Strategic report
NWB Group
Annual Report and Accounts 2023
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 subsidiaries.
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
National Westminster Bank Plc (‘NWB Plc’, which wholly owns
Coutts & Company) is a principal entity under NatWest Holdings
Limited (‘NWH Ltd’), together with The Royal Bank of Scotland
plc (‘RBS plc’). In 2022 Ulster Bank Ireland DAC (‘UBIDAC’) was
also a principal entity under NWH Ltd. The term ‘NWB Group’
refers to NWB Plc and its subsidiary and associated undertakings.
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.
The reportable operating segments are as follows:
Retail Banking -
serves personal customers in the UK and
includes Ulster Bank customers in Northern Ireland.
Private Banking
-
serves UK-connected, high-net-worth
individuals and their business interests.
Commercial & Institutional
-
consists of customer businesses
reported under Business Banking, Commercial Mid-market and
Corporate & Institutions, supporting our customers across the full
non-personal customer lifecycle, both domestically and
internationally.
Central items & other
-
includes corporate functions such as
treasury, finance, risk management, compliance, legal,
communications and human resources. NWB Plc is the main
service 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
Strong financial performance
NWB Group profit for the year was £3,509 million compared with
£3,689 million in 2022, driven by additional operating expenses
and net impairment losses, partially offset by increased income.
Total income increased by £343 million to £12,086 million,
primarily reflecting the beneficial impact from base rate rises and
lending growth, partially offset by higher funding costs.
Operating expenses increased by £505 million to £6,793 million,
reflecting higher staff costs as a result of increased pay awards
to support our colleagues with cost of living challenges combined
with an increase in restructuring costs, an increase in other
administrative costs primarily driven by a new profit share
arrangement with a fellow NatWest Group subsidiary, and an
increase in depreciation and amortisation costs.
Net impairment losses of £504 million principally reflects
increased economic uncertainty. Defaults remain stable and at
low levels across the portfolio. Total impairment provisions
increased by £0.3 billion to £2.9 billion in the year. Expected
credit loss (ECL) coverage ratio increased from 0.84% to 0.88%.
Robust balance sheet with strong capital levels
Total assets increased by £6.0 billion to £415.5 billion at 31
December 2023. This was primarily driven by increases in other
financial assets, as a result of bond activity, and loans to
customers, partially offset by a decrease in cash and balances at
central banks resulting from business segment net funding
outflows due to overall market liquidity contraction.
Loans to customers increased by £16.8 billion to £318.5 billion
primarily driven by growth in Retail Banking mortgage business,
an increase in commercial lending and Treasury reverse repo
activity.
Customer deposits decreased by £8.9 billion to £313.8 billion
primarily reflecting higher outflows and overall market liquidity
contraction.
The Common Equity Tier 1 (CET1) ratio increased 30 basis
points over the period due to a £1.4 billion increase in CET1
capital, driven by attributable profit, partially offset by interim and
foreseeable dividends. This is partially offset by a £9.3 billion
increase in RWAs.
Total risk-weighted assets (RWAs) increased by £9.3 billion
mainly reflecting an increase in credit risk RWAs of £7.8 billion,
primarily driven by an increase in internal ratings based (IRB)
Temporary Model Adjustments as well as increased exposures in
Retail Banking and Commercial & Institutional, and an increase
following the annual operational risk RWA recalculation.
Page
Strategic report
Presentation of information
2
Description of business
2
Performance overview
2
Stakeholder engagement and s.172(1)
3
Board of directors and secretary
4
Top and emerging threats
5
Financial review
7
Risk and capital management
10
Report of the directors
78
Statement of directors’ responsibilities
85
Financial statements
86
Risk factors
173
Forward-looking statements
194
Stakeholder engagement and s.172(1) statement
NWB Group
Annual Report and Accounts 2023
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 2023, they remained
investors, customers, colleagues, regulators, communities and
suppliers.
Directors are mindful that it is not always possible to achieve an
outcome which meets the expectations of all stakeholders who
may be impacted, and that there may be impacted stakeholders
outside the six key groups the Board has identified. 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 78 (Corporate governance statement).
Supporting effective Board discussions and
decision-making
Board and Committee terms of reference reinforce the
importance of considering the matters set out in section 172 (the
s172 factors, as set out below). The Board and Committee paper
template also supports consideration of stakeholders and enables
good decision making.
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 includes a case study of a principal decision taken
by the Board during 2023. Further information on the Board’s
principal activities can be found in the Corporate governance
statement on pages 78 to 84.
The s172 factors
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 – Appointing a new non-
executive director
Factors considered:
A C E
What was the decision-making process?
On 22 August 2023
the Board approved the appointment of
Mark Rennison as an independent non-executive director with
effect from 1 September 2023.
The appointment followed a rigorous search process led by the
NWH Ltd Nominations Committee on behalf of the Board to
recruit an additional double independent non-executive director
(DINED) to the Boards of NWH Ltd, National Westminster Bank
Plc and The Royal Bank of Scotland plc, as part of ongoing Board
succession planning activity. An additional DINED was also
needed in order to maintain three DINEDs on the Board following
the resignation of Graham Beale on 31 August 2023, ensuring
continued compliance with ring-fencing requirements.
To support the Board’s decision, a detailed paper was prepared
for consideration by the directors which described how Mr
Rennison had been identified as the preferred candidate.
Directors considered how the role specification criteria had been
met, and how the appointment would enhance the Board’s
composition.
Following discussion, the Board approved the appointment,
noting that Mr Rennison had extensive retail banking and
financial services expertise alongside broad experience at a
board and committee level.
How did the directors fulfil their duties under section 172?
How were stakeholders considered?
In identifying the skills, knowledge and experience required at
Board level to support delivery of NatWest Group’s purpose and
strategic priorities, a long-term view was taken.
The Board discussed how Mr Rennison’s background as a
Chartered Accountant with 12 years’ experience as CFO for
Nationwide would enhance the balance of skills and experience
on the Board. Mr Rennison would also bring significant non-
executive experience from previous external roles, including as
non-executive director and audit committee Chair of another UK
bank.
In the context of maintaining a reputation for high standards of
business conduct, directors considered detailed character
references from Mr Rennison’s current and previous Boards and
employers prior to approval, and in order to support their
assessment of Mr Rennison’s fitness, propriety and suitability.
Directors also noted that Mr Rennison had sufficient time to
devote to the role and that the UK Corporate Governance Code
criteria on director independence would be met.
The Board noted that Mr Rennison’s strengths and experience,
combined with his non-executive portfolio experience would
complement and enhance the overall knowledge and experience
of the Board.
Actions and outcomes
Since joining the Board, Mr Rennison has embarked on a tailored
induction programme, spending time with key stakeholders to
deepen his knowledge of the business and the context in which it
operates.
He has also joined the NWH Audit Committee and the NWH
Performance and Remuneration Committee.
Further details on the search process leading to Mr Rennison’s
appointment can be found in the Group Nominations and
Governance Committee report on pages 105 to 109 of the
NatWest Group plc 2023 Annual Report and Accounts.
Board of directors and secretary
NWB Group
Annual Report and Accounts 2023
4
Approval of Strategic report
The Strategic report for the year ended 31 December 2023 set out on pages 2 to 77 was approved by the Board of directors on 15
February 2024.
By order of the Board
Jan Cargill
Chief Governance Officer and Company Secretary
15 February 2024
Chairman
Howard Davies
Executive directors
John-Paul Thwaite (CEO)
Katie Murray (CFO)
Non-executive directors
Francesca Barnes
Ian Cormack
Roisin Donnelly
Patrick Flynn
Rick Haythornthwaite
Yasmin Jetha
Stuart Lewis
Mark Rennison
Mark Seligman
Lena Wilson
Board and committee membership
Nominations Committee
Howard Davies (Chair)
Ian Cormack
Patrick Flynn
Rick Haythornthwaite
Stuart Lewis
Mark Seligman
Lena Wilson
Audit Committee
Patrick Flynn (Chair)
Ian Cormack
Stuart Lewis
Mark Rennison
Mark Seligman
Board Risk Committee
Stuart Lewis (Chair)
Francesca Barnes
Ian Cormack
Patrick Flynn
Lena Wilson
Performance and Remuneration Committee
Lena Wilson (Chair)
Ian Cormack
Mark Rennison
Mark Seligman
Senior independent non-executive director
Ian Cormack
Chief Governance Officer and Company Secretary
Jan Cargill
Board changes
Stuart Lewis (non-executive director) appointed on 1 April 2023
Mike Rogers (non-executive director) stood down on 25 April
2023
Alison Rose (executive director) stood down on 25 July 2023
Morten Friis (non-executive director) stood down on 31 July 2023
Graham Beale (non-executive director) stood down on 31 August
2023.
Mark Rennison (non-executive director) appointed on 1
September 2023
Rick Haythornthwaite (non-executive director and Chair
Designate) appointed on 8 January 2024
For additional detail on the activities of the Committees above,
refer to the Report of the directors.
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
Coutts & Company
440 Strand
London WC2R 0QS
National Westminster Bank Plc
Registered in England No. 929027
Top and emerging risks
NWB Group
Annual Report and Accounts 2023
5
Top and emerging risks are scenarios that could have a significant negative impact on our ability to operate or deliver our strategy
and are managed through the enterprise-wide risk management framework toolkit. They usually combine elements of several principal
risks and require a coordinated management response. Top risks could occur or require management action within 1-2 years while
emerging risks are evolving and/or could occur over a longer time horizon, but have the potential to become a top risk. Both are
subject to review by senior governance forums including Executive Risk Committee (ERC) and Board Risk Committee (BRC). Horizon
scanning is an important element of the toolkit, enabling NWB Group to identify, assess and mitigate both top and emerging risks. A
range of methods are used including scenario exercises, analysis, planning, monitoring, review of industry/institutional insights and
discussion with external experts. In 2023, there was continued focus on assessing and managing interconnected risks assessing
preparedness for correlated risk scenarios. This approach helps to integrate strategic risk considerations into business processes, as
well as planning and strategy.
Top risk scenarios in
focus in 2023
Description
Mitigants
Increased competition
Competitive pressures could intensify, impeding NWB
Group’s ability to grow or retain market share, impacting
revenues and profitability, particularly in key UK Retail,
Commercial & Institutional banking segments. Drivers of
competition mainly relate to developments in technology,
evolving incumbents, challengers, new entrants to the
market, shifts in customer behaviour and changes in
regulation. For example, increased competition from
technology conglomerates, who may have competitive
advantages in scale, technology and customer engagement
(including brand recognition).
NWB Group closely monitors the competitive
environment and adapts strategy as appropriate.
This includes utilising scenario analysis and
assessing how mega-trends will impact industry
competitive dynamics. Strategic responses are
focused on investing to deliver innovative and
compelling propositions for customers and
effectively leveraging acquisitions and
partnerships.
Cyberattack
There is a constantly evolving threat from cyberattacks that
are increasing in terms of frequency, sophistication, impact
and severity. This includes hostile attempts to gain access to
and exploit potential vulnerabilities of IT systems including via
malware. 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, loss of data, and may cause associated reputational
damage.
NWB Group continues to invest in additional
capability to defend against threats including
developing and evolving cybersecurity policies,
procedures and controls that are designed to
minimise the potential effect of such attacks. The
focus is to manage the impact of the attacks and
maintain services for NWB Group’s customers.
This includes testing and proving cyber resilience
capabilities via stress testing of NWB Group’s
important business services.
Economic and rate
volatility
High interest rates and the rising cost of living created
uncertain economic conditions in 2023 including driving a
shifts in customer behaviours and increased deposit
competition. Economic conditions could deteriorate,
depending on factors including weak economic activity,
volatility in interest rates, liquidity pressures, sharp falls in
asset prices, escalating geopolitical tensions and concerns
regarding sovereign debt or sovereign credit ratings. Any of
the above may have a material adverse effect on NWB
Group’s future financial prospects.
A range of complementary approaches is used to
mitigate the risks, such as targeted scenario
analysis, stress tests, targeted customer reviews
and reviews of risk appetite. Stress tests included
completion of regulatory stress tests including the
Bank of England 2022/23 Annual Cyclical Scenario
and the 2023/24 System Wide Exploratory
Scenario as well as a range of internal scenarios.
Climate change
Climate-related risks represent a source of systemic risk in
the global financial system. The financial impacts of climate-
related risks, both physical and transition risk, are expected
to be widespread and may disrupt the proper functioning of
financial markets and institutions, including NWB Group.
NWB Group’s climate-related strategy, targets
and transition plan support the identification and
management of climate-related risks. However,
they also entail significant execution and
reputational risk and are unlikely to be achieved
without significant and timely government policy,
technology and customer behavioural changes.
Operational risk
scenarios
Operational risks are inherent in NWB Group’s businesses
and a broad range of scenarios are considered. NWB Group
could be adversely impacted by a broad range of operational
risk scenarios including a failure to have or be able to access
current, complete, and accurate data or disruption to
services should a third-party service provider experience any
interruptions. These scenarios could result in business and
customer interruption and related reputational damage,
significant compensation costs, regulatory sanctions and/or a
breach of applicable regulations.
NWB Group devotes significant resources to third-
party risk management. Focus areas include
identification of critical service suppliers,
developing robust exit and contingency plans in
the event of supply-chain disruption, and ensuring
appropriate monitoring and oversight of third-
party performance.
Effective and ethical use of data is critical to NWB
Group’s goals, with continued focus on delivering
a long-term data strategy alongside enhancing
control and policy frameworks governing data
usage.
Evolving regulation
NWB Group’s businesses are subject to substantial regulation
and oversight, which are constantly evolving and may have
an adverse impact on NWB Group. Areas of focus include
Basel 3.1 standards implementation, including the resulting
effect on RWAs and models and the FCA’s Consumer Duty
standards on consumer protection.
NWB Group constantly monitor regulatory change
and work with the regulators to help shape those
developments that materially impact NWB Group,
responding when necessary either bilaterally or in
partnership with one of the affiliated industry
bodies. We implement new regulatory
requirements where applicable and use our
frequent engagement meetings with regulators to
discuss key regulatory priorities.
Top and emerging risks continued
NWB Group
Annual Report and Accounts 2023
6
Emerging risk scenarios
in focus in 2023
Description
Mitigants
Artificial intelligence
Innovations in artificial intelligence (AI), including generative
AI, may rapidly transform and disrupt customers, industry
and the economy. NWB Group’s ability to continue to deploy
AI solutions and integrate AI in systems and controls will
become increasingly important to retain and grow business.
There can be no certainty that NWB Group’s innovation
strategy will be successful, and competitors may be more
successful in implementing AI technologies, in turn, affecting
industry competitive dynamics. Developments in AI may also
result in increased model risk and rising levels of fraud.
NWB Group closely monitors developments in
disruptive technologies including AI and adapts
strategy as appropriate. The focus is on how we
use AI and machine-learning technologies safely
and ethically to improve the support we can offer
to our customers and ensure that our use of data
continues to be secure, accountable, fair and
ethical.
Biodiversity and nature
loss
NWB Group and its customers, suppliers and counterparties
face uncertainty in terms of risks relating to the degradation
of the environment, such as air, water and land pollution,
biodiversity loss and deforestation. There is also increasing
investor, regulatory and stakeholder scrutiny regarding how
businesses address these changes and related climate
change, biodiversity and other sustainability issues.
NWB Group is developing its approach to assess,
manage and mitigate nature-related risks. Using
emerging industry guidance such as the Task
Force on Nature Related Financial Disclosure
framework, NWB Group is seeking to further its
understanding of nature-related risks. This
includes how its business activities impact nature,
the dependencies NWB Group and its
counterparties (including its suppliers) and
customers have on nature, and the risks and
opportunities nature can generate.
Central bank digital
currency
NWB Group operates in markets which would be exposed to
any developments in digital money, including a UK central
bank digital currency (CBDC). The Bank of England and HMT
are exploring the case and design for a retail CBDC that
could be used by the public and businesses, the digital pound.
The future introduction of retail CBDCs, including a digital
pound, could result in deposit outflows, higher funding costs,
and/or other implications for UK banks including NWB Group.
NatWest Group engages with the UK government
and regulators on digital currency developments.
This includes engagement with policymakers on a
bilateral and industry level. For example, NatWest
Group is represented on the Bank of England’s
CBDC Engagement Forum, and responds to
relevant consultations, discussion papers and
other publications. In addition, NatWest Group has
established an Executive Steering Group on digital
assets including overseeing developments and
engagement on digital currencies, such as CBDCs.
NatWest Group has also reviewed the potential
impact of a UK central bank digital currency
including on deposits, funding costs and broader
implications for the business model.
Geopolitical risk
NWB Group is exposed to risks arising from geopolitical
events or political developments. Geopolitical tensions remain
elevated and a range of potential scenarios and impacts
were considered. This includes the potential impact of armed
conflict, global trade and supply-chain disruption, volatility in
commodity prices, protectionist policies or trade barriers and
state sponsored cyberattacks.
NWB Group closely monitors the geopolitical risk
outlook and undertakes regular scenario analysis
to understand the potential impacts and takes
mitigating actions as required. This includes
second and third order analysis of impacts, for
example, through customers’ supply-chain
disruption or disruption to third-party providers.
Financial review
NWB Group
Annual Report and Accounts 2023
7
Summary consolidated income statement for the year ended 31 December 2023
Retail
Private
Commercial &
Central items
Banking
Banking
Institutional
& other
2023
2022
Variance
£m
£m
£m
£m
£m
£m
£m
%
Net interest income
4,595
709
2,955
(236)
8,023
7,532
491
7
Non-interest income
436
276
1,410
1,941
4,063
4,211
(148)
(4)
Total income
5,031
985
4,365
1,705
12,086
11,743
343
3
Operating expenses
(2,311)
(615)
(2,315)
(1,552)
(6,793)
(6,288)
(505)
8
Profit before impairment losses/releases
2,720
370
2,050
153
5,293
5,455
(162)
(3)
Impairment (losses)/releases
(410)
(13)
(82)
1
(504)
(341)
(163)
48
Operating profit before tax
2,310
357
1,968
154
4,789
5,114
(325)
(6)
Tax charge
(1,280)
(1,425)
145
(10)
Profit for the year
3,509
3,689
(180)
(5)
Key metrics and ratios
2023
2022
Cost:income ratio
(1)
56.2%
53.5%
Loan impairment rate
(2)
15bps
11bps
CET1 ratio
(3)
11.6%
11.3%
Leverage ratio
(4)
4.5%
4.4%
Risk weighted assets (RWAs)
£121.7bn
£112.4bn
Loan:deposit ratio
(5)
97%
90%
(1)
Cost:income ratio is total operating expenses divided by total income.
(2)
Loan impairment rate is the loan impairment charge divided by gross customer loans.
(3)
CET1 ratio is CET1 capital divided by RWAs.
(4)
Leverage ratio is Tier 1 capital divided by total exposure. This is
in accordance with changes to the UK’s leverage ratio framework, refer to page 62 for further details.
(5)
Loan deposit ratio is total loans divided by total deposits.
NWB Group reported a profit of £3,509 million compared with
£3,689 million in 2022, driven by increased operating expenses of
£505 million and impairment losses of £163 million, partially offset
by an increase in total income of £343 million.
Total income
increased by £343 million, or 3%, to £12,086 million,
primarily reflecting increases in net interest income.
Net interest income
increased by £491 million, or 7%, to £8,023
million, primarily reflecting beneficial impact from base rate rises
and lending growth partially offset by higher funding costs.
Non-interest income
decreased by £148 million, or 4%, to £4,063
million, primarily driven by other operating income, partially offset
by an increase in net fees and commissions.
Net fees and commissions
increased by £43 million, or 3%, to
£1,669 million, largely within Commercial & Institutional, driven by
increased lending fees and card volumes coupled with higher
payment services income.
Other operating income
reduced by £191 million, or 7%, to £2,394
million primarily reflecting:
£309 million lower income from hedging activities, including
reduced gains on economic hedging derivatives, due to
interest rate rises, reflecting interest rate volatility across all
currencies. This is partially offset by a £3 million increase as a
result of hedge ineffectiveness; and
an £80 million prior year non-recurring profit from insurance
liabilities included within other income; partially offset by
a £234 million gain on redemption of own debt.
Operating expenses
increased by £505 million, or 8%, to £6,793
million reflecting:
an increase in staff costs of £213 million primarily as a result
of increased pay awards to support our colleagues with cost
of living challenges combined with an increase in restructuring
costs;
an increase in other administrative costs of £138 million
primarily driven by a new profit share arrangement with a
fellow NatWest Group subsidiary; and
an increase in depreciation and amortisation costs of £109
million primarily as a result of intangible and fixed asset
additions and a property impairment in 2023.
Net impairment losses
of £504 million principally reflects increased
economic uncertainty. Defaults remain stable and at low levels
across the portfolio. Total impairment provisions increased by £0.3
billion to £2.9 billion in the year. ECL coverage ratio increased
from 0.84% to 0.88%.
Financial review continued
NWB Group
Annual Report and Accounts 2023
8
Segmental performance
Retail Banking
Operating profit was £2,310 million in 2023.
Net interest income increased by £101 million to £4,595 million,
reflecting lending growth, combined with the impact of rate rises
on deposit funding income, partly offset by reduction in mortgage
margins, higher funding costs and impact of deposit balance mix
shift from non-interest bearing balances to interest bearing
balances.
Non-interest income increased by £37 million to £436 million,
primarily due to higher profit share and increased spend related
fee income.
Operating expenses increased by £196 million to £2,311 million,
primarily reflecting higher pay awards to support our colleagues
with cost of living challenges, property lease termination losses,
increased restructuring costs and continued investment in the
business. This was partly offset by savings from headcount
reductions.
Net impairment losses of £410 million reflect higher stage 3
inflows and increased good book charges driven by both lending
growth and normalisation of risk parameters.
Loans to customers increased by £9.1 billion to £190.7 billion,
primarily reflecting strong mortgage growth of £7.6 billion driven
by gross new mortgage lending of £29.4 billion. Credit card
balances increased by £1.3 billion in 2023 reflecting continued
strong customer demand and personal advances increased by
£0.3 billion.
Customer deposits increased by £0.8 billion to £152.7 billion
driven by higher fixed term savings deposits, partially offset by
higher outflows from current accounts.
Private Banking
Operating profit was £357 million in 2023.
Net interest income decreased by £45 million to £709 million.
Margins have been adversely impacted reflecting lower deposit
balances with mix shifting from non-interest bearing to interest
bearing balances, as customers migrated to savings products
offering higher returns, combined with reduced lending volumes
and mortgage margin dilution, and partially offset by the impact
of rate rises on deposit income.
Non-interest income increased by £5 million to £276 million,
reflecting increases in fee income and other operating income.
Operating expenses increased by £19 million to £615 million,
reflecting an increase in pay awards to support our colleagues
with cost of living challenges, an additional VAT charge, property
revaluation costs and strategic spend to increase operational
efficiency.
Net impairment losses of £13 million in 2023 largely reflect non-
repeat of good book releases in 2022 whilst overall impairments
remain at low levels.
Loans to customers decreased by £0.7 billion to £18.5 billion as
higher levels of customer repayments more than offset gross
new lending.
Customer deposits decreased by £3.5 billion to £37.6 billion,
reflecting an increase in competition and an increase in tax
outflows in Q1 2023. Changes in customer behaviour drove a
change in mix of deposits with a decrease in instant access
savings and current accounts, and a switch to term accounts.
Commercial & Institutional
Operating profit was £1,968 million in 2023.
Net interest income increased by £215 million to £2,955 million,
reflecting higher deposit returns supported by interest rate rises,
partially offset by higher funding costs.
Non-interest income increased by £124 million to £1,410 million,
primarily reflecting higher lending and finance fees in relation to
volume growth, increased credit and debit card fees reflecting
higher volumes and margins and higher payment services fees.
Operating expenses increased by £376 million to £2,315 million,
primarily reflecting an increase in relation to a new profit share
arrangement with a fellow NatWest Group subsidiary, higher pay
awards to support our colleagues with cost of living challenges
and continued investment in the business.
Net impairment losses of £82 million were primarily driven by
good book releases and lower stage 3 charges.
Loans to customers increased by £1.8 billion to £83.4 billion,
primarily due to an increase in term loan facilities, partly offset by
UK Government scheme repayments.
Customer deposits decreased by £7.0 billion to £111.3 billion
driven by overall market liquidity contraction.
Central items & other
Operating profit was £154 million in 2023.
Total income decreased by £94 million to £1,705 million in 2023,
primarily due to lower income from hedging activities, including
reduced gains on economic hedging derivatives, and a prior year
£80 million profit from insurance liabilities, partially offset by a
£234 million gain on redemption of own debt and increased
funding income. Income from the recharging of costs to other
NatWest Group entities reduced, principally reflecting the impact
of organisational restructure activity.
Operating expenses decreased by £86 million to £1,552 million,
principally reflecting the reduction in costs related to data and
technology. £1,430 million of total expenses were recovered
through service charges in non-interest income.
Financial review continued
NWB Group
Annual Report and Accounts 2023
9
Summary consolidated balance sheet as at 31 December 2023
2023
2022
Variance
£m
£m
£m
%
Assets
Cash and balances at central banks
48,259
73,065
(24,806)
(34)
Derivatives
3,184
4,407
(1,223)
(28)
Loans to banks - amortised cost
3,355
3,197
158
5
Loans to customers - amortised cost
318,466
301,684
16,782
6
Amounts due from holding companies and fellow subsidiaries
2,311
4,903
(2,592)
(53)
Other financial assets
31,944
14,546
17,398
120
Other assets
7,949
7,667
282
4
Total assets
415,468
409,469
5,999
1
Liabilities
Bank deposits
18,052
16,060
1,992
12
Customer deposits
313,752
322,614
(8,862)
(3)
Amounts due to holding companies and fellow subsidiaries
47,252
38,771
8,481
22
Derivatives
1,718
2,088
(370)
(18)
Other financial liabilities
9,011
5,384
3,627
67
Subordinated liabilities
122
197
(75)
(38)
Notes in circulation
806
809
(3)
-
Other liabilities
3,325
3,470
(145)
(4)
Total liabilities
394,038
389,393
4,645
1
Total equity
21,430
20,076
1,354
7
Total liabilities and equity
415,468
409,469
5,999
1
Total assets
increased by £6.0 billion to £415.5 billion at 31
December 2023.
Cash and balances at central banks
decreased by £24.8 billion to
£48.3 billion, reflecting:
£19.5 billion decrease due to net bond purchases, disposal
and maturity combined with net repo and collateral activity;
£10.7 billion decrease due to business segment net funding
outflows; partially offset by
£4.0 billion increase due to the funding of a subsidiary
undertaking being transferred from NWB Plc to RBS plc; and
£1.6 billion increase in debt capital market activity.
Loans to banks – amortised cost
increased by £0.2 billion to £3.4
billion, as a result of an increase in non-sterling lending and
treasury activities offset by a reduction in sterling activities.
Loans to customers
increased by £16.8 billion to £318.5 billion,
reflecting:
£7.2 billion growth in mortgage business;
£6.7 billion increase as a result of treasury reverse repo
activity;
£1.8 billion net increase in commercial lending, primarily due
to an increase in term loan facilities, partly offset by UK
Government scheme repayments; and
£0.4 billion increase in credit card balances due to business
initiatives.
Amounts due from holding companies and fellow subsidiaries
decreased by £2.6 billion to £2.3 billion primarily due to reduced
balances with fellow subsidiaries of NWH Group.
Other financial assets
increased by £17.4 billion to £31.9 billion,
primarily reflecting £36.8 billion of bond purchases, partially offset
by bond disposals of £12.3 billion and maturities of £8.5 billion.
Bank deposits
increased by £2.0 billion to £18.1 billion, driven
primarily by an increase in repo balances.
Customer deposits
decreased by £8.9 billion to £313.8 billion,
driven primarily by higher outflows from business current account
balances, overall market liquidity contraction and a reduction in
savings, demand and non-interest bearing deposits, as a result of
a change in customer behaviour, partly offset by an increase in
repo balances.
Amounts due to holding companies and fellow subsidiaries
increased by £8.5 billion to £47.3 billion, primarily due to
increased balances with RBS plc, NWH Ltd and other fellow
subsidiaries of NatWest Group, partially offset by a net reduction
in balances with NatWest Group plc.
Derivative liabilities
decreased by £0.4 billion to £1.7 billion, driven
by an adverse movement within the liquidity portfolio due to float
rate decreases and foreign exchange swap movements.
Other financial liabilities
increased by £3.6 billion to £9.0 billion,
driven by short term issuances as a result of the current market
environment and increasing rates during the year.
Total equity
increased by £1.4 billion to £21.4 billion. The increase
reflects attributable profit for 2023 of £3.4 billion, partially offset
by dividends paid to NWH Ltd and an increase in the cash flow
hedging reserves due to interest rate rises.
Risk and capital management
NWB Group
Annual Report and Accounts 2023
10
Page
Presentation of information
10
Risk management framework
Introduction
10
Culture
11
Governance
12
Risk appetite
14
Identification and measurement
15
Mitigation
15
Testing and monitoring
15
Stress testing
15
Credit risk
Definition and sources of risk
19
Governance and risk appetite
19
Identification and measurement
19
Mitigation
19
Assessment and monitoring
20
Problem debt management
20
Forbearance
21
Impairment, provisioning and write-offs
22
Governance and post model adjustments
23
Significant increase in credit risk and asset lifetimes
25
Economic loss drivers
26
Measurement uncertainty and ECL sensitivity analysis
31
Measurement uncertainty and ECL adequacy
33
Banking activities
34
Capital, liquidity and funding risk
Definition and sources
59
Capital, liquidity and funding risk management
60
Key points
61
Minimum requirements
62
Measurement
62
Non-traded market risk
67
Pension risk
71
Compliance & conduct risk
72
Financial crime risk
73
Climate risk
73
Operational risk
74
Model risk
76
Reputational risk
77
Presentation of information
Where marked as audited in the section header, certain
information in the Risk and capital management section (pages
10 to 77) 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.
Risk management framework
Introduction
NWB Group operates under NatWest Group’s enterprise-wide
risk management framework, which is centred on 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 and
emerging threats, which are those that could have a significant
negative impact on NWB Group’s ability to meet its strategic
objectives. Both top and emerging threats may incorporate
aspects of – or correlate to – a number of principal risks and are
reported alongside them to the Board on a regular basis.
Risk and capital management continued
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Annual Report and Accounts 2023
11
Risk management framework continued
Culture
NWB Group supports NatWest Group’s multi-year programme to
enhance risk management capability at different levels of the
organisation which has an ongoing emphasis on risk culture. The
approach to risk culture, under the banner of intelligent risk-
taking, ensures a focus on robust risk management behaviours
and practices. This underpins the strategy and values across all
three lines of defence, enables NWB Group to support better
customer outcomes, develop a stronger and more sustainable
business and deliver an improved cost base.
NWB Group expects leaders to act as role models for strong risk
behaviours and practices building clarity, developing capability
and motivating employees to reach the required standards set
out in the intelligent risk-taking approach. Colleagues are
expected to:
Consistently role-model the values and behaviours in Our
Code, based on strong ethical standards.
Empower others to take risks aligned to NWB Group’s
strategy, explore issues from a fresh perspective, and tackle
challenges in new and better ways across organisational
boundaries.
Manage risk in line with appropriate risk appetite.
Ensure each decision made keeps NWB Group, colleagues,
customers, communities and shareholders safe and secure.
Understand their role in managing risk, remaining clear and
capable, grounded in knowledge of regulatory obligations.
Consider risk in all actions and decisions.
Escalate risks and issues early; taking action to mitigate risks
and learning from mistakes and near-misses, reporting and
communicating these transparently.
Challenge others’ attitudes, ideas and actions.
The target intelligent risk-taking behaviours are embedded in
NatWest Group’s Critical People Capabilities and are clearly
aligned to the core values of inclusive, curious, robust,
sustainable and ambitious. These aim to 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 may 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 2023
12
Risk management framework continued
Governance
Committee structure
The diagram shows NWB Group’s governance structure in 2023.
(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.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2023
13
Risk management framework continued
Risk management structure
The diagram shows NWB Group’s risk management structure in 2023 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 business segments 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
& Institutional 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.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2023
14
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 businesses,
Technology and Services as well as support functions such as
People and Transformation, Legal and Finance.
The first line of defence is empowered to take risks within the
constraints of the risk management framework, policies, risk
appetite statements set by NatWest Group and measures set by
the NWB Group Board.
The first line of defence is responsible for managing its direct
risks, and with the support of specialist functions, 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 NWB Group engages in permissible and
sustainable risk-taking activities.
The second line of defence advises on, monitors, challenges,
approves and escalates where required and reports on the risk-
taking activities of the first line, ensuring that these are within the
constraints of the risk management framework, policies, risk
appetite statements set by NatWest Group and measures set by
the NWB Group 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
assurance to the NatWest Group Board, its subsidiary legal entity
boards and executive management on the overall design and
operating effectiveness of the risk management framework and
its components. This includes the adequacy and effectiveness of
key internal controls, governance and the risk management in
place to monitor, manage and mitigate the principal 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 on independence and
objectivity.
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 threats 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 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.
Establishing risk appetite
In line with the 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 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.
Risk appetite statements and associated measures are reviewed
at least annually by the Board on the Board Risk Committee’s
recommendation to ensure they remain appropriate and aligned
to strategy.
NWB Group’s risk profile is continually monitored and frequently
reviewed. Management focus is concentrated on all principal
risks as well as the top and emerging threats that 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 2023
15
Risk management framework continued
Identification and measurement
Identification and measurement within the risk management
process comprises:
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 the NatWest Group Risk Directory. This provides a
common risk language to ensure consistent terminology is used
across NWB Group. The NatWest Group 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 threats 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
Specific activities relating to compliance and conduct, credit and
financial crime risk are subject to testing and monitoring by the
Risk function. This confirms to both internal and external
stakeholders – including the Board, senior management, the
customer-facing businesses, Internal Audit and NWB Group’s
regulators – that risk policies and procedures are being correctly
implemented and that they are operating adequately and
effectively. Thematic reviews and targeted reviews are also
carried out where relevant to ensure appropriate customer
outcomes.
Independent control testing of the NWH Group Risk function is
completed on principal processes and controls impacting the
financial statements, in line with section 404 of the Sarbanes-
Oxley Act 2002, which focusses on the formalised evaluation,
testing and reporting of significant internal controls over financial
reporting and the associated 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 2023
16
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. Principal 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
liquidity and funding 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 and funding
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.
Stress testing
usage within
NatWest
Group
Contingency
planning & management
actions
Assess financial
performance
Capital
adequacy
Earnings
stability
Sector review
& credit limit
setting
Business
vulnerabilities
analysis
Tail risk
assessment
Early
warning
indicators
(4)
Risk
mitigation
(1)
Strategic
financial
& capital
planning
(2)
Risk
appetite
(3)
Risk
monitoring
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Annual Report and Accounts 2023
17
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 reviewed and approved
by the Board prior to submission to the PRA on a biennial basis.
Individual recovery plans are also prepared for NatWest Holdings
Limited, NatWest Markets Plc, RBS International Limited 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). NatWest Group ensures ongoing maintenance and
enhancements of its resolution capabilities, 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 2023
18
Risk management framework continued
Internal scenarios - climate
In 2023, NatWest Group deployed a new in-house corporate
transition risk model, as part of an internal scenario analysis
exercise, to assess climate transition related credit risks to
corporate counterparties.
This involved running the following two climate scenarios:
A disruptive policy response scenario, where the introduction
of policy from the Network for Greening the Financial System
delayed transition scenario, is accelerated to this decade.
Inevitable policy response 1.8°C scenario, which anticipates
investor, corporate and civil society pressure will push
policymakers to make changes between 2023 and 2033, that
could result in warming at or below 1.8°C by 2100.
These scenarios tested NatWest Group’s resilience to alternative
transition pathways, including a disruptive transition, and to
identify losses that are sensitive to scenario policy and
technology assumptions.
The corporate transition risk model and internal exercise builds
on the learnings from the Climate Biennial Exploratory Scenario
and integrates climate into ICAAP. The model is capable of
accounting for sector specific exposure to climate-related
transition risks and counterparty specific response to a limited set
of demand shocks and rising carbon prices, by mitigating
emissions and passing costs through to customers.
Regulatory stress testing
The Bank of England published the results of the 2022 annual
cyclical scenario (ACS) stress test on 12 July 2023. The results of
this stress test, and other relevant information, will be used to
help inform NatWest Group capital buffers (both the UK
countercyclical capital buffer rate and PRA buffers).
The 2022 stress test aimed to assess the impact of a UK and
global macroeconomic stress on UK banks, spanning a five-year
period from Q3 2022 to Q2 2027. It is a coherent ‘tail risk’
scenario, designed to be severe and broad enough to assess the
resilience of UK banks to a range of adverse shocks.
The stress scenario is broadly similar to the 2019 ACS and more
severe overall than the global financial crisis, with the key
difference being elevated levels of inflation. Annual UK inflation
averaged around 11% over the first three years of the scenario,
peaking at 17% in early 2023.
The stress test was based on an end-of-June 2022 balance sheet
starting position.
Further details can be found at:
https://www.bankofengland.co.uk/stress-testing/2023/bank-of-
england-stress-testing-results
Following the UK’s exit from the European Union on 31
December 2020, only relevant European subsidiaries of NatWest
Group take part in the European Banking Authority stress tests.
NatWest Group itself does not participate.
Natwest Group is taking part in the Bank of England’s system-
wide exploratory scenario in 2023/24. The objective of the
exercise is to understand the risks and behaviours flowing from
non-bank financial institutions under stress, and how these risks
could amplify market shocks and pose a risk to financial stability.
The Bank of England will publish a report on this scenario in 2024
following completion of the exercise.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2023
19
Definition
(audited)
Credit risk is the risk that customers, counterparties or issuers fail
to meet a 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 and proposing credit risk appetite measures for Board
approval.
Establishing credit risk policy, standards and toolkits which set
out the mandatory limits and parameters required to ensure
that credit risk is managed within risk appetite and which
provide the minimum standards for the identification,
assessment, management, monitoring and reporting of credit
risk.
Oversight of the first line of defence to ensure that credit risk
remains within the appetite set by the Board and that it is
being managed 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.
Providing regular reporting on credit risk to the Board Risk
Committee and Board.
Risk appetite
Credit risk appetite is approved by the Board and is set and
monitored through risk appetite frameworks tailored to NWB
Group’s Personal and Wholesale segments. Risk appetite
statements and associated measures are reviewed at least
annually by the Board on the Board Risk Committee’s
recommendation to ensure they remain appropriate and aligned
to strategy.
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.
Operational limits are used to manage concentrations of risk
which may arise across four lenses – single name, sector, country
and product and asset classes.
The framework is supported by a suite of transactional
acceptance standards that set out the risk parameters within
which businesses should operate.
Identification and measurement
Credit stewardship (audited)
Risks are identified through relationship management and credit
stewardship of customers and portfolios. Credit 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 risk
toolkits 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 Retail Banking UK residential property values
quarterly using country (Scotland, Wales and Northern Ireland) or
English regional specific Office for National Statistics House Price
indices.
Within the Private Banking segment, properties securing loans
greater than £2.5 million are revalued every three years.
The current indexed value of the property is a component of the
ECL provisioning calculation.
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 contracted through a service agreement to
ensure consistency of quality and advice. In the UK, an
independent third-party market indexation is applied to update
external valuations for commercial property once they are more
than a year old. For loan obligations in excess of £2.5 million and
where the charged property has a book value in excess of £0.5
million, a formal valuation review is commissioned at least every
three years.
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 managed on an individual basis.
Customers are aggregated as a single risk when sufficiently
interconnected to the extent that a failure of one could lead to the
failure of another.
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.
For lower risk transactions below specific thresholds, credit
decisions can be approved through a combination of fully
automated or relationship manager self-sanctioning within the
business. This process is facilitated through an auto-decision
making system, which utilises scorecards, strategies and policy
rules.
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.
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 quality through PD credit grades or performance against a
combination of risk triggers in business banking, and 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.
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.
In July 2023, Mortgage Charter support was introduced for
residential mortgage customers. Mortgage Charter support
includes temporary interest only or term extensions at the
customer’s request. A request for Mortgage Charter does not, of
itself trigger transfer to a specialist team.
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 resolved
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’. All treatments available
to customers experiencing financial difficulties are reviewed to
ensure they remain appropriate for customers impacted by
current economic conditions. In the event that an affordable and
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
triggered any other unlikeliness to pay indicators, 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. There is an equivalent process
for business banking customers, with problem debt cases
reallocated to increased monitoring and support under a Portfolio
Management Relationship team or the Financial Health and
Support Team. Broader macro-economic trends including
commodity prices, foreign exchange rates and consumer and
government spend are also tracked, helping inform decisions on
sector risk appetite. Customer level early warning indicators are
regularly reviewed to ensure alignment with prevailing economic
conditions, ensuring both the volume and focus of alerts is aligned
to the point-in-time risk within each sector.
The aligned Risk of Credit Loss and Viability framework
This framework focuses on all Wholesale customers to provide
early identification of credit deterioration, support intelligent risk-
taking, ensure fair and consistent customer outcomes and provide
key insights into Wholesale lending portfolios. Expert judgement 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 who are in financial stress –
Heightened Monitoring and Risk of Credit Loss. For the purposes
of provisioning, all exposures categorised as Heightened
Monitoring or Risk of Credit Loss 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.
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.
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: return
the customer to a satisfactory status, offer additional lending and
continue monitoring, transfer the relationship to Restructuring if
appropriate, or exit the relationship.
