Final Results

National Westminster Bank Plc

2020 Annual Results

Financial review

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' 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 (renamed from The Royal Bank of Scotland Group plc on 22 July 2020) 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, respectively, and references to 'pence' represent pence in the United Kingdom ('UK'). 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, and references to 'cents' represent cents in the US. The abbreviation '€' represents the 'euro', and the abbreviations '€m' and '€bn' represent millions and thousands of millions of euros, respectively, and references to 'cents' represent cents in the European Union ('EU').

To aid readability, this document retains references to EU legislative and regulatory provisions in effect in the UK before 1 January 2021 that have now been implemented in UK domestic law. These references should be read and construed as including references to the applicable UK implementation measures with effect from 1 January 2021.

Description of business

The principal entities under NWH Ltd are National Westminster Bank Plc (which wholly owns Coutts and Company and Ulster Bank Limited), The Royal Bank of Scotland plc and Ulster Bank Ireland DAC.

Principal activities and operating segments

NWB Group serves customers across the UK and Ireland 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 individuals and mass affluent customers in the UK and includes Ulster Bank customers in Northern Ireland.

Commercial Banking serves start-up, SME, commercial and corporate customers in the UK.

Private Banking serves UK-connected, high net worth, individuals and their business interests.

Central items & other includes corporate functions, such as 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.

Business Developments

In December 2020, we acquired a £3.0 billion portfolio of prime UK mortgages from Metro Bank plc. Growing our mortgage book is an important strategic priority, as we build a bank that delivers sustainable returns for shareholders. The addition of this loan book will supplement the strong organic growth that we continue to achieve.

Financial review

Performance overview

The business performance of NWB Group in the year has been significantly impacted by the challenges and uncertainty the economy continues to face as a result of COVID-19. However, NWB Group has a robust capital position, underpinned by a resilient, capital generative and well diversified business. A strong balance sheet and prudent approach to risk means NWB Group is well placed not only to withstand COVID-19 related impacts but to provide the right support to customers in the tough times to come.

Financial performance in a challenging environment

NWB Group attributable profit for the year was £536 million compared with £884 million in 2019, reflecting lower income and significantly higher impairment charges primarily due to the current COVID-19 crisis and resulting uncertain economic conditions, partly offset by a reduction in costs.

Total income decreased by £208 million compared with 2019 as the lower yield curve, mortgage margin dilution, subdued business activity and lower consumer spending due to government measures in response to COVID-19 were partially offset by strong balance growth.

Operating expenses decreased by £1,081 million compared with 2019 principally due to lower litigation and conduct costs, reducing the cost:income ratio from 79.3% to 69.1%.

Impairment losses increased by £1,597 million compared with 2019, primarily reflecting the deterioration of the economic outlook as a result of the COVID-19 pandemic driving Stage 2 charges.

Robust balance sheet with strong capital levels

Total assets increased by £71.0 billion to £389.5 billion compared with £318.5 billion at 31 December 2019. This included net increases in loans to customers - amortised cost of £39.3 billion primarily driven by growth in retail mortgages and an increase in corporate lending due to drawdowns against UK Government lending initiatives in response to COVID-19 uncertainty.

Customer deposits increased by £51.5 billion as customers sought to retain liquidity in response to the uncertain economic environment together with increases of £35.5 billion in cash and balances at central banks and £12.5 billion in reverse repos as a result.

Common Equity Tier 1 (CET1) ratio increased to 17.8% from 15.9% due to a £2.6 billion increase in CET1 capital primarily driven by a reduction in the regulatory capital deductions for significant investments in other financial institutions of £0.4 billion, software development costs of £0.5 billion due to the implementation of CRR2 amended Article 36 and a £1.0 billion increase for IFRS 9 transitional arrangements on expected credit losses, which offsets the impact of the increased impairment losses charged to the attributable profit of £0.6 billion. RWAs increased by £5.8 billion to £86.9 billion primarily due to an increase in credit risk RWAs of £5.7 billion during 2020.

