee savings
plan
Continuing employment or
leavers in certain circumstances
2022 to 2026
Deferred performance
awards
All
Awards of ordinary
shares and conditional
shares
Continuing employment or
leavers in certain circumstances
2022 to 2028
Long-term incentives
(2)
Senior employees
Awards of ordinary
shares and conditional
shares
Continuing employment or
leavers in certain circumstances
and/or satisfaction of the pre-
vest assessment and underpins
2022 to 2028
(1)
All awards have vesting conditions which may not be met.
(2)
Long-term incentives include buy-out awards offered to compensate certain new hires for the loss of forfeited awards from their previous employment. All awards are granted
under the Employee Share Plan.
The fair value of Sharesave options granted in 2021 was determined using a pricing model that included: expected volatility of
shares determined at the grant date based on historical volatility over a period of up to five years; expected option lives that equal
the vesting period; expected dividends on equity shares; and risk-free interest rates determined from UK gilts with terms matching
the expected lives of the options.
The exercise price of options and the fair value on granting awards of fully paid shares is the average market price over the five
trading days (three trading days for Sharesave) preceding grant date. When estimating the fair value of the award, the number of
shares granted, and the prevailing share price (as defined in the NWG ARA on pages 146-147) are used. The fair value of the
award is recognised as services are provided over the vesting period.
Bonus awards
The following tables analyse NWB Group's bonus awards.
2021
2020
Change
£m
£m
%
Non-deferred cash awards
(1)
32
27
19%
Deferred cash awards
150
66
127%
Deferred share awards
24
14
71%
Total deferred bonus awards
174
80
118%
Total bonus rewards
(2)
206
107
93%
Reconciliation of bonus awards to income statement charge
2021
2020
£m
£m
Bonus awarded
206
107
Less: deferral of charge for amounts awarded for current year
(63)
(36)
Income statement charge for amounts awarded in current year
143
71
Add: current year charge for amounts deferred from prior years
40
63
Less: forfeiture of amounts deferred from prior years
(4)
(7)
Income statement charge for amounts deferred from prior years
36
56
Income statement charge for bonus awards
(2)
179
127
(1)
Non-deferred cash awards are limited to £2,000 for all employees.
(2)
Excludes other performance related compensation.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
109
4 Segmental analysis
Reportable operating segments
The reportable operating segments are as follows:
Retail Banking
serves personal customers in the UK and
includes Ulster Bank customers.
Private Banking
serves UK-connected high net worth
individuals and their business interests.
Commercial Banking
serves start-up, SME, commercial and
corporate customers in the UK.
Central items & other
includes corporate functions, such as
NatWest Group treasury, finance, risk management,
compliance, legal, communications and human resources. NWB
Plc is the main provider of shared services and treasury
activities for NatWest Group. The services are mainly provided
to NWH Group, however, in certain instances, where permitted,
services are also provided to the wider NatWest Group
including the non-ring fenced business.
Retail
Private
Commercial
Central items
Banking
Banking
Banking
& other
Total
2021
£m
£m
£m
£m
£m
Net interest income
3,541
461
2,171
(171)
6,002
Net fees and commissions
303
239
947
(7)
1,482
Other operating income
42
24
93
1,626
1,785
Total income
3,886
724
3,211
1,448
9,269
Depreciation and amortisation
—
—
(146)
(630)
(776)
Other operating expenses
(1,917)
(513)
(1,746)
(1,247)
(5,423)
Impairment releases
23
53
737
—
813
Operating profit/(loss)
1,992
264
2,056
(429)
3,883
2020
Net interest income
3,114
466
2,302
(72)
5,810
Net fees and commissions
300
235
854
(5)
1,384
Other operating income
(28)
16
80
1,693
1,761
Total income
3,386
717
3,236
1,616
8,955
Depreciation and amortisation
—
(8)
(149)
(684)
(841)
Other operating expenses
(2,064)
(444)
(1,862)
(973)
(5,343)
Impairment losses
(669)
(106)
(1,378)
(16)
(2,169)
Operating profit/(loss)
653
159
(153)
(57)
602
Total revenue
(1)
Retail
Private
Commercial
Central items
Banking
Banking
Banking
& other
Total
2021
£m
£m
£m
£m
£m
External
4,660
703
3,030
1,975
10,368
Intersegment
97
161
147
(405)
—
Total
4,757
864
3,177
1,570
10,368
2020
External
4,490
662
2,909
2,210
10,271
Intersegment
26
199
196
(421)
—
Total
4,516
861
3,105
1,789
10,271
(1)
Total revenue comprises interest receivable, fees and commissions receivable and other operating income.
Total income
Retail
Private
Commercial
Central items
Banking
Banking
Banking
& other
Total
2021
£m
£m
£m
£m
£m
External
3,791
668
3,191
1,619
9,269
Intersegment
95
56
20
(171)
—
Total
3,886
724
3,211
1,448
9,269
2020
External
3,374
613
3,185
1,783
8,955
Intersegment
12
104
51
(167)
—
Total
3,386
717
3,236
1,616
8,955
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
110
4 Segmental analysis continued
Analysis of net fees and commissions
Retail
Private
Commercial
Central items
Banking
Banking
Banking
& other
Total
2021
£m
£m
£m
£m
£m
Fees and commissions receivable
- Payment services
248
33
415
—
696
- Credit and debit card fees
276
10
111
—
397
- Lending and financing
11
10
416
—
437
- Brokerage
38
5
—
—
43
- Investment management, trustee and fiduciary services
3
214
—
—
217
- Other
—
35
128
(91)
72
Total
576
307
1,070
(91)
1,862
Fees and commissions payable
(273)
(68)
(123)
84
(380)
Net fees and commissions
303
239
947
(7)
1,482
2020
Fees and commissions receivable
- Payment services
209
26
390
—
625
- Credit and debit card fees
239
9
96
—
344
- Lending and financing
34
7
382
—
423
- Brokerage
41
6
—
—
47
- Investment management, trustee and fiduciary services
3
205
—
—
208
- Other
1
26
82
(71)
38
Total
527
279
950
(71)
1,685
Fees and commissions payable
(227)
(44)
(96)
66
(301)
Net fees and commissions
300
235
854
(5)
1,384
Retail
Private
Commercial
Central items
Banking
Banking
Banking
& other
Total
2021
£m
£m
£m
£m
£m
Assets
168,228
18,509
83,347
164,479
434,563
Liabilities
153,653
37,219
133,156
89,798
413,826
2020
Assets
156,829
17,113
84,629
130,968
389,539
Liabilities
143,638
30,392
125,635
69,982
369,647
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
111
4 Segmental analysis continued
Geographical segments
The geographical analysis has in the tables below has been comprised on the basis of location of office where the transactions are
recorded.
UK
RoW
Total
2021
£m
£m
£m
Total revenue
10,250
118
10,368
Interest receivable
6,650
71
6,721
Interest payable
(642)
(77)
(719)
Net fees and commissions
1,482
—
1,482
Other operating income
1,738
47
1,785
Total income
9,228
41
9,269
Operating profit before tax
3,825
58
3,883
Total assets
419,978
14,585
434,563
Total liabilities
413,527
299
413,826
Contingent liabilities and commitments
81,721
94
81,815
Cost to acquire property, plant and equipment and intangible assets
1,308
166
1,474
2020
Total revenue
10,219
52
10,271
Interest receivable
6,825
—
6,825
Interest payable
(1,001)
(14)
(1,015)
Net fees and commissions
1,384
—
1,384
Other operating income
1,710
51
1,761
Total income
8,918
37
8,955
Operating profit/(loss) before tax
986
(384)
602
Total assets
375,223
14,316
389,539
Total liabilities
369,441
206
369,647
Contingent liabilities and commitments
77,766
25
77,791
Cost to acquire property, plant and equipment and intangible assets
750
32
782
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
112
5 Pensions
Defined contribution schemes
NWB Group sponsors a number of defined contribution pension
schemes in different territories, which new employees are
offered the opportunity to join.
Defined benefit schemes
NWB Group sponsors a number of pension schemes in the UK
and overseas, including the Main section of the NatWest Group
Pension Fund (the “Main section”) which operates under UK
trust law and is managed and administered on behalf of its
members in accordance with the terms of the trust deed, the
scheme rules and UK legislation.
Pension fund trustees are appointed to operate each fund and
ensure benefits are paid in accordance with the scheme rules
and national law. The trustees are the legal owner of a
scheme’s assets, and have a duty to act in the best interests of
all scheme members.
The schemes generally provide a pension of one-sixtieth of final
pensionable salary for each year of service prior to retirement
up to a maximum of 40 years and are contributory for current
members. These have been closed to new entrants for over ten
years, although current members continue to build up
additional pension benefits, currently subject to 2% maximum
annual salary inflation, while they remain employed by NWB
Group.
The Main section corporate trustee is NatWest Pension Trustee
Limited (the Trustee), a wholly owned subsidiary of NWB Plc,
Principal Employer of the Main section. The Board of the
Trustee comprises four member trustee directors selected from
eligible active staff, deferred and pensioner members who
apply and six appointed by NatWest Group. Under UK
legislation, a defined benefit pension scheme is required to
meet the statutory funding objective of having sufficient and
appropriate assets to cover its liabilities (the pensions that have
been promised to members).
Similar governance principles apply to NWB Group’s other
pension schemes.
For accounting policy information see Accounting policies note
3.
Investment strategy
The assets of the Main section, which is typical of other group
schemes, represent 97% of all plan assets at 31 December 2021
(2020 - 97%) and are invested as shown below.
The Main section employs derivative instruments to achieve a
desired asset class exposure and to reduce the section’s
interest rate, inflation and currency risk. This means that the
net funding position is considerably less sensitive to changes in
market conditions than the value of the assets or liabilities in
isolation.
2021
2020
Major classes of plan assets as a percentage of
Quoted
Unquoted
Total
Quoted
Unquoted
Total
total plan assets of the Main section
%
%
%
%
%
%
Equities
3.7
4.7
8.4
3.9
4.6
8.5
Index linked bonds
46.7
—
46.7
49.4
—
49.4
Government bonds
9.8
—
9.8
6.2
—
6.2
Corporate and other bonds
10.7
4.4
15.1
11.8
5.0
16.8
Real estate
—
4.4
4.4
—
4.2
4.2
Derivatives
—
8.8
8.8
—
10.0
10.0
Cash and other assets
—
6.8
6.8
—
4.9
4.9
70.9
29.1
100.0
71.3
28.7
100.0
The Main section's holdings of derivative instruments are summarised in the table below:
2021
2020
Notional
Fair value
Notional
Fair value
amounts
Assets
Liabilities
amounts
Assets
Liabilities
£bn
£m
£m
£bn
£m
£m
Inflation rate swaps
20
1,408
796
18
1,390
1,716
Interest rate swaps
172
8,385
4,421
68
11,197
6,215
Currency forwards
12
61
98
11
334
38
Equity and bond call options
—
1
—
1
169
1
Equity and bond put options
—
1
3
3
1
19
Other
1
9
10
2
63
17
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
113
5 Pensions continued
Swaps have been executed at prevailing market rates and
within standard market bid/offer spreads with a number of
counterparties, including NWB Plc.
At 31 December 2021, the gross notional value of the swaps
was £192 billion (2020 - £88 billion) and had a net positive fair
value of £4,573 million (2020 - £4,706 million) against which the
counterparties had posted approximately 95% collateral.
The schemes do not invest directly in NWB Group but can have
exposure to NWB Group. The trustees of the respective UK
schemes are responsible for ensuring that indirect investments
in NWB Group do not exceed the regulatory limit of 5% of plan
assets.
NWB Group
NWB Plc
Present
Present
value
Asset
value
Asset
Fair
of
defined
ceiling/
Net
Fair
of
defined
ceiling/
Net
value
benefit
minimum
pension
value
benefit
minimum
pension
of plan
obligation
funding
(asset)/
of plan
obligation
funding
(asset)/
assets
(1)
(2)
liability
assets
(1)
(2)
liability
Changes in value of net pension (asset)/liability
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2020
47,953
40,822
7,179
48
46,555
39,683
6,886
14
Currency translation and other adjustments
1
5
—
4
—
5
—
5
Income statement
963
985
146
168
936
931
141
136
Statement of comprehensive income
5,586
5,327
335
76
5,486
5,130
426
70
Contributions by employer
243
—
—
(243)
212
—
—
(212)
Contributions by plan participants and other scheme
members
23
23
—
—
31
31
—
—
Benefits paid
(1,950)
(1,950)
—
—
(1,897)
(1,897)
—
—
Liabilities extinguished upon settlement
—
(2)
—
(2)
—
—
—
—
Transfer to/from fellow subsidiaries
—
4
—
4
—
—
—
—
At 1 January 2021
52,819
45,214
7,660
55
51,323
43,883
7,453
13
Currency translation and other adjustments
2
(1)
1
(2)
—
(1)
1
—
Income statement
Net interest expense
735
623
107
(5)
727
614
107
(6)
Current service cost
—
178
—
178
—
164
—
164
Less, direct contributions from other scheme members
—
(9)
—
(9)
—
(18)
—
(18)
Past service cost
—
9
—
9
—
6
—
6
735
801
107
173
727
766
107
146
Statement of comprehensive income
Return on plan assets excluding recognised interest
income
857
—
—
(857)
852
—
—
(852)
Experience gains and losses
—
(244)
—
(244)
—
(245)
—
(245)
Effect of changes in actuarial financial assumptions
—
(1,192)
—
(1,192)
—
(1,184)
—
(1,184)
Effect of changes in actuarial demographic
assumptions
—
346
—
346
—
348
—
348
Asset ceiling adjustments
—
—
2,478
2,478
—
—
2,478
2,478
857
(1,090)
2,478
531
852
(1,081)
2,478
545
Contributions by employer
716
—
—
(716)
696
—
—
(696)
Contributions by plan participants and other scheme
20
20
—
—
28
28
—
—
members
—
—
—
—
—
—
—
—
Benefits paid
(1,618)
(1,618)
—
—
(1,611)
(1,611)
—
—
Liabilities extinguished upon settlement
—
—
—
—
—
—
—
—
Transfer to/from fellow subsidiaries
—
—
—
—
1,366
1,163
207
4
At 31 December 2021
53,531
43,326
10,246
41
53,381
43,147
10,246
12
(1)
Defined benefit obligations are subject to annual valuation by independent actuaries.
(2)
NWB Group recognises the net pension scheme surplus or deficit as a net asset or liability. In doing so, the funded status is adjusted to reflect any schemes with a surplus that NWB
Group may not be able to access, as well as any minimum funding requirement to pay in additional contributions. This is most relevant to the Main section, where the current
surplus is not recognised as the trustees may have control over the use of the surplus.
Other NWB Group schemes that this applies to include the Ulster Bank Pension Scheme (NI).
(3)
NWB Group expects to make contributions to the Main section of £714 million in 2022. Following the £500m contribution in March 2021, additional contributions of up to £500 million
will be paid to the Main section in 2022, should NatWest Group make further distributions in 2022. This leaves one remaining payment of up to £500 million to be paid to the Main
Section after 2022, in line with the ring-fencing agreement with the Trustee. Such contributions do not constitute a minimum funding requirement as the obligation to pay only
arises on the payment of a distribution to shareholders.
(4)
In May 2021, following the changes to Ulster Bank Limited, NWB Group assumed responsibility as Principal Employer for the Ulster Bank Pension Scheme (NI).
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
114
5 Pensions continued
All schemes
2021
2020
Amounts recognised on the balance sheet
£m
£m
Fund assets at fair value
53,531
52,819
Present value of fund liabilities
43,326
45,214
Funded status
10,205
7,605
Asset ceiling/minimum funding
10,246
7,660
(41)
(55)
NWB Group
NWB Plc
2021
2020
2021
2020
Net pension asset/(liability) comprises
£m
£m
£m
£m
Net assets of schemes in surplus (included in Other assets, Note 16)
7
2
—
—
Net liabilities of schemes in deficit (included in Other liabilities, Note 21)
(48)
(57)
(12)
(13)
(41)
(55)
(12)
(13)
Funding and contributions by NWB Group
In the UK, the trustees of defined benefit pension schemes are
required to perform funding valuations every three years. The
trustees and the sponsor, with the support of the Scheme
Actuary, agree the assumptions used to value the liabilities and
to determine future contribution requirements. The funding
assumptions incorporate a margin for prudence over and above
the expected cost of providing the benefits promised to
members, taking into account the sponsor’s covenant and the
investment strategy of the scheme. Similar arrangements apply
in the other territories where NWB Group sponsors defined
benefit pension schemes.
A full triennial funding valuation of the Main section, effective 31
December 2020, was completed during the year.
This triennial funding valuation determined the funding level to
be 104%, pension liabilities to be £49 billion and the surplus to
be £2 billion, all assessed on the agreed funding basis. The
average cost of the future service of current members is 49% of
salary before contributions from those members. In addition,
the sponsor has agreed to meet administrative expenses.
Following the ring-fencing agreement with the Trustee reached
in 2018, additional contributions of up to £500 million p.a. are
payable to the Main section should the Group make distributions
to shareholders of an equal amount.
These contributions are capped at £1.5 billion in total; £500
million were made in 2021 (2020 – Nil).
The key assumptions used to determine the funding liabilities
were the discount rate, which is determined based on fixed
interest swap and gilt yields plus 0.64% per annum, and
mortality assumptions, which result in life expectancies of
27.7/29.4 years for males/females who are currently age 60 and
28.9/30.7 years from age 60 for males/females who are
currently aged 40.
The 2020 triennial valuation of the Group Pension Fund included
an allowance for the estimated impact of guaranteed minimum
pension equalisation, which is reflected in the IAS 19 valuation
at 31 December 2021. As such, no explicit allowance is
required in the IAS 19 figures (2020: £169 million).
Accounting Assumptions
Placing a value on NWB Group’s defined benefit pension
schemes’ liabilities requires NWB Group’s management to make
a number of assumptions, with the support of independent
actuaries. The ultimate cost of the defined benefit obligations
depends upon actual future events and the assumptions made
are unlikely to be exactly borne out in practice, meaning the
final cost may be higher or lower than expected.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
115
5 Pensions continued
The most significant assumptions used for the Main section are shown below:
Principal IAS 19 actuarial assumptions
2021
2020
%
%
Discount rate
1.8
1.4
Inflation assumption (RPI)
3.3
2.9
Rate of increase in salaries
1.8
1.8
Rate of increase in deferred pensions
3.7
3.0
Rate of increase in pensions in payment
2.5
2.7
Lump sum conversion rate at retirement
18
20
Longevity at age 60:
Current pensioners
years
years
Males
27.3
27.1
Females
29.0
29.0
Future pensioners, currently aged 40
Males
28.2
28.3
Females
30.1
30.4
Discount rate
The IAS 19 valuation uses a single discount rate set by
reference to the yield on a basket of ‘high quality’ sterling
corporate bonds.
Significant judgment is required when setting the criteria for
bonds to be included in the basket of bonds that is used to
determine the discount rate used in the IAS 19 valuations. The
criteria include issue size, quality of pricing and the exclusion of
outliers. Judgment is also required in determining the shape of
the yield curve at long durations: a constant credit spread
relative to gilts is assumed. Sensitivity to the main assumptions
is presented below.
The weighted average duration of the Main section’s defined benefit obligation at 31 December 2021 is 20 years (2020 - 22 years).
The chart below shows the projected benefit payment pattern for the Main section in nominal terms. These cashflows are based on
the most recent formal actuarial valuation, effective 31 December 2020
.
The larger outflow in the first three years represents the expected level of transfers out to 31 December 2023.
0
500
1000
1500
2000
2500
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
2041
2043
2045
2047
2049
2051
2053
2055
2057
2059
2061
2063
2065
2067
2069
2071
2073
2075
2077
2079
2081
2083
2085
2087
2089
2091
2093
2095
Non pensioner
Pensioner
Expected Cashflows (£m)
Year
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
116
5 Pensions continued
The table below shows how the net pension asset of the Main section would change if the key assumptions used were changed
independently. In practice the variables have a degree of correlation and do not move completely in isolation.
(Decrease)/
(Decrease)/
Increase in
increase in
increase in
net pension
value of
value of
(obligations)/
assets
liabilities
assets
2021
£m
£m
£m
0.25% increase in interest rates/discount rate
(2,917)
(1,926)
(991)
0.25% increase in inflation
1,883
1,329
554
0.25% increase in credit spreads
(3)
(1,926)
1,923
Longevity increase of one year
—
1,790
(1,790)
0.25% additional rate of increase in pensions in payment
—
1,485
(1,485)
Increase in equity values of 10%
(1)
442
—
442
2020
0.25% increase in interest rates/discount rate
(2,585)
(2,384)
(201)
0.25% increase in inflation
2,204
1,603
601
0.25% increase in credit spreads
(6)
(2,384)
2,378
Longevity increase of one year
—
1,930
(1,930)
0.25% additional rate of increase in pensions in payment
—
1,608
(1,608)
Increase in equity values of 10%
(1)
454
—
454
(1)
Includes both quoted and private equity.
The funded status is most sensitive to movements in credit spreads and longevity. The table below shows the combined change in
the funded status of the Main section as a result of larger movements in these assumptions, assuming no changes in other
assumptions.
Change in life expectancies
- 2 years
- 1 years
No change
+ 1 year
+ 2 years
2021
£bn
£bn
£bn
£bn
£bn
+50 bps
6.9
5.3
3.8
2.3
0.8
No change
3.6
1.8
—
(1.8)
(3.6)
Change in credit spreads
-50 bps
(0.3)
(2.4)
(4.5)
(6.6)
(8.7)
Change in life expectancies
- 2 years
- 1 years
No change
+ 1 year
+ 2 years
2020
£bn
£bn
£bn
£bn
£bn
+50 bps
7.8
6.1
4.5
2.9
1.3
No change
3.9
1.9
—
(1.9)
(3.9)
Change in credit spreads
-50 bps
(0.6)
(2.8)
(5.1)
(7.4)
(9.7)
The defined benefit obligation of the Main section is attributable to the different classes of scheme members in the following
proportions:
2021
2020
Membership category
%
%
Active members
10.7
14.2
Deferred members
47.6
50.9
Pensioners and dependants
41.7
34.9
100.0
100.0
The experience history of NWB Group schemes is shown below:
NWB Group
NWB Plc
2021
2020
2019
2018
2017
2021
2020
2019
2018
2017
History of defined benefit schemes
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Fair value of plan assets
53,531
52,819
47,953
45,061
46,199
53,381
51,323
46,555
43,807
44,653
Present value of defined benefit
obligations
43,326
45,214
40,822
36,435
39,120
43,147
43,883
39,683
35,466
37,937
Net surplus/(deficit)
10,205
7,605
7,131
8,626
7,079
10,234
7,440
6,872
8,341
6,716
Experience (losses)/gains on plan liabilities
244
431
264
(124)
(107)
245
427
275
(122)
(108)
Experience (losses)/gains on plan assets
857
5,586
3,156
(1,937)
1,602
852
5,486
3,021
(1,892)
1,580
Actual return on plan assets
1,592
6,549
4,437
(782)
2,790
1,579
6,422
4,266
(769)
2,735
Actual return on plan assets
3.0%
13.7%
9.8%
(1.7%)
6.2%
3.1%
13.8%
9.7%
(1.7%)
6.2%
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
117
6 Auditor’s remuneration
Amounts payable to NWB Group’s auditors for statutory audit and other services are set out below:
2021
2020
£m
£m
Fees payable for:
- the audit of NWB Group’s annual accounts
11.6
12.4
- the audit of NWB Plc’s subsidiaries
2.1
2.1
Total audit and audit-related assurance service fees
13.7
14.5
Fees payable to the auditor for non-audit services are disclosed in the consolidated financial statements of NatWest Group plc.
7 Tax
2021
2020
£m
£m
Current tax
Charge for the year
(998)
(190)
Over provision in respect of prior years
38
10
(960)
(180)
Deferred tax
(Charge)/credit for the year
(195)
40
UK tax rate change impact
(1)
161
82
Increase/(decrease) in the carrying value of deferred tax assets in respect of UK losses
14
(7)
Over/(under) provision in respect of prior years
(2)
4
(1)
Tax charge for the year
(976)
(66)
(1)
It was announced in the UK Government’s budget on 3 March 2021 that the main UK corporation tax rate will increase from 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 charge differs from the expected tax charge, computed by applying the standard rate of UK corporation tax of 19%
(2020 – 19%), as follows:
2021
2020
£m
£m
Expected tax charge
(738)
(114)
Losses and temporary differences in period where no deferred tax asset recognised
1
—
Foreign profits taxed at other rates
(6)
(3)
Items not allowed for tax:
- losses on disposals and write-downs
(50)
(5)
- UK bank levy
(12)
(18)
- regulatory and legal actions
(73)
22
- other disallowable items
(15)
(39)
Non-taxable items
9
6
Taxable foreign exchange movements
1
—
Unrecognised losses brought forward and utilised
2
—
Increase/(decrease) in the carrying value of deferred tax assets in respect of:
- UK losses
14
(7)
Banking surcharge
(328)
(28)
Tax on paid in equity
16
29
UK tax rate change impact
161
82
Adjustments in respect of prior years
42
9
Actual tax charge
(976)
(66)
Judgment: Tax contingencies
NWB Group’s corporate income tax charge and its provisions for corporate income taxes necessarily involve a significant degree of
estimation and judgment. The tax treatment of some transactions is uncertain and tax computations are yet to be agreed with the
tax authorities in a number of jurisdictions. NWB Group recognises anticipated tax liabilities based on all available evidence and,
where appropriate, in the light of external advice. Any difference between the final outcome and the amounts provided will affect
current and deferred income tax assets and charges in the period when the matter is resolved.
For accounting policy information see Accounting policies note 9.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
118
7 Tax continued
Deferred tax
NWB Group
NWB Plc
2021
2020
2021
2020
£m
£m
£m
£m
Deferred tax liability
209
166
—
—
Deferred tax asset
(1,268)
(1,289)
(1,244)
(1,248)
Net deferred tax asset
(1,059)
(1,123)
(1,244)
(1,248)
Net deferred tax asset comprised:
NWB Group
Accelerated
Tax losses
capital
Expense
Financial
carried
Pension
allowances
provisions
instruments
forward
Other
Total
£m
£m
£m
£m
£m
£m
£m
At 1 January 2020
(249)
(195)
(68)
18
(545)
(22)
(1,061)
Acquisitions and disposals of subsidiaries
—
(2)
(1)
—
—
—
(3)
Charge/(credit) to income statement
12
(84)
9
7
(55)
(3)
(114)
Charge to other comprehensive income
101
—
—
(41)
—
—
60
Currency translation and other adjustments
—
(1)
—
—
—
(4)
(5)
At 31 December 2020
(136)
(282)
(60)
(16)
(600)
(29)
(1,123)
Charge/(credit) to income statement
15
12
2
1
(8)
(6)
16
Charge/(credit) to other comprehensive
income
14
—
(3)
40
—
(3)
48
Currency translation and other adjustments
1
(2)
—
—
—
1
—
At 31 December 2021
(106)
(272)
(61)
25
(608)
(37)
(1,059)
NWB Plc
Accelerated
Tax losses
capital
Expense
Financial
carried
Pension
allowances
provisions
instruments
forward
Other
Total
£m
£m
£m
£m
£m
£m
£m
At 1 January 2020
(243)
(354)
(58)
24
(530)
(23)
(1,184)
Acquisitions and disposal of subsidiaries
—
(2)
—
—
—
—
(2)
Charge/(credit) to income statement
12
(82)
11
4
(62)
(4)
(121)
Charge/(credit) to other comprehensive
income
101
—
—
(41)
—
—
60
Currency translation and other adjustments
—
—
(1)
—
—
—
(1)
At 31 December 2021
(130)
(438)
(48)
(13)
(592)
(27)
(1,248)
Charge/(credit) to income statement
13
(29)
—
—
(9)
(7)
(32)
Charge/(credit) to other comprehensive
income
14
—
(3)
40
—
(3)
48
Amounts transferred from Ulster Bank
Limited
—
(2)
(2)
—
(7)
(1)
(12)
At 31 December 2021
(103)
(469)
(53)
27
(608)
(38)
(1,244)
Deferred tax assets in respect of unused tax losses are recognised if the losses can be used to offset probable future taxable profits
after taking into account the expected reversal of other temporary differences. Recognised deferred tax assets in respect of tax
losses are analysed further below.
2021
2020
£m
£m
UK tax losses carried forward
- NWB Plc
608
592
- Ulster Bank Limited
—
8
608
600
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
119
7 Tax continued
Critical accounting policy: Deferred tax
The deferred tax assets of £1,268 million as at 31 December
2021 (2020 - £1,289 million) principally comprises losses which
arose in the UK, and temporary differences. These deferred tax
assets are recognised to the extent that it is probable that there
will be future taxable profits to recover them.
Judgment
- NWB Group has considered the carrying value of
deferred tax assets and concluded that, based on
management’s estimates, sufficient taxable profits will be
generated in future years to recover recognised deferred tax
assets.
Estimate
-
These estimates are based on forecast performance
for management’s detailed plans. They have regard to inherent
uncertainties, such as climate change and the impact of COVID.
UK tax losses
- Under UK tax rules, tax losses can be carried
forward indefinitely. As the recognised tax losses in the Group
arose prior to 1 April 2015, credit in future periods is given
against 25% of profits at the main rate of UK corporation tax,
excluding the Banking Surcharge 8% rate introduced by The
Finance (No. 2) Act 2015.
It was announced in the UK Government’s budget on 3 March
2021 that the main UK corporation tax rate will increase from
19% to 25% from 1 April 2023. This legislative change was
enacted on 10 June 2021. NWB Group’s closing deferred tax
assets and liabilities have therefore been recalculated taking
into account this change of rate and the applicable period the
deferred tax assets and liabilities are expected to crystallise. As
a result, the net deferred tax asset position in NWB Group has
increased by £156 million, with a £161 million tax credit included
in the income statement (refer to reconciling item above), and a
£5 million tax charge included in other comprehensive income.
It was subsequently announced in the UK Government’s budget
on 27 October 2021 that the UK banking surcharge will
decrease from 8% to 3% from 1 April 2023. This legislative
change was substantively enacted on 2 February 2022. Had this
rate reduction been substantively enacted as at the balance
sheet date, the estimated rate change impact would not have
been material.
National Westminster Bank Plc
– A deferred tax asset of £608
million (2020 - £592 million) has been recognised in respect of
total losses of £2,610 million. The losses arose principally as a
result of significant impairment and conduct charges between
2009 and 2012 during challenging economic conditions in the
UK banking sector. NWB Plc expects the deferred tax asset to
be utilised against future taxable profits by the end of 2025.
Unrecognised deferred tax
Deferred tax assets of £237 million (2020 - £191 million) have
not been recognised in respect of tax losses and other
deductible temporary differences carried forward of £949 million
(2020 - £1,003 million) in jurisdictions where doubt exists over
the availability of future taxable profits.
The tax losses and other
deductible temporary differences carried forward have no
expiry date.
Deferred tax liabilities of £123 million (2020 - £103 million) on
aggregate underlying temporary differences of £490 million
(2020 - £479 million) have not been recognised in respect of
retained earnings of overseas subsidiaries and held-over gains
on the incorporation of certain overseas branches. Retained
earnings of overseas subsidiaries are expected to be reinvested
indefinitely or remitted to the UK free from further taxation. No
taxation is expected to arise in the foreseeable future in respect
of held-over gains on which deferred tax is not recognised.
Changes to UK tax legislation largely exempts from UK tax
overseas dividends received on or after 1 July 2009.
8 Profit/(loss) dealt with in the accounts of the NWB Plc
As permitted by section 408(3) of the Companies Act 2006, no income statement for the Bank has been presented as a primary
financial statement.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
120
9 Financial instruments – classification
The following tables analyse financial assets and liabilities in accordance with the categories of financial instruments on an IFRS 9
basis.
NWB Group
Amortised
Other
MFVTPL
FVOCI
cost
assets
Total
£m
£m
£m
£m
£m
Assets
Cash and balances at central banks
101,213
101,213
Derivatives
(1)
2,460
2,460
Loans to banks - amortised cost
(2)
4,182
4,182
Loans to customers - amortised cost
(3)
286,971
286,971
Amounts due from holding companies and fellow subsidiaries
348
2,554
617
3,519
Other financial assets
226
26,148
2,657
29,031
Other assets
7,187
7,187
31 December 2021
3,034
26,148
397,577
7,804
434,563
Cash and balances at central banks
62,983
62,983
Derivatives
(1)
3,288
3,288
Loans to banks - amortised cost
(2)
3,344
3,344
Loans to customers - amortised cost
(3)
271,581
271,581
Amounts due from holding companies and fellow subsidiaries
556
2,683
66
3,305
Other financial assets
476
33,853
3,666
37,995
Other assets
7,043
7,043
31 December 2020
4,320
33,853
344,257
7,109
389,539
Held-for-
Amortised
Other
trading
cost
liabilities
Total
£m
£m
£m
£m
Liabilities
Bank deposits
(4)
22,831
22,831
Customer deposits
329,440
329,440
Amounts due to holding companies and fellow subsidiaries
—
45,034
102
45,136
Derivatives
(1)
4,119
4,119