The aligned Risk of Credit Loss and Viability 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. Helping viable customers
return to financial health and restoring a normal banking
relationship is always the preferred outcome, however, where this
is not possible, NWB Group will work with customers to achieve a
solvent outcome. Throughout this period, the mainstream
relationship manager will remain an integral part of the customer
relationship. Insolvency is considered as a last resort and if
deemed necessary, NWB Group will work to recover its capital in
a fair and efficient manner, while upholding the fair treatment of
customers and NWB Group’s core values
.
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, 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 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.
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
.
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.
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 can be
returned to performing status once exit criteria, as set out by
regulatory guidance, is met.
Refer to pages 44 and 46 for further details on Wholesale and
Personal forbearance.
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 IRB
models as a starting point, incorporate term structures and
forward-looking information. Regulatory conservatism within the
IRB 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 policy 2.3 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 IRB 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.
Economic forecasts
–
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.
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 follow a discrete multi-horizon survival
approach, predicting quarterly PDs up to lifetime at account level,
with a key driver being scores from related IRB PD models.
Forward-looking economic information is brought in by economic
response models, which leverage the existing stress test model
suite. The current suite of PD models was introduced in 2022
replacing the previous, first-generation models to remediate a
range of model weaknesses.
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 IRB 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 point-in-time/through-the-cycle
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 IRB 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.
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 IRB 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 review, challenge and
approval through model or provisioning committees. 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
with a particular focus on segments of the portfolio (both
commercial and consumer) that are likely to be more susceptible
to high inflation, high interest rates and supply.
ECL post model adjustments (audited)
The table below shows ECL post model adjustments.
Retail Banking | Private | Commercial & | Central items | |||
Mortgages | Other | Banking | Institutional | & other | Total | |
2023 | £m | £m | £m | £m | £m | £m |
Deferred model calibrations | - | - | 1 | 14 | - | 15 |
Economic uncertainty | 109 | 31 | 13 | 191 | 3 | 347 |
Other adjustments | 1 | - | - | 6 | - | 7 |
Total | 110 | 31 | 14 | 211 | 3 | 369 |
Of which: | ||||||
- Stage 1 | 72 | 11 | 6 | 83 | - | 172 |
- Stage 2 | 29 | 20 | 8 | 124 | 3 | 184 |
- Stage 3 | 9 | - | - | 4 | - | 13 |
2022 | ||||||
Economic uncertainty | 91 | 40 | 6 | 151 | - | 288 |
Other adjustments | 7 | 15 | - | 11 | - | 33 |
Total | 98 | 55 | 6 | 162 | - | 321 |
Of which: | ||||||
- Stage 1 | 58 | 21 | 3 | 50 | - | 132 |
- Stage 2 | 29 | 34 | 3 | 108 | - | 174 |
- Stage 3 | 11 | - | - | 4 | - | 15 |
Post model adjustments increased since 31 December 2022, with
notable shifts in all categories. This reflected:
The addition of deferred model calibration post model
adjustments to account for elevated refinance risks on
deteriorated exposures largely due to pressures from inflation
and liquidity.
The increase in the economic uncertainty post model
adjustments for Wholesale portfolios relating to inflation,
supply chain and liquidity prompted by continued affordability
risks, as a result of higher interest rates and sustained
inflation. This was partially offset by a reduction in COVID-19
related post model adjustments.
Retail Banking –
The post model adjustments for economic
uncertainty increased slightly to £140 million at 31 December
2023, from £131 million at 31 December 2022. Continued
consumer affordability risks, as a result of higher interest
rates and sustained inflation, prompted an uplift in the cost of
living post model adjustment (up from £112 million to £130
million). The cost of living post model adjustment captured the
risk on segments in the Retail Banking portfolio that are more
susceptible to the effects of cost of living rises. It focused on
key affordability lenses, including customers with lower
income in fuel poverty, over-indebted borrowers and
customers vulnerable to a potential mortgage rate shock.
This increase during the year was partly offset by some LGD
post model adjustment reductions.
Additionally, the judgemental post model adjustment relating
to the modelling of cards EAD (£15 million at 31 December
2022) was discontinued at H1 2023 and the latest update to
the post model adjustment for legacy higher risk interest only
residential mortgages resulted in a £6 million reduction in the
post model adjustment from 31 December 2022, reflecting
latest analysis of the portfolio segment.
Commercial & Institutional –
The post model adjustments for
economic uncertainty increased to £191 million at 31
December 2023, from £151 million at 31 December 2022. It
included an overlay of £36 million, at 31 December 2023,
from £85 million at 31 December 2022, to cover the residual
risks from COVID-19, including the risk that government
support schemes could affect future recoveries and concerns
surrounding associated debt, to customers that have utilised
government support schemes. The inflation and supply chain
post model adjustment was maintained with a mechanistic
adjustment, via a sector-level downgrade, being applied to
the sectors that were considered most at risk from these
headwinds. A number of additional sectors were added to the
sector-level downgrade reflecting the ongoing pressures from
inflation being higher for longer plus broader concerns around
reducing cash reserves across many sectors. The impact of
the sector-level downgrades is a post model adjustment
increase to £153 million at 31 December 2023 from £66
million at 31 December 2022, reflecting these significant
headwinds which are not fully captured in the models.
The £14 million judgemental overlay for deferred model
calibrations relates to refinance risk with the existing
mechanistic modelling approach not fully capturing the risk on
deteriorated exposures.
Other adjustments included an overlay of £6 million to
mitigate the effect of operational timing delays in the
identification and flagging of a SICR.
Risk and capital management continued
(audited)
Significant increase in credit risk (SICR)
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:
PD bandings (based | ||
on residual lifetime | ||
Personal | PD calculated at | PD deterioration |
risk bands | DOIR) | 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 |
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.
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.
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.
Monitoring the effect on relative PD deterioration when
originating new lending at times of weaker economic outlook
(therefore, higher PDs at initial recognition) is important to ensure
SICR criteria remains effective.
(audited)
Asset lifetimes
The choice of initial recognition and asset duration is another
critical judgement 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 judgement 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 £82
million (2022 – £62 million). However, credit card balances
originated under the 0% balance transfer product and
representing approximately 40% (2022 – 20%) 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.
NWB Group
Annual Report and Accounts 2023
25
Risk and capital management continued
(audited)
Economic loss drivers
Introduction
The portfolio segmentation and selection of economic loss drivers
for IFRS 9 follows 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 variables, (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 judgement.
The most significant economic loss drivers for the most material
portfolios are shown in the table below:
Portfolio | Economic loss drivers |
UK Personal | UK unemployment rate, sterling swap rate, |
mortgages | UK house price index, UK real wage |
UK Personal | UK unemployment rate, sterling swap rate, |
unsecured | UK real wage |
UK corporates | UK stock price index, UK gross domestic |
product (GDP), Bank of England base rate | |
UK commercial | UK stock price index, UK commercial |
real estate | property price index, UK GDP, Bank of |
England base rate |
Economic scenarios
At 31 December 2023, 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 the current
risks faced by the economy, particularly in relation to the path of
inflation and interest rates.
For 2023, 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 declines
and the degree of permanent damage to the economy, around
which there remains pronounced levels of uncertainty.
Upside –
This scenario assumes robust growth as inflation falls
sharply and rates are lowered more quickly than expected.
Consumer spending is supported by savings built up since
COVID-19 and further helped by fiscal support and strong
business investment. The labour market remains resilient, with
the unemployment rate falling. The housing market slows down
compared to the previous year but remains robust.
Compared to 31 December 2022, the upside scenario remains
similarly configured, exploring a more benign set of economic
outcomes, including a stronger performing stock market, real
estate prices, and supported by a stronger global growth
backdrop, relative to the base case view. Reflecting recent
outturn data, inflation falls back quicker and the labour market is
tighter than previously assumed.
Base case –
High inflation and tight monetary policy leads to
muted economic growth. However, continued disinflation allows
an easing cycle to start in 2024. The unemployment rate rises
modestly but there are no wide-spread job losses. Inflation
moderates and falls to a target level of 2% by early 2025. The
housing market experiences modest nominal price decline but the
extent of the decline is lower than experienced during prior
stresses. Housing market activities remain weak but gains pace
gradually as interest rates fall and real income recovers.
Since 31 December 2022, the economic outlook has improved as
energy prices fell sharply and the labour market remained
resilient. The near-term inflation outlook remains elevated and
upside risks remain but they have reduced since last year. Rates
increased to levels higher than expected previously and are
expected to remain higher for longer. Economic growth is still
expected to be muted in the near-term. The base case now
assumes muted growth in 2023 as opposed to a mild recession
assumed previously. The unemployment rate still rises but the
peak is marginally lower and is underpinned by a resilient labour
market
The peak to trough house price correction remains broadly
similar to the previous assumption but the timing of the fall is
more spread out.
Downside
– Inflation resurges as energy prices rise and core
inflation remains persistently high. The economy experiences a
recession as consumer confidence weakens due to a fall in real
income. Interest rates are raised higher than the base case and
remain elevated for longer. High rates are assumed to have a
more significant impact on the labour market. Unemployment is
higher than the base case scenario while house prices
experience declines comparable to previous episodes of stress.
Compared to 31 December 2022, the downside scenario
explores risks associated with ongoing price pressures and
significantly higher interest rates across the period. This contrasts
with last year’s scenario, which assumed lower rates than the
base case view. Partly as a result, UK economic activity and
labour market are slightly weaker. Nominal asset prices, while
experiencing declines comparable with past downturns, perform
slightly better than previously assumed.
Extreme downside –
This scenario assumes a classical recession
with loss of consumer confidence leading to a deep economic
recession. This results in widespread job losses with the
unemployment rate rising above the levels seen during the 2008
financial crisis. Rates are cut sharply in response, leading to some
support to the recovery. House prices lose approximately a third
of their value.
Compared to 31 December 2022, the extreme downside again
captures an extreme set of economic outcomes, with very sharp
falls in asset prices and a marked deterioration in the labour
market. The key difference is the assumed path for interest
rates. Unlike at 31 December 2022, when recessionary risks
were explored in the context of a stubbornly high inflation
environment, both inflation and interest rates are now assumed
to follow a significantly lower trajectory – consistent with
recession driven by material weakness in domestic demand.
NWB Group
Annual Report and Accounts 2023
26
Risk and capital management continued
(audited)
Economic loss drivers
The main macroeconomic variables for each of the four scenarios used for expected credit loss (ECL) modelling are set out in the main
macroeconomic variables table below.
Main macroeconomic variables | 31 December 2023 | 31 December 2022 | ||||||||
Extreme | Weighted | Extreme | Weighted | |||||||
Upside | Base case | Downside | downside | average | Upside | Base case | Downside | downside | average | |
Five-year summary | % | % | % | % | % | % | % | % | % | % |
GDP | 1.8 | 1.0 | 0.5 | (0.3) | 0.9 | 2.2 | 1.3 | 0.8 | 0.4 | 1.2 |
Unemployment | 3.5 | 4.6 | 5.2 | 6.8 | 4.8 | 3.9 | 4.5 | 4.9 | 6.7 | 4.8 |
House price index | 3.9 | 0.3 | (0.4) | (5.7) | 0.3 | 5.1 | 0.8 | (0.7) | (4.4) | 0.6 |
Commercial real estate price | 3.1 | (0.2) | (2.0) | (6.8) | (0.6) | 1.2 | (1.9) | (2.8) | (9.1) | (2.5) |
Consumer price index | 1.7 | 2.6 | 5.2 | 1.8 | 2.8 | 3.6 | 4.2 | 4.4 | 8.2 | 4.8 |
Bank of England base rate | 3.8 | 3.7 | 5.6 | 2.9 | 4.0 | 2.4 | 3.1 | 1.5 | 4.5 | 2.8 |
UK stock price index | 4.8 | 3.3 | 1.2 | (0.4) | 2.8 | 3.0 | 1.4 | (1.1) | (3.7) | 0.5 |
World GDP | 3.7 | 3.2 | 2.7 | 1.8 | 3.0 | 3.7 | 3.3 | 1.7 | 1.1 | 2.7 |
Probability weight | 21.2 | 45.0 | 20.4 | 13.4 | 18.6 | 45.0 | 20.8 | 15.6 | ||
(1)
The five-year summary runs from 2023-27 for 31 December 2023 and from 2022-26 for 31 December 2022.
(2)
The table shows CAGR for annual GDP, average levels for the unemployment rate and Bank of England base rate and Q4 to Q4 CAGR for other parameters.
Climate transition
During 2023, NatWest Group continued to align its financial
planning process with the climate transition planning process. This
included adding climate policy and technology related transition
assumptions into NatWest Group’s base case macroeconomic
scenario used for financial planning and assessment of ECL in this
IFRS 9 reporting period. This resulted in an increase in ECL of less
than £1 million.
As in the initial iteration of the Climate transition plan, included in
NatWest Group’s 2022 Climate-related Disclosures Report,
NatWest Group assesses the effects of climate transition policies
within the base case macroeconomic scenario, using the UK
Climate Change Committee (CCC) Balanced Net Zero (BNZ)
scenario, aligned with the UK CCC sixth carbon budget, as a
starting point. In addition, NatWest Group included estimated
average policy delay into the climate economic assumptions for
IFRS 9 purposes, based on the credibility ratings for sectoral
policies provided by the UK CCC 2022 Progress Report to
Parliament, to reflect estimated time delays based on credibility
ratings as follows:
Credible policies
– estimated zero years of delayed adjustment
to the BNZ pathway for the associated policy.
Policies with some or significant risk
– estimated three and five
years of delay respectively for the associated policy.
Policies with insufficient plans
– estimated ten years of delay
for the associated policy.
The base case macroeconomic scenario now explicitly includes
assumptions about the changes in transition policy expressed as
an additional implicit carbon price. Implicit carbon price is an
additional cost related to greenhouse gas emissions as a result of
climate transition policy.
NatWest Group assumes that between now and 2028, the
transition policy will change slowly, and the implicit carbon price
will increase modestly by £10.5/tCO2e, which is consistent with
the UK CCC BNZ scenario. The base case macroeconomic
scenario also included assumptions about abatement technology
development and specific sectors’ transition, for example, the
switch from fossil fuels to renewable energy sources. NatWest
Group will continue to enhance this analysis, including updates in
the UK CCC 2023 Progress Report to Parliament published in
June 2023.
While previous NatWest Group IFRS 9 base case scenarios
included some climate transition considerations, they were based
on all enacted policies and available technologies. The new
approach described here applies to explicitly identifying the effect
of additional climate transition policy.
NatWest Group and its customers have a dependency on timely
and appropriate government policies to provide the necessary
impetus for technology development and customer behaviour
changes, to enable the UK’s successful transition to net zero.
Policy delays and risks outlined in the UK CCC 2022 and 2023
Progress Reports, if not adequately addressed in a timely manner,
put at risk the UK’s net zero transition and in turn that of NatWest
Group and its customers.
For this first iteration of climate economic assumptions included
within the base case macroeconomic scenario, NatWest Group
focused on policy and technology related transition risks. It is
assumed that in more extreme scenarios it is likely that climate
policy changes would offset adverse/benign economic conditions.
NatWest Group’s tools, methodologies and assessment of climate
risks will continue to evolve to further align financial planning and
climate transition planning processes.
NWB Group
Annual Report and Accounts 2023
27
Economic loss drivers
Probability weightings of scenarios
NWB Group’s quantitative 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. This
quantitative approach is used for 31 December 2023.
The approach involves comparing UK GDP paths for NWB
Group’s scenarios against a set of 1,000 model runs, following
which, a percentile in the distribution is established that most
closely corresponded to the scenario. Probability weight for base
case is set first based on judgement, while probability weights for
the alternate scenarios are assigned based on these percentiles
scores.
The assigned probability weights were judged to be aligned with
the subjective assessment of balance of the risks in the economy.
The weights were broadly comparable to those used at 31
December 2022 but with slightly less downside skew. This is
reasonable as the inflation outturn since then has been
encouraging, with continued disinflation and a reduced risk of
stagflation. However, the risks still remain elevated and there is
considerable uncertainty in the economic outlook, particularly with
respect to persistence and the range of outcomes on inflation.
Given that backdrop, NWB Group judges it appropriate that
downside-biased scenarios have higher combined probability
weights than the upside-biased scenario. It presents good
coverage to the range of outcomes assumed in the scenarios,
including the potential for a robust recovery on the upside and
exceptionally challenging outcomes on the downside. A 21.2%
weighting was applied to the upside scenario, a 45.0% weighting
applied to the base case scenario, a 20.4% weighting applied to
the downside scenario and a 13.4% weighting applied to the
extreme downside scenario.
UK gross domestic product (£bn)
2600
2500
2400
2300
2200
2100
2000
2023Q1
2024Q1
2025Q1
2026Q1
2027Q1
2028Q1
Upside
Base case
Downside
Extreme downside
NWB Group
Annual Report and Accounts 2023
28
Risk and capital management continued
Economic loss drivers
Bank of England base rate (%)
7
6
5
4
3
2
1
0
2023Q1
2024Q1
2025Q1
2026Q1
2027Q1
2028Q1
Upside
Base case
Downside
Extreme downside
UK unemployment rate (%)
9
8
7
6
5
4
3
2
1
0
2023Q1
2024Q1
2025Q1
2026Q1
2027Q1
2028Q1
Upside
Base case
Downside
Extreme downside
NWB Group
Annual Report and Accounts 2023
29
Risk and capital management continued
(audited)
Economic loss drivers
Annual figures
GDP - annual growth | |||||
Extreme | Weighted | ||||
Upside | Base case | Downside | downside | average | |
% | % | % | % | % | |
2023 | 0.5 | 0.5 | 0.5 | 0.5 | 0.5 |
2024 | 3.6 | 0.4 | (1.1) | (2.7) | 0.3 |
2025 | 2.3 | 1.3 | 0.4 | (1.6) | 1.0 |
2026 | 1.2 | 1.6 | 1.2 | 1.2 | 1.4 |
2027 | 1.2 | 1.4 | 1.3 | 1.2 | 1.3 |
2028 | 1.2 | 1.4 | 1.3 | 1.2 | 1.3 |
Unemployment rate - annual average | |||||
Extreme | Weighted | ||||
Upside | Base case | Downside | downside | average | |
% | % | % | % | % | |
2023 | 4.2 | 4.2 | 4.2 | 4.2 | 4.2 |
2024 | 3.9 | 4.7 | 5.2 | 6.2 | 4.8 |
2025 | 3.2 | 4.7 | 5.8 | 8.4 | 5.1 |
2026 | 3.2 | 4.6 | 5.6 | 8.0 | 5.0 |
2027 | 3.3 | 4.6 | 5.5 | 7.4 | 4.8 |
2028 | 3.3 | 4.5 | 5.3 | 6.7 | 4.7 |
House price index - four quarter change | |||||
Extreme | Weighted | ||||
Upside | Base case | Downside | downside | average | |
% | % | % | % | % | |
2023 | (2.9) | (2.9) | (2.9) | (2.9) | (2.9) |
2024 | 7.2 | (5.0) | (7.1) | (11.5) | (3.7) |
2025 | 9.4 | 3.1 | (3.1) | (14.2) | 1.2 |
2026 | 2.8 | 3.4 | 5.5 | (5.8) | 2.7 |
2027 | 3.3 | 3.4 | 6.1 | 7.2 | 4.3 |
2028 | 3.5 | 3.4 | 4.4 | 6.6 | 3.9 |
Commercial real estate - four quarter change | |||||
Extreme | Weighted | ||||
Upside | Base case | Downside | downside | average | |
% | % | % | % | % | |
2023 | (7.2) | (7.2) | (7.2) | (7.2) | (7.2) |
2024 | 12.7 | - | (7.3) | (18.4) | (1.2) |
2025 | 3.5 | 2.7 | (2.0) | (20.0) | (0.5) |
2026 | 4.6 | 2.0 | 3.8 | 6.7 | 3.4 |
2027 | 2.9 | 1.9 | 3.1 | 8.5 | 3.0 |
2028 | 1.3 | 0.8 | 2.6 | 8.6 | 2.0 |
| Consumer price index - four quarter change | |||||
Extreme | Weighted | ||||
Upside | Base case | Downside | downside | average | |
| % | % | % | % | % | |
2023 | 4.6 | 4.6 | 4.6 | 4.6 | 4.6 |
2024 | 0.9 | 2.5 | 8.5 | (1.2) | 2.9 |
2025 | 0.7 | 2.0 | 5.3 | 1.7 | 2.4 |
2026 | 1.1 | 1.9 | 3.8 | 2.0 | 2.1 |
2027 | 1.2 | 1.9 | 3.7 | 2.0 | 2.2 |
2028 | 1.1 | 1.9 | 3.6 | 2.0 | 2.1 |
Bank of England base rate - annual average | |||||
Extreme | Weighted | ||||
Upside | Base case | Downside | downside | average | |
% | % | % | % | % | |
2023 | 4.68 | 4.68 | 4.68 | 4.68 | 4.68 |
2024 | 4.79 | 4.77 | 6.10 | 4.00 | 4.94 |
2025 | 3.46 | 3.46 | 6.08 | 2.06 | 3.81 |
2026 | 3.17 | 2.85 | 5.69 | 2.00 | 3.38 |
2027 | 2.75 | 2.75 | 5.31 | 2.00 | 3.17 |
2028 | 2.50 | 2.75 | 5.06 | 2.25 | 3.10 |
UK stock price index - four quarter change | |||||
Extreme | Weighted | ||||
Upside | Base case | Downside | downside | average | |
% | % | % | % | % | |
2023 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7 |
2024 | 8.1 | 3.2 | (17.4) | (41.5) | (5.9) |
2025 | 5.1 | 3.2 | 8.7 | 24.9 | 6.5 |
2026 | 3.6 | 3.2 | 7.9 | 16.7 | 5.5 |
2027 | 3.6 | 3.2 | 5.6 | 11.0 | 4.6 |
2028 | 2.9 | 3.2 | 5.3 | 9.9 | 4.3 |
Worst points
| 31 December 2023 | 31 December 2022 | |||||||||
Extreme | Weighted | Extreme | Weighted | |||||||
Downside | downside | average | Downside | downside | average | |||||
% | Quarter | % | Quarter | % | % | Quarter | % | Quarter | % | |
GDP | (1.2) | Q3 2024 | (4.5) | Q4 2024 | 0.3 | (3.2) | Q4 2023 | (4.7) | Q4 2023 | (0.8) |
Unemployment rate - peak | 5.8 | Q1 2025 | 8.5 | Q2 2025 | 5.2 | 6.0 | Q1 2024 | 8.5 | Q3 2024 | 5.4 |
House price index | (12.5) | Q4 2025 | (31.7) | Q2 2026 | (6.5) | (15.0) | Q1 2025 | (26.2) | Q3 2025 | (3.4) |
Commercial real estate price | (16.6) | Q1 2025 | (39.9) | Q3 2025 | (10.2) | (21.8) | Q4 2023 | (46.8) | Q3 2024 | (16.4) |
Consumer price index | 10.3 | Q1 2023 | 10.3 | Q1 2023 | 10.3 | 15.7 | Q1 2023 | 17.0 | Q4 2023 | 11.7 |
Bank of England base rate | 6.5 | Q4 2024 | 5.3 | Q4 2023 | 5.3 | 4.0 | Q1 2023 | 6.0 | Q1 2024 | 4.1 |
UK stock price index | (14.3) | Q4 2024 | (39.3) | Q4 2024 | (2.4) | (26.0) | Q4 2023 | (48.7) | Q4 2023 | (14.1) |
(1)
Unless specified otherwise, the figures show falls relative to the starting period. The calculations are performed over five years, with a starting point of Q4 2022 for 31 December 2023
scenarios and Q4 2021 for 31 December 2022 scenarios.
NWB Group
Annual Report and Accounts 2023
30
Risk and capital management continued
Use of the scenarios in Personal lending
Personal lending follows a discrete scenario approach. The PD,
EAD, LGD and resultant ECL for each discrete scenario is
calculated using product specific economic response models.
Probability weighted averages across the suite of economic
scenarios are then calculated for each of the model outputs, with
the weighted PD being used for staging purposes.
Business Banking utilises the Personal lending methodology
rather than the Wholesale lending methodology.
Use of the scenarios in Wholesale lending
Wholesale lending follows a continuous scenario approach to
calculate ECL. PD and LGD values arising from multiple economic
forecasts (based on the concept of credit cycle indices) are
simulated around the central projection. The central projection is
a weighted average of economic scenarios with the scenarios
translated into credit cycle indices using the Wholesale economic
response models.
UK economic uncertainty
The high inflation environment alongside high interest rates are
presenting significant headwinds for some businesses and
consumers, in many cases compounding. These cost pressures
remain a feature of the economic environment, though they are
expected to moderate over 2024 and 2025 in the base case
scenario. NWB Group has considered where these are most likely
to affect the customer base, with the cost of borrowing during
2023 for both businesses and consumers presenting an additional
affordability challenge.
The effects of these risks are not expected to be fully captured
by forward-looking credit modelling, particularly given the high
inflation environment, low unemployment base case outlook. Any
incremental ECL effects for these risks will be captured via post
model adjustments and are detailed further in the Governance
and post model adjustments section.
Model and monitoring enhancements
During 2023, the monitoring framework for the retail model suite
was enhanced to enable more granular performance tracking at
key segment levels, such as balance transfers versus non-
balance transfers for the credit cards models.
A new Business Banking PD, EAD and LGD model suite was
redeveloped in 2023, ensuring appropriate treatment of
government-guaranteed loans.
In addition, the retail economic response models, which are used
to bring forward-looking information into the IFRS 9 PD models,
were redeveloped to bring in more inflationary drivers.
In Wholesale lending, new economic response models were
introduced in 2022 and 2023 that follow an improved modelling
approach and put higher weight on stock price indices compared
to previous models.
Measurement uncertainty and ECL sensitivity analysis
(audited)
The recognition and measurement of ECL is complex and
involves the use of significant judgement 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 impact arising from the base case, upside, downside and
extreme downside scenarios was simulated. These scenarios are
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 were applied to all modelled portfolios in the
analysis below, with the simulation impacting both PDs and
LGDs. Post model adjustments included in the ECL estimates that
were modelled were sensitised in line with the modelled ECL
movements, but those that were judgemental in nature, primarily
those for deferred model calibrations and economic uncertainty,
were not (refer to the Governance and post model adjustments
section) on the basis these would be re-evaluated by
management through ECL governance for any new economic
scenario outlook and not be subject to an automated calculation.
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.
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 2023. 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 were not
considered in this analysis.
NWB Group’s core criterion to identify a SICR is founded on PD
deterioration. Under the simulations, PDs change and result in
exposures moving between Stage 1 and Stage 2 contributing to
the ECL impact.
NWB Group
Annual Report and Accounts 2023
31
Risk and capital management continued
(audited)
Measurement uncertainty and ECL sensitivity analysis
Moderate upside | Moderate Downside | Extreme downside | |||
2023 | Actual | Base scenario | scenario | scenario | scenario |
Stage 1 modelled loans (£m) | |||||
Retail Banking - mortgages | 163,933 | 164,545 | 165,165 | 161,475 | 155,743 |
Retail Banking - unsecured | 7,171 | 7,201 | 7,330 | 7,042 | 6,775 |
Wholesale - property | 17,560 | 17,698 | 17,750 | 17,312 | 13,996 |
Wholesale - non-property | 87,054 | 87,836 | 88,402 | 86,249 | 72,373 |
275,718 | 277,280 | 278,647 | 272,078 | 248,887 | |
Stage 1 modelled ECL (£m) | |||||
Retail Banking - mortgages | 82 | 82 | 80 | 80 | 75 |
Retail Banking - unsecured | 185 | 185 | 183 | 184 | 176 |
Wholesale - property | 74 | 58 | 44 | 95 | 129 |
Wholesale - non-property | 211 | 189 | 160 | 257 | 331 |
552 | 514 | 467 | 616 | 711 | |
Stage 1 coverage | |||||
Retail Banking - mortgages | 0.05% | 0.05% | 0.05% | 0.05% | 0.05% |
Retail Banking - unsecured | 2.58% | 2.57% | 2.50% | 2.61% | 2.60% |
Wholesale - property | 0.42% | 0.33% | 0.25% | 0.55% | 0.92% |
Wholesale - non-property | 0.24% | 0.22% | 0.18% | 0.30% | 0.46% |
0.20% | 0.19% | 0.17% | 0.23% | 0.29% | |
Stage 2 modelled loans (£m) | |||||
Retail Banking - mortgages | 15,942 | 15,330 | 14,710 | 18,400 | 24,132 |
Retail Banking - unsecured | 3,065 | 3,035 | 2,906 | 3,194 | 3,461 |
Wholesale - property | 2,292 | 2,154 | 2,102 | 2,540 | 5,856 |
Wholesale - non-property | 10,758 | 9,976 | 9,410 | 11,563 | 25,439 |
32,057 | 30,495 | 29,128 | 35,697 | 58,888 | |
Stage 2 modelled ECL (£m) | |||||
Retail Banking - mortgages | 55 | 51 | 44 | 64 | 92 |
Retail Banking - unsecured | 368 | 360 | 316 | 404 | 459 |
Wholesale - property | 67 | 58 | 50 | 80 | 199 |
Wholesale - non-property | 292 | 247 | 210 | 350 | 656 |
782 | 716 | 620 | 898 | 1,406 | |
Stage 2 coverage | |||||
Retail Banking - mortgages | 0.35% | 0.33% | 0.30% | 0.35% | 0.38% |
Retail Banking - unsecured | 12.01% | 11.86% | 10.87% | 12.65% | 13.26% |
Wholesale - property | 2.92% | 2.69% | 2.38% | 3.15% | 3.40% |
Wholesale - non-property | 2.71% | 2.48% | 2.23% | 3.03% | 2.58% |
2.44% | 2.35% | 2.13% | 2.52% | 2.39% | |
Stage 1 and Stage 2 modelled loans (£m) | |||||
Retail Banking - mortgages | 179,875 | 179,875 | 179,875 | 179,875 | 179,875 |
Retail Banking - unsecured | 10,236 | 10,236 | 10,236 | 10,236 | 10,236 |
Wholesale - property | 19,852 | 19,852 | 19,852 | 19,852 | 19,852 |
Wholesale - non-property | 97,812 | 97,812 | 97,812 | 97,812 | 97,812 |
307,775 | 307,775 | 307,775 | 307,775 | 307,775 | |
Stage 1 and Stage 2 modelled ECL (£m) | |||||
Retail Banking - mortgages | 137 | 133 | 124 | 144 | 167 |
Retail Banking - unsecured | 553 | 545 | 499 | 588 | 635 |
Wholesale - property | 141 | 116 | 94 | 175 | 328 |
Wholesale - non-property | 503 | 436 | 370 | 607 | 987 |
1,334 | 1,230 | 1,087 | 1,514 | 2,117 | |
Stage 1 and Stage 2 coverage | |||||
Retail Banking - mortgages | 0.08% | 0.07% | 0.07% | 0.08% | 0.09% |
Retail Banking - unsecured | 5.40% | 5.32% | 4.87% | 5.74% | 6.20% |
Wholesale - property | 0.71% | 0.58% | 0.47% | 0.88% | 1.65% |
Wholesale - non-property | 0.51% | 0.45% | 0.38% | 0.62% | 1.01% |
0.43% | 0.40% | 0.35% | 0.49% | 0.69% | |
Reconciliation to Stage 1 and Stage 2 ECL (£m) | |||||
ECL on modelled exposures | 1,334 | 1,230 | 1,087 | 1,514 | 2,117 |
ECL on non-modelled exposures | 26 | 26 | 26 | 26 | 26 |
Total Stage 1 and Stage 2 ECL (£m) | 1,360 | 1,256 | 1,113 | 1,540 | 2,143 |
Variance to actual total Stage 1 and Stage 2 ECL (£m) | (104) | (247) | 180 | 783 |
NWB Group
Annual Report and Accounts 2023
32
Risk and capital management continued
(audited)
Measurement uncertainty and ECL sensitivity analysis continued
Moderate upside | Moderate Downside | Extreme downside | |||
2023 | Actual | Base scenario | scenario | scenario | scenario |
Reconciliation to Stage 1 and Stage 2 Flow Exposure (£m) | |||||
Modelled loans | 307,775 | 307,775 | 307,775 | 307,775 | 307,775 |
Non-modelled loans | 17,116 | 17,116 | 17,116 | 17,116 | 17,116 |
Other asset classes | 70,753 | 70,753 | 70,753 | 70,753 | 70,753 |
(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 2022
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 2022. 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 2022 Annual Report and Accounts for 2022 comparatives
.
Measurement uncertainty and ECL adequacy
If the economics were as negative as observed in the extreme
downside (i.e. 100% probability weighting), total Stage 1 and
Stage 2 ECL was simulated to increase by around £0.8 billion
(approximately 58%). 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 portfolio, there was a significant increase in
ECL under both a moderate and extreme downside scenario.
The Wholesale property ECL increase was mainly due to
commercial real estate prices which showed negative growth
until 2025 and significant deterioration in the stock index. The
non-property increase was mainly due to GDP contraction
and significant deterioration in the stock index.
A net improvement in the economic scenarios since 2022
resulted in a reduction in modelled ECL.
Given that continued uncertainty remained due to high
inflation, high interest rates during 2023 and supply chain
disruption, NWB Group utilised a framework of quantitative
and qualitative measures to support the levels of ECL
coverage. This included economic data, credit performance
insights, supply chain contagion analysis and problem debt
trends. This was particularly important for consideration of
post model adjustments.
As the effects of these economic risks evolve into 2024, there
is a risk of further credit deterioration. However, the income
statement effect of this should have been mitigated by the
forward-looking provisions retained on the balance sheet at
31 December 2023.
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. Such factors which could
impact the IFRS 9 models, include an adverse deterioration in
unemployment and GDP in the economies in which NWB
Group operates.
NWB Group
Annual Report and Accounts 2023
33
Credit risk – Banking activities
Introduction
This section details the credit risk profile of NWB Group’s banking activities.
Refer to Accounting policy 2.3 and Note 13 to the financial statements for policies and critical judgements 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 2023 | 31 December 2022 | |||||
Gross | ECL | Net | Gross | ECL | Net | |
£bn | £bn | £bn | £bn | £bn | £bn | |
Balance sheet total gross amortised cost and FVOCI | 404.4 | 394.6 | ||||
In scope of IFRS 9 ECL framework | 404.2 | 394.4 | ||||
% in scope | 100% | 100% | ||||
Loans to customers - in scope - amortised cost | 321.6 | 2.9 | 318.7 | 304.5 | 2.6 | 301.9 |
Loans to customers - in scope - FVOCI | - | - | - | - | - | - |
Loans to banks - in scope - amortised cost | 3.3 | - | 3.3 | 3.2 | - | 3.2 |
Total loans - in scope | 324.9 | 2.9 | 322.0 | 307.7 | 2.6 | 305.1 |
Stage 1 | 288.8 | 0.6 | 288.2 | 266.7 | 0.5 | 266.2 |
Stage 2 | 31.7 | 0.8 | 30.9 | 37.2 | 0.8 | 36.4 |
Stage 3 | 4.4 | 1.5 | 2.9 | 3.8 | 1.3 | 2.5 |
Other financial assets - in scope - amortised cost | 55.8 | - | 55.8 | 77.0 | - | 77.0 |
Other financial assets - in scope - FVOCI | 23.5 | - | 23.5 | 9.7 | - | 9.7 |
Total other financial assets - in scope | 79.3 | - | 79.3 | 86.7 | - | 86.7 |
Stage 1 | 78.2 | - | 78.2 | 85.9 | - | 85.9 |
Stage 2 | 1.1 | - | 1.1 | 0.8 | - | 0.8 |
Stage 3 | - | - | - | - | - | - |
Out of scope of IFRS 9 ECL framework | 0.2 | na | 0.2 | 0.2 | na | 0.2 |
Loans to customers - out of scope - amortised cost | (0.3) | na | (0.3) | (0.3) | na | (0.3) |
Loans to banks - out of scope - amortised cost | - | na | - | - | na | - |
Other financial assets - out of scope - amortised cost | 0.5 | na | 0.5 | 0.5 | na | 0.5 |
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 £0.6 billion (2022 –
£0.7 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
£(0.4) billion (2022 – £(0.5) billion).
In scope assets also include an additional £1.8 billion (2022 – £4.2
billion) of inter-group assets not shown in table above.
Contingent liabilities and commitments
In addition to contingent liabilities and commitments disclosed in
Note 26 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 £87.9 billion (2022 –
£92.1 billion) comprised Stage 1 £79.2 billion (2022 – £79.3 billion);
Stage 2 £8.2 billion (2022 – £12.2 billion); and Stage 3 £0.5 billion
(2022 – £0.7 billion).
NWB Group
Annual Report and Accounts 2023
34
Risk and capital management continued
(audited)
Segment analysis – portfolio summary
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 | Institutional | & other | Total | |
2023 | £m | £m | £m | £m | £m |
Loans - amortised cost and FVOCI | |||||
Stage 1 | 170,668 | 17,565 | 71,748 | 28,791 | 288,772 |
Stage 2 | 18,690 | 906 | 12,131 | - | 31,727 |
Stage 3 | 2,480 | 258 | 1,667 | - | 4,405 |
Inter-group (1) | 1,809 | 1,809 | |||
191,838 | 18,729 | 85,546 | 30,600 | 326,713 | |
ECL provisions (2) | |||||
Stage 1 | 267 | 20 | 262 | 17 | 566 |
Stage 2 | 422 | 20 | 349 | 3 | 794 |
Stage 3 | 869 | 33 | 610 | - | 1,512 |
Inter-group | 1 | 1 | |||
1,558 | 73 | 1,221 | 21 | 2,873 | |
ECL provisions coverage (3) | |||||
Stage 1 (%) | 0.16 | 0.11 | 0.37 | 0.10 | 0.20 |
Stage 2 (%) | 2.26 | 2.21 | 2.88 | NM | 2.50 |
Stage 3 (%) | 35.04 | 12.79 | 36.59 | - | 34.32 |
Inter-group (%) | 0.06 | 0.06 | |||
0.81 | 0.39 | 1.43 | 0.07 | 0.88 | |
Impairment (releases)/losses | |||||
ECL (release)/charge (4) | |||||
Stage 1 | (142) | (9) | (171) | 3 | (319) |
Stage 2 | 379 | 15 | 135 | - | 529 |
Stage 3 | 173 | 7 | 118 | (1) | 297 |
Inter-group | (3) | (3) | |||
410 | 13 | 82 | (1) | 504 | |
Amounts written-off | 143 | 2 | 90 | - | 235 |
For the notes to this table refer to the following page.
NWB Group
Annual Report and Accounts 2023
35
Risk and capital management continued
Segment analysis – portfolio summary (audited)
Retail Banking | Private Banking | Commercial & | Central items & | ||
Institutional | other | Total | |||
2022 | £m | £m | £m | £m | £m |
Loans - amortised cost and FVOCI | |||||
Stage 1 | 161,743 | 18,368 | 64,407 | 22,204 | 266,722 |
Stage 2 | 18,768 | 801 | 17,563 | 84 | 37,216 |
Stage 3 | 1,988 | 241 | 1,554 | - | 3,783 |
Inter-group (1) | - | - | - | 4,220 | 4,220 |
182,499 | 19,410 | 83,524 | 26,508 | 311,941 | |
ECL provisions (2) | |||||
Stage 1 | 213 | 22 | 259 | 12 | 506 |
Stage 2 | 371 | 14 | 419 | 9 | 813 |
Stage 3 | 713 | 25 | 524 | - | 1,262 |
Inter-group | - | - | - | 4 | 4 |
1,297 | 61 | 1,202 | 25 | 2,585 | |
ECL provisions coverage (3) | |||||
Stage 1 (%) | 0.13 | 0.12 | 0.40 | 0.05 | 0.19 |
Stage 2 (%) | 1.98 | 1.75 | 2.39 | 10.71 | 2.18 |
Stage 3 (%) | 35.87 | 10.37 | 33.72 | - | 33.36 |
Inter-group (%) | - | - | - | 0.09 | 0.09 |
0.71 | 0.31 | 1.44 | 0.11 | 0.84 | |
Impairment (releases)/losses | |||||
ECL (release)/charge (4) | |||||
Stage 1 | (116) | 2 | (119) | (10) | (243) |
Stage 2 | 232 | (7) | 116 | 7 | 348 |
Stage 3 | 102 | 3 | 129 | (1) | 233 |
Inter-group | - | - | - | 3 | 3 |
218 | (2) | 126 | (1) | 341 | |
Amounts written-off | 167 | 15 | 139 | - | 321 |
(1)
NWB Group's intercompany assets are classified in Stage 1.
(2)
Includes £8 million (2022 – £2 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 loans and total ECL provisions, including ECL for other (non-
loan) assets and unutilised exposure. Some segments with a high proportion of debt securities or unutilised exposure may result in a not meaningful coverage ratio.
(4)
Includes a £10 million charge (2022 – nil) related to other financial assets, of which a £6 million charge (2022 – £1 million release) related to assets classified as FVOCI, and includes a £2
million release (2022 – nil) 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 £47.8 billion (2022 – £72.5
billion) and debt securities of £31.5 billion (2022 – £14.1 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.