Financial review

Summary consolidated income statement for the year ended 31 December 2020

NWB Group reported a profit of £536 million compared with £884 million in 2019, driven mainly by an increase in impairment losses of £1,597 million reflecting the deterioration of the economic outlook as a result of the COVID-19 pandemic, together with a decrease in total income of £208 million, partially offset by a reduction in operating expenses of £1,081 million.

Total income decreased by £208 million, or 2%, to £8,955 million compared with £9,163 million in 2019.

Net interest income decreased by £26 million to £5,810 million compared with £5,836 million in 2019, reflecting the lower yield curve and mortgage margin dilution, partially offset by a substantial increase in asset volumes as a result of mortgage lending growth and drawdowns against UK Government lending schemes.

Non-interest income decreased by £182 million to £3,145 million compared with £3,327 million in 2019. Net fees and commissions decreased by £339 million to £1,384 million due to regulatory changes, subdued business activity and lower customer spending resulting from government measures in response to COVID-19 in 2020. Other non-interest income increased by £157 million to £1,761 million compared with £1,604 million in 2019, as a result of a £208 million increase in recharges to other NatWest Group entities.

Other key drivers include: 

· an increase in hedging-related income of £75 million;

· increased income from asset sales of £25 million;

· a decrease of £108 million in income related to the disposal of subsidiaries, branches and property; and

· a £25 million increase in fair value losses.

Operating expenses decreased by £1,081 million, or 15%, to £6,184 million, compared with £7,265 million in 2019, primarily due to PPI provision releases of £175 million in 2020, compared with a charge of £603 million in 2019, partly offset by other conduct provision charges in 2020. Other reductions reflect our continued transition from physical to digital, the optimisation of our property footprint and lower investment spend.

Strategic costs of £728 million include charges related to reductions in the property portfolio and restructuring costs incurred to achieve operating and cost efficiencies.

Impairment losses increased by £1,597 million, or 279%, to £2,169 million compared with £572 million in 2019, primarily reflecting the deterioration of the economic outlook as a result of the COVID-19 pandemic driving Stage 2 charges. The level of Stage 3 defaults remains low.

Financial review

Summary consolidated balance sheet as at 31 December 2020

Total assets increased by £71.0 billion to £389.5 billion at 31 December 2020, compared with £318.5 billion at 31 December 2019.

Cash and balances at central banks increased by £35.5 billion to £63.0 billion, compared with £27.5 billion at 31 December 2019, driven by increased deposits and a £14.0 billion liquidity switch from The Royal Bank of Scotland plc (RBS plc) to NWB Plc to maintain the operational buffer in the Bank of England account. The increases were partially offset by a net £5.0 billion reduction related to Term Funding Scheme (TFS) repayments and a Term Funding Scheme with additional incentives for SMEs (TFSME) drawdown in the year, and £2.0 billion decrease due to liquidity portfolio optimisation activity. The net impact of issuance activity was neutral, as £6.8 billion of new issuances was offset by £6.6 billion of covered bond maturities and debt redemptions.

Loans to customers - amortised cost increased by £39.3 billion to £271.6 billion, compared with £232.3 billion at 31 December 2019, reflecting £18.8 billion of strong gross new mortgage lending growth, partially offset by redemptions, and the purchase of a £3.0 billion mortgage portfolio from Metro Bank plc, £9.8 billion growth in corporate lending due to drawdowns against UK Government lending schemes in response to COVID-19 and £12.5 billion higher volume of reverse repos.

Amounts due from holding companies and fellow subsidiaries decreased by £0.5 billion to £3.3 billion, compared with £3.8 billion at 31 December 2019, reflecting a decrease of inter company balances with entities outside the ring-fenced bank.

Other financial assets decreased by £3.0 billion to £38.0 billion, primarily reflecting the net impact of sales, maturities and purchases of bonds which form part of the treasury liquidity portfolio.

Other assets decreased by £0.3 billion to £7.0 billion, reflecting decreased tangible assets due to the ongoing optimisation of the property portfolio.

Bank deposits decreased by £0.6 billion to £14.9 billion, driven by a net £5.0 billion repayment of the TFS / TFSME facilities, partially offset by an increase in repos of £4.1 billion and additional third party deposits of £0.3 billion.