Other financial liabilities
99
7,152
7,251
Subordinated liabilities
211
211
Notes in circulation
904
904
Other liabilities
(5)
1,071
2,863
3,934
31 December 2021
4,218
406,643
2,965
413,826
Bank deposits
(4)
14,871
14,871
Customer deposits
293,605
293,605
Amounts due to holding companies and fellow subsidiaries
37,558
1
37,559
Derivatives
(1)
6,552
6,552
Other financial liabilities
3
10,380
10,383
Subordinated liabilities
1,230
1,230
Notes in circulation
1,012
1,012
Other liabilities
(5)
1,509
2,926
4,435
31 December 2020
6,555
360,165
2,927
369,647
(1)
Includes net hedging derivative assets of £113 million (2020 – £1 million) and net hedging derivative liabilities of £71 million (2020 - £173 million).
(2)
Includes items in the course of collection from other third party banks of £3 million (2020 - £2 million).
(3)
Includes finance lease receivables of £8,434 million (2020 - £8,577 million).
(4)
Includes items in the course of transmission to other banks is £19 million (2020 - £1 million).
(5)
Includes lease liabilities of £1,008 million (2020 - £1,398 million) held at amortised cost.
Judgment: classification of financial assets
Classification of financial assets between amortised cost and fair value through other comprehensive income requires a degree of
judgment in respect of business models and contractual cashflows.
-
The business model criteria is assessed at a portfolio level to determine whether assets are classified as held to collect or held
to collect and sell. Information that is considered in determining the applicable business model includes the portfolio’s policies
and objectives; how the performance and risks of the portfolio are managed, evaluated and reported to management; and the
frequency, volume and timing of sales in prior periods, sales expectation for future periods, and the reasons for sales.
-
The contractual cash flow characteristics of financial assets are assessed with reference to whether the cash flows represent
solely payments of principal and interest. A level of judgment is made in assessing terms that could change the contractual
cash flows so that it would not meet the condition for solely payments of principal and interest, including contingent and
leverage features, non-recourse arrangements and features that could modify the time value of money.
For accounting policy information see Accounting policies notes 10, 12, 13 and 15.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
121
9 Financial instruments - classification continued
NWB Plc
Amortised
Other
MFVTPL
FVOCI
cost
assets
Total
£m
£m
£m
£m
£m
Assets
Cash and balances at central banks
101,210
101,210
Derivatives
(1)
2,547
2,547
Loans to banks - amortised cost
(2)
3,638
3,638
Loans to customers - amortised cost
(3)
255,443
255,443
Amounts due from holding companies and fellow subsidiaries
1,012
25,354
756
27,122
Other financial assets
226
26,148
2,275
28,649
Investment in group undertakings
2,319
2,319
Other assets
5,183
5,183
31 December 2021
3,785
26,148
387,920
8,258
426,111
Cash and balances at central banks
62,878
62,878
Derivatives
(1)
3,438
3,438
Loans to banks - amortised cost
(2)
2,798
2,798
Loans to customers - amortised cost
(3)
238,366
238,366
Amounts due from holding companies and fellow subsidiaries
937
27,067
172
28,176
Other financial assets
476
33,853
3,277
37,606
Investment in group undertakings
2,374
2,374
Other assets
4,967
4,967
31 December 2020
4,851
33,853
334,386
7,513
380,603
NWB Plc
Held-for-
Amortised
Other
trading
DFV
cost
liabilities
Total
£m
£m
£m
£m
£m
Liabilities
Bank deposits
(4)
22,829
22,829
Customer deposits
292,470
292,470
Amounts due to holding companies and fellow subsidiaries
—
242
76,344
136
76,722
Derivatives
(1)
4,336
4,336
Other financial liabilities
99
—
6,285
6,384
Subordinated liabilities
205
205
Notes in circulation
904
904
Other liabilities
(5)
958
2,137
3,095
31 December 2021
4,435
242
399,995
2,273
406,945
Bank deposits
(4)
14,866
14,866
Customer deposits
255,290
255,290
Amounts due to holding companies and fellow subsidiaries
—
69,617
69,617
Derivatives
(1)
6,769
6,769
Other financial liabilities
3
—
9,609
9,612
Subordinated liabilities
1,230
1,230
Notes in circulation
1,266
1,266
Other liabilities
(5)
1,375
2,114
3,489
31 December 2020
6,772
—
353,253
2,114
362,139
(1)
Includes net hedging derivative assets of £108 million (2020 - £1 million) and net hedging derivative liabilities of £55 million (2020 - £149 million).
(2)
Includes items in the course of collection from other banks of £3 million (2020 - £2 million).
(3)
Includes finance lease receivables of £531 million (2020 - £657 million).
(4)
Includes items in the course of transmission to other banks of £19 million (2020 - £1 million).
(5)
Includes lease liabilities of £898 million (2020 - £1,280 million) held at amortised cost.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
122
9 Financial instruments - classification continued
The following tables include amounts due from/to holding companies and fellow subsidiaries:
NWB Group
2021
2020
Holding
Fellow
Holding
Fellow
companies
subsidiaries
Total
companies
subsidiaries
Total
£m
£m
£m
£m
£m
£m
Assets
Loans to banks - amortised cost
—
2,542
2,542
—
2,663
2,663
Loans to customers - amortised cost
—
12
12
8
12
20
Other financial assets
—
348
348
—
556
556
Other assets
14
603
617
63
3
66
Amounts due from holding companies and fellow
subsidiaries
14
3,505
3,519
71
3,234
3,305
Derivatives
(1)
47
910
957
83
959
1,042
Liabilities
Bank deposits
—
25,216
25,216
—
22,722
22,722
Customer deposits
11,029
28
11,057
7,571
48
7,619
Subordinated liabilities
3,074
—
3,074
3,309
—
3,309
MREL instruments issued to NatWest Holdings Ltd
5,687
—
5,687
3,908
—
3,908
Other liabilities
—
102
102
—
1
1
Amounts due to holding companies and fellow
subsidiaries
19,790
25,346
45,136
14,788
22,771
37,559
Derivatives
(1)
127
695
822
94
1,594
1,688
NWB Plc
2021
2020
Holding
Fellow
Holding
Fellow
companies
subsidiaries
Subsidiaries
Total
companies
subsidiaries
Subsidiaries
Total
£m
£m
£m
£m
£m
£m
£m
£m
Assets
Loans to banks - amortised cost
—
2,042
7,595
9,637
—
2,079
9,310
11,389
Loans to customers - amortised cost
—
11
15,706
15,717
8
12
15,658
15,678
Other financial assets
—
352
660
1,012
—
556
381
937
Other assets
14
529
213
756
63
—
109
172
Amounts due from holding companies
and fellow subsidiaries
14
2,934
24,174
27,122
71
2,647
25,458
28,176
Derivatives
(1)
47
910
97
1,054
83
959
178
1,220
Liabilities
Bank deposits
—
22,746
28,840
51,586
—
20,871
28,892
49,763
Customer deposits
11,029
10
5,200
16,239
7,571
34
5,032
12,637
Subordinated liabilities
3,074
—
—
3,074
3,309
—
—
3,309
MREL instruments issued to NatWest Holdings
Ltd
5,687
—
—
5,687
3,908
—
—
3,908
Other liabilities
—
99
37
136
—
—
—
—
Amounts due to holding companies
and fellow subsidiaries
19,790
22,855
34,077
76,722
14,788
20,905
33,924
69,617
Derivatives
(1)
127
695
222
1,044
94
1,593
218
1,905
(1)
Intercompany derivatives are included within derivative classification on the balance sheet.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
123
9 Financial instruments - classification continued
Interest rate benchmark reform
The
Natwest
Group
IBOR
program
successfully
delivered
the
conversion
of
the
vast
majority
of
the
IBOR
exposures
to
risk
free
rates
(RFR)
in
advance
of
the
cessation
date.
This
encompasses
loans,
deposits,
capital
instruments
and
derivatives,
which
have
been
converted
using
fallback
provisions,
switch
provisions
or
as
part
of
market-wide
conversion
events
in
the
case
of
derivatives
subject to clearing. These instruments will convert at the first repricing date post cessation.
The total amount of exposure for NWB Group at 31 December 2021 subject to above conversion provisions is £14,141 million of
assets, £700 million of liabilities, £9,399 million of loan commitments and £114.0 billion of derivative notionals. The exposure for
NWB Plc at 31 December 2021 subject to above conversion provisions is £10,972 million of assets, £700 million of liabilities, £9,356
million of loan commitments and £114.0 billion of derivative notionals.
Despite the significant conversion levels achieved, certain instruments remain in discussion with customers and counterparties to
achieve consensual conversion. If consensual conversion is not achieved these instruments will default to synthetic LIBOR in line
with relevant legislation.
The level of exposures without explicit or agreed conversion provisions as of 31 December 2021 is as follows:
NWB Group
Rates subject to IBOR reform
GBP LIBOR
USD IBOR (1)
Other IBOR (2)
Total
2021
£m
£m
£m
£m
Loans to customers - amortised cost
2,129
2,659
4
4,792
Other financial assets
744
37
—
781
Other financial liabilities
1,070
—
—
1,070
Amounts due to holding companies
and fellow subsidiaries
—
3,058
—
3,058
Loan commitments
(3)
790
3,785
55
4,630
Derivatives notional (£bn)
0.1
27.4
—
27.5
NWB Group
Rates subject to IBOR reform
GBP LIBOR
USD IBOR (1)
EURIBOR(2)
Other IBOR
Total
2020
£m
£m
£m
£m
£m
Loans to banks - amortised cost
2
82
—
—
84
Loans to customers - amortised cost
25,113
3,192
60
97
28,462
Other financial assets
1,415
37
65
—
1,517
Other financial liabilities
1,114
—
1,157
—
2,271
Subordinated liabilities
—
519
170
—
689
Amounts due to holding companies
and fellow subsidiaries
733
4,696
—
—
5,429
Loan commitments
(3)
15,260
4,809
1,071
570
21,710
Derivatives notional (£bn)
143.9
26.5
37.0
0.8
208.2
For the notes to this table refer to the following page.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
124
9 Financial instruments - classification continued
NWB Plc
Rates subject to IBOR reform
GBP LIBOR
USD IBOR (1)
Other IBOR (2)
Total
2021
£m
£m
£m
£m
Loans to customers - amortised cost
1,946
2,113
—
4,059
Other financial assets
744
37
—
781
Other financial liabilities
1,070
—
—
1,070
Amounts due to holding companies
and fellow subsidiaries
—
3,058
—
3,058
Loan commitments
(3)
754
3,785
55
4,594
Derivatives notional (£bn)
0.1
27.4
—
27.5
NWB Plc
Rates subject to IBOR reform
GBP LIBOR
USD IBOR (1)
EURIBOR (2)
Other IBOR
Total
2020
£m
£m
£m
£m
£m
Loans to banks - amortised cost
2
82
—
—
84
Loans to customers - amortised cost
20,487
2,557
7
48
23,099
Other financial assets
1,415
37
65
—
1,517
Amounts due from holding companies
and fellow subsidiaries
588
—
80
—
668
Other financial liabilities
1,114
—
1,157
—
2,271
Subordinated liabilities
—
519
170
—
689
Amounts due to holding companies
and fellow subsidiaries
730
4,696
—
—
5,426
Loan commitments (3)
15,040
4,808
1,065
565
21,478
Derivatives notional (£bn)
144.0
26.5
37.0
0.8
208.3
(1)
In 2021 the FCA declared that USD IBOR will be non-representative post 30 June 2023; at the time of preparing the 2020 Annual Report and Accounts this date was expected to be
31 December 2021.
(2)
In 2021 management concluded that EURIBOR 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. Where these are fully undrawn, they are allocated to the principal currency of the facility. Where the facilities are partly
drawn, the remaining loan commitment is allocated to the currency with the largest drawn amount.
At December 2021 NWB Group held certain currency swaps with both legs subject to IBOR reform, for which only the GBP LIBOR
leg has an explicit or agreed conversion provisions as of 31 December 20201, but not the entire contract. These include currency
swaps of GBP LIBOR of £0.4 billion with USD IBOR; and currency swaps of USD IBOR of £0.4 billion with GBP LIBOR.
Included within the above December 2020 tables for derivatives were currency swaps with corresponding legs also subject to IBOR
reform of GBP LIBOR of £2.7 billion with USD IBOR of £0.3 billion and EURIBOR £2.4 billion. Currency swaps of USD IBOR of £0.8
billion with GBP LIBOR of £0.5 billion and EURIBOR £0.3 billion. Currency swaps of EURIBOR of £0.3 billion with USD IBOR of £0.3
billion.
AT1 issuances
NWB Plc has issued certain capital instruments (AT1), under which reset clauses are linked to IBOR rates subject to reform. Where
under the contractual terms of the instrument the coupon resets to a rate which has IBOR as a specified component of its pricing
structure these are subject to IBOR reform and are shown in Note 22.
As part of its capital management activities the NWB Plc has acquired certain equity instruments issued by its subsidiaries which
contain coupons or reset clauses linked to IBOR rates subject to reform.
This is outlined below:
31 December
31 December
2021
2020
£m
£m
£167 million 6%
167
167
£35 million 6.09%
35
35
£60 million 7.335%
60
60
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
125
9 Financial instruments - classification continued
The tables below present information on financial assets and liabilities that are offset on the balance sheet under IFRS or subject to
enforceable master netting agreements together with financial collateral received or given
.
NWB Group
Offsetable Instruments
Offsetable potential not recognised by IFRS
Net amount
Effect
after the
effect
of master
of netting
netting and
agreements
Amounts not
Balance
IFRS
Balance
similar
Cash
Securities
and related
subject
sheet
Gross
offset
sheet
agreements
collateral
collateral
collateral
to offset
total
2021
£m
£m
£m
£m
£m
£m
£m
£m
£m
Derivatives assets
10,399
(7,961)
2,438
(1,644)
(96)
—
698
22
2,460
Derivative liabilities
12,676
(8,568)
4,108
(1,644)
(355)
(1,842)
267
11
4,119
Net position
(1)
(2,277)
607
(1,670)
—
259
1,842
431
11
(1,659)
Non trading reverse repos
33,397
(7,594)
25,803
—
—
(25,803)
—
—
25,803
Non trading repos
29,267
(7,594)
21,673
—
—
(21,673)
—
—
21,673
Net position
4,130
—
4,130
—
—
(4,130)
—
—
4,130
2020
Derivatives assets
14,069
(10,807)
3,262
(2,445)
(2)
—
815
26
3,288
Derivative liabilities
18,090
(11,540)
6,550
(2,445)
(790)
(2,433)
882
2
6,552
Net position
(1)
(4,021)
733
(3,288)
—
788
2,433
(67)
24
(3,264)
Non trading reverse repos
33,202
(9,936)
23,266
—
—
(23,266)
—
—
23,266
Non trading repos
21,373
(9,936)
11,437
—
—
(11,437)
—
—
11,437
Net position
11,829
—
11,829
—
—
(11,829)
—
—
11,829
NWB Plc
Offsetable Instruments
Offsetable potential not recognised by IFRS
Net amount
Effect
after the
effect
of master
of netting
netting and
agreements
Amounts not
Balance
IFRS
Balance
similar
Cash
Securities
and related
subject
sheet
Gross
offset
sheet
agreements
collateral
collateral
collateral
to offset
total
2021
£m
£m
£m
£m
£m
£m
£m
£m
£m
Derivatives assets
10,476
(7,961)
2,515
(1,649)
(96)
—
770
32
2,547
Derivative liabilities
12,682
(8,568)
4,114
(1,649)
(355)
(1,842)
268
222
4,336
Net position
(1)
(2,206)
607
(1,599)
—
259
1,842
502
(190)
(1,789)
Non trading reverse repos
33,397
(7,594)
25,803
—
—
(25,803)
—
—
25,803
Non trading repos
29,267
(7,594)
21,673
—
—
(21,673)
—
—
21,673
Net position
(1)
4,130
—
4,130
—
—
(4,130)
—
—
4,130
2020
Derivatives assets
14,188
(10,807)
3,381
(2,446)
(2)
—
933
57
3,438
Derivative liabilities
18,096
(11,540)
6,556
(2,446)
(790)
(2,433)
887
213
6,769
Net position
(1)
(3,908)
733
(3,175)
—
788
2,433
46
(156)
(3,331)
Non trading reverse repos
33,202
(9,936)
23,266
—
—
(23,266)
—
—
23,266
Non trading repos
21,373
(9,936)
11,437
—
—
(11,437)
—
—
11,437
Net position
11,829
—
11,829
—
—
(11,829)
—
—
11,829
(1)
Within NWB Group and NWB Plc, the net IFRS offset balance of £607 million (2020 - £733 million) relates to variation margin netting reflected on other balance sheet lines.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
126
10 Financial instruments - valuation
Critical accounting policy: Fair value -
financial instruments
Financial instruments classified as mandatory fair value
through profit or loss; held-for-trading; designated fair value
through profit or loss and fair value through other
comprehensive income are recognised in the financial
statements at fair value. All derivatives are measured at fair
value.
Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. A fair value
measurement considers the characteristics of the asset or
liability and the assumptions that a market participant would
consider when pricing the asset or liability.
NWB Group manages some portfolios of financial assets and
financial liabilities based on its net exposure to either market or
credit risk. In these cases, the fair value is derived from the net
risk exposure of that portfolio with portfolio level adjustments
applied to incorporate bid-offer spreads, counterparty credit
risk, and funding costs (see ‘Valuation Adjustments’).
Where the market for a financial instrument is not active, fair
value is established using a valuation technique. These
valuation techniques involve a degree of estimation, the extent
of which depends on the instrument’s complexity and the
availability of market-based data. The complexity and
uncertainty in the financial instrument’s fair value is
categorised using the fair value hierarchy.
For accounting policy information see Accounting policies
notes 10 and 15.
Valuation
Fair value hierarchy
Financial instruments carried at fair value have been classified
under the fair value hierarchy. The classification ranges from
level 1 to level 3, with more expert judgment and price
uncertainty for those classified at level 3.
The determination of an instrument’s level cannot be made at
a global product level as a single product type can be in more
than one level. For example, a single name corporate credit
default swap could be in level 2 or level 3 depending on the
level of market activity for the referenced entity
.
Level 1 – instruments valued using unadjusted quoted prices in
active and liquid markets, for identical financial instruments.
Examples include government bonds, listed equity shares and
certain exchange-traded derivatives.
Level 2 - instruments valued using valuation techniques that
have observable inputs. Observable inputs are those that are
readily available with limited adjustments required. Examples
include most government agency securities, investment-grade
corporate bonds, certain mortgage products - including CLOs,
most bank loans, repos and reverse repos, state and municipal
obligations, most notes issued, certain money market securities,
loan commitments and most OTC derivatives.
Level 3 - instruments valued using a valuation technique where
at least one input which could have a significant effect on the
instrument’s valuation, is not based on observable market data.
Examples include non-derivative instruments which trade
infrequently, certain syndicated and commercial mortgage
loans, private equity, and derivatives with unobservable model
inputs.
Page
Financial instruments
Critical accounting policy: Fair value
126
Valuation
Fair value hierarchy
(D)
125
Valuation techniques
(D)
127
Inputs to valuation models
(D)
127
Valuation control
(D)
127
Key areas of judgment
(D)
128
Table of assets and liabilities split by fair value
hierarchy level
(T)
128
Valuation adjustments
Table of fair value adjustments made
(T)
129
Funding valuation adjustments (FVA)
(D)
129
Credit valuation adjustments (CVA)
(D)
129
Bid-offer
(D)
129
Product and deal specific
(D)
129
Level 3 additional information
Level 3 ranges of unobservable inputs
(D)
129
Alternative assumptions
(D)
130
Other considerations
(D)
130
Table of high and low range of fair value of
level 3 assets and liabilities
(T)
130
Movement in level 3 assets and liabilities
over the reporting period
(D)
130
Table of the movement in level 3 assets and liabilities
(T)
130
Fair value of financial instruments measured
at amortised cost
Table showing the fair value of financial instruments
measured at amortised cost on the balance sheet
(T)
131
(D) = Descriptive; (T) = Table
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
127
10 Financial instruments – valuation
continued
Valuation techniques
NWB Group derives the fair value of its instruments differently
depending on whether the instrument is a non-modelled or a
modelled product.
Non-modelled products
are valued directly from a price input,
typically on a position-by-position basis. Examples include
equities and most debt securities.
Non-modelled products can fall into any fair value levelling
hierarchy depending on the observable market activity,
liquidity, and assessment of valuation uncertainty of the
instruments. The assessment of fair value and the classification
of the instrument to a fair value level is subject to the valuation
controls discussed in the “Valuation control” section.
Modelled products
valued using a pricing model range in
complexity from comparatively vanilla products such as interest
rate swaps and options (e.g., interest rate caps and floors)
through to more complex derivatives (e.g., balance guarantee
swaps).
For modelled products, the fair value is derived using the model
and the appropriate model inputs or parameters, as opposed to
from a cash price equivalent. Model inputs are taken either
directly or indirectly from available data, where some inputs
are also modelled.
Fair value classification of modelled instruments is either level 2
or level 3, depending on the product/model combination, the
observability and quality of input parameters and other factors.
All these must be assessed to classify a position. The modelled
product is assigned to the lowest fair value hierarchy level of
any significant input used in that valuation.
Most derivative instruments, for example vanilla interest rate
swaps, foreign exchange swaps and liquid single name credit
derivatives, are classified as level 2. This is because they are
vanilla products valued using standard market models and with
observable inputs. Level 2 products range from vanilla to more
complex products, where more complex products remain
classified as Level 2 due to the materiality of any unobservable
inputs.
Inputs to valuation models
When using valuation techniques, the fair value can be
significantly affected by the choice of valuation model and
underlying assumptions. Factors considered include the
cashflow amounts and timing of those cash flows, and
application of appropriate discount rates, incorporating both
funding and credit risk. Values between and beyond available
data points are obtained by interpolation and extrapolation.
The principal inputs to these valuation techniques are as
follows:
Bond prices - quoted prices are generally available for
government bonds, certain corporate securities, and some
mortgage-related products.
Credit spreads - these express the return required over a
benchmark rate or index to compensate for the referenced
credit risk. Where available, these are derived from the price of
credit default swaps or other credit-based instruments, such as
debt securities. When direct prices are not available, credit
spreads are determined with reference to available prices of
entities with similar characteristics.
Interest rates - these are principally based on interest rate
swap prices referencing benchmark interest rates. Benchmark
rates include Interbank Offered Rates (IBOR) and the Overnight
Index Swap (OIS) rate, including SONIA (Sterling Overnight
Interbank Average Rate). Other quoted interest rates may also
be used from both the bond and futures markets.
Foreign currency exchange rates - there are observable prices
both for spot and forward contracts and futures in the world's
major currencies.
Equity and equity index prices - quoted prices are generally
readily available for equity shares listed on the world's major
stock exchanges and for major indices on such shares.
Price volatilities and correlations - volatility is a measure of the
tendency of a price to change with time. Correlation measures
the degree which two or more prices or variables are observed
to move together. Variables that move in the same direction
show positive correlation; those that move in opposite
directions are negatively correlated.
Prepayment rates - rates used to reflect how fast a pool of
assets prepay. The fair value of a financial instrument that can
be prepaid by the issuer or borrower differs from that of an
instrument that cannot be prepaid. When valuing prepayable
instruments, the value of this prepayment option is considered.
Recovery rates/loss given default - these are used as an input
to valuation models and reserves for asset-backed securities
and other credit products as an indicator of severity of losses
on default. Recovery rates are primarily sourced from market
data providers, the value of the underlying collateral, or
inferred from observable credit spreads.
Valuation control
NWB Group's control environment for the determination of the
fair value of financial instruments includes formalised
procedures for the review and validation of fair values. This
review is performed by an independent price verification (IPV)
team.
IPV is a key element of the control environment. Valuations are
first performed by the business which entered into the
transaction. These valuations are then reviewed by the IPV
team, independent of those trading the financial instruments, in
light of available pricing evidence.
Independent pricing data is collated from a range of sources.
Each source is reviewed for quality and the independent data
applied in the IPV processes using a formalised input quality
hierarchy. Consensus services are one source of independent
data and encompass interest rate, currency, credit, and bond
markets, providing comprehensive coverage of vanilla products
and a wide selection of exotic products.
Where measurement differences are identified through the IPV
process these are grouped by the quality hierarchy of the
independent data. If the size of the difference exceeds defined
thresholds, an adjustment is made to bring the valuation to
within the independently calculated fair value range.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
128
10 Financial instruments – valuation
continued
IPV takes place at least monthly, for all fair value financial
instruments. The IPV control includes formalised reporting and
escalation of any valuation differences in breach of established
thresholds.
The quality and completeness of the information gathered in
the IPV process gives an indication as to the liquidity and
valuation uncertainty of an instrument and forms part of the
information considered when determining fair value hierarchy
classifications.
Initial fair value level classification of a financial instrument is
carried out by the IPV team. These initial classifications are
subject to senior management review. Particular attention is
paid to instruments transferring from one level to another, new
instrument classes or products, instruments where the
transaction price is significantly different from the fair value
and instruments where valuation uncertainty is high.
Valuation Committees are made up of valuation specialists and
senior business representatives from various functions and
oversee pricing, reserving and valuations issues. These
committees meet monthly to review and ratify any
methodology changes. The Executive Valuation Committee
meets quarterly to address key material and subjective
valuation issues, to review items escalated by Valuation
Committees and to discuss other relevant industry matters.
The Group model risk policy sets the policy for model
documentation, testing and review. Governance of the model
risk policy is carried out by the Group model risk oversight
committee, which comprises model risk owners and
independent model experts. All models are required to be
independently validated in accordance with the Model Risk
Policy.
Key areas of judgment
Over the years the business has simplified, with most products
classified as level 1 or 2 of the fair value hierarchy. However,
the diverse range of products historically traded by NWB Group
means some products remain classified as level 3. Level 3
indicates a significant level of pricing uncertainty, where expert
judgment is used. As such, extra disclosures are required in
respect of level 3 instruments
.
In general, the degree of expert judgment used and hence
valuation uncertainty depends on the degree of liquidity of an
instrument or input.
Where markets are liquid, little judgment is required. However,
when the information regarding the liquidity in a particular
market is not clear, a judgment may need to be made. For
example, for an equity traded on an exchange, daily volumes of
trading can be seen, but for an over the counter (OTC)
derivative, assessing the liquidity of the market with no central
exchange is more challenging.
A key related matter is where a market moves from liquid to
illiquid or vice versa. Where this movement is considered
temporary, the fair value level is not changed. For example, if
there is little market trading in a product on a reporting date
but at the previous reporting date and during the intervening
period the market has been liquid. In this case, the instrument
will continue to be classified at the same level in the hierarchy.
This is to provide consistency so that transfers between levels
are driven by genuine changes in market liquidity and do not
reflect short term or seasonal effects. Material movements
between levels are reviewed quarterly by the Business and IPV.
The breadth and depth of the IPV data allows for a rules-based
quality assessment to be made of market activity, liquidity, and
pricing uncertainty, which assists with the process of allocation
to an appropriate level. Where suitable independent pricing
information is not readily available, the quality assessment will
result in the instrument being assessed as level 3.
The table below shows the assets and liabilities held by NWB Group split by fair value hierarchy level. Level 1 are considered the
most liquid instruments, and level 3 the most illiquid, valued using expert judgment and hence carrying the most significant price
uncertainty.
2021
2020
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
£m
£m
£m
£m
£m
£m
£m
£m
Assets
Derivatives
—
2,459
1
2,460
—
3,283
5
3,288
Amounts due from holding
companies and fellow subsidiaries
—
348
—
348
—
556
—
556
Other financial assets
Securities
20,229
5,718
2
25,949
—
426
50
476
Loans - MFVTPL
—
165
50
215
27,707
6,146
—
33,853
Loans - FVOCI
—
210
—
210
—
—
—
—
Total financial assets held at fair
value
20,229
8,900
53
29,182
27,707
10,411
55
38,173
As % of total fair value assets
69%
31%
0%
73%
27%
0%
Liabilities
Derivatives
—
3,980
139
4,119
—
6,324
228
6,552
Other financial liabilities
Deposits - HFT
—
99
—
99
—
3
—
3
Total financial liabilities held at fair
value
—
4,079
139
4,218
—
6,327
228
6,555
As % of total fair value liabilities
—
97%
3%
—
97%
3%
(1)
Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instrument was transferred.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
129
10 Financial instruments – valuation
continued
When valuing financial instruments in the trading book,
adjustments are made to mid-market valuations to cover bid-
offer spread, funding and credit risk. These adjustments are
presented in the table below:
Adjustment
2021
£m
2020
£m
Funding – FVA
31
19
Credit – CVA
1
2
Bid – Offer
27
24
59
45
Funding valuation adjustments (FVA)
FVA represents an estimate of the adjustment that a market
participant would make to incorporate funding costs and
benefits that arise in relation to derivative exposures. FVA is
calculated as a portfolio level adjustment and can result in
either a funding charge (positive) or funding benefit (negative).
Funding levels are applied to estimated potential future
exposures. For uncollateralised derivatives, the exposure
reflects the future valuation of the derivative. For collateralised
derivatives, the exposure reflects the difference between the
future valuation of the derivative and the level of collateral
posted.
Credit valuation adjustments (CVA)
CVA represents an estimate of the adjustment to fair value that
is made to incorporate the counterparty credit risk inherent in
derivative exposures. CVA is actively managed by a credit and
market risk hedging process, and therefore movements in CVA
are partially offset by trading revenue on the hedges.
The CVA is calculated on a portfolio basis reflecting an
estimate of the amount a third party would charge to assume
the credit risk.
Collateral held under a credit support agreement is factored
into the CVA calculation. In such cases where NWB Group
holds collateral against counterparty exposures, CVA is held to
the extent that residual risk remains.
Bid-offer
Fair value positions are required to be marked to exit,
represented by bid (long positions) or offer (short positions)
levels. Non-derivative positions are typically marked directly to
bid or offer prices. However derivative exposures are adjusted
to exit levels by taking bid-offer reserves calculated on a
portfolio basis. The bid-offer approach is based on current
market spreads and standard market bucketing of risk.
Bid-offer spreads vary by maturity and risk type to reflect
different spreads in the market. For positions where there is no
observable quote, the bid-offer spreads are widened in
comparison to proxies to reflect reduced liquidity or
observability.
Netting is applied on a portfolio basis to reflect the value at
which NWB Group believes it could exit the net risk of the
portfolio, rather than the sum of exit costs for each of the
portfolio’s individual trades. This is applied where the asset and
liability positions are managed as a portfolio for risk and
reporting purposes.
Product and deal specific
On initial recognition of financial assets and liabilities valued
using valuation techniques which have a significant
dependence on information other than observable market data,