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Annual Report and Accounts 2023
36
Risk and capital management continued
(audited)
Segmental loans and impairment metrics
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 past | Not past | |||||||||||||
Stage 1 | due | 1-30 DPD | >30 DPD | Total | Stage 3 | Total | Stage 1 | due | 1-30 DPD | >30 DPD | Total | Stage 3 | Total | |
2023 | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m |
Retail Banking | 170,668 | 17,788 | 620 | 282 | 18,690 | 2,480 | 191,838 | 267 | 380 | 13 | 29 | 422 | 869 | 1,558 |
Private Banking | 17,565 | 772 | 77 | 57 | 906 | 258 | 18,729 | 20 | 18 | 1 | 1 | 20 | 33 | 73 |
Personal | 14,296 | 158 | 73 | 24 | 255 | 209 | 14,760 | 3 | 2 | - | - | 2 | 20 | 25 |
Wholesale | 3,269 | 614 | 4 | 33 | 651 | 49 | 3,969 | 17 | 16 | 1 | 1 | 18 | 13 | 48 |
Commercial & | ||||||||||||||
Institutional | 71,748 | 11,297 | 518 | 316 | 12,131 | 1,667 | 85,546 | 262 | 324 | 17 | 8 | 349 | 610 | 1,221 |
Central items & other | 28,791 | - | - | - | - | - | 28,791 | 17 | 3 | - | - | 3 | - | 20 |
Total loans | 288,772 | 29,857 | 1,215 | 655 | 31,727 | 4,405 | 324,904 | 566 | 725 | 31 | 38 | 794 | 1,512 | 2,872 |
Of which: | ||||||||||||||
Personal | 184,964 | 17,946 | 693 | 306 | 18,945 | 2,689 | 206,598 | 270 | 382 | 13 | 29 | 424 | 889 | 1,583 |
Wholesale | 103,808 | 11,911 | 522 | 349 | 12,782 | 1,716 | 118,306 | 296 | 343 | 18 | 9 | 370 | 623 | 1,289 |
2022 | ||||||||||||||
Retail Banking | 161,743 | 18,026 | 496 | 246 | 18,768 | 1,988 | 182,499 | 213 | 334 | 12 | 25 | 371 | 713 | 1,297 |
Private Banking | 18,368 | 730 | 39 | 32 | 801 | 241 | 19,410 | 22 | 14 | - | - | 14 | 25 | 61 |
Personal | 15,182 | 122 | 35 | 16 | 173 | 207 | 15,562 | 7 | 2 | - | - | 2 | 17 | 26 |
Wholesale | 3,186 | 608 | 4 | 16 | 628 | 34 | 3,848 | 15 | 12 | - | - | 12 | 8 | 35 |
Commercial & | ||||||||||||||
Institutional | 64,407 | 16,302 | 762 | 499 | 17,563 | 1,554 | 83,524 | 259 | 385 | 21 | 13 | 419 | 524 | 1,202 |
Central items & other | 22,204 | 84 | - | - | 84 | - | 22,288 | 12 | 9 | - | - | 9 | - | 21 |
Total loans | 266,722 | 35,142 | 1,297 | 777 | 37,216 | 3,783 | 307,721 | 506 | 742 | 33 | 38 | 813 | 1,262 | 2,581 |
Of which: | ||||||||||||||
Personal | 176,925 | 18,148 | 531 | 262 | 18,941 | 2,195 | 198,061 | 220 | 336 | 12 | 25 | 373 | 730 | 1,323 |
Wholesale | 89,797 | 16,994 | 766 | 515 | 18,275 | 1,588 | 109,660 | 286 | 406 | 21 | 13 | 440 | 532 | 1,258 |
For the notes to this table refer to the following page.
NWB Group
Annual Report and Accounts 2023
37
Risk and capital management continued
(audited)
Segmental loans and impairment metrics
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 past | (release) / | Amounts | |||||||
Stage 1 | due | 1-30 DPD | >30 DPD | Total | Stage 3 | Total | charge | written-off | |
| 2023 | % | % | % | % | % | % | % | £m | £m |
Retail Banking | 0.16 | 2.14 | 2.10 | 10.28 | 2.26 | 35.04 | 0.81 | 410 | 143 |
Private Banking | 0.11 | 2.33 | 1.30 | 1.75 | 2.21 | 12.79 | 0.39 | 13 | 2 |
Personal | 0.02 | 1.27 | - | - | 0.78 | 9.57 | 0.17 | (3) | 2 |
Wholesale | 0.52 | 2.61 | 25.00 | 3.03 | 2.76 | 26.53 | 1.21 | 16 | 0 |
Commercial & Institutional | 0.37 | 2.87 | 3.28 | 2.53 | 2.88 | 36.59 | 1.43 | 82 | 90 |
Central items & other | 0.06 | NM | - | - | NM | - | 0.07 | 2 | — |
Total loans | 0.20 | 2.43 | 2.55 | 5.80 | 2.50 | 34.32 | 0.88 | 507 | 235 |
Of which: | |||||||||
Personal | 0.15 | 2.13 | 1.88 | 9.48 | 2.24 | 33.06 | 0.77 | 407 | 145 |
Wholesale | 0.29 | 2.88 | 3.45 | 2.58 | 2.89 | 36.31 | 1.09 | 100 | 90 |
2022 | |||||||||
Retail Banking | 0.13 | 1.85 | 2.42 | 10.16 | 1.98 | 35.87 | 0.71 | 218 | 167 |
Private Banking | 0.12 | 1.92 | - | - | 1.75 | 10.37 | 0.31 | (2) | 15 |
Personal | 0.05 | 1.64 | - | - | 1.16 | 8.21 | 0.17 | (2) | - |
Wholesale | 0.47 | 1.97 | - | - | 1.91 | 23.53 | 0.91 | - | 15 |
Commercial & Institutional | 0.40 | 2.36 | 2.76 | 2.61 | 2.39 | 33.72 | 1.44 | 126 | 139 |
Central items & other | 0.05 | 10.71 | - | - | 10.71 | - | 0.09 | (4) | - |
Total loans | 0.19 | 2.11 | 2.54 | 4.89 | 2.18 | 33.36 | 0.84 | 338 | 321 |
Of which: | |||||||||
Personal | 0.12 | 1.85 | 2.26 | 9.54 | 1.97 | 33.26 | 0.67 | 216 | 167 |
Wholesale | 0.32 | 2.39 | 2.74 | 2.52 | 2.41 | 33.50 | 1.15 | 122 | 154 |
(1)
30 DPD – 30 days past due, the mandatory 30 days past due backstop as prescribed by IFRS 9 for a SICR.
Retail Banking –
Balance sheet growth continued during H2
2023, although at a reduced pace compared to H1 2023,
reflecting the wider UK mortgage market trends. Unsecured
balances growth in H2 2023, primarily in credit cards, was a
continuation of the strong customer demand seen in the first
half of the year. Lending criteria and affordability assumptions
continue to be reviewed to ensure new business is assessed
appropriately in the higher interest rate and inflationary
environment. While portfolio performance continued to remain
stable, total ECL coverage increased. The rise in coverage
was reflective of increased Stage 3 ECL on unsecured
portfolios, mainly due to reduced write-off activity, however,
Stage 3 inflows were higher this year, in line with growth and
normalisation of risk parameters. The modest increase in good
book coverage during the year reflected a slight increase in
early arrears levels and a rise in the unsecured mix of the
portfolio. Furthermore, post model adjustments to capture
increased affordability pressures on customers due to high
inflation and interest rates have increased during the year,
ensuring ECL reflects the continued uncertainty despite
modelled ECL reductions due to improved forward-looking
economic updates since the end of 2022.
Commercial & Institutional –
There was modest growth in
Commercial & Institutional due to increased lending to
corporates, notably in the power utilities sector, partially offset
by reductions in other sectors. There were also continued
repayments of COVID-19 government lending schemes, and
strategic reductions in certain sectors. Sector appetite
continues to be reviewed regularly, with particular focus on
sector clusters and sub-sectors that are vulnerable to
inflationary and supply chain pressures or deemed to
represent a heightened risk. Stage 2 ECL reduced due to
positive portfolio performance and improvements in the latest
economic scenarios, which also led to a reduction in total
coverage. Coverage on Stage 1 and Stage 2, however, is still
significantly above pre-COVID-19 levels, reflecting continued
economic uncertainty.
Central items & other
–
Balance sheet growth in 2023
compared to 2022 was mainly due to an increase in central
items held in the course of treasury related management
activities.
NWB Group
Annual Report and Accounts 2023
38
(2)
Some segments with a high proportion of debt securities or unutilised exposure may result in a not meaningful coverage ratio.
(audited)
Sector analysis – portfolio summary
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 | ||
2023 | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m |
Loans by geography | 193,810 | 4,865 | 7,923 | 206,598 | 21,034 | 63,187 | 32,511 | 1,574 | 118,306 | 324,904 |
- UK | 193,810 | 4,865 | 7,923 | 206,598 | 20,697 | 54,391 | 29,739 | 1,392 | 106,219 | 312,817 |
- RoI | - | - | - | - | 9 | 852 | 113 | - | 974 | 974 |
- Other Europe | - | - | - | - | 217 | 3,624 | 486 | 37 | 4,364 | 4,364 |
- RoW | - | - | - | - | 111 | 4,320 | 2,173 | 145 | 6,749 | 6,749 |
Loans by stage and asset quality (2) | 193,810 | 4,865 | 7,923 | 206,598 | 21,034 | 63,187 | 32,511 | 1,574 | 118,306 | 324,904 |
Stage 1 | 176,085 | 3,115 | 5,764 | 184,964 | 18,341 | 51,604 | 32,311 | 1,552 | 103,808 | 288,772 |
- AQ1 | 1,264 | - | 135 | 1,399 | - | 877 | 644 | 37 | 1,558 | 2,957 |
- AQ2 | 1,564 | - | 133 | 1,697 | 2,129 | 1,282 | 15,845 | 1,387 | 20,643 | 22,340 |
- AQ3 | 3,169 | 4 | 98 | 3,271 | 2,644 | 5,134 | 7,059 | 5 | 14,842 | 18,113 |
- AQ4 | 97,273 | 104 | 364 | 97,741 | 3,668 | 12,319 | 6,464 | - | 22,451 | 120,192 |
- AQ5 | 63,483 | 859 | 345 | 64,687 | 5,780 | 18,445 | 1,334 | - | 25,559 | 90,246 |
- AQ6 | 4,429 | 1,185 | 3,029 | 8,643 | 2,561 | 8,720 | 722 | - | 12,003 | 20,646 |
- AQ7 | 4,445 | 904 | 1,184 | 6,533 | 1,439 | 4,414 | 235 | - | 6,088 | 12,621 |
- AQ8 | 307 | 53 | 438 | 798 | 114 | 378 | 7 | 123 | 622 | 1,420 |
- AQ9 | 151 | 6 | 38 | 195 | 6 | 35 | 1 | - | 42 | 237 |
Stage 2 | 15,951 | 1,640 | 1,354 | 18,945 | 2,282 | 10,311 | 189 | - | 12,782 | 31,727 |
- AQ1 | 17 | - | - | 17 | - | 20 | - | - | 20 | 37 |
- AQ2 | 12 | - | - | 12 | 49 | - | - | - | 49 | 61 |
- AQ3 | 44 | - | 4 | 48 | 49 | 11 | - | - | 60 | 108 |
- AQ4 | 6,603 | - | 126 | 6,729 | 126 | 726 | 13 | - | 865 | 7,594 |
- AQ5 | 6,567 | 78 | 92 | 6,737 | 549 | 1,824 | 75 | - | 2,448 | 9,185 |
- AQ6 | 995 | 333 | 424 | 1,752 | 498 | 3,126 | 6 | - | 3,630 | 5,382 |
- AQ7 | 599 | 973 | 268 | 1,840 | 775 | 3,205 | 68 | - | 4,048 | 5,888 |
- AQ8 | 503 | 210 | 345 | 1,058 | 182 | 1,183 | 20 | - | 1,385 | 2,443 |
- AQ9 | 611 | 46 | 95 | 752 | 54 | 216 | 7 | - | 277 | 1,029 |
Stage 3 | 1,774 | 110 | 805 | 2,689 | 411 | 1,272 | 11 | 22 | 1,716 | 4,405 |
- AQ10 | 1,774 | 110 | 805 | 2,689 | 411 | 1,272 | 11 | 22 | 1,716 | 4,405 |
Loans past due analysis (3) | 193,810 | 4,865 | 7,923 | 206,598 | 21,034 | 63,187 | 32,511 | 1,574 | 118,306 | 324,904 |
- Not past due | 191,498 | 4,738 | 7,085 | 203,321 | 20,312 | 60,429 | 32,486 | 1,574 | 114,801 | 318,122 |
- Past due 1-30 days | 984 | 33 | 59 | 1,076 | 376 | 1,904 | 17 | - | 2,297 | 3,373 |
- Past due 31-89 days | 422 | 31 | 94 | 547 | 151 | 347 | 3 | - | 501 | 1,048 |
- Past due 90-180 days | 363 | 26 | 85 | 474 | 23 | 56 | 2 | - | 81 | 555 |
- Past due >180 days | 543 | 37 | 600 | 1,180 | 172 | 451 | 3 | - | 626 | 1,806 |
Loans - Stage 2 | 15,951 | 1,640 | 1,354 | 18,945 | 2,282 | 10,311 | 189 | - | 12,782 | 31,727 |
- Not past due | 15,080 | 1,599 | 1,267 | 17,946 | 2,118 | 9,610 | 183 | - | 11,911 | 29,857 |
- Past due 1-30 days | 639 | 21 | 33 | 693 | 82 | 435 | 5 | - | 522 | 1,215 |
- Past due 31-89 days | 232 | 20 | 54 | 306 | 82 | 266 | 1 | - | 349 | 655 |
For the notes to this table refer to page 42.
NWB Group
Annual Report and Accounts 2023
39
(audited)
Sector analysis – portfolio summary
Personal | Wholesale | Total | ||||||||
Credit | Other | |||||||||
Mortgages (1) | cards | personal | Total | Property | Corporate | FI | Sovereign | Total | ||
2023 | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m |
Weighted average life (5) | ||||||||||
- ECL measurement (years) | 9 | 4 | 6 | 6 | 6 | 6 | 2 | - | 6 | 6 |
Weighted average 12 months PDs (5) | ||||||||||
- IFRS 9 (%) | 0.48 | 3.46 | 5.33 | 0.71 | 1.61 | 1.67 | 0.21 | 0.61 | 1.24 | 0.90 |
- Basel (%) | 0.64 | 3.36 | 3.24 | 0.80 | 1.05 | 1.31 | 0.19 | 0.61 | 0.94 | 0.85 |
ECL provisions by geography | 321 | 299 | 963 | 1,583 | 266 | 980 | 33 | 10 | 1,289 | 2,872 |
- UK | 321 | 299 | 963 | 1,583 | 263 | 808 | 19 | 7 | 1,097 | 2,680 |
- RoI | - | - | - | - | - | 2 | 1 | - | 3 | 3 |
- Other Europe | - | - | - | - | 2 | 131 | 5 | - | 138 | 138 |
- RoW | - | - | - | - | 1 | 39 | 8 | 3 | 51 | 51 |
ECL provisions by stage | 321 | 299 | 963 | 1,583 | 266 | 980 | 33 | 10 | 1,289 | 2,872 |
- Stage 1 | 83 | 59 | 128 | 270 | 74 | 193 | 22 | 7 | 296 | 566 |
- Stage 2 | 55 | 167 | 202 | 424 | 69 | 292 | 8 | 1 | 370 | 794 |
- Stage 3 | 183 | 73 | 633 | 889 | 123 | 495 | 3 | 2 | 623 | 1,512 |
ECL provisions coverage (%) | 0.17 | 6.15 | 12.15 | 0.77 | 1.26 | 1.55 | 0.10 | 0.64 | 1.09 | 0.88 |
- Stage 1 (%) | 0.05 | 1.89 | 2.22 | 0.15 | 0.40 | 0.37 | 0.07 | 0.45 | 0.29 | 0.20 |
- Stage 2 (%) | 0.34 | 10.18 | 14.92 | 2.24 | 3.02 | 2.83 | 4.23 | NM | 2.89 | 2.50 |
- Stage 3 (%) | 10.32 | 66.36 | 78.63 | 33.06 | 29.93 | 38.92 | 27.27 | 9.09 | 36.31 | 34.32 |
ECL charge/(release) - Third party | 36 | 161 | 210 | 407 | 35 | 71 | (4) | (2) | 100 | 507 |
Amounts written-off | 19 | 54 | 72 | 145 | 20 | 70 | - | - | 90 | 235 |
Other financial assets | ||||||||||
by asset quality (2) | - | - | - | - | - | 2,606 | 14,339 | 62,352 | 79,297 | 79,297 |
- AQ1-AQ4 | - | - | - | - | - | 2,606 | 13,957 | 62,352 | 78,915 | 78,915 |
- AQ5-AQ8 | - | - | - | - | - | - | 382 | - | 382 | 382 |
Off-balance sheet | 7,537 | 13,862 | 6,990 | 28,389 | 9,239 | 45,896 | 4,246 | 122 | 59,503 | 87,892 |
Loan commitments | 7,537 | 13,862 | 6,945 | 28,344 | 9,023 | 43,922 | 3,928 | 122 | 56,995 | 85,339 |
Financial guarantees | - | - | 45 | 45 | 216 | 1,974 | 318 | - | 2,508 | 2,553 |
Off-balance sheet | ||||||||||
by asset quality (2) | 7,537 | 13,862 | 6,990 | 28,389 | 9,239 | 45,896 | 4,246 | 122 | 59,503 | 87,892 |
- AQ1-AQ4 | 7,134 | 388 | 6,129 | 13,651 | 6,585 | 26,426 | 3,244 | 60 | 36,315 | 49,966 |
- AQ5-AQ8 | 389 | 13,223 | 837 | 14,449 | 2,641 | 19,249 | 999 | 45 | 22,934 | 37,383 |
- AQ9 | 7 | 5 | 4 | 16 | 2 | 12 | - | - | 14 | 30 |
- AQ10 | 7 | 246 | 20 | 273 | 11 | 209 | 3 | 17 | 240 | 513 |
For the notes to this table refer to page 42
.
NWB Group
Annual Report and Accounts 2023
40
Sector analysis – portfolio summary
(audited)
| Personal | Wholesale | Total | ||||||||
Other | ||||||||||
Mortgages (1) | Credit cards | personal | Total | Property | Corporate | FI | Sovereign | Total | ||
2022 (4) | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m |
Loans by geography | 186,650 | 3,509 | 7,902 | 198,061 | 20,335 | 63,186 | 24,435 | 1,704 | 109,660 | 307,721 |
- UK | 186,650 | 3,509 | 7,902 | 198,061 | 19,715 | 54,283 | 21,549 | 1,553 | 97,100 | 295,161 |
- RoI | - | - | - | - | 9 | 838 | 42 | - | 889 | 889 |
- Other Europe | - | - | - | - | 275 | 3,600 | 537 | 36 | 4,448 | 4,448 |
- RoW | - | - | - | - | 336 | 4,465 | 2,307 | 115 | 7,223 | 7,223 |
Loans by stage and asset quality (2) | 186,650 | 3,509 | 7,902 | 198,061 | 20,335 | 63,186 | 24,435 | 1,704 | 109,660 | 307,721 |
Stage 1 | 168,675 | 2,590 | 5,660 | 176,925 | 17,277 | 47,069 | 23,747 | 1,704 | 89,797 | 266,722 |
- AQ1 | 1,383 | - | 198 | 1,581 | 877 | 600 | 3,247 | 1,589 | 6,313 | 7,894 |
- AQ2 | 1,689 | - | 179 | 1,868 | 2,017 | 1,350 | 15,943 | - | 19,310 | 21,178 |
- AQ3 | 3,494 | 3 | 190 | 3,687 | 1,904 | 5,360 | 247 | - | 7,511 | 11,198 |
- AQ4 | 101,451 | 71 | 420 | 101,942 | 3,384 | 8,740 | 2,480 | - | 14,604 | 116,546 |
- AQ5 | 51,653 | 755 | 481 | 52,889 | 5,269 | 17,435 | 1,028 | - | 23,732 | 76,621 |
- AQ6 | 3,981 | 935 | 2,746 | 7,662 | 2,197 | 8,069 | 572 | - | 10,838 | 18,500 |
- AQ7 | 4,571 | 744 | 1,113 | 6,428 | 1,450 | 4,861 | 218 | 115 | 6,644 | 13,072 |
- AQ8 | 291 | 78 | 308 | 677 | 170 | 624 | 12 | - | 806 | 1,483 |
- AQ9 | 162 | 4 | 25 | 191 | 9 | 30 | - | - | 39 | 230 |
Stage 2 | 16,511 | 834 | 1,596 | 18,941 | 2,636 | 14,986 | 653 | - | 18,275 | 37,216 |
- AQ1 | 6 | - | - | 6 | 54 | 86 | - | - | 140 | 146 |
- AQ2 | 3 | - | 2 | 5 | 10 | 130 | - | - | 140 | 145 |
- AQ3 | 96 | - | 2 | 98 | 58 | 295 | - | - | 353 | 451 |
- AQ4 | 8,009 | - | 105 | 8,114 | 157 | 2,852 | 375 | - | 3,384 | 11,498 |
- AQ5 | 6,074 | 29 | 80 | 6,183 | 505 | 2,683 | 110 | - | 3,298 | 9,481 |
- AQ6 | 861 | 146 | 531 | 1,538 | 870 | 3,741 | 95 | - | 4,706 | 6,244 |
- AQ7 | 525 | 423 | 336 | 1,284 | 722 | 3,533 | 46 | - | 4,301 | 5,585 |
- AQ8 | 414 | 209 | 434 | 1,057 | 190 | 1,388 | 19 | - | 1,597 | 2,654 |
- AQ9 | 523 | 27 | 106 | 656 | 70 | 278 | 8 | - | 356 | 1,012 |
Stage 3 | 1,464 | 85 | 646 | 2,195 | 422 | 1,131 | 35 | - | 1,588 | 3,783 |
- AQ10 | 1,464 | 85 | 646 | 2,195 | 422 | 1,131 | 35 | - | 1,588 | 3,783 |
Loans past due analysis (3) | 186,650 | 3,509 | 7,902 | 198,061 | 20,335 | 63,186 | 24,435 | 1,704 | 109,660 | 307,721 |
- Not past due | 184,826 | 3,417 | 7,190 | 195,433 | 19,634 | 60,114 | 24,321 | 1,704 | 105,773 | 301,206 |
- Past due 1-30 days | 733 | 24 | 69 | 826 | 349 | 2,212 | 86 | - | 2,647 | 3,473 |
- Past due 31-89 days | 400 | 21 | 84 | 505 | 162 | 410 | 2 | - | 574 | 1,079 |
- Past due 90-180 days | 294 | 18 | 65 | 377 | 26 | 22 | 23 | - | 71 | 448 |
- Past due >180 days | 397 | 29 | 494 | 920 | 164 | 428 | 3 | - | 595 | 1,515 |
Loans - Stage 2 | 16,511 | 834 | 1,596 | 18,941 | 2,636 | 14,986 | 653 | - | 18,275 | 37,216 |
- Not past due | 15,837 | 809 | 1,502 | 18,148 | 2,351 | 13,996 | 647 | - | 16,994 | 35,142 |
- Past due 1-30 days | 476 | 13 | 42 | 531 | 145 | 617 | 4 | - | 766 | 1,297 |
- Past due 31-89 days | 198 | 12 | 52 | 262 | 140 | 373 | 2 | - | 515 | 777 |
For the notes to this table refer to the following page.
(audited)
Sector analysis – portfolio summary
| Personal | Wholesale | Total | ||||||||
Credit | Other | |||||||||
Mortgages (1) | cards | personal | Total | Property | Corporate | FI | Sovereign | Total | ||
2022 (4) | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m |
Weighted average life (5) | ||||||||||
- ECL measurement (years) | 8 | 2 | 6 | 6 | 5 | 6 | 3 | — | 5 | 6 |
Weighted average 12 months PDs (5) | ||||||||||
- IFRS 9 (%) | 0.47 | 2.52 | 4.72 | 0.66 | 1.97 | 2.13 | 0.26 | 0.37 | 1.64 | 1.01 |
- Basel (%) | 0.61 | 2.90 | 3.09 | 0.74 | 1.14 | 1.45 | 0.19 | 0.37 | 1.09 | 0.86 |
ECL provisions by geography | 278 | 197 | 848 | 1,323 | 259 | 952 | 38 | 9 | 1,258 | 2,581 |
- UK | 278 | 197 | 848 | 1,323 | 250 | 794 | 25 | 9 | 1,078 | 2,401 |
- RoI | - | - | - | - | - | 4 | - | - | 4 | 4 |
- Other Europe | - | - | - | - | 7 | 65 | 3 | - | 75 | 75 |
- RoW | - | - | - | - | 2 | 89 | 10 | - | 101 | 101 |
ECL provisions by stage | 278 | 197 | 848 | 1,323 | 259 | 952 | 38 | 9 | 1,258 | 2,581 |
- Stage 1 | 75 | 48 | 97 | 220 | 74 | 188 | 15 | 9 | 286 | 506 |
- Stage 2 | 55 | 92 | 226 | 373 | 69 | 362 | 9 | - | 440 | 813 |
- Stage 3 | 148 | 57 | 525 | 730 | 116 | 402 | 14 | - | 532 | 1,262 |
ECL provisions coverage (%) | 0.15 | 5.61 | 10.73 | 0.67 | 1.27 | 1.51 | 0.16 | 0.53 | 1.15 | 0.84 |
- Stage 1 (%) | 0.04 | 1.85 | 1.71 | 0.12 | 0.43 | 0.40 | 0.06 | 0.53 | 0.32 | 0.19 |
- Stage 2 (%) | 0.33 | 11.03 | 14.16 | 1.97 | 2.62 | 2.42 | 1.38 | - | 2.41 | 2.18 |
- Stage 3 (%) | 10.11 | 67.06 | 81.27 | 33.26 | 27.49 | 35.54 | 40.00 | - | 33.50 | 33.36 |
ECL (release)/charge - Third party | (30) | 35 | 211 | 216 | 98 | 20 | 7 | (3) | 122 | 338 |
Amounts written-off | 18 | 50 | 99 | 167 | 20 | 94 | 40 | - | 154 | 321 |
Other financial assets | ||||||||||
by asset quality (2) | - | - | - | - | - | 402 | 7,785 | 78,437 | 86,624 | 86,624 |
- AQ1-AQ4 | - | - | - | - | - | 402 | 7,556 | 78,437 | 86,395 | 86,395 |
- AQ5-AQ8 | - | - | - | - | - | - | 229 | - | 229 | 229 |
Off-balance sheet | 15,894 | 12,287 | 7,030 | 35,211 | 8,791 | 44,362 | 3,596 | 102 | 56,851 | 92,062 |
- Loan commitments | 15,894 | 12,287 | 6,979 | 35,160 | 8,536 | 41,881 | 3,344 | 102 | 53,863 | 89,023 |
- Financial guarantees | - | - | 51 | 51 | 255 | 2,481 | 252 | - | 2,988 | 3,039 |
Off-balance sheet | ||||||||||
by asset quality (2) | 15,894 | 12,287 | 7,030 | 35,211 | 8,791 | 44,362 | 3,596 | 102 | 56,851 | 92,062 |
- AQ1-AQ4 | 15,212 | 370 | 6,170 | 21,752 | 6,620 | 26,097 | 2,592 | 39 | 35,348 | 57,100 |
- AQ5-AQ8 | 674 | 11,687 | 839 | 13,200 | 2,157 | 18,005 | 1,003 | 63 | 21,228 | 34,428 |
- AQ9 | 2 | 3 | 4 | 9 | 3 | 16 | - | - | 19 | 28 |
- AQ10 | 6 | 227 | 17 | 250 | 11 | 244 | 1 | - | 256 | 506 |
(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 (2022 – £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)
Previously published sectors for the Wholesale portfolio have been re-presented to reflect updated internal sector reporting.
(5)
Not within the scope of the Independent auditors’ report.
NWB Group
Annual Report and Accounts 2023
42
(audited)
Sector analysis – portfolio summary
The table below shows ECL by stage, for the Personal portfolio and selected sectors of the Wholesale portfolio including those that
contain an element of exposure classified as heightened climate-related risk.
| 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 | |
2023 | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m |
Personal | 184,964 | 18,945 | 2,689 | 206,598 | 28,344 | 45 | 270 | 424 | 889 | 1,583 |
Mortgages | 176,085 | 15,951 | 1,774 | 193,810 | 7,537 | - | 83 | 55 | 183 | 321 |
Credit cards | 3,115 | 1,640 | 110 | 4,865 | 13,862 | - | 59 | 167 | 73 | 299 |
Other personal | 5,764 | 1,354 | 805 | 7,923 | 6,945 | 45 | 128 | 202 | 633 | 963 |
Wholesale | 103,808 | 12,782 | 1,716 | 118,306 | 56,995 | 2,508 | 296 | 370 | 623 | 1,289 |
Property | 18,341 | 2,282 | 411 | 21,034 | 9,023 | 216 | 74 | 69 | 123 | 266 |
Financial institutions | 32,311 | 189 | 11 | 32,511 | 3,928 | 318 | 22 | 8 | 3 | 33 |
Sovereign | 1,552 | - | 22 | 1,574 | 122 | — | 7 | 1 | 2 | 10 |
Corporate | 51,604 | 10,311 | 1,272 | 63,187 | 43,922 | 1,974 | 193 | 292 | 495 | 980 |
Of which: | ||||||||||
Agriculture | 3,305 | 821 | 75 | 4,201 | 768 | 14 | 16 | 28 | 26 | 70 |
Airlines and aerospace | 1,330 | 303 | 3 | 1,636 | 1,260 | 152 | 4 | 5 | 2 | 11 |
Automotive | 6,749 | 989 | 73 | 7,811 | 3,078 | 34 | 17 | 17 | 25 | 59 |
Building materials | 1,112 | 250 | 67 | 1,429 | 1,265 | 67 | 6 | 8 | 5 | 19 |
Chemicals | 311 | 61 | 4 | 376 | 684 | 11 | 1 | 9 | 1 | 11 |
Industrials | 1,814 | 450 | 63 | 2,327 | 2,379 | 107 | 8 | 15 | 17 | 40 |
Land transport and logistics | 3,533 | 529 | 23 | 4,085 | 2,408 | 132 | 9 | 13 | 10 | 32 |
Leisure | 3,435 | 1,867 | 233 | 5,535 | 1,446 | 98 | 25 | 58 | 74 | 157 |
Mining and metals | 127 | 30 | 1 | 158 | 376 | 2 | - | - | 1 | |
Oil and gas | 607 | 124 | 25 | 756 | 1,415 | 132 | 2 | 2 | 25 | 29 |
Power utilities | 4,961 | 417 | 39 | 5,417 | 5,023 | 405 | 12 | 13 | 24 | 49 |
Retail | 4,032 | 1,152 | 209 | 5,393 | 3,703 | 357 | 18 | 30 | 110 | 158 |
Shipping | 191 | 8 | 3 | 202 | 54 | 21 | - | - | 2 | |
Water and waste | 3,487 | 120 | 12 | 3,619 | 1,820 | 68 | 4 | 4 | 4 | 12 |
Total | 288,772 | 31,727 | 4,405 | 324,904 | 85,339 | 2,553 | 566 | 794 | 1,512 | 2,872 |
2022 (1) | ||||||||||
Personal | 176,925 | 18,941 | 2,195 | 198,061 | 35,160 | 51 | 220 | 373 | 730 | 1,323 |
Mortgages | 168,675 | 16,511 | 1,464 | 186,650 | 15,894 | - | 75 | 55 | 148 | 278 |
Credit cards | 2,590 | 834 | 85 | 3,509 | 12,287 | - | 48 | 92 | 57 | 197 |
Other personal | 5,660 | 1,596 | 646 | 7,902 | 6,979 | 51 | 97 | 226 | 525 | 848 |
Wholesale | 89,797 | 18,275 | 1,588 | 109,660 | 53,863 | 2,988 | 286 | 440 | 532 | 1,258 |
Property | 17,277 | 2,636 | 422 | 20,335 | 8,536 | 255 | 74 | 69 | 116 | 259 |
Financial institutions | 23,747 | 653 | 35 | 24,435 | 3,344 | 252 | 15 | 9 | 14 | 38 |
Sovereign | 1,704 | - | - | 1,704 | 102 | - | 9 | - | - | |
Corporate | 47,069 | 14,986 | 1,131 | 63,186 | 41,881 | 2,481 | 188 | 362 | 402 | 952 |
Of which: | ||||||||||
Agriculture | 3,065 | 824 | 67 | 3,956 | 739 | 17 | 17 | 25 | 29 | 71 |
Airlines and aerospace | 367 | 1,048 | 17 | 1,432 | 919 | 61 | 2 | 37 | 7 | 46 |
Automotive | 5,270 | 1,409 | 20 | 6,699 | 3,194 | 41 | 17 | 16 | 8 | 41 |
Building materials | 1,105 | 240 | 9 | 1,354 | 1,343 | 74 | 7 | 6 | 4 | 17 |
Chemicals | 323 | 113 | 1 | 437 | 546 | 11 | 1 | 2 | 1 | |
Industrials | 1,923 | 694 | 73 | 2,690 | 2,638 | 129 | 8 | 13 | 19 | 40 |
Land transport and logistics | 3,249 | 1,059 | 28 | 4,336 | 2,699 | 129 | 11 | 29 | 10 | 50 |
Leisure | 2,769 | 2,855 | 174 | 5,798 | 1,386 | 51 | 22 | 97 | 84 | 203 |
Mining and metals | 157 | 40 | 2 | 199 | 349 | 2 | - | 1 | 1 | |
Oil and gas | 608 | 111 | 37 | 756 | 1,079 | 136 | 2 | 1 | 27 | 30 |
Power utilities | 3,715 | 404 | 1 | 4,120 | 3,916 | 1,115 | 9 | 11 | - | 20 |
Retail | 4,919 | 1,248 | 126 | 6,293 | 3,475 | 335 | 17 | 25 | 56 | 98 |
Shipping | 141 | 129 | 14 | 284 | 78 | 14 | - | 6 | 6 | 12 |
Water and waste | 2,970 | 303 | 7 | 3,280 | 1,796 | 79 | 4 | 4 | 4 | 12 |
Total | 266,722 | 37,216 | 3,783 | 307,721 | 89,023 | 3,039 | 506 | 813 | 1,262 | 2,581 |
(1)
Previously published sectors for the Wholesale portfolio have been re-presented to reflect updated internal sector reporting.
NWB Group
Annual Report and Accounts 2023
43
1
2
9
4
2
Risk and capital management continued
(audited)
Wholesale forbearance
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.
Other | |||||
Property | FI | Sovereigns | wholesale | Total | |
2023 | £m | £m | £m | £m | £m |
Forbearance (flow) | 490 | 47 | 22 | 2,263 | 2,822 |
Forbearance (stock) | 600 | 61 | 22 | 3,265 | 3,948 |
Heightened Monitoring and Risk of Credit Loss | 638 | 167 | 3,567 | 4,372 | |
2022 | |||||
Forbearance (flow) | 368 | 105 | — | 2,123 | 2,596 |
Forbearance (stock) | 475 | 106 | — | 3,694 | 4,275 |
Heightened Monitoring and Risk of Credit Loss | 471 | 68 | — | 2,832 | 3,371 |
(audited)
Sector analysis – portfolio summary
Loans by geography and sector –
In line with NWB Group’s
strategic focus, exposures continued to be mainly in the UK.
Loans by stage
– There was an increase in Stage 1 exposure
due to mortgage growth in Personal and financial institutions
lending in Wholesale. An overall improvement in forward-
looking economics during 2023 drove a reduction in IFRS 9
PDs meaning a reduction in the proportion of most portfolio
segments triggering PD deterioration rules.
Loans – Past due analysis –
In Personal, the value of arrears
increased during 2023 as expected with portfolio growth in
recent years and adjustments to lending criteria following
COVID-19.
Weighted average 12 months PDs –
IFRS 9 PDs remained
broadly stable overall, with some increases in Personal
portfolios, most notably in credit cards which had an IFRS 9
PD modelling update. In Wholesale, some reductions were
observed in PDs in corporate and property portfolios, linked to
the economic scenario updates during the year.
ECL provisions by stage –
Portfolio growth was the key driver
behind an increase in Stage 1 provisions. Stage 2 provisions
reduced during 2023, reflecting broadly stable credit
performance of the portfolios and the effect of improved 2023
forward-looking scenario updates. As outlined previously,
Stage 3 provisions have yet to be materially affected by the
customer affordability risks linked to the current economic
uncertainty prevalent in the UK. However, there has been an
increase in Stage 3 ECL linked to a modest rise in default
levels and reduced write-off activity.
ECL provisions coverage
– Overall provisions coverage
remained broadly consistent with 31 December 2022. This
was mainly a result of continued stable portfolio performance
and MES economics-driven modelled ECL releases contrasted
with increased economic uncertainty, captured through ECL
post model adjustments.
ECL charge –
The impairment charge for 2023 of £508 million
(excluding inter-group lending) primarily reflected the
underlying Stage 3 charges and portfolio growth.
Loans by residual maturity –
The maturity profile of the
portfolios remained consistent with prior periods. 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.
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 decreased 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,
off-balance sheet exposures increased due to increased
securitisations lending within financial institutions, with asset
quality in line with existing off-balance sheet exposures.
Wholesale forbearance –
Forbearance flow and stock
increased for 2023 compared to 2022. Payment holidays and
covenant waivers were the most common forms of
forbearance granted.
Heightened Monitoring and Risk of Credit Loss –
Risk of Credit
Loss framework exposures and inflows increased in 2023
compared to 2022. Retail SME customers do not form part of
the Wholesale Risk of Credit Loss framework. Customers in
financial difficulty within this group are managed by specialist
problem debt management teams. The balances in arrears
and recoveries remained flat in 2023, with inflows continuing
to be driven by Bounce Back Loan Scheme (BBLS) exposures.
Excluding BBLS balances, the debt value for this population
that are in problem debt/recoveries also remained stable.
NWB Group
Annual Report and Accounts 2023
44
Risk and capital management continued
(audited)
Credit risk enhancement and mitigation
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 | |
2023 | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn |
Financial assets | |||||||||||
Cash and balances at central banks | 47.8 | - | 47.8 | - | - | - | - | - | - | 47.8 | - |
Loans - amortised cost (3) | 324.9 | 2.9 | 322.0 | 2.9 | 33.4 | 222.2 | 18.8 | 274.4 | 2.5 | 47.6 | 0.4 |
Personal (4) | 206.6 | 1.6 | 205.0 | 1.8 | 0.8 | 193.2 | - | 194.0 | 1.6 | 11.0 | 0.2 |
Wholesale (5) | 118.3 | 1.3 | 117.0 | 1.1 | 32.6 | 29.0 | 18.8 | 80.4 | 0.9 | 36.6 | 0.2 |
Debt securities | 31.5 | - | 31.5 | - | - | - | - | - | - | 31.5 | - |
Total financial assets | 404.2 | 2.9 | 401.3 | 2.9 | 33.4 | 222.2 | 18.8 | 274.4 | 2.5 | 126.9 | 0.4 |
Contingent liabilities and | |||||||||||
commitments | |||||||||||
Personal (6,7) | 28.4 | - | 28.4 | 0.3 | 0.8 | 1.8 | - | 2.6 | - | 25.8 | 0.3 |
Wholesale | 59.5 | - | 59.5 | 0.2 | 1.0 | 4.5 | 3.7 | 9.1 | - | 50.4 | 0.2 |
Total off-balance sheet | 87.9 | - | 87.9 | 0.5 | 1.8 | 6.3 | 3.7 | 11.7 | - | 76.2 | 0.5 |
Total exposure | 492.1 | 2.9 | 489.2 | 3.4 | 35.2 | 228.5 | 22.5 | 286.1 | 2.5 | 203.1 | 0.9 |
2022 | |||||||||||
Financial assets | |||||||||||
Cash and balances at central banks | 72.5 | - | 72.5 | - | - | - | - | - | - | 72.5 | - |
Loans - amortised cost (3) | 307.8 | 2.5 | 305.3 | 2.6 | 28.3 | 214.2 | 17.8 | 260.4 | 2.2 | 44.9 | 0.4 |
Personal (4) | 198.1 | 1.3 | 196.8 | 1.5 | 0.9 | 185.9 | - | 186.9 | 1.3 | 9.9 | 0.2 |
Wholesale (5) | 109.7 | 1.2 | 108.5 | 1.1 | 27.4 | 28.3 | 17.8 | 73.5 | 0.9 | 35.0 | 0.2 |
Debt securities | 14.1 | - | 14.1 | - | - | - | - | - | - | 14.1 | - |
Total financial assets | 394.4 | 2.5 | 391.9 | 2.6 | 28.3 | 214.2 | 17.8 | 260.4 | 2.2 | 131.5 | 0.4 |
Contingent liabilities and | |||||||||||
commitments | |||||||||||
Personal (6,7) | 35.2 | - | 35.2 | 0.2 | 0.6 | 1.9 | - | 2.5 | - | 32.7 | 0.2 |
Wholesale | 56.9 | 0.1 | 56.8 | 0.3 | 0.9 | 4.5 | 3.3 | 8.7 | - | 48.1 | 0.3 |
Total off-balance sheet | 92.1 | 0.1 | 92.0 | 0.5 | 1.5 | 6.4 | 3.3 | 11.2 | - | 80.8 | 0.5 |
Total exposure | 486.5 | 2.6 | 483.9 | 3.1 | 29.8 | 220.6 | 21.1 | 271.6 | 2.2 | 212.3 | 0.9 |
(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 (2022 – £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 £5.8 billion (2022 – £13.8 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.