Customer deposits increased by £51.5 billion to £293.6 billion, as customers sought to retain liquidity and reduced spending in response to COVID-19.

Amounts due to holding companies and fellow subsidiaries increased by £16.1 billion to £37.6 billion, compared with £21.4 billion at 31 December 2019, primarily due to a £14.0 billion cash transfer from RBS plc.

Derivative liabilities increased by £1.7 billion to £6.6 billion, compared with £4.9 billion at 31 December 2019, due to the valuation of derivative products used to hedge the liquidity portfolio, driven by floating rate decreases.

Other financial liabilities increased by £2.1 billion to £10.4 billion, compared with £8.3 billion at 31 December 2019, driven by £3.1 billion payable to Metro Bank plc for the acquisition of its mortgage book in December 2020 and £1.7 billion of commercial paper issuances, offset by a £2.9 billion decrease due to maturity of covered bonds.

Total equity increased by £0.2 billion to £19.9 billion, compared with £19.7 billion at 31 December 2019. The increase reflects attributable profit for 2020, partially offset by lower cash flow hedge reserves of £0.2 billion and lower merger reserves of £0.2 billion

Statement of directors' responsibilities

This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 81 to 90 of the NatWest Bank Group 2020 Annual Report and Accounts.

The directors are responsible for the preparation of the Annual Report and Accounts. The directors are required by Article 4 of the IAS Regulation (European Commission Regulation No 1606/2002) to prepare Group accounts, and as permitted by the Companies Act 2006 have elected to prepare company accounts, for each financial year in accordance with International Financial Reporting Standards as adopted by the European Union. They are responsible for preparing accounts that present fairly the financial position, financial performance and cash flows of NWB Group and NWB Plc. In preparing those accounts, the directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and estimates that are reasonable and prudent; and

· state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts.

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.

The directors confirm that to the best of their knowledge:

· the financial statements, prepared in accordance with International Financial Reporting 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

18 February 2021

Board of directors

Consolidated income statement for the year ended 31 December 2020

Consolidated statement of comprehensive income for the year ended 31 December 2020

Balance sheet as at 31 December 2020

Owners' equity of NWB Plc as at 31 December 2020 includes the profit for the year of £722 million (2019 - £724 million).

Statement of changes in equity for the year ended 31 December 2020

Note:

(1) A new merger reserve of £34 million was created at NWB Group relating to the purchase of NWM SIPL from NWM Group.

Cash flow statement for the year ended 31 December 2020

Note:

(1) NWB Group includes interest received of £6,736 million (2019 - £7,422 million) and interest paid of £1,092 million (2019 - £1,570 million), and NWB Plc includes interest received of £6,063 million (2019 - £6,711 million) and interest paid of £1,345 million (2019 - £1,760 million).

Notes to the financial statements

1. Basis of preparation

The consolidated financial statements should be read in conjunction with NatWest Bank Plc 2020 Annual Report and Accounts which were prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 and with International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.

Going concern

Having reviewed NWB Plc's 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 the foreseeable future. Accordingly, the results for the period ended 31 December 2020 have been prepared on a going concern basis.

2. Accounting policies

NWB Plc's principal accounting policies are as set out on pages 95 to 99 of the NatWest Bank Plc 2020 Annual Report and Accounts and are unchanged other than as presented below.

Accounting changes effective 1 January 2020

Amendments to IFRS 3 Business Combinations (IFRS 3) - Changes to the definition of a business

The IASB amended IFRS 3 to provide additional guidance on the definition of a business. The amendment aims to help entities when determining whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendments are in line with current accounting policy and therefore did not affect the accounts.

Definition of material - Amendments to IAS 1 - Presentation of Financial Statements (IAS 1) and IAS 8 -

Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8)

The IASB clarified the definition of 'material' and aligned the definition of material used in the Conceptual Framework and in other IFRS standards. The amendments clarify that materiality will depend on the nature or magnitude of information. Under the amended definition of materiality, an entity will need to assess whether the information, either individually or in combination with other information, is material in the context of the accounts. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users. NWB Group's definition and application of materiality is in line with the definition in the amendments.