any difference between the transaction price and that derived
from the valuation technique is deferred. Such amounts are
recognised in the income statement over the life of the
transaction, when market data becomes observable, or when
the transaction matures or is closed out as appropriate.
Where system generated valuations do not accurately recover
market prices, manual valuation adjustments are applied either
at a position or portfolio level. Manual adjustments are subject
to the scrutiny of independent control teams and are subject to
monthly review by senior management.
L3 additional information
For illiquid assets and liabilities, classified as level 3, additional information is provided on the valuation techniques used and price
sensitivity of the products to those inputs. This is to enable the reader to gauge the level of uncertainty that arises from positions
with significant unobservable inputs or modelling parameters.
Level 3 ranges of unobservable inputs
The table below provides additional information on level 3 instruments and inputs. This shows the valuation technique used for the
fair value calculation, the unobservable input or inputs and input range.
2021
2020
Financial instrument
Valuation technique
Unobservable inputs
Units
Low
High
Low
High
Other financial assets
Loans Discount cash flow
Discount margin
bps
113
169
154
194
Derivative assets and liabilities
Interest rate & FX
derivatives
Discount cash flow
Conditional prepayment risk
%
4
6
6
8
(1)
NWB Group does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
130
10 Financial instruments: valuation continued
The level 3 sensitivities presented below are calculated at a
trade or low-level portfolio basis rather than an overall portfolio
basis. As individual sensitivities are aggregated with no
reflection of the correlated nature between instruments, the
overall portfolio sensitivity may not be accurately reflected. For
example, some portfolios may be negatively correlated to
others, where a downwards movement in one asset would
produce an upwards movement in another. However, due to the
additive presentation of the above figures this correlation impact
cannot be displayed. As such, the actual potential downside
sensitivity of the total portfolio may be less than the non-
correlated sum of the additive figures as shown in the below
table.
Alternative assumptions
Reasonably plausible alternative assumptions of unobservable
inputs are determined based on a specified target level of
certainty of 90%.
Alternative assumptions are determined with reference to all
available evidence including consideration of the following:
quality of independent pricing information considering
consistency between different sources, variation over time,
perceived tradability or otherwise of available quotes; consensus
service dispersion ranges; volume of trading activity and market
bias (e.g. one-way inventory); day 1 profit or loss arising on new
trades; number and nature of market participants; market
conditions; modelling consistency in the market; size and nature
of risk; length of holding of position; and market intelligence.
Other considerations
Whilst certain inputs used to calculate CVA and FVA are not
based on observable market data, the uncertainty of these
inputs is not considered to have a significant effect on the net
valuation of the related derivative portfolios.
As such, the fair value levelling of the derivative portfolios is not
determined by CVA or FVA inputs. In addition, any fair value
sensitivity driven by these inputs is not included in the level 3
sensitivities presented.
The table below shows the high and low range of fair value of
the level 3 assets and liabilities. This range incorporates the
range of fair value inputs as described in the previous table.
2021
2020
Level 3
Favourable
Unfavourable
Level 3
Favourable
Unfavourable
£m
£m
£m
£m
£m
£m
Assets
Derivatives
1
—
—
5
—
—
Other financial assets
Loans - MFVTPL
50
—
—
50
—
—
Securities
2
—
—
—
—
—
53
—
—
55
—
—
Liabilities
Derivatives
139
10
(10)
228
—
—
139
10
(10)
228
—
—
Movement in level 3 assets and liabilities over the reporting period
The following table shows the movement in level 3 assets and liabilities in the year.
2021
2020
Other
Other
Trading
financial
Total
Total
Trading
financial
Total
Total
assets (2)
assets (3)
assets
liabilities
assets (2)
assets (3)
assets
liabilities
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January
5
50
55
228
4
—
4
181
Amounts recorded in the income statement
(1)
(1)
3
2
(70)
4
—
4
70
Level 3 transfers in
—
—
—
—
—
50
50
—
Level 3 transfers out
—
(3)
(3)
—
—
—
—
—
Purchases/originations
—
2
2
—
—
—
—
—
Settlements/other decreases
(3)
—
(3)
(19)
(3)
—
(3)
(23)
At 31 December
1
52
53
139
5
50
55
228
Amounts recorded in the income statement in
respect of balances held at year end:
- unrealised
(3)
—
(3)
(89)
4
—
4
48
- realised
3
—
3
19
—
—
—
23
(1)
Net gains on trading assets and liabilities of £69 million (2020 – net losses £66 million) were recorded in income from trading activities.
(2)
Trading assets comprise assets 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
.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
131
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 and fair value of financial instruments measured at amortised cost on the balance
sheet
.
NWB Group
NWB Plc
Items where
Items where
fair value
fair value
approximates
Carrying
Fair
Fair value hierarchy level
approximates
Carrying
Fair
Fair value hierarchy level
carrying value
value
value
Level 1
Level 2
Level 3
carrying value
value
value
Level 1
Level 2
Level 3
2021
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
Financial assets
Cash and balances at central
banks
101.2
101.2
Loans to banks
4.1
4.0
—
3.5
0.5
3.6
3.6
—
3.5
0.1
Loans to customers
287.0
283.0
—
27.6
255.4
255.4
251.3
—
27.5
223.8
Amounts due from holding
companies
and fellow subsidiaries
2.5
2.5
—
0.3
2.2
25.3
25.5
—
17.6
7.9
Other financial assets - securities
2.7
2.7
1.6
0.7
0.4
2.3
2.3
1.6
0.7
—
2020
Financial assets
Cash and balances at central
banks
63.0
62.9
Loans to banks
3.3
3.3
—
2.4
0.9
2.8
2.8
—
2.4
0.4
Loans to customers
271.6
271.1
—
23.3
247.8
238.4
237.7
—
23.2
214.5
Amounts due from holding
companies
and fellow subsidiaries
2.7
2.7
—
0.3
2.4
27.1
27.8
—
17.3
10.5
Other financial assets - securities
3.7
3.8
2.2
1.2
0.4
3.3
3.4
2.2
1.2
—
2021
Financial liabilities
Bank deposits
3.7
19.1
18.8
—
18.8
—
3.7
19.1
18.8
—
18.8
—
Customer deposits
305.4
24.1
24.3
—
17.5
6.9
270.4
22.1
22.4
—
17.5
4.9
Amounts due to holding companies
and fellow subsidiaries
2.8
42.2
42.3
—
9.8
32.5
1.8
74.6
74.6
—
22.5
52.1
Other financial liabilities
Debt securities in issue
7.2
7.2
—
3.0
4.2
6.3
6.4
—
3.0
3.4
Settlement balances
—
—
Subordinated liabilities
0.2
0.3
—
0.3
—
0.2
0.3
—
0.3
—
Notes in circulation
0.9
0.9
2020
Financial liabilities
Bank deposits
3.4
11.5
11.5
—
11.3
0.2
3.4
11.5
11.5
—
11.3
0.2
Customer deposits
253.3
40.3
40.4
—
9.2
31.2
230.0
25.3
25.4
—
9.2
16.2
Amounts due to holding companies
and fellow subsidiaries
16.8
20.8
21.1
—
8.0
13.1
16.1
53.5
54.1
—
20.2
33.9
Other financial liabilities
Debt securities in issue
7.1
7.2
—
3.1
4.1
6.3
6.4
—
3.1
3.3
Settlement balances
3.3
3.3
Subordinated liabilities
1.2
1.3
—
1.3
—
1.2
1.3
—
1.3
—
Notes in circulation
1.0
1.3
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
132
10 Financial instruments: fair value of financial instruments measured at amortised cost
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, NWB Group’s loans are segregated
into appropriate portfolios reflecting the characteristics of the
constituent loans. Two principal methods are used to estimate
fair value:
(a)
Contractual cash flows are discounted using a market
discount rate that incorporates the current spread for the
borrower or where this is not observable, the spread for
borrowers of a similar credit standing. This method is used
for portfolios where counterparties have external ratings.
(b)
Expected cash flows (unadjusted for credit losses) are
discounted at the current offer rate for the same or similar
products. The current methodology caps all loan values at
par rather than modelling clients’ option to repay loans
early. This approach is adopted for lending portfolios in
Retail Banking, Commercial Banking (SME loans) and
Private Banking in order to reflect the homogeneous
nature of these portfolios.
Debt securities and subordinated liabilities
Most debt securities are valued using quoted prices in active
markets or from quoted prices of similar financial instruments in
active markets. Fair values of the remaining population are
determined using market standard valuation techniques, such as
discounted cash flows, adjusting for own credit spreads where
appropriate.
Bank and customer deposits
Fair values of deposits are estimated using discounted cash flow
valuation techniques. Where required, methodologies can be
revised as additional information and valuation inputs become
available.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
133
11 Financial instruments - maturity analysis
Remaining maturity
The following table shows the residual maturity of financial instruments, based on contractual date of maturity
.
NWB Group
2021
2020
Less than
More than
Less than
More than
12 months
12 months
Total
12 months
12 months
Total
£m
£m
£m
£m
£m
£m
Assets
Cash and balances at central banks
101,213
—
101,213
62,983
—
62,983
Derivatives
159
2,301
2,460
197
3,091
3,288
Loans to banks - amortised cost
4,173
9
4,182
3,335
9
3,344
Loans to customers - amortised cost
78,287
208,684
286,971
64,102
207,479
271,581
Amounts due from holding companies and fellow subsidiaries
(1)
2,635
267
2,902
2,936
303
3,239
Other financial assets
4,642
24,389
29,031
4,180
33,815
37,995
Liabilities
Bank deposits
10,831
12,000
22,831
9,871
5,000
14,871
Customer deposits
328,748
692
329,440
292,631
974
293,605
Derivatives
123
3,996
4,119
336
6,216
6,552
Amounts due to holding companies and fellow subsidiaries
(2)
35,795
9,239
45,034
29,984
7,574
37,558
Other financial liabilities
3,551
3,700
7,251
6,644
3,739
10,383
Subordinated liabilities
88
123
211
313
917
1,230
Notes in circulation
904
—
904
1,012
—
1,012
Lease liabilities
203
805
1,008
142
1,256
1,398
NWB Plc
2021
2020
Less than
More than
Less than
More than
12 months
12 months
Total
12 months
12 months
Total
£m
£m
£m
£m
£m
£m
Assets
Cash and balances at central banks
101,210
—
101,210
62,878
—
62,878
Derivatives
156
2,391
2,547
197
3,241
3,438
Loans to banks - amortised cost
3,638
—
3,638
2,798
—
2,798
Loans to customers - amortised cost
67,008
188,435
255,443
51,137
187,229
238,366
Amounts due from holding companies and fellow subsidiaries
(1)
10,633
15,733
26,366
12,577
15,427
28,004
Other financial assets
4,260
24,389
28,649
3,791
33,815
37,606
Liabilities
Bank deposits
10,829
12,000
22,829
9,866
5,000
14,866
Customer deposits
291,780
690
292,470
254,317
973
255,290
Amounts due to holding companies and fellow subsidiaries
(2)
52,883
23,703
76,586
48,094
21,523
69,617
Derivatives
120
4,216
4,336
340
6,429
6,769
Other financial liabilities
3,551
2,833
6,384
6,644
2,968
9,612
Subordinated liabilities
88
117
205
313
917
1,230
Notes in circulation
904
—
904
1,266
—
1,266
Lease liabilities
194
704
898
132
1,148
1,280
(1)
Amounts due from holding companies and fellow subsidiaries relating to non-financial instruments of £617 million (2020 - £66 million) for NWB Group and £756 million (2020 – £172
million) for NWB Plc have been excluded from the tables.
(2)
Amounts due to holding companies and fellow subsidiaries relating to non-financial instruments of £102 million (2020 - £1 million) for NWB Group and £136 million (2020 – nil) for
NWB Plc have been excluded from the tables.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
134
11 Financial instruments - maturity analysis continued
Liabilities by contractual cash flows up to 20 years
The tables below show the timing of cash outflows to settle financial liabilities, prepared on the following basis:
Financial liabilities are included at the earliest date on which
the counterparty can require repayment regardless of whether
or not such early repayment results in a penalty. If repayment
is triggered by, or is subject to, specific criteria such as market
price hurdles being reached, the liability is included at the
earliest possible date that conditions could be fulfilled without
considering the probability of the conditions being met. For
example, if a structured note automatically prepays hen an
equity index exceeds a certain level, the cash outflow will be
included in the less than three months period whatever the
level of the index at year end.
The settlement date of debt securities issued by certain
securitisation vehicles consolidated by the Group depends on
when cash flows are received from the securitised assets.
Where these assets are prepayable, the timing of cash outflow
relating to securities assumes that each asset will be prepaid at
the earliest possible date.
The principal amounts of financial liabilities that are repayable
after 20 years or where the counterparty has no right to
repayment of the principal are excluded from the table along
with interest payments after 20 years.
The maturity of guarantees and commitments is based on the
earliest possible date they would be drawn in order to evaluate
NWB Group’s liquidity position.
Held-for-trading liabilities amounting to £4.1 billion (2020 - £6.4
billion) for the NWB Group and £4.4 billion (2020 - £6.6 billion)
for the bank have been excluded from the tables.
NWB Group
0-3 months
3-12 months
1-3 years
3-5 years
5-10 years
10-20 years
2021
£m
£m
£m
£m
£m
£m
Liabilities by contractual maturity up to 20 years
Bank deposits
10,828
—
—
12,003
—
—
Customer deposits
325,645
2,864
913
4
—
—
Amounts due to holding companies and fellow
subsidiaries
(1)
24,079
10,096
4,117
3,149
4,112
110
Derivatives held for hedging
5
5
53
32
24
13
Other financial liabilities
2,285
1,177
2,915
289
499
79
Subordinated liabilities
—
103
21
21
58
200
Notes in circulation
904
—
—
—
—
—
Lease liabilities
64
136
170
129
219
205
363,810
14,381
8,189
15,627
4,912
607
Guarantees and commitments notional amount
Guarantees
(2)
796
—
—
—
—
—
Commitments
(3)
78,742
—
—
—
—
—
79,538
—
—
—
—
—
2020
Liabilities by contractual maturity up to 20 years
Bank deposits
9,612
258
—
5,001
—
—
Customer deposits
287,847
4,789
955
5
18
—
Amounts due to holding companies and fellow
subsidiaries
(1)
24,562
5,679
940
4,094
2,618
106
Derivatives held for hedging
11
35
82
41
31
12
Other financial liabilities
5,368
1,286
870
2,476
397
79
Subordinated liabilities
14
344
133
37
90
315
Notes in circulation
1,012
—
—
—
—
—
Lease liabilities
40
103
233
201
358
409
328,466
12,494
3,213
11,855
3,512
921
Guarantees and commitments notional amount
Guarantees
(2)
762
—
—
—
—
—
Commitments
(3)
74,858
—
—
—
—
—
75,620
—
—
—
—
—
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
135
11 Financial instruments - maturity analysis continued
NWB Plc
0-3 months
3-12 months
1-3 years
3-5 years
5-10 years
10-20 years
2021
£m
£m
£m
£m
£m
£m
Liabilities by contractual maturity up to 20 years
Bank deposits
10,826
—
—
12,003
—
—
Customer deposits
289,509
2,033
911
4
—
—
Amounts due to holding companies and fellow
subsidiaries
(1)
31,445
17,388
6,134
9,988
11,883
377
Derivatives held for hedging
3
3
49
29
19
13
Other financial liabilities
2,285
1,177
2,915
—
—
—
Subordinated liabilities
—
103
21
21
52
200
Notes in circulation
904
—
—
—
—
—
Lease liabilities
62
129
153
123
216
199
335,034
20,833
10,183
22,168
12,170
789
Guarantees and commitments notional amount
Guarantees
(2)
742
—
—
—
—
—
Commitments
(3)
74,875
—
—
—
—
—
75,617
—
—
—
—
—
2020
Liabilities by contractual maturity up to 20 years
Bank deposits
(1)
9,607
258
—
5,001
—
—
Customer deposits
250,637
3,684
955
5
18
—
Amounts due to holding companies and fellow
subsidiaries
(1)
40,984
7,808
6,599
9,510
4,651
2,220
Derivatives held for hedging
11
32
76
36
23
11
Other financial liabilities
5,367
1,286
870
2,180
—
—
Subordinated liabilities
14
344
133
37
90
315
Notes in circulation
1,266
—
—
—
—
—
Lease liabilities
38
96
222
190
349
385
307,924
13,508
8,855
16,959
5,131
2,931
Guarantees and commitments notional amount
Guarantees
(2)
674
—
—
—
—
—
Commitments
(3)
68,636
—
—
—
—
—
69,310
—
—
—
—
—
(1)
Amounts due to holding companies and fellow subsidiaries relating to non-financial instruments have been excluded from the tables.
(2)
NWB Group is only called upon to satisfy a guarantee when the guaranteed party fails to meet its obligations. NWB Group expects most guarantees it provides to expire unused.
(3)
NWB Group has given commitments to provide funds to customers under undrawn formal facilities, credit lines and other commitments to lend subject to certain conditions being
met by the counterparty. NWB does not expect all facilities to be drawn, and some may lapse before drawdown.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
136
12 Derivatives
NWB Group uses derivatives to manage its own risk such as interest rate, foreign exchange, or credit risk or in certain customer
transactions.
NWB Group
2021
2020
Notional
Assets
Liabilities
Notional
Assets
Liabilities
£bn
£m
£m
£bn
£m
£m
Exchange rate contracts
26
180
218
25
163
528
Interest rate contracts
428
2,280
3,901
389
3,113
6,024
Credit derivatives
—
—
—
—
12
—
2,460
4,119
3,288
6,552
NWB Plc
2021
2020
Notional
Assets
Liabilities
Notional
Assets
Liabilities
£bn
£m
£m
£bn
£m
£m
Exchange rate contracts
27
184
231
26
163
631
Interest rate contracts
437
2,363
4,105
400
3,263
6,138
Credit derivatives
—
—
—
—
12
—
2,547
4,336
3,438
6,769
For accounting policy information see Accounting policies notes 10 and 15.
Refer to Note 9 for amounts due from/to fellow NatWest Group subsidiaries.
NWB Group applies hedge accounting to reduce the accounting
mismatch caused in the income statement by using derivatives
to hedge the following risks: interest rate, foreign exchange
and net investment in foreign operations.
NWB Group’s interest rate hedging relates to the management
of NWB Group’s non-trading structural interest rate risk,
caused by the mismatch between fixed interest rates and
floating interest rates on its financial instruments. NWB Group
manages this risk within approved limits. Residual risk positions
are hedged with derivatives, principally interest rate swaps.
Suitable larger fixed rate financial instruments are subject to
fair value hedging; the remaining exposure, where possible, is
hedged by derivatives designated as cash flow hedges.
Cash flow hedges of interest rate risk relate to exposures to the
variability in future interest payments and receipts due to the
movement of benchmark interest rates on forecast transactions
and on financial assets and financial liabilities. This variability in
cash flows is hedged by interest rate swaps, which convert
variable cash flows into fixed. For these cash flow hedge
relationships, the hedged items are actual and forecast variable
interest rate cash flows arising from financial assets and
financial liabilities with interest rates linked to the relevant
benchmark rates, most notably LIBOR, EURIBOR, SONIA and
the Bank of England Official Bank Rate. The variability in cash
flows due to movements in the relevant benchmark rate is
hedged; this risk component is identified using the risk
management systems of NWB Group and encompasses the
majority of cash flow variability risk.
Fair value hedges of interest rate risk involve interest rate
swaps transforming the fixed interest rate risk in financial
assets and financial liabilities to floating. The hedged risk is the
risk of changes in the hedged item’s fair value attributable to
changes in the benchmark interest rate risk component of the
hedged item. The significant benchmarks identified as risk
components are USD/GBP LIBOR, EURIBOR and SONIA. These
risk components are identified using the risk management
systems of NWB Group and encompass the majority of the
hedged item’s fair value risk.
NWB Group hedges the exchange rate risk of its net investment
in foreign currency denominated operations with currency
borrowings and forward foreign exchange contracts. NWB
Group reviews the value of the investments’ net assets,
executing hedges where appropriate to reduce the sensitivity of
capital ratios to foreign exchange rate movement. Hedge
accounting relationships will be designated where required.
Exchange rate risk also arises in NWB Group where payments
are denominated in currencies other than the functional
currency. Residual risk positions are hedged with forward
foreign exchange contracts, fixing the exchange rate the
payments will be settled in. The derivatives are documented as
cash flow hedges.
For all cash flow hedging and fair value hedge relationships
NWB Group determines that there is an adequate level of
offsetting between the hedged item and hedging instrument at
inception and on an ongoing basis. This is achieved by
comparing movements in the fair value of the expected highly
probable forecast interest cash flows/fair value of the hedged
item attributable to the hedged risk with movements in the fair
value of the expected changes in cash flows from the hedging
interest rate swap. Hedge effectiveness is assessed on a
cumulative basis over a time period management determines to
be appropriate. NWB Group uses either the actual ratio
between the hedged item and hedging instrument(s) or one
that minimises hedge ineffectiveness to establish the hedge
ratio for hedge accounting. Hedge ineffectiveness is measured
and recognised in the income statement as it arises.
IBOR reform - NWB Group in the year continued to apply, for
relationships directly affected by interest rate benchmark
reform, Interest Rate Benchmark Reform Amendments to IAS39
and IFRS 7 issued September 2019 (“Phase 1 relief”) and
Interest Rate Benchmark Reform – Phase 2 Amendments to IAS
39 and IFRS 7 issued August 2020 (“Phase 2 relief”).
Significant transitions in the year were the GBP, JPY and CHF
derivatives subject to cash flow and fair value hedging
transitioned as part of the LCH ‘big bang’ conversion in
December 2021. The swaps were restructured to reprice off
the appropriate risk free rate from the next repricing date post
31 December 2021 plus a spread adjustment. All impacted
hedge accounting relationships had their designations updated
to reflect this transition
USD cash flow and fair value hedges of interest rate risk that
mature post 30 June 2023 continue to be directly affected by
interest rate benchmark reform.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
137
12 Derivatives continued
Included in the tables above are derivatives held for hedging purposes as follows
:
NWB Group
2021
2020
Change in fair
Change in fair
value used for
value used for
hedge
hedge
Notional
Assets
Liabilities
ineffectiveness (1)
Notional
Assets
Liabilities
ineffectiveness (1)
£bn
£m
£m
£m
£bn
£m
£m
£m
Fair value hedging - interest rate contracts
32.7
462
1,273
1,200
36.7
677
2,773
(1,366)
Cash flow hedging - interest rate contracts
86.5
538
550
183
51.2
114
345
(250)
Cash flow hedging - exchange rate contracts
0.2
6
—
26
2.0
—
19
2
Net investment hedging - exchange rate
contracts
0.2
4
1
7
0.1
—
3
7
119.6
1,010
1,824
1,416
90.0
791
3,140
(1,607)
IFRS netting
(897)
(1,753)
(790)
(2,967)
113
71
1
173
NWB Plc
2021
2020
Change in fair
Change in fair
value used for
value used for
hedge
hedge
Notional
Assets
Liabilities
ineffectiveness (1)
Notional
Assets
Liabilities
ineffectiveness (1)
£bn
£m
£m
£m
£bn
£m
£m
£m
Fair value hedging - interest rate contracts
32.4
462
1,255
1,198
36.7
677
2,752
(1,366)
Cash flow hedging - interest rate contracts
86.5
538
550
183
51.2
114
345
(250)
Cash flow hedging - exchange rate contracts
0.1
5
—
25
2.0
—
19
2
119.0
1,005
1,805
1,406
89.9
791
3,116
(1,614)
IFRS netting
(897)
(1,750)
(790)
(2,967)
108
55
1
149
(1)
The change in fair value used for hedge ineffectiveness includes instruments that were derecognised in the year.
The notional of hedging instruments affected by interest rate benchmark reform is as follows:
NWB Group
NWB Plc
2021
2020
2021
2020
£bn
£bn
£bn
£bn
Fair value hedging
EURIBOR
(1)
—
5.5
—
5.4
GBP LIBOR
—
7.3
—
7.3
USD LIBOR
(2)
10.6
12.4
10.6
12.4
Cash flow hedging
EURIBOR
(1)
—
0.2
—
0.2
GBP LIBOR
—
6.8
—
6.8
USD LIBOR
(2)
1.3
0.7
1.3
0.7
(1)
In 2021 management concluded that EURIBOR is not expected to be significantly reformed 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 Annual Report and Accounts was expected to be 31
December 2021.
(3)
Notional of £17 million GBP LIBOR derivative contracts in fair value hedge relationships will convert to repricing off SONIA at the first repricing date post cessation.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
138
12 Derivatives continued
The following table shows the period in which the notional of hedging contract ends:
NWB Group
0-3 months
3-12 months
1-3 years
3-5 years
5-10 years
10-20 years
20+ years
Total
2021
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
Fair value hedging
Hedging assets - interest rate risk
0.7
1.6
3.0
4.8
5.3
3.6
3.2
22.2
Hedging liabilities - interest rate risk
0.5
—
3.9
2.6
3.5
—
—
10.5
Cash flow hedging
Hedging assets - interest rate risk
0.3
—
5.5
16.0
4.5
—
—
26.3
Average fixed interest rate
(%)
2.09
—
0.53
0.48
0.53
—
—
0.52
Hedging liabilities - interest rate risk
8.3
15.2
30.0
4.4
2.3
—
—
60.2
Average fixed interest rate
(%)
0.45
0.21
0.30
0.40
0.74
—
—
0.32
Hedging liabilities - exchange rate
risk
0.1
0.1
—
—
—
—
—
0.2
Net investment hedging
Exchange rate risk
0.2
—
—
—
—
—
—
0.2
NWB Group
0-3 months
3-12 months
1-3 years
3-5 years
5-10 years
10-20 years
20+ years
Total
2020
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
Fair value hedging
Hedging assets - interest rate risk
1.1
1.5
3.8
6.4
7.7
3.8
3.5
27.8
Hedging liabilities - interest rate risk
—
0.3
0.6
5.7
2.3
—
—
8.9
Cash flow hedging
Hedging assets - interest rate risk
—
0.1
2.3
2.2
2.3
—
—
6.9
Average fixed interest rate
(%)
—
2.18
0.47
0.46
0.40
—
—
0.46
Hedging liabilities - interest rate risk
—
10.6
27.2
3.6
2.9
—
—
44.3
Average fixed interest rate
(%)
—
0.59
0.28
0.48
0.41
—
—
0.38
Hedging liabilities - exchange rate
risk
0.1
1.2
—
0.7
—
—
—
2.0
Net investment hedging
Exchange rate risk
0.1
—
—
—
—
—
—
0.1
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
139
12 Derivatives continued
The table below analyses assets and liabilities, including intercompany, subject to hedging derivatives:
NWB Group
Impact on
Change in fair value
Impact of hedged
Carrying value
hedged items
used as a basis to
items ceased to be
of hedged assets
included in
determine
adjusted for hedging
and liabilities
carrying value
ineffectiveness (1)
gains or losses
2021
£m
£m
£m
£m
Fair value hedging - interest rate
Loans to customers – amortised cost
2,270
58
(186)
27
Other financial assets - securities
25,936
506
(1,396)
—
Total
28,206
564
(1,582)
27
Other financial liabilities - debt securities in issue
7,828
144
288
—
Subordinated liabilities
2,374
(41)
107
—
Total
10,202
103
395
—
Cash flow hedge - interest rate
Loans to banks and customers – amortised cost
26,329
623
Other financial assets - securities
28
1
Total
26,357
624
Customer deposits
59,605
(770)
Other financial liabilities - debt securities in issue
560
(6)
Total
60,165
(776)
Cash flow hedge - exchange rate
Subordinated liabilities
—
(15)
Other
200
(10)
Total
200
(25)
2020
Fair value hedging - interest rate
Loans to customers – amortised cost
2,076
224
140
29
Other financial assets - securities
31,499
2,102
1,479
—
Total
33,575
2,326
1,619
29
Other financial liabilities - debt securities in issue
6,185
432
(172)
—
Subordinated liabilities
2,918
153
(92)
—
Total
9,103
585
(264)
—
Cash flow hedge - interest rate
Loans to banks and customers – amortised cost
6,870
(37)
Other financial assets - securities
38
(39)
Total
6,908
(76)
Customer deposits
43,472
292
Other financial liabilities - debt securities in issue
804
7
Total
44,276
299
Cash flow hedge - exchange rate
Subordinated liabilities
1,831
—
Other
151
(2)
Total liabilities
1,982
(2)
For the note to this table refer to the following page.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
140
12 Derivatives continued
NWB Plc
Impact on
Change in fair value
Impact of hedged
Carrying value (CV)
hedged items
used as a basis to
items ceased to be
of hedged assets
included in
determine
adjusted for hedging
and liabilities
carrying value
ineffectiveness (1)
gains or losses
2021
£m
£m
£m
£m
Fair value hedging - interest rate
Loans to customers – amortised cost
2,178
42
(179)
—
Other financial assets - securities
25,936
506
(1,397)
—
Total
28,114
548
(1,576)
—
Other financial liabilities - debt securities in issue
7,588
148
283
—
Subordinated liabilities
2,374
(41)
107
—
Total
9,962
107
390
—
Cash flow hedge - interest rate
Loans to banks and customers – amortised cost
26,329
623
Other financial assets - securities
28
1
Total
26,357
624
Customer deposits
59,605
(770)
Other financial liabilities - debt securities in issue
560
(6)
Total
60,165
(776)
Cash flow hedge - exchange rate
Subordinated liabilities
—
(15)
Other
150
(9)
Total
150
(24)
2020
Fair value hedging - interest rate
Loans to customers – amortised cost
1,935
202
139
1
Other financial assets - securities
31,499
2,102
1,479
—
Total
33,434
2,304
1,618
1
Other financial liabilities - debt securities in issue
6,185
432
(172)
—
Subordinated liabilities
2,918
153
(92)
—
Total
9,103
585
(264)
—
Cash flow hedge - interest rate
Loans to banks and customers – amortised cost
6,870
(37)
Other financial assets - securities
38
(39)
Total
6,908
(76)
Customer deposits
43,472
292
Other financial liabilities - debt securities in issue
804
7
Total
44,276
299
Cash flow hedge - exchange rate
Subordinated liabilities
1,831
—
Other
151
(2)
Total
1,982
(2)
(1)
The change in fair value used for ineffectiveness includes instruments that were derecognised in the year.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
141
12 Derivatives continued
The following risk exposures will be affected by interest rate benchmark reform (notional, hedged adjustment):
NWB Group
NWB Plc
2021
2020
2021
2020
Hedged
Hedged
Hedged
Hedged
Notional
adjustment
Notional
adjustment
Notional
adjustment
Notional
adjustment
£bn
£m
£bn
£m
£bn
£m
£bn
£m
Fair value hedging
EURIBOR
(1)
—
—
5.5
173
—
—
5.4
161
GBP LIBOR
—
—
7.3
731
—
—
7.3
722
USD LIBOR
(2)
10.6
147
12.4
270
10.6
147
12.4
270
Cash flow hedging
EURIBOR
(1)
—
—
0.2
1
—
—
0.2
1
USD LIBOR
(2)
1.3
19
0.7
(18)
1.3
19
0.7
(18)
BOE Base rate
(3)
—
—
6.8
93
—
—
6.8
93
(1)
In 2021 management concluded that EURIBOR is not expected to be significantly reformed 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 where either the hedged item or the hedging instrument is subject to the IBOR reform.
The following shows analysis of the pre-tax cash flow hedge reserve and foreign exchange hedge reserve:
NWB Group
2021
2020
Cash flow
Foreign exchange
Cash flow
Foreign exchange
hedge reserve
hedge reserve
hedge reserve
hedge reserve
£m
£m
£m
£m
Continuing
Interest rate risk
(2)
—
(151)
—
Foreign exchange risk
(1)
6
20
(19)
2
De-designated
Interest rate
(6)
—
(12)
—
Foreign exchange risk
(1)
—
7
—
3
Total
(2)
27
(182)
5
NWB Plc
2021
2020
Cash flow
Foreign exchange
Cash flow
Foreign exchange
hedge reserve
hedge reserve
hedge reserve
hedge reserve
£m
£m
£m
£m
Continuing
Interest rate risk
(2)
—
(151)
—
Foreign exchange risk
5
17
(19)
2
De-designated
Interest rate
(6)
—
(12)
—
Total
(3)
17
(182)
2
For the notes to these tables refer to the following page.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
142
12 Derivatives continued
NWB Group
2021
2020
Foreign
Foreign
Cash flow
exchange
Cash flow
exchange
hedge reserve
hedge reserve
hedge reserve
hedge reserve
£m
£m
£m
£m
Amount recognised in equity
Interest rate risk
99
—
(274)
—
Foreign exchange risk
3
22
(1)
(5)
Total
102
22
(275)
(5)
Amount transferred from equity to earnings
Interest rate risk to net interest income
57
—
53
—
Interest rate risk to non-interest income
(2)
(2)
—
—
—
Foreign exchange risk to net interest income
3
—
—
—
Foreign exchange risk to non-interest income
17
—
—
—
Foreign exchange risk to operating expenses
3
—
4
—
Total
78
—
57
—
NWB Plc
2021
2020
Foreign
Foreign
Cash flow
exchange
Cash flow
exchange
hedge reserve
hedge reserve
hedge reserve
hedge reserve
£m
£m
£m
£m
Amount recognised in equity
Interest rate risk
99
—
(274)
—
Foreign exchange risk
1
15
(1)
(5)
Total
100
15
(275)
(5)
Amount transferred from equity to earnings
Interest rate risk to net interest income
58
—
53
—
Interest rate risk to non-interest income
(2)
(2)
—
—
—
Foreign exchange risk to net interest income
3
—
—
—
Foreign exchange risk to non-interest income
17
—
—
—
Foreign exchange risk to operating expenses
3
—
4
—
Total
79
—
57
—
(1)
There was £2 million reclassified from the cash flow reserve to earnings due to forecasted cash flows that are no longer expected to occur.
Hedge ineffectiveness recognised in other operating income comprised:
NWB Group
2021
2020
£m
£m
Fair value hedging
(Losses)/gains on the hedged items attributable to the hedged risk
(1,187)
1,355
Gains/(Losses) on the hedging instruments
1,200
(1,366)
Fair value hedging ineffectiveness
13
(11)
Cash flow hedging
- Interest rate risk
32
(27)
Cash flow hedging ineffectiveness
32
(27)
Total
45
(38)
The main sources of ineffectiveness for interest rate risk hedge accounting relationships are:

the effect of the counterparty credit risk on the fair value of the interest rate swap, which is not reflected in the fair value of the
hedged item attributable to the change in interest rate; and

upfront present values on the hedging derivatives where hedge accounting relationships have been designated after the trade
date.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
143
13 Loan impairment provisions
Loan exposure and impairment metrics
The table below summarises loans and related credit impairment measures within the scope of ECL framework.
NWB Group
NWB Plc
31 December
31 December
31 December
31 December
2021
2020
2021
2020
£m
£m
£m
£m
Loans - amortised cost
Stage 1
264,656
217,575
236,255
192,484
Stage 2
26,003
57,864
22,492
49,473
Stage 3
2,985
3,254
2,548
2,438
Inter-Group
(1)
2,555
2,685
25,362
27,092
Total
296,199
281,378
286,657
271,487
ECL provisions
(2)
Stage 1
231
365
207
305
Stage 2
1,105
2,060
1,026
1,808
Stage 3
1,167
1,285
1,037
1,093
Inter-Group
1
2
8
25
2,504
3,712
2,278
3,231
ECL provision coverage
(3)
Stage 1
(%)
0.09
0.17
0.09
0.16
Stage 2
(%)
4.25
3.56
4.56
3.65
Stage 3
(%)
39.10
39.49
40.70
44.83
Inter-Group
(%)
0.04
0.07
0.03
0.09
0.85
1.33
0.87
1.31
Impairment (releases)/losses
ECL (release)/charge
(4)
Stage 1
(995)
(69)
(945)
(51)
Stage 2
(30)
1,839
48
1,638
Stage 3
213
397
183
327
Third party
(812)
2,167
(714)
1,914
Inter-Group
(1)
2
(18)
20
(813)
2,169
(732)
1,934
Amounts written-off
388
517
352
487
(1)
NWB Group’s intercompany assets are classified in Stage 1.
(2)
Includes £3 million (2020 – £5 million) related to assets classified as FVOCI.
(3)
ECL provisions coverage is calculated as total ECL provisions divided by third party loans – amortised cost and FVOCI.
(4)
Includes a £1 million
charge (2020 – £9
million charge) related
to other financial assets,
of which a £2
million release (2020 –
£2 million charge) related
to assets classified as
FVOCI;
and a £13 million release (2020 – £13 million charge) related to contingent liabilities.
(5)
The table shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to Financial instruments within the scope of the IFRS 9 ECL
framework for further details. Other financial assets within the scope of the IFRS 9 ECL framework were cash and balances at central banks totaling £100.6 billion (2020 – £62.0
billion) and debt securities of £28.2 billion (2020 – £37.1 billion).
Credit risk enhancement and mitigation
For information on credit risk enhancement and mitigation held
as security, refer to Risk and capital management – credit risk
enhancement and mitigation section.
Critical accounting policy: Loan impairment provisions
Accounting policies note 11 sets out how the expected loss
approach is applied. At 31 December 2021, customer loan
impairment provisions amounted to £2,504 million (2020 -
£3,712 million). A loan is impaired when there is objective
evidence that the cash flows will not occur in the manner
expected when the loan was advanced. Such evidence includes
changes in the credit rating of a borrower, the failure to make
payments in accordance with the loan agreement, significant
reduction in the value of any security, breach of limits or
covenants, and observable data about relevant macroeconomic
measures.
The impairment loss is the difference between the carrying
value of the loan and the present value of estimated future
cash flows at the loan's original effective interest rate.
The measurement of credit impairment under the IFRS
expected loss model depends on management’s assessment of
any potential deterioration in the creditworthiness of the
borrower, its modelling of expected performance and the
application of economic forecasts. All three elements require
judgments that are potentially significant to the estimate of
impairment losses. For further information and sensitivity
analysis, refer to Risk and capital management – measurement
uncertainty and ECL sensitivity analysis section.
IFRS 9 ECL model design principles
Refer to Credit risk – IFRS 9 ECL model design principles
section for further details.
Approach for multiple economic scenarios (MES)
The base scenario plays a greater part in the calculation of
ECL than the approach to MES. Refer to Credit risk – economic
loss drivers – probability weightings of scenarios section for
further details.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
144
14 Investments in Group undertakings
Investments in Group undertakings are carried at cost less impairment losses. Movements during the year were as follows
:
NWB Plc
2021
2020
£m
£m
At 1 January
2,374
2,394
Currency translation and other adjustments
(7)
14
Additional investments in Group undertakings
13
16
Impairment of investments
(61)
(50)
At 31 December
2,319
2,374
The recoverable amount of investments in Group undertakings is the higher of net asset value as a proxy for fair value less cost to
sell or value in use. Where recoverable value is based on net asset value, the fair value measurement is categorised as Level 3 of
the fair value hierarchy. The carrying value of Investments in Group undertakings at 31 December 2021 is supported by the
respective recoverable values of the entities.
In 2021, additions relate to additional investments in World Learning Limited and Silvermere Holdings Limited. 2020 additions were
related to the investments in Esme Loans Limited and Silvermere Holdings Limited.
In 2021, Impairment of investments includes a £42 million impairment of the company’s investment in Ulster Bank Limited due to a
decline in its net asset value mainly driven by dividends paid during the year and losses incurred by the business. The impairment
in 2020 was also related to Ulster Bank Limited.
The value in use review as at 31 December 2021 did not indicate the need for a further impairment in the investment in Coutts &
Company. Future value in use is primarily affected by changes in profitability, and changes in discount rate. Adverse changes
would lead to value in use falling below carrying value. The most likely cause for this would be a failure to meet budgeted targets,
including cost targets, or external downgrades in the UK economy. If the carrying value is also not supported by the net asset
value, an impairment will be recorded. Beneficial changes would lead to a reversal of historic impairment.
The principal subsidiary undertakings
(2)
of the company are shown below and are wholly-owned directly or indirectly through
intermediate holding companies. Their capital consists of ordinary shares and additional Tier 1 notes which are unlisted. All those
subsidiary undertakings are included in NWB Group’s consolidated financial statements and have an accounting reference date of
31 December.
Country of incorporation
Nature of
and principal area
business
of operations
Coutts & Company
(1)
Private banking
Great Britain
Lombard North Central PLC
Leasing
Great Britain
(1)
Coutts & Company is incorporated with unlimited liability.
(2)
The business of Ulster Bank Limited, which was included in the principal subsidiary undertakings in 2020, was transferred to NatWest Bank Plc on 3 May 2021. The planned removal
of the Ulster Bank Limited license remains subject to regulatory application and approval.
For accounting policy information see Accounting policies note 16.
For full information on all related undertakings refer to Note 36.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
145
15 Other financial assets
NWB Group
Debt securities
Central and local government
Other
Equity
UK
US
Other
debt
Total
shares
Loans
Total
2021
£m
£m
£m
£m
£m
£m
£m
£m
Mandatory fair value through profit or loss
—
—
—
—
—
11
215
226
Fair value through other comprehensive income
10,118
6,088
2,845
6,885
25,936
2
210
26,148
Amortised cost
1,582
—
—
1,075
2,657
—
—
2,657
Total
11,700
6,088
2,845
7,960
28,593
13
425
29,031
2020
Mandatory fair value through profit or loss
—
—
—
—
—
—
476
476
Fair value through other comprehensive income
16,089
7,870
3,747
6,147
33,853
—
—
33,853
Amortised cost
2,096
—
—
1,570
3,666
—
—
3,666
Total
18,185
7,870
3,747
7,717
37,519
—
476
37,995
NWB Plc
Debt securities
Central and local government
Other
Equity
UK
US
Other
debt
Total
shares
Loans
Total
2021
£m
£m
£m
£m
£m
£m
£m
£m
Mandatory fair value through profit or loss
—
—
—
—
—
11
215
226
Fair value through other comprehensive income
10,118
6,088
2,845
6,885
25,936
2
210
26,148
Amortised cost
1,582
—
—
693
2,275
—
—
2,275
Total
11,700
6,088
2,845
7,578
28,211
13
425
28,649
2020
Mandatory fair value through profit or loss
—
—
—
—
—
—
476
476
Fair value through other comprehensive income
16,089
7,870
3,747
6,147
33,853
—
—
33,853
Amortised cost
2,096
—
—
1,181
3,277
—
—
3,277
Total
18,185
7,870
3,747
7,328
37,130
—
476
37,606
For accounting policy information see Accounting policies note 10.
16 Other assets
NWB Group
NWB Plc
2021
2020
2021
2020
£m
£m
£m
£m
Intangible assets
(Note 17)
1,232
1,092
1,100
977
Property, plant and equipment
(Note 18)
3,644
3,671
1,989
1,968
Pension schemes in net surplus
(Note 5)
7
2
—
—
Assets of disposal groups
37
17
34
8
Prepayments
342
307
310
264
Accrued income
150
134
76
79
Tax recoverable
30
23
5
—
Deferred tax
(Note 7)
1,268
1,289
1,244
1,248
Acceptances
58
90
55
84
Other assets
419
418
370
339
7,187
7,043
5,183
4,967
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
146
17 Intangible assets
NWB Group
2021
2020
Goodwill
Other (1)
Total
Goodwill
Other (1)
Total
£m
£m
£m
£m
£m
£m
Cost
At 1 January
623
2,570
3,193
664
2,276
2,940
Currency translation and other adjustments
—
29
29
—
—
—
Additions
—
465
465
—
340
340
Disposals and write-off of fully amortised assets
—
(50)
(50)
(41)
(46)
(87)
At 31 December
623
3,014
3,637
623
2,570
3,193
Accumulated amortisation and impairment
At 1 January
564
1,537
2,101
606
1,269
1,875
Currency translation and other adjustments
—
31
31
(1)
2
1
Disposals and impairment of fully amortised assets
—
(28)
(28)
(41)
(24)
(65)
Amortisation charge for the year
—
299
299
—
281
281
Impairment of intangible assets
—
2
2
—
9
9
At 31 December
564
1,841
2,405
564
1,537
2,101
Net book value at 31 December
59
1,173
1,232
59
1,033
1,092
NWB Plc
2021
(1)
2020
£m
£m
Cost
At 1 January
2,478
2,192
Currency translation and other adjustments
24
—
Additions
433
316
Disposals and write-off of fully amortised assets
(46)
(30)
At 31 December
2,889
2,478
Accumulated amortisation
At 1 January
1,502
1,229
Currency translation and other adjustments
24
—
Disposals and write-off of fully amortised assets
(26)
(9)
Charge for the year
289
272
Impairment of intangible assets
—
9
At 31 December
1,789
1,501
Net book value at 31 December
1,100
977
(1)
Principally internally generated software.
Intangible assets and goodwill are reviewed for indicators of
impairment. Impairment testing involves the comparison of the
carrying value of each cash-generating unit (CGU) with its
recoverable amount. The carrying values of the segments
reflect the equity allocations made by management which are
consistent with NatWest Group’s capital targets.
Recoverable amount is the higher of fair value less costs of
disposal and value in use. Fair value is the price that would be
received to sell an asset in an orderly transaction between
market participants. Value in use is the present value of
expected future cash flows from the CGU.
The recoverable amounts for all CGUs at 31 December 2021
were based on value in use, using management's latest five-
year revenue and cost forecasts. These are discounted cash
flow projections over five years. The forecast is then
extrapolated in perpetuity using a long-term growth rate to
compute a terminal value, which comprises the majority of the
value in use. The long-term growth rates have been based on
expected growth of the CGUs. The pre-tax risk discount rates
are based on those observed to be applied to businesses
regarded as peers of the CGUs.
For accounting policy information see Accounting policies notes
4 and 5.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
147
18 Property, plant and equipment
NWB Group
Investment
Property, plant
Operating
properties
and equipment
leases
Total
2021
£m
£m
£m
£m
Cost or valuation
At 1 January
760
6,954
1,129
8,843
Transfers to disposal groups
—
(71)
—
(71)
Transfers from fellow subsidiaries
—
3
—
3
Currency translation and other adjustments
(64)
13
—
(51)
Additions
144
767
98
1,009
Disposals and write-off of fully depreciated assets
—
(696)
(132)
(828)
At 31 December
840
6,970
1,095
8,905
Accumulated impairment, depreciation and amortisation
At 1 January
—
4,643
529
5,172
Transfers to disposal groups
—
(39)
—
(39)
Currency translation and other adjustments
(1)
—
260
—
260
Disposals and write-off of fully depreciated assets
—
(507)
(100)
(607)
Charge for the year
—
312
140
452
Impairment of property, plant and equipment
—
23
—
23
At 31 December
—
4,692
569
5,261
Net book value at 31 December
840
2,278
526
3,644
2020
Cost or valuation
At 1 January
868
7,124
1,120
9,112
Transfers to disposal groups
(71)
(6)
—
(77)
Transfers from/(to) holding company and fellow subsidiaries
—
15
—
15
Currency translation and other adjustments
26
(5)
—
21
Additions
11
299
132
442
Disposals and write-off of fully depreciated assets
(74)
(473)
(123)
(670)
At 31 December
760
6,954
1,129
8,843
Accumulated impairment, depreciation and amortisation
At 1 January
—
4,542
467
5,009
Transfers to disposal groups
—
(5)
—
(5)
Transfers from/(to) holding company and fellow subsidiaries
—
7
—
7
Currency translation and other adjustments
—
(5)
—
(5)
Disposals and write-off of fully depreciated assets
—
(302)
(83)
(385)
Charge for the year
—
306
145
451
Impairment of property, plant and equipment
—
100
—
100
At 31 December
—
4,643
529
5,172
Net book value at 31 December
760
2,311
600
3,671
(1)
Other adjustments include the effect of the purchase of freeholds for properties where the Group was the primary leaseholder.
Investment property valuations principally employ present value
techniques that discount expected cash flows. Expected cash
flows reflect rental income, occupancy and residual market
values; valuations are sensitive to changes in these factors. The
investment property fair value measurements are categorised
as level 3. A 5% change in the most sensitive assumption,
residual values, is £27 million (2020: £22 million) on the value of
Investment property.
Valuations were carried out by qualified surveyors who are
members of the Royal Institution of Chartered Surveyors, or an
equivalent overseas body; property with a fair value of £236
million (2020 - £270 million) was valued by independent
valuersfor the purposes of year end valuations.
For accounting policy information see Accounting policies notes
5 and 6.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
148
18 Property, plant and equipment continued
NWB Plc
Investment
Property, plant
properties
and equipment
Total
2021
£m
£m
£m
Cost or valuation
At 1 January
6
6,346
6,352
Transfers to disposal groups
—
(71)
(71)
Transfers from subsidiaries and fellow subsidiaries
—
132
132
Currency translation and other adjustments
—
(5)
(5)
Additions
—
735
735
Disposals and write-off of fully depreciated assets
—
(658)
(658)
At 31 December
6
6,479
6,485
Accumulated impairment, depreciation and amortisation
At 1 January
—
4,384
4,384
Transfers to disposal groups
—
(39)
(39)
Transfers from subsidiaries and fellow subsidiaries
—
83
83
Currency translation and other adjustments
(1)
—
239
239
Disposals and write-off of fully depreciated assets
—
(476)
(476)
Charge for the year
—
282
282
Impairment of property, plant and equipment
—
23
23
At 31 December
—
4,496
4,496
Net book value at 31 December
6
1,983
1,989
2020
Cost or valuation
At 1 January
—
6,525
6,525
Transfers to disposal groups
6
5
11
Transfers from/(to) holding company and fellow subsidiaries
—
(10)
(10)
Currency translation and other adjustments
—
—
—
Additions
—
249
249
Disposals and write-off of fully depreciated assets
—
(423)
(423)
At 31 December
6
6,346
6,352
Accumulated impairment, depreciation and amortisation
At 1 January
—
4,283
4,283
Transfers to disposal groups
—
2
2
Transfers from/(to) holding company and fellow subsidiaries
(7)
(7)
Currency translation and other adjustments
—
—
—
Disposals and write-off of fully depreciated assets
—
(261)
(261)
Charge for the year
—
270
270
Impairment of property, plant and equipment
—
97
97
At 31 December
—
4,384
4,384
Net book value at 31 December
6
1,962
1,968
(1)
Other adjustments include the effect of the purchase of freeholds for properties where the Group was the primary leaseholder.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
149
19 Other financial liabilities
NWB Group
NWB Plc
2021
2020
2021
2020
£m
£m
£m
£m
Bank deposits - held-for-trading
66
1
66
1
Customer deposits - held-for-trading
33
2
33
2
Settlement balances
(1)
—
3,297
—
3,297
Debt securities in issue - amortised cost
7,152
7,083
6,285
6,312
Total
7,251
10,383
6,384
9,612
(1)
In 2020 £3.1 billion pertains to purchase price consideration of Metro Bank’s mortgage portfolio which was settled in February 2021.
For accounting policy information see Accounting policies notes 10 and 14.
20 Subordinated liabilities
NWB Group
NWB Plc
2021
2020
2021
2020
£m
£m
£m
£m
Dated loan capital
—
309
—
309
Undated loan capital
93
778
87
778
Preference shares
118
143
118
143
211
1,230
205
1,230
(1)
The table above excludes amounts due to holding company and fellow subsidiaries of £3,074 million (2020 - £3,309 million) for NWB Group and £3,074 million (2020 - £3,309 million)
for NWB Plc. Refer to intercompany balances in Note 10
.
The preference shares issued by NWB Plc are classified as liabilities; these securities remain subject to the capital maintenance
rules of the Companies Act 2006.
For accounting policy information see Accounting policies notes 10 and 14.
The following tables analyse third party subordinated liabilities:
2021
2020
Dated loan capital
Capital
Treatment
£m
£m
National Westminster Bank Plc
£300 million 6.50% notes 2021 (not callable)
Tier 2
—
309
—
309
(1)
In the event of certain changes in tax laws, dated 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 approval.
(2)
Except as stated above, claims in respect of NWB Group’s dated loan capital are subordinated to the claims of other creditors. None of NWB Group’s dated loan capital is secured.
(3)
Interest on all floating rate subordinated notes is calculated by reference to market rates
.
2021
2020
Undated loan capital
Capital Treatment
£m
£m
National Westminster Bank Plc
US$193 million floating rate notes (callable semi-annually)
(5)
Tier 2
—
142
US$229 million floating rate notes (callable semi-annually)
(5)
Tier 2
—
168
US$285 million floating rate notes (callable semi-annually)
(5)
Tier 2
—
209
€178 million floating rate notes (callable quarterly)
(5)
Tier 2
—
160
€10 million floating rate notes (callable quarterly)
(5)
Tier 2
—
10
£53 million 7.125% notes (callable every five years from October 2022)
Tier 2
56
55
£35 million 11.50% notes (callable December 2022)
(1)
Tier 2
31
34
87
778
(1)
Exchangeable at the option of the issuer into 8.392% (gross) non-cumulative preference shares of £1 each of NWB Plc at any time.
(2)
NWB Group can satisfy interest payment obligations by issuing sufficient ordinary shares to appointed Trustees to enable them, on selling these shares, to settle the interest
payment.
(3)
Except as stated above, claims in respect of NWB Group's undated loan capital are subordinated to the claims of other creditors. None of NWB Group's undated loan capital is
secured.
(4)
In the event of certain changes in tax laws, undated loan capital issues may be redeemed in whole, but not in part, at the option of NWB Group, at the principal amount thereof plus
accrued interest, subject to prior regulatory approval.
(5)
Interest on all floating rate subordinated notes is calculated by reference to market rates
.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
150
20 Subordinated liabilities continued
2021
2020
Preference shares
(1)
Capital
Treatment
£m
£m
National Westminster Bank Plc
£140 million 9.00% Series A Non-cumulative preference shares of £1 (not callable)
Tier 1
118
143
118
143
(1)
Further details of the contractual terms of the preference shares are given in Note 22.
Capital
2021
2020
Redemptions in the period (values as at date of transaction)
Treatment
£m
£m
National Westminster Bank Plc
£300 million 6.5% subordinated notes 2021 (not callable)
Tier 2
300
—
€10 million floating rate notes (callable quarterly)
Upper Tier 2
9
—
€178 million floating rate notes (callable quarterly)
Upper Tier 2
152
—
US$193 million floating rate notes (callable semi-annually)
Upper Tier 2
138
—
US$229 million floating rate notes (callable semi-annually)
Upper Tier 2
167
—
US$285 million floating rate notes (callable semi-annually)
Upper Tier 2
201
—
£35 million 11.5% notes (callable December 2022) (partial redemption)
Upper Tier 2
3
—
£140 million 9% cumulative preference shares of £1 (not callable)
Tier 1
24
—
994
—
The following tables analyse the intercompany subordinated liabilities.
NWB Group and Bank
2021
2020
£m
£m
Dated loan capital
2,374
2,609
Undated loan capital
700
700
Preference shares
—
—
3,074
3,309
2021
2020
Dated loan capital
Capital
treatment
£m
£m
National Westminster Bank Plc
US$1,900 million subordinated loan capital 2024
Tier 2
—
1,519
US$750 million 3.754% dated notes 2029
Tier 2
567
580
£500 million 3.622% dated notes 2030 (callable once in August 2025)
Tier 2
491
510
£1,000 million 2.105% dated notes 2031 (callable November 2026)
Tier 2
975
—
€411.4 million 3.622% dated notes 2032 (callable September 2027)
Tier 2
341
—
2,374
2,609
Undated loan capital
National Westminster Bank Plc
£700 million floating rate notes (callable quarterly from September 2016)
Tier 2
700
700
700
700
2021
2020
Issuances in the period (values as at date of transaction)
Capital
treatment
£m
£m
National Westminster Bank Plc
£500 million 3.622% dated notes 2030 (callable once in August 2025)
Tier 2
—
500
£1,000 million 2.105% dated notes 2031 (callable anytime from November 2026)
Tier 2
1,000
—
€411.4 million 1.043% dated notes 2032 (callable anytime from September 2027)
Tier 2
351
—
1,351
500
Redemptions in the period (values as at date of transaction)
National Westminster Bank Plc
US$1,900 million subordinated loan capital 2024
Tier 2
1,357
—
1,357
—
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
151
21 Other liabilities
NWB Group
NWB Plc
2021
2020
2021
2020
£m
£m
£m
£m
Lease liabilities (Note 23)
1,008
1,398
898
1,280
Provisions for liabilities and charges
640
943
604
868
Retirement benefit liabilities (Note 5)
48
57
12
13
Accruals
1,185
790
1,051
686
Deferred income
204
213
186
190
Current tax
21
160
1
154
Deferred tax (Note 7)
209
166
—
—
Acceptances
58
90
55
84
Other liabilities
561
618
288
214
3,934
4,435
3,095
3,489
NWB Group
Litigation
Financial
Customer
and other
commitments
redress (1)
regulatory
Property (3)
and guarantees
Other (2)
Total
Provisions for liabilities and charges
£m
£m
£m
£m
£m
£m
At 1 January 2021
440
12
208
106
177
943
Expected credit losses impairment release
—
—
—
(41)
—
(41)
Currency translation and other movements
—
—
—
(2)
—
(2)
Charge to income statement
108
270
93
—
141
612
Release to income statement
(18)
(8)
(109)
—
(89)
(224)
Provisions utilised
(232)
(270)
(26)
—
(120)
(648)
At 31 December 2021
298
4
166
63
109
640
NWB Plc
Litigation
Financial
Customer
and other
commitments
redress (1)
regulatory
Property (3)
and guarantees
Other (2)
Total
Provisions for liabilities and charges
£m
£m
£m
£m
£m
£m
At 1 January 2021
432
1
197
95
143
868
Expected credit losses impairment release
—
—
(37)
—
(37)
Currency translation and other movements
2
—
5
2
6
15
Charge to income statement
99
270
90
—
133
592
Release to income statement
(14)
—
(107)
—
(83)
(204)
Provisions utilised
(226)
(270)
(22)
—
(112)
(630)
At 31 December 2021
293
1
163
60
87
604
(1)
Includes payment protection insurance provision which reflects the estimated cost of PPI redress attributable to claims prior to the Financial Conduct Authority (FCA) complaint
deadline of 29 August 2019. All pre-deadline complaints have been processed which removes complaint volume estimation uncertainty from the provision estimate. NatWest Group
continues to conclude remaining bank-identified closure work and conclude cases with the Financial Ombudsmen Service.
(2)
Other materially comprises provisions relating to restructuring costs.
(3)
Property provision materially includes dilapidation provisions. Release in property provision includes the effect of purchase of freeholds for properties where the group was the
primary leaseholder.
Provisions are liabilities of uncertain timing or amount and are recognised when there is a present obligation as a result of a past
event, the outflow of economic benefit is probable and the outflow can be estimated reliably. Any difference between the final
outcome and the amounts provided will affect the reported results in the period when the matter is resolved.
For accounting policy information see Accounting policies note 8.
Critical accounting policy: Provisions for liabilities
The key judgment is involved in determining whether a present obligation exists. There is often a high degree of uncertainty and
judgment is based on the specific facts and circumstances relating to individual events in determining whether there is a present
obligation. Judgment is also involved in estimation of the probability, timing and amount of any outflows. Where NWB Group can
look to another party such as an insurer to pay some or all of the expenditure required to settle a provision, any reimbursement is
recognised when, and only when, it is virtually certain that it will be received.
Estimates
-
Provisions are liabilities of uncertain timing or amount and are recognised when there is a present obligation as a result
of a past event, the outflow of economic benefit is probable and the outflow can be estimated reliably. Any difference between the
final outcome and the amounts provided will affect the reported results in the period when the matter is resolved.
-
Customer redress: Provisions reflect the estimated cost of redress attributable to claims where it is determined that a present
obligation exists.
-
Litigation and other regulatory: NWB Group is engaged in various legal proceedings, both in the UK and in overseas
jurisdictions, including the US. For further information in relation to legal proceedings and discussion of the associated
uncertainties, refer to Note 27.
-
Property: This includes provision for contractual costs such as rates associated with vacant properties.
-
Other provisions: These materially comprise provisions for onerous contracts and restructuring costs. Onerous contract
provisions comprise an estimate of the costs involved in fulfilling the terms and conditions of contracts net of any expected
benefits to be received. This includes provision for contractual costs such as rates associated with vacant properties.
Redundancy and restructuring provisions comprise the estimated cost of restructuring, including redundancy costs where an
obligation exists.
Background information on all material provisions is given in Note 27.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
152
22 Share capital and reserves
2021
2020
Number of shares - 000s
Allotted, called up and fully paid
£m
£m
2021
2020
Ordinary shares of £1
1,678
1,678
1,678,177
1,678,177
Non-cumulative preference shares of £1
116
140
116,349
140,000
Ordinary shares
No ordinary shares were issued during 2021 or 2020.
In 2021, NWB plc paid an ordinary dividend of £1.6 billion to
NWH Ltd (2020 - nil).
Preference shares
The 9% non-cumulative preference shares Series A of £1 each
are non-redeemable.
The holders of sterling preference shares are entitled, on the
winding-up of NWB Plc, to priority over the ordinary
shareholders as regards payment of capital. Otherwise the
holders of preference shares are not entitled to any further
participation in the profits or assets of NWB Plc and accordingly
these shares are classified as non-equity shares.
The holders of sterling preference shares are not entitled to
receive notice of, attend, or vote at any general meeting unless
the business of the meeting includes the consideration of a
resolution for the winding-up of NWB Plc or the sale of the
whole of the business of NWB Plc or any resolution directly
affecting any of the special rights or privileges attached to any
of the classes of preference shares.
Under IFRS, NWB Plc preference shares are classified as debt
and are included in subordinated liabilities on the balance sheet
(Note 20).
In June 2021, the company purchased 23,650,959 9% non-
cumulative preference shares Series A (nominal value
£23,650,959) at a purchase price of 175% for the total
consideration of £41,778,334 by way of a tender offer launched
on 7 June 2021 inviting holders to tender all such securities for
purchase by the company for cash.
Paid-in equity
Comprises equity instruments issued by NWB Plc other than
those legally constituted as shares.
Additional Tier 1 Instruments issued by NWB Plc having the
legal form of debt are classified as equity under IFRS. The
coupons on these Instruments are non-cumulative and payable
at NWB Plc’s discretion.
Capital recognised for regulatory purposes cannot be
redeemed without Prudential Regulation Authority consent. This
includes ordinary shares, preference shares and additional Tier
1 Instruments.
Reserves
Under UK companies legislation, when shares are redeemed or
purchased wholly or partly out of NWB Plc’s profits, the amount
by which NWB Plc’s issued share capital is diminished must be
transferred to the capital redemption reserve. The capital
maintenance provisions of UK companies legislation apply to
the capital redemption reserve as if it were part of NWB Plc’s
paid up share capital.
UK law prescribes that only reserves of NWB Plc are taken into
account for the purpose of making distributions and the
permissible applications of the share premium account and
capital redemption reserve of £631 million (2020 - £608 million)
included within other reserves.
NWB Plc optimises capital efficiency by maintaining reserves in
subsidiaries, including regulated entities. Certain preference
shares and subordinated debt are also included within
regulatory capital. The remittance of reserves to the parent
company or the redemption of shares or subordinated capital
by regulated entities may be subject to maintaining the capital
resources required by the relevant regulator.
For accounting policy information see Accounting policies note
14.
2021
2020
£m
£m
Additional Tier 1 instruments
US$2,000 billion 3.8495% instruments callable
August 2023
US$1,300 billion 6.49% instruments callable August
2023
US$750 thousand 4.3517% instruments callable
December 2031
GBP£400 thousand 3.9438% instruments callable
September 2028
1,436
-
541
400
1,436
934
-
-
2,377
2,370
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
153
23 Leases
Lessees
The NWB Group is party to lease contracts as lessee to
support its operations. The following table provides information in respect
of those lease contracts as lessee
.
NWB Group
2021
2020
£m
£m
Amounts recognised in consolidated income statement
Interest payable
(30)
(33)
Depreciation
(1)
(117)
(170)
Rental expense on short term leases
—
(1)
Income from subleasing right-of-use assets
12
14
NWB Group
NWB Plc
2021
2020
2021
2020
£m
£m
£m
£m
Amounts recognised on balance sheet
Right of use assets included in property, plant and equipment
(2),(3)
603
779
503
671
Additions to right of use assets
67
67
55
60
Lease liabilities
(3),(4)
(1,008)
(1,398)
(898)
(1,280)
The total cash outflow for leases for NWB Group was £149 million (2020: £168 million) and for NWB Plc £138 million (2020: £151
million). This included payment of principal for NWB Group of £126 million (2020: £135 million) and NWB Plc of £114 million (2020:
£122 million). These amounts are included in the operating activities in cash flow statement.
(1)
Depreciation includes impairment of right of use assets of £29 million (2020 - £80 million).
(2)
Includes right of use asset for property, plant and equipment of £9 million (2020 - £8 million) and depreciation of £4 million (2020 - £2 million).
(3)
Includes the effect of the purchase of freeholds for properties where the Group was the primary leaseholder.
(4)
Contractual cashflows of lease liabilities is shown in Note 11.
Lessor
Acting as a lessor, NWB Group provides asset finance to its customers. It purchases plant, equipment and intellectual property,
renting them to customers under lease arrangements that, depending on their terms, qualify as either operating or finance leases.
NWB Group
2021
2020
Amounts included in consolidated income statement
£m
£m
Finance leases
Finance income on the net investment in leases
293
266
Operating leases
Lease income
169
168
The following table shows the reconciliation of undiscounted finance lease receivables to net investment in finance leases:
NWB Group
NWB Plc
2021
2020
2021
2020
Amount receivable under finance leases
£m
£m
£m
£m
Within 1 year
3,252
2,978
271
22
1 to 2
years
2,019
2,095
138
195
2 to 3 years
1,433
1,521
55
266
3 to 4 years
748
943
21
101
4 to 5 years
420
438
20
33
After 5 years
1,356
1,617
54
75
Lease payments total
9,228
9,592
559
692
Unguaranteed residual values
225
232
—
—
Future drawdowns
(21)
(22)
—
—
Unearned income
(856)
(1,034)
(15)
(20)
Present value of lease payments
8,576
8,768
544
672
Impairments
(142)
(191)
(13)
(15)
Net investment in finance leases
8,434
8,577
531
657
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
154
23 Leases continued
The following tables show undiscounted lease receipts due from operating leases:
NWB Group
2021
2020
Amounts receivable under operating leases receivables
£m
£m
Within 1 year
131
143
1 to 2 years
92
112
2 to 3 years
50
79
3 to 4 years
23
34
4 to 5 years
11
14
After 5 years
9
11
Total
316
393
NWB Group
2021
2020
£m
£m
Nature of operating lease assets on the balance sheet
Transportation
282
327
Cars and light commercial vehicles
21
28
Other
223
245
526
600
Fair value of investment properties under operating lease are £820 million (2020 - £741 million) and had lease income of £54 million
(2020 - £58 million). The following table shows undiscounted lease receivables from investment properties
:
2021
2020
Amounts receivable under investment properties
£m
£m
Within 1 year
62
63
1 to 2 years
61
124
2 to 3 years
58
51
3 to 4 years
56
73
4 to 5 years
51
85
After 5 years
300
121
Total
588
517
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
155
24 Structured entities
A structured entity (SE) is an entity that has been designed
such that voting or similar rights are not the dominant factor in
deciding who controls the entity, for example when any voting
rights relate to administrative tasks only and the relevant
activities are directed by means of contractual arrangements.
SEs are usually established for a specific, limited purpose, they
do not carry out a business or trade and typically have no
employees. They take a variety of legal forms - trusts,
partnerships and companies - and fulfil many different
functions. As well as being a key element of securitisations, SEs
are also used in fund management activities to segregate
custodial duties from the fund management advice.
Consolidated structured entities
Securitisations
In a securitisation, assets, or interests in a pool of assets, are
transferred generally to an SE which then issues liabilities to
third party investors. The majority of securitisations are
supported through liquidity facilities or other credit
enhancements. NWB Group arranges securitisations to facilitate
client transactions and undertakes own-asset securitisations to
sell or to fund portfolios of financial assets.
NWB Group also acts as an underwriter and depositor in
securitisation transactions in both client and proprietary
transactions.
NWB Group’s involvement in client securitisations takes a
number of forms. It may: sponsor or administer a securitisation
programme; provide liquidity facilities or programme-wide
credit enhancement; and purchase securities issued by the
vehicle.
Other credit risk transfers securitisations
NWB Group also transfers credit risk on originated loans and
mortgages without the transfer of the assets to a SE. As part of
this, NWB Group enters into credit derivative and financial
guarantee contracts with consolidated SEs. At 31 December
2021, debt securities in issue by such SEs (and held by third
parties) were £867 million (2020 - £772 million). The associated
loans and mortgages at 31 December 2021 were £7,137 million
(2020 - £10,027 million). At 31 December, ECL in relation to
non-defaulted assets was reduced by £28 million (2020 - £183
million) as a result of financial guarantee contracts with
consolidated SEs.
Covered bond programme
Certain loans to customers have been assigned to bankruptcy remote limited liability partnerships to provide security for issues of
debt securities by NWB Group. NWB Group retains all of the risks and rewards of these loans. The partnerships are consolidated by
NWB Group, the loans retained on NWB Group’s balance sheet and the related covered bonds included within debt securities in
issue of the NWB Group. At 31 December 2021, £8,267 million of loans to customers have been assigned to bankruptcy remote
limited liability partnerships to provide security for issues of debt securities by the NWB Group of £2,886 million (2020 - loans to
customers - £10,012 million, debt securities in issue – £3,020 million).
Unconsolidated structured entities
NWB Group’s interest in unconsolidated structured entities is analysed below.
2021
2020
Asset backed
Investment
Asset backed
Investment
securitisation
funds
securitisation
funds
vehicles
and other
Total
vehicles
and other
Total
£m
£m
£m
£m
£m
£m
Non-trading assets
Loans to customers
5
208
213
15
216
231
Other financial assets
964
—
964
1,480
—
1,480
Total
969
208
1,177
1,495
216
1,711
Liquidity facilities/loan commitments
1
55
56
1
65
66
Maximum exposure
970
263
1,233
1,496
281
1,777
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
156
25 Asset transfers
Transfers that do not qualify for
derecognition
NWB Group enters into securities repurchase agreements and
securities lending transactions under which it transfers
securities in accordance with normal market practice.
Generally, the agreements require additional collateral to be
provided if the value of the securities falls below a
predetermined level.
Under standard terms for repurchase transactions in the UK
and US markets, the recipient of collateral has an unrestricted
right to sell or re-pledge it, subject to returning equivalent
securities on settlement of the transaction.
Securities sold under repurchase transactions are not
derecognised if NWB Group retains substantially all the risks
and rewards of ownership. The fair value (and carrying value)
of securities transferred under such repurchase transactions
included on the balance sheet, are set out below. All of these
securities could be sold or re-pledged by the holder.
For accounting policy information see Accounting policies note
12.
NWB Group
NWB Plc
2021
2020
2021
2020
The following assets have failed derecognition
(1)
£m
£m
£m
£m
Loans to banks - amortised cost
38
5
38
5
Loans to customers - amortised cost
1,837
39
1,837
39
Other financial assets
10,813
11,438
10,813
11,438
12,688
11,482
12,688
11,482
(1)
Associated liabilities were £10,783 million for both NWB Group and NWB Plc (2020- £11,391 million).
Assets pledged as collateral
NWB Group pledges collateral with its counterparties in respect of derivative liabilities and bank and stock borrowings
.
NWB Group
NWB Plc
2021
2020
2021
2020
Assets pledged against liabilities
£m
£m
£m
£m
Loans to banks - amortised cost
62
49
—
—
Loans to customers - amortised cost
20,108
9,675
20,108
9,675
Other financial assets
(1)
2,429
2,710
2,429
2,710
22,599
12,434
22,537
12,385
(1)
Includes amount pledged for pension derivatives.
The following table analyses assets that have been transferred but have failed the derecognition rules under IFRS 9 and therefore
continue to be recognised on NWB Plc’s balance sheet
.
2021
2020
Asset type
(1)
£m
£m
UK mortgages - covered bond programme
8,267
10,012
(1)
The associated liabilities are £8,166 million (2020 - £9,916 million).
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
157
26 Capital resources
Regulatory capital is assessed against minimum requirements that are set out under the Capital Requirements Regulation on a
legal entity and consolidated basis. Transitional arrangements on the phasing in of end-point capital resources are set by the
relevant regulatory authority.
The capital resources under the PRA transitional basis for NWB Plc are set out below.
2021
2020
Shareholders' equity (excluding non-controlling interests)
£m
£m
Shareholders’ equity
19,166
18,464
Other equity instruments
(2,377)
(2,370)
16,789
16,094
Regulatory adjustments and deductions
Cash flow hedging reserve
2
133
Deferred tax assets
(541)
(523)
Prudential valuation adjustments
(12)
(9)
Goodwill and other intangible assets
(703)
(525)
Instruments of financial sector entities where the institution has a significant investment
(607)
(499)
Significant investments in excess of secondary capital
(73)
—
Foreseeable charges
(993)
—
Foreseeable pension contributions
(365)
(266)
Adjustment under IFRS 9 transition arrangements
429
1,019
Other regulatory adjustments
(2)
—
(2,865)
(670)
CET1 capital
13,924
15,424
Additional Tier 1 (AT1) capital
Qualifying instruments and related share premium
2,377
2,370
Qualifying instruments and related share premium subject to phase out
—
58
2,377
2,428
Tier 1 capital
Instruments of financial sector entities where the institution has a significant investment
(262)
(262)
Tier 1 capital
16,039
17,590
Qualifying Tier 2 capital
Qualifying instruments and related share premium
3,156
3,386
Tier 2 deductions