NWB Group
Annual Report and Accounts 2023
45
Risk and capital management continued
(audited)
Personal portfolio
Disclosures in the Personal portfolio section include drawn exposure (gross of provisions).
| 2023 | 2022 | |||||
Retail | Private | Retail | Private | |||
Banking | Banking | Total | Banking | Banking | Total | |
Personal lending | £m | £m | £m | £m | £m | £m |
Mortgages | 180,629 | 13,222 | 193,851 | 172,941 | 13,709 | 186,650 |
Of which: | ||||||
Owner occupied | 163,114 | 11,629 | 174,743 | 156,261 | 12,096 | 168,357 |
Buy-to-let | 17,515 | 1,593 | 19,108 | 16,680 | 1,613 | 18,293 |
Interest only | 22,817 | 11,631 | 34,448 | 18,247 | 11,877 | 30,124 |
Mixed (1) | 9,208 | 25 | 9,233 | 8,746 | 1 | 8,747 |
Impairment provisions (2) | 308 | 12 | 320 | 269 | 9 | 278 |
Other personal lending (3) | 11,251 | 1,395 | 12,646 | 9,567 | 1,853 | 11,420 |
Impairment provisions (2) | 1,249 | 12 | 1,261 | 1,026 | 15 | 1,041 |
Total personal lending | 191,880 | 14,617 | 206,497 | 182,508 | 15,562 | 198,070 |
Mortgage LTV ratios | ||||||
- Owner occupied | 56% | 59% | 56% | 53% | 59% | 53% |
- Stage 1 | 56% | 59% | 56% | 53% | 59% | 53% |
- Stage 2 | 55% | 63% | 55% | 53% | 61% | 53% |
- Stage 3 | 49% | 61% | 50% | 47% | 59% | 48% |
- Buy-to-let | 53% | 59% | 54% | 51% | 59% | 52% |
- Stage 1 | 53% | 60% | 54% | 51% | 59% | 52% |
- Stage 2 | 50% | 57% | 50% | 49% | 53% | 49% |
- Stage 3 | 51% | 53% | 51% | 47% | 55% | 50% |
Gross new mortgage lending | 29,150 | 1,400 | 30,550 | 40,248 | 2,968 | 43,216 |
Of which: | ||||||
Owner occupied | 27,222 | 1,267 | 28,489 | 35,394 | 2,701 | 38,095 |
LTV > 90% | 1,132 | - | 1,132 | 1,192 | - | 1,192 |
Weighted average LTV | 70% | 65% | 71% | 69% | 65% | 69% |
Buy-to-let | 1,928 | 133 | 2,061 | 4,854 | 267 | 5,121 |
Weighted average LTV | 58% | 66% | 58% | 64% | 66% | 64% |
Interest only | 2,626 | 1,224 | 3,850 | 5,229 | 2,664 | 7,893 |
Mixed (1) | 1,552 | 2 | 1,554 | 2,266 | - | 2,266 |
Mortgage forbearance | ||||||
Forbearance flow | 500 | 22 | 522 | 152 | 7 | 159 |
Forbearance stock | 1,140 | 28 | 1,168 | 744 | 16 | 760 |
Current | 782 | 10 | 792 | 473 | 8 | 481 |
1-3 months in arrears | 97 | 2 | 99 | 108 | - | 108 |
>3 months in arrears | 261 | 16 | 277 | 163 | 8 | 171 |
(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)
Excludes a non-material amount of lending and 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.
For the key points to this table refer to the following page.
NWB Group
Annual Report and Accounts 2023
46
Risk and capital management continued
(audited)
Personal portfolio
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) | ||||||||||
Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total (1) | Stage 1 | Stage 2 | Stage 3 | Total | |
2023 | £m | £m | £m | £m | £m | £m | £m | £m | % | % | % | % |
≤50% | 61,263 | 6,230 | 832 | 68,325 | 24 | 16 | 88 | 128 | 0.0 | 0.3 | 10.6 | 0.2 |
>50% and ≤70% | 63,356 | 6,478 | 629 | 70,463 | 34 | 24 | 58 | 116 | 0.1 | 0.4 | 9.2 | 0.2 |
>70% and ≤80% | 22,141 | 1,580 | 100 | 23,821 | 13 | 7 | 11 | 31 | 0.1 | 0.4 | 11.0 | 0.1 |
>80% and ≤90% | 13,330 | 1,097 | 43 | 14,470 | 9 | 6 | 5 | 20 | 0.1 | 0.6 | 11.6 | 0.1 |
>90% and ≤100% | 2,968 | 361 | 11 | 3,340 | 2 | 2 | 2 | 6 | 0.1 | 0.6 | 18.2 | 0.2 |
>100% | 21 | 6 | 9 | 36 | - | - | 4 | 4 | - | - | 44.4 | 11.1 |
Total with LTVs | 163,079 | 15,752 | 1,624 | 180,455 | 82 | 55 | 168 | 305 | 0.1 | 0.4 | 10.3 | 0.2 |
Other | 172 | - | 2 | 174 | 1 | - | 1 | 2 | 0.6 | - | 50.0 | 1.2 |
Total | 163,251 | 15,752 | 1,626 | 180,629 | 83 | 55 | 169 | 307 | 0.1 | 0.4 | 10.4 | 0.2 |
2022 | ||||||||||||
≤50% | 63,446 | 6,809 | 742 | 70,997 | 23 | 17 | 77 | 117 | - | 0.3 | 10.4 | 0.2 |
>50% and ≤70% | 65,419 | 7,118 | 495 | 73,032 | 31 | 27 | 47 | 105 | 0.1 | 0.4 | 9.5 | 0.1 |
>70% and ≤80% | 17,227 | 1,540 | 52 | 18,819 | 7 | 6 | 7 | 20 | - | 0.4 | 13.5 | 0.1 |
>80% and ≤90% | 7,714 | 889 | 14 | 8,617 | 6 | 4 | 4 | 14 | 0.1 | 0.5 | 28.6 | 0.2 |
>90% and ≤100% | 1,363 | 17 | 4 | 1,384 | 2 | - | 1 | 3 | 0.2 | - | 25.0 | 0.2 |
>100% | 34 | 7 | 9 | 50 | 2 | - | 4 | 6 | 5.9 | - | 44.4 | 12.0 |
Total with LTVs | 155,203 | 16,380 | 1,316 | 172,899 | 71 | 54 | 140 | 265 | 0.1 | 0.3 | 10.6 | 0.2 |
Other | 40 | 1 | 1 | 42 | 3 | - | 1 | 4 | 7.5 | - | 100.0 | 9.5 |
Total | 155,243 | 16,381 | 1,317 | 172,941 | 74 | 54 | 141 | 269 | 0.1 | 0.3 | 10.7 | 0.2 |
Growth in the mortgage portfolio decreased in the second
half of 2023, consistent with trends in the wider UK
mortgage market.
Mortgage portfolio LTV increased, partly due to the higher
relative proportion of new business from recent years’
strong lending performance, as well as easing of house
prices reflected in the Office for National Statistics house
price indices.
The proportion of overall interest only mortgage balances
increased in 2023 following the implementation of the
Mortgage Charter. Interest only new lending reduced
during the year consistent with the reduction in buy-to-let
new lending.
Portfolios and new business were closely monitored
against agreed operating limits. These included loan-to-
value ratios, buy-to-let concentrations, new-build
concentrations and credit quality. Lending criteria,
affordability calculations and assumptions for new lending
were adjusted during the year, considering inflationary
pressure and interest rate rises, to maintain credit quality
in line with appetite and to ensure customers are assessed
fairly.
Other personal lending balances increased during the year
mainly as a result of credit card new business. Lending
criteria were carefully managed and the credit quality
(based on new business PD) of the new business written
improved, compared to 2022.
Support for customers was proactively promoted during
the year. The flow and stock of forbearance increased
during the year. The reported forbearance values included
customers who used Mortgage Charter support if they
met relevant forbearance triggers. The number of
customers requesting support outside of Mortgage Charter
(primarily forbearance) increased gradually during the
year, but remained within expectations.
As noted previously, ECL increased. For further details on
the movements in ECL provisions at product level, refer to
the Flow statements section.
NWB Group
Annual Report and Accounts 2023
47
Risk and capital management continued
(audited)
Personal portfolio
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 | |
2023 | £m | £m | £m | £m | £m | % | £m | £m |
South East | 13,612 | 18,238 | 3,094 | 1 | 34,945 | 55 | 2 | 34,947 |
Greater London | 13,548 | 17,720 | 2,353 | 1 | 33,622 | 54 | 3 | 33,625 |
Scotland | 2,745 | 4,458 | 1,216 | - | 8,419 | 58 | 1 | 8,420 |
North West | 6,150 | 8,164 | 1,849 | 2 | 16,165 | 56 | - | 16,165 |
South West | 6,845 | 8,166 | 1,372 | - | 16,383 | 54 | 1 | 16,384 |
West Midlands | 4,933 | 6,904 | 1,394 | - | 13,231 | 56 | 1 | 13,232 |
East of England | 7,953 | 11,631 | 2,198 | - | 21,782 | 56 | 2 | 21,784 |
Rest of the UK | 12,538 | 19,003 | 4,334 | 32 | 35,907 | 57 | 165 | 36,072 |
Total | 68,324 | 94,284 | 17,810 | 36 | 180,454 | 55 | 175 | 180,629 |
2022 | ||||||||
South East | 14,606 | 17,383 | 1,388 | 1 | 33,378 | 51 | 3 | 33,381 |
Greater London | 13,876 | 17,199 | 1,324 | 1 | 32,400 | 52 | 3 | 32,403 |
Scotland | 2,546 | 4,466 | 952 | - | 7,964 | 58 | - | 7,964 |
North West | 6,315 | 8,133 | 1,205 | 2 | 15,655 | 54 | 1 | 15,656 |
South West | 7,315 | 7,782 | 621 | - | 15,718 | 51 | 1 | 15,719 |
West Midlands | 4,948 | 6,815 | 853 | 1 | 12,617 | 54 | 1 | 12,618 |
East of England | 8,484 | 11,304 | 981 | 2 | 20,771 | 53 | 2 | 20,773 |
Rest of the UK | 12,907 | 18,769 | 2,677 | 43 | 34,396 | 55 | 31 | 34,427 |
Total | 70,997 | 91,851 | 10,001 | 50 | 172,899 | 53 | 42 | 172,941 |
NWB Group
Annual Report and Accounts 2023
48
Risk and capital management continued
(audited)
Commercial real estate
CRE LTV distribution by stage
The table below shows CRE current exposure and related ECL by LTV band.
| Gross Loans | ECL provisions | ECL provisions coverage | ||||||||||
Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | |
2023 | £m | £m | £m | £m | £m | £m | £m | £m | % | % | % | % |
≤50% | 4,748 | 304 | 40 | 5,092 | 26 | 8 | 6 | 40 | 0.6 | 2.6 | 15.0 | 0.8 |
>50% and ≤70% | 2,231 | 398 | 64 | 2,693 | 15 | 13 | 12 | 40 | 0.7 | 3.3 | 18.8 | 1.5 |
>70% and ≤100% | 239 | 24 | 30 | 293 | 1 | 1 | 5 | 7 | 0.4 | 4.2 | 16.7 | 2.4 |
>100% | 140 | 6 | 16 | 162 | 1 | 1 | 9 | 11 | 0.7 | 16.7 | 56.3 | 6.8 |
Total with LTVs | 7,358 | 732 | 150 | 8,240 | 43 | 23 | 32 | 98 | 0.6 | 3.1 | 21.3 | 1.2 |
Total portfolio average LTV | 46% | 53% | 66% | 47% | - | - | - | - | - | - | - | - |
Other (1) | 1,790 | 294 | 32 | 2,116 | 7 | 5 | 11 | 23 | 0.4 | 1.7 | 34.4 | 1.1 |
Investment | 9,148 | 1,026 | 182 | 10,356 | 50 | 28 | 43 | 121 | 0.6 | 2.7 | 23.6 | 1.2 |
Development (2) | 1,366 | 87 | 22 | 1,475 | 11 | 3 | 12 | 26 | 0.8 | 3.5 | 54.6 | 1.8 |
Total | 10,514 | 1,113 | 204 | 11,831 | 61 | 31 | 55 | 147 | 0.6 | 2.8 | 27.0 | 1.2 |
2022 | ||||||||||||
≤50% | 4,306 | 276 | 31 | 4,613 | 22 | 8 | 7 | 37 | 0.5 | 2.9 | 22.6 | 0.8 |
>50% and ≤70% | 2,458 | 424 | 30 | 2,912 | 18 | 8 | 8 | 34 | 0.7 | 1.9 | 26.7 | 1.2 |
>70% and ≤100% | 205 | 23 | 30 | 258 | 1 | 1 | 3 | 5 | 0.5 | 4.4 | 10.0 | 1.9 |
>100% | 84 | 6 | 12 | 102 | 1 | - | 8 | 9 | 1.2 | - | 66.7 | 8.8 |
Total with LTVs | 7,053 | 729 | 103 | 7,885 | 42 | 17 | 26 | 85 | 0.6 | 2.3 | 25.2 | 1.1 |
Total portfolio average LTV | 47% | 52% | 69% | 48% | - | - | - | - | - | - | - | - |
Other (1 ) | 1,229 | 484 | 38 | 1,751 | 6 | 12 | 15 | 33 | 0.5 | 2.5 | 39.5 | 1.9 |
Investment | 8,282 | 1,213 | 141 | 9,636 | 48 | 29 | 41 | 118 | 0.6 | 2.4 | 29.1 | 1.2 |
Development (2) | 1,258 | 126 | 28 | 1,412 | 12 | 3 | 16 | 31 | 1.0 | 2.4 | 57.1 | 2.2 |
Total | 9,540 | 1,339 | 169 | 11,048 | 60 | 32 | 57 | 149 | 0.6 | 2.4 | 33.7 | 1.4 |
(1)
Relates mainly to business banking and unsecured corporate lending.
(2)
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.
2023 trends –
In H2 2023, conditions were impacted by the
uncertain interest rate outlook. Investment volumes were at
historic lows for much of 2023, and values continued to drift
downwards in some sectors. There were some early signs of
improving sentiment following a sharp reduction in medium-
term interest rates, but valuations remain somewhat
uncertain, particularly in the office sector.
Credit quality –
The CRE portfolio has coped well to date with
the fall in capital values and increase in rates, with no
significant increase to loans coming into the Risk of Credit
Loss Framework.
Risk appetite –
Lending appetite is subject to regular review.
NWB Group
Annual Report and Accounts 2023
49
(audited)
Flow statements
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 with a post model
adjustment in place for Commercial & Institutional to account
for this risk.
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 | Financial | Financial | Financial | |||||
assets | ECL | assets | ECL | assets | ECL | assets | ECL | |
NWB Group total | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2023 | 359,432 | 506 | 39,087 | 813 | 3,862 | 1,262 | 402,381 | 2,581 |
Currency translation and other adjustments | (1,023) | (1) | (176) | - | 99 | 120 | (1,100) | 119 |
Inter-Group transfers | - | - | - | - | - | - | - | - |
Transfers from Stage 1 to Stage 2 | (41,314) | (266) | 41,314 | 266 | - | - | - | - |
Transfers from Stage 2 to Stage 1 | 38,528 | 622 | (38,528) | (622) | - | - | - | - |
Transfers to Stage 3 | (281) | (5) | (2,610) | (225) | 2,891 | 230 | - | - |
Transfers from Stage 3 | 255 | 22 | 488 | 39 | (743) | (61) | - | - |
Net re-measurement of ECL on stage | ||||||||
transfer | (440) | 673 | - | 189 | 422 | |||
Changes in risk parameters | (45) | (9) | - | 247 | 193 | |||
Other changes in net exposure | 6,291 | 173 | (5,819) | (140) | (1,434) | (129) | (962) | (96) |
Other (P&L only items) | (7) | 5 | - | (10) | (12) | |||
Income statement (releases)/charges | (319) | 529 | 297 | 507 | ||||
Amounts written-off | - | - | - | - | (235) | (235) | (235) | (235) |
Unwinding of discount | - | - | (1) | (111) | (112) | |||
At 31 December 2023 | 361,888 | 566 | 33,756 | 794 | 4,440 | 1,512 | 400,084 | 2,872 |
Net carrying amount | 361,322 | 32,962 | 2,928 | 397,212 | ||||
At 1 January 2022 | 388,953 | 231 | 27,337 | 1,105 | 3,147 | 1,167 | 419,437 | 2,503 |
2022 movements | (29,521) | 275 | 11,750 | (292) | 715 | 95 | (17,056) | 78 |
At 31 December 2022 | 359,432 | 506 | 39,087 | 813 | 3,862 | 1,262 | 402,381 | 2,581 |
Net carrying amount | 358,926 | 38,274 | 2,600 | 399,800 | ||||
NWB Group
Annual Report and Accounts 2023
50
Risk and capital management continued
(audited)
Flow statements
Stage 1 | Stage 2 | Stage 3 | Total | |||||
Financial | Financial | Financial | Financial | |||||
assets | ECL | assets | ECL | assets | ECL | assets | ECL | |
Retail Banking - mortgages | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2023 | 153,791 | 74 | 16,557 | 55 | 1,321 | 139 | 171,669 | 268 |
Currency translation and other adjustments | - | 1 | - | - | 53 | 54 | 53 | 55 |
Transfers from Stage 1 to Stage 2 | (17,314) | (18) | 17,314 | 18 | - | - | - | - |
Transfers from Stage 2 to Stage 1 | 15,396 | 34 | (15,396) | (34) | - | - | - | - |
Transfers to Stage 3 | (50) | - | (827) | (6) | 877 | 6 | - | - |
Transfers from Stage 3 | 34 | 1 | 234 | 5 | (268) | (6) | - | - |
Net re-measurement of ECL on stage transfer | (20) | 27 | 3 | 10 | ||||
Changes in risk parameters | 24 | (4) | 57 | 77 | ||||
Other changes in net exposure | 12,117 | (13) | (1,940) | (6) | (365) | (30) | 9,812 | (49) |
Other (P&L only items) | - | - | (4) | (4) | ||||
Income statement (releases)/charges | (9) | 17 | 26 | 34 | ||||
Amounts written-off | - | - | - | - | (18) | (18) | (18) | (18) |
Unwinding of discount | - | - | (34) | (34) | ||||
At 31 December 2023 | 163,974 | 83 | 15,942 | 55 | 1,600 | 171 | 181,516 | 309 |
Net carrying amount | 163,891 | 15,887 | 1,429 | 181,207 | ||||
At 1 January 2022 | 146,450 | 22 | 8,692 | 123 | 875 | 158 | 156,017 | 303 |
2022 movements | 7,341 | 52 | 7,865 | (68) | 446 | (19) | 15,652 | (35) |
At 31 December 2022 | 153,791 | 74 | 16,557 | 55 | 1,321 | 139 | 171,669 | 268 |
Net carrying amount | 153,717 | 16,502 | 1,182 | 171,401 | ||||
ECL levels for mortgages increased during 2023, reflecting
continued strong growth. While portfolio performance
remained stable, increased economic uncertainty is
captured through ECL post model adjustments (reflected
in changes in risk parameters).
There were net flows into Stage 2 from Stage 1 with an
upward trend in early arrears coupled with the collective
migration into Stage 2 of higher risk customers utilising
new Mortgage Charter treatments (approximately £0.9
billion exposure). PDs remained broadly stable due to the
impact of improved economics since 2022.
The increase in the cost of living post model adjustment
during 2023 proportionately allocated more ECL to Stage
1 given the forward-looking nature of the affordability
threat. Refer to the Governance and post model
adjustments section for more information.
The Stage 3 inflows remained broadly stable, albeit with
signs of an upward drift in default rates, reflecting slightly
poorer arrears performance on mortgages recently rolled
off onto higher product rates. Furthermore, the increase in
Stage 3 ECL overall reflected recent house price index
deterioration.
The relatively small ECL cost for net re-measurement on
stage transfer included the effect of risk targeted ECL
adjustments, when previously in the good book. 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.
NWB Group
Annual Report and Accounts 2023
51
Risk and capital management continued
(audited)
Flow statements
Stage 1 | Stage 2 | Stage 3 | Total | |||||
Financial | Financial | Financial | Financial | |||||
assets | ECL | assets | ECL | assets | ECL | assets | ECL | |
Retail Banking - credit cards | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2023 | 2,420 | 47 | 855 | 91 | 88 | 57 | 3,363 | 195 |
Currency translation and other adjustments | - | - | - | - | 3 | 2 | 3 | 2 |
Transfers from Stage 1 to Stage 2 | (1,578) | (34) | 1,578 | 34 | - | - | - | - |
Transfers from Stage 2 to Stage 1 | 610 | 43 | (610) | (43) | - | - | - | - |
Transfers to Stage 3 | (17) | (1) | (98) | (36) | 115 | 37 | - | - |
Transfers from Stage 3 | 2 | 1 | 5 | 2 | (7) | (3) | - | - |
Net re-measurement of ECL on stage transfer | (26) | 136 | 33 | 143 | ||||
Changes in risk parameters | 15 | 22 | 7 | 44 | ||||
Other changes in net exposure | 1,432 | 13 | (74) | (40) | (28) | (1) | 1,330 | (28) |
Other (P&L only items) | - | (1) | 2 | 1 | ||||
Income statement (releases)/charges | 2 | 117 | 41 | 160 | ||||
Amounts written-off | - | - | - | - | (54) | (54) | (54) | (54) |
Unwinding of discount | - | - | (5) | (5) | ||||
At 31 December 2023 | 2,869 | 58 | 1,656 | 166 | 117 | 73 | 4,642 | 297 |
Net carrying amount | 2,811 | 1,490 | 44 | 4,345 | ||||
At 1 January 2022 | 2,096 | 47 | 751 | 114 | 69 | 45 | 2,916 | 206 |
2022 movements | 324 | - | 104 | (23) | 19 | 12 | 447 | (11) |
At 31 December 2022 | 2,420 | 47 | 855 | 91 | 88 | 57 | 3,363 | 195 |
Net carrying amount | 2,373 | 764 | 31 | 3,168 | ||||
The overall increase in ECL was mainly due to the increase in
Stage 2 ECL.
While portfolio performance remained stable, a net flow into
Stage 2 from Stage 1 was observed as PDs increased with
observed unemployment and PD modelling updates capturing
more economic downside.
Credit card balances continued to grow since the 2022 year
end, in line with industry trends in the UK, reflecting strong
customer demand, while sustaining robust risk appetite.
Stage 3 inflows remained relatively stable during the year,
although there was a modest upward trend in default levels,
in line with growth and normalisation of risk parameters.
Charge-off (analogous to partial write-off) typically occurs
after 12 missed payments.
NWB Group
Annual Report and Accounts 2023
52
Risk and capital management continued
(audited)
Flow statements
Stage 1 | Stage 2 | Stage 3 | Total | |||||
Financial | ECL | Financial | ECL | Financial | ECL | Financial | ECL | |
assets | assets | assets | assets | |||||
Retail Banking - other personal unsecured | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2023 | 3,813 | 92 | 1,666 | 225 | 638 | 516 | 6,117 | 833 |
Currency translation and other adjustments | - | - | (1) | 1 | 21 | 20 | 20 | 21 |
Transfers from Stage 1 to Stage 2 | (2,319) | (101) | 2,319 | 101 | - | - | - | - |
Transfers from Stage 2 to Stage 1 | 1,917 | 270 | (1,917) | (270) | - | - | - | - |
Transfers to Stage 3 | (49) | (2) | (274) | (109) | 323 | 111 | - | - |
Transfers from Stage 3 | 6 | 2 | 19 | 8 | (25) | (10) | - | - |
Net re-measurement of ECL on stage transfer | (191) | 278 | 42 | 129 | ||||
Changes in risk parameters | (35) | 12 | 69 | 46 | ||||
Other changes in net exposure | 879 | 91 | (441) | (45) | (90) | (26) | 348 | 20 |
Other (P&L only items) | - | - | 21 | 21 | ||||
Income statement (releases)/charges | (135) | 245 | 106 | 216 | ||||
Amounts written-off | - | - | - | - | (71) | (71) | (71) | (71) |
Unwinding of discount | - | - | (26) | (26) | ||||
At 31 December 2023 | 4,247 | 126 | 1,371 | 201 | 796 | 625 | 6,414 | 952 |
Net carrying amount | 4,121 | 1,170 | 171 | 5,462 | ||||
At 1 January 2022 | 3,636 | 43 | 1,574 | 242 | 510 | 438 | 5,720 | 723 |
2022 movements | 177 | 49 | 92 | (17) | 128 | 78 | 397 | 110 |
At 31 December 2022 | 3,813 | 92 | 1,666 | 225 | 638 | 516 | 6,117 | 833 |
Net carrying amount | 3,721 | 1,441 | 122 | 5,284 | ||||
Total ECL increased, mainly in Stage 3. While default levels
were broadly stable, they were higher than in 2022. This
increase was in line with growth and normalisation of risk
parameters. Furthermore, write-off levels were lower during
2023, which sustained a higher Stage 3 ECL position at 31
December 2023.
A slight rise in early arrears levels since 2022 and modest PD
increases during the year resulted in a net migration from
Stage 1 into Stage 2. However, good book ECL and coverage
levels were largely consistent with 2022, with the improved
economic outlook since 2022 mitigating further IFRS 9 PD
increases and balance paydown within Stage 2.
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.
NWB Group
Annual Report and Accounts 2023
53
Risk and capital management continued
Flow statements (audited)
Stage 1 | Stage 2 | Stage 3 | Total | |||||
Financial | Financial | Financial | Financial | |||||
assets | ECL | assets | ECL | assets | ECL | assets | ECL | |
Commercial & Institutional total | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2023 | 63,844 | 259 | 18,360 | 419 | 1,567 | 524 | 83,771 | 1,202 |
Currency translation and other adjustments | (348) | 1 | (172) | - | 21 | 40 | (499) | 41 |
Inter-group transfers | - | - | - | - | - | - | - | - |
Transfers from Stage 1 to Stage 2 | (18,055) | (105) | 18,055 | 105 | - | - | - | - |
Transfers from Stage 2 to Stage 1 | 18,525 | 256 | (18,525) | (256) | - | - | - | - |
Transfers to Stage 3 | (91) | (2) | (1,244) | (73) | 1,335 | 75 | - | - |
Transfers from Stage 3 | 131 | 18 | 199 | 23 | (330) | (41) | - | - |
Net re-measurement of ECL on stage transfer | (190) | 216 | 111 | 137 | ||||
Changes in risk parameters (model inputs) | (49) | (38) | 103 | 16 | ||||
Other changes in net exposure | 7,891 | 74 | (3,611) | (47) | (846) | (73) | 3,434 | (46) |
Other (P&L only items) | (6) | 4 | (23) | (25) | ||||
Income statement (releases)/charges | (171) | 135 | 118 | 82 | ||||
Amounts written-off | - | - | - | - | (90) | (90) | (90) | (90) |
Unwinding of discount | - | - | (39) | (39) | ||||
At 31 December 2023 | 71,897 | 262 | 13,062 | 349 | 1,657 | 610 | 86,616 | 1,221 |
Net carrying amount | 71,635 | 12,713 | 1,047 | 85,395 | ||||
At 1 January 2022 | 61,223 | 96 | 15,055 | 588 | 1,422 | 486 | 77,700 | 1,170 |
2022 movements | 2,621 | 163 | 3,305 | (169) | 145 | 38 | 6,071 | 32 |
At 31 December 2022 | 63,844 | 259 | 18,360 | 419 | 1,567 | 524 | 83,771 | 1,202 |
Net carrying amount | 63,585 | 17,941 | 1,043 | 82,569 | ||||
There was growth in exposures, notably in the power utilities
sector.
There was a small increase in ECL during 2023 reflecting
stable portfolio performance.
Reductions in modelled ECL from improving economic
variables and risk metrics were partially offset by increases in
post model adjustments to capture continued economic
uncertainty.
Stage 3 ECL increased mainly due to charges on a few
individual customers.
Overall impairment charges were low as the effects of
inflation, high interest rates and supply chain disruption have,
to date, not led to a significant increase in defaults.
Stage 1 | Stage 2 | Stage 3 | Total | |||||
Financial | Financial | Financial | Financial | |||||
assets | ECL | assets | ECL | assets | ECL | assets | ECL | |
Commercial & Institutional - corporate | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2023 | 43,744 | 182 | 14,997 | 352 | 1,126 | 388 | 59,867 | 922 |
Currency translation and other adjustments | (328) | 2 | (143) | - | 22 | 38 | (449) | 40 |
Inter-group transfers | 83 | - | (75) | - | (24) | - | (16) | - |
Transfers from Stage 1 to Stage 2 | (14,049) | (80) | 14,049 | 80 | - | - | - | - |
Transfers from Stage 2 to Stage 1 | 14,232 | 199 | (14,232) | (199) | - | - | - | - |
Transfers to Stage 3 | (82) | (2) | (958) | (58) | 1,040 | 60 | - | - |
Transfers from Stage 3 | 95 | 15 | 162 | 18 | (257) | (33) | - | - |
Net re-measurement of ECL on stage transfer | (153) | 164 | 91 | 102 | ||||
Changes in risk parameters (model inputs) | (30) | (38) | 101 | 33 | ||||
Other changes in net exposure | 6,250 | 52 | (3,513) | (38) | (629) | (63) | 2,108 | (49) |
Other (P&L only items) | (6) | 6 | (24) | (24) | ||||
Income statement (releases)/charges | (137) | 94 | 105 | 62 | ||||
Amounts written-off | - | - | - | - | (65) | (65) | (65) | (65) |
Unwinding of discount | - | - | (33) | (33) | ||||
At 31 December 2023 | 49,945 | 185 | 10,287 | 281 | 1,213 | 484 | 61,445 | 950 |
Net carrying amount | 49,760 | 10,006 | 729 | 60,495 | ||||
There was modest exposure growth, with increased new
lending largely offset by repayments.
ECL marginally increased with reductions in Stage 2 ECL
from repayments more than offset by an increase in Stage 3
ECL following charges on a few individual customers.
Overall impairment charges were low as the effects of
inflation, high interest rates and supply chain disruption have,
to date, not led to a significant increase in defaults. The 2023
charge was largely driven by charges on a few individual
customers.
NWB Group
Annual Report and Accounts 2023
54
Risk and capital management continued
(audited)
Flow statements
Stage 1 | Stage 2 | Stage 3 | Total | |||||
Financial | Financial | Financial | Financial | |||||
assets | ECL | assets | ECL | assets | ECL | assets | ECL | |
Commercial & Institutional - property | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2023 | 15,694 | 66 | 2,600 | 59 | 369 | 123 | 18,663 | 248 |
Currency translation and other adjustments | (3) | - | (3) | - | - | - | (6) | - |
Inter-group transfers | (45) | - | 7 | - | 2 | - | (36) | - |
Transfers from Stage 1 to Stage 2 | (3,518) | (23) | 3,518 | 23 | - | - | - | - |
Transfers from Stage 2 to Stage 1 | 3,063 | 49 | (3,063) | (49) | - | - | - | - |
Transfers to Stage 3 | (10) | (1) | (280) | (14) | 290 | 15 | - | - |
Transfers from Stage 3 | 34 | 3 | 36 | 5 | (70) | (8) | - | - |
Net re-measurement of ECL on stage transfer | (32) | 47 | 20 | 35 | ||||
Changes in risk parameters | (17) | 1 | 4 | (12) | ||||
Other changes in net exposure | 1,452 | 21 | (674) | (9) | (176) | (9) | 602 | 3 |
Other (P&L only items) | - | - | - | - | ||||
Income statement (releases)/charges | (28) | 39 | 15 | 26 | ||||
Amounts written-off | - | - | - | - | (20) | (20) | (20) | (20) |
Unwinding of discount | - | - | (6) | (6) | ||||
At 31 December 2023 | 16,667 | 66 | 2,141 | 63 | 395 | 119 | 19,203 | 248 |
Net carrying amount | 16,601 | 2,078 | 276 | 18,955 | ||||
The property portfolio remained stable throughout 2023 with
minor movements on exposure and ECL unchanged.
Overall, ECL remained constant as write-offs and other
movements offset impairment charges.
Impairment charges were lower than historic trends, as the
effects of inflation, high interest rates and supply chain
disruption have, to date, not led to a significant increase in
defaults.
Stage 1 | Stage 2 | Stage 3 | Total | |||||
Financial | Financial | Financial | Financial | |||||
assets | ECL | assets | ECL | assets | ECL | assets | ECL | |
Commercial & Institutional - other | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2023 | 4,406 | 11 | 763 | 8 | 72 | 13 | 5,241 | 32 |
Currency translation and other adjustments | (18) | - | (26) | 1 | - | 1 | (44) | 2 |
Inter-group transfers | (37) | - | 67 | - | 22 | - | 52 | - |
Transfers from Stage 1 to Stage 2 | (488) | (2) | 488 | 2 | - | - | - | - |
Transfers from Stage 2 to Stage 1 | 1,230 | 8 | (1,230) | (8) | - | - | - | - |
Transfers to Stage 3 | - | - | (6) | - | 6 | - | - | - |
Transfers from Stage 3 | 3 | - | 1 | - | (4) | - | - | - |
Net re-measurement of ECL on stage transfer | (6) | 4 | - | (2) | ||||
Changes in risk parameters | (1) | (1) | (2) | (4) | ||||
Other changes in net exposure | 189 | 1 | 577 | (1) | (42) | - | 724 | - |
Other (P&L only items) | - | - | - | - | ||||
Income statement (releases)/charges | (6) | 2 | (2) | (6) | ||||
Amounts written-off | - | - | - | - | (5) | (5) | (5) | (5) |
Unwinding of discount | - | - | - | - | ||||
At 31 December 2023 | 5,285 | 11 | 634 | 5 | 49 | 7 | 5,968 | 23 |
Net carrying amount | 5,274 | 629 | 42 | 5,945 | ||||
While there was some portfolio growth, ECL reduced due to
improving economic variables and risk metrics along with
some write-offs.
Overall, there was a net impairment release as the effects of
inflation, high interest rates and supply chain disruption have,
to date, not led to a significant increase in defaults.
NWB Group
Annual Report and Accounts 2023
55
Risk and capital management 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 | |
2023 | £m | £m | £m | £m | £m | £m | £m | £m |
Personal | ||||||||
Currently >30 DPD | 230 | 1 | 11 | 5 | 42 | 16 | 283 | 22 |
Currently <=30 DPD | 15,721 | 54 | 1,629 | 162 | 1,312 | 186 | 18,662 | 402 |
- PD deterioration | 11,448 | 43 | 1,180 | 130 | 685 | 107 | 13,313 | 280 |
- PD persistence | 2,115 | 5 | 390 | 25 | 306 | 28 | 2,811 | 58 |
- Other driver (adverse credit, forbearance etc) | 2,158 | 6 | 59 | 7 | 321 | 51 | 2,538 | 64 |
Total Stage 2 | 15,951 | 55 | 1,640 | 167 | 1,354 | 202 | 18,945 | 424 |
2022 | ||||||||
Personal | ||||||||
Currently >30 DPD | 156 | 1 | 7 | 4 | 41 | 15 | 204 | 20 |
Currently <=30 DPD | 16,355 | 54 | 827 | 88 | 1,555 | 211 | 18,737 | 353 |
- PD deterioration | 14,484 | 50 | 620 | 72 | 845 | 114 | 15,949 | 236 |
- PD persistence | 767 | 2 | 160 | 11 | 150 | 13 | 1,077 | 26 |
- Other driver (adverse credit, forbearance etc) | 1,104 | 2 | 47 | 5 | 560 | 84 | 1,711 | 91 |
Total Stage 2 | 16,511 | 55 | 834 | 92 | 1,596 | 226 | 18,941 | 373 |
The levels of PD driven deterioration decreased in 2023,
mainly in the mortgage portfolio. The economic scenario
updates during 2023 resulted in a reduction in lifetime PDs for
the mortgage and personal loan portfolios. This drove a
segment of lower risk cases out of PD SICR deterioration (and
captured in PD persistence in the case of Q4 MES update).
The PD modelling update during H1 2023 on the credit card
portfolio resulted in more downside risk captured through
modelled ECL and this, alongside modest increase in early
arrears levels, led to more PD SICR deterioration being
Higher risk mortgage customers who utilised the new
Mortgage Charter measures were collectively migrated into
Stage 2, approximately £0.9 billion of exposures, and captured
in the other driver category.
Accounts that are less than 30 days past due continue to
represent the vast majority of the Stage 2 population, whilst
noting that the greater than 30 days past due population
increased during 2023. As expected, ECL coverage was
higher in accounts that were more than 30 days past due
than those in Stage 2 for other reasons.
Property | Corporate | Other | Total | |||||||
Loans | ECL | Loans | ECL | Loans | ECL | Loans | ECL | Loans | ECL | |
2023 | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m |
Wholesale | ||||||||||
Currently >30 DPD | 82 | 2 | 265 | 7 | 1 | - | - | - | 348 | 9 |
Currently <=30 DPD | 2,200 | 67 | 10,046 | 285 | 188 | 8 | - | 1 | 12,434 | 361 |
- PD deterioration | 1,595 | 54 | 6,381 | 178 | 57 | 2 | - | - | 8,033 | 234 |
- PD persistence | 181 | 3 | 688 | 12 | 9 | - | - | - | 878 | 15 |
- Other driver (forbearance, RoCL etc) | 424 | 10 | 2,977 | 95 | 122 | 6 | - | 1 | 3,523 | 112 |
Total Stage 2 | 2,282 | 69 | 10,311 | 292 | 189 | 8 | - | 1 | 12,782 | 370 |
2022 | ||||||||||
Wholesale | ||||||||||
Currently >30 DPD | 135 | 2 | 366 | 9 | 2 | - | - | - | 503 | 11 |
Currently <=30 DPD | 2,501 | 67 | 14,620 | 353 | 651 | 9 | - | - | 17,772 | 429 |
- PD deterioration | 1,604 | 45 | 11,898 | 286 | 581 | 6 | - | - | 14,083 | 337 |
- PD persistence | 66 | 2 | 216 | 8 | 4 | - | - | - | 286 | 10 |
- Other driver (forbearance, RoCL etc) | 831 | 20 | 2,506 | 59 | 66 | 3 | - | - | 3,403 | 82 |
Total Stage 2 | 2,636 | 69 | 14,986 | 362 | 653 | 9 | - | - | 18,275 | 440 |
The improved economic outlook, including a more optimistic
forecast for stock index and commercial real estate
valuations, resulted in a reduction of IFRS 9 PDs.
Consequently, compared to 2022, 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.
NWB Group
Annual Report and Accounts 2023
56
captured during 2023.
Stage 2 decomposition by a significant increase in credit risk trigger
UK mortgages | Credit cards | Other | Total | |||||
2023 | £m | % | £m | % | £m | % | £m | % |
Personal trigger (1) | ||||||||
PD movement | 11,583 | 72.5 | 1,191 | 72.6 | 715 | 52.8 | 13,489 | 71.2 |
PD persistence | 2,115 | 13.3 | 390 | 23.8 | 306 | 22.6 | 2,811 | 14.8 |
Adverse credit bureau recorded with credit reference agency | 877 | 5.5 | 40 | 2.4 | 82 | 6.1 | 999 | 5.3 |
Forbearance support provided | 110 | 0.7 | - | - | 9 | 0.7 | 119 | 0.6 |
Customers in collections | 158 | 1.0 | 1 | 0.1 | 7 | 0.5 | 166 | 0.9 |
Collective SICR and other reasons (2) | 1,017 | 6.4 | 18 | 1.1 | 228 | 16.8 | 1,263 | 6.7 |
Days past due >30 | 91 | 0.6 | - | - | 7 | 0.5 | 98 | 0.5 |
15,951 | 100 | 1,640 | 100 | 1,354 | 100 | 18,945 | 100 | |
2022 | ||||||||
Personal trigger (1) | ||||||||
PD movement | 14,598 | 88.4 | 626 | 75.1 | 873 | 54.7 | 16,097 | 85.0 |
PD persistence | 767 | 4.6 | 161 | 19.3 | 150 | 9.4 | 1,078 | 5.7 |
Adverse credit bureau recorded with credit reference agency | 725 | 4.4 | 39 | 4.7 | 79 | 4.9 | 843 | 4.5 |
Forbearance support provided | 75 | 0.5 | 1 | 0.1 | 14 | 0.9 | 90 | 0.5 |
Customers in collections | 133 | 0.8 | 1 | 0.1 | 3 | 0.2 | 137 | 0.7 |
Collective SICR and other reasons (2) | 171 | 1.0 | 6 | 0.7 | 466 | 29.2 | 643 | 3.3 |
Days past due >30 | 42 | 0.3 | - | - | 11 | 0.7 | 53 | 0.3 |
16,511 | 100 | 834 | 100 | 1,596 | 100 | 18,941 | 100 | |
For the notes to this table refer to the following page.
PD-related SICR triggers continued to represent the vast
majority of Stage 2.
The levels of PD driven deterioration decreased in 2023,
mainly in the mortgage portfolio. The economic scenario
updates during 2023 resulted in a reduction in lifetime PDs
for the mortgage and personal loan portfolios, which drove
a segment of lower risk cases out of PD SICR
deterioration.
The Q4 2023 economic modelling updates that reduced
PDs on mortgages and loans are captured in PD
persistence category (for at least three months).
The PD modelling update during H1 2023 on the credit
card portfolio resulted in more downside risk captured
through modelled ECL and this, alongside modest increase
in early arrears levels, led to more PD SICR deterioration
being captured during 2023.
Higher risk mortgage customers who utilised the new
Mortgage Charter measures are collectively migrated into
Stage 2, approximately £0.9 billion of exposures. This is
captured in the collective SICR and other reasons.