Interest Rate Benchmark Reform (IBOR reform) Phase 1 amendments to IFRS 9 and IAS 39

The IASB issued 'Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7)' as a first reaction to the potential effects the IBOR reform could have on financial reporting. The amendments focused on hedge accounting and allow hedge relationships affected by the IBOR reform to be accounted for as continuing hedges. Amendments are effective for annual reporting periods beginning on or after 1 January 2020 with early application permitted. NWB Group early adopted these amendments for the annual period ending on 31 December 2019.

Interest Rate Benchmark Reform (IBOR reform) Phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16

Phase 2 of the IASB's IBOR project (published in August 2020) addresses the wider accounting issues arising from the IBOR reform. The amendments are effective for annual reporting periods beginning on or after 1 January 2021 with early application permitted. As NWB Group early adopted these amendments for the annual period ending on 31 December 2020, which have been endorsed by the EU and UK in January 2021, NWB Group has applied International Accounting Standards, which have been adopted for use within the UK. NWB Group's IBOR transition program remains on-track and key milestones have been met. Conversion from rates subject to reform to alternative risk-free rates (RFRs) is expected to increase as RFR-based products become more widely available and key market-driven conversion events occur.

Critical accounting policies and key sources of estimation uncertainty

The judgements and assumptions that are considered to be the most important to the portrayal of NWB Plc's financial condition are those relating to deferred tax, fair value of financial instruments, loan impairment provision and provisions for liabilities and charges. These critical accounting policies and judgements are described on page 99 of the NatWest Bank Plc 2020 Annual Report and Accounts. Estimation uncertainty has been affected by the COVID-19 pandemic during 2020. Management's consideration of this source of uncertainty is outlined in the relevant sections of NatWest Bank Plc 2020 Annual Report and Accounts, including the ECL estimate for the period in the Risk and capital management section.

Information used for significant estimates

The COVID-19 pandemic has continued to cause significant economic and social disruption during 2020. 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. Changes in judgements and assumptions could result in a material adjustment to those estimates in the next reporting periods. (refer to the Risk factors in the NatWest Bank Plc 2020 Annual Report and Accounts).

Notes to the financial statements

3 Operating expenses

Notes:

(1) 2020 includes a cost of £144 million including accelerated depreciation of £71 million (2019 - £161 million including £40 million accelerated depreciation) in relation to the planned reduction of the property portfolio (2020 - freehold £1 million; leasehold £143 million; 2019 - freehold £4million; leasehold £157 million).

(2) 2020 includes a £100 million charge relating to the reduction in property portfolio, leasehold £81 million and freehold £19 million (2019 - £275 million charge, leasehold £20 million and freehold £255 million).

(3) Includes litigation and conduct costs. Further details are provided in Note 21 of the NatWest Bank Group 2020 Annual Report and Accounts..

(4) In 2019 NWB Group became the provider of shared services to NatWest Group. Direct costs incurred are recovered through legal entity recharging and recorded in Other operating income. For periods prior to 2019 NWB Group was a net receiver of shared services from fellow NatWest Group companies.

4. Segmental analysis

Reportable operating segments

The reportable operating segments are as follows:

Retail Banking serves individuals and mass affluent customers in the UK and includes Ulster Bank customers in Northern Ireland.

Commercial Banking serves start-up, SME, commercial and corporate customers in the UK.

Private Banking serves UK-connected high net worth individuals and their business interests. 

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.

Notes to the financial statements

4 Segmental analysis continued 

Note:

(1) Total revenue comprises interest receivable, fees and commissions receivable and other operating income.

Analysis of net fees and commissions

Note:

(1) Comparisons with prior periods are impacted by the transfer of the Private Client Advice business to Private Banking from 1 January 2020.

Notes to the financial statements

5 Tax

The actual tax charge differs from the expected tax charge, computed by applying the standard rate of UK corporation tax of 19% (2019 - 19%), as follows:

Notes:

(1) The Finance Bill 2020 amended the rate of UK corporation tax to 19% for the financial year beginning 1 April 2020. This reverses the rate reduction to 17% for the financial year beginning 1 April 2020 previously enacted. Deferred tax balances previously based on the lower rate have been restated accordingly.