Instruments of financial sector entities where the institution has a significant investment
(367)
(332)
Other regulatory adjustments
117
121
(250)
(211)
Tier 2 capital
2,906
3,175
Total regulatory capital
18,945
20,765
In the management of capital resources, NWB Plc is governed
by NatWest Group's policy to maintain a strong capital base, to
expand it as appropriate and to utilise it efficiently throughout
its activities to optimise the return to shareholders while
maintaining a prudent relationship between the capital base
and the underlying risks of the business. In carrying out this
policy, NatWest Group has regard to the supervisory
requirements of the PRA. The PRA uses capital ratios as a
measure of capital adequacy in the UK banking sector,
comparing a bank's capital resources with its risk-weighted
assets (the assets and off-balance sheet exposures are
weighted to reflect the inherent credit and other risks); by
international agreement, the Pillar 1 capital ratios, excluding
capital buffers should be not less than 8% with a Common
equity Tier 1 component of not less than 4%. NWB Plc has
complied with the PRA’s capital requirements throughout the
year.
A number of subsidiaries and sub-groups within NWB Group,
principally banking entities, are subject to various individual
regulatory capital requirements in the UK and overseas.
Furthermore, the payment of dividends by subsidiaries and the
ability of members of NatWest Group to lend money to other
members of NatWest Group may be subject to restrictions such
as local regulatory or legal requirements, the availability of
reserves and financial and operating performance.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
158
27 Memorandum items
Contingent liabilities and commitments
The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31
December 2021. Although NWB Group is exposed to credit risk in the event of non-performance of the obligations undertaken by
customers, the amounts shown do not, and are not intended to, provide any indication of NWB Group’s expectation of future
losses
.
For accounting policy information see Accounting policies note 8.
NWB Group
NWB Plc
2021
2020
2021
2020
£m
£m
£m
£m
Contingent liabilities and commitments
Guarantees
796
762
742
674
Other contingent liabilities
1,193
1,404
1,187
1,361
Standby facilities, credit lines and other commitments
79,826
75,625
75,936
69,372
81,815
77,791
77,865
71,407
(1)
In the normal course of business, NWB Plc guarantees specified third party liabilities of certain subsidiaries; it also gives undertakings that individual subsidiaries will fulfil their
obligations to third parties under contractual or other arrangements which are excluded from the table above.
Banking commitments and contingent obligations, which have
been entered into on behalf of customers and for which there
are corresponding obligations from customers, are not included
in assets and liabilities. NWB Group’s maximum exposure to
credit loss, in the event of its obligation crystallising and all
counterclaims, collateral or security proving valueless, is
represented by the contractual nominal amount of these
instruments included in the table above. These commitments
and contingent obligations are subject to NWB Group’s normal
credit approval processes.
Guarantees - NWB Group gives guarantees on behalf of
customers. A financial guarantee represents an irrevocable
undertaking that NWB Group will meet a customer’s specified
obligations to a third party if the customer fails to do so. The
maximum amount that NWB Group could be required to pay
under a guarantee is its principal amount as disclosed in the
table above. NWB Group expects most guarantees it provides
to expire unused.
Other contingent liabilities - these include standby letters of
credit, supporting customer debt issues and contingent
liabilities relating to customer trading activities such as those
arising from performance and customs bonds, warranties and
indemnities.
Standby facilities and credit lines - under a loan commitment
NWB Group agrees to make funds available to a customer in
the future. Loan commitments, which are usually for a specified
term, may be unconditionally cancellable or may persist,
provided all conditions in the loan facility are satisfied or
waived.
Commitments to lend include commercial standby facilities and
credit lines, liquidity facilities to commercial paper conduits and
unutilised overdraft facilities.
Other commitments - these include documentary credits, which
are commercial letters of credit providing for payment by NWB
Group to a named beneficiary against presentation of specified
documents, forward asset purchases, forward deposits placed
and undrawn note issuance and revolving underwriting
facilities, and other short-term trade related transactions.
Indemnity deed
In April 2019, NWM Plc and NWB Plc entered into a cross
indemnity agreement for losses incurred within the entities in
relation to business transferred to or from the ring-fenced bank
under the NatWest Group’s structural re-organisation. Under
the agreement, NWM Plc is indemnified by NWB Plc against
losses relating to the NWB Plc transferring businesses and ring-
fenced bank obligations and NWB Plc is indemnified by NWM
Plc against losses relating to NWM Plc transferring businesses
and non ring-fenced bank obligations with effect from the
relevant transfer date.
Capital Support Deed
NWB Plc, together with certain other subsidiaries of NatWest
Holdings Limited, is party to a Capital Support Deed (CSD).
Under the terms of the CSD, the Bank may be required, if
compatible with its legal obligations, to make distributions on,
or repurchase or redeem, its ordinary shares. The amount of
this obligation is limited to the NWB Plc’s capital resources in
excess of the capital and financial resources needed to meet its
regulatory requirements. NWB Plc may also be obliged to make
onward distribution to its ordinary shareholders of dividends or
other capital distributions received from subsidiaries that are
party to the CSD. The CSD also provides that, in certain
circumstances, funding received by NWB Plc from other
parties to the CSD becomes immediately repayable, such
repayment being limited to the NWB Plc’s available resources.
Contractual obligations for future expenditure not provided for in the accounts
The following table shows contractual obligations for future expenditure not provided for in the accounts at the year end
.
NWB Group
NWB Plc
2021
2020
2021
2020
£m
£m
£m
£m
Capital expenditure on other property, plant and equipment
14
7
13
7
Contracts to purchase goods or services
(1)
677
722
568
603
691
729
581
610
(1)
Of which due within 1 year: £298 million (2020 - £263 million) for NWB Group and £273 million (2020 - £239 million) for NWB Plc.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
159
27 Memorandum items continued
Trustee and other fiduciary activities
In its capacity as trustee or other fiduciary role, NWB Group
may hold or place assets on behalf of individuals, trusts,
companies, pension schemes and others. The assets and their
income are not included in NWB Group's financial statements.
NWB Group earned fee income of £216 million (2020 - £185
million) from these activities.
The Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS), the UK's
statutory fund of last resort for customers of authorised
financial services firms, pays compensation if a firm is unable to
meet its obligations. The FSCS funds compensation for
customers by raising management expenses levies and
compensation levies on the industry. In relation to protected
deposits, each deposit-taking institution contributes towards
these levies in proportion to their share of total protected
deposits on 31 December of the year preceding the scheme
year (which runs from 1 April to 31 March), subject to annual
maxima set by the Prudential Regulation Authority. In addition,
the FSCS has the power to raise levies on a firm that has
ceased to participate in the scheme and is in the process of
ceasing to be authorised for the costs that it would have been
liable to pay had the FSCS made a levy in the financial year it
ceased to be a participant in the scheme.
Litigation and regulatory matters
NWB Plc and its subsidiary and associated undertakings (‘NWB
Group’) are party to legal proceedings and involved in
regulatory matters, including as the subject of investigations
and other regulatory and governmental action (Matters) in the
United Kingdom (UK), the United States (US), the European
Union (EU) and other jurisdictions.
NWB Group recognises a provision for a liability in relation to
these Matters when it is probable that an outflow of economic
benefits will be required to settle an obligation resulting from
past events, and a reliable estimate can be made of the amount
of the obligation.
In many of these Matters, it is not possible to determine
whether any loss is probable, or to estimate reliably the amount
of any loss, either as a direct consequence of the relevant
proceedings and regulatory matters or as a result of adverse
impacts or restrictions on NWB Group’s reputation, businesses
and operations. Numerous legal and factual issues may need to
be resolved, including through potentially lengthy discovery and
document production exercises and determination of important
factual matters, and by addressing novel or unsettled legal
questions relevant to the proceedings in question, before a
liability can reasonably be estimated for any claim. NWB Group
cannot predict if, how, or when such claims will be resolved or
what the eventual settlement, damages, fine, penalty or other
relief, if any, may be, particularly for claims that are at an early
stage in their development or where claimants seek substantial
or indeterminate damages.
There are situations where NWB Group may pursue an
approach that in some instances leads to a settlement
agreement. This may occur in order to avoid the expense,
management distraction or reputational implications of
continuing to contest liability, or in order to take account of the
risks inherent in defending claims or regulatory matters, even
for those Matters for which NWB Group believes it has credible
defences and should prevail on the merits. The uncertainties
inherent in all such Matters affect the amount and timing of
any potential outflows for both Matters with respect to which
provisions have been established and other contingent
liabilities. It is not practicable to provide an aggregate estimate
of potential liability for our legal proceedings and regulatory
matters as a class of contingent liabilities.
The future outflow of resources in respect of any Matter may
ultimately prove to be substantially greater than or less than
the aggregate provision that NWB Group has recognised.
Where (and as far as) liability cannot be reasonably estimated,
no provision has been recognised. NWB Group expects that in
future periods, additional provisions, settlement amounts and
customer redress payments will be necessary, in amounts that
are expected to be substantial in some instances. Please refer
to Note 21 for information on material provisions.
We have provided information below on the procedural history
of certain Matters, where we believe appropriate, to aid the
understanding of the Matter.
For a discussion of certain risks associated with NWB Group’s
litigation and regulatory matters, see the Risk factor relating to
legal, regulatory and governmental actions and investigations
set out on page 185.
Litigation
London Interbank Offered Rate (LIBOR) and other rates
litigation
In January 2019, a class action antitrust complaint was filed in
the United States District Court for the Southern District of New
York alleging that the defendants (USD ICE LIBOR panel banks
and affiliates) have conspired to suppress USD ICE LIBOR from
2014 to the present by submitting incorrect information to ICE
about their borrowing costs. The NatWest Group defendants
are NatWest Group plc, NatWest Markets Plc, NatWest Markets
Securities Inc., and NWB Plc. The defendants made a motion to
dismiss this case, which was granted by the court in March
2020. One plaintiff sought to appeal the dismissal, but on 14
February 2022, the United States Court of Appeals for the
Second Circuit (US Court of Appeals) dismissed the appeal
because that plaintiff lacks standing to maintain the appeal.
In August 2020, a complaint was filed in the United States
District Court for the Northern District of California by several
United States consumer borrowers against the USD ICE LIBOR
panel banks and their affiliates, alleging that the normal
process of setting USD ICE LIBOR amounts to illegal price-
fixing, and also that banks in the United States have illegally
agreed to use LIBOR as a component of price in variable
consumer loans. The NatWest Group defendants are NatWest
Group plc, NatWest Markets Plc, NatWest Markets Securities
Inc., and NWB Plc. The plaintiffs seek damages and to prevent
the enforcement of LIBOR-based instruments through
injunction. Defendants have filed a motion to dismiss, which
remains pending.
Offshoring VAT assessments
HMRC issued protective tax assessments in 2018 against
NatWest Group plc totalling £143 million relating to unpaid VAT
in respect of the UK branches of two NatWest Group
companies registered in India. NatWest Group formally
requested reconsideration by HMRC of their assessments, and
this process was completed in November 2020. HMRC upheld
their original decision and, as a result, NatWest Group plc
lodged an appeal with the Tax Tribunal and an application for
judicial review with the High Court of Justice
of England and Wales, both in December 2020. In order to
lodge the appeal with the Tax Tribunal, NatWest Group plc was
required to pay the £143 million to HMRC, and payment was
made in December 2020. The appeal and the application for
judicial review have both been stayed pending resolution of a
separate case involving another bank.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
160
27 Memorandum items continued
Litigation and regulatory matters
US Anti-Terrorism Act litigation
NWB Plc is a defendant in lawsuits filed in the United States
District Court for the Eastern District of New York by a number
of US nationals (or their estates, survivors, or heirs) who were
victims of terrorist attacks in Israel. The plaintiffs allege that
NWB Plc is liable for damages arising from those attacks
pursuant to the US Anti-Terrorism Act because NWB Plc
previously maintained bank accounts and transferred funds for
the Palestine Relief & Development Fund, an organisation which
plaintiffs allege solicited funds for Hamas, the alleged
perpetrator of the attacks.
In March 2019, the trial court granted summary judgment in
favour of NWB Plc. In April 2021, the US Court of Appeals
affirmed the trial court’s judgment in favour of NWB Plc. In
September 2021, the plaintiffs filed a petition seeking
discretionary review by the United States Supreme Court and
that petition remains pending.
Regulatory matters (including investigations and customer
redress programmes)
NWB Group’s financial condition can be affected by the actions
of various governmental and regulatory authorities in the UK,
the US, the EU and elsewhere. NWB Group and/or NatWest
Group have engaged, and will continue to engage, in
discussions with relevant governmental and regulatory
authorities, including in the UK, the US, the EU and elsewhere,
on an ongoing and regular basis, and in response to informal
and formal inquiries or investigations, regarding operational,
systems and control evaluations and issues including those
related to compliance with applicable laws and regulations,
including consumer protection, investment advice, business
conduct, competition/anti-trust, VAT recovery, anti-bribery,
anti-money laundering and sanctions regimes.
Any matters discussed or identified during such discussions and
inquiries may result in, among other things, further inquiry or
investigation, other action being taken by governmental and
regulatory authorities, increased costs being incurred by NWB
Group, remediation of systems and controls, public or private
censure, restriction of NWB Group’s business activities and/or
fines. Any of the events or circumstances mentioned in this
paragraph or below could have a material adverse effect on
NWB Group, its business, authorisations and licences,
reputation, results of operations or the price of securities issued
by it, or lead to material additional provisions being taken.
NWB Group is co-operating fully with the matters described
below.
Investigations
FCA investigation into NatWest Group’s compliance with the
Money Laundering Regulations 2007
Following an FCA investigation, commenced in 2017, into
potential breaches of the UK Money Laundering Regulations
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 November
2013 and 23 June 2016, and regulations 8(3) and 14(1) between
8 November 2012 and 23 June 2016. These regulations
required the firm to determine, conduct and demonstrate risk
sensitive due diligence and ongoing monitoring of its
relationships with its customers for the purposes of preventing
money laundering. The offences relate to operational
weaknesses between 2012 and 2016, during which period NWB
Plc did not adequately monitor the accounts of a UK
incorporated customer. In December 2021, NWB Plc was fined
£264.8 million, incurred a confiscation order and was ordered
to pay costs. This was met by NWB Plc from existing provisions,
with a small additional provision taken in Q4 2021.
Other material adverse collateral consequences may occur as
a result of this matter, as further described in the Risk factor
relating to legal, regulatory and governmental actions and
investigations set out on page 185.
Systematic Anti-Money Laundering Programme assessment
In December 2018, the FCA commenced a Systematic Anti-
Money Laundering Programme assessment of NatWest Group.
In August 2019, the FCA instructed NatWest Group to appoint a
Skilled Person under section 166 of the Financial Services and
Markets Act 2000 to provide assurance on financial crime
governance arrangements in relation to two financial crime
change programmes. The Skilled Person’s final report was
received in January 2022.
Customer redress programmes
FCA review of NatWest Group’s treatment of SMEs
In 2014, the FCA appointed an independent Skilled Person
under section 166 of the Financial Services and Markets Act
2000 to review NatWest Group’s treatment of SME customers
whose relationship was managed by NatWest Group’s Global
Restructuring Group (GRG) in the period 1 January 2008 to 31
December 2013. In response to the Skilled Person’s final report
and update in 2016, NatWest Group announced redress steps
for SME customers in the UK and the Republic of Ireland that
were in GRG between 2008 and 2013. These steps were (i) an
automatic refund of certain complex fees; and (ii) a new
complaints process, overseen by an independent third party.
Both processes have now been completed. Accordingly,
NatWest Group retains only a small residual provision at
December 2021.
Investment advice review
In October 2019, the FCA notified NatWest Group of its
intention to appoint a Skilled Person under section 166 of the
Financial Services and Markets Act 2000 to conduct a review of
whether NatWest Group’s past business review of investment
advice provided during 2010 to 2015 was subject to
appropriate governance and accountability and led to
appropriate customer outcomes. The Skilled Person’s review
has concluded and, after discussion with the FCA, NatWest
Group is now conducting additional review / remediation work.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
161
28 Analysis of the net investment in business interests and intangible assets
NWB Group
NWB Plc
2021
2020
2021
2020
£m
£m
£m
£m
Value recognised for business transferred from fellow subsidiary
—
(47)
—
(22)
Additional investments in subsidiaries and associates
(11)
—
(23)
(16)
Net assets/liabilities purchased
(1)
(3,256)
(19)
(2,666)
(19)
Net outflow of cash in respect of purchases
(3,267)
(66)
(2,689)
(57)
Net assets/liabilites sold
29
14
27
14
Profit on disposal of net assets
2
6
2
6
Net inflow of cash in respect of disposals
31
20
29
20
Net cash expenditure on intangible assets
(465)
(341)
(433)
(316)
Net outflow of cash
(3,701)
(387)
(3,093)
(353)
(1)
NWB Group Net assets/liabilities purchased is the settlement of the 2020 purchase of Loans and advances to customers from Metro Bank plc of £3.2 billion. NWB Plc Net
assets/liabilities purchased includes the Metro Bank plc transaction as for NWB Group, and the transfer of Ulster Bank Limited business including cash and cash equivalents of
£266m, Loans and advances to customers of £3.5 billion, and Customer deposits of £8.5 billion.
29 Analysis of changes in financing during the year
NWB Group
NWB Plc
Called up share
Called up share
capital, share
capital, share
premium, and
Subordinated
premium, and
Subordinated
paid-in equity
liabilities
MRELs
paid-in equity
liabilities
MRELs
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January
6,273
6,273
4,539
4,029
3,908
3,116
6,273
6,273
4,539
4,029
3,597
2,805
Issue of paid-in equity
941
—
941
—
Redemption of paid-in equity
(934)
—
(934)
—
Issue of
subordinated liabilities
1,351
500
1,351
500
Redemption of subordinated liabilities
(2,468)
—
(2,468)
—
Interest on subordinated liabilities
(150)
(179)
(150)
(179)
Issue of MRELs
1,931
809
1,679
809
Interest on MRELs
(169)
(161)
(164)
(155)
Net cash inflow/(outflow) from financing
7
—
(1,267)
321
1,762
648
7
—
(1,267)
321
1,515
654
Effects of foreign exchange
(53)
(75)
66
(173)
(54)
(75)
73
(174)
Changes in fair value of subordinated liabilities
and MRELs
(195)
82
(225)
155
(195)
82
(223)
155
Interest on subordinated liabilities and MRELs
139
182
176
162
139
182
171
157
Loss on redemption of own debt
117
—
117
—
Other
—
—
5
—
—
—
—
—
—
—
—
—
At 31 December
6,280
6,273
3,285
4,539
5,687
3,908
6,280
6,273
3,279
4,539
5,133
3,597
30 Analysis of cash and cash equivalents
In the cash flow statement, cash and cash equivalents comprises cash and loans to banks with an original maturity of less than
three months that are readily convertible to known amounts of cash and subject to insignificant risk of change in value.
NWB Group
NWB Plc
2021
2020
2021
2020
£m
£m
£m
£m
At 1 January
- cash
62,983
27,457
62,878
26,377
- cash equivalents
5,065
5,809
4,316
7,243
68,048
33,266
67,194
33,620
Net increase in cash and cash equivalents
38,597
34,782
38,352
33,574
At 31 December
106,645
68,048
105,546
67,194
Comprising:
Cash and balances at central banks
101,213
62,983
101,210
62,878
Other financial assets
7
165
7
165
Loans to banks including intragroup balances
(1)
5,425
4,900
4,329
4,151
Cash and cash equivalents
106,645
68,048
105,546
67,194
(1)
Includes cash collateral posted with bank counterparties in respect of derivative liabilities of £7 million (2020 - £165 million).
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
162
31 Directors’ and key management remuneration
The composition of NWB Plc’s board of directors is aligned to its intermediate holding company NatWest Holdings Ltd. The
directors are remunerated for their services to NatWest Group as a whole, and their remuneration cannot be apportioned in
respect of their services to NWB Plc.
The directors’ emoluments in the table below represent the NWH Group emoluments of the directors.
2021
2020
Directors' remuneration
£000
£000
Non-executive directors emoluments
1,955
2,078
Chairman and executive directors emoluments
4,688
4,349
6,643
6,427
Amounts receivable under long-term incentive plans and share option plans
549
609
7,192
7,036
The
total
emoluments
and
amounts
receivable
under
long-term
incentive
plans
and
share
option
plans
of
the
highest
paid
director
were £2,808,000 (2020 - £2,561,000).
No directors accrued benefits under defined benefit schemes or defined contribution schemes during 2021 and 2020. The executive
directors may participate in the NatWest Group's long-term incentive plans, executive share option and sharesave schemes. Where
directors of NWB Plc are also directors of NatWest Group plc, details of their share interests can be found in the 2020 Annual
Report and Accounts of NatWest Group plc, in line with regulations applying to NatWest Group plc as a premium listed company.
Compensation of key management
The aggregate remuneration of directors and other members of key management
(1)
during the year was as follows:
2021
2020
£000
£000
Short-term benefits
15,604
15,099
Post-employment benefits
280
363
Share-based payments
1,967
2,707
17,851
18,169
(1)
Key management comprises members of the NWH Ltd Executive Committee.
32 Transactions with directors and key management
At 31 December 2021, amounts outstanding in relation to transaction, arrangements and agreements entered into by authorised
institutions in NWB Group, as defined in UK legislation, were £7,032,240 in respect of loans to eight persons who were directors of
NWB Plc at any time during the financial period.
For the purposes of IAS 24 ‘Related Party Disclosures’, key management comprise directors of NWB Plc and members of the NWB
Plc Executive Committee. Amounts in the table below are attributed to each person at their highest level of NatWest Group key
management.
2021
2020
£000
£000
Loans to customers - amortised cost
8,632
5,105
Customer deposits
45,719
39,164
Key management have banking relationships with NatWest Group entities which are entered into in the normal course of business
and on substantially the same terms, including interest rates and security, as for comparable transactions with other persons of a
similar standing or, where applicable, with other employees. These transactions did not involve more than the normal risk of
repayment or present other unfavourable features. Key management had no reportable transactions or balances with the holding
companies.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
163
33 Related parties
UK Government
The UK Government through HM Treasury is the ultimate
controlling party of NatWest Group plc. The UK Government’s
shareholding is managed by UK Government Investments
Limited, a company wholly owned by the UK Government. As a
result the UK Government and UK Government controlled
bodies are related parties of the Group.
At 31 December 2021, HM Treasury’s holding in NatWest
Group’s ordinary shares was 52.96%.
NWB Group enters into transactions with many of these bodies.
Transactions include the payment of: taxes, principally UK
corporation tax (Note 7) and value added tax; national
insurance contributions; local authority rates; and regulatory
fees and levies; together with banking transactions such as
loans and levysits undertaken in the normal course of banker-
customer relationships.
Bank of England facilities
NWB Group may participate in a number of schemes operated
by the Bank of England in the normal course of business.
Members of NWB Group that are UK authorised institutions are
required to maintain non-interest bearing (cash ratio) deposits
with the Bank of England amounting to 0.406% of their average
eligible liabilities in excess of £600 million. They also have
access to Bank of England reserve accounts: sterling current
accounts that earn interest at the Bank of England base rate.
NWB Plc guarantees certain liabilities of NWH Group to the
Bank of England.
Other related parties
(a)
In their roles as providers of finance, NWB Group
companies provide development and other types of capital
support to businesses. These investments are made in the
normal course of business. In some instances, the
investment may extend to ownership or control over 20% or
more of the voting rights of the investee company.
(b)
NWB Group recharges NatWest Group Pension Fund with
the cost of administration services incurred by it. The
amounts involved are not material to NWB Group.
(c)
In accordance with IAS 24, transactions or balances
between NWB Group entities that have been eliminated on
consolidation are not reported.
(d)
The captions in the primary financial statements of the
parent company include amounts attributable to
subsidiaries. These amounts have been disclosed in
aggregate in the relevant notes to the financial statements.
Other net income/(expenses) represents the share of post-
tax results of associates and joint ventures, profit (or loss)
on disposal of subsidiaries, associates and joint ventures,
and gains on acquisitions.
The table below discloses transactions between NWB Group and subsidiaries of NatWest Group.
2021
2020
£m
£m
Interest receivable
33
2
Interest payable
(220)
(272)
Fees and commissions receivable
31
—
Fees and commissions payable
(6)
(2)
Other administrative expenses
34
12
(128)
(260)
34 Ultimate holding company
NWB Group’s ultimate holding company is NatWest Group plc and its intermediate parent company is NatWest Holdings Limited
(‘NWH Ltd’ or ‘the intermediate holding company’).
NatWest Group plc is incorporated in the United Kingdom and
registered in Scotland and NWH Ltd is registered in England.
As at
31 December 2021, NatWest Group
plc heads the largest group in which NWB Group is consolidated. Copies of the consolidated
accounts of both companies may be obtained from
Legal, Governance & Regulatory Affairs, NatWest Group plc, Gogarburn, PO
Box 1000, Edinburgh EH12 1HQ, the Registrar of Companies or at natwestgroup.com.
Following placing and open offers by NatWest Group plc in December 2008 and April 2009, the UK Government, through HM
Treasury, currently holds 52.96%
of the issued ordinary share capital of the ultimate holding company and is therefore NWB
Group’s ultimate controlling party.
35 Post balance sheet events
There have been no other significant events between 31 December 2021 and the date of approval of these accounts which would
require a change to or additional disclosure in the accounts.
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
164
36 Related undertakings
Legal entities and activities at 31 December 2021
In accordance with the Companies Act 2006, NWB Plc’s related undertakings and the accounting treatment for each are listed
below. All undertakings are wholly-owned by NWB Plc or subsidiaries of NWB Plc and are consolidated by reason of contractual
control (Section 1162(2) CA 2006), unless otherwise indicated. NWB Group interest refers to ordinary shares of equal values and
voting rights unless further analysis is provided in the notes. Activities are classified in accordance with Annex I to the Capital
Requirements Directive (“CRD IV”) and the definitions in Article 4 of the Capital Requirements Regulation.
The following table details active related undertakings incorporated in the UK which are 100% owned by NWB Group and fully
consolidated for accounting purposes
.
Regulatory
Entity name
Activity
treatment
Notes
Caledonian Sleepers Rail Leasing Ltd
BF
FC
(1)
Coutts & Company
CI
FC
(10)
Coutts Finance Company
BF
FC
(10)
Esme Loans Ltd
BF
FC
(1)
FreeAgent Central Ltd
SC
FC
(18)
FreeAgent Holdings Ltd
SC
FC
(18)
G L Trains Ltd
BF
FC
(13)
Gatehouse Way Developments Ltd
INV
DE
(1)
KUC Properties Ltd
BF
DE
(3)
Land Options (West) Ltd
INV
DE
(3)
Lombard & Ulster Ltd
BF
FC
(9)
Lombard Business Finance Ltd
BF
FC
(1)
Lombard Business Leasing Ltd
BF
FC
(1)
Lombard Corporate Finance
(December 1) Ltd
BF
FC
(1)
Lombard Corporate Finance
(December 3) Ltd
BF
FC
(1)
Lombard Corporate Finance (June 2) Ltd
BF
FC
(1)
Lombard Discount Ltd
BF
FC
(1)
Lombard Finance Ltd
BF
FC
(1)
Lombard Industrial Leasing Ltd
BF
FC
(1)
Lombard Lease Finance Ltd
BF
FC
(1)
Lombard Leasing Company Ltd
BF
FC
(1)
Lombard Leasing Contracts Ltd
BF
FC
(1)
Lombard Lessors Ltd
BF
FC
(1)
Lombard Maritime Ltd
BF
FC
(1)
Lombard North Central Leasing Ltd
BF
FC
(1)
Lombard North Central Plc
BF
FC
(1)
Lombard Property Facilities Ltd
BF
FC
(1)
Lombard Technology Services Ltd
BF
FC
(1)
Regulatory
Entity name
Activity
treatment
Notes
Mettle Ventures Ltd
OTH
FC
(1)
National Westminster Home Loans Ltd
BF
FC
(1)
NatWest Corporate Investments
BF
FC
(1)
NatWest Invoice Finance Ltd
OTH
FC
(1)
NatWest Property Investments Ltd
INV
DE
(1)
Pittville Leasing Ltd
BF
FC
(1)
Premier Audit Company Ltd
BF
FC
(1)
R.B. Capital Leasing Ltd
BF
FC
(1)
R.B. Leasing (September) Ltd
BF
FC
(1)
R.B. Quadrangle Leasing Ltd
BF
FC
(1)
RBS Asset Management Holdings
BF
FC
(10)
RBS Collective Investment Funds Ltd
BF
FC
(7)
RBS Invoice Finance Ltd
BF
FC
(1)
RBSG Collective Investments Holdings Ltd
BF
FC
(7)
RBSSAF (2) Ltd
BF
FC
(1)
RBSSAF (8) Ltd
BF
FC
(1)
RBSSAF (25) Ltd
BF
FC
(1)
Royal Bank Leasing Ltd
BF
FC
(3)
Royal Bank of Scotland (Industrial
Leasing) Ltd
BF
FC
(3)
Royal Scot Leasing Ltd
BF
FC
(3)
RoyScot Trust Plc
BF
FC
(1)
The Royal Bank of Scotland Group
Independent Financial Services Ltd
BF
FC
(3)
Ulster Bank Ltd
CI
FC
(9)
Ulster Bank Pension Trustees Ltd
TR
DE
(9)
Voyager Leasing Ltd
BF
FC
(1)
Walton Lake Developments Ltd
INV
DE
(1)
World Learning Limited
BF
FC
(16)
The following table details active related undertakings incorporated outside the UK which are 100% owned by NWB Group and fully
consolidated for accounting purposes
Regulatory
Entity name
Activity
treatment
Notes
Airside Properties AB
BF
FC
(2)
Airside Properties ASP Denmark AS
BF
FC
(8)
Airside Properties Denmark AS
BF
FC
(8)
Arkivborgen KB
BF
FC
(2)
Artul Koy
BF
FC
(4)
Backsmedjan KB
BF
FC
(2)
BD Lagerhus AS
BF
FC
(5)
Bilfastighet i Akalla AB
BF
FC
(2)
Bioenergie Wiesenburg GmbH & Co. KG
INV
DE
(30)
Brödmagasinet KB
BF
FC
(2)
Eiendomsselskapet Apteno La AS
BF
FC
(5)
Espeland Naering AS
BF
FC
(5)
Eurohill 4 KB
BF
FC
(2)
Fab Ekenäs Formanshagen 4
BF
FC
(4)
Fastighets AB Flöjten I Norrköping
BF
FC
(11)
Fastighets Aktiebolaget Sambiblioteket
BF
FC
(2)
Fastighetsbolaget Holma I Höör AB
BF
FC
(11)
Forskningshöjden KB
BF
FC
(2)
Regulatory
Entity name
Activity
treatment
Notes
Förvaltningsbolaget Dalkyrkan KB
BF
FC
(11)
Förvaltningsbolaget Klöverbacken Skola KB
BF
FC
(11)
Fyrsate Fastighets AB
BF
FC
(11)
Gredelinen KB
BF
FC
(2)
Grinnhagen KB
BF
FC
(2)
Hatros 1 AS
BF
FC
(5)
Horrsta 4:38 KB
BF
FC
(2)
IR Fastighets AB
BF
FC
(2)
IR IndustriRenting AB
BF
FC
(2)
Kallebäck Institutfastigheter AB
BF
FC
(11)
Kastrup Commuter K/S
BF
FC
(8)
Kastrup Hangar 5 K/S
BF
FC
(8)
Kastrup V & L Building K/S
BF
FC
(8)
KB Eurohill
BF
FC
(2)
KB Lagermannen
BF
FC
(2)
KB Likriktaren
BF
FC
(2)
Koy Espoon Entresse II
BF
FC
(4)
Koy Helsingin Mechelininkatu 1
BF
FC
(4)
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
165
36 Related undertakings continued
Regulatory
Entity name
Activity
treatment
Notes
Koy Helsingin Osmontie 34
BF
FC
(4)
Koy Helsingin Panuntie 6
BF
FC
(4)
Koy Helsingin Panuntie 11
BF
FC
(4)
Koy Iisalmen Kihlavirta
BF
FC
(4)
Koy Jämsän Keskushovi
BF
FC
(4)
Koy Jasperintie 6
BF
FC
(14)
Koy Kokkolan Kaarlenportti Fab
BF
FC
(4)
Koy Kouvolan Oikeus ja Poliisitalo
BF
FC
(4)
Koy Lohjan Ojamonharjuntie 61
BF
FC
(4)
Koy Millennium
BF
FC
(4)
Koy Nummelan Portti
BF
FC
(4)
Koy Nuolialan päiväkoti
BF
FC
(4)
Koy Peltolantie 27
BF
FC
(14)
Koy Pennalan Johtotie 2
BF
FC
(4)
Koy Porkkanakatu 2
BF
FC
(24)
Koy Puotikuja 2 Vaasa
BF
FC
(4)
Koy Raision Kihlakulma
BF
FC
(4)
Koy Ravattulan Kauppakeskus
BF
FC
(4)
Koy Tapiolan Louhi
BF
FC
(4)
Koy Vantaan Rasti IV
BF
FC
(4)
Koy Vapaalan Service-Center
BF
FC
(4)
Kvam Eiendom AS
BF
FC
(5)
Läkten 1 KB
BF
FC
(2)
Leiv Sand Eiendom AS
BF
FC
(5)
LerumsKrysset KB
BF
FC
(2)
Limstagården KB
BF
FC
(2)
Lundbyfilen 5 AB
BF
FC
(11)
Narmovegen 455 AS
BF
FC
(5)
National Westminster International
Holdings B.V.
BF
FC
(34)
Regulatory
Entity name
Activity
treatment
Notes
NatWest Services (Switzerland) Ltd
SC
FC
(29)
Nordisk Renting AB
BF
FC
(2)
Nordisk Renting AS
BF
FC
(27)
Nordisk Renting OY
BF
FC
(4)
Nordisk Specialinvest AB
BF
FC
(2)
Nordiska Strategifastigheter Holding AB
BF
FC
(2)
NWM Services India Private Ltd
SC
FC
(21)
Nybergflata 5 AS
BF
FC
(5)
Optimus KB
BF
FC
(2)
RBS Asset Management (Dublin) Ltd
BF
FC
(31)
RBS Deutschland Holdings GmbH
BF
FC
(19)
RBS Polish Financial Advisory Services Sp. Z o.o.
BF
FC
(28)
RBS Services India Private Ltd
SC
FC
(24)
Rigedalen 44 Eiendom AS
BF
FC
(5)
Ringdalveien 20 AS
BF
FC
(5)
Sandmoen Naeringsbygg AS
BF
FC
(5)
SFK Kommunfastigheter AB
BF
FC
(2)
Sjöklockan KB
BF
FC
(2)
Skinnarängen KB
BF
FC
(2)
Sletta Eiendom II AS
BF
FC
(5)
Snipetjernveien 1 AS
BF
FC
(5)
Solbänken KB
BF
FC
(2)
Solnorvika AS
BF
FC
(5)
Strand European Holdings AB
BF
FC
(11)
Svenskt Fastighetskapital AB
BF
FC
(2)
Svenskt Energikapital AB
BF
FC
(2)
Svenskt Fastighetskapital Holding AB
BF
FC
(2)
Tygverkstaden 1 KB
BF
FC
(2)
The following table details active related undertakings which are 100% owned by NWB Group but are not consolidated for
accounting purposes
Regulatory
Entity name
Activity
treatment
Notes
West Granite Homes Inc.
INV
DE
(22)
The following table details active related undertakings incorporated in the UK where NWB Group ownership is less than 100%
Accounting
Regulatory
Group
Entity name
Activity
treatment
treatment
%
Notes
Falcon Wharf Ltd
OTH
EAJV
PC
50
(17)
GWNW City
Developments Ltd
BF
EAJV
DE
50
(17)
Jaguar Cars Finance Ltd
BF
FC
FC
50
(1)
JCB Finance (Leasing) Ltd
BF
FC
FC
75
(15)
JCB Finance Ltd
BF
FC
FC
75
(15)
Landpower Leasing Ltd
BF
FC
FC
75
(15)
Accounting
Regulatory
Group
Entity name
Activity
treatment
treatment
%
Notes
London Rail Leasing Ltd
BF
EAJV
PC
50
(25)
Natwest Covered
Bonds (LM) Ltd
BF
IA
PC
20
(12)
Natwest Covered Bonds LLP
BF
FC
FC
73
(13)
Pollinate Networks Ltd
OTH
AHC
DE
30
(35)
Silvermere Holdings Ltd
BF
FC
FC
95
(7)
The following table details active related undertakings incorporated outside the UK where NWB Group ownership is less than 100%
Accounting
Regulatory
Group
Entity name
Activity
treatment
treatment
%
Notes
Nightingale CRE 2018-1 Ltd
BF
FC
DE
0
(6)
Nightingale LF 2021-1 Ltd
BF
FC
DE
0
(6)
Nightingale Project Finance
2019 1 Ltd
BF
FC
DE
0
(6)
Nightingale Securities
2017-1 Ltd
BF
FC
DE
0
(6)
Accounting
Regulatory
Group
Entity name
Activity
treatment
treatment
%
Notes
Nightingale UK Corp
2020 2 Ltd
BF
FC
DE
0
(6)
Pharos Estates Ltd
OTH
AHC
DE
49
(23)
Wiöniowy Management
sp. Z.o.o.
SC
AHC
DE
25
(28)
The following table details related undertakings that are not active (actively being dissolved)
Accounting
Regulatory
Group
Entity name
treatment
treatment
%
Notes
Belfast Bankers' Clearing
Company Ltd
AHC
DE
25
(26)
NatWest Capital Finance Ltd
FC
FC
100
(1)
Accounting
Regulatory
Group
Entity name
treatment
treatment
%
Notes
Northern Isle Ferries Ltd
FC
FC
100
(1)
NatWest Nominees Ltd
FC
FC
100
(1)
RBS Asset Finance Europe Ltd
FC
FC
100
(1)
Notes to the financial statements continued
NWB Group
Annual Report and Accounts 2021
166
36 Related undertakings continued
The following table details related undertakings that are dormant
Accounting
Regulatory
Group
Entity name
treatment
treatment
%
Notes
Dixon Vehicle Sales Ltd
FC
FC
100
(1)
Dunfly Trustee Ltd
FC
FC
100
(1)
JCB Finance Pension Ltd
FC
DE
88
(9)
Lombard Ireland Group Holdings
Unlimited
FC
FC
100
(20)
Lombard Ireland Ltd
FC
FC
100
(20)
NatWest FIS Nominees Ltd
FC
FC
100
(1)
NatWest Group Secretarial
Services Ltd
FC
FC
100
(3)
NatWest Pension Trustee Ltd
NC
DE
100
(1)
NatWest PEP Nominees Ltd
FC
FC
100
(1)
Nordisk Renting A/S
FC
FC
100
(33)
Accounting
Regulatory
Group
Entity name
treatment
treatment
%
Notes
Nordisk Renting HB
FC
FC
100
(2)
R.B. Leasing (March) Ltd
FC
FC
100
(1)
RBS Investment Executive Ltd
NC
DE
100
(3)
RBS Retirement Savings
Trustee Ltd
FC
FC
100
(1)
RBSG Collective Investments Nominees
Ltd
FC
FC
100
(7)
RoosterMoney UK Limited
FC
FC
100
(16)
Strand Nominees Ltd
FC
FC
100
(10)
Syndicate Nominees Ltd
FC
FC
100
(1)
The Royal Bank of Scotland
Group Ltd
FC
FC
100
(1)
The following table details the overseas branches of NWB Group
Subsidiary
National Westminster Bank Plc
Geographic location
Germany
Key:
BF
Banking and financial institution
CI
Credit institution
INV
Investment (shares or property) holding company
SC
Service company
TR
Trustee
OTH
Other
DE
Deconsolidated
FC
Full consolidation
PC
Pro-rata consolidation
AHC
Associate held at cost
EAJV
Equity accounting – Joint venture
IA
Investment accounting
NC
Not consolidated
Notes
Registered addresses
Country of incorporation
(1)
250 Bishopsgate, London, EC2M 4AA
UK
(2)
c/o Nordisk Renting AB, Jakobsbergsgatan 13, 8 storey, Box 14044, SE-111 44, Stockholm
Sweden
(3)
RBS Gogarburn, 175 Glasgow Road, Edinburgh, EH12 1HQ
UK
(4)
c/o Epicenter, Mikonkatu 9, 6th Floor, 00100, Helsinki
Finland
(5)
c/o Advokatfirmaet Wiersholm AS, Postboks 1400, 0115 Oslo
Norway
(6)
44 Esplanade, St Helier, JE4 9WG
Jersey
(7)
6-8 George Street, Edinburgh, EH2 2PF
UK
(8)
C/O Visma Services Danmark A/S, Lyskaer 3C-3D, 2730 Herlev
Denmark
(9)
11-16 Donegall Square East, Belfast, Co Antrim, BT1 5UB
UK
(10)
440, Strand, London, England, WC2R OQS
UK
(11)
C/O Nordisk Renting AB, Box 14044, SE-104 40 Stockholm
Sweden
(12)
1 Bartholomew Lane London EC2N 2AX
UK
(13)
1 Princes Street, London, EC2R 8BP
UK
(14)
c/o Nordisk Renting Oy, Mikonkatu 9, 00100 Helsinki
Finland
(15)
The Mill, High Street, Rocester, Staffordshire, ST14 5JW
UK
(16)
64 New Cavendish Street, London, W1G 8TB
UK
(17)
Gate House, Turnpike Road, High Wycombe, Buckinghamshire, HP12 3NR
UK
(18)
One Edinburgh Quay, 133 Fountainbridge, Edinburgh, EH3 9QG
UK
(19)
Roßmarkt 10, Frankfurt am Main, 60311
Germany
(20)
Ulster Bank Group Centre, George's Quay, Dublin 2
RoI
(21)
1st floor, Tower A, Building No. 1, Candor Techspace, IT/ITES SEZ, Sector 21, Gurugram, Haryana, 122016
India
(22)
200, Bellevue Parkway, Suite 210, Wilmington, DE 19809
USA
(23)
24 Demostheni Severi, 1st Floor, Nicosia, 1080, Cyprus
Cyprus
(24)
6th Floor,Tower A, Building 2, Candor Techspace, IT/ITES SEZ, Sector 21, Gurugram, Haryana, 122016
India
(25)
99 Queen Victoria Street, London, EC4V 4EH
UK
(26)
C/o Pinsent Masons Llp, The Soloist, 1 Lanyon Place, Belfast, Co. Antrim, BT1 3LP
UK
(27)
H. Heyerdahlsgate 1, Postboks 2020 Vika, Oslo, 0125
Norway
(28)
Ilzecka 26 Street, Warsaw, 02-135
Poland
(29)
Lerchenstrasse 18, Zurich, CH 8022