NWB Group
Annual Report and Accounts 2023
57
Stage 2 decomposition by a significant increase in credit risk trigger
Property | Corporate | FI | Total | |||||||
2023 | £m | % | £m | % | £m | % | £m | % | £m | % |
Wholesale trigger (1) | ||||||||||
PD movement | 1,627 | 71.2 | 6,484 | 62.9 | 58 | 30.7 | 8,169 | 63.9 | ||
PD persistence | 184 | 8.1 | 695 | 6.7 | 9 | 4.8 | 888 | 6.9 | ||
Risk of Credit Loss | 293 | 12.8 | 2,218 | 21.5 | 118 | 62.4 | 2,629 | 20.6 | ||
Forbearance support provided | 22 | 1.0 | 332 | 3.2 | - | - | 354 | 2.8 | ||
Customers in collections | 6 | 0.3 | 18 | 0.2 | - | - | 24 | 0.2 | ||
Collective SICR and other reasons (2) | 55 | 2.4 | 391 | 3.8 | 4 | 2.1 | 450 | 3.5 | ||
Days past due >30 | 95 | 4.2 | 173 | 1.7 | - | - | 268 | 2.1 | ||
2,282 | 100 | 10,311 | 100 | 189 | 100 | 12,782 | 100 | |||
2022 | ||||||||||
Wholesale trigger (1) | ||||||||||
PD movement | 1,661 | 63.0 | 12,110 | 81.0 | 582 | 89.1 | 14,353 | 78.5 | ||
PD persistence | 65 | 2.5 | 217 | 1.4 | 4 | 0.6 | 286 | 1.6 | ||
Risk of Credit Loss | 327 | 12.4 | 1,414 | 9.4 | 29 | 4.4 | 1,770 | 9.7 | ||
Forbearance support provided | 23 | 0.9 | 337 | 2.2 | 19 | 2.9 | 379 | 2.1 | ||
Customers in collections | 9 | 0.3 | 32 | 0.2 | - | - | 41 | 0.2 | ||
Collective SICR and other reasons (2) | 479 | 18.2 | 739 | 4.9 | 18 | 2.8 | 1,236 | 6.8 | ||
Days past due >30 | 72 | 2.7 | 137 | 0.9 | 1 | 0.2 | 210 | 1.1 | ||
2,636 | 100 | 14,986 | 100 | 653 | 100 | 18,275 | 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, there was a reduction in cases
triggering Stage 2.
Moving exposures on to the Risk of Credit Loss framework
remained an important backstop indicator of a SICR. The
exposures classified under the Stage 2 Risk of Credit Loss
framework trigger increased over the year, as less exposures
NWB Group
Annual Report and Accounts 2023
58
Risk and capital management continued
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 its 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.
(audited)
Definitions
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 risk is the inability to conduct business in base or stress
conditions on a risk or leverage basis due to insufficient qualifying
capital as well as the failure to assess, monitor, plan and manage
capital adequacy requirements.
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 actual or potential financial
obligations in a timely manner as they fall due in the short term.
Funding consists of on-balance sheet liabilities that are used to
provide cash to finance assets. Funding risk is the risk that
current or prospective financial obligations cannot be met as they
fall due in the medium to long term, either at all or without
increasing funding costs unacceptably.
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
(audited)
Sources of risk
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 and Tier 2 capital instruments with certain
qualifying criteria 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 of NWH Group’s three licensed deposit
taking UK banks: National Westminster Bank Plc, The Royal Bank
of Scotland plc and Coutts & Company.
NWH Group maintains a prudent approach to the definition of
liquidity portfolio to ensure it is available when and where
required, taking into account regulatory, legal and other
constraints.
Liquidity portfolio is divided into primary and secondary liquidity as
follows:
Primary liquidity is
LCR eligible assets and includes cash and
balances at central banks, Treasury bills and high quality
government securities.
Secondary liquidity is assets 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
Funding risk within NWB plc is managed as part of the UK
DoLSub allowing regulatory metrics, net stable funding ratio
(NSFR) and internally defined views to be met as a single
consolidated group.
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,
refer to the NatWest Holdings Group and NWB Plc Pillar 3 Reports
2023.
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.
NWB Group
Annual Report and Accounts 2023
59
Risk and capital management continued
Capital risk management
Capital management is the process by which the NWB Plc 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 NWB Plc 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 14 and 15.
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
.
| Capital plans are produced for NWB Group, | |
Produce | its key operating entities and its businesses | |
capital plans | 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 plans are developed to maintain |
capital | capital of sufficient quantity and quality to | |
Adequacy | 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 | | Capital planning informs potential capital |
actions | actions including buybacks, redemptions, | |
dividends and new issuance. | ||
| 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. |
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
.
NWB Group
Annual Report and Accounts 2023
60
Risk and capital management continued
Key points
CET1 ratio
11.6%
(2022 - 11.3%)
The CET1 ratio increased 30 basis points to 11.6% over the
period due to a £1.4 billion increase in CET1 capital, partially
offset by a £9.3 billion increase in RWAs.
The CET1 capital increase reflects the attributable profit in the
period of £3.5 billion, partially offset by:
Interim dividend paid of £0.8 billion;
foreseeable dividend of £0.9 billion;
increase in intangible assets deduction £0.2 billion and;
other movements on reserves and regulatory adjustments
of £0.2 billion.
UK leverage ratio
4.5%
(2022 - 4.4%)
The leverage ratio increased by 10 basis points to 4.5%. The
increase was due to a £1.4 billion increase in Tier 1 capital
partially offset by an £18.6 billion increase in leverage exposure.
The key driver in the leverage exposure was an increase in
other financial assets partially offset by a decrease in net
central bank items.
LCR
138%
(2022 - 131%)
The UK DoLSub Liquidity Coverage Ratio (LCR) increased
during the year to 138% driven by a decrease in net outflows
and a lower than proportionate reduction in liquidity portfolio.
The decrease in net outflows was due to a reduction in current
and instant access accounts partially offset by an increase in
fixed term accounts. The decrease in liquidity portfolio was
driven by increased customer lending offset by increased
wholesale funding and repayment of loans and advances
provided to UBIDAC.
RWAs
£121.7bn
(2022 - £112.4bn)
Total RWAs increased by £9.3 billion to £121.7 billion mainly
reflecting:
an increase in credit risk RWAs of £7.8 billion, driven by an
increase in IRB Temporary Model Adjustment related to
mortgages within Retail Banking, as well as increased
exposures within Commercial & Institutional and Retail
Banking;
an increase in operational risk RWAs of £1.3 billion
following the annual recalculation;
an increase in counterparty credit risk RWAs of £0.2 billion,
due to increased exposures.
Liquidity portfolio
£180.6bn
(2022 - £184.0bn)
The liquidity portfolio decreased by £3.4 billion to £180.6 billion,
with primary liquidity decreasing by £14.2 billion to £105.9
billion. The decrease in primary liquidity is driven by increased
lending and reduced deposits, offset by repayment of loans
and advances provided to UBIDAC and increased certificates
of deposit and commercial paper issuance. The growth in
secondary liquidity is due to an increase in the pre-positioned
collateral at the Bank of England.
NSFR
126%
(2022 - 137%)
The UK DoLSub net stable funding ratio (NSFR) has decreased
11% during the year to 126% driven by reduced customer
deposits and increased lending.
NWB Group
Annual Report and Accounts 2023
61
Risk and capital management 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.
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) | 1.8% | 1.8% | 1.8% |
Total (2) | 8.8% | 10.3% | 12.3% |
(1)
The Financial Policy Committee increased the UK CCyB rate from 1% to 2% effective from 5 July 2023. The Central Bank of Ireland increased CCyB on Irish exposures from 0% to 0.5%
applicable 15
June 2023 and 1% from 24
November 2023. A further increase to 1.5% will be effective 7 June 2024.
(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
The table below summarises the minimum ratios of capital to leverage exposure under the binding PRA UK leverage framework
applicable for NWB Plc.
Type | CET1 | Total Tier 1 |
Minimum ratio | 2.44% | 3.25% |
Countercyclical leverage ratio buffer (1) | 0.6% | 0.6% |
Total | 3.04% | 3.85% |
(1)
The countercyclical leverage ratio buffer is set at 35% of NWB Plc’s CCyB. The UK CCyB increased from 1% to 2% from 5 July 2023. Foreign exposure may be subject to different CCyB
rates depending on the rates set in those jurisdictions.
Liquidity and funding ratios
The table below summarises the minimum requirements for key liquidity and funding metrics under the PRA framework.
NWB Plc is a
member of the UK DoLSub which is presented below.
Type | |
Liquidity Coverage Ratio (LCR) | 100% |
Net Stable Funding Ratio (NSFR) | 100% |
Measurement
Capital, RWAs and leverage
The table below sets out the key capital and leverage ratios on a PRA transitional basis.
2023 | 2022 | |
Capital adequacy ratios | % | % |
CET1 (1) | 11.6 | 11.3 |
Tier 1 | 13.4 | 13.3 |
Total | 16.3 | 15.9 |
Capital | £m | £m |
CET1 (1) | 14,082 | 12,713 |
Tier 1 | 16,360 | 14,956 |
Total | 19,798 | 17,877 |
Risk-weighted assets | ||
Credit risk | 106,696 | 98,913 |
Counterparty credit risk | 713 | 497 |
Market risk | 12 | 26 |
Operational risk | 14,319 | 12,992 |
Total RWAs | 121,740 | 112,428 |
Leverage | ||
Tier 1 capital (£m) | 16,360 | 14,956 |
Leverage exposure (£m) (2) | 359,897 | 341,308 |
Leverage ratio (%) (1) | 4.5 | 4.4 |
(1)
Includes an IFRS 9 transitional adjustment of £0.2 billion (2022 - £0.3 billion). Excluding this adjustment, the CET1 ratio would be 11.4% (2022 – 11.1%) and the leverage ratio would be
4.5% (2022 – 4.3%).
(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
.
NWB Group
Annual Report and Accounts 2023
62
Risk and capital management 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.
2023 | UK DoLSub |
Liquidity Coverage Ratio | 138% |
Stressed Outflow Coverage (1) | 143% |
Net Stable Funding Ratio | 126% |
2022 | |
Liquidity Coverage Ratio | 131% |
Stressed Outflow Coverage (1) | 131% |
Net Stable Funding Ratio | 137% |
(1)
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.
Leverage exposure
The leverage metrics for UK entities are calculated in accordance with the Leverage ratio (CRR) part of the PRA Rulebook.
2023 | 2022 | |
Leverage | £m | £m |
Cash and balances at central banks | 48,238 | 73,062 |
Derivatives | 3,213 | 4,430 |
Financial assets | 351,948 | 316,584 |
Other assets | 8,350 | 7,671 |
Total assets | 411,749 | 401,747 |
Derivatives | ||
- netting and variation margin | (3,212) | (3,313) |
- potential future exposures | 1,537 | 1,692 |
Securities financing transactions gross up | 383 | 2,391 |
Undrawn commitments | 29,632 | 29,593 |
Regulatory deductions and other adjustments | (3,015) | (2,023) |
Exclusion of core UK-group exposure | (26,753) | (22,080) |
Claims on central banks | (47,297) | (62,228) |
Exclusion of bounce back loans | (3,127) | (4,471) |
Leverage exposure | 359,897 | 341,308 |
Liquidity portfolio
The table below shows the composition of the liquidity portfolio with primary liquidity aligned to high-quality liquid assets on a
regulatory LCR basis. Secondary liquidity comprises of assets which are eligible as collateral for local central bank liquidity facilities and
do not form part of the LCR eligible high-quality liquid assets.
2023 | 2022 (4) | |
UK DoLSub | UK DoLSub | |
£m | £m | |
Cash and balances at central banks | 67,954 | 104,606 |
High quality government/MDB/PSE and GSE bonds (1) | 26,510 | 11,714 |
Extremely high quality covered bonds | 4,164 | 1,812 |
LCR Level 1 eligible assets | 98,628 | 118,132 |
LCR Level 2 eligible assets (2) | 7,320 | 2,032 |
Primary liquidity (HQLA) (3) | 105,948 | 120,164 |
Secondary liquidity | 74,683 | 63,849 |
Total liquidity value | 180,631 | 184,013 |
(1)
Multilateral development bank abbreviated to MDB, public sector entities abbreviated to PSE and government sponsored entities abbreviated to GSE.
(2)
Includes Level 2A and Level 2B.
(3)
High-quality liquid assets abbreviated to HQLA.
(4)
Comparative periods have been re-presented on an LCR basis in line with the Liquidity portfolio definition at 31 December 2023.
NWB Group
Annual Report and Accounts 2023
63
(audited)
| 2023 | 2022 | |||||
Long-term | Long-term | |||||
Short-term | more than 1 | Short-term | more than 1 | |||
less than 1 year | year | Total | less than 1 year | year | Total | |
£m | £m | £m | £m | £m | £m | |
Bank deposits | ||||||
Repos | 2,632 | - | 2,632 | 595 | - | 595 |
Other bank deposits | 3,420 | 12,000 | 15,420 | 3,465 | 12,000 | 15,465 |
6,052 | 12,000 | 18,052 | 4,060 | 12,000 | 16,060 | |
Customer deposits | ||||||
Repos | 10,427 | - | 10,427 | 9,575 | - | 9,575 |
Personal | 173,558 | 5,349 | 178,907 | 178,865 | 1,009 | 179,874 |
Corporate | 107,046 | 22 | 107,068 | 114,157 | 16 | 114,173 |
Non-bank financial institutions | 17,348 | 2 | 17,350 | 18,987 | 5 | 18,992 |
308,379 | 5,373 | 313,752 | 321,584 | 1,030 | 322,614 | |
Other financial liabilities (1) | ||||||
Debt securities in issue | ||||||
Commercial papers and certificates of deposit | 6,009 | - | 6,009 | 1,664 | - | 1,664 |
Covered bonds | 2,122 | - | 2,122 | 804 | 2,038 | 2,842 |
Securitisations | - | 863 | 863 | - | 859 | 859 |
8,131 | 863 | 8,994 | 2,468 | 2,897 | 5,365 | |
Subordinated liabilities | 2 | 120 | 122 | 74 | 123 | 197 |
Amounts due to holding company and fellow subsidiaries (2) | ||||||
Bank and customer deposits | 36,789 | - | 36,789 | 29,333 | - | 29,333 |
MREL | 1,240 | 5,308 | 6,548 | 221 | 6,118 | 6,339 |
Subordinated liabilities | 618 | 3,018 | 3,636 | 714 | 2,227 | 2,941 |
38,647 | 8,326 | 46,973 | 30,268 | 8,345 | 38,613 | |
Total funding | 361,211 | 26,682 | 387,893 | 358,454 | 24,395 | 382,849 |
Of which: available in resolution (3) | 10,184 | 9,297 | ||||
(1)
Excludes settlement balances of £4 million (2022 – £2 million) and derivative cash collateral of £13 million (2022 – £17 million).
(2)
Amounts due to holding companies and fellow subsidiaries relating to non-financial instruments of £279 million (2022 - £156 million) and nil intercompany settlement balances (2022- £2
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
Risk and capital management continued
NWB Group
Annual Report and Accounts 2023
64
Risk and capital management 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 and are shown in total in the table below.
| Banking activities | |||||||||||
Less than 1 | 1-3 | 3-6 | 6 months | 1-3 | 3-5 | More than | MFVTPL | ||||
month | months | months | -1 year | Subtotal | years | years | 5 years | Total | and HFT | Total | |
2023 | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m |
Cash and balances at central banks | 48,259 | - | - | - | 48,259 | - | - | - | 48,259 | - | 48,259 |
Derivatives | 13 | 38 | 129 | 122 | 302 | 163 | 47 | 14 | 526 | 2,658 | 3,184 |
Loans to banks - amortised cost | 1,844 | 58 | 1,178 | 11 | 3,091 | 15 | 249 | - | 3,355 | - | 3,355 |
Loans to customers - amortised | |||||||||||
cost (1) | 27,862 | 15,587 | 10,111 | 14,654 | 68,214 | 45,787 | 35,433 | 171,826 | 321,260 | - | 321,260 |
Personal | 3,897 | 2,009 | 2,776 | 5,332 | 14,014 | 20,375 | 19,003 | 152,879 | 206,271 | - | 206,271 |
Corporate | 14,850 | 2,749 | 3,466 | 6,040 | 27,105 | 23,610 | 15,964 | 18,873 | 85,552 | - | 85,552 |
Non-bank financial institutions | 9,115 | 10,829 | 3,869 | 3,282 | 27,095 | 1,802 | 466 | 74 | 29,437 | - | 29,437 |
Other financial assets | 1,371 | 1,675 | 2,343 | 2,422 | 7,811 | 7,496 | 8,695 | 7,489 | 31,491 | 453 | 31,944 |
Total financial assets | 79,349 | 17,358 | 13,761 | 17,209 | 127,677 | 53,461 | 44,424 | 179,329 | 404,891 | 3,111 | 408,002 |
2022 | |||||||||||
Total financial assets | 101,746 | 13,212 | 11,409 | 13,852 | 140,219 | 50,151 | 40,202 | 164,756 | 395,328 | 4,081 | 399,409 |
2023 | |||||||||||
Bank deposits excluding repos | 3,158 | - | 262 | - | 3,420 | 3,800 | 8,200 | - | 15,420 | - | 15,420 |
Bank repos | 2,632 | - | - | - | 2,632 | - | - | - | 2,632 | - | 2,632 |
Customer repos | 8,121 | 27 | 2,029 | 250 | 10,427 | - | - | - | 10,427 | - | 10,427 |
Customer deposits excluding repos | 267,023 | 9,493 | 9,755 | 11,681 | 297,952 | 5,356 | 8 | 9 | 303,325 | - | 303,325 |
Personal | 155,934 | 3,336 | 4,717 | 9,571 | 173,558 | 5,346 | 3 | - | 178,907 | - | 178,907 |
Corporate | 94,873 | 5,449 | 4,790 | 1,934 | 107,046 | 10 | 3 | 9 | 107,068 | - | 107,068 |
Non-bank financial institutions | 16,216 | 708 | 248 | 176 | 17,348 | - | 2 | - | 17,350 | - | 17,350 |
Derivatives | (1) | 13 | 27 | 4 | 43 | 167 | 148 | 46 | 404 | 1,314 | 1,718 |
Other financial liabilities | 1,736 | 1,812 | 3,621 | 966 | 8,135 | 297 | 377 | 189 | 8,998 | 13 | 9,011 |
CPs and CDs | 685 | 1,812 | 2,546 | 966 | 6,009 | - | - | - | 6,009 | - | 6,009 |
Covered bonds | 1,047 | - | 1,075 | - | 2,122 | - | - | - | 2,122 | - | 2,122 |
Securitisations | - | - | - | - | - | 297 | 377 | 189 | 863 | - | 863 |
Bank deposits | - | - | - | - | - | - | - | - | - | 6 | 6 |
Customer deposits | - | - | - | - | - | - | - | - | - | 7 | 7 |
Settlement balances | 4 | - | - | - | 4 | - | - | - | 4 | - | 4 |
Subordinated liabilities | - | - | 2 | - | 2 | - | - | 120 | 122 | - | 122 |
Notes in circulation | 806 | - | - | - | 806 | - | - | - | 806 | - | 806 |
Lease liabilities | 12 | 13 | 18 | 34 | 77 | 119 | 66 | 251 | 513 | - | 513 |
Total financial liabilities | 283,487 | 11,358 | 15,714 | 12,935 | 323,494 | 9,739 | 8,799 | 615 | 342,647 | 1,327 | 343,974 |
2022 | |||||||||||
Total financial liabilities | 313,634 | 8,054 | 4,612 | 2,886 | 329,186 | 7,404 | 8,779 | 835 | 346,204 | 1,849 | 348,053 |
(
1) Loans to customers excludes £2,794 million (2022 - £2,510 million) of impairment provisions.
NWB Group
Annual Report and Accounts 2023
65
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.
Unencumbered. 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 | ||||||||||
transactions with counterparties | Unencumbered assets not pre-positioned | |||||||||
other than central banks | with central banks | |||||||||
Collateral ring- | ||||||||||
Pre-positioned | fenced to meet | |||||||||
regulatory | Total third | |||||||||
SFT, | requirement | party (4) | ||||||||
Covered | Derivatives & | & encumbered | fenced to meet | Readily | Other | Cannot be | ||||
bonds | other | Total | assets held at | regulatory | available | available | used | |||
(1) | central banks | requirement | (2) | (3) | Total | |||||
2023 | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn |
Cash and balances at central | ||||||||||
banks | — | 2.5 | 2.5 | — | — | 45.8 | — | — | 45.8 | 48.3 |
Derivatives | 3.2 | 3.2 | 3.2 | |||||||
Loans to banks - amortised cost | — | 0.1 | 0.1 | — | — | 2.7 | — | 0.6 | 3.3 | 3.4 |
Loans to customers - amortised | ||||||||||
cost (5) | 9.8 | 0.3 | 10.1 | 104.0 | — | 78.1 | 83.1 | 43.2 | 204.4 | 318.5 |
Other financial assets (6) | — | 7.7 | 7.7 | — | 1.9 | 20.9 | 0.1 | 1.3 | 22.3 | 31.9 |
Intangible assets | 1.9 | 1.9 | 1.9 | |||||||
Other assets | — | — | — | — | — | — | 2.5 | 3.5 | 6.0 | 6.0 |
Total assets | 9.8 | 10.6 | 20.4 | 104.0 | 1.9 | 147.5 | 85.7 | 53.7 | 286.9 | 413.2 |
Amounts due from holding company and fellow | ||||||||||
subsidiaries | 2.3 | |||||||||
415.5 | ||||||||||
2022 | ||||||||||
Total assets | 7.0 | 6.0 | 13.0 | 91.3 | 1.8 | 166.5 | 85.4 | 46.6 | 298.5 | 404.6 |
Amounts due from holding company and fellow | ||||||||||
subsidiaries | 4.9 | |||||||||
409.5 | ||||||||||
(1)
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.
(2)
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.
(3)
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 are not encumbered and 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.
(4)
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.
(5)
The pre-positioned and encumbered assets held at central banks of £104.0 billion includes the encumbered residential mortgages of £21.6 billion. £66.7 billion of residential UK mortgages
are included in £78.1 billion readily available loans to customers.
(6)
Other financial assets under SFT, derivatives and other include £0.5 billion of debt securities under the continuing control of NWB Plc. This follows the agreement between NWB Plc and
NWB Group
Annual Report and Accounts 2023
66
Risk and capital management continued
(audited)
Definition
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.
(audited)
Sources of risk
The key sources of NWB Group’s non-traded market risk are
interest rate risk, credit spread risk and foreign exchange risk.
Key developments in 2023
In the UK, the Bank of England base rate rose from 3.50% at
31 December 2022 to 5.25% at 31 December 2023 as
inflation pressures persisted in the short term. However, the
five-year sterling overnight index interest rate swap rate rose
from 4.10% at 31 December 2022 to a peak of 5.37% in the
third quarter of 2023, but fell back to 3.38% at 31 December
2023. The corresponding ten-year rate rose from 3.75% at
31 December 2022 to a peak of 4.68% in the third quarter of
2023, but fell back to 3.29% at 31 December 2023.
Overall, non-traded market risk VaR increased in 2023, on
both an average and period-end basis. This was driven by an
increase in credit spread VaR, notably in the second half of
the year, reflecting increased holdings of bonds in the liquidity
portfolio. Interest rate VaR fell slightly in H2 2023, driven by a
reduction in the interest-rate-sensitive position, particularly in
sterling.
By the end of 2023, credit spread risk replaced interest rate
risk as the main driver of non-traded market risk VaR
.
NWB Group’s structural hedge notional fell to £156 billion at
31 December 2023 from £173 billion at 31 December 2022.
Overall, the sensitivity of net interest earnings fell year on
year. The main contributors to the reduced sensitivity were
lower volumes of managed margin deposits and current
accounts, which included the impact of migration to term
savings accounts.
(audited)
Governance
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.
The risk appetite statements and associated measures are
reviewed at least annually by the relevant legal entity board on
the relevant board risk committee’s recommendation to ensure
they remain appropriate and aligned to strategy. For further
information on risk appetite and risk controls, refer to pages 14
and 15.
Measurement
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 68. Each of the key risk types are discussed in greater detail in their individual sub-sections
following this table.
| 2023 | 2022 | |||||||
Average | Maximum | Minimum | Period end | Average | Maximum | Minimum | Period end | |
£m | £m | £m | £m | £m | £m | £m | £m | |
Interest rate | 39.6 | 66.5 | 26.7 | 26.7 | 28.7 | 57.5 | 11.8 | 32.1 |
Credit spread | 27.8 | 45.9 | 17.8 | 45.9 | 31.2 | 73.1 | 17.2 | 17.7 |
Structural foreign exchange risk | 24.6 | 26.0 | 22.1 | 22.1 | 19.4 | 24.6 | 16.4 | 24.6 |
Equity | 0.1 | 0.2 | 0.1 | 0.1 | 0.1 | 0.2 | 0.1 | 0.1 |
Pipeline risk (1) | 3.1 | 6.5 | 1.6 | 6.5 | 1.5 | 4.8 | 0.5 | 2.6 |
Diversification (2) | (35.6) | (30.5) | (32.0) | (30.6) | ||||
Total | 59.6 | 83.5 | 45.7 | 70.8 | 48.9 | 75.1 | 36.6 | 46.5 |
(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.
For VaR commentary, refer to key developments in 2023
above.
NWB Group
Annual Report and Accounts 2023
67
Risk and capital management 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 current accounts and
savings, in addition to its equity and reserves.
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 2023, NWB Group’s structural hedge had a
notional of £156 billion (compared to £173 billion at 31 December
2022) with an average life of 2.5 to 3 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 2023 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.
NWB Group
Annual Report and Accounts 2023
68
Risk and capital management 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 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.
| 2023 | 2022 | |||||||
+25 basis | -25 basis points | +100 basis | -100 basis | +25 basis | -25 basis points | +100 basis | -100 basis | |
points | with no floor | points | points | points | with no floor | points | points | |
Shifts in yield curve | £m | £m | £m | £m | £m | £m | £m | £m |
12-month interest earnings sensitivity | 116 | (118) | 439 | (491) | 145 | (160) | 580 | (654) |
(1)
Earnings sensitivity considers only the main drivers, namely structural hedging and margin management.
The overall reduction in the sensitivity of net interest earnings in all scenarios mainly reflects lower managed rate deposit and
current account volumes. This includes changes in the deposit mix, whereby customers have moved balances into fixed-term
savings from managed-rate savings accounts.
Sensitivity of fair value through other comprehensive income (FVOCI) portfolios and cash flow hedging reserves to interest
rate movements.
NWB Group holds most of the bonds in its liquidity portfolio at fair value and the bonds are generally classified as FVOCI for accounting
purposes Valuation changes arising from unexpected movements in market rates are initially recognised in FVOCI reserves.
Interest rate swaps are used to implement the structural hedging programme and also hedging of some personal and commercial
lending portfolios, primarily fixed-rate mortgages. Generally, these swaps are booked in cash flow hedge accounting relationships.
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 bonds initially classified as FVOCI and swaps subject to cash flow hedge accounting to a
parallel shift in all rates. Valuation changes affecting interest rate swaps that hedge bonds in the liquidity portfolio are also included.
Where FVOCI bonds and swaps are booked in fair value hedge accounting relationships, the valuation change affecting both
instruments would be recognised in the income statement. Cash flow hedges are assumed to be fully effective.
Note that the effectiveness of cash flow and fair value hedge relationships is monitored and regularly tested in accordance with IFRS
requirements. Note also that valuation changes affecting the cash flow hedge reserve affect tangible net asset value, but would not be
expected to affect CET1 capital. The movement in cash flow hedge reserves is shown in the statement of changes in equity on page
100.
| 2023 | 2022 | |||||||
+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 | - | - | (4) | (6) | 3 | (3) | 9 | (17) |
Cash flow hedge reserves | 9 | (9) | 38 | (32) | (11) | 11 | (42) | 46 |
Total | 9 | (9) | 34 | (38) | (8) | 8 | (33) | 29 |
NWB Group
Annual Report and Accounts 2023
69
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 fair value
through other comprehensive income.
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 regular 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
The table below shows structural foreign currency exposures.
| 2023 | 2022 | |||||
| Net investments | Structural foreign | Net investments in | Structural foreign | |||
| in foreign | Net investment | currency | foreign operations | Net investment | currency | |
| operations | hedges | exposures | hedges | exposures | ||
£m | £m | £m | £m | £m | £m | |
Euro | 737 | (487) | 250 | 738 | (720) | 18 |
Other non-sterling | 417 | (145) | 272 | 456 | (148) | 308 |
Total | 1,154 | (632) | 522 | 1,194 | (868) | 326 |
.
Non-traded market risk continued
NWB Group
Annual Report and Accounts 2023
70
Risk and capital management continued
Risk and capital management continued
NWB Group
Annual Report and Accounts 2023
71
Pension risk
Definition
Pension risk is defined as the inability to meet contractual
obligations and other liabilities to the established employee or
related company pension scheme.
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 £33.6 billion of assets and £26.5 billion of
liabilities at 31 December 2023 (2022 – £34.0 billion of assets and
£24.7 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.
On 16 June 2023, the High Court issued a ruling in respect of
Virgin Media v NTL Pension Trustees II Limited (and others) calling
into question the validity of rule amendments made to defined
benefit pension schemes contracted-out on a Reference Scheme
Test basis between 6 April 1997 and 5 April 2016. Amendments
to these pension schemes over this time required confirmation
from the Scheme Actuary that the Reference Scheme Test would
continue to be met. In the absence of such a confirmation, the
Rule amendment would be void. Following the review of a
selection of amendments judged as material, the liabilities
disclosed in Note 5 to the financial statements include no
adjustments for the potential impact of this ruling. Future
developments will be kept under review.
Key developments in 2023
A new contractual agreement was reached with the Trustee
of the Main section that assets to the value of the remaining
contributions previously due to the Main section in 2023 under
the Memorandum of Understanding signed with the Trustee in
April 2018, would instead be paid to a Reservoir Trust. During
the year, it was agreed with the Trustee to establish a
bankruptcy remote Reservoir Trust to hold assets with a value
equivalent to £471 million. For further details, refer to Note 5
to the financial statements.
Notwithstanding the above development, NWB Group’s
exposure to pension risk remained generally stable over the
year.
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
the 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. The NatWest Group Board reviews and as appropriate
approves any material pension strategy proposals
.
For further information on governance, refer to page 12
.
Risk appetite
NWB Group maintains an independent view of the risk inherent in
its pension funds. NWB Group has a pension risk appetite
statement incorporating defined metrics against which risk is
measured that is reviewed at least annually by the Board on the
Board Risk Committee’s recommendation to ensure they remain
appropriate and aligned to strategy.
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 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, whilst
the NatWest Group Asset & Liability Management Committee
receives updates on the performance of NatWest Group’s
material pension funds. Relevant pension risk matters are
escalated to the Board as applicable.
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, its net zero commitment and its climate disclosures
produced on an annual basis, as required by The Occupational
Pension Schemes (Climate Change Governance and Reporting)
Regulations 2021.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2023
72
Compliance and conduct risk
Definition
Compliance risk is the risk that NWB Group fails to observe the
letter and spirit of all relevant laws, codes, rules, regulations and
standards of good market practice.
Conduct risk is the risk of inappropriate behaviour towards
customers, or in the markets in which NWB Group operates,
which leads to poor or inappropriate customer outcomes.
The consequences of failing to meet compliance and/or conduct
responsibilities can be significant and could result, for example, in
legal action, regulatory enforcement, material financial loss and/or
reputational damage.
Sources of risk
Compliance and conduct risks exist across all stages of NWB
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.
As set out in Note 26 to the financial statements, members of
NatWest Group are party to legal proceedings and are subject to
investigation and other regulatory action in the UK, the US and
other jurisdictions.
Key developments in 2023
Further progress was made on the compliance agenda during
2023. Significant enhancements were made to the compliance
and conduct framework with the introduction of numerous
new tools to manage the risk profile. These include a
compliance and conduct risk directory, new risk standards
and toolkits which support NWB Group to measure and
manage compliance accurately and efficiently, and a
regulatory compliance operational policy framework to ensure
key regulatory requirements are captured. These new tools
align with the existing enterprise-wide risk management
framework.
From a conduct risk perspective, the NatWest Group-wide
programme made significant progress on implementation of
the Consumer Duty requirements by the first regulatory
milestone of 31 July 2023. The focus is now on closed book
products and services, which is expected to conclude before
the end of July 2024.
The focus on consumer protection and supporting customers
with their financial needs continues, given the ongoing cost-of-
living challenges and their impact on customers in vulnerable
situations. For example, NatWest was the first high street
bank to offer customers additional support through the
Mortgage Charter from July 2023. Vulnerable customer
outcomes are also an integral part of our
enhanced
‘Good
Customer Outcome’ reporting which was introduced through
the Consumer Duty programme.
Governance
NWB Group defines appropriate standards of compliance and
conduct and ensures adherence to those standards through its
risk management framework. To support ongoing oversight of the
management of the compliance and conduct risk profile there are
a number of committees in place. These include a NatWest Group
Consumer Duty Executive Steering Group and conflicts of interest
fora across both the first and second line of defence. Relevant
compliance and conduct matters are escalated through Executive
Risk Committee and Board Risk Committee.
Risk appetite
The Risk appetite statement and associated measures for
compliance and conduct risks are approved at least annually by
the Board on the Board Risk Committee’s recommendation to
ensure they remain appropriate and aligned to strategy. 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 are operated to ensure the business delivers
good customer outcomes and are conducted in accordance with
legal and regulatory requirements. A suite of risk policies, risk
standards and regulatory compliance operational policies
addressing compliance and conduct risks set appropriate
standards across NWB Group. Examples of these include those
relating to product mis-selling, customers in vulnerable situations,
complaints management, cross-border activities and market
abuse. Continuous monitoring and targeted assurance are carried
out as appropriate.
Monitoring and measurement
Compliance and conduct risks are measured and managed
through continuous assessment and regular risk reporting to NWB
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 NWB Group’s strategic
planning cycle.
Mitigation
Activity to mitigate the most material compliance and conduct
risks is carried out across NWB 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, conflicts of interest
management, market conduct surveillance, complaints
management, mapping of priority regulatory requirements and
independent monitoring activity. Internal policies help support a
strong customer focus across NatWest Group.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2023
73
Financial crime risk
Definition
Financial crime risk is the risk that NWB
Group's products,
services, employees and/or third parties are intentionally or
unintentionally used to facilitate financial crime in the form of
money laundering, terrorist financing, bribery and corruption,
sanctions and tax evasion, as well as external or internal fraud.
Sources of risk
Financial crime risk may be present if NWB Group’s customers,
employees or third parties undertake or facilitate financial crime,
or if NWB Group’s products or services are used intentionally or
unintentionally
to facilitate such crime. Financial crime risk is an
inherent risk across all lines of business.
Key developments in 2023
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, data quality, and
data analytics to improve the effectiveness of systems used to
monitor customers and transactions.
Financial crime roadshows and events were held throughout
the year to further embed financial crime risk management
culture and behaviours.
A centralised hub model and One Bank approach to financial
crime risk management was embedded, with hub capabilities
further deployed across NatWest Group. This has led to better
outcomes, including a consistent understanding of controls
and oversight across NatWest Group.
Active participation in public-private partnerships, including
the Joint Money Laundering Intelligence Taskforce.
Governance
The Financial Crime Executive Steering Group, which is jointly
chaired by the NatWest Group Chief Risk Officer and the Group
Chief Information Officer, is the core governance committee for
financial crime risk (excluding fraud). It oversees financial crime
risk management, operational performance, and transformation
matters including decision-making and escalations to the
Executive Risk Committee, Board Risk Committee and NatWest
Group Executive Committee.
The Fraud Executive Steering Group, which is chaired by the
Chief Information Officer, is the core governance committee for
fraud. It oversees fraud risk management, operational
performance, and investment matters including decision-making
and escalations to relevant senior committees.
Risk appetite
There is no appetite to operate in an environment where systems
and controls do not enable the effective 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.
NWB Group operates a framework with 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 NWB
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, reputational damage and
liability risk.
Key developments in 2023
NatWest Group continued to enhance its in-house climate risk
modelling capabilities, supporting the integration of climate risk
within its capital adequacy (ICAAP); impairment (IFRS 9); and
risk management processes.
An end-to-end test of NatWest Group’s in-house first-
generation corporate transition risk model was completed.
In parallel with the full roll out of first-generation qualitative
climate risk scorecards for the Commercial & Institutional
segment, NatWest Group began development of the second-
generation of climate risk scorecards. This involved the
expansion of the scorecard methodology to capture
quantitative considerations, with initial roll-out scheduled for
2024 on a test-and-learn basis. These scorecards do not drive
credit risk decision making as yet.
NatWest Group improved the oversight of climate-related risk
through regular reporting and review of climate risk appetite
and associated operational measures, and improved
calibration of existing limits to inform monthly risk committee
updates.
An assessment of potential greenwashing risks was
undertaken, driven by a hypothetical risk scenario where
increased competition in the green finance market led to less
efficient product designs and diminished robustness of
governance.
Recognising the inextricable link between climate risk and
nature degradation, NatWest Group added nature risk to its
climate risk considerations within the risk directory and policy,
for consideration from 2024.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2023
74
Climate risk continued
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 are 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 Chief Executive Officer 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 2023, the Executive
Steering Group provided oversight of the second iteration of
NatWest Group’s Climate transition plan, progression in
establishing partnerships and opportunities including oversight of
progress against the NatWest Group climate and sustainable
funding and financing target and ensuring the effective
management of climate-related risks. 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,
helping to address the climate challenge. This ambition is
underpinned by activity to at least halve the climate impact of
NatWest Group’s financing activity by 2030 (against a 2019
baseline) and to achieve net zero by 2050.
Work continued in 2023 to mature NatWest Group’s climate-
related risk capabilities. Throughout 2023, the Board Risk
Committee monitored Board approved quantitative climate risk
appetite measures in line with the enterprise-wide risk
management framework. These measures provided a heightened
focus on balance sheet exposure to financed emissions.
Risk appetite statements and associated measures are reviewed
at least annually by the relevant legal entity board on the relevant
board risk committee’s recommendation to ensure they remain
appropriate and aligned to strategy.
The overall suite of metrics is used to inform climate risk reporting
to senior risk management forums, linking risk management to
NatWest Group’s strategic priorities.
Mitigation
NatWest Group focused on continuing to develop 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, maximise the opportunities
arising from a transition to a low-carbon economy and support
decision making.
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.
NatWest Group recognises a number of potential key use cases
for climate scenario analysis, including, but not restricted to, the
following:
Regulatory stress testing requirements.
Heightened climate risk sector classifications.
Sector/sub-sector risk appetite.
Portfolio management.
Strategic decision-making, capital adequacy and provisioning.
There are a number of challenges with climate scenario analysis,
for example, in relation to the immaturity of modelling techniques
and data on climate-related risks, as well as the 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, economic systems, policy and wider
society. These risks and uncertainties, coupled with significantly
long timeframes make the outputs of climate-related risk
modelling with respect to the potential use cases identified
inherently more uncertain than outputs modelled for traditional
financial planning cycles based on historical financial information.
NatWest Group continued to develop its specialist climate data
capabilities, including bringing in new datasets to increase the
granularity for which climate risks are assessed, such as
enhanced UK flood risk data and a more comprehensive set of
EPC data for residential properties.
NatWest Group continues to participate in a number of industry
forums to help shape the financial service industry’s response to
the challenges posed by climate risk, including scenario analysis.
An example is the Climate Financial Risk Forum, established by
the PRA and FCA.
NatWest Group also continues to engage actively with academia
to ensure best practice and the latest thinking on climate risks is
considered within NatWest Group’s work. For example, around
the appropriate assessment of physical risks, both short and
longer term, are a particular focus for 2024.
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, processes, 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.
Risk and capital management continued
NWB Group
Annual Report and Accounts 2023
75
Operational risk continued
Key developments in 2023
A review of the NatWest Group Risk Directory was completed
and benchmarked against industry standard, to ensure
comprehensive coverage of all operational risks.
The operational risk policy was reviewed and refreshed and
supported by the development of a suite of new risk
standards, operational guidance and risk toolkits to enable
effective policy application.
The enhanced risk and control self-assessment approach
continued to be rolled out and embedded with a focus on
material operational risks across key end-to-end processes.
Given the risk associated with the processing of payments,
a
NatWest Group-wide programme on the movement of funds
was mobilised, which focused on enhancing payment related
controls.
Governance
The risk governance arrangements in place for operational risk
are aligned to the requirements set out in the NatWest 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
risk appetite is vital for stability and reputational integrity.
To support ongoing oversight of the management of the
operational risk profile an Operational Risk Executive Steering
Committee is in place. This forum ensures all material operational
risks are monitored and managed within appetite. The NatWest
Group Board Risk Committee and NatWest Group Board receives
regular updates on the outputs of the Operational Risk Executive
Steering Committee.
Risk appetite
Operational risk appetite supports effective management of all
operational risks. It expresses the level and types of operational
risk NatWest Group is willing to accept to achieve its strategic
objectives and business plans. NatWest Group’s operational risk
appetite quantitative and qualitative statements encompass the
full range of operational risks faced by its legal entities,
businesses, and functions. The Risk appetite statement and
associated measures for operational risk are approved at least
annually by the relevant legal entity board on the relevant board
risk committee’s recommendation to ensure they remain
appropriate and aligned to strategy.
Mitigation
Risks are mitigated by applying key preventative and detective
controls. This is an integral step in the risk self-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.
All residual risks that exceed the target appetite position are
subject to action plans to bring them within appetite.
The Control Environment Certification (CEC) process is a half-
yearly self-assessment by the CEOs of NatWest Group’s
customer-facing business areas, as well as the heads of its
support functions. NatWest Group uses this process as an
effective means to provide 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
NatWest Group Board Risk Committee. They are also shared with
external auditors.
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.
Monitoring and measurement
Operational risk is measured and managed through continuous
assessment and regular reporting to NatWest Group’s senior risk
committees and at Board-level.