(2) Prior year tax adjustments incorporate refinements to tax computations made on submission and agreement with the tax authorities. Current taxation balances include provisions in respect of uncertain tax positions, in particular in relation to restructuring and other costs where the taxation treatment remains subject to agreement with the relevant tax authorities.

Judgment: Tax contingencies

NWB Group's income tax charge and its provisions for income taxes necessarily involves a significant degree of estimation and judgement. 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.

Notes to the financial statements

6 Loan impairment provisions

Loan exposure and impairment metrics

The table below summarises loans and related credit impairment measures within the scope of ECL framework.

Notes:

(1) NWB Group's intercompany assets are classified in Stage 1.

(2) Includes £5 million (2019 - £2 million) related to assets classified as FVOCI.

(3) ECL provisions coverage is calculated as ECL provisions divided by loans - amortised cost and FVOCI.

(4) ECL provisions coverage and ECL loss rates are calculated on third party loans and related ECL provisions and charge respectively. ECL loss rate is calculated as annualised third party ECL charge divided by loans - amortised cost and FVOCI.

(5) Includes a £9 million charge (2019 - £28 million charge) related to other financial assets, of which a £2 million charge (2019 - £1 million charge) related to assets classified as FVOCI; and a £13 million charge (2019 - £27 million) related to contingent liabilities.

(6) The table shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to page 31 of the NatWest Bank Plc 2020 Annual Report and Accounts for 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 £62.0 billion (2019 - £26.8 billion) and debt securities of £37.1 billion (2019 - £40.2 billion).

Credit risk enhancement and mitigation

For information on Credit risk enhancement and mitigation held as security, refer to Risk and capital management - Credit risk enhancement and mitigation section.

Critical accounting policy: Loan impairment provisions

The loan impairment provisions have been established in accordance with IFRS 9. Accounting policy 14 sets out how the expected loss approach is applied. At 31 December 2020, customer loan impairment provisions amounted to £3,712 million (2019 - £2,022 million). A loan is impaired when there is objective evidence that the cash flows will not occur in the manner expected when the loan was advanced. Such evidence includes changes in the credit rating of a borrower, the failure to make payments in accordance with the loan agreement, significant reduction in the value of any security, breach of limits or covenants, and observable data about relevant macroeconomic measures.

The impairment loss is the difference between the carrying value of the loan and the present value of estimated future cash flows at the loan's original effective interest rate.

The measurement of credit impairment under the IFRS expected loss model depends on management's assessment of any potential deterioration in the creditworthiness of the borrower, its modelling of expected performance and the application of economic forecasts. All three elements require judgments that are potentially significant to the estimate of impairment losses. For further information and sensitivity analysis, refer to Risk and capital management - Measurement uncertainty and ECL sensitivity analysis section of the NatWest Bank Plc 2020 Annual Report and Accounts.

Notes to the financial statements

6 Loan impairment provisions continued

IFRS 9 ECL model design principles

To meet IFRS 9 requirements, PD, LGD and EAD used in ECL calculations must be:

· Unbiased - material regulatory conservatism has been removed to produce unbiased model estimates.

· Point-in-time - recognise current economic conditions.

· Forward-looking - incorporated into PD estimates and, where appropriate, EAD and LGD estimates.

· For the life of the loan - all PD, LGD and EAD models produce term structures to allow a lifetime calculation for assets in Stage 2 and Stage 3.

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 probability of default over the remaining lifetime at the reporting date) with the equivalent lifetime PD as determined at the date of initial recognition.

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.

For wholesale, while conversion ratios in the historical data show temporal variations, these cannot be sufficiently explained by the CCI measure (unlike in the case of PD and some LGD models) and are presumed to be driven to a larger extent by exposure management practices. Therefore point-in-time best estimates measures for EAD are derived by estimating the regulatory model specification on a rolling five-year window.

Approach for multiple economic scenarios (MES)

The base scenario plays a greater part in the calculation of ECL than the approach to MES.

Portfolio summary - segment analysis

The table below shows gross loans and ECL, by segment and stage, within the scope of the IFRS 9 ECL framework.