Switzerland
(30)
Liszt Straße 10, Regensburg, D-93053
Germany
(31)
One Dockland Central, Guild Street, IFSC, Dublin 1
RoI
(32)
The Chestnuts Brewers End, Takeley, Bishop's Stortford, CM22 6QJ
UK
(33)
c/o Adv Jan-Erik Svensson, HC Andersens Boulevard 12, Kopenhaum V, 1553
Denmark
(34)
Kokermolen 16, Houten, 3994 DH
Netherlands
(35)
2nd Floor 120 Old Broad Street, London, EC2N 1AR
UK
Risk factors
NWB Group
Annual Report and Accounts 2021
167
Principal Risks and Uncertainties
Set out below are certain risk factors
that could adversely affect NWB Group’s
future results, its financial condition and
prospects and cause them to be
materially different from what is forecast
or expected, and directly or indirectly
impact the value of its securities 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 of all potential
risks and uncertainties facing NWB
Group. The COVID-19 pandemic may
exacerbate any of the risks described
below.
Economic and political risk
The impact of the COVID-19 pandemic
and related uncertainties continue to
affect the UK, global economies and
financial markets and NWB Group’s
customers, as well as its competitive
environment, which may continue to
have an adverse effect on NWB Group
In many countries, including the UK
(NWB 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. The COVID-19
pandemic has also, at times, caused
significant reductions in levels of
consumer and commercial activity,
reductions in consumer spending,
increased levels of corporate debt and,
for some customers, personal debt,
increased unemployment and significant
market volatility in asset prices, interest
rates and foreign exchange rates. It has
also, at times, caused physical disruption
to global supply chains and working
practices, all of which have affected
NWB Group’s customers. NatWest Group
has significant exposures to many of the
commercial sectors economically
impacted by the COVID-19 pandemic,
including property, retail, leisure and
travel.
Despite widespread COVID-19
vaccination within the geographical
regions in which NWB Group operates,
the proliferation of COVID-19 variants
continues to affect the UK and global
economies. Further waves of infection or
the spread of new strains may result 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 elsewhere
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
initiatives. 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
environment and NWB Group. Moreover,
it is unclear as to how any further
measures, such as rising interest rates
and inflation, may affect NWB Group’s
business and performance.
The COVID-19 pandemic has prompted
many changes that may prove to be
permanent shifts in customer behaviour
and economic activity, such as changes
in spending patterns and significantly
more people working from home. These
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 on
analytical models, planning and
forecasting for NWB Group more
complex, and may result in uncertainty
impacting the risk profile of NWB Group
and/or that of the wider banking
industry. The medium and
long-term
implications of the COVID-19 pandemic
for NWB Group customers, the UK
housing market, and the UK and global
economies and financial markets remain
uncertain.
Any of the above may have a negative
impact on NWB Group.
NWB Group faces continued economic
and political risks and uncertainty in the
UK and global markets.
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 of and/or
continuation of trade wars, widespread
political instability (including as a result
of populism and nationalism, which may
lead to protectionist policies, state and
privately sponsored cyber and terrorist
acts or threats, efforts to destabilise
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 system
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 or
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 NWB Group serves,
increasing social and other 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 NWB Group directly
(for example, as a result of credit losses)
or indirectly (for example, by impacting
global economic growth and financial
markets and NWB Group’s customers
and their banking needs).
In addition, NWB Group is exposed to
risks arising out of geopolitical events or
political developments, such as,
exchange controls and other measures
taken by sovereign governments that
may hinder economic or financial activity
levels. Furthermore, unfavourable
political, military or diplomatic events,
including secession movements or the
exit of other member states from the EU,
armed conflict, pandemics and
widespread public health crises
(including the current COVID-19
pandemic and any future epidemics or
pandemics), state and privately
sponsored cyber and terrorist acts or
threats, and the responses to them by
governments and markets, could
negatively affect the business and
performance of NWB Group, including as
a result of the indirect effect on regional
or global trade and/or NWB Group’s
customers.
NWB Group faces political uncertainty in
Scotland as a result of a possible second
Scottish independence referendum.
Independence may adversely impact
NWB Group since NatWest Group plc
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Annual Report and Accounts 2021
168
and other NatWest Group entities are
incorporated in Scotland. Any changes
to Scotland’s relationship with the UK or
the EU would impact the environment in
which NatWest Group and its
subsidiaries operate, and may require
further changes to NatWest Group’s
(including NWB Group’s) structure,
independently or in conjunction with
other mandatory or strategic structural
and organisational changes which, any
of which could adversely impact NWB
Group
Any of the above may have a negative
effect on NWB Group.
Continuing uncertainty regarding the
effects and extent of the UK’s post Brexit
divergence from EU laws and regulation,
and NWB Group’s post Brexit EU
operating model may continue to
adversely affect NWB Group and its
operating environment.
The UK ceased to be a member of the
EU and the European Economic Area
(‘EEA’) on 31 January 2020 (‘Brexit’) and
the 2020 EU-UK Trade and Cooperation
Agreement (‘TCA’) ended the transition
period on 31 December 2020. The TCA
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 financial
services providers no longer have EU
passporting rights and there is no mutual
recognition regime. Financial services
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
NWB 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. The
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 legislation that
would require non-EU firms to establish
a branch or subsidiary in the EU before
providing “banking services” in the EU. If
these proposals become law all “banking
services” will be licensable activities in
each EU member state and member
states will not be permitted to offer
bilateral permissions to financial
institutions outside the EU allowing them
to provide “banking services” in the EU.
Uncertainty remains as to whether
“banking services” will also include
investment products.
NatWest Group continues to evaluate its
post Brexit EU operating model, making
adaptations as necessary. NatWest
Group also continues to assess where
NatWest Group companies can obtain
bilateral regulatory permissions to
facilitate intragroup transactions and/or
to permit business to continue from its
UK entities, transferring what cannot be
continued to be rendered from the UK to
an EEA subsidiary or branch, where
permitted. Where such 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. There 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 NatWest
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 entities.
Furthermore, transferring business to an
EEA based subsidiary is a complex
exercise and involves legal, regulatory
and execution risks, and could result in a
loss of business and/or customers or
greater than expected costs. The
changes to NatWest Group’s operating
model have been costly and further
changes to its business operations,
product offering and customer
engagement could result in further costs
and operating complexity.
In addition, to improve efficiencies and
best serve customers, following Brexit,
NatWest Group expects that certain
assets, liabilities, transactions and
activities of its Western European
corporate portfolio (principally including
term funding and revolving credit
facilities), will be transferred from the
ring-fenced subgroup of NatWest Group,
including NWB Group, to NWM Group on
a rolling basis, subject to certain
regulatory and customer requirements.
The timing and quantum of these
transfers remain uncertain as is the
impact of these transactions on its go-
forward results of operations and
financial position. As a result, NWB
Group’s business, results of operations,
financial position and prospects could be
adversely affected.
The long-term effects of Brexit and the
uncertainty regarding NWB Group’s EU
operating model may have a negative
impact on NWB Group’s operating
business. These may be exacerbated by
wider global macro-economic trends and
events, particularly COVID-19 pandemic
related uncertainties, which may
significantly impact NWB 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-
economic 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 proposed
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 NWB Group and its
subsidiaries will operate. This divergence
could lead to further market
fragmentation. These risks and
uncertainties may require costly changes
to NWB 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
amended rules, could have a significant
adverse impact on NWB Group’s
businesses, non-UK operations and/or
legal entity structure, including attendant
operating, compliance and costs, level of
impairments, capital requirements,
changes to intragroup arrangements,
increased complexity, regulatory
environment and tax implications and as
a result may adversely impact NWB
Group’s profitability, competitive position,
business model and product
offering.
Changes in interest rates have
significantly affected and will continue to
affect NWB Group’s business and results.
Interest rate risk is significant for NWB
Group. 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,
market expectations are currently that
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Annual Report and Accounts 2021
169
benchmark interest rates such as UK
base rate, could begin to rise further and
faster than had been anticipated
previously and that this could be
accompanied by other measures to
reverse accommodative policy, such as
quantitative tightening.
While increases in medium term swap
interest rates may support the yield of
NWB Group’s equity structural hedge
interest income, sharp rises could have
macroeconomic effects that lead to
adverse outcomes for the business or
customers. For example, they could lead
to generally weaker than expected
growth, or even contracting GDP,
reduced business confidence, higher
default rates on customer loans, higher
levels of unemployment or
underemployment, and falling property
prices in the markets in which NWB
Group operates, all of which could
adversely affect the business and
performance of NWB Group. Conversely,
decreases in interest rates and/or
continued sustained low, zero or
negative interest rates would be
expected to put pressure on NWB
Group’s interest income and profitability.
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. Unexpected
movements in spreads between key
benchmark rates could have adverse
impacts and also adversely affect NWB
Group’s financial position.
Changes in foreign currency exchange
rates may affect NWB Group’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 or market
events which are outside NWB Group’s
control, may lead to sharp and sudden
variations in foreign exchange rates.
NWB Group’s foreign exchange exposure
arises from structural foreign exchange
risk, including capital deployed in NWB
Group’s foreign subsidiaries, branches
and joint arrangements, and non-trading
foreign exchange risk, including
customer transactions, profits, and losses
that are in a currency other than the
functional currency of the transaction
entity. NWB Group also issues
instruments in foreign currencies that
assist in meeting NWB Group’s minimum
requirements for own funds and eligible
liabilities (‘MREL’). NWB Group maintains
policies and procedures designed to
manage the impact of exposures to
fluctuations in currency rates.
Nevertheless, changes in currency rates,
particularly in the sterling-US dollar and
euro-sterling exchange rates, can
adversely affect the value of assets,
liabilities (including the total amount of
MREL-eligible instruments), income and
expenses, RWAs and hence the reported
earnings and financial condition of NWB
Plc.
HM Treasury (or UKGI on its behalf)
could exercise a significant degree of
influence over NatWest Group and NWB
Group is controlled by NatWest Group.
In its March 2021 Budget, the UK
Government announced its intention to
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 objective of
selling all of its remaining shares in
NatWest Group plc by 2025-2026. As 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-downs 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 NWB Group) will
continue to have their own independent
board of directors and management
team determining their own strategy.
However, for as long as HM Treasury
remains NatWest Group plc’s, largest
single shareholder, HM Treasury and
UKGI (as manager of HM Treasury’s
shareholding) could exercise a significant
degree of influence over the election of
directors and appointment of senior
management, NatWest Group’s
(including NWB Group’s) capital strategy,
dividend policy, remuneration policy or
the conduct of NatWest Group’s
(including NWB Group’s) operations,
amongst others.
HM Treasury or UKGI’s approach
depends on government policy, which
could change. The manner in which HM
Treasury or UKGI exercises HM
Treasury’s rights as the largest single
shareholder of NatWest Group could give
rise to conflicts between the interests of
HM Treasury and the interests of other
shareholders, including as a result of a
change in government policy. The
exertion of such influence over NatWest
Group could in turn have an adverse
effect on the governance or business
strategy of NWB Group.
In addition, NWB Plc is a wholly owned
subsidiary of NatWest Group plc, and
NatWest Group plc therefore controls
NWB Group’s board of directors,
corporate policies and strategic
direction. The interests of NatWest
Group plc as an equity holder and as
NWB Group’s parent may differ from the
interests of NWB Group or of potential
investors in NWB Group’s
securities.
Strategic risk
NatWest Group (NWB Plc’s parent
company) continues to implement its
purpose-led strategy, which carries
significant execution and operational
risks and may not achieve its stated aims
and targeted outcomes.
In February 2020, NatWest Group
(NWB’s parent company) announced a
new strategy, focused on becoming a
purpose-led business, designed to
champion potential and to help
individuals, families and businesses to
thrive. This strategy is intended to reflect
the rapidly shifting environment and
backdrop of unprecedented disruption in
society driven by technology and
changing customer expectations, as
accelerated by the COVID-19 pandemic.
The purpose-led strategy has required
an internal cultural shift across NWB
Group as to how performance is
perceived and how NWB Group conducts
its business. These changes are
substantial and will take many years to
fully embed. These changes may not
result in the expected outcome within
the timeline and in the manner currently
contemplated.
As part of its purpose-led strategy,
NatWest Group has set a number of
financial, capital and operational targets
and expectations, both for the short term
and throughout the implementation
period. Realising these cost reductions
may result in material strategic costs,
which may be more than currently
expected. The continued focus on
meeting cost reduction targets may also
mean limited investment in other areas,
which could affect NWB Group’s long-
term prospects, product offering or
competitive position, its ability to meet its
other targets and commitments
(including those related to customer
satisfaction) and its capacity to respond
to climate-related risks. NWB Group’s
ability to meet its planned reductions in
its annual underlying costs may vary
considerably from year to year. Any of
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NWB Group
Annual Report and Accounts 2021
170
the factors above could jeopardise NWB
Group’s ability to achieve its associated
financial targets and generate
sustainable returns.
The financial services industry is
currently experiencing a trend towards
consolidation and technological
advancement and disruption. In pursuing
its purpose-led strategy, NatWest Group
(and NWB Group) may decide to
undertake divestments, restructurings or
reorganisations of certain of its customer
segments. Conversely, it may decide to
grow its business through acquisitions,
joint ventures, investments and/or
strategic partnerships as well as other
transactions and initiatives, in certain
customer segments and including to: (i)
enhance capabilities that may lead to
better productivity or cost efficiencies; (ii)
acquire talent; (iii) pursue new products
or expand existing products; or (iv) enter
new markets or enhance its presence in
existing markets. There are risks that
NatWest Group (and NWB Group) may
not fully realise the expected benefits
and value from these transactions and
initiatives. In particular, NatWest Group
(and NWB Group) may: (i) fail to realise
the business rationale for the transaction
or initiative or assumptions underlying
the business plans supporting the
valuation of a target business may prove
inaccurate, for example, regarding
synergies and expected commercial
demand; (ii) fail to successfully integrate
any acquired businesses (including in
respect of technologies, existing
strategies, products and human capital);
(iii) fail to retain key employees,
customers and suppliers of any acquired
business; (iv) be required or wish to
terminate pre-existing contractual
relationships, which could prove costly
and/or be executed at unfavourable
terms and conditions; (v) fail to discover
certain contingent or undisclosed
liabilities in businesses that it acquires, or
its due diligence to discover any such
liabilities may be inadequate; and (vi) not
obtain necessary regulatory and other
approvals or onerous conditions may be
attached to such approvals.
Accordingly, NatWest Group (and NWB
Group) may not be successful in growing
its business through these types of
transactions and initiatives and any
particular transaction may not succeed,
may be limited in scope or scale
(including due to NatWest Group’s
current ownership structure) and may
not conclude on the terms contemplated,
or at all. Any of the above may
materially and adversely affect NWB
Group’s results of operations, financial
condition or prospects.
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 International
businesses to form a single franchise to
best support its customers across the full
non-personal customer lifecycle. The
transition is expected to begin over the
coming months and be effective from
July 2022.
In pursuing its strategy, NatWest Group
(and NWB Group) may not be able to
successfully: (i) implement all aspects of
its strategy; (ii) reach any or all of the
related targets or expectations of its
strategy; or (iii) realise the intended
strategic objectives of any other future
strategic or growth initiative. The scale
and scope of NatWest Group’s (and NWB
Group’s) strategy and the intended
changes continue to present material
business, operational (including
compliance with the UK ring-fencing
regime), legal, execution, IT system,
internal culture, conduct and people risks
to NatWest Group (and NWB Group).
Implementing many changes and
strategic actions concurrently, including
in respect of any growth initiatives, will
require application of robust governance
and controls frameworks and robust IT
systems; there is a risk that NatWest
Group (and NWB Group) may not be
successful in these respects. The
implementation of the purpose-led
strategy and any other strategic
initiatives could result in materially
higher costs than initially contemplated
(including due to material uncertainties
and factors outside of NatWest Group
and NWB Group’s control) and may not
be completed as planned, or at all, or
could be phased or could progress in a
manner other than currently expected.
This could lead to additional
management actions by NatWest Group
(or NWB Group).
Changes in the economic, political and
regulatory environment in which NWB
Group operates, or regulatory
uncertainty and changes, strong market
competition and industry disruption or
economic volatility may require NWB
Group to adjust aspects of its strategy or
the timeframe for its implementation
including in relation to its financial,
capital and operational targets and
expectations. As certain initiatives
depend on achieving growth in new
ventures and opportunities for NatWest
Group, NWB Group’s strategy is
vulnerable to an economic downturn.
NWB Group’s strategy also requires
ongoing confidence from customers and
the wider market, without which
customer activity and related income
levels may fall or NWB Group’s
reputation may be adversely affected.
Each of these risks, and others identified
in these Risk Factors, individually or
collectively could jeopardise the
implementation and delivery of the
purpose-led strategy and other strategic
initiatives, result in higher than expected
costs, impact NWB Group’s products and
services offering, its reputation with
customers or business model and
adversely impact NWB Group’s ability to
deliver its strategy and meet its targets
and guidance, each of which could have
a negative impact on NWB Group.
Trends relating to the COVID-19
pandemic may adversely affect NWB
Group’s strategy and impair its ability to
meet its targets and strategic objectives.
The trajectory of the COVID-19
pandemic’s impact on the UK and global
economy and NWB Group remain
uncertain. If trends relating to the
COVID-19 pandemic negatively impact
the UK and global economy, NWB Group
may be unable to meet its financial,
capital and operational targets and
expectations. It is uncertain as to how
the broader macroeconomic business
environment and societal norms may be
impacted by the COVID-19 pandemic,
causing significant wider societal
changes. For example, one of the most
notable effects of the COVID-19
pandemic has been its disproportionate
impact on the most vulnerable groups of
society and concerns about systemic
racial biases and social inequalities.
In addition, the COVID-19 pandemic 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, each 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, social,
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
NWB 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, governance and
other sustainability-related risks and
opportunities may have a material
adverse impact on NWB Group’s
reputation, business, results of
operations, outlook and the value of
NWB Group’s securities. See also ‘
Any
Risk factors continued
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Annual Report and Accounts 2021
171
failure by NWB Group to implement
effective and compliant climate change
resilient systems, controls and
procedures could adversely affect NWB
Group’s ability to manage climate-
related risks
’.
The COVID-19 pandemic may also result
in unexpected developments or changes
in financial markets, the fiscal, tax and
regulatory frameworks and consumer
customer and corporate client behaviour,
which could intensify competition in the
financial services industry. This could
negatively impact NWB Group if it is
not
able to adapt or compete effectively.
Financial resilience risk
NWB Group may not meet the targets it
communicates or generate sustainable
returns.
As part of NatWest Group’s strategy,
NWB Group has set a number of
financial, capital and operational targets
for NatWest Group as part of its
purpose-led strategy including in respect
of: MREL targets, funding plans,
employee engagement, diversity and
inclusion as well as ESG (including
climate and sustainable funding and
financing targets). See also, ‘
NatWest
Group (NWB Plc’s parent company)
continues to implement its purpose-led
strategy, which carries significant
execution and operational risks and may
not achieve its stated aims and targeted
outcomes
’.
NWB Group’s ability to meet NatWest
Group and NWB Group’s respective
targets and to successfully meet its
strategy are subject to various internal
and external factors and risks. These
include, but are not limited to: the impact
of the COVID-19 pandemic, market,
regulatory, macroeconomic and political
uncertainties, developments relating to
litigation, governmental actions,
investigations and regulatory matters,
and operational risks and risks relating
to NWB Group’s business model and
strategy (including risks associated with
climate, environmental, social,
governance and other sustainability-
related issues issues). A number of
factors, including the economic and
other effects of the COVID-19 pandemic,
may impact the Bank’s ability to
maintain its current CET1 ratio,
including: impairments, limited organic
capital generation or unanticipated
increases in RWAs. In addition, the run-
down of RWAs may be accompanied by
the recognition of disposal losses which
may be higher than anticipated. See also
‘
NatWest Group (NWB Plc’s parent
company) continues to implement its
purpose-led strategy, which carries
significant execution and operational
risks and may not achieve its stated aims
and targeted outcomes’
.
There is a risk that NatWest Group’s
purpose-led strategy may not be
successfully executed, that NWB Group
will not meet its targets and
expectations, or that NWB Group will not
be a viable, competitive or profitable
banking business.
The impact of the COVID-19 pandemic
on the credit quality of NWB Group’s
counterparties may negatively impact
NWB Group.
The effects of the COVID-19 pandemic
have adversely affected the credit quality
of some of NWB Group’s borrowers and
other counterparties, and government
support schemes may delay the effects
of defaults by such counterparties.
As government support schemes reduce,
defaults are expected to rise with more
customers moving from IFRS 9 Stage 2
to Stage 3. As a result, NWB Group
continues to experience elevated
exposure to credit risk and demands on
its funding, and the long-term effects
remain uncertain. If borrowers or other
counterparties face increasing levels of
debt and default or suffer deterioration
in credit, this would increase impairment
charges, write-downs, regulatory
expected loss and impact credit
reserves. See also, ‘
NWB Group has
significant exposure to counterparty and
borrower risk
’.
In line with certain mandated COVID-19
pandemic support schemes, NWB Group
has sought to assist affected customers
with a number of initiatives including
NWB Group’s participation in BBLS,
CBILS and CLBILS products. NWB Group
has sought to manage the risks of fraud
and money laundering against the need
for the fast and efficient release of funds
to customers and businesses. NWB
Group may be exposed to fraud, conduct
and litigation risks arising from
inappropriate approval (or denial) of
BBLS or CBILS or the enforcing or
pursuing repayment of BBLS and CBILS
(or a failure to exercise forbearance),
which may have an adverse effect on
NWB Group’s reputation and results of
operations. The implementation of the
initiatives and efforts mentioned above
may result in litigation, regulatory and
government actions and proceedings.
These actions may result in judgments,
settlements, penalties or fines
.
Any of the above may have a negative
impact on NWB Group.
NWB Group has significant exposure to
counterparty and borrower risk.
NWB Group has exposure to many
different industries, customers and
counterparties, and risks arising from
actual or perceived changes in credit
quality and the recoverability of monies
due from borrowers and other
counterparties are inherent in a wide
range of NWB Group’s businesses. NWB
Group’s lending strategy and associated
processes may fail to identify or
anticipate weaknesses or risks in a
particular sector, market or borrower, or
fail to adequately value physical or
financial collateral. This may result in
increased default rates or a higher loss
given default for loans, which may, in
turn, impact NWB Group’s profitability.
See also ‘
Risk and capital management
— Credit Risk
’.
The credit quality of NWB Group’s
borrowers and other counterparties may
be affected by a deterioration in
prevailing economic and market
conditions (including those caused by the
COVID-19 pandemic) and by changes in
the legal and regulatory landscape in the
UK and countries where NatWest Group
is exposed to credit risk any
deterioration in such conditions or
changes to legal or regulatory
landscapes (including the extent of the
UK’s post-Brexit divergence from EU
laws and regulation). These could
worsen borrower and counterparty
credit quality or impact the enforcement
of contractual rights over security,
increasing credit risk.
An increase in drawings upon committed
credit facilities may also increase NWB
Group’s RWAs. In addition, the level of
household indebtedness in the UK
remains high. The ability of households
to service their debts could be worsened
by a period of high unemployment
(including as a result of the COVID-19
pandemic), increasing interest rates and
higher inflation, particularly if prolonged.
NWB Group may be affected by volatility
in property prices (including as a result
of the general UK political or economic
climate or the COVID-19 pandemic)
given that NWB Group’s mortgage loan
and wholesale property loan portfolios as
at 31 December 2021, amounted to
£190.3 billion, representing 65% of NWB
Group’s customer loan exposure. If
property prices were to weaken this
could lead to higher impairment charges,
particularly if default rates also increase.
In addition, NWB Group’s credit risk may
be exacerbated if the collateral that it
holds cannot be realised as a result of
market conditions or regulatory
intervention or if it is liquidated at prices
Risk factors continued
NWB Group
Annual Report and Accounts 2021
172
not sufficient to recover the net amount
after accounting for any IFRS provisions
already made. This is most likely to
occur during periods of illiquidity or
depressed asset valuations.
Concerns about, or a default by, a
financial institution could lead to
significant liquidity problems and losses
or defaults by other financial institutions,
since the commercial and financial
soundness of many financial institutions
is closely related and interdependent as
a result of credit, trading, clearing and
other relationships. Any perceived lack
of creditworthiness of a counterparty
may lead to market-wide liquidity
problems and losses for NWB Group.
This systemic risk may also adversely
affect financial intermediaries, such as
clearing agencies, clearing houses,
banks, securities firms and exchanges
with which NWB Group interacts on a
daily basis. See also, ‘
NWB Group may
not be able to adequately access sources
of liquidity and funding
’.
As a result, adverse changes in borrower
and counterparty credit risk may cause
accelerated impairment charges under
IFRS 9, increased repurchase demands,
higher costs, additional write-downs and
losses for NWB Group and an inability to
engage in routine funding transactions.
NWB Group has applied an internal
analysis of multiple economic scenarios
(MES) together with the determination of
specific overlay adjustments to inform its
IFRS 9 ECL (Expected Credit Loss). The
recognition and measurement of ECL is
complex and involves the use of
significant judgment and estimation. This
includes the formulation and
incorporation of multiple forward-looking
economic scenarios into ECL to meet the
measurement objective of IFRS 9. The
ECL provision is sensitive to the model
inputs and economic assumptions
underlying the estimate. Going forward,
NWB Group anticipates observable credit
deterioration of a proportion of assets
resulting in a systematic uplift in defaults,
which is mitigated by those economic
assumption scenarios being reflected in
the Stage 2 ECL across portfolios, along
with a combination of post model
overlays in both wholesale and retail
portfolios reflecting the uncertainty of
credit outcomes. See also, ‘
Risk and
capital management — Credit Risk
’. A
credit deterioration would also lead to
RWA increases. Furthermore, the
assumptions and judgments used in the
MES and ECL assessment at 31
December 2021 may not prove to be
adequate resulting in incremental ECL
provisions for NWB Group. As
government support schemes reduce,
defaults are expected to rise with more
ECLs cases moving from Stage 2 to
Stage
3.
If NWB Group experiences losses and a
reduction in future profitability, this is
likely to affect the recoverable value of
fixed assets, including goodwill and
deferred taxes, which may lead to
further write-downs.
NWB Group operates in markets that are
highly competitive, with increasing
competitive pressures and technology
disruption.
The market for UK financial services is
highly competitive. NWB Group expects
such competition to continue and
intensify in response to various changes.
These include: evolving customer
behaviour, technological changes
(including digital currencies, stablecoins
and the growth of digital banking,
including from fintech entrants),
competitor behaviour, new entrants to
the market (including non-traditional
financial services providers such as large
retail or technology conglomerates, who
may have competitive advantages in
scale, technology and customer
engagement), competitive foreign-
exchange offerings, industry trends
resulting in increased disaggregation or
unbundling of financial services or
conversely the re-intermediation of
traditional banking services, and the
impact of regulatory actions and other
factors. In particular, developments in
the financial sector resulting from new
banking, lending and payment solutions
offered by rapidly evolving incumbents,
challengers and new entrants, notably
with respect to payment services and
products, and the introduction of
disruptive technology may impede NWB
Group’s ability to grow or retain its share
and impact its revenues and profitability,
particularly in its key UK retail and
commercial banking segments.
Moreover, innovations such as
biometrics, artificial intelligence, the
cloud, blockchain, cryptocurrencies and
quantum computing may rapidly
facilitate industry transformation.
These trends have accelerated during
the COVID-19 pandemic and may be
catalysed by various regulatory and
competition policy interventions,
including the UK initiative on Open
Banking (PSD2), Open Finance and other
remedies imposed by the Competition
and Markets Authority (‘CMA’) which are
designed to further promote competition
within retail banking. The competition
enhancing measures under NatWest
Group’s independently administered
Alternative Remedies Package (‘ARP’)
benefits grant recipients and eligible
competitors. The ARP may be more
costly than anticipated and may
adversely impact customer service for
NWB Group’s own customers, its
competitive position and reputation.
Failure to comply with the terms of the
scheme could result in the imposition of
additional measures or limitations on
NWB Group’s operations, additional
supervision by NWB Group’s regulators,
and loss of investor confidence.
Increasingly many of the products and
services offered by NWB Group are, and
will become, more technology intensive.
For example, NWB Group recently
invested in a number of fintech ventures,
including Mettle, FreeAgent, Tyl, Rapid
Cash and Rooster Money. See also,
‘
NatWest Group (NWB Plc’s parent
company) continues to implement its
purpose-led strategy, which carries
significant execution and operational
risks and may not achieve its stated aims
and targeted outcomes
’. NWB Group’s
ability to develop such digital solutions
(which also need to comply with
applicable and evolving regulations) has
become increasingly important to
retaining and growing NWB Group’s
customer business in the UK. There can
be no certainty that NWB Group’s
innovation strategy (which includes
investment in its IT capability intended to
address the material increase in
customer use of online and mobile
technology for banking as well as
selective acquisitions, which carry
associated risks) will be successful or
that it will allow NWB Group to continue
to grow such services in the future.
Certain of NWB Group’s current or
future competitors may be more
successful in implementing innovative
technologies for delivering products or
services to their customers. NWB Group
may also fail to identify future
opportunities or derive benefits from
disruptive technologies in the context of
rapid technological innovation, changing
customer behaviour and growing
regulatory demands resulting in
increased competition from traditional
banking businesses as well
as new
providers of financial services, including
technology companies with strong brand
recognition, that may be able to develop
financial services at a lower cost base.
NWB Group’s competitors may also be
better able to attract and retain
customers and key employees, may have
better IT systems, and may have access
to lower cost funding and/or be able to
attract deposits on more favourable
terms than NWB Group. Although NWB
Group invests in new technologies and
participates in industry and research led
initiatives aimed at developing new
technologies, such investments may be
insufficient or ineffective, especially given
NWB Group’s focus on its cost savings
targets. This may limit additional
investment
in areas such as financial
innovation and could therefore affect
NWB Group’s offering of innovative
products or technologies for delivering
Risk factors continued
NWB Group
Annual Report and Accounts 2021
173
products or services to customers and its
competitive position. Furthermore, the
development of innovative products
depends on NWB Group’s ability to
produce underlying high quality data,
failing which its ability to offer innovative
products may be compromised.
If NWB Group is unable to offer
competitive, attractive and innovative
products that are also profitable and
timely, it will lose share, incur losses on
some or all of its activities and lose
opportunities for growth. In this context,
NWB Group is investing in the
automation of certain solutions and
interactions within its customer-facing
businesses, including through artificial
intelligence. Such initiatives may result in
operational, reputational and conduct
risks if the technology used is defective,
inadequate or is not fully integrated into
NWB Group’s current solutions. There
can be no certainty that such initiatives
will deliver the expected cost savings
and investment in automated processes
will likely also result in increased short-
term costs for NWB
Group.
In addition, the implementation of
NatWest Group’s purpose-led strategy
(including in relation to acquisitions,
reorganisations and/or partnerships),
may also have an impact on NWB
Group’s ability to compete effectively
and intensified competition from
incumbents, challengers and new
entrants could affect NWB Group’s ability
to maintain satisfactory returns.
Moreover, activist investors have
increasingly become engaged and
interventionist in recent years, which
may pose a threat to NatWest Group’s
strategic initiatives. Furthermore,
continued consolidation or technological
or other developments in certain sectors
of the financial services industry could
result in
NWB Group’s remaining
competitors gaining greater capital and
other resources, including the ability to
offer a broader range of products and
services and geographic diversity, or the
emergence of new competitors each of
which may adversely affect NWB’s
business and result of operations.
NWB Group may not meet the prudential
regulatory requirements for capital and
MREL, or manage its capital effectively,
which could trigger the execution of
certain management actions or recovery
options.
NatWest Group and NWB Plc (on a
standalone basis) are required by
regulators in the UK, the EU and other
jurisdictions in which they undertake
regulated activities to maintain adequate
financial resources. Adequate capital
provides NatWest Group (including NWB
Group) with financial flexibility in the
face of turbulence and uncertainty in the
global economy and specifically in their
core UK operations.
As at 31 December 2021, NWB Plc’s
CET1 ratio was 16.1%. NatWest Group
currently targets a CET1 ratio of 13-14%
by the end of 2023. NatWest Group’s
target capital ratio is based on a
combination of its expected regulatory
requirements and internal modelling,
including stress scenarios and
management’s and/or the Prudential
Regulation Authority’s (PRA) views on
appropriate buffers above minimum
operating levels.
NatWest Group’s current capital strategy
for NWB Plc is based on: the expected
accumulation of additional capital
through the accrual of profits over time;
the receipt of assets and resultant RWAs
from other NatWest Group entities; RWA
growth in the form of regulatory uplifts
and lending growth and other capital
management initiatives which focus on
improving capital efficiency through
improved data and upstreaming of
dividends from NWB Plc to NatWest
Group plc and ensuring NatWest Group
meets its medium to long term targets.
A number of factors may impact NWB
Group’s ability to maintain its current
CET1 ratio target and achieve its capital
strategy. These include, amongst other
things:

a depletion of its capital resources
through increased costs or liabilities
or reduced profits;

an increase in the quantum of RWAs
in excess of that expected, including
due to regulatory changes or a
failure in internal controls or
procedures to accurately measure
and report RWAs; and

changes in prudential regulatory
requirements including NWB Plc’s
Total Capital Requirement set by the
PRA, including Pillar 2 requirements
and regulatory buffers as well as any
applicable scalars.
In addition to regulatory capital, NWB Plc
is required to maintain a set quantum of
internal MREL set as the higher of its
scaled RWAs or leverage requirement.
The internal MREL requirement is met
with loss-absorbing senior funding and
regulatory capital instruments internally
issued (indirectly) up to NatWest Group
plc. The Bank of England has identified
single point-of-entry as the preferred
resolution strategy for NatWest Group.
As a result, only NatWest Group plc is
able to issue Group MREL eligible
liabilities to third-party investors, using
the proceeds to fund the internal capital
and MREL targets and/or requirements
of its operating entities, including NWB
Plc. NWB Plc is therefore dependent not
only on NatWest Group plc
to fund NWB
Plc’s internal MREL targets over time,
but also on NatWest Group plc’s ability to
issue and maintain sufficient amounts of
external MREL liabilities to support this.
In turn, NWB Plc is required to fund the
internal capital and MREL requirements
of its subsidiaries. See also, ‘
NWB Group
is reliant on NatWest Group for capital
and funding support, and is substantially
reliant on NatWest Group plc’s ability to
issue sufficient amounts of capital and
external MREL securities and
downstream the proceeds to NWB
Group. The inability to do so may
adversely affect NWB Group
’.
If, under a stress scenario, the level of
capital or MREL falls outside of risk
appetite, there are a range of recovery
management actions (focused on risk
reduction and mitigation) that NWB
Group could take to manage its capital
levels, but any such actions may not be
sufficient to restore adequate capital
levels. Under the EU Bank Recovery and
Resolution Directives I and II (‘BRRD’), as
implemented in the UK, NatWest Group
must maintain a recovery plan
acceptable to its regulator, such that a
breach of NWB Group’s applicable
capital or leverage requirements may
trigger the application of NatWest
Group’s recovery plan to remediate a
deficient capital position. NatWest
Group’s regulator may request that NWB
Group carry out certain capital
management actions or, if NatWest
Group’s CET1 ratio falls below 7%,
certain regulatory capital instruments
issued by NatWest Group will be written-
down or converted into equity and there
may be an issue of additional equity by
NatWest Group, which could result in the
dilution of the holdings of NatWest
Group’s existing shareholders. The
success of such issuances will also be
dependent on favourable market
conditions and NatWest Group may not
be able to raise the amount of capital
required on acceptable terms or at all.
Separately, NatWest Group may address
a shortage of capital by taking action to
reduce leverage exposure and/or RWAs
via asset or business disposals. Such
actions may, in turn, affect, among other
things, NWB Group’s product offering,
credit ratings, ability to operate its
businesses, pursue its current strategies
and pursue strategic opportunities, any
of which may affect the underlying
profitability of NWB Group and future
growth potential. See also
,
‘
NatWest
Group (including NWB Group) may
become subject to the application of UK
statutory stabilisation or resolution
powers which may result in, among
other actions, the write-down or
conversion of NWB Group’s Eligible
Liabilities
’.
Risk factors continued
NWB Group
Annual Report and Accounts 2021
174
NWB Group may not be able to
adequately access sources of liquidity
and funding.
NWB Group is required to access sources
of liquidity and funding through retail
and wholesale deposits, as well as
through the debt capital markets. As at
31 December 2021, NWB Plc held £352.3
billion in deposits. The level of deposits
may fluctuate due to factors outside
NWB Group’s control, such as a loss of
investor confidence (including in other
NatWest Group entities), sustained low or
negative interest rates, government
support, increasing competitive
pressures for retail and corporate
customer deposits or the reduction or
cessation of deposits by wholesale
depositors, which could result in a
significant outflow of deposits within a
short period of time. An inability to grow,
or any material decrease in NWB
Group’s deposits could, particularly if
accompanied by one of the other factors
described above, materially affect NWB
Group’s ability to satisfy its liquidity or
funding needs. In turn, this could require
NWB Group to adapt its funding plans.
The effects of the COVID-19 pandemic,
current economic uncertainties and any
significant market volatility could affect
NWB Group’s ability to access sources of
liquidity and funding, which may result in
higher funding costs and failure to
comply with regulatory capital, funding
and leverage requirements.
As a result,
NWB Group could be required to adapt
their funding plans.
This could
exacerbate funding and liquidity risk,
which could have a negative effect on
NWB Group.
If NWB Group’s liquidity position were to
come under stress, and if NWB Group
were unable to raise funds through
deposits or in the debt capital markets
on acceptable terms or at all, its liquidity
position could be adversely affected and
it might be unable to meet deposit
withdrawals on demand or at their
contractual maturity, to repay
borrowings as they mature, to meet its
obligations under committed financing
facilities, to comply with regulatory
funding requirements, to undertake
certain capital and/or debt management
activities, or to fund new loans,
investments and businesses. NWB Group
may need to liquidate unencumbered
assets to meet its liabilities, including
disposals of assets not previously
identified for disposal to reduce its
funding commitments or trigger the
execution of certain management
actions or recovery options. In a time of
reduced liquidity, NWB Group may be
unable to sell some of its assets, or may
need to sell assets at depressed prices,
which in either case could negatively
affect NWB Group’s results.
NWB Group is reliant on NatWest Group
for capital and funding support, and is
substantially reliant on NatWest Group
plc’s ability to issue sufficient amounts of
capital and external MREL securities and
downstream the proceeds to NWB
Group. The inability to do so may
adversely affect NWB Group.
NWB Plc receives capital and funding
from NatWest Group. NWB Plc has set
target levels for different tiers of capital
and for the internal MREL, as
percentages of its RWAs. The level of
capital and funding required for NWB Plc
to meet its internal targets is therefore a
function of the level of RWAs and its
leverage exposure in NWB Plc and this
may vary over time.
NWB Plc’s internal MREL comprises the
capital value of regulatory capital
instruments and loss-absorbing senior
funding issued by NWB Plc to its ultimate
parent, NatWest Group plc. The Bank of
England has identified that the preferred
resolution strategy for NatWest Group is
as a single point of entry. As a result,
only NatWest Group plc is able to issue
Group MREL eligible liabilities to third-
party investors, using the proceeds to
fund
the internal MREL targets and/or
requirements of its operating entities,
including NWB
Plc.
NWB Plc is therefore dependent on
NatWest Group plc to fund its internal
capital targets and its ability to source
appropriate funding at NatWest Group
plc level to support this. NWB Plc is also
dependent on NatWest Group plc to fund
its internal MREL target over time and its
ability to raise and maintain sufficient
amounts of external MREL liabilities to
support this.
If NatWest Group plc is unable to issue
adequate levels of MREL securities such
that it is unable to downstream sufficient
amounts to NWB Plc, this could lead to a
failure of NWB Group to meet its own
individual internal MREL requirements as
well as the internal MREL requirements
of subsidiaries within NWB Group. See
also, ‘
NWB Group may not meet the
prudential regulatory requirements for
capital and MREL, or manage its capital
effectively, which could trigger the
execution of certain management
actions or recovery options
’.
Any reduction in the credit rating and/or
outlooks assigned to NatWest Group plc,
any of its subsidiaries (including NWB Plc
or other NWB Group subsidiaries) or any
of their respective debt securities could
adversely affect the availability of
funding for NWB Group, reduce its
liquidity position and increase the cost of
funding.
Rating agencies regularly review
NatWest Group plc, NWB Plc and other
NatWest Group entity credit ratings and
outlooks, which could be negatively
affected by a number of factors that can
change over time, including: the credit
rating agency’s assessment of NWB
Group’s strategy and management’s
capability; its financial condition
including in respect of profitability, asset
quality, capital, funding and liquidity; the
level of political support for the industries
in which NWB Group operates; the
implementation of structural reform; the
legal and regulatory frameworks
applicable to NWB Group’s legal
structure; business activities and the
rights of its creditors; changes in rating
methodologies; changes in the relative
size of the loss-absorbing buffers
protecting bondholders and depositors;
the competitive environment, political
and economic conditions in NWB Group’s
key markets (including the impact of the
COVID-19 pandemic and any further
Scottish independence referendum); any
reduction of the UK’s sovereign credit
rating and market uncertainty.
In addition, credit ratings agencies are
increasingly taking into account
sustainability-related factors, including
climate, environmental, social and
governance related risk, as part of the
credit ratings analysis, as are investors in
their investment decisions.
Any reductions in the credit ratings of
NatWest Group plc, NWB Plc or of
certain other NatWest Group entities,
including, in particular, downgrades
below investment grade, or a
deterioration in the capital markets’
perception of NWB Group’s financial
resilience could significantly affect NWB
Group’s access to money markets,
reduce th
e size of its deposit base and
trigger additional collateral or other
requirements in derivatives contracts
and other secured funding arrangements
or the need to amend such
arrangements, which could adversely
affect NWB Group’s (and, in particular,
NWB Plc’s) cost of funding and its access
to capital markets and could limit the
range of counterparties willing to enter
into transactions with NWB Group (and,
in particular, with NWB Plc). This could in
turn adversely impact NWB Group’s
competitive position and threaten its
prospects in the short to medium-term.
Risk factors continued
NWB Group
Annual Report and Accounts 2021
175
NWB Group may be adversely affected if
NatWest Group fails to meet the
requirements of regulatory stress tests.
NatWest Group is subject to annual
stress tests by its regulator in the UK and
is also subject to stress tests by
European regulators with respect to
NWM N.V. and Ulster Bank Ireland DAC.
Stress tests are designed to assess the
resilience of banks to potential adverse
economic or financial developments and
ensure that they have robust, forward-
looking capital planning processes that
account for the risks associated with
their business profile. If the stress tests
reveal that a bank’s existing regulatory
capital buffers are not sufficient to
absorb the impact of the stress, then it is
possible that the bank will need to take
action to strengthen its capital position.
Failure by NatWest Group to meet the
quantitative and qualitative requirements
of the stress tests as set forth by its UK
regulator 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,
restrictions on capital distributions and
loss of investor confidence. This may, in
turn, negatively affect NWB Group.
NWB Group could incur losses or be
required to maintain higher levels of
capital as a result of limitations or failure
of various models.
Given the complexity of NWB Group’s
business, strategy and capital
requirements, NWB Group relies on
analytical and other models for a wide
range of purposes, including to manage
its business, assess the value of its assets
and its risk exposure, as well as to
anticipate capital and funding
requirements (including to facilitate
NatWest Group’s mandated stress
testing). In addition, NWB Group utilises
models for valuations, credit approvals,
calculation of loan impairment charges
on an IFRS 9 basis, financial reporting
and for financial crime (criminal activities
in the form of money laundering,
terrorist financing, bribery and
corruption, tax evasion and sanctions as
well as fraud risk management
(collectively, ‘financial crime’)). NWB
Group’s models, and the parameters and
assumptions on which they are based,
are periodically reviewed and updated to
maximise their accuracy.
As models analyse scenarios based on
assumed inputs and a conceptual
approach, model outputs therefore
remain uncertain. Failure of models
(including due to errors in model design)
or new data inputs (including non-
representative data sets), for example, to
accurately reflect changes in the micro
and macroeconomic environment in
which NWB 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 NatWest Group’s
or NWB Group’s current business model
or operations, or for findings of
deficiencies by NatWest Group’s (and in
particular, NWB Group’s) regulators
(including as part of NatWest Group’s
mandated stress testing) may render
some business lines uneconomic, result
in increased capital requirements, may
require management action or may
subject NWB Group to regulatory
sanction. NWB Group may also face
adverse consequences as a result of
actions based on models that are poorly
developed, implemented or used, models
that are based on inaccurate or
compromised data or as a result of the
modelled outcome being misunderstood,
or
by such information being used for
purposes for which it was not
designed.
NWB Group’s financial statements are
sensitive to the underlying accounting
policies, judgments, estimates and
assumptions.
The preparation of financial statements
requires management to make
judgments, estimates and assumptions
that affect the reported amounts of
assets, liabilities, income, expenses,
exposures and RWAs. While estimates,
judgments and assumptions take into
account historical experience and other
factors, (including market practice and
expectations of future events that are
believed to be reasonable under the
circumstances), actual results may differ
due to the inherent uncertainty in
making estimates, judgments and
assumptions (particularly those involving
the use of complex models).
The accounting policies deemed critical
to NWB Group’s results and financial
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 accounting
standards and interpretations that have
been issued by the International
Accounting Standards Board but which
have not yet been adopted by NWB
Group are discussed in ‘
Future
accounting developments
’.
Changes in accounting standards may
materially impact NWB 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
NWB Group having to recognise
additional liabilities on its balance sheet,
or in further write-downs or impairments
to its assets and could also significantly
impact the financial results, condition
and prospects of NWB Group.
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, NWB Group relies on quoted
market prices or, where the market for a
financial instrument is not 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, NWB Group’s internal
valuation models require NWB Group to
make assumptions, judgments and
estimates to establish fair value, which
are complex and often relate to matters
that are inherently uncertain.
NatWest Group (including NWB Group)
may become subject to the application of
UK statutory stabilisation or resolution
powers which may result in, among
other actions, the write-down or
conversion of NWB Group’s Eligible
Liabilities.
HM Treasury, the Bank of England and
the PRA and FCA (together, the
‘Authorities’) are granted substantial
powers to resolve and stabilise UK-
incorporated financial institutions.
Five stabilisation options exist: (i) transfer
of all of the business of a relevant entity
or the shares of the relevant entity to a
private sector purchaser; (ii) transfer of
all or part of the business of the relevant
entity to a ‘bridge bank’ wholly-owned
by the Bank of
England; (iii) transfer of
part of the assets, rights or liabilities of
the relevant entity to one or more asset
management vehicles for management
of the transferor’s assets, rights or
liabilities; (iv) the write-down, conversion,
transfer, modification, or suspension of
the relevant entity’s equity, capital
instruments and liabilities (‘Eligible
Liabilities’); and (v) temporary public
ownership of the relevant entity. These
tools may be applied to NatWest Group
plc as the parent company or to NWB
Group, as an affiliate, where certain
conditions are met (such as, whether the
firm is failing or likely to fail, or whether
it is reasonably likely that action will be
taken (outside of resolution) that will
result in the firm no longer failing or
being likely to fail). Moreover, there are
modified insolvency and administration
Risk factors continued
NWB Group
Annual Report and Accounts 2021
176
procedures for relevant entities, and the
Authorities have the power to modify or
override certain contractual
arrangements in certain circumstances
and amend the law for the purpose of
enabling their powers to be used
effectively and may promulgate
provisions with retrospective
applicability.
Under the UK Banking Act, the
Authorities are generally required to
have regard to specified objectives in
exercising the powers provided for by
the Banking Act. One of the objectives
(which is required to be balanced as
appropriate with the other specified
objectives) refers to the protection and
enhancement of the stability of the
financial system of the UK. Moreover, the
‘no creditor worse off’ safeguard
contained in the Banking Act may not
apply in relation to an application of the
separate write-down and conversion
power relating to capital instruments
under the Banking Act, in circumstances
where a stabilisation power is not also
used. Holders of debt instruments which
are subject to the power may, however,
have ordinary shares transferred to or
issued to them by way of compensation.
Uncertainty exists as to how the
Authorities may exercise their powers
including the determination of actions
undertaken in relation to the ordinary
shares and other securities issued by
NatWest Group (including NWB Group),
which may depend on factors outside of
NWB Group’s control. Moreover, the
Banking Act provisions remain untested
in practice.
If NatWest Group is at or is approaching
the point of non-viability such that
regulatory intervention is required, there
may be a corresponding adverse effect
on the business, results of operations
and outlook of NWB Group.
NatWest Group is subject to Bank of
England and PRA oversight in respect of
resolution, and NWB Group could be
adversely affected should the Bank of
England deem NatWest Group’s
preparations to be inadequate.
NatWest Group is subject to regulatory
oversight by the Bank of England and
the PRA, and is required (under the PRA
rulebook) to carry out an assessment of
its preparations for resolution, submit a
report of the assessment to the PRA, and
disclose a summary of this report. The
initial report was submitted to the PRA
on 30 September 2021 and the Bank of
England’s assessment of NatWest
Group’s preparations is scheduled to be
released on 10 June 2022 although the
Bank of England may provide feedback
before then.
NatWest Group has dedicated significant
resources towards the preparation of
NatWest Group for a potential resolution
scenario.
However, if the Bank of England
assessment identifies a significant gap in
NatWest Group’s ability to achieve the
resolvability outcomes, or reveals that
NatWest Group is not adequately
prepared to be resolved, or did not have
adequate plans in place to meet
resolvability requirements which came
into effect on 1 January 2022, NatWest
Group may be required to take action to
enhance its preparations to be
resolvable, resulting in additional costs
and the dedication of additional
resources. These actions may have an
impact on NatWest Group (and NWB
Group) as, depending on the Bank of
England’s assessment, potential action
may include, but is not limited to,
restrictions on maximum individual and
aggregate exposures, a requirement to
dispose of specified assets, a
requirement to change legal or
operational structure, a requirement to
cease carrying out certain activities
and/or maintaining a specified amount of
MREL. This may also impact NatWest
Group’s (and NWB Group’s) strategic
plans and may have an adverse effect
on the financial position of NWB Group
or result in reputational damage or a loss
of investor confidence.
Climate and sustainability-related risks
NWB Group and its customers face
significant climate-related risks, including
in transitioning to a net zero economy,
which may adversely impact NWB
Group.
Climate-related risks and uncertainties
are continuing to receive increasing
regulatory, judicial, political and societal
scrutiny.
Financial and non-financial risks from
climate change arise through physical
and transition risks. Furthermore, NWB
Group may also face a variety of
climate-related legal risks, both physical
and transition, from potential litigation
and conduct liability. See also, ‘
NWB
Group may be subject to potential
climate, environmental and other
sustainability-related litigation,
enforcement proceedings, investigations
and conduct risk’
.
There are significant uncertainties as to
the extent and timing of the
manifestation of the physical risks of
climate change, such as more severe
and frequent extreme weather events
(flooding, subsidence, heat waves and
long-lasting wildfires), rising sea levels,
biodiversity loss and resource scarcity.
Damage to NWB Group customers’
properties and operations could disrupt
business, impair asset values and
negatively impact the creditworthiness of
customers leading to increased default
rates, delinquencies, write-offs and
impairment charges in NWB Group’s
portfolios. In addition, NWB Group’s
premises and operations, or those of its
critical outsourced functions may
experience damage or disruption leading
to increased costs and negatively
affecting NatWest Group’s business
continuity and 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 and
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 NWB
Group operates will be required to meet
the goals of the 2015 Paris Agreement,
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 transition
remains uncertain, but it is expected to
be significant and may be disruptive
across the global economy and markets,
especially if these changes do not occur
in an orderly or timely manner or are not
effective in reducing emissions
sufficiently. Some sectors such as
property, energy (including oil and gas),
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 NWB Group fails to adapt its business
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 risks and
opportunities that NWB Group, its
customers and value chain face, NWB
Group’s reputation, business, operations
or value chain and results of operations
and outlook may be impacted adversely.
Risk factors continued
NWB Group
Annual Report and Accounts 2021
177
NatWest Group’s purpose-led strategy
includes climate change as one its three
areas of focus. This is likely to require
material changes to the business and
operating model of NWB Group which
entails significant execution risk.
In February 2020, NatWest Group
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 financing
activity by 2030 and intending to do
what is necessary to achieve alignment
with the 2015 Paris Agreement. In
addition, 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 transition to a net zero
economy, NatWest Group has also
announced its ambitions to phase out
providing banking services to UK coal
production, coal fired generation and
coal related infrastructure
by 1 October
2024, with a global phase out by 1
January 2030; to plan to stop financing
new customer relationships with
corporate customers who explore for,
extract or produce coal or operate
unabated coal powered plants; and that
it will 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 ambitions,
NatWest Group has also announced
other climate ambitions, targets and
commitments, and going-forward it may
also announce other climate ambitions,
targets and commitments, including
science-based targets to be validated by
the Science Based Target Initiative.
Making the changes necessary to
achieving these ambitions may materially
affect NWB Group’s business and
operations and will require significant
reductions to its financed emissions and
to its exposure to customers that do not
align with a transition to 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 reductions
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
NWB Group’s business, operating model
and existing exposures (potentially on
accelerated timescales and outside of
risk appetite) which may negatively
impact NWB Group’s ability to achieve its
financial targets and generate
sustainable returns.
NWB Group’s ability to achieve these
ambitions, targets and commitments
through its own specific targets will
depend to a large extent on many
factors beyond NWB Group’s control.
These include the macroeconomic
environment, the extent and pace of
climate change, including the timing and
manifestation of physical and transition
risks and the effectiveness of actions of
governments, legislators, 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, ‘
NatWest
Group (NWB Plc’s parent company)
continues to implement its purpose-led
strategy, which carries significant
execution and operational risks and may
not achieve its stated aims and targeted
outcomes
’ and ‘There are significant
challenges in relation to climate-related
data due to quality and other limitations,
lack of standardisation, consistency and
incompleteness which amongst other
factors contribute to the significant
uncertainties inherent in accurately
modelling the impact of climate-related
risks’
These internal and external factors and
uncertainties will make it challenging for
NWB Group to meet its climate
ambitions, targets and commitments and
there is a significant risk that all or some
of them will not be achieved. Any delay
or failure by NWB Group’s contribution to
in setting, making progress against or
meeting NatWest Group’s climate-related
ambitions, targets and commitments
through its own specific targets may
have a material adverse impact on NWB
Group, its reputation, business, results of
operations, outlook, market and
competitive position and may increase
the climate-related risks NWB Group
faces.
Any failure by NWB Group to implement
effective and compliant climate change
resilient systems, controls and
procedures could adversely affect NWB
Group’s ability to manage climate-
related risks.
The prudential regulation of climate-
related risks is an important driver in
how NatWest Group develops its risk
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 management
of financial risks from climate change
with respect to governance, risk
management, scenario analysis and
disclosures. Following the submission of
initial plans by UK banks in October
2019, in July 2020 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 COVID-19 pandemic
had disrupted some elements of NatWest
Group’s original plan and, as a result, the
updated plan would require additional
operating cycles reaching into 2022 and
beyond to prove embedding.
Subsequently the PRA issued its ‘Climate
Change Adaptation Report’ in October
2021 advising firms of the need to
continue to refine and innovate ways to
further integrate the financial risks from
climate change within risk management
practices and it restated that by the end
of 2021, firms should be able to
demonstrate that the expectations set
out in SS3/19 have been implemented
and embedded throughout the firms’
organisation as fully as possible. In
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 qualitative in
nature, approach to supervisory
requirements.
In June 2021, the Bank of England
launched its 2021 Biennial 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 change
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 nature.
The Bank of England guidance for the
CBES confirmed that it is exploratory in
nature and not intended to be used to
set capital requirements. In the
Ad
d
i
t
io
nal
i
nfo
r
mati
on
Risk factors continued
NWB Group
Annual Report and Accounts 2021
178
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 regulatory
capital frameworks as they relate to
climate related financial risk. To support
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 steps and
internal analysis, the Bank of England is
expected to publish a follow-up report 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 NWB
Group), may be required to hold
additional capital to enhance their
resilience against systemic and/or
institution specific vulnerabilities to
climate-related financial risks, which
could, in turn, negatively impact NWB
Group.
Any failure of NWB Group to fully and
timely embed climate-related risks into
its risk management practices and
framework to appropriately identify,
measure, manage and mitigate the
various climate-related physical and
transition risks and apply the appropriate
product governance in line with
applicable legal and regulatory
requirements and expectations, may
have a material and adverse impact on
NWB Group’s regulatory compliance,
prudential capital requirements, liquidity
position, reputation, business, results of
operations and outlook.
There are significant challenges in
relation to climate-related data due to
quality and other limitations, lack of
standardisation, consistency and
incompleteness which amongst other
factors contribute to the significant
uncertainties inherent in accurately
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 counterparties or
customers. These may not be generally
available or, if available, may not be
accurate, verifiable, reliable, consistent,
or comparable. Any failure of NatWest
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 customer
data, may have a material adverse
impact on NatWest Group’s ability to
prepare meaningful reporting of climate-
related risks and opportunities, its
regulatory compliance, reputation,
business and its competitive position.
In the absence of other sources,
reporting of financed emissions by
financial institutions, including NWB
Group, is necessarily based 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 greater number
and level of assumptions and estimates
than many of our financial disclosures.
These assumptions and estimates are
highly likely to change over time, and,
when coupled with the longer time
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 counterparty
or customer. There may also be data
gaps, particularly for private companies,
that are filled using proxy data, such as
sectoral averages, again developed in
different ways. As a result, our climate
related disclosures may be amended,
updated or restated in the future as the
quality and completeness of our data
and methodologies continues to improve.
These data quality challenges, gaps and
limitations could have a material impact
on NWB Group’s ability to make effective
business decisions about climate risks
and opportunities, including risk
management decisions, comply with
disclosure requirements and our ability
to monitor and report our progress in
meeting our ambitions, targets and
commitments.
Significant risks, uncertainties and
variables are inherent in the assessment,
measurement and mitigation of climate-
related risks. These include data quality
gaps and limitations mentioned above,
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 change
and the transition to a net zero economy
will unfold over the coming decades and
affect how and when climate-related
risks will manifest. These timeframes are
considerably longer than NWB Group’s
historical strategic, financial, resilience
and investment planning horizons.
As a result, it is very difficult to predict
and model the impact of climate-related
risks into precise financial and economic
outcomes and impacts. Climate-related
risks present significant methodological
challenges due to their forward-looking
nature, the lack and/or quality of
historical testing capabilities, lack of
standardisation and incompleteness of
emissions and other climate and sub-
sector related data and the immature
nature of risk measurement and
modelling methodologies. The evaluation
of climate-related risk exposure and the
development of associated potential risk
mitigation techniques largely depend on
the choice of climate scenario modelling
methodology and the assumptions made
which involves a number of risks and
uncertainties, for example