Risk and control self-assessments
are used across business areas and support functions to identify
and assess material non-financial risk (including operational risks,
conduct risks) and key controls. All risks and controls are mapped
to NatWest Group’s Risk Directory. Risk assessments are
refreshed at least annually and in response to internal and
external events to ensure they remain relevant and that they
capture any emerging risks.
The process is designed to confirm that risks are effectively
managed in line with risk appetite. Key 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 and security
NWB Group manages and monitors operational resilience through
its enhanced risk and control self-assessment methodology. This
is underpinned by setting and monitoring of forward-looking risk
indicators and performance metrics for the operational resilience
of important business services. Progress continues on meeting
regulatory expectations for operational resilience, with
involvement in a number of industry-wide operational resilience
forums. This enables a cross-sector view of the operational
resilience risk profile and the pace of ongoing innovation and
change, both internally and externally.
NatWest Group operates layered security controls, and its
network architecture is designed to provide inherent protection
against threats.
This approach avoids reliance on any one type or
method of security control.
Minimum security control requirements
are set out in Key Risk Policies
(1)
,
standards, processes and
procedures. Through 2024, NatWest Group will monitor and
manage the threat landscape focusing on:
Risk and capital management continued
NWB Group
Annual Report and Accounts 2023
76
Operational risk continued
Attack surface vulnerabilities – such as the rising number of
zero-days and code vulnerabilities impacting organisations.
Initial access brokers and nation states – increasingly
sophisticated attacks from ransomware gangs and ongoing
challenges following Russia’s invasion of Ukraine which has
raised international tensions increasing the likelihood of
disruptive cyber-attacks.
Developments in innovation and technology, assessing the
inherent risk and developing appropriate response to mitigate
associated risks, for example large language models, artificial
intelligence and cloud adoption.
As cyberattacks evolve and become more sophisticated, NatWest
Group continues to invest in additional capability designed to
defend against emerging threats.
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
an early event escalation process. NWB Group has not
experienced a cyber security breach or associated material loss in
the last three years.
All financial impacts and recoveries associated with an operational
risk event are reported against the date they were recorded in
NatWest 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 2023
may relate to events that occurred, or were identified in, prior
years. NatWest Group purchases insurance, against specific
losses, including cyber-attacks, and to comply with statutory or
contractual requirements.
Model risk
Definition
Model risk is the potential for adverse consequences from model
errors or the inappropriate use of modelled outputs to inform
business decisions. A model is defined 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 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), calculating regulatory
capital and liquidity requirements and automation of operational
processes.
Model applications may give rise to different risks depending on
the business segment in which they are used. Model risk is
therefore assessed separately for each business segment in
addition to the overall assessment made for NWB Group.
(1)
Risk policies are in place for each principal risk and define, at a high level, the cascade of
qualitative expectations, guidance and standards that stipulate the nature and extent of
permissible risk taking. They are consistently applied across NatWest Group and subsidiary
legal entities and form part of the qualitative expression of risk appetite for each principal risk.
Key developments in 2023
Following extensive model remediation work, NWH Group
returned to model risk appetite in January 2023. Ongoing
remediation work continues to be a key focus to further
strengthen the model risk appetite position and is closely
monitored.
NWB Group’s model risk management practices continued to
evolve, supported by a dedicated model risk management
enhancement programme, set up in response to the PRA’s
Supervisory Statement 1/23. An updated Group model risk
policy was approved by the NatWest Group Board Risk
Committee.
Implementation of model risk procedures, aligned to the
delivery and embedding of the enterprise-wide risk
management framework, continued. This was supported by
significant model inventory design enhancements and a bank-
wide model risk data remediation exercise. This activity
improved the quality and completeness of model risk data held
within the model inventory system and enabled enhanced
insights and reporting capabilities.
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 validation
leads. Model risk owners are responsible for model approval and
ongoing performance monitoring. Model validation leads, 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.
Business and function model management committees are used
to escalate model risk matters to senior management where
required.
The NatWest Group Model Risk Oversight Committee further
enhances model risk governance by providing a platform for
executive level discussion on emerging model risks, identification
of systemic risks and the evolution of model risk management
practices. NWB Group is considered in scope of the NatWest
Group Model Risk Oversight 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. The model risk appetite statement and associated
measures are approved by the relevant legal entity board on the
relevant board risk committee’s recommendation at least annually
to ensure they remain appropriate and aligned to strategy.
Business areas are responsible for monitoring performance
against appetite and remediating models outside appetite.
Monitoring and measurement
Model risk is measured and managed through continuous
assessment and regular reporting to NatWest Group’s senior risk
committees and at NatWest Board level.
Policies, toolkits and model standards related to the development,
validation, approval, implementation, 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 comprising of skilled, well-informed subject matter
experts. This is completed for new models or material
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 and capital management continued
NWB Group
Annual Report and Accounts 2023
77
Model risk continued
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 model owners
and overseen by the model validators 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.
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 – 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
The three primary drivers of reputational risk are: failure in
internal risk management systems, process or culture; NWB
Group’s actions materially conflicting with stakeholder
expectations; and contagion (when NWB Group’s reputation is
damaged by failures in key sectors including the Group’s supply
chain or other partnerships).
Key developments in 2023
Reputational risks were elevated in relation to the departure
of Alison Rose as NatWest Group Chief Executive Officer and
issues that had arisen in connection with account closure
decisions that attracted significant public and media attention.
Relevant updates to the Reputational Risk Framework are
being implemented following an independent legal review of
customer account closures and internal reviews.
Reputational risk registers are in place across all
relevant
business areas.
New environmental, social and ethical (ESE) risk acceptance
criteria were created to support the management of human
rights risk and will be implemented in 2024.
All climate focused ESE risk acceptance criteria (mining and
metals, power generation and oil and gas) underwent a
review to ensure they reflect the current risk landscape.
Governance
A reputational risk policy supports reputational risk management
across NWB Group. Reputational risk registers are used to
manage reputational risks identified within relevant business
areas. These are reported to the relevant business risk
committee.
Material reputational risks to NWB Group are escalated via the
NatWest Group reputational risk register which is reported at
every meeting of the NatWest Group Reputational Risk
Committee.
The NatWest Group Reputational Risk Committee
also opines on matters that represent material reputational risks.
The NatWest Group Executive and Board Risk Committees
oversee the identification and reporting of reputational risk via the
NatWest Group Risk Report.
Risk appetite
NWB Group manages and articulates its appetite for reputational
risk through a qualitative reputational risk appetite statement and
associated quantitative measures which are approved at least
annually by the NatWest Group Board on the NatWest Group Risk
Committee’s recommendation to ensure they remain appropriate
and aligned to strategy.
NWB Group seeks to identify, measure and manage risk aligned
to stakeholder trust. 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 via reputational risk registers at business or legal
entity level. They are escalated, where appropriate, to the
relevant executive committee and where material, to the NatWest
Group Reputational Risk Committee via the NatWest Group Risk
report.
Additional principal risk indicators for material risks being
monitored are also reported to the Group Reputational Risk
Committee and to the Executive and Board Risk Committees via
the NatWest Group Risk Report.
Mitigation
Standards of conduct are in place across NWB 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 NWB Group’s top and emerging
threats process (where sufficiently material) as well as through
the NatWest Group and business level reputational risk registers.
Report of the directors
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Annual Report and Accounts 2023
78
The directors present their report together with the audited
accounts for the year ended 31 December 2023.
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 | 7 |
Segmental analysis | Note 4 |
Share capital and reserves | Note 22 |
Post balance sheet events | Note 35 |
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
Details of NWB Plc’s principal subsidiary undertakings and their
activities are shown in Note 14 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
Results and dividends
The profit attributable to the ordinary shareholders of NWB Plc
for the year ended 31 December 2023 was £3,368 million
compared with a profit of £3,564 million for the year ended 31
December 2022, as set out in the consolidated income statement
on page 99.
No ordinary shares were issued during 2023 or 2022.
In 2023, NWB Plc paid an ordinary dividend of £1.7 billion to NWH
Ltd (2022 – £3.3 billion).
Employees
At 31 December 2023, NWB Group employed 56,600 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 permanent
employees and, in some instances, members of the wider
workforce e.g. temporary employees and agency workers.
Corporate governance statement
For the financial year ended 31 December 2023 NWB Plc has
again chosen to report against the Wates Corporate Governance
Principles for Large Private Companies (the Wates Principles),
published by the Financial Reporting Council (FRC) in December
2018 and available on the FRC website. The disclosures below
explain how NWB Plc has applied the Wates Principles in the
context of its corporate governance arrangements.
1. Purpose and leadership
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
strategy can be found in the NatWest Group plc 2023 Annual
Report and Accounts.
In December 2021 the Board approved NatWest Group’s
refreshed values (Inclusive, Curious, Robust, Sustainable and
Ambitious), ahead of their launch in February 2022. During 2023
the Board received regular updates on how our values are
embedding within the organisation through Our View colleague
opinion survey results and culture measurement reports.
Colleague sentiment towards the values was also observed via
the Colleague Advisory Panel meetings, which are chaired by
Roisin Donnelly who reports on each meeting to the Board.
Further information on NatWest Group’s values can be found in
the NatWest Group plc 2023 Annual Report and Accounts on
page 37.
The Board assesses and monitors culture in several ways, as
described below.
Colleague Advisory Panel reports which provided feedback
on discussions from meetings held in May and November.
Topics included executive remuneration and the wider
workforce, environmental, social and governance topics,
Consumer Duty and human rights.
Our View colleague survey results which provided insights
from the colleague opinion surveys conducted in April and
September. Colleagues responded to questions across the
whole colleague experience including wellbeing, building
capability and leadership. The key areas identified for focus
related to leadership and ensuring consistency across
NatWest Group.
Culture measurement reports which used an integrated suite
of qualitative, quantitative, internal and external data sources
to support NatWest Group in assessing the effectiveness and
impact of its culture journey.
One Bank Culture updates. In October, the NatWest Group
Sustainable Banking Committee (SBC) considered an update
on progress of the One Bank Culture Plan, noting our One
Bank Culture journey to date and plans to grow leadership
capability, scale and build confidence in experimentation and
sharpen our focus through the transformation of
performance management.
SBC considered how business ethics is monitored and
reported through the NatWest Group Culture Measurement
Framework.
Board business insights packs which included metrics to
demonstrate how NatWest Group is delivering for
colleagues
(
including building capability, diversity and inclusion and
learning).
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
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Annual Report and Accounts 2023
79
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. Their biographies are available at natwestgroup.com
(NatWest Holdings Limited section).
The role of the Chairman is to lead the Board and ensure its
overall effectiveness. This is distinct and separate from that of
the CEO who manages the business day-to-day.
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.
Balance and diversity
The Board operates a boardroom inclusion policy which reflects
NatWest Group’s values, its inclusion principles and relevant legal
or voluntary code requirements.
The boardroom inclusion policy
aims to promote diversity and inclusion in the composition of the
Boards and Board Committees of NatWest Group plc, NWH Ltd,
NWB Plc and RBS plc and in the nominations and appointments
process.
A copy of the 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.
The policy includes targets which aspire to meet those set out in
the UK Listing Rules along with the recommendations of the
FTSE Women Leaders Review and the Parker Review.
As at 31 December 2023:
NWB Plc exceeded the FTSE Women Leaders Review
voluntary target of 40% women’s representation on boards
by the end of 2025, with 42% of the Board being women;
with a woman as CFO, NWB Plc met the FTSE Women
Leaders Review recommendation that companies should
have at least one woman in the Chair or Senior
Independent Director roles on the board and/or one woman
in the Chief Executive Officer or Finance Director role by
the end of 2025; and
the company met the recommendation of the Parker
Review with at least one member of the Board being from
an ethnic minority background and it intends to continue to
meet that recommendation.
Changes since 1 January 2024
Rick Haythornthwaite joined the Board as an independent non-
executive director on 8 January 2024. This appointment to the
Board means women’s representation will be 38% between 8
January and 15 April 2024. Rick will succeed Howard Davies as
Chair on 15 April 2024 (at which point Howard Davies will step
down as a director). After Howard steps down, women’s
representation on the Board will revert to 42%, assuming no
other changes to Board composition. In addition, Geeta Gopalan
will join the NatWest group and NWH Sub Group Boards on 1
July 2024 as an independent non-executive director.
The boardroom inclusion policy also acknowledges NatWest
Group’s ambition to have gender balance in the global top three
levels (CEO-3 and above) by 2030, and progress against this
ambition is set out on pages 38 to 39 of the NatWest Group plc
2023 Annual Report and Accounts (Strategic report).
Size and structure
NWH Ltd is the holding company for NatWest Group’s ring-
fenced operations, which include the Retail and Private Banking
businesses and certain aspects of the Commercial & Institutional
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.
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, Ian Cormack and
Mark Rennison. On 31 August 2023, Graham Beale stood down
as NWH Senior Independent Director and a DINED. On 1
September 2023 Ian Cormack assumed the SID role and Mark
Rennison joined the NWH Sub Group boards as a DINED.
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. They attend NatWest Group plc Board and relevant
Board committee meetings as observers. 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.
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 2023 the Nominations Committee, in conjunction
with the NatWest Group Nominations & Governance Committee,
reviewed, and the Boards approved, an updated version of the
NatWest Group plc and NWH Sub Group Board skills matrix. A
summary view of the NatWest Group plc Board skills matrix is
available on page 90 of the NatWest Group plc 2023 Annual
Report and Accounts.
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Annual Report and Accounts 2023
80
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.
Board committees also comprise directors with a variety of skills
and experience so that no undue reliance is placed on any one
individual.
The Senior Independent Director acts as a sounding board for
the Chairman and as an intermediary for other directors when
necessary.
Along with the Chairman and executive directors, the non-
executive directors are responsible for ensuring the Board fulfils
its responsibilities under its terms of reference.
The independent non-executive directors combine broad
business and commercial experience with independent and
objective judgement. 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.
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.
Mark Rennison joined the Board on 1 September 2023 and the
Chief Governance Officer and Company Secretary worked
closely with Mr Rennison to devise a comprehensive induction
programme which was tailored to his needs and flexible to
respond to areas of focus which emerged as the programme
progressed. Priorities included early engagement with key
stakeholders, and developing an understanding of NatWest
Group’s structure and business operations, and its strategic
priorities.
Stuart Lewis joined the Board on 1 April 2023 and Rick
Haythornthwaite joined the Board on 8 January 2024. Further
information on their inductions can be found in the NatWest
Group plc accounts.
All new directors receive a copy of the non-executive 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
an online 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 usually
conducted annually.
Progress following the 2022 evaluation
An internal evaluation was conducted in 2022 by the Chief
Governance Officer and Company Secretary. A number of
actions were progressed during 2023 in response to the findings
of the 2022 external evaluation.
In December 2023 the directors reviewed the progress achieved
against the actions agreed following the 2022 evaluation of the
effectiveness of the Board and its committees. It was agreed that
all actions had been successfully completed, with improvements
including a refreshed format for the strategy session, enhanced
focus of Board meetings and increased opportunities for
engagement with the executive talent pipeline.
Deferral of 2023 evaluation
In September 2023, the Group Nominations & Governance
Committee and the NWH Ltd Nominations Committee agreed
that it would be appropriate to defer the internal evaluation of
the NatWest Group and NWH Sub Group Boards and committees
effectiveness due in Q4 2023 until 2024, given the July 2023
change in Group CEO and upcoming Chair succession. The
Board confirmed its support for this approach. Accordingly, the
next Board and committee evaluation will be conducted in 2024
by an external facilitator, in accordance with the Code
requirement for an externally facilitated process every three
years.
Year end reviews of the Chairman’s and non-executive directors’
performances were undertaken in Q4 2023, in line with our
normal evaluation timetable.
Directors’ training and development is co-ordinated by the Chief
Governance Officer and Company Secretary. Directors have
access to a wide range of briefing and training sessions and
other professional development opportunities.
Internal training relevant to the business of NatWest Group is also
provided and during 2023 the Board undertook a comprehensive
programme of training sessions on a variety of topics.
Some of
these were determined at the start of the year and others
arranged in response to events or Board discussions. Training
was delivered by both members of management and external
parties.
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Annual Report and Accounts 2023
81
Topics covered included financial crime; recovery and resolution
planning; digital assets; nature and biodiversity (delivered by
Worldwide Fund for Nature); legal privilege; Consumer Duty
(delivered by Oxera); capital management and deposits. The
training sessions enabled the directors to deepen their
understanding on these topics and informed their decision
making. A number of directors also accepted an invitation to the
full Board to join meetings of the Group Sustainable Banking
Committee which covered areas of broader interest, including
artificial intelligence.
The Board also held a training session to consider top and
emerging threats. Discussions covered the current and potential
geo-political landscape, macro-economic and regulatory trends
and the impact of emerging technologies on the risk
environment.
Directors undertake the training they consider necessary to
assist them in carrying out their duties and responsibilities.
The non-executive directors discuss their training and
professional development with the Chairman at least annually.
3. Director responsibilities
Accountability
All directors receive guidance on their statutory duties under the
Companies Act 2006 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.
Details of all directors’ conflicts of interest are recorded in a
register which is maintained by the Chief Governance Officer and
Company Secretary and reviewed annually by the Board.
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 and NWH
Group, with particular focus on customers and employees. It sets
and oversees the strategic direction of the NWH Group. It
reviews and approves the NWB Plc risk management framework
(including NatWest Group’s risk appetite framework as a
component thereof (‘Risk Appetite Framework’)) and risk appetite
for key risks in accordance with the Risk Appetite Framework;
and it monitors performance against risk appetite for NWB Plc. It
considers any material risks and approves, as appropriate,
recommended actions escalated by the NatWest Holdings Board
Risk Committee. 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 2023.
There were eight scheduled Board meetings during 2023. As well
as scheduled meetings, additional ad hoc meetings of the Board
and some of its committees were held throughout the year to
receive updates and deal with time-critical matters. There was
also one strategy session with executive management in 2023.
When directors are unable to attend meetings convened at short
notice, they receive the papers and have the opportunity to
provide their feedback in advance.
At each scheduled Board meeting the directors receive reports
from the Chairman, Board committee Chairs, CEO, CFO, Chief
Risk Officer and other members of the executive management
team, as appropriate. Business reviews from the CEOs of the
Retail Banking, Private Banking and Commercial & Institutional
businesses included updates on progress against strategy and
spotlights on current topics including the cost of living,
personalisation of services, business strategies and deposit plans.
In addition to the business CEOs, a number of 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 supported succession planning.
The Board also welcomed external presenters and advisers to
Board meetings, who provided useful insights and perspectives.
The Board and Group Executive Committee (ExCo) operating
rhythm continues to support a proactive and transparent agenda
planning and paper preparation process. This process includes
the following elements:
A pre-Board meeting with the Chairman, CEO, CFO and
Chief Governance Officer and Company Secretary to ensure
the Board and executive management are aligned on Board
agendas.
A post-Board meeting with the Chairman, CEO and Chief
Governance Officer and Company Secretary to discuss
what went well or could be improved after each meeting.
A look ahead paper at each ExCo and Board meeting
setting out key items that will be discussed at the next
meeting.
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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.
The Audit Committee
comprises at least three independent non-
executive directors, one of whom is the Board Risk Committee
Chair and 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, non-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, two
of whom are DINEDs. It assists the NatWest Group plc
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 his individual
accountabilities including matters relating to strategy, financials,
risk, customer and operational issues and culture and values.
Integrity of information
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.
4. Opportunity and risk
The role of the Board is to promote the long-term sustainable
success of NWB Plc.
The Board held one strategy session with the executive
management team in 2023. 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 operates within NatWest Group’s integrated enterprise-
wide 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. As part of the enterprise-
wide framework NWB Plc complies with NatWest Group’s risk
appetite framework, which is approved annually by the NatWest
Group plc Board. NatWest Group’s risk appetite is set in line with
overall strategy. 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 NatWest Group’s integrated enterprise-
wide risk management framework including risk culture, risk
appetite, risk identification, risk measurement and risk mitigation,
as well as NWB Plc risk governance, can be found in the risk and
capital management section of this report (pages 10 to 77).
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.
The 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 are set goals across a balanced
scorecard of measures. NatWest Group continues to pay
colleagues fairly for the work they do, 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 helps to
improve colleagues’ financial wellbeing, which is a core priority in
NatWest Group’s wellbeing plans. Following on from the
extensive support provided in 2022 to help our colleagues with
the cost of living, NatWest Group continued targeted action in
2023 to help those colleagues most likely to be affected by the
sudden spike in inflation. As a responsible employer we believe it
Report of the directors continued
NWB Group
Annual Report and Accounts 2023
83
is important that what we pay our employees meets the true
cost of living, and we are proud to be accredited as a Living
Wage Employer in the UK since 2014. Our rates of pay continue
to exceed the real living wage (RLW) rates as set by the Living
Wage Foundation. In 2023, we extended this commitment to our
global operations by achieving accreditation as a Regional Living
Wage Employer by the Fair Wage Network, recognising that our
rates of pay for our colleagues outside the UK are at or above
the living wage threshold as defined by the Fair Wage Network.
NatWest Group helps colleagues to 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 plc 2023 Annual
Report and Accounts. Gender and Ethnicity Pay Gap information
can be found in the Strategic report section of the NatWest
Group plc 2023 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 2023 the Board approved its annual objectives and
confirmed the Board’s key stakeholder groups –investors,
customers, colleagues, regulators, communities 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,
refer to pages 24 to 29 and pages 101 to 102 of the NatWest
Group plc 2023 Annual Report and Accounts, and below under
Additional colleague-related disclosures (workforce engagement
including the Colleague Advisory Panel).
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, refer to page 3 of the Strategic report which includes a
section 172(1) statement and signposts to further information
contained in the NatWest Group plc 2023 Annual Report and
Accounts.
Additional colleague-related disclosures
Informing and consulting colleagues
NatWest Group listens to our colleagues and uses this insight to
attract, engage and retain the best talent for the future. Our
colleague listening strategy contributes to our deeper
understanding of colleague sentiment and includes: our colleague
opinion surveys including pulse surveys; a Colleague Advisory
Panel (CAP) that connects colleagues directly with our Board; the
Colleague Experience Squad, a group of colleagues who
volunteer to provide feedback on colleague products and
services; and Engage, our social media platform. We also track
metrics and key performance indicators which we can
benchmark with sector and high-performing comparisons.
Over 51,000 colleagues (84%) across all countries and levels
participated in our September 2023 Our View survey. At 84%,
this is our highest ever participation rate. Despite tough economic
conditions and the events of the summer, our results remain
strong showing an average +1 percentage point improvement
across the survey compared to September 2022.
While
purposeful leadership fell marginally, our culture and purpose
measures have improved, exceeding NatWest Group targets.
Across all comparable categories, NatWest Group sits an
average of eight percentage points above the Global Financial
Services norm (GFSN) and three percentage points above the
Global High Performing 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. NatWest Group is
also committed to respecting employees’ rights of freedom of
association across all of its business.
In addition, through the 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 are self-nominated and are representative of the
bank’s population e.g., business area, level, location, working
pattern and employee-led networks. In April 2023 Roisin Donnelly
succeeded Mike Rogers as CAP Chair when Mike Rogers stepped
down as a director. New members received training on the role
of the CAP and their responsibilities as members.
The CAP met with representatives from the Board twice in 2023,
in May and November.
Panel members and directors shared
views on executive remuneration and the wider workforce,
environmental social and governance topics, Consumer Duty and
human rights.
The Board discusses colleague feedback received
from the CAP and the CAP Chair provides feedback on this
discussion to the Panel to ensure a continuous feedback loop.
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.
Disability Smart
NatWest Group makes workplace adjustments to support
colleagues with a disability, health or mental health condition
and/or a neurodivergence to succeed. If a colleague develops a
disability, health or mental health condition and/or a
neurodivergence NatWest Group will, wherever possible, make
adjustments to support them in their existing job or re-deploy
them to a more suitable alternative job.
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 reasonable
adjustments to support at any stage of the recruitment process.
Report of the directors continued
NWB Group
Annual Report and Accounts 2023
84
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 2023 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 2023 are shown in the Corporate governance,
Annual report on remuneration section of the NatWest Group plc
2023 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 2022 to 17 February 2023.
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 2023, and anticipated future developments are
detailed in the Capital, liquidity and funding section on pages 59
to 66. This section also describes NWB Group’s funding and
liquidity profile, including changes in key metrics and the build-up
of liquidity reserves.
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.
Political donations
During 2023, 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
15 February 2024
National Westminster Bank Plc Is registered in England No.
929027
Statement of directors’ responsibilities
NWB Group
Annual Report and Accounts 2023
85
This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 87 to 98.
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 judgements 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
John-Paul Thwaite
Katie Murray
Chairman
Chief Executive Officer
Chief Financial Officer
15 February 2024
Board of directors
Chairman
Executive directors
Non-executive directors
Howard Davies
John-Paul Thwaite
Katie Murray
Francesca Barnes
Ian Cormack
Roisin Donnelly
Patrick Flynn
Rick Haythornthwaite
Yasmin Jetha
Stuart Lewis
Mark Rennison
Mark Seligman
Lena Wilson
Financial statements
NWB Group
Annual Report and Accounts 2023
86
Page
Independent auditor’s report
87
Consolidated income statement
99
Consolidated statement of comprehensive income
99
Balance sheet
100
Statement of changes in equity
101
Cash flow statement
103
Accounting policies
104
Notes to the financial statements
1
Net interest income
110
2
Non-interest income
110
3
Operating expenses
111
4
Segmental analysis
113
5
Pensions
116
6
Auditor’s remuneration
121
7
Tax
121
8
Profit/(loss) dealt with in the accounts of the Bank
123
9
Financial instruments - classification
124
10
Financial instruments - valuation
128
11
Financial instruments - maturity analysis
137
12
Derivatives
140
13
Loan impairment provisions
148
14
Investment in Group undertakings
149
15
Other financial assets
150
16
Other assets
150
17
Intangible assets
151
18
Property, plant and equipment
152
19
Other financial liabilities
153
20
Subordinated liabilities
154
21
Other liabilities
155
22
Share capital and reserves
156
23
Structured entities
157
24
Asset transfers
158
25
Capital resources
159
26
Memorandum items
160
27
Analysis of the net investment in business interests and intangible assets
162
28
Non-cash and other items
163
29
Analysis of changes in financing during the year
164
30
Analysis of cash and cash equivalents
164
31
Directors’ and key management remuneration
165
32
Transactions with directors and key management
165
33
Related parties
166
34
Ultimate holding company
168
35
Post balance sheet events
168
36
Related undertakings
169
Independent auditors’ report to the members of National
Westminster Bank Plc
NWB Group
Annual Report and Accounts 2023
87
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 2023 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
(IAS);
the Bank financial statements have been properly prepared in accordance with UK adopted IAS 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 (refer to the table below) of the Bank and the Group for the year ended 31 December 2023
which comprise:
Group
Bank
Consolidated balance sheet as at 31 December 2023;
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 2023;
Statement of changes in equity for the year then
ended;
Cash flow statement for the year then ended;
Accounting policies; and
Related Notes 5, 7 – 30 and 33 to the financial
statements.
The financial reporting framework that has been applied in their preparation is applicable law and UK adopted IAS, 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 believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Group and the 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.
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
.
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 the 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 engaged with management early to ensure all key factors were considered in their assessment;
We evaluated management’s going concern assessment which included assessing their evaluation of long-term business and
strategic plans, capital adequacy, liquidity, and funding positions. Management 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, climate risk and operational risk;
With the involvement of specialists, we evaluated management's assessment by considering the Group's ability to continue in
operation and meets its liabilities under different scenarios including the impact of the Group's strategic plans, and the current
uncertain geopolitical and economic outlook;
Considered the results of the Group’s stress testing; and
We reviewed the Group’s going concern disclosures included in the annual report for conformity with the reporting standards.
Independent auditor’s report to the members of National Westminster Bank Plc continued
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Annual Report and Accounts 2023
88
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 the 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 and
the Bank’s ability to continue as a going concern.
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.
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 four reporting components of the Group, we selected three
components based on size and risk, which represent the principal reporting legal entities within the Group.
The scoping for the current year is as follows:
Component | Scope | Key locations |
Retail Banking | Full | United Kingdom |
Commercial & Institutional | Full | United Kingdom |
Private Banking | Specific | United Kingdom |
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 | 87% | 13% | 0% | 100% |
Total equity | 85% | 15% | 0% | 100% |
Total income | 93% | 7% | 0% | 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.
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 that has been designed to ensure that the Senior Statutory Auditor, or another Group audit partner, has
ongoing interactions with all in scope and locations, including those outside the United Kingdom. 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
Stakeholders are increasingly interested in how climate change will impact the Group. The Group has determined that the most
significant future impacts from climate change on its operations will be from credit risk, operational risk and reputational risk. These
are explained in the Climate Risk
section within Risk and Capital Management in the Strategic Report, which forms part of the “Other
information”, rather than the audited financial statements. Our procedures on these unaudited disclosures therefore 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, in line with our responsibilities on “Other information”.
In planning and performing our audit we assessed the potential impacts of climate change on the Group’s business and any
consequential material impact on its financial statements.
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2023
89
The Group has explained in the Accounting Policy note how they have reflected the impact of climate change in their financial
statements, and the significant judgements and estimates relating to climate change. The Group notes that many of the impacts will be
longer term in nature, with an inherent level of uncertainty, and have limited effect on accounting judgements and estimates for the
current period under the requirements of UK adopted international accounting standards.
Our audit effort in considering the impact of climate change on the financial statements was focused on evaluating the Group’s
assessment of the impact of climate risk, their climate commitments and the significant judgements and estimates disclosed in the
Accounting Policies, and whether these have been appropriately reflected in the asset values where these are impacted by future cash
flows, and in the timing and nature of liabilities recognised following the requirements of UK adopted international accounting
standards. As part of this evaluation, we performed our own risk assessment, supported by our climate change and economic
specialists, to determine the risk of material misstatement in the financial statements from climate change which needed to be
considered in our audit. We also evaluated the Directors’ considerations of climate change risks in their assessment of going concern
and associated disclosures.
Based on our work, whilst we have not identified the impact of climate change on the financial statements to be a standalone key
audit matter, we have considered the impact within the key audit matter for Expected Credit Loss provisions and Recognition of
deferred tax assets, impairment of goodwill and, in the Bank’s accounts, investments in group undertakings. Details of our procedures
and findings are included in our explanation of key audit matters below.
Key audit matters
Key audit matters are those matters that, in our professional judgement, 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, 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 2023
90
Risk
Our response to the risk
Expected credit loss provisions
At 31 December 2023 the Group reported
total gross loans – amortised cost and
FVOCI of £326.7 billion (2022 -£311.9 billion)
and £2.9 billion of expected credit losses
(ECL) (2022 - £2.6 billion).
Management’s judgements and estimates
are especially subjective due to significant
uncertainty associated with the assumptions
used. These include the impacts of
continuing uncertain geopolitical and
economic outlook, higher for longer interest
rate environment, a protracted period of
inflation that is above the policy target,
refinance risks, stresses on recoverable
values, and potential impacts of climate
change, which were all considered in our risk
assessment.
Aspects with increased
complexity and judgements in respect of the
timing and measurement of ECL include:
Staging
–
Timely allocation of assets to
stage 1, 2, or 3 using criteria in
accordance with IFRS 9.
Models and model assumptions -
Accounting interpretations, modelling
assumptions and data used to build and
run the models that calculate the ECL.
There is also increasing complexity in
assessing the adequacy of model
performance in the protracted period of
inflation and elevated interest rates, since
the historic data used to build these
models is not reflective of the economic
environment in 2023.
Economic scenarios
-
Inputs, assumptions
and weightings used to estimate the
impact of multiple economic scenarios
particularly those influenced by the
continuing uncertain geopolitical and
economic outlook, higher for longer
interest rates and protracted peak of
inflation, including any changes to
scenarios required through 31 December
2023.
Post-model adjustments
-
Appropriateness, completeness and
valuation of post-model adjustments
which represent approximately 13% of
total ECL (2022: 12%), including
adjustments required to address the
limitation of models to adequately
incorporate the risks of inflation, elevated
interest rates, and other geopolitical and
economic uncertainties, and the
identification of vulnerable customers with
higher risks of defaults than currently
reflected; and
Individual provisions
-
Measurement of
individual provisions including the
assessment of multiple scenarios and
probability weights, the impact of the
current uncertain geopolitical and
economic outlook on exit or recovery
strategies, collateral valuations, and time
to collect.
Controls testing
- We evaluated the design and operating effectiveness of controls
over the ECL process, including those over management’s judgements and
estimates. These controls, among others, covered:
the staging of assets per the criteria, and 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 management review of post-model adjustments; and
individual provisions.
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 credit
quality and composition of the Group’s portfolios, risk profile, impact of the current
uncertain geopolitical and economic outlook and climate change on the Group’s
customers. We performed peer benchmarking where available to assess overall
staging and provision coverage levels. We also performed sensitivity analysis to
assess the impact of changing selected key assumptions on the ECL provision.
Staging
- We evaluated the criteria used to allocate a financial asset to stage 1, 2
or 3 in accordance with IFRS 9. We recalculated the staging of the complete
population of assets based on management’s criteria, and performed sensitivity
analysis to assess the impact of different criteria on the ECL and considered the
impact of performing collective staging downgrades to industries, geographic
regions and high risk population particularly impacted by recent economic
conditions and 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, such as commercial real
estate, automotive, retail and leisure.
Models and model assumptions
- We selected a sample of models based on a both
quantitative and qualitative factors. We involved EY modelling specialists to test the
assumptions, inputs, methodology and model build. This included a combination of
assessing model design and formulae, alternative modelling techniques,
recalculating the PD, LGD and EAD, and implementation of new models during the
year. We also considered the results of the Group’s internal model monitoring and
validation results. We performed an assessment of the extent to which model
methodologies developed using historic experience were able to respond to the
current economic conditions, and where we identified model limitations, we tested
the extent to which these effects have been appropriately captured in Post Model
Adjustments.
To evaluate data quality, we agreed a sample of data points to source systems,
including 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.
Economic scenarios
- We involved EY economic specialists to assist us in
evaluating the base case and alternative economic scenarios, including evaluating
probability weights. This assessment included the impacts of the current
geopolitical and economic environment, as well as the impacts of climate change
on the economic variables.
We assessed whether forecasted macroeconomic
variables such as GDP, unemployment rate, Consumer Price Index, UK Stock Price
Index, Bank of England base rates and the House Price Index were appropriate.
With the support of our credit modelling specialists, we evaluated the correlation
and translation of the macroeconomic factors, including the impacts of alternative
paths or weights to ECL.
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NWB Group
Annual Report and Accounts 2023
91
Risk
Our response to the risk
Expected credit loss provisions continued
Post-Model Adjustments
- We have evaluated and tested the appropriateness,
adequacy and completeness of the Post Model Adjustments (PMAs) held at year end.
This included challenging management’s identification of retail customers vulnerable to
price and rate increases, commercial sub-sectors susceptible to inflation and liquidity
challenges, loss given default assumptions, and time to collect. We have also
challenged the appropriateness of PMAs remaining from previous years related to
matters such as COVID-19, by checking the latest default trends in those cohorts. We
also assessed all the PMAs against the risk of double counting of either certain
portfolios/customers or identified risks. With our modelling and economic specialists,
we assessed the risk of bias and the completeness of these adjustments by
considering the data, judgements, 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 samples considered higher risk sectors identified with reference to
external sources, such as commercial real estate,
manufacturing, automotive, health,
retail, and leisure. We considered the impact of the current geopolitical and economic
outlook and climate change had on collateral valuations and time to collect as well as
whether planned exit strategies remained viable.
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 Group Audit Committee that contributed to our overall conclusion:
Effectiveness of the overall control environment, including the compensating controls identified by management, where
deficiencies were identified.
Results of our testing of models and model assumptions, including the reasonableness of the macroeconomic variables used.
The accuracy of staging, including considering management override, and our independent sensitivity analysis on the staging
criteria to assess appropriateness.
Reasonableness and adequacy of the post-model adjustments recorded to reflect risk in the portfolios.
For individually assessed impairments, the overall reasonableness of the provisions, including assumptions applied.
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 2023
92
Risk
Our response to the risk
Provisions for customer redress, litigation and other regulatory matters
At 31 December 2023, the Group has
reported £0.5 billion (2022 - £0.6 billion) of
provisions for liabilities and charges, including
£0.2 billion (2022 - £0.3 billion) for customer
redress, litigation and other regulatory matters
as detailed in Note 21 of the financial
statements.
The Group operates in an industry where it is
subject to regulatory scrutiny and
investigations, litigation and customer
remediation. Significant management
judgement is required when accounting for
provisions and contingent liabilities, including;
Determining whether a present obligation
exists and therefore whether a provision
should be recorded and subsequently
measured in accordance with IAS 37
Provisions, Contingent Liabilities and
Contingent Assets, as at 31 December
2023.
Estimating the probability and amount of
any outflow of resources embodying
economic benefits, including through the
selection and use of assumptions in the
provision.
Assessing the adequacy of disclosures.
Controls testing
: We tested the design and operating effectiveness of the Group’s
controls over the identification, completeness, estimation and monitoring of
provisions and disclosures. Our procedures included testing management’s
controls to determine whether a provision is required and the completeness and
accuracy of data used in the process.
Provision assessment
:
We assessed the risks facing the Group, including the status
of any investigations and implications of these on the Group’s provisions. We
tested management’s assessment of the potential outcomes, including the
evaluation of assumptions and completeness of the data considered in making
these assessments.
Where no provision was booked by management, we
critically challenged this conclusion with reference to the requirements of IAS 37.
Where relevant we undertook this assessment with the input of our specialists,
including conduct specialists.
Inquiry of legal counsel:
We conducted inquires with internal legal counsel and
where relevant, obtained, and reviewed reports from external counsel to evaluate
the existence of the obligation and / or management’s estimate of the outflow at
year-end.
Examination of regulatory and legal correspondence
: We examined the relevant
regulatory and legal correspondence to assess factual developments. 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.
Disclosure
: We evaluated whether the disclosures provided in the financial
statements fairly reflect the facts and key sources of uncertainty.
Key observations communicated to the NWH Group Audit Committee
Based on the procedures performed and evidence obtained, we are satisfied that provisions for liabilities and charges were
reasonable and recognised in accordance with IFRS. We highlighted the following matters to the Group Audit Committee that
contributed to our overall conclusion:
Effectiveness of the overall control environment over the Group's process for concluding whether a provision or disclosure
should be recorded and how such matters are measured.
Reasonableness of the methodologies, judgements and assumptions used by management to conclude upon the recognition of
the related balances.
The fact that we did not identify any material unrecorded provisions or disclosures.
Relevant references in the Annual Report and Accounts
Accounting policies
Note 21 and 26 to the financial statements
Independent auditor’s report to the members of National Westminster Bank Plc continued
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Annual Report and Accounts 2023
93
Risk
Our response to the risk
Impairment of investments in group undertakings and recognition of deferred tax assets in the Bank’s financial statements
At 31 December 2023, the Group has
reported net deferred tax assets of £0.9
billion (2022 - £1.1 billion) and
investments in group undertakings of
£2.6 billion (2022 - £2.0 billion).
Management have assessed whether
sufficient taxable profits will be generated
in future years to recover any deferred
tax assets recognised and concluded that
net deferred tax assets recognised on
the balance sheet are recoverable.
Management reviewed investments in
subsidiaries of the Bank, as at 31
December 2023, for indicators of
impairment or that impairment charges
recognised in prior periods should be
reversed in accordance with IAS 36.
Where indicators have been identified,
management assess any asset
impairment based upon value in use. As
a result of the assessment management
concluded that in the Bank’s accounts
the carrying amount investments in
group undertakings is recoverable.
These estimates are based on the five-
year revenue and cost forecasts, which
are more susceptible to management
override due to the following inherent
uncertainties involved determining the
forecast:
Profitability estimates, including costs,
ECL and the impact of climate within
business planning.
Macro-economic assumptions; and
Capital forecasts.
Controls testing:
We evaluated the design and operating effectiveness of controls over
the key judgemental inputs (macro-economic assumptions including interest rates,
business forecasts and capital). In addition, we have assessed the controls over the
methodology, models and methods utilised in the value in use and deferred tax assets
assessment.
We have also performed test of details to evaluate the recoverability of DTA and
Investments in group undertakings through:
Assumption and model testing:
-
Tested mathematical accuracy of the models and calculations utilised in the value
in use and DTA processes.
-
Challenged the reasonableness and achievability of management forecasts from
a combination of historical performance, benchmarking with external data and
evaluating underlying business strategies.
-
Engaged specialists to evaluate the appropriateness of significant assumptions
(macroeconomic and modelling assumptions).
-
Engaged taxation specialists to assess the deferred tax model including an
assessment of the time horizon used for the recoverability of losses and other
temporary differences.
Disclosure
:
We challenged and verified the adequacy of the information disclosed in the
consolidated (and for investment in subsidiaries, in the Bank’s annual accounts in
accordance with applicable standards and regulations.
Key observations communicated to the NWH Group Audit Committee
We are satisfied that the carrying value of deferred tax assets and, in the Bank’s accounts, investments in group undertakings,
were reasonable and recognised in accordance with IFRS. We highlighted the following matters to the NWH Group Audit
Committee that contributed to our overall conclusion:
Effectiveness of the overall control environment, including management’s identification of compensating controls where
deficiencies were identified;
Reasonableness of the methodologies, judgments and assumptions used by management to conclude upon the recognition of
the related balances;
Management's approach to estimating the recoverable amounts for the subsidiaries of the Group is reasonable; and
Appropriateness of the disclosures in relation deferred tax assets and in the Bank’s accounts, investments in group
undertakings.
Relevant references in the Annual Report and Accounts
Accounting policies
Note 7 and Note 14 to the financial statements
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2023
94
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 2023, the Group
reported a net pension liability of £32 million
(2022 - £28 million) comprising £5 million of
schemes in surplus and £37 million of schemes
in deficit (2022 - £7 million and £35 million
respectively). The net pension balance is
sensitive to changes in the key judgements
and estimates, including the effects of the
current uncertain geopolitical and economic
outlook and associated market volatility,
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;
Funding
– the pension schemes have
adequate liquidity to cover for any shortfall
in derivative asset prices as a result of
current economic conditions; and
Augmentation cap
-
Quantification of
trustees’ 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 defined benefit obligation process including the setting of actuarial
assumptions, 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 used to calculate the defined benefit obligation by comparing them to
ranges independently developed from 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, and whether these were supported by
objective external evidence and rationales, including the effects of current
uncertain geopolitical and economic outlook, including market volatility.
Valuations
- We tested the fair value of scheme assets by independently
calculating the fair value for a sample of the assets held. Our sample included
cash, equity and debt instruments, derivative financial instruments, and illiquid
assets. We involved our valuation specialists to assess the appropriateness of
management’s valuation methodology including the judgements made in
determining significant assumptions used in the valuation of complex and illiquid
pension assets, including the effects of current uncertain geopolitical and economic
outlook, including market volatility. We independently re-priced illiquid and complex
assets that had been valued using unobservable market inputs, using alternative
pricing sources where available, to evaluate management’s valuations.
Funding
–
We assessed whether the pension schemes have adequate funding to
cover for any shortfall in derivative asset prices given the current economic
conditions.
Augmentation cap and equalisation adjustments
- We involved our actuarial
specialists to assess the estimation of the Augmentation cap including the inputs
used in the calculation. We also assessed the methodology and judgements 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, sensitivities and
disclosures over investment strategy and risk management.
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 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 reasonable and the methodology consistent with IAS 19
and IFRIC 14
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 2023
95
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 daily, 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
growing 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 similar thematic issues have
been noted in the current year, and thus 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.
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 ensuring the completeness of user data, automated
identification of movers and leavers and the adequacy of the overall control
environment in addressing access-related IT risks to financial reporting. There
have been no significant changes in the suite of access management controls
operated by the Group in the current year.
For systems outsourced to third party service providers, we tested IT general
controls through evaluating the relevant Service Organisation Controls (“SOC”)
reports (where available). This included assessing the timing of the reporting, the
controls tested by the service auditor and whether they addressed 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 risks to financial reporting.
Several
systems have been migrated to a cloud-hosted infrastructure model, however
access management processes and controls remained in-house, and they formed
part of our testing.
Where control deficiencies were identified, we tested remediation activities
performed by management and/or compensating controls in place and assessed
the impact, of any residual risk over financial statement reporting. We also
performed a further aggregation analysis of access management deficiencies
identified by EY, management, and Internal Audit to consider the pervasiveness of
findings identified, and the impact on our overall approach to access management
testing. We noted that no further changes to our approach were required.
Key observations communicated to the NWH Group Audit Committee
Based on our testing procedures, including validating management’s remediation activities, and testing of compensating controls, we
are satisfied that reliance can be placed upon IT controls impacting material financial reporting systems. The following matters were
reported to the NWH Group Audit Committee:
IT control deficiencies were identified in relation to privileged access management. These deficiencies in the audit period
resulted in an increased risk in relation to data, reports and automated system functionality within the impacted systems.
However, overall, in combination with compensating controls, we are satisfied that the Group’s overall IT control environment
appropriately supports the financial reporting process.
While improvements have been made to further standardise IT access management processes and controls, there are still IT
applications relevant to financial reporting which make use of bespoke tools and/or processes to perform access-related
controls. Control deficiencies continued to be observed in these areas, which led to an increase in the overall number of
reported IT control deficiencies requiring remediation by management.
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2023
96
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 £246 million (2022 -£267 million), which is 5% (2022 - 5%) of profit before tax of the
Group of £4,789 million (2022 - £5,114 million) adjusted for non-recurring conduct and litigation costs. We believe removing these non-
recurring charges 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 £181 million (2022 - £182 million) which is 0.8% (2022 - 1%) of equity of the Bank.
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 2023
97
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 judgement was
that performance materiality was 75% (2022 -75%) of our planning materiality, namely £185 million (2022 -£200 million).
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 £102 million to £162 million (2022
-£46 million to £133 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 £12
million (2022 - £13 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.
Independent auditor’s report to the members of National Westminster Bank Plc continued
NWB Group
Annual Report and Accounts 2023
98
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.
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 banking regulatory bodies
in relevant jurisdictions; reviewed minutes of the Board and Risk Committees; and gained an understanding of the Group’s
governance framework.
Conducted a review of correspondence with and reports from the banking regulators in relevant jurisdictions, including the PRA
and the FCA.
Carried out an assessment of matters reported on the group’s whistleblowing programmes where these related to the financial
statements.
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 assessed the risks of fraud in our
key audit matters. Our procedures over our key audit matters and other significant accounting estimates included challenging
management on the assumptions and judgments made in determining these estimates.
We designed our audit procedures to identify non-compliance with laws and regulations. Our procedures involved inquiries of legal
counsel, executive management, internal audit and reading reports of reviews performed by external legal counsel. We also tested
controls and performed procedures to respond to any financial statement impacts of non-compliance with laws and regulations
through our work in response to the Provisions for customer redress, litigation and other regulatory matters, key audit matter.
These procedures were performed by both the primary team and component teams with oversight from the primary team.
Identified and tested journal entries, including those posted with certain descriptions or unusual characteristics, backdated journals
or posted by infrequent and unexpected users.
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 8 years, covering periods from
our appointment through 31 December 2023.
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.
Micha Missakian (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London, United Kingdom
15 February 2024
Consolidated income statement
For the year ended 31 December 2023
NWB Group
Annual Report and Accounts 2023
99
2023
2022
Note
£m
£m
Interest receivable
Interest payable
(6,741 )
(1,627 )
Net interest income
1
Fees and commissions receivable
Fees and commissions payable
(508 )
(493 )
Other operating income
Non-interest income
2
Total income
Staff costs
(3,109 )
(2,896 )
Premises and equipment
(1,039 )
(994 )
Other administrative expenses
(1,768 )
(1,630 )
Depreciation and amortisation
(877 )
(768 )
Operating expenses
3
(6,793 )
(6,288 )
Profit before impairment losses
Impairment losses
13
(504 )
(341 )
Operating profit before tax
Tax charge
7
(1,280 )
(1,425 )
Profit for the year
Attributable to:
Ordinary shareholders
Paid-in equity holders
Non-controlling interests
(1 )
Consolidated statement of comprehensive income
For the year ended 31 December 2023
2023
2022
£m
£m
Profit for the year
Items that do not qualify for reclassification
Remeasurement of retirement benefit schemes
(147 )
(556 )
Tax
(107 )
(410 )
Items that do qualify for reclassification
FVOCI financial assets
(392 )
Cash flow hedges
(1)
(290 )
(542 )
Currency translation
(17 )
(2 )
Tax
(191 )
(660 )
Other comprehensive loss after tax
(298 )
(1,070 )
Total comprehensive income for the year
Attributable to:
Ordinary shareholders
Paid-in equity holders
Non-controlling interests
(1 )
(1)
Refer to footnotes 2 and 3 of the statement in changes in equity.
The accompanying notes on pages 110 to 172, the accounting policies on pages 104 to 109 and the audited sections of the Financial
review and Risk and capital management on pages 7 to 77 form an integral part of these financial statements
.
Balance sheet
As at 31 December 2023
NWB Group
Annual Report and Accounts 2023
100
NWB Group
NWB Plc
2023
2022
2023
2022
Note
£m
£m
£m
£m
Assets
Cash and balances at central banks
9
48,238
73,062
Derivatives
12
3,213
4,430
Loans to banks - amortised cost
9
3,043
2,870
Loans to customers - amortised cost
9
284,314
267,401
Amounts due from holding companies and fellow subsidiaries
9
33,499
32,133
Securities subject to repurchase agreements
6,469
2,140
Other financial assets excluding securities subject to repurchase agreements
24,623
12,040
Other financial assets
15
31,092
14,180
Investment in group undertakings
14
2,615
2,030
Other assets
16
5,735
5,641
Total assets
411,749
401,747
Liabilities
Bank deposits
9
18,052
16,059
Customer deposits
9
276,202
281,558
Amounts due to holding companies and fellow subsidiaries
9
84,174
75,037
Derivatives
12
2,014
2,582
Other financial liabilities
19
8,147
4,525
Subordinated liabilities
20
119
191
Notes in circulation
806
809
Other liabilities
21
2,534
2,743
Total liabilities
392,048
383,504
Owners' equity
22
19,701
18,243
Non-controlling interests
-
-
Total equity
19,701
18,243
Total liabilities and equity
411,749
401,747
Owners’ equity of NWB Plc as at 31 December 2023 includes the profit for the year of £3,625 million (2022- £3,457 million).
The accompanying notes on pages 110 to 172, the accounting policies on pages 104 to 109 and the audited sections of the Financial
review and Risk and capital management on pages 7 to 77 form an integral part of these financial statements
.
Howard Davies
John-Paul Thwaite
Katie Murray
National Westminster Bank Plc
Chairman
Chief Executive Officer
Chief Financial Officer
Statement of changes in equity
For the year ended 31 December 2023
NWB Group
Annual Report and Accounts 2023
101
NWB Group
NWB Plc
2023
2022
2023
2022
Note
£m
£m
£m
£m
Called-up share capital - at 1 January and 31 December
22
1,678
1,678
Paid-in equity - at 1 January
2,518
2,377
Redeemed
(359 )
-
(359)
Issued
-
500
At 31 December
22
2,518
2,518
Share premium account - at 1 January and 31 December
2,225
2,225
Merger reserve - at 1 January
(2)
(89)
Additions
-
-
Amortisation
(49 )
2
87
At 31 December
-
(2)
FVOCI reserve - at 1 January
(76 )
(76)
193
Unrealised losses
(485 )
(11)
(486)
Realised losses
43
93
Tax
(8 )
(8)
124
At 31 December
(41 )
(76 )
(52)
(76)
Cash flow hedging reserve - at 1 January
(391 )
(1 )
(393)
(2)
Amount recognised in equity
(2)
(180 )
(283 )
(180)
(288)
Amount transferred from equity to earnings
(3)
(110 )
(259 )
(109)
(255)
Tax
81
152
At 31 December
(600 )
(391 )
(601)
(393)
Foreign exchange reserve - at 1 January
(87 )
(85 )
(18)
(16)
Retranslation of net assets
(31 )
(12)
31
Foreign currency gains/(losses) on hedges of net assets
(31 )
12
(33)
At 31 December
(104 )
(87 )
(18)
(18)
Capital redemption reserve - at 1 January and 31 December
820
820
Retained earnings - at 1 January
11,491
11,980
Profit attributable to ordinary shareholders and other equity owners
3,625
3,457
Paid-in equity dividends paid
(142 )
(120 )
(142)
(120)
Ordinary dividends paid
(1,738 )
(3,293 )
(1,738)
(3,293)
Redemption/reclassification of paid-in equity
- gross
(29 )
-
(29)
- tax
(6 )
-
(6)
Remeasurement of the retirement benefit schemes
- gross
(147 )
(556 )
(139)
(565)
- tax
39
146
Share-based payments
- gross
10
6
- tax
(13 )
(13)
2
Amortisation of merger reserve
(39 )
(2)
(87)
At 31 December
13,131
11,491
For the notes to this table refer to the following page.
Statement of changes in equity for the year ended 31 December 2023 continued
NWB Group
Annual Report and Accounts 2023
102
NWB Group
NWB Plc
2023
2022
2023
2022
£m
£m
£m
£m
Owners' equity at 31 December
19,701
18,243
Non-controlling interests - at 1 January
-
-
(Loss)/profit attributable to non-controlling interests
(1 )
-
-
Dividends paid
(5 )
(5 )
-
-
Acquisition of subsidiary
-
-
At 31 December
-
-
Total equity at 31 December
19,701
18,243
Attributable to:
Ordinary shareholders
17,183
15,725
Paid-in equity holders
2,518
2,518
Non-controlling interests
-
-
19,701
18,243
(1)
The total distributable reserves for NWB Plc is £12,460 million (2022 – £11,002 million). Refer to Note 22 for additional information.
(2)
The change in the cash flow hedging reserve is driven by realised accrued interest transferred into the income statement and a decrease in swap rates compared to previous periods.
(3)
The portfolio of hedging instruments is predominantly pay fixed swaps.
(4)
As referred to in Note 12, the amount transferred from equity to the income statement is mostly recorded within net interest income mainly on loans to customers – amortised cost,
balances at central banks and loans to banks – amortised cost, and customer deposits as referred to in Note 1.
The accompanying notes on pages 110 to 172, the accounting policies on pages 104 to 109 and the audited sections of the Financial
review and Risk and capital management on pages 7 to 77 form an integral part of these financial statements
.
Cash flow statement
For the year ended 31 December 2023
NWB Group
Annual Report and Accounts 2023
103
NWB Group
NWB Plc
2023
2022
2023
2022
Note
£m
£m
£m
£m
Cash flows from operating activities
Operating profit before tax
4,705
4,687
Adjustments for:
Non-cash and other items
28
396
756
Changes in operating assets and liabilities
28
(10,132 )
(45,270 )
(8,999)
(45,374)
Income taxes paid
(780 )
(1,161 )
(484)
(998)
Net cash flows from operating activities
(1,2)
(4,794 )
(39,743 )
(4,382)
(40,929)
Cash flows from investing activities
Sale and maturity of other financial assets
17,887
25,339
Purchase of other financial assets
(35,090 )
(13,388 )
(34,249)
(13,022)
Income received on other financial assets
435
371
Net movement
in business interests and intangible assets
27
(724 )
(992 )
(1,188)
(719)
Dividends received from subsidiaries
617
1,010
Sale of property, plant and equipment
34
82
Purchase of property, plant and equipment
(787 )
(618 )
(544)
(316)
Net cash flows from investing activities
(17,805 )
(17,008)
12,745
Cash flows from financing activities
Issue of paid-in equity
-
500
Redemption of paid-in equity
(388 )
-
(388)
Issue of subordinated liabilities
1,263
-
Redemption of subordinated liabilities
(539 )
(55 )
(539)
(55)
Interest paid on subordinated liabilities
(145 )
(145 )
(120)
(144)
Issue of MRELs
441
700
Maturity and redemption of MRELs
(157 )
(107)
-
Interest paid on MRELs
(293 )
(202 )
(261)
(191)
Dividends paid
(1,885 )
(3,418 )
(1,880)
(3,413)
Net cash flows from financing activities
29
(1,315 )
(2,958 )
(1,203)
(2,991)
Effects of exchange rate changes on cash and cash equivalents
(403 )
(397)
1,101
Net decrease in cash and cash equivalents
(24,317 )
(30,327 )
(22,990)
(30,074)
Cash and cash equivalents at 1 January
75,472
105,546
Cash and cash equivalents at 31 December
30
52,482
75,472
(1)
NWB Group includes interest received of £14,320 million (2022 - £9,167 million) and interest paid of £6,043 million (2022 - £1,412 million), and NWB Plc includes interest received of
£13,338 million (2022 – £8,421 million) and interest paid of £6,259 million (2022 - £1,623 million).
(2)
The total cash outflow for leases for NWB Group was £100 million (2022 - £130 million) and for NWB Plc £89 million (2022 - £119 million). This included payment of principal for NWB
Group of £84 million (2022 - £111 million) and NWB Plc of £76 million (2022 - £99 million). These amounts are included in the operating activities in cash flow statement.
The accompanying notes on pages 110 to 172, the accounting policies on pages 104 to 109 and the audited sections of the Financial
review and Risk and capital management on pages 7 to 77 form an integral part of these financial statements.
statements are presented in the functional currency, pounds
sterling.
The audited financial statements include audited sections of the
Risk and capital management section. 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 (refer to the Report of the
directors) and in accordance with UK adopted International
Accounting Standards (IAS), and International Financial Reporting
Standards (IFRS) as issued by the International Accounting
policies and related judgements are set out below.
The financial statements are presented on a historical cost basis
except for certain financial instruments and investment
properties which are stated at fair value.
The effect of the amendments to IFRS effective from 1 January
2023 on our financial statements was immaterial.
We have applied the exception issued by the IASB in May 2023
from the accounting requirements for deferred taxes in IAS 12
Income taxes in respect of Pillar Two income taxes. Accordingly,
we have not recognised or disclosed information about deferred
tax assets and liabilities related to Pillar Two income taxes.
NWB Plc and the entities it controls. Control arises when we have
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.
We apply accounting for associates and joint arrangements to
entities where we have significant influence, but not control, over
the operating and financial policies. We assess significant
influence by reference to a presumption of voting rights of more
than 20%, but less than 50%, supplemented by a qualitative
assessment of substantive rights which include representation at
the Board of Directors, significant exchange of managerial
personnel or technology amongst others.
Investments in associates and joint ventures are recorded upon
initial recognition at cost, increased or decreased each period by
the share of the subsequent levels of profit or loss, and other
and estimates
Business planning
Key financial estimates are based on management's latest five-
year revenue and cost forecasts. The outputs from this forecast
affect forward-looking accounting estimates.
Measurement of deferred tax and expected credit losses are
highly sensitive to reasonably possible changes in those
anticipated conditions. In 2023, our scenario planning was
enhanced by the further integration of NatWest Group’s climate
transition plan, including the assessment of climate-related risks
and opportunities.
Our Climate transition plan includes an assessment of:
changes in products, services and business operations
to support customer transition towards net zero;
financial impacts of supporting customer transition,
including investment required. The linkage between our
financial plan and our Climate transition plan will
continue to be developed and refreshed annually as
part of the financial planning cycle;
the climate impact of policies, using the UK Climate
Change Committee (UK CCC) Balanced Net Zero (BNZ)
pathway scenario, aligned with the UK’s Sixth Carbon
Budget. In addition, we have used the credibility ratings
for sectoral policies provided by the UK CCC 2023
Progress Report, published in June, to the Parliament to
develop a BNZ adjusted pathway to reflect estimated
time delays of these policies.
There remains considerable uncertainty regarding this policy
response, including the effect of wider geo-political
uncertainty on governmental ambitions regarding climate
transition and the effect of decarbonisation on wider
economic growth, technology development and customer
behaviours.
Information used in other accounting estimates
We make use of reasonable and supportable information to make
accounting judgements 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
our 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 judgements 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 use of market indicators as inputs to fair value is
assumed to include current information and knowledge
regarding the effect of climate risk.
Effect of climate change in the estimation of expected credit
loss
We are monitoring the effect of the physical and transition
consequences of climate change on our experience of loan loss.
We use available information regarding the effect of climate
transition policy largely driven by carbon prices as an adjustment
to macroeconomic factors that are used as inputs to the models
that generate PD and LGD outcomes, which are key inputs to
the ECL calculation. The determination of whether specific loss
drivers and climate events generate specific losses is ongoing
and is necessary to determine how sensitive changes in ECL
could be to climate inputs.
Future cashflows are discounted, so long dated cashflows are
less likely to affect current expectations on credit loss. Our
assessment of sector specific risks, and whether additional
adjustments are required, include expectations of 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
ccounting policies continued
A
The judgements and assumptions involved in our accounting policies that are considered by the Board to be the most important to the
portrayal of our financial condition are noted below. The use of estimates, assumptions or models that differ from those adopted by us
would affect our reported results. Management’s consideration of uncertainty is outlined in the relevant sections, including the ECL
estimate in the Risk and capital management section.
Information used for significant estimate
Further | |||
Policy | Judgement | Estimate | information |
Deferred tax | Determination of whether sufficient sustainable | Our estimates are based on the five-year | Note 7 |
taxable profits will be generated in future years | revenue and cost forecasts (which inherent | ||
to recover the deferred tax asset. | uncertainties). | ||
Fair value – | Classification of a fair value instrument as level 3, | Estimation of the fair value, where it is | Note 10 |
financial | where the valuation is driven by unobservable | reasonably possible to have alternative | |
instruments | inputs. | assumptions in determining the FV. | |
Loan | Definition of default against which to apply PD, | ECL estimates contain a number of | Note 13 |
impairment | LGD and EAD models. Selection of multiple | measurement uncertainties (such as the | |
provisions | economic scenarios. | weighting of multiple economic scenarios) and | |
Criteria for a significant increase in credit risk. | disclosures include sensitivities to show impact | ||
Identification of risks not captured by the models. | on other reasonably possible scenarios. | ||
Provisions for | Determination of whether a present obligation | Provisions remain sensitive to the assumptions | Note 21 |
liabilities and | exists in respect of customer redress, litigation | used in the estimate. We consider a wide range | |
charges | and other regulatory, property and other | of possible outcomes. It is often not practical to | |
provisions. Legal proceedings often require a high | meaningfully quantify ranges of possible | ||
degree of judgement and these are likely to | outcomes, given the uncertainties involved. | ||
change as the matter progresses. | |||
Investment in | Our estimates are based on the five-year | Note 14 | |
Group | revenue and cost forecasts (which include | ||
undertakings | inherent uncertainties). | ||
(parent | Long term growth rate and discount rate are | ||
company | subject to uncertain factors. | ||
only) |
Deferred tax is the estimated 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 in the future. 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 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 asset recoverability is based on the level of
supporting offsetable deferred tax liabilities we have and of our
future taxable profits. These future taxable profits are based on
our five-year revenue and cost forecasts 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. The long term growth rate
reflects external indicators which will include market expectations
on climate risk. We do not consider any additional adjustments to
We measure financial instruments at fair value when they are
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 and they are recognised in
the financial statements at fair value. All derivatives are measured
at fair value.
We manage some portfolios of financial assets and financial
liabilities based on our 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 (refer to ‘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.
The use of market indicators as inputs to fair value is assumed to
include current information and knowledge regarding the effect of
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.
NWB Group
Annual Report and Accounts 2023
105
Accounting policies continued
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.
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. Our assessment of sector
specific risks, and whether additional adjustments are required,
include expectations of the ability of those sectors to meet their
financing needs in the market. Changes in credit risk appetite and
how we manage credit positions that stem from climate
considerations, such as oil and gas, will directly affect our
positions.
Judgement is exercised as follows:
Models
–
in certain low default portfolios, Basel parameter
estimates are also applied for IFRS 9.
Non-modelled portfolios
–
use a standardised capital
requirement under Basel II. Under IFRS 9, they have bespoke
treatments for the identification of 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 our 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 we conclude 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 our
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
We recognise a provision for a present obligation resulting from a
past event when it is more likely than not that we 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 we have a constructive obligation. An
obligation exists when we have a detailed formal plan for the
restructuring and have raised a valid expectation in those affected
either by starting to implement the plan or by announcing its main
features.
We recognise any onerous cost of the present obligation under a
contract as a provision. An onerous cost is the unavoidable cost
of meeting our contractual obligations that exceed the expected
economic benefits. When we intend 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
Our investments in Group undertakings (subsidiaries) are stated at
3. Material accounting polices
Interest receivable and payable 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.
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
Employee costs, such as salaries, paid absences, and other
benefits are recognised over the period in which the employees
provide the related services to us. Employees may receive
variable compensation in cash, in deferred cash or debt
instruments of NatWest Group or in ordinary shares of NatWest
Group plc subject to deferral, clawback and forfeiture criteria. We
operate a number of share-based compensation schemes under
which we grant awards of NatWest Group plc shares and share
options to our 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, cancelation and forfeiture criteria
with a corresponding increase in equity.
NWB Group
Annual Report and Accounts 2023
106
Accounting policies continued
3. Material accounting polices continued
The fair value of shares granted is the market price adjusted for
the expected effect of dividends as employees are not entitled to
dividends until shares are vested.
The fair value of options granted is determined using option
pricing models to estimate the numbers of shares likely to vest.
These consider the exercise price of the option, the current share
price, the risk-free interest rate, the expected volatility of the
share price over the life of the option and other relevant factors
Defined contribution pension scheme
A scheme where we pay fixed contributions and; there is no legal
or constructive obligation to pay further contributions or benefits.
Contributions are recognised in the income statement as
employee service costs accrue.
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 us in the form of refunds
from the plan or reduced contributions to it.
We will recognise a liability where a minimum funding requirement
exists for any of our 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 we only include contributions that
are substantively or contractually agreed and do not include
contingent and discretionary features, including dividend-linked
contributions or contributions subject to contingent events
requiring future verification.
We will recognise a net defined benefit asset when the net defined
benefit surplus can generate a benefit in the form of a refund or
reduction in future contributions to the plan. The net benefit
pension asset is recognised at the present value of the benefits
that will be available to us excluding interest and the effect of the
asset ceiling (if any, excluding interest). Changes in the present
value of the net benefit pension asset are recognised immediately
in other comprehensive income.
In instances where Trustees have the ability to declare
augmented benefits to participants, we do not recognise a defined
benefit pension asset and write-off the surplus immediately in
Intangible assets are identifiable non-monetary assets without
physical substance acquired or developed by us, and are stated at
cost less accumulated amortisation and impairment losses.
Amortisation is a method to spread the cost of such assets over
time in 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 10 years |
Other acquired intangibles | 3 to 5 years |
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 three years are also reported
Goodwill is tested for impairment annually or more frequently if
events or changes in circumstances indicate that it might be
impaired
At each balance sheet date, we assess whether there is any
indication that other intangible assets or property, plant and
equipment are impaired. If any such indication exists, we estimate
the recoverable amount of the asset and compare it to its balance
sheet value to calculate if an impairment loss should be
recognised in the income statement. A reversal of an impairment
loss on other 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
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.
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
NWB Group
Annual Report and Accounts 2023
107
Accounting policies continued
The estimated useful lives of our 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.
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
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
Tax encompassing current tax and deferred tax is recognised in
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.
Accounting for taxes is judgemental and carries a degree of
uncertainty because tax law is subject to interpretation, which
might be questioned by the relevant tax authority. We recognise
the most likely current and deferred tax liability or asset, assessed
for uncertainty using consistent judgements 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
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 (MFVTPL)
measured at fair value and changes in fair value reported in
the income statement; or
designated at fair value through profit or loss (DFV)
measured
at fair value and changes in fair value reported in the income
statement.
Classification by business model reflects how we manage our
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. When a significant change to our business is
communicated to external parties, we reassess our business
model for managing those financial assets. We reclassify financial
assets if we have a significant change to the business model. A
reclassification is applied prospectively from the reclassification
date.
The contractual terms of a financial asset; any leverage features;
prepayment and extension terms; and discounts or penalties to
interest rates that are part of meeting environmental, social and
governance targets as well as other contingent and leverage
features, non-recourse arrangements and features that could
modify the timing and/or amount of the contractual cash flows
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 for non-monetary assets
(equity shares) the cumulative
gains or losses are transferred
directly to retained earnings.
Regular way purchases and sales 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.
NWB Group
Annual Report and Accounts 2023
108
Accounting policies continued
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
Financial assets and financial liabilities are offset, and the net
amount presented on the balance sheet when, and only when, we
currently have a legally enforceable right to set off the recognised
amounts and we intend either to settle on a net basis or to realise
the asset and settle the liability simultaneously. We are party to a
number of arrangements, including master netting agreements,
that give us the right to offset financial assets and financial
liabilities, but where we do not intend to settle the amounts net or
simultaneously, the assets and liabilities concerned are presented
We classify a financial instrument that we issue 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 we evidence a residual
interest in our assets after the deduction of liabilities. Incremental
costs and related tax that are directly attributable to an equity
Derivatives are reported on the balance sheet at fair value. We
use derivatives to manage our 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 the 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 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.
When designating a hedging relationship, we consider: the
economic relationship between the hedged item (including the risk
being hedged) and the hedging instrument; the nature of the risk;
the risk management objective and strategy for undertaking the
hedge; and the appropriateness of the method that will be used to
assess hedge effectiveness.
Designated hedging relationships must be expected to be highly
effective both on a prospective and retrospective basis. This is
assessed using regression techniques which model the degree of
offsetting between the changes in fair value or cash flows
attributable to the hedged risk and the changes in fair value of the
designated hedging derivatives. Ineffectiveness is measured based
on actual levels of offsetting and recognised in the income
statement.
We enter into three types of hedge accounting relationships.
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
International Financial Reporting Standards
Effective 1 January 2024
Classification of Liabilities as Current or Non-current
(Amendments to IAS 1)
Non-current Liabilities with Covenants (Amendments to IAS 1)
Lease Liability in a Sale and Leaseback (Amendments to IFRS
16)
Supplier Finance Arrangements (Amendments to IAS 7 and
IFRS 7)
Effective 1 January 2025
Lack of Exchangeability (Amendments to IAS 21)
We are assessing the effect of adopting these amendments on our
NWB Group
Annual Report and Accounts 2023
109
Notes to the financial statements
2023 | 2022 | |
£m | £m | |
Balances at central banks and loans to banks - amortised cost | 1,272 | 981 |
Loans to customers - amortised cost | 12,394 | 7,883 |
Amounts due from holding companies and fellow subsidiaries | 133 | 41 |
Other financial assets | 965 | 254 |
Interest receivable | 14,764 | 9,159 |
Bank deposits | 849 | 267 |
Customer deposits | 3,042 | 335 |
Amounts due to holding companies and fellow subsidiaries | 2,262 | 777 |
Other financial liabilities | 576 | 189 |
Subordinated liabilities | 12 | 59 |
Interest payable | 6,741 | 1,627 |
Net interest income | 8,023 | 7,532 |
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 of £480 million (2022 - £310 million) which is
recognised at a constant periodic rate of return before tax on the net investment.
2023 | 2022 | |
£m | £m | |
Net fees and commissions (1) | 1,669 | 1,626 |
Other operating income | ||
Gain on redemption of own debt | 234 | - |
Operating leases and other rental income | 237 | 233 |
Changes in fair value of other financial assets held at mandatory fair value through profit or loss (2) | 1 | (12) |
Hedge ineffectiveness | 23 | 20 |
Net income from economic hedging (3) | 468 | 777 |
Gain/(loss) on disposal of amortised cost assets | 7 | (17) |
Loss on disposal of fair value through other comprehensive income assets | (43) | (92) |
Loss on sale of property, plant and equipment | (50) | (5) |
Share of loss of associated entities | (3) | (6) |
Legal entity recharges (4) | 1,542 | 1,616 |
Other income | (22) | 71 |
2,394 | 2,585 | |
Non-interest income | 4,063 | 4,211 |
(1)
Refer to Note 4 for further analysis.
(2)
Includes instruments that have failed solely payment of principal and interest testing under IFRS 9.
(3)
Includes fair value changes on derivatives which have not been designated in a hedge accounting relationship and gains and losses from the management of the NWB Group’s funding
requirements involving the use of derivatives including foreign exchange derivatives. These are aimed at managing the interest rate and foreign exchange risk that NWB Group is
exposed to.
(4)
Income from recharging shared services to other NatWest Group subsidiaries.
NWB Group
Annual Report and Accounts 2023
110
Notes to the financial statements continued
2023 | 2022 | |
£m | £m | |
Wages, salaries and other staff costs | 2,407 | 2,138 |
Temporary and contract costs | 163 | 207 |
Social security costs | 289 | 263 |
Pension costs | 250 | 288 |
- defined benefit schemes (Note 5) | 89 | 154 |
- defined contribution schemes | 161 | 134 |
Staff costs | 3,109 | 2,896 |
Premises and equipment | 1,039 | 994 |
Depreciation and amortisation | 877 | 768 |
Other administrative expenses (1) | 1,768 | 1,630 |
Administrative expenses | 3,684 | 3,392 |
6,793 | 6,288 |
(1)
NWB Group provides shared services to NatWest Group. Costs incurred are recovered through legal entity recharging, recorded in
Other operating income.
For accounting policy information refer to Accounting policies 3.2, 3.3, 3.4 and 3.5.
The average number of persons employed during the year, rounded to the nearest hundred and excluding temporary staff, was
55,900 (2022 – 53,600). The number of persons employed, rounded to the nearest hundred and excluding temporary staff, at 31
:
December 2023, was as follows
2023 | 2022 (1) | |
Retail Banking | 13,400 | 14,000 |
Commercial & Institutional | 8,800 | 8,800 |
Private Banking | 2,400 | 2,300 |
Central items & other | 32,000 | 30,100 |
Total | 56,600 | 55,200 |
UK | 37,800 | 37,600 |
India | 16,900 | 15,700 |
Poland | 1,500 | 1,500 |
Rest of the World | 400 | 400 |
Total | 56,600 | 55,200 |
(1)
NWB Group
Annual Report and Accounts 2023
111
Notes to the financial statements continued
NWB Group grants share-based awards to employees principally on the following bases:
(1)
Award plan | Eligible employees | Nature of award | Vesting conditions | Settlement |
Sharesave | UK, Channel Islands, | Option to buy shares under | Continuing employment or | 2024 to 2028 |
Gibraltar, Isle of Man, | employee savings plan | leavers in certain circumstances | ||
Poland and India. | ||||
Deferred performance | All | Awards of ordinary shares | Continuing employment or | 2024 to 2031 |
awards | and conditional shares | leavers in certain circumstances | ||
Long-term incentives (2,3) | Senior employees | Awards of ordinary shares | Continuing employment or | 2024 to 2030 |
and conditional shares | leavers in certain circumstances | |||
and/or satisfaction of the pre- | ||||
vest assessment and underpins |
(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.
(3)
Existing Long-term incentive scheme has been closed to new awards and members as at 31 December 2022. The scheme will be replaced by a new Restricted share plan scheme with
similar granting and vesting conditions.
The fair value of Sharesave options granted in 2023 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; estimated dividend yield 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 NatWest Group ARA on page 148) are used.
The fair value of the
Bonus awards
The following tables analyse NWB Group's bonus awards.
2023 | 2022 | Change | |
£m | £m | ||
Non-deferred cash awards (1) | 38 | 36 | 6% |
Deferred cash awards | 181 | 182 | (1%) |
Deferred share awards | 26 | 30 | (13%) |
Total deferred bonus awards | 207 | 212 | (2%) |
Total bonus awards (2) | 245 | 248 | (1%) |
Reconciliation of bonus awards to income statement charge
2023 | 2022 | |
£m | £m | |
Bonus awarded | 245 | 248 |
Less: deferral of charge for amounts awarded in current year | (74) | (80) |
Income statement charge for amounts awarded in current year | 171 | 168 |
Add: current year charge for amounts deferred from prior years | 76 | 56 |
Less: forfeiture of amounts deferred from prior years | (2) | - |
Income statement charge for amounts deferred from prior years | 74 | 56 |
Income statement charge for bonus awards (2) | 245 | 224 |
(1)
Non-deferred cash awards are limited to £2,000 for all employees.
(2)
NWB Group
Annual Report and Accounts 2023
112
Notes to the financial statements continued
Reportable operating segments
NWB Plc is organised into the following reportable segments: Retail Banking, Private Banking, Commercial & Institutional and Central
items & other.
Retail Banking
serves personal customers in the UK and includes Ulster Bank customers in Northern Ireland.
Private Banking
serves UK-connected high-net-worth individuals and their business interests.
Commercial & Institutional
consists of customer businesses reported under Business Banking, Commercial Mid-market and Corporate
& Institutions, supporting our customers across the full non-personal customer lifecycle, both domestically and internationally.
Central items & other
includes corporate functions such as treasury, finance, risk management, compliance, legal, communications and
human resources. NWB Plc is the main service 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
Retail | Private | Commercial & | Central items | ||
Banking | Banking | Institutional | & other | Total | |
2023 | £m | £m | £m | £m | £m |
Net interest income | 4,595 | 709 | 2,955 | (236) | 8,023 |
Net fees and commissions | 327 | 245 | 1,096 | 1 | 1,669 |
Other operating income | 109 | 31 | 314 | 1,940 | 2,394 |
Total income | 5,031 | 985 | 4,365 | 1,705 | 12,086 |
Depreciation and amortisation | - | - | (124) | (753) | (877) |
Other operating expenses | (2,311) | (615) | (2,191) | (799) | (5,916) |
Impairment (losses)/releases | (410) | (13) | (82) | 1 | (504) |
Operating profit | 2,310 | 357 | 1,968 | 154 | 4,789 |
2022 | |||||
Net interest income | 4,494 | 754 | 2,740 | (456) | 7,532 |
Net fees and commissions | 334 | 243 | 1,038 | 11 | 1,626 |
Other operating income | 65 | 28 | 248 | 2,244 | 2,585 |
Total income | 4,893 | 1,025 | 4,026 | 1,799 | 11,743 |
Depreciation and amortisation | - | - | (135) | (633) | (768) |
Other operating expenses | (2,115) | (596) | (1,804) | (1,005) | (5,520) |
Impairment (losses)/releases | (218) | 2 | (126) | 1 | (341) |
Operating profit | 2,560 | 431 | 1,961 | 162 | 5,114 |
(1)
Total revenue
Retail | Private | Commercial & | Central items | ||
Banking | Banking | Institutional | & other | Total | |
2023 | £m | £m | £m | £m | £m |
External | 6,565 | 1,156 | 6,440 | 5,174 | 19,335 |
Inter-segment (2) | (187) | 998 | (1,558) | 747 | - |
Total | 6,378 | 2,154 | 4,882 | 5,921 | 19,335 |
2022 | |||||
External | 5,039 | 856 | 4,072 | 3,896 | 13,863 |
Inter-segment (2) | 29 | 416 | (294) | (151) | - |
Total | 5,068 | 1,272 | 3,778 | 3,745 | 13,863 |
Total income
Retail | Private | Commercial & | Central items | ||
Banking | Banking | Institutional | & other | Total | |
2023 | £m | £m | £m | £m | £m |
External | 4,172 | 324 | 4,652 | 2,938 | 12,086 |
Inter-segment (2) | 859 | 661 | (287) | (1,233) | - |
Total | 5,031 | 985 | 4,365 | 1,705 | 12,086 |
2022 | |||||
External | 4,439 | 719 | 3,625 | 2,960 | 11,743 |
Inter-segment (2) | 454 | 306 | 401 | (1,161) | - |
Total | 4,893 | 1,025 | 4,026 | 1,799 | 11,743 |
For the notes to this table refer to page 115.
NWB Group
Annual Report and Accounts 2023
113
Notes to the financial statements continued
Analysis of net fees and commissions
Retail | Private | Commercial & | Central items | ||
Banking | Banking | Institutional | & other | Total | |
2023 | £m | £m | £m | £m | £m |
Fees and commissions receivable | |||||
- Payment services | 263 | 32 | 518 | - | 813 |
- Credit and debit card fees | 323 | 13 | 197 | - | 533 |
- Lending and financing | 12 | 5 | 489 | - | 506 |
- Brokerage | 27 | 6 | - | - | 33 |
- Investment management, trustee and fiduciary services | 2 | 205 | - | - | 207 |
- Underwriting fees | - | - | 1 | - | 1 |
- Other | 4 | 5 | 60 | 15 | 84 |
Total | 631 | 266 | 1,265 | 15 | 2,177 |
Fees and commissions payable | (304) | (21) | (169) | (14) | (508) |
Net fees and commissions | 327 | 245 | 1,096 | 1 | 1,669 |
2022 | |||||
Fees and commissions receivable | |||||
- Payment services | 254 | 25 | 489 | - | 768 |
- Credit and debit card fees | 323 | 14 | 170 | - | 507 |
- Lending and financing | 15 | 8 | 446 | - | 469 |
- Brokerage | 34 | 6 | - | - | 40 |
- Investment management, trustee and fiduciary services | 4 | 213 | - | - | 217 |
- Underwriting fees | - | - | 3 | - | 3 |
- Other | - | 3 | 113 | (1) | 115 |
Total | 630 | 269 | 1,221 | (1) | 2,119 |
Fees and commissions payable | (296) | (26) | (183) | 12 | (493) |
Net fees and commissions | 334 | 243 | 1,038 | 11 | 1,626 |
Retail | Private | Commercial & | Central items | ||
Banking | Banking | Institutional | & other | Total | |
2023 | £m | £m | £m | £m | £m |
Assets | 194,488 | 19,284 | 89,783 | 111,913 | 415,468 |
Liabilities | 154,083 | 37,816 | 123,084 | 79,055 | 394,038 |
2022 | |||||
Assets | 184,140 | 19,734 | 86,406 | 119,189 | 409,469 |
Liabilities | 153,304 | 41,489 | 127,301 | 67,299 | 389,393 |
NWB Group
Annual Report and Accounts 2023
114
Notes to the financial statements continued
4 Segmental analysis continued
Geographical segments
The geographical analysis in the tables below has been compiled on the basis of location of office where the transactions are recorded.
UK | RoW | Total | |
2023 | £m | £m | £m |
Total revenue (1) | 18,591 | 744 | 19,335 |
Interest receivable | 14,725 | 39 | 14,764 |
Interest payable | (6,717) | (24) | (6,741) |
Net fees and commissions | 1,668 | 1 | 1,669 |
Other operating income | 1,689 | 705 | 2,394 |
Total income | 11,365 | 721 | 12,086 |
Operating profit before tax | 4,668 | 121 | 4,789 |
Total assets | 407,211 | 8,257 | 415,468 |
Total liabilities | 392,940 | 1,098 | 394,038 |
Contingent liabilities and commitments | 79,206 | 322 | 79,528 |
Cost to acquire property, plant and equipment and intangible assets | 1,527 | 92 | 1,619 |
2022 | |||
Total revenue (1) | 13,134 | 729 | 13,863 |
Interest receivable | 9,104 | 55 | 9,159 |
Interest payable | (1,567) | (60) | (1,627) |
Net fees and commissions | 1,610 | 16 | 1,626 |
Other operating income | 1,955 | 630 | 2,585 |
Total income | 11,102 | 641 | 11,743 |
Operating profit before tax | 5,017 | 97 | 5,114 |
Total assets | 394,504 | 14,965 | 409,469 |
Total liabilities | 388,996 | 397 | 389,393 |
Contingent liabilities and commitments | 89,931 | 215 | 90,146 |
Cost to acquire property, plant and equipment and intangible assets | 1,254 | 158 | 1,412 |
(1)
Total revenue comprises interest receivable, fees and commissions receivable and other operating income.