climate scenarios are not predictions
of what is likely to happen or what
NatWest Group would like to happen,
they rather explore the possible
implications of different judgments
and assumptions by considering a
series of scenarios;

climate scenarios do not provide a
comprehensive description of all
possible future outcomes;

it requires a special skill set that
banks traditionally do not have and
therefore NWB Group needs to rely
on third party advice, modelling, and
data which is also subject to many
limitations and uncertainties;

modelling approaches and data on
climate-related risks on financial
assets is immature in nature and it is
expected that techniques and
understanding will evolve rapidly in
the coming years;

it is challenging to benchmark or
back test the climate scenarios given
their forward-looking nature and the
multiple possible outcomes;

there is a significant uncertainty as to
how the climate will evolve over time,
how and when governments,
regulators, businesses, investors and
customers respond and how those
responses impact the economy, asset
valuations, land systems, energy
systems, technology, policy and
wider society;

the assumptions will be continually
evolving with more data/information
which may affect the baselines for
comparability across reporting
periods and impact internal and
external verification processes; and

the pace of the development of the
methodologies across different
sectors may be different and
therefore it may be challenging to
report on the whole balance sheet
with regard to emissions.
Accordingly, these risks and
uncertainties coupled with significantly
longer timeframes make the outputs of
climate-related risk modelling, including
Risk factors continued
NWB Group
Annual Report and Accounts 2021
179
emissions reductions targets and
pathways, inherently more uncertain
than outputs modelled for traditional
financial planning cycles based on
historical financial information.
Capabilities within NWB Group to
appropriately assess, model and manage
climate-related risks and the suitability of
the assumptions required to model and
manage climate-related risks
appropriately are developing. Even when
those capabilities are developed, the high
level of uncertainty regarding any
assumptions modelled, the highly
subjective nature of risk measurement
and mitigation techniques, incorrect or
inadequate assumptions and judgments
and data quality gaps and limitations
may lead to inadequate risk
management information and
frameworks, or ineffective business
adaptation or mitigation strategies,
which may have a material adverse
impact on NWB Group’s regulatory
compliance, reputation, business, results
of operations and outlook.
A failure to adapt NWB Group’s business
strategy, governance, procedures,
systems and controls to manage
emerging sustainability-related risks and
opportunities may have a material
adverse effect on NWB Group, its
reputation, business, results of
operations and outlook.
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 environmental
(including biodiversity and loss of natural
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 NWB
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 on increasing positive
impact on environment and biodiversity
and nature-based solutions. In 2021,
NatWest Group (including NWB Group)
accordingly classified ‘Biodiversity and
Nature Loss’ as an emerging risk for
NatWest Group (including NWB 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
impacts of financing activities on the
environment, biodiversity and nature as
well as supporting the growing sector of
nature-based solutions, habitat
restoration and biodiversity markets.
NatWest Group is in the early stages of
developing its approach and NatWest
Group recognises the need for more
progress.
There is also increased investor,
regulatory and customer scrutiny
regarding how businesses address 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 NWB
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 society.
The
increased focus on these issues may
create reputational and other risks for
financial institutions, including NWB
Group.
In addition to climate-related risks,
sustainability-related risks (i) may also
adversely affect economic activity, asset
pricing and valuations of issuers’
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 indirectly (for
example through macro-financial
changes); (iii) may also affect the viability
or resilience of business models over the
medium to longer term, particularly
those business models most vulnerable
to sustainability-related risks; (iv) can
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 NWB 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 effects
on our business.
Furthermore, sustainability-related risks
may be drivers of several different risk
categories simultaneously and may
exacerbate the risks described herein,
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).
Accordingly, any or delay by NatWest
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-related risks and
opportunities may have a material
adverse impact on NWB Group’s
reputation, liquidity position, business,
results of operations, outlook and the
value of NatWest Group’s securities
Any reduction in the ESG ratings of
NatWest Group (including NWB Group)
could have a negative impact on
NatWest Group’s (including NWB Group)
reputation and on investors’ risk appetite
and customers’ willingness to deal with
NatWest Group.
ESG ratings from agencies and data
providers which rate how NatWest
Group (including NWB Group) manages
environmental, social and governance
risks are increasingly influencing
investment decisions or being used as a
basis to label financial products and
services as green or sustainable. ESG
ratings are (i) unsolicited; (ii) subject to
the assessment and interpretation by the
ESG rating agencies; (iii) provided
without warranty; (iv) not a sponsorship,
endorsement, or promotion of NatWest
Group (including NWB Group) by the
relevant rating agency; and (v) may
depend on many factors some of which
are beyond NatWest Group’s and NWB
Group’s control (e.g. any change in
rating methodology). Any reduction in
the ESG ratings of NatWest Group
(including NWB Group) could have a
negative impact on NWB Group’s
reputation and could influence investors’
risk appetite for NWB Group’s and/or its
subsidiaries’ securities, particularly ESG
securities and could affect a customer’s
willingness to deal with NWB Group.
Increasing levels of climate,
environmental and sustainability-related
laws, regulation and oversight may
adversely affect NWB Group’s business
and expose NWB Group to increased
costs of compliance, regulatory sanction
and 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,
Risk factors continued
NWB Group
Annual Report and Accounts 2021
180
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 focused on
developing standardised definitions for
green and sustainable criteria of assets
and liabilities, integrating climate change
and sustainability into decision-making
and customers access to green and
sustainable financial products and
services which may have a significant
impact on the services provided by NWB
Group and its subsidiaries, especially
mortgage lending, and its associated
credit, market and financial risk profile.
They could also impact NWB Group’s
recognition of its climate and sustainable
funding and financing activity and may
adversely affect NWB Group’s ability to
achieve its climate strategy and climate
and sustainable funding and financing
ambitions.
In addition, NatWest Group and its
subsidiaries are and will be subject to
increasing entity wide climate-related
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
(including NWB Group) will be required
to provide enhanced climate-related
disclosures consistent with the TCFD
recommendations to comply with the
FCA Policy Statement on the new Listing
Rules (PS 20/17) that require commercial
companies with a UK premium listing –
such as NatWest Group - to make
climate related disclosures, consistent
with TCFD, on a ‘comply or explain’
basis. The FCA is proposing to expand
this requirement to a wider scope of
listed issuers which would include
NatWest Group’ subsidiaries - including
NWB Group - as it moves towards
mandatory TCFD reporting across the
UK economy by 2025 (See also, ‘
There
are significant challenges in relation to
climate-related data due to quality and
other limitations, lack of standardisation,
consistency and incompleteness which
amongst other factors contribute to the
significant uncertainties inherent in
accurately modelling the impact of
climate-related risks
.’)
In addition, NatWest Group’s EU
subsidiaries 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
NatWest Group not meeting investors’
expectations, may increase the cost of
doing business and may restrict access
of NatWest Group’s UK business to the
EU/EEA market.
NatWest Group (including NWB Group) is
also participating in various voluntary
carbon reporting and other standard
setting initiatives for disclosing climate
and sustainability-related information,
many of which have differing objectives
and methodologies and are at different
stages of development in terms of how
they apply to financial institutions.
Compliance with these developing and
evolving climate and sustainability-
related requirements is likely to require
NWB Group to implement significant
changes to its business models, product
and other governance, internal controls
over financial reporting, disclosure
controls and procedures, modelling
capability and risk management systems,
which may increase the cost of doing
business, entail additional change risk
and compliance costs.
Failure to implement and comply with
these legal and regulatory requirements
or emerging best practice expectations
may have a material adverse effect on
NWB Group’s regulatory compliance and
may result in regulatory sanction,
reputational damage and investor
disapproval each of which could have an
adverse effect on NWB Group’s business,
results of operations and outlook.
NWB
Group may be subject to potential
climate, environmental and other
sustainability-related litigation,
enforcement proceedings, investigations
and conduct risk.
Due to increasing new climate and
sustainability-related jurisprudence, laws
and regulations in the UK and other
jurisdictions, growing demand from
investors and customers for
environmentally sustainable products
and services, and regulatory scrutiny,
financial institutions, including NWB
Group, may through their business
activities face increasing litigation,
conduct, enforcement and contract
liability risks related to climate change,
environmental degradation and other
social, governance and sustainability-
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 climate
and/or sustainability related risks or
otherwise provide appropriate disclosure
to investors, customers, counterparties
and other stakeholders; (ii) conduct, mis-
selling and other customer protection
type claims; (iii) marketing that portrays
products, securities, activities or 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 understanding
of what constitutes positive climate,
environmental or sustainable outcomes
as a result of developing climate science,
leading to discrepancy between current
product offerings and investor and/or
market and/or broader stakeholder
expectations; (vi) any weaknesses or
failures in specific systems or processes
associated particularly with climate,
environmental or sustainability linked
products, including any failure in timely
implementation, onboarding and/or
updating of such systems or processes;
or (vii) counterparties, collaborators and
third parties in NWB Group’s value chain
action who act, or fail to act, or
undertake due diligence, or apply
appropriate risk management and
product governance in a manner that
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
NWB Group for financing or contributing
to climate change and environmental
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 science
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 assessing
claims about historic conduct or dealings
of financial institutions, including NWB
Group.
These potential litigation, conduct,
enforcement and contract liability risks
Risk factors continued
NWB Group
Annual Report and Accounts 2021
181
may have a material adverse effect on
NWB Group’s ability to achieve its
strategy, including its climate ambition,
and they could have an adverse effect
on NWB Group’s reputation, business,
financial results, position and prospects,
results of operations and outlook.
Operational and IT resilience risk
Operational risks (including reliance on
third party suppliers and outsourcing of
certain activities) are inherent in NWB
Group’s businesses.
Operational risk is the risk of loss
resulting from inadequate or failed
internal processes, procedures, people or
systems, or from external events,
including legal risks. NWB Group offers a
diverse range of products and services
supported directly or indirectly by third
party suppliers. As a result, operational
risks or losses can arise from a number
of internal or external factors (including
financial crime and fraud), for which
there is now greater scrutiny by third
parties on NWB Group’s compliance with
financial crime requirements; see ‘
NWB
Group is exposed to the risks of various
litigation matters, regulatory and
governmental actions and investigations
as well as remedial undertakings,
including conduct related reviews, anti-
money laundering and redress projects,
the outcomes of which are inherently
difficult to predict, and which could have
an adverse effect on NWB Group
’).
These risks are also present when NWB
Group relies on third-party suppliers or
vendors to provide services to it or its
customers, as is increasingly the case as
NWB 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 be
heightened as a result of the
implementation of NatWest Group’s
purpose-led strategy, NatWest Group’s
current cost-reduction measures, and
conditions affecting the financial services
industry generally (including the COVID-
19 pandemic and other geo-political
developments) as well as the legal and
regulatory uncertainty resulting
therefrom. It is unclear as to how the
future ways of working may evolve,
including in respect of how working
practices may develop, or how NWB
Group will evolve to best serve its
customers. Any of the above may place
significant pressure on NWB Group’s
ability to maintain effective internal
controls and governance frameworks.
NWB Group increasingly provides certain
shared critical services, including
property
and financial accounting,
regulatory reporting and certain
administrative, treasury and legal
services to other entities within NatWest
Group (in particular, NWM Plc). The
increased reliance by other NatWest
Group entities on the provision of such
services by NWB Group may result in
increased costs or liabilities to NWB
Group should NWB Group have to
increase its capacity to provide these
services internally, if it is required to
outsource to third parties in order to
provide or maintain these services, or if
a NatWest Group entity ceases to require
such services. The effective management
of operational risks is critical to meeting
customer service expectations and
retaining and attracting customer
business. Although NWB Group has
implemented risk controls and mitigation
actions, with resources and planning
having been devoted to mitigate
operational risk, such measures may not
be effective in controlling each of the
operational risks faced by NWB Group.
Ineffective management of such risks
could adversely affect NWB Group.
NWB Group is subject to increasingly
sophisticated and frequent cyberattacks.
NWB Group experiences a constant
threat from cyberattacks across the
entire NatWest Group (including NWB
Group) and against NatWest Group and
NWB Group’s supply chain, reinforcing
the importance of due diligence of and
close working relationship with the third
parties on which NWB Group relies. NWB
Group is reliant on technology, against
which there is a constantly evolving
series of attacks that are increasing in
terms of frequency, sophistication,
impact and severity. As cyberattacks
evolve and become more sophisticated,
NWB Group is required to continue to
invest in additional capability designed to
defend against the emerging threats. In
2021, NWB Group and its supply chain
were subjected to a small number of
Distributed Denial of Service (‘DDOS’)
and ransomware attacks, which are a
pervasive and significant threat to the
global financial services industry. The
focus is to manage the impact of the
attacks and sustain availability of
services for NWB Group’s customers.
NWB Group continues to invest
significant resources in the development
and evolution of cyber security controls
that are designed to minimise the
potential effect of such attacks.
Hostile attempts are made by third
parties to gain access to, introduce
malware (including ransomware) into
and exploit vulnerabilities of NWB
Group’s IT systems. NWB Group has
information and cyber security controls
in place to 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, ‘
NWB
Group’s operations are highly dependent
on its complex IT systems (including
those that enable remote working) and
any IT failure could adversely affect NWB
Group
’.
Any failure in NWB Group’s
cybersecurity policies, procedures or
controls, may result in significant
financial losses, major business
disruption, inability to deliver customer
services, or loss of data or other
sensitive information (including as a
result of an outage) and may cause
associated reputational damage. Any of
these factors could increase costs
(including costs relating COVID-19 to
notification of, or compensation for
customers, credit monitoring or card
reissuance), result in regulatory
investigations or sanctions being
imposed, or may affect NWB Group’s
ability to retain and attract customers.
Regulators in the UK, US and Europe
continue to recognise cybersecurity a
s
an important systemic risk to the
financial sector and have highlighted the
need for financial institutions to improve
their monitoring and control of, and
resilience (particularly of critical services)
to cyberattacks, and to provide timely
notification of them, as appropriate.
Additionally, third parties may also
fraudulently attempt to induce
employees, customers, third party
providers or other users who have
access to NWB Group’s systems to
disclose sensitive information in order to
gain access to NWB Group’s data or that
of NWB Group’s customers or
employees. Cybersecurity and
information security events can derive
from groups or factors such as: internal
or external threat actors, human error,
fraud or malice on the part of NWB
Group’s employees or third parties,
including third party providers, or may
result from accidental technological
failure.
NWB Group expects greater regulatory
engagement, supervision and
enforcement to continue at a high level
in relation to its overall resilience to
withstand IT systems and related
disruption, either through a cyberattack
or some other disruptive event. Such
Risk factors continued
NWB Group
Annual Report and Accounts 2021
182
increased regulatory engagement,
supervision and enforcement is uncertain
in relation to the scope, cost,
consequence and the pace of change,
which could negatively impact NWB
Group. Due to NWB Group’s reliance on
technology and the increasing
sophistication, frequency and impact of
cyberattacks, such attacks may have a
negative impact on NWB Group.
In accordance with the Data Protection
Act 2018 and the European Union
Withdrawal Act 2018, the Data
Protection, Privacy and Electronic
Communications (Amendments Etc.) (EU
Exit) Regulations 2019, as amended by
the Data Protection, Privacy and
Electronic Communications
(Amendments Etc.) (EU Exit) Regulations
2020 (‘UK Data Protection Framework’)
and European Banking Authority (‘EBA’)
Guidelines on ICT and Security Risk
Management, NWB Group is required to
ensure it implements timely, appropriate
and effective organisational and
technological safeguards against
unauthorised or unlawful access to the
data of NWB Group, its customers and its
employees. In order to meet this
requirement, NWB Group relies on the
effectiveness of its internal policies,
controls and procedures to protect the
confidentiality, integrity and availability
of information held on its IT systems,
networks and devices as well as with
third parties with whom NWB Group
interacts. A failure to monitor and
manage data in accordance with the UK
Data Protection Framework and EBA
requirements of the applicable legislation
may result in financial losses, regulatory
fines and investigations and associated
reputational damage.
NWB Group operations and strategy are
highly dependent on the accuracy and
effective use of data.
NWB Group relies on the effective use of
accurate data to support, monitor,
evaluate, manage and enhance its
operations and deliver its strategy. The
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 becoming
a critical strategic asset, which is subject
to increased regulatory focus. Failure to
have that data or the ineffective use or
governance of that data could result in a
failure to manage and report important
risks and opportunities or satisfy
customers’ expectations including the
inability to deliver innovative products
and services. This could also reduce in a
failure to deliver NWB Group’s strategy
and could place NWB Group at a
competitive disadvantage by increasing
its costs, inhibiting its efforts to reduce
costs or its ability to improve its systems,
controls and processes, which could
result in a failure to deliver NWB Group’s
strategy. These data limitations, or the
unethical or inappropriate use of data,
and/or non-compliance with customer
data protection laws could give rise to
conduct and litigation risks and may
increase the risk of operational events,
losses or other adverse consequences
due to inappropriate models, systems,
processes, decisions or other actions.
NWB Group’s operations are highly
dependent on its complex IT systems
(including those that enable remote
working) and any IT failure could
adversely affect NWB Group.
NWB Group’s operations are highly
dependent on the ability to process a
very large number of transactions
efficiently and accurately while
complying with applicable laws and
regulations. The proper functioning of
NatWest Group’s (including NWB
Group’s) payment systems, financial
crime, fraud systems and controls, risk
management, credit analysis and
reporting, accounting, customer service
and other IT systems (some of which are
owned and operated by other entities in
NatWest Group or third parties), as well
as
the communication networks between
their branches and main data processing
centres, is critical to NWB Group’s
operations.
Individually or collectively, any critical
system failure, material loss of service
availability or material breach of data
security could cause serious damage to
NWB Group’s ability to provide services
to its customers, 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 affect
its regulatory approvals, competitive
position, business and brands, which
could undermine its ability to attract and
retain customers. This risk is heightened
as most of NWB Group’s employees
continue to work remotely, as it
outsources certain functions and as it
continues to innovate and offer new
digital solutions to its customers as a
result of the trend towards online and
mobile banking.
In 2021, NWB Group continued to make
considerable investments to further
simplify, upgrade and improve its IT and
technology capabilities (including
migration of certain services to cloud
platforms). NWB Group also continues to
develop and enhance digital services for
its customers and seeks to improve its
competitive position through enhancing
controls and procedures and
strengthening the resilience of services
including cyber security. Any failure of
these investment and rationalisation
initiatives to achieve the expected
results, due to cost challenges or
otherwise, could negatively affect NWB
Group’s operations, its reputation and
ability to retain or grow its customer
business or adversely impact its
competitive position, thereby negatively
impacting NWB Group.
Remote working may adversely affect
NWB Group’s ability to maintain effective
internal controls.
From March 2020 to September 2021,
many of NWB Group’s employees
worked exclusively on a remote basis.
Following the lifting of government
restrictions, NWB 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 NWB
Group employees continues to place
heavy reliance on the IT systems that
enable remote working and increased
exposure to fraud, conduct, operational
and other risks and may place additional
pressure on NWB Group’s ability to
maintain effective internal controls and
governance frameworks. Remote
working arrangements are also subject
to regulatory scrutiny to ensure
adequate recording, surveillance and
supervision of regulated activities, and
compliance with regulatory requirements
and expectations, including requirements
to: meet threshold conditions for
regulated activities; ensure the ability to
oversee functions (including any
outsourced functions); ensure no
detriment is caused to customers; and
ensure no increased risk of financial
crime. See also, ‘
A failure in NWB
Group’s risk management framework
could adversely affect NWB Group,
including its ability to achieve its
strategic objectives
’. Moreover
,
the IT
systems that enable remote working
interface with third-party systems, and
NWB Group could experience service
denials or disruptions if such systems
exceed capacity or if a third-party
system fails or experiences any
interruptions, all of which could result in
business and customer interruption and
related reputational damage, significant
compensation costs, regulatory sanctions
and/or a breach of applicable
regulations. See also, ‘
NWB Group’s
operations are highly dependent on its
complex
Risk factors continued
NWB Group
Annual Report and Accounts 2021
183
IT systems (including those that enable
remote working) and any IT failure could
adversely affect NWB Group
’.
Sustained periods of remote working
may
also negatively affect workforce
morale. Whilst NWB Group has taken
measures seeking to maintain the health,
wellbeing and safety of its employees,
these measures may be ineffective.
Any of the above could impair NWB
Group’s ability to hire, retain and engage
well-qualified employees, especially at a
senior level, which in turn may adversely
impact NWB Group’s ability to serve its
customers efficiently and impact
productivity across NWB Group. This
could also adversely affect NWB Group’s
reputation, and competitive position and
its ability to grow its business.
NWB Group relies on attracting, retaining
and developing diverse senior
management and skilled personnel, and
is required to maintain good employee
relations.
NWB Group’s success depends on its
ability to attract, retain through creating
an inclusive environment, and develop
highly skilled and qualified diverse
personnel, including senior management,
directors and key employees especially
for technology and data focused roles, in
a highly competitive market and under
internal cost reduction pressures. NWB
Group’s ability to do this may be more
difficult due to the cost reduction
pressures, heightened regulatory
oversight of banks and the increasing
scrutiny of, and (in some cases)
restrictions placed upon, employee
compensation arrangements (in
particular those of banks in receipt of
government support such as NatWest
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 increase the number of
departures of existing employees.
Moreover, a failure to foster a diverse
and inclusive workforce may have an
adverse impact on NWB Group’s
employee engagement and the
formulation and execution of its strategy,
and could also have a negative effect on
its reputation with customers, investors
and regulators.
The inability to compensate employees
competitively and/or any reduction of
compensation, as a result of negative
economic developments or otherwise,
could have an adverse effect on NWB
Group’s ability to hire, retain and engage
well qualified employees, especially at a
senior level, which may have a negative
impact on the financial position and
prospects of NWB Group.
Many of NWB Group’s employees in the
UK, the ROI and continental Europe are
represented by employee representative
bodies, including trade unions and works
councils. Engagement with its employees
and such bodies is important to NWB
Group in maintaining good employee
relations. Any failure to do so could
impact NWB Group’s ability to operate its
business effectively.
A failure in NWB Group’s risk
management framework could adversely
affect NWB Group, including its ability to
achieve its strategic objectives.
Risk management is an integral part of
all of NWB Group’s activities and includes
the definition and monitoring of NWB
Group’s risk appetite and reporting on its
risk exposure and the potential impact
thereof on its financial condition.
Financial risk management is highly
dependent on the use and 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 incentives, lack of
accountability control and governance,
incomplete risk monitoring and
management or insufficient challenges or
assurance processes. Failure to manage
risks effectively could adversely impact
NWB Group’s reputation or its
relationship with its regulators,
customers, shareholders or other
stakeholders.
In addition, financial crime risk
management is dependent on the use
and effectiveness of financial crime
assessment, systems and controls. Weak
or ineffective financial crime processes
and controls may risk 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
NWB Group) has made and continues to
make significant, multi-year investments
to strengthen and improve its overall
financial crime control framework with
prevention systems and capabilities. As
part of its ongoing programme of
investment, there is current and future
investment planned to further strengthen
financial crime controls 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.
NWB Group’s operations are inherently
exposed to conduct risks, which include
business decisions, actions or reward
mechanisms that are not responsive to
or aligned with NWB Group’s regulatory
obligations, customers’ needs or do not
reflect NWB Group’s customer-focused
strategy, ineffective product
management, unethical or inappropriate
use of data, information asymmetry,
implementation and utilisation of new
technologies, outsourcing of customer
service and product delivery, the
possibility of mis-selling of financial
products and mishandling of customer
complaints. Some of these risks have
materialised in the past and ineffective
management and oversight of conduct
risks may lead to further remediation
and regulatory intervention or
enforcement.
NWB Group’s businesses are also
exposed to risks from employee-
misconduct including non-compliance
with policies and regulations, negligence
or fraud (including financial crimes and
fraud), any of which could result in
regulatory fines or sanctions and serious
reputational or financial harm to NWB
Group. These risks may be exacerbated
as most of NWB Group’s employees
continue to work remotely, which places
additional pressure on NWB Group’s
ability to maintain effective internal
controls and governance frameworks.
NWB Group has been seeking to embed
a strong risk culture across the
organisation and has implemented
policies and allocated new resources
across all levels of the organisation to
manage and mitigate conduct risk and
expects to continue to invest in its risk
management framework. However, such
efforts may not insulate NWB Group
from future instances of misconduct and
no assurance can be given that NWB
Group’s strategy and control framework
will be effective. Any failure in NWB
Group’s risk management framework
could negatively affect NWB Group and
its financial condition through
reputational and financial harm and may
result in the inability to achieve its
strategic objectives for their customers,
employees and wider stakeholders.
NWB Group’s operations are subject to
inherent reputational risk.
Reputational risk relates to stakeholder
and public perceptions of NWB Group
arising from an actual or perceived
failure to meet stakeholder expectations,
including with respect to NatWest
Group’s purpose-led strategy and related
targets, due to any events, behaviour,
action or inaction by NWB Group, its
employees or those with whom NWB
Group is associated. See also, ‘
NWB
Group’s businesses are subject to
substantial regulation and oversight,
Risk factors continued
NWB Group
Annual Report and Accounts 2021
184
which are constantly evolving and may
adversely affect NWB Group
’. This
includes brand damage, which may be
detrimental to NWB Group’s business,
including its ability to build or sustain
business relationships with customers,
and may cause low employee morale,
regulatory censure or reduced access to,
or an increase in the cost of, funding.
Reputational risk may arise whenever
there is a material lapse in standards of
integrity, compliance, customer or
operating efficiency and may adversely
affect NWB Group’s ability to attract and
retain customers. In particular, NWB
Group’s ability to attract and retain
customers (particularly, corporate and
retail depositors) may be adversely
affected by, amongst others: negative
public opinion resulting from the actual
or perceived manner in which NWB
Group or any other member of NatWest
Group conducts or modifies its business
activities and operations, media
coverage (whether accurate or
otherwise), employee misconduct, NWB
Group’s financial performance, IT
systems failures or cyberattacks, data
breaches, financial crime and fraud, the
level of direct and indirect government
support, or the actual or perceived
practices in the banking and financial
industry in general, or a wide variety of
other factors.
Modern technologies, in particular online
social networks and other broadcast
tools that facilitate communication with
large audiences in short timeframes and
with minimal costs, may also significantly
increase and accelerate the impact of
damaging information and allegations.
Although NWB Group has implemented a
Reputational Risk Policy to improve the
identification, assessment and
management of customers, transactions,
products and issues which represent a
reputational risk, NWB Group cannot be
certain that it will be successful in
avoiding damage to its business from
reputational risk.
Legal, regulatory and conduct risk
NWB Group’s businesses are subject to
substantial regulation and oversight,
which are constantly evolving and may
adversely affect NWB Group.
NWB Group is subject to extensive laws,
regulations, corporate governance
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 if EU/EEA and UK laws
diverge as a result of Brexit. NWB Group
expects government and regulatory
intervention in the financial
services
industry to remain high for the
foreseeable future.
In recent years, regulators and
governments have focused on reforming
the prudential regulation of the financial
services industry and the manner in
which the business of financial services is
conducted. Amongst others, measures
have included: enhanced capital, liquidity
and funding requirements,
implementation of the UK ring-fencing
regime, implementation and
strengthening of the recovery and
resolution framework applicable to
financial institutions in the UK, the EU
and the US, financial industry reforms
(including in respect of MiFID II),
corporate governance requirements,
restrictions on the compensation of
senior management and other
employees, enhanced data protection
and IT resilience requirements, financial
market infrastructure reforms (including
enhanced data protection and IT
resilience requirements, enhanced
regulations in respect of the provision of
‘investment services and activities’), and
increased regulatory focus in certain
areas, including conduct, consumer
protection, competition and disputes
regimes, anti-money laundering,
anti-
corruption, anti-bribery, anti-tax evasion,
payment systems, sanctions and anti-
terrorism laws and regulations.
Other areas in which, and examples of
where, governmental policies, regulatory
and accounting changes and increased
public and regulatory scrutiny could
have an adverse impact (some of which
could be material) on NWB Group
include, but are not limited to, the
following:

general changes in government,
central bank, regulatory or
competition policy, or changes in
regulatory regimes that may
influence investor decisions in the
jurisdictions in which NWB Group
operates;

rules relating to foreign ownership,
expropriation, nationalisation and
confiscation of assets;

increased scrutiny from the CMA,
FCA and Payment Systems Regulator
(‘PSR’) for the protection and
resilience of, and competition and
innovation in, digital markets, UK
payment systems and retail banking
developments relating to the UK
initiative on Open Banking, Open
Finance and the European directive
on payment services;

the ongoing compliance by NatWest
Group with CMA’s Retail Banking
Market Order 2017 (the ‘Order’) as
well as the ongoing consultation by
the UK Government to introduce
penalties for breaches of the Order
(in addition to the current customer
remediation requirements);

ongoing competition litigation in the
English courts around payment card
interchange fees, combined with
increased regulatory scrutiny (from
the PSR) of the Visa and Mastercard
card schemes;

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 CJEU 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 changes to,
taxes, levies or fees applicable to
NWB Group’s operations, such as the
imposition of a financial transaction
tax, introduction of global minimum
tax rules, changes in tax rates,
changes in the scope and
administration of the Bank Levy,
increases in the bank corporation tax
surcharge in the UK, restrictions on
the tax deductibility of interest
payments or further restrictions
imposed on the treatment of carry-
forward tax losses that reduce the
value of deferred tax assets and
require increased payments of tax;

increased regulatory focus on
customer protection (such as the
FCA’s consumer duty 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 NWB Group; and

regulatory enforcement in the form
of PRA imposed financial penalties
for failings in banks’ regulatory
reporting governance and controls,
and regulatory scrutiny following the
2019 PRA “Dear CEO letter” letter
regarding PRA’s ongoing focus on:
the integrity of regulatory reporting,
which the PRA considers has equal
standing with financial reporting; the
PRA’s thematic reviews of the
governance, controls and processes
for preparing regulatory returns of
selected UK banks, including NatWest
Group; the publication of the PRA’s
common findings from those reviews
in September 2021; and NatWest
Group’s programme of improvements
to meet PRA expectations.
Risk factors continued
NWB Group
Annual Report and Accounts 2021
185
These and other recent regulatory
changes, proposed or future
developments and heightened levels of
public and regulatory scrutiny in the UK,
the EU and the US have resulted in
increased capital, funding and liquidity
requirements, changes in the competitive
landscape, changes in other regulatory
requirements and increased operating
costs, and have impacted, and will
continue to impact, competitive position,
product offerings and business models.
Future competition investigations, market
reviews, or the regulation of mergers
may lead to the imposition of financial
penalties or market remedies that may
adversely impact NatWest Group’s
competitive or financial position. Any of
these developments (including any failure
to comply with new rules and
regulations) could also have a significant
impact on NWB Group’s authorisations
and licences, the products and services
that NWB Group may offer, its reputation
and the value of its assets, NWB Group’s
operations or
legal entity structure, and
the manner in which NWB Group
conducts its business. Material
consequences could arise should NWB
Group be found to be non-compliant
with these regulatory requirements.
Regulatory developments may also result
in an increased number of regulatory
investigations and proceedings and have
increased the risks relating to NWB
Group’s ability to comply with the
applicable body of rules and regulations
in the manner and within the timeframes
required.
Changes in laws, rules or regulations, or
in their interpretation or enforcement, or
the implementation of new laws, rules or
regulations, including contradictory or
conflicting laws, rules or regulations by
key regulators or policymakers in
different jurisdictions, or failure by NWB
Group to comply with such laws, rules
and regulations, may adversely affect
NWB Group’s business, results of
operations and outlook. In addition,
uncertainty and insufficient international
regulatory coordination as enhanced
supervisory standards are developed and
implemented may adversely affect NWB
Group’s ability to engage in effective
business, risk and capital management
planning.
NWB Group is exposed to the risks of
various litigation matters, regulatory and
governmental actions and investigations
as well as remedial undertakings,
including conduct-related reviews, anti-
money laundering and redress projects,
the outcomes of which are inherently
difficult to predict, and which could have
an adverse effect on NWB Group.
NWB Group’s operations are diverse and
complex and it operates in legal and
regulatory environments that expose it to
potentially significant legal proceedings,
and civil and criminal regulatory and
governmental actions. NWB Group has
resolved a number of legal and
regulatory actions over the past several
years but continues to be, and may in
the future be, involved in such actions in
the US, the UK, Europe and other
jurisdictions.
NWB Group is currently, has recently
been and will likely be involved in a
number of significant legal and
regulatory actions, including
investigations, proceedings and ongoing
reviews (both formal and informal) by
governmental law enforcement and
other agencies and litigation proceedings
relating to, among other matters, the
setting of benchmark rates such as
LIBOR and related derivatives trading,
product mis-selling, customer
mistreatment, anti-money laundering
and various other compliance issues.
Legal and regulatory actions are subject
to many uncertainties, and their
outcomes, including the timing, amount
of fines, damages or settlements or the
form of any settlements, which may be
material and in excess of any related
provisions, are often difficult to predict,
particularly in the early stages of a case
or investigation. NWB Group’s
expectations for resolution may change
and substantial additional provisions and
costs may be recognised in respect of
any matter.
The resolution of significant
investigations includes National
Westminster Bank Plc’s October 2021
guilty plea for breaches of the UK Money
Laundering Regulations 2007, which
resulted in a fine of approximately £265
million. For additional information
relating to these and other legal and
regulatory proceedings and matters to
which NWB Group is currently exposed,
see ‘
Litigation and regulatory matters
’ at
Note 27 to the consolidated accounts.
The recent guilty pleas, other recently
resolved matters or adverse outcomes or
resolution of current or future legal or
regulatory actions, including conduct-
related reviews or redress projects, could
increase the risk of greater regulatory
and third party scrutiny and could have
material collateral consequences for
NWB Group’s business and result in
restrictions or limitations on NWB
Group’s operations. These may include
consequences resulting from the need to
reapply for various important licences or
obtain waivers to conduct certain
existing activities of NWB Group, which
may take a significant period of time and
the results of which are uncertain.
Failure to obtain such licences or waivers
could adversely impact NWB Group’s
business, including if it results in NWB
Group being precluded from carrying out
certain activities. This in turn and/or any
fines, settlement payments or penalties
could adversely impact NWB Group’s
capital position. Similar consequences
could result from legal or regulatory
actions relating to other parts of NatWest
Group.
Failure to comply with undertakings
made by NWB Group to its regulators
may result in additional measures or
penalties being taken against NWB
Group. In addition, any failure to
administer conduct redress processes
adequately, or to handle individual
complaints fairly or appropriately, could
result in further claims as well as the
imposition of additional measures or
limitations on NWB Group’s operations,
additional supervision by NWB Group’s
regulators, and loss of investor
confidence.
NWB Group may not effectively manage
the transition of LIBOR and other IBOR
rates to alternative risk free rates.
UK and international regulators are
driving the transition from the use of
interbank offer rates (‘IBORs’), including
LIBOR, to alternative primarily risk free
rates (‘RFRs’). As of 31 December 2021,
LIBOR, as currently determined, has
ceased for all tenors of GBP, JPY, CHF,
EUR, and for the 1 week and 2 month
tenors for USD. The remaining USD
LIBOR tenors, as currently determined,
are due to cease after 30 June 2023. The
FCA has used its powers under the UK
Benchmarks Regulation (‘UK BMR’) to
require, for a limited period of time after
31 December 2021, the ongoing
publication of the 1, 3, and 6 month GBP
and JPY LIBOR tenors using a changed
methodology (i.e., ‘Art23A LIBOR’ on a
synthetic basis). The UK has passed the
Critical Benchmarks (References and
Administrators’ Liability) Act 2021
(‘Critical Benchmarks Act’) which
establishes a framework that allows the
ongoing use of Art23A LIBOR under
certain circumstances where contracts
have pro-actively transitioned onto
alternative rates. 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
Risk factors continued
NWB Group
Annual Report and Accounts 2021
186
very quickly; and (ii) mis-matches
between positions in cleared derivatives
and the exposures they are hedging
where those exposures are permitted to
make use of Art23A LIBOR, as the FCA
has chosen not to permit the use of
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
LIBOR tenors after 31 December 2021,
other than in a very limited range of
circumstances. NWB Group will continue
to have ongoing exposure to the
remaining USD LIBOR tenors until they
cease at the end of June 2023.
NWB Group had significant exposures to
IBORs and has actively sought to
transition away from these during 2021
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 LIBOR
exposures so that they cease to
reference LIBOR and instead reference
alternative 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) have conducted mass
conversion exercises in December 2021
covering GBP, JPY, CHF and EUR LIBOR
cleared derivatives to fully transition all
outstanding LIBOR exposure to the
relevant RFR . NWB Group entities, along
with many of their major counterparties,
have already adhered to the ISDA IBOR
fall-backs supplement and protocol
which establishes a clear, industry
accepted, contractual process to
manage the transition from IBORs to
RFRs for non-cleared derivative
products.
These transition efforts include extensive
engagement with customers, industry
working groups and regulators to seek to
deliver transition in a transparent and
economically appropriate manner. Any
economic impacts will be dependent 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 accept, and transition to,
these conventions. Furthermore, certain
IBOR obligations may not be able to be
pro-actively changed which could,
depending on any over-arching
legislative transition frameworks,
potentially result in fundamentally
different economic outcomes than
originally intended. The uncertainties
around the manner of transition to RFRs,
and the ongoing broader acceptance
and use of RFRs across the market,
expose NWB Group, its clients and the
financial services 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, but
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
NWB Group’s performance, including its
cost of funds and its risk management
related financial models; (iii) pricing,
interest rate or settlement risks such as
changes to benchmark rates that could
impact pricing, interest rate or
settlement mechanisms in or on certain
instruments; (iv) operational risks due to
the requirement to adapt IT systems,
trade reporting infrastructure and
operational processes, as well as
ensuring compliance with restrictions on
new USD LIBOR usage after December
2021; (v) conduct 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 states and
the EU, the UK has not provided a clear
and robust safe harbour to protect
against litigation and potential liability
arising out of the switch to ‘synthetic
LIBOR’.
Notwithstanding all efforts to date, until
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 customer
groups, it remains difficult to determine
to what extent the changes will affect
NWB 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 affect
financial instruments originally
referencing LIBOR as the benchmark.
The implementation of any alternative
RFRs may be impossible
or impracticable
under the existing terms of certain
financial instruments and could have an
adverse effect on the value of, return on
and trading market for, certain financial
instruments and on NWB Group’s
profitability.
Changes in tax legislation or failure to
generate future taxable profits may
impact the recoverability of certain
deferred tax assets recognised by NWB
Group.
In accordance with the accounting
policies set out in ‘
Critical accounting
policies and key sources of estimation
uncertainty
’, NWB Group has recognised
deferred tax assets on losses available to
relieve future profits from tax only to the
extent it is probable that they will be
recovered. The deferred tax assets are
quantified on the basis of current tax
legislation and accounting standards and
are subject to change in respect of the
future rates of tax or the rules for
computing taxable profits and offsetting
allowable
losses.
Failure to generate sufficient future
taxable profits or further changes in tax
legislation (including with respect to
rates of tax) or accounting standards
may reduce the recoverable amount of
the recognised tax loss deferred tax
assets, amounting to £608 million as at
31 December 2021. Changes to the
treatment of certain deferred tax assets
may impact NWB Group’s capital
position. In addition, NWB Group’s
interpretation or application of relevant
tax laws may differ from those of the
relevant tax authorities and provisions
are made for potential tax liabilities that
may arise on the basis of the amounts
expected to be paid to tax authorities.
The amounts ultimately paid may differ
materially from the amounts provided
depending on the ultimate resolution of
such matters.
Forward-looking statements
NWB Group
Annual Report and Accounts 2021
187
Cautionary statement regarding forward-looking statements
This document contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform
Act of 1995, such as statements that include, without limitation, the words ‘expect’, ‘estimate’, ‘project’, ‘anticipate’, ‘commit’,
‘believe’, ‘should’, ‘intend’, ‘will’, ‘plan’, ‘could’, ‘probability’, ‘risk’, ‘Value-at-Risk (VaR)’, ‘target’, ‘goal’, ‘objective’, ‘may’,
‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and similar expressions or variations on these expressions. These statements
concern or may affect future matters, such as NWB Group’s future economic results, business plans and current strategies. In
particular, this document may include forward-looking statements relating to NWB Group in respect of, but not limited to: the
impact of the COVID-19 pandemic, its regulatory capital position and related requirements, its financial position, profitability and
financial performance (including financial, capital, cost savings and operational targets), the implementation of NatWest Group’s
purpose-led strategy, NWB Group’s ESG and climate related targets, its access to adequate sources of liquidity and funding,
increasing competition from new incumbents and disruptive technologies, its exposure to third party risks, its ongoing compliance
with the UK ring-fencing regime and ensuring operational continuity in resolution, its impairment losses and credit exposures under
certain specified scenarios, substantial regulation and oversight, ongoing legal, regulatory and governmental actions and
investigations, the transition of LIBOR and IBOR rates to alternative risk free rates and NWB Group’s exposure to economic and
political risks (including with respect to terms surrounding Brexit and climate change), operational risk, conduct risk, financial crime
risk, cyber, data and IT risk, key person risk and credit rating risk. Forward-looking statements are subject to a number of risks
and uncertainties that might cause actual results and performance to differ materially from any expected future results or
performance expressed or implied by the forward-looking statements. Factors that could cause or contribute to differences in
current expectations include, but are not limited to, the impact of the COVID-19 pandemic, the outcome of legal, regulatory and
governmental actions and investigations, legislative, political, fiscal and regulatory developments, accounting standards,
competitive conditions, technological developments, interest and exchange rate fluctuations and general economic and political
conditions and the impact of climate related risks and the transitioning to net zero economy. These and other factors, risks and
uncertainties that may impact any forward-looking statement or the NWB Group's actual results are discussed in the NWB Plc's UK
2021 Annual Report and Accounts (ARA). The forward-looking statements contained in this document speak only as of the date of
this document and NWB Plc does not assume or undertake any obligation or responsibility to update any of the forward-looking
statements contained in this document, whether as a result of new information, future events or otherwise, except to the extent
legally required.