(2)
NWB Group
Annual Report and Accounts 2023
115
Notes to the financial statements continued
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 active 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
includes member trustee directors selected from eligible active
staff, deferred and pensioner members who apply and trustee
directors 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 refer to Accounting policy Note
3.2.
Investment strategy
The assets of the Main section, which is typical of other group
schemes, represent 97% of all plan assets at 31 December 2023
(2022 - 97%) and are invested as shown below.
The Main section employs physical, derivative and non-derivatives
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. In particular, movements in interest rates and
inflation are substantially hedged by the Trustee.
| 2023 | 2022 | |||||
Major classes of plan assets as a percentage of | Quoted | Unquoted | Total | Quoted | Unquoted | Total |
total plan assets of the Main section | % | % | % | % | % | % |
Equities | 0.1 | 6.7 | 6.8 | 0.1 | 7.7 | 7.8 |
Index linked bonds | 36.7 | - | 36.7 | 37.7 | - | 37.7 |
Government bonds | 13.3 | - | 13.3 | 18.4 | - | 18.4 |
Corporate and other bonds | 19.2 | 6.4 | 25.6 | 15.3 | 6.7 | 22.0 |
Real estate | - | 4.5 | 4.5 | - | 6.0 | 6.0 |
Derivatives | - | 2.7 | 2.7 | - | 8.2 | 8.2 |
Cash and other assets | - | 10.4 | 10.4 | - | (0.1) | (0.1) |
69.3 | 30.7 | 100.0 | 71.5 | 28.5 | 100.0 | |
The Main section's holdings of derivative instruments are summarised in the table below:
| 2023 | 2022 | |||||
Notional | Fair value | Notional | Fair value | |||
amounts | Assets | Liabilities | amounts | Assets | Liabilities | |
£bn | £m | £m | £bn | £m | £m | |
Inflation rate swaps | 29 | 1,929 | 940 | 21 | 1,873 | 990 |
Interest rate swaps | 52 | 3,121 | 3,394 | 103 | 14,317 | 12,546 |
Currency forwards | 13 | 235 | 34 | 12 | 310 | 113 |
Equity and bond put options | - | - | 4 | - | 2 | 70 |
Other | 1 | 8 | 20 | 1 | 14 | 19 |
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 2023, the gross notional value of the swaps was £81 billion (2022 - £124 billion) and had a net positive fair value of
£714 million (2022 - £2,642 million) against which the counterparties had posted approximately 128% collateral.
The schemes do not invest directly in NWB Group but may have exposure to NWB Group through indirect holdings. 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
Annual Report and Accounts 2023
116
Notes to the financial statements continued
5 Pensions continued
NWB Group | NWB Plc | |||||||
Present | Present | |||||||
value of | Asset | Net | value of | Asset | Net | |||
defined | ceiling | pension | defined | ceiling/ | pension | |||
Fair value of | benefit | / minimum | asset/ | Fair value of | benefit | minimum | asset/ | |
plan assets | obligation (1) | funding (2) | (liability) | plan assets | obligation (1) | funding (2) | (liability) | |
Changes in value of net pension asset/(liability) | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2022 | 53,531 | (43,326) | (10,246) | (41) | 53,381 | (43,147) | (10,246) | (12) |
Currency translation and other adjustments | 8 | (8) | - | - | - | - | - | - |
Income statement - operating expenses | 960 | (930) | (184) | (154) | 956 | (904) | (184) | (132) |
Recognised in other comprehensive income | (18,757) | 17,238 | 963 | (556) | (18,736) | 17,208 | 963 | (565) |
Contributions by employer | 723 | - | - | 723 | 700 | - | - | 700 |
Contributions by plan participants and other scheme | 19 | (19) | - | - | 26 | (26) | - | - |
members | ||||||||
Benefits paid | (1,527) | 1,527 | - | - | (1,512) | 1,512 | - | - |
At 1 January 2023 | 34,957 | (25,518) | (9,467) | (28) | 34,815 | (25,357) | (9,467) | (9) |
Currency translation and other adjustments | - | 1 | - | 1 | - | - | - | - |
Income statement - other expenses | ||||||||
Net interest expense | 1,721 | (1,250) | (472) | (1) | 1,716 | (1,239) | (472) | 5 |
Current service cost | - | (89) | - | (89) | - | (80) | - | (80) |
Loss on curtailments or settlements | - | - | - | - | - | (4) | - | (4) |
Less, direct contributions from other | ||||||||
scheme members | - | 6 | - | 6 | - | 17 | - | 17 |
Past service cost | - | (5) | - | (5) | - | (2) | - | (2) |
1,721 | (1,338) | (472) | (89) | 1,716 | (1,308) | (472) | (64) | |
Other comprehensive income | ||||||||
Return on plan assets excluding recognised | ||||||||
interest income (3) | (1,111) | - | - | (1,111) | (1,107) | - | - | (1,107) |
Experience gains and losses | - | (1,563) | - | (1,563) | - | (1,559) | - | (1,559) |
Effect of changes in actuarial financial assumptions | - | (599) | - | (599) | - | (599) | - | (599) |
Effect of changes in actuarial demographic | ||||||||
assumptions | - | 386 | - | 386 | - | 386 | - | 386 |
Asset ceiling adjustments | - | - | 2,740 | 2,740 | - | - | 2,740 | 2,740 |
(1,111) | (1,777) | 2,740 | (147) | (1,107) | (1,772) | 2,740 | (139) | |
Contributions by employer (3) | 228 | 3 | - | 231 | 203 | - | - | 203 |
Contributions by plan participants and other scheme | ||||||||
members | 18 | (18) | - | - | 25 | (25) | - | - |
Benefits paid | (1,272) | 1,272 | - | - | (1,262) | 1,262 | - | - |
At 31 December 2023 (4) | 34,541 | (27,375) | (7,199) | (32) | 34,390 | (27,200) | (7,199) | (9) |
(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 £207 million in 2024.
(4)
On 16 June 2023 the High Court issued a ruling in respect of Virgin Media v NTL Pension Trustees II Limited (and others), which has the potential to affect the defined benefit obligation
(DBO) values. Reasonable due diligence has concluded that the DBO values above require no adjustment for the impact of this case. Further details included in the Risk and capital
management, pension risk section of this report.
NWB Group
Annual Report and Accounts 2023
117
Notes to the financial statements continued
5 Pensions continued
All schemes | ||
2023 | 2022 | |
Amounts recognised on the balance sheet | £m | £m |
Fund asset at fair value | 34,541 | 34,957 |
Present value of fund liabilities | (27,374) | (25,518) |
Funded status | 7,167 | 9,439 |
Assets ceiling/minimum funding | (7,199) | (9,467) |
(32) | (28) | |
NWB Group | NWB Plc | |||
2023 | 2022 | 2023 | 2022 | |
Net pension asset/(liability) comprises | £m | £m | £m | £m |
Net assets of schemes in surplus (Note 16) | 5 | 7 | - | - |
Net liabilities of schemes in deficit ( Note 21) | (37) | (35) | (9) | (9) |
(32) | (28) | (9) | (9) | |
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 financial year 2021.
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 were capped at £1.5 billion in
total, of which £1.0 billion was paid over 2021 and 2022.
During 2023, NatWest Bank entered a new contractual
agreement with the Trustee, such that assets to the value of the
remaining contributions falling due under the previous agreement
would instead be paid to a Reservoir Trust. These assets have
been restricted and are reserved to ensure they are available
should they be needed by the Trustee in the future, according to
agreed criteria. They are included in the encumbered balance
sheet in the Risk section of this report. The assets under this
arrangement will be available to the Group in future, to the extent
that they are not needed under the defined trigger events.
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 2023.
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.
NWB Group
Annual Report and Accounts 2023
118
Notes to the financial statements continued
The most significant assumptions used for the Main section are shown below:
Principal IAS 19 actuarial assumptions (1) | ||
2023 | 2022 | |
% | % | |
Discount rate | 4.8 | 5.0 |
Inflation assumption (RPI) | 3.1 | 3.2 |
Rate of increase in salaries | 1.8 | 1.8 |
Rate of increase in deferred pensions | 3.2 | 3.2 |
Rate of increase in pensions in payment | 2.4 | 2.5 |
Lump sum conversion rate at retirement | 18 | 18 |
Longevity at age 60: | years | years |
Current pensioners | ||
Males | 26.8 | 27.3 |
Females | 28.6 | 29.1 |
Future pensioners, currently aged 40 | ||
Males | 27.7 | 28.3 |
Females | 29.5 | 30.1 |
(1)
The above financial assumptions are long-term assumptions set with reference to the period over which the obligations are expected to be settled.
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.
discount rate used in the IAS 19 valuations. The criteria include issue size, quality of pricing and the exclusion of outliers. Judgement is
also required in determining the shape of the yield curve at long durations: a constant credit spread relative to gilts is assumed.
The weighted average duration of the Main section’s defined benefit obligation at 31 December 2023 is 14 years (2022 – 15.3 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
.
1,800
1,600
1,400
1,200
1,000
800
600
Expected Cashflows (£m)
400
200
0
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
2052
2054
2056
2058
2060
2062
2064
2066
2068
2070
2072
2074
2076
2078
2080
2082
2084
2086
2088
2090
2092
2094
Year
Pensioner
Non pensioner
NWB Group
Annual Report and Accounts 2023
119
Notes to the financial statements 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 net | |
increase in | increase in | pension | |
value of assets | value of liabilities | (obligations)/assets | |
2023 | £m | £m | £m |
0.5% increase in interest rates/discount rate | (2,292) | (1,746) | (546) |
0.25% increase in inflation | 811 | 578 | 233 |
0.5% increase in credit spreads | (12) | (1,746) | 1,734 |
Longevity increase of one year | na | 902 | (902) |
0.25% additional rate of increase in pensions in payment | na | 706 | (706) |
Increase in equity values of 10% (1) | 229 | na | 229 |
2022 | |||
0.5% increase in interest rates/discount rate | (2,689) | (1,766) | (923) |
0.25% increase in inflation | 963 | 632 | 331 |
0.5% increase in credit spreads | (6) | (1,766) | 1,760 |
Longevity increase of one year | na | 767 | (767) |
0.25% additional rate of increase in pensions in payment | na | 679 | (679) |
Increase in equity values of 10% (1) | 267 | na | 267 |
(1) Includes both quoted and private equity.
The table below shows the combined change in defined benefit obligation from larger movements in these assumptions, assuming no
changes in other assumptions
| Change in life expectancies | ||||||
- 2 years | - 1 year | No change | + 1 year | + 2 years | ||
2023 | £bn | £bn | £bn | £bn | £bn | |
Change in credit spreads | +50 bps | (3.5) | (2.6) | (1.7) | (0.9) | (0.1) |
No change | (1.9) | (0.9) | - | 0.9 | 1.8 | |
-50 bps | - | 1.0 | 2.0 | 2.9 | 3.9 | |
| Change in life expectancies | ||||||
- 2 years | - 1 year | No change | + 1 year | + 2 years | ||
2022 | £bn | £bn | £bn | £bn | £bn | |
Change in credit spreads | +50 bps | (3.7) | (2.8) | (1.8) | (0.8) | 0.2 |
No change | (2.1) | (1.1) | - | 1.1 | 2.1 | |
-50 bps | (0.3) | 0.9 | 2.0 | 3.2 | 4.3 | |
The defined benefit obligation of the Main section is attributable to the different classes of scheme members in the following
proportions:
2023 | 2022 | |
Membership category | % | % |
Active members | 7.5 | 8.4 |
Deferred members | 41.9 | 41.0 |
Pensioners and dependants | 50.6 | 50.6 |
100.0 | 100.0 |
The experience history of NWB Group schemes is shown below:
| NWB Group | NWB Plc | |||||||||
2023 | 2022 | 2021 | 2020 | 2019 | 2023 | 2022 | 2021 | 2020 | 2019 | |
History of defined benefit schemes | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m |
Fair value of plan assets | 34,541 | 34,957 | 53,531 | 52,819 | 47,953 | 34,390 | 34,815 | 53,381 | 51,323 | 46,555 |
Present value of defined benefit obligations | (27,374) | (25,518) | (43,326) | (45,214) | (40,822) | (27,200) | (25,357) | (43,147) | (43,883) | (39,683) |
Net surplus | 7,167 | 9,439 | 10,205 | 7,605 | 7,131 | 7,190 | 9,458 | 10,234 | 7,440 | 6,872 |
Experience (losses)/gains on plan liabilities | (1,563) | (2,042) | 244 | 431 | 264 | (1,559) | (2,041) | 245 | 427 | 275 |
Experience (losses)/gains on plan assets | (1,111) | (18,757) | 857 | 5,586 | 3,156 | (1,107) | (18,736) | 852 | 5,486 | 3,021 |
Actual return on plan assets | 610 | (17,797) | 1,592 | 6,549 | 4,437 | 609 | (17,780) | 1,579 | 6,422 | 4,266 |
Actual return on plan assets % | 1.7% | (33.2%) | 3.0% | 13.7% | 9.8% | 1.7% | (33.3%) | 3.1% | 13.8% | 9.7% |
NWB Group
Annual Report and Accounts 2023
120
5 Pensions continued
Notes to the financial statements continued
Amounts payable to NWB Group’s auditor for statutory audit and other services are set out below:
2023 | 2022 | |
£m | £m | |
Fees payable for: | ||
- the audit of NWB Group’s annual accounts | 11.4 | 12.4 |
- the audit of NWB Plc’s subsidiaries | 2.8 | 3.1 |
- audit-related assurance services | 0.8 | - |
Total audit and audit-related assurance service fees | 15.0 | 15.5 |
Corporate finance services | 0.1 | - |
2023 | 2022 | |
£m | £m | |
Current tax | ||
Charge for the year | (1,108) | (1,187) |
(Under)/over provision in respect of prior years | (63) | 63 |
(1,171) | (1,124) | |
Deferred tax | ||
Charge for the year | (220) | (151) |
UK tax rate change impact | - | (82) |
Increase/(decrease) in the carrying value of deferred tax assets in respect of UK losses | 137 | (6) |
Under provision in respect of prior years | (26) | (62) |
Tax charge for the year | (1,280) | (1,425) |
Current tax for the year ended 31 December 2023 is based on blended rates of 23.5% for the standard rate of UK corporation tax and
4.25% for the UK banking surcharge.
The actual tax charge differs from the expected tax charge, computed by applying the standard rate of UK corporation tax of 23.5%
(2022 – 19%), as follows:
2023 | 2022 | |
£m | £m | |
Expected tax charge | (1,125) | (972) |
Losses and temporary differences in period where no deferred tax asset recognised | (1) | - |
Foreign profits taxed at other rates | (8) | (8) |
Items not allowed for tax: | ||
- losses on disposals and write-downs | - | (8) |
- UK bank levy | (19) | (12) |
- regulatory and legal actions | - | 6 |
- other disallowable items | (32) | (13) |
Non-taxable items | 15 | 18 |
Taxable foreign exchange movements | (1) | 2 |
Increase/(decrease) in the carrying value of deferred tax assets in respect of: | ||
- UK losses (2) | 137 | (6) |
Banking surcharge | (190) | (373) |
Tax on paid in equity dividends | 33 | 22 |
UK tax rate change impact | - | (82) |
Adjustments in respect of prior years (1) (2) | (89) | 1 |
Actual tax charge | (1,280) | (1,425) |
(1)
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.
(2)
Includes a net £69 million benefit from UK group relief and loss relief claims at higher tax rates (refer to the Deferred Tax section below for details of the recent changes in UK tax rates).
On 11 July 2023 the government of the UK, where the parent company is incorporated, enacted the Pillar 2 income taxes legislation
effective for the Group’s financial year beginning 1 January 2024. Under the legislation, NatWest Group plc will be required to pay, in
the UK, top-up tax on profits of its subsidiaries that are taxed at a Pillar 2 effective tax rate of less than 15%. This legislation is
expected to have no material impact for NWB Group.
NWB Group
Annual Report and Accounts 2023
121
NWB Group’s corporate income tax charge and its provisions for corporate income taxes necessarily involve 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
relevant tax authorities. 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.
Deferred tax
NWB Group | NWB Plc | |||
2023 | 2022 | 2023 | 2022 | |
£m | £m | £m | £m | |
Deferred tax liability | 89 | 130 | - | - |
Deferred tax asset | (981) | (1,117) | (966) | (1,104) |
Net deferred tax asset | (892) | (987) | (966) | (1,104) |
Net deferred tax asset comprised:
| NWB Group | |||||||
Tax losses | |||||||
Accelerated | Expense | Financial | carried | ||||
Pension | capital allowances | provisions | instruments (1) | forward | Other | Total | |
£m | £m | £m | £m | £m | £m | £m | |
At 1 January 2022 | (106) | (272) | (61) | 25 | (608) | (37) | (1,059) |
Charge to income statement | - | 100 | 4 | 23 | 163 | 11 | 301 |
Charge/(credit) to other comprehensive | 39 | - | 1 | (275) | - | (3) | (238) |
income | |||||||
Currency translation and other adjustments | - | 10 | - | - | - | (1) | 9 |
At 31 December 2022 | (67) | (162) | (56) | (227) | (445) | (30) | (987) |
(Credit)/charge to income statement | (1) | 29 | 7 | 6 | 83 | (15) | 109 |
Charge/(credit) to other comprehensive | 31 | - | - | (73) | - | 13 | (29) |
income | |||||||
Currency translation and other adjustments | (1) | 16 | - | - | - | - | 15 |
At 31 December 2023 | (38) | (117) | (49) | (294) | (362) | (32) | (892) |
| NWB Plc | |||||||
Tax losses | |||||||
Accelerated | Expense | Financial | carried | ||||
Pension | capital allowances | provisions | instruments (1) | forward | Other | Total | |
£m | £m | £m | £m | £m | £m | £m | |
At 1 January 2022 | (103) | (469) | (53) | 27 | (608) | (38) | (1,244) |
Charge to income statement | - | 186 | 2 | 18 | 163 | 11 | 380 |
Charge/(credit) to other comprehensive | 38 | - | 1 | (276) | - | (3) | (240) |
income | |||||||
At 31 December 2022 | (65) | (283) | (50) | (231) | (445) | (30) | (1,104) |
Charge/(credit) to income statement | - | 70 | 3 | 10 | 83 | (15) | 151 |
Charge/(credit) to other comprehensive | 32 | - | - | (73) | - | 13 | (28) |
income | |||||||
Currency translation and other adjustments | (1) | 16 | - | - | - | 15 | |
At 31 December 2023 | (34) | (197) | (47) | (294) | (362) | (32) | (966) |
(1)
The in-year movement predominantly relates to cash flow hedges.
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
.
2023 | 2022 | |
£m | £m | |
UK tax losses carried forward | ||
- NWB Plc | 362 | 445 |
362 | 445 |
NWB Group
Annual Report and Accounts 2023
122
Notes to the financial statements continued
The deferred tax assets of £981 million as at 31 December 2023
(2022 - £1,117 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.
The main UK corporation tax increased from 19% to 25%, and the
UK banking surcharge decreased from 8% to 3%, from 1 April
2023. NWB Group’s closing deferred tax assets and liabilities are
therefore recognised based on these rates.
Judgement -
NWB Group has considered the carrying value of
deferred tax assets and concluded that, based on management’s
estimates, sufficient sustainable 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
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
rate introduced by The Finance (No. 2) Act 2015.
National Westminster Bank Plc
– A deferred tax asset of £362
million (2022 - £445 million) has been recognised in respect of
losses of £1,448 million of total losses of £2,308 million carried
forward at 31 December 2023. 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 returned to tax profitability during 2015,
and based on a 5 year recovery period, expects the deferred tax
asset to be utilised against future taxable profits by the end of
2028.
Unrecognised deferred tax
-
Deferred tax assets of £220 million
(2022 - £223 million) have not been recognised in respect of tax
losses and other deductible temporary differences carried forward
of £881 million (2022 - £892 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 £104 million (2022 - £105 million) on
aggregate underlying temporary differences of £463 million (2022
- £468 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
As permitted by section 408(3) of the Companies Act 2006, no income statement for the Bank has been presented as a primary
NWB Group
Annual Report and Accounts 2023
123
Classification of financial assets between amortised cost and fair
value through other comprehensive income requires a degree of
judgement 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 (SPPI). A
level of judgement is made in assessing terms that could
change the contractual cash flows so that it would not meet
the condition for SPPI, including contingent and leverage
features, non-recourse arrangements and features that could
modify the time value of money.
We originate loans that include features that change the
contractual cash flows based on the borrower meeting certain
contractually specified environmental, social and governance
(ESG) targets. These are known as ESG-linked (or sustainability-
linked) loans. As part of the terms of these loans, the contractual
interest rate is reduced or increased if the borrower meets (or
fails to meet) specific targets linked to the activity of the borrower
for example reducing carbon emissions, increase the level of
diversity at Board level, or achieving a sustainable supply chain.
ESG features are first assessed to ascertain whether the
adjustment to the contractual cash flows results in a de minimis
exposure to risks or volatility in those contractual cash flows. If
this is the case the classification of the loan is not affected. If the
effect of the ESG feature is assessed as being more than de
minimis, we apply judgement to ensure that the ESG features do
not generate compensation for risks that are not in line with a
basic lending arrangement. This includes amongst other aspects a
review of the consistency of the ESG targets with the asset or
activity of the borrower, and consideration of the targets within
our risk appetite. Some of these loans are an integral part of
NatWest Group’s climate and sustainable funding and financing
target.
For accounting policy information refer to Accounting policies 3.8,
The following tables analyse NWB Group’s financial assets and liabilities in accordance with the categories of financial instruments in
IFRS 9.
| NWB Group | |||||
Amortised | Other | ||||
MFVTPL | FVOCI | cost | assets | Total | |
Assets | £m | £m | £m | £m | £m |
Cash and balances at central banks | 48,259 | 48,259 | |||
Derivatives (1) | 3,184 | 3,184 | |||
Loans to banks - amortised cost (2) | 3,355 | 3,355 | |||
Loans to customers - amortised cost (3) | 318,466 | 318,466 | |||
Amounts due from holding companies and fellow subsidiaries | - | - | 1,808 | 503 | 2,311 |
Other financial assets | 453 | 23,495 | 7,996 | 31,944 | |
Other assets | 7,949 | 7,949 | |||
31 December 2023 | 3,637 | 23,495 | 379,884 | 8,452 | 415,468 |
Cash and balances at central banks | 73,065 | 73,065 | |||
Derivatives (1) | 4,407 | 4,407 | |||
Loans to banks - amortised cost (2) | 3,197 | 3,197 | |||
Loans to customers - amortised cost (3) | 301,684 | 301,684 | |||
Amounts due from holding companies and fellow subsidiaries | 5 | - | 4,173 | 725 | 4,903 |
Other financial assets | 417 | 9,713 | 4,416 | 14,546 | |
Other assets | 7,667 | 7,667 | |||
31 December 2022 | 4,829 | 9,713 | 386,535 | 8,392 | 409,469 |
For the notes to this table refer to the following page.
NWB Group
Annual Report and Accounts 2023
124
Notes to the financial statements continued
Held-for- | Amortised | Other | ||
trading | cost | liabilities | Total | |
Liabilities | £m | £m | £m | £m |
Bank deposits | 18,052 | 18,052 | ||
Customer deposits | 313,752 | 313,752 | ||
Amounts due to holding companies and fellow subsidiaries | 17 | 46,956 | 279 | 47,252 |
Derivatives (1) | 1,718 | 1,718 | ||
Other financial liabilities | 13 | 8,998 | 9,011 | |
Subordinated liabilities | 122 | 122 | ||
Notes in circulation | 806 | 806 | ||
Other liabilities (4) | 569 | 2,756 | 3,325 | |
31 December 2023 | 1,748 | 389,255 | 3,035 | 394,038 |
Bank deposits | 16,060 | 16,060 | ||
Customer deposits | 322,614 | 322,614 | ||
Amounts due to holding companies and fellow subsidiaries | 104 | 38,511 | 156 | 38,771 |
Derivatives (1) | 2,088 | 2,088 | ||
Other financial liabilities | 17 | 5,367 | 5,384 | |
Subordinated liabilities | 197 | 197 | ||
Notes in circulation | 809 | 809 | ||
Other liabilities (4) | 960 | 2,510 | 3,470 | |
31 December 2022 | 2,209 | 384,518 | 2,666 | 389,393 |
(1)
Includes net hedging derivative assets of £526 million (2022 – £741 million) and net hedging derivative liabilities of £405 million (2022 - £258 million).
(2)
Includes items in the course of collection from other banks of £26 million (2022 - £2 million).
(3)
Includes finance lease receivables of £8,664 million (2022 - £8,324 million).
(4)
Includes lease liabilities of £513 million (2022 - £901 million), held at amortised cost.
The following table shows the reconciliation of undiscounted finance lease receivables to net investment in finance leases which are
presented under Loans to customers-amortised cost on the balance sheet.
NWB Group | NWB Plc | |||
2023 | 2022 | 2023 | 2022 | |
Amount receivable under finance leases | £m | £m | £m | £m |
Within 1 year | 3,332 | 3,212 | 36 | 137 |
1 to 2 years | 2,351 | 2,247 | 5 | 55 |
2 to 3 years | 1,617 | 1,381 | 4 | 21 |
3 to 4 years | 892 | 825 | 4 | 20 |
4 to 5 years | 382 | 404 | 4 | 15 |
After 5 years | 1,042 | 1,089 | 37 | 38 |
Total lease payments | 9,616 | 9,158 | 90 | 286 |
Unguaranteed residual values | 169 | 171 | - | - |
Future drawdowns | (12) | (13) | - | - |
Unearned income | (1,017) | (879) | (9) | (8) |
Present value of lease payments | 8,756 | 8,437 | 81 | 278 |
Impairments | (92) | (113) | (1) | (11) |
Net investment in finance leases | 8,664 | 8,324 | 80 | 267 |
NWB Group
Annual Report and Accounts 2023
125
Notes to the financial statements continued
The following tables analyse NWB Plc’s financial assets and liabilities in accordance with the categories of financial instruments in IFRS
9.
| NWB Plc | |||||
MFVTPL | FVOCI | Amortised cost | Other assets | Total | |
Assets | £m | £m | £m | £m | £m |
Cash and balances at central banks | 48,238 | 48,238 | |||
Derivatives (1) | 3,213 | 3,213 | |||
Loans to banks - amortised cost (2) | 3,043 | 3,043 | |||
Loans to customers - amortised cost (3) | 284,314 | 284,314 | |||
Amounts due from holding companies and fellow | |||||
| subsidiaries | 559 | - | 32,158 | 782 | 33,499 |
Other financial assets | 453 | 23,013 | 7,626 | 31,092 | |
Investment in group undertakings | 2,615 | 2,615 | |||
Other assets | 5,735 | 5,735 | |||
31 December 2023 | 4,225 | 23,013 | 375,379 | 9,132 | 411,749 |
Cash and balances at central banks | 73,062 | 73,062 | |||
Derivatives (1) | 4,430 | 4,430 | |||
Loans to banks - amortised cost (2) | 2,870 | 2,870 | |||
Loans to customers - amortised cost (3) | 267,401 | 267,401 | |||
Amounts due from holding companies and fellow | |||||
subsidiaries | 608 | - | 30,585 | 940 | 32,133 |
Other financial assets | 417 | 9,713 | 4,050 | 14,180 | |
Investment in group undertakings | 2,030 | 2,030 | |||
Other assets | 5,641 | 5,641 | |||
31 December 2022 | 5,455 | 9,713 | 377,968 | 8,611 | 401,747 |
Held-for- trading | DFV | Amortised cost | Other liabilities | Total | |
Liabilities | £m | £m | £m | £m | £m |
Bank deposits | 18,052 | 18,052 | |||
Customer deposits | 276,202 | 276,202 | |||
Amounts due to holding companies and fellow subsidiaries | 17 | 268 | 83,524 | 365 | 84,174 |
Derivatives (1) | 2,014 | 2,014 | |||
Other financial liabilities | 13 | - | 8,134 | 8,147 | |
Subordinated liabilities | 119 | 119 | |||
Notes in circulation | 806 | 806 | |||
Other liabilities (4) | 480 | 2,054 | 2,534 | ||
31 December 2023 | 2,044 | 268 | 387,317 | 2,419 | 392,048 |
Bank deposits | 16,059 | 16,059 | |||
Customer deposits | 281,558 | 281,558 | |||
Amounts due to holding companies and fellow subsidiaries | 104 | 248 | 74,502 | 183 | 75,037 |
Derivatives (1) | 2,582 | 2,582 | |||
Other financial liabilities | 17 | - | 4,508 | 4,525 | |
Subordinated liabilities | 191 | 191 | |||
Notes in circulation | 809 | 809 | |||
Other liabilities (4) | 858 | 1,885 | 2,743 | ||
31 December 2022 | 2,703 | 248 | 378,485 | 2,068 | 383,504 |
(1)
Includes net hedging derivative assets of £523 million (2022 - £738 million) and net hedging derivative liabilities of £398 million (2022 - £251 million).
(2)
Includes items in the course of collection from other banks of £26 million (2022 - £2 million).
(3)
Includes finance lease receivables of £80 million (2022 - £267 million).
(4)
Includes lease liabilities of £427 million (2022 - £802 million), held at amortised cost.
NWB Group
Annual Report and Accounts 2023
126
Notes to the financial statements continued
Financial instruments – financial assets and liabilities that can be offset
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 | |||||||||
Instruments which can be offset | Potential for offset not recognised by IFRS | ||||||||
Effect of | Net amount after | ||||||||
master netting | effect of netting | Instruments | |||||||
Balance | and similar | Cash | Securities | agreements and | outside netting | Balance sheet | |||
Gross | IFRS offset | sheet | agreements | collateral | collateral related collateral | agreements | total | ||
2023 | £m | £m | £m | £m | £m | £m | £m | £m | £m |
Derivative assets | 18,535 | (15,355) | 3,180 | (1,405) | (13) | (324) | 1,438 | 4 | 3,184 |
Derivative liabilities | 20,325 | (18,627) | 1,698 | (1,405) | (198) | - | 95 | 20 | 1,718 |
Net position (1) | (1,790) | 3,272 | 1,482 | - | 185 | (324) | 1,343 | (16) | 1,466 |
Non trading reverse repos | 34,682 | (8,570) | 26,112 | - | - | (26,112) | - | - | 26,112 |
Non trading repos | 21,629 | (8,570) | 13,059 | - | - | (13,059) | - | - | 13,059 |
Net position | 13,053 | - | 13,053 | - | - | (13,053) | - | - | 13,053 |
2022 | |||||||||
Derivative assets | 20,617 | (16,221) | 4,396 | (1,523) | (116) | (361) | 2,396 | 11 | 4,407 |
Derivative liabilities | 21,652 | (19,602) | 2,050 | (1,523) | (280) | - | 247 | 38 | 2,088 |
Net position (1) | (1,035) | 3,381 | 2,346 | - | 164 | (361) | 2,149 | (27) | 2,319 |
Non trading reverse repos | 23,255 | (4,090) | 19,165 | - | - | (19,165) | - | - | 19,165 |
Non trading repos | 14,260 | (4,090) | 10,170 | - | - | (10,170) | - | - | 10,170 |
Net position | 8,995 | - | 8,995 | - | - | (8,995) | - | - | 8,995 |
| NWB Plc | |||||||||
Instruments which can be offset | Potential for offset not recognised by IFRS | ||||||||
Effect of | Net amount after | ||||||||
master netting | effect of netting | Instruments | |||||||
Balance | and similar | Cash | Securities | agreements and | outside netting | Balance sheet | |||
Gross | IFRS offset | sheet | agreements | collateral | collateral | related collateral | agreements | total | |
2023 | £m | £m | £m | £m | £m | £m | £m | £m | £m |
Derivative assets | 18,551 | (15,355) | 3,196 | (1,407) | (13) | (324) | 1,452 | 17 | 3,213 |
Derivative liabilities | 20,348 | (18,627) | 1,721 | (1,407) | (198) | - | 116 | 293 | 2,014 |
Net position (1) | (1,797) | 3,272 | 1,475 | - | 185 | (324) | 1,336 | (276) | 1,199 |
Non trading reverse repos | 34,682 | (8,570) | 26,112 | - | - | (26,112) | - | - | 26,112 |
Non trading repos | 21,629 | (8,570) | 13,059 | - | - | (13,059) | - | - | 13,059 |
Net position | 13,053 | - | 13,053 | - | - | (13,053) | - | - | 13,053 |
2022 | |||||||||
Derivative assets | 20,632 | (16,221) | 4,411 | (1,526) | (116) | (361) | 2,408 | 19 | 4,430 |
Derivative liabilities | 21,688 | (19,602) | 2,086 | (1,526) | (280) | - | 280 | 496 | 2,582 |
Net position (1) | (1,056) | 3,381 | 2,325 | - | 164 | (361) | 2,128 | (477) | 1,848 |
Non trading reverse repos | 23,255 | (4,090) | 19,165 | - | - | (19,165) | - | - | 19,165 |
Non trading repos | 14,260 | (4,090) | 10,170 | - | - | (10,170) | - | - | 10,170 |
Net position | 8,995 | - | 8,995 | - | - | (8,995) | - | - | 8,995 |
(1)
NWB Group
Annual Report and Accounts 2023
127
Notes to the financial statements continued
Page | |
Financial instruments | |
Critical accounting policy: Fair value | 128 |
Valuation | |
Fair value hierarchy (D) | 128 |
Valuation techniques (D) | 128 |
Inputs to valuation models (D) | 129 |
Valuation control (D) | 129 |
Key areas of judgement (D) | 130 |
Assets and liabilities split by fair value | |
hierarchy level (T) | 130 |
Valuation adjustments | |
Fair value adjustments made (T) | 131 |
Funding valuation adjustments (FVA) (D) | 131 |
Credit valuation adjustments (CVA) (D) | 131 |
Bid-offer (D) | 131 |
Product and deal specific (D) | 131 |
Level 3 additional information | |
Level 3 ranges of unobservable inputs (D) | 131 |
Alternative assumptions (D) | 132 |
Other considerations (D) | 132 |
High and low range of fair value of | |
level 3 assets and liabilities (T) | 132 |
Movement in level 3 assets and liabilities | |
over the reporting period (D) | 133 |
Movement in level 3 assets and liabilities (T) | 133 |
Fair value of financial instruments measured | |
at amortised cost | |
Fair value of financial instruments | |
measured at amortised cost on the balance sheet (T) | 134 |
(D) = Descriptive; (T) = Table |
- 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 (refer to 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 refer to Accounting policies
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 judgement 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
collateralised loan obligations (CLOs), most bank loans, repos
and reverse repos, state and municipal obligations, most notes
issued, certain money market securities, loan commitments and
most over the counter (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.
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.
NWB Group
Annual Report and Accounts 2023
128
Notes to the financial statements continued
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/margins
- these reflect credit default swap levels
or 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/margins 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 overnight interest
rates, 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. The review of market
prices and inputs 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.
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.
NWB Group
Annual Report and Accounts 2023
129
Notes to the financial statements continued
10 Financial instruments – valuation
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.
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
judgement is used. As such, extra disclosures are required in
.
respect of level 3 instruments
In general, the degree of expert judgement used and hence
valuation uncertainty depends on the degree of liquidity of an
instrument or input.
Where markets are liquid, little judgement is required. However,
when the information regarding the liquidity in a particular
market is not clear, a judgement may need to be made. For
example, for an equity traded on an exchange, daily volumes of
trading can be seen, but for an 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
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 judgement and so carrying the most significant price uncertainty.
| 2023 | 2022 | |||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |
£m | £m | £m | £m | £m | £m | £m | £m | |
Assets | ||||||||
Derivatives | ||||||||
Interest rate | - | 3,098 | 3 | 3,101 | - | 4,229 | 20 | 4,249 |
Foreign exchange | - | 83 | - | 83 | - | 158 | - | 158 |
Amounts due from holding companies and | ||||||||
fellow subsidiaries | - | - | - | - | - | 5 | - | 5 |
Other financial assets | ||||||||
Securities | 14,159 | 9,334 | 2 | 23,495 | 5,105 | 4,606 | 2 | 9,713 |
Loans | - | 278 | 175 | 453 | - | 369 | 48 | 417 |
Total financial assets held at fair value | 14,159 | 12,793 | 180 | 27,132 | 5,105 | 9,367 | 70 | 14,542 |
As % of total fair value assets | 52% | 47% | 1% | 35% | 65% | - | ||
Liabilities | ||||||||
Derivatives | ||||||||
Interest rate | - | 1,460 | 9 | 1,469 | - | 1,665 | 7 | 1,672 |
Foreign exchange | - | 249 | - | 249 | - | 416 | - | 416 |
Amounts due to holding companies and fellow | ||||||||
| subsidiaries | - | 17 | - | 17 | - | 104 | - | 104 |
Other financial liabilities | ||||||||
Deposits | - | 13 | - | 13 | - | 17 | - | 17 |
Total financial liabilities held at fair value | - | 1,739 | 9 | 1,748 | - | 2,202 | 7 | 2,209 |
As % of total fair value liabilities | - | 99% | 1% | - | 100% | - | ||
(1)
Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instrument was transferred.
NWB Group
Annual Report and Accounts 2023
130
Notes to the financial statements continued
10 Financial instruments – valuation
Valuation adjustments
When valuing financial instruments in the trading book,
adjustments are made to mid-market valuations to cover bid-
offer spread, funding and credit risk. These adjustments are
presented in the table below:
2023 | 2022 | |
Adjustment | £m | £m |
Funding valuation adjustments | 122 | 166 |
Bid-offer | 14 | 22 |
Total | 136 | 188 |
Funding valuation adjustments decreased during the year,
primarily driven by changes in GBP interest rates and funding
spreads tightening. The decrease in bid-offer was driven by
contraction in spreads.
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. 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.
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 reflect
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 liquid 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.
2023 | 2022 | ||||||
Financial instrument | Valuation technique | Unobservable inputs | Units | Low | High | Low | High |
Other financial assets | |||||||
Loans | Discount cash flow | Discount margin | bps | 174 | 228 | 174 | 222 |
Derivative assets and liabilities | |||||||
Interest rate & FX | |||||||
derivatives | Discount cash flow | Conditional prepayment risk | % | 3 | 5 | 2 | 4 |
(1)
NWB Group does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement.
NWB Group
Annual Report and Accounts 2023
131
Notes to the financial statements continued
10 Financial instruments: valuation continued
L3 sensitivities
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
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.
| 2023 | 2022 | |||||
Level 3 | Favourable | Unfavourable | Level 3 | Favourable | Unfavourable | |
£m | £m | £m | £m | £m | £m | |
Assets | ||||||
Derivatives | ||||||
Interest rate | 3 | - | - | 20 | - | - |
Other financial assets | ||||||
Securities | 2 | - | - | 2 | - | - |
Loans | 175 | - | (10) | 48 | - | - |
Total | 180 | - | (10) | 70 | - | - |
Liabilities | ||||||
Derivatives | ||||||
Interest rate | 9 | - | - | 7 | - | - |
Total | 9 | - | - | 7 | - | - |
NWB Group
Annual Report and Accounts 2023
132
sensitivities presented.
Notes to the financial statements continued
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.
Other | Other | Other | Other | |||||
Derivatives | trading | financial | Total | Derivatives | trading | financial | Total | |
assets | assets (2) | assets (3) | assets | liabilities | liabilities (2) | liabilities | liabilities | |
2023 | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January | 20 | - | 50 | 70 | 7 | - | - | 7 |
Amounts recorded in the income | ||||||||
statement (1) | (8) | - | (19) | (27) | 3 | - | - | 3 |
Level 3 transfers in | - | - | 23 | 23 | - | - | - | - |
Purchases/originations | - | - | 122 | 122 | - | - | - | - |
Settlements/other decreases | (8) | - | - | (8) | (2) | - | - | (2) |
Foreign exchange and other | (1) | - | 1 | - | 1 | - | - | 1 |
At 31 December | 3 | - | 177 | 180 | 9 | - | - | 9 |
Amounts recorded in the income statement | ||||||||
in respect of balances held at period end | ||||||||
- unrealised | (10) | - | (19) | (29) | 2 | - | - | 2 |
2022 | ||||||||
At 1 January | 1 | - | 52 | 53 | 139 | - | - | 139 |
Amounts recorded in the income | ||||||||
statement (1) | 19 | - | (2) | 17 | (127) | - | - | (127) |
Level 3 transfers in | - | - | - | - | - | - | - | - |
Purchases/originations | - | - | - | - | - | - | - | - |
Settlements/other decreases | - | - | - | - | (5) | - | - | (5) |
Foreign exchange and other | - | - | - | - | - | - | - | - |
At 31 December | 20 | - | 50 | 70 | 7 | - | - | 7 |
Amounts recorded in the income statement | ||||||||
in respect of balances held at period end | ||||||||
- unrealised | 19 | - | (4) | 15 | (132) | - | - | (132) |
(1)
Net losses on trading assets and liabilities of £11 million (2022 – net gains £146 million) were recorded in income from trading activities.
(2)
Other trading assets and other trading liabilities comprise assets and liabilities held at fair value in trading portfolios.
(3)
Other financial assets comprise fair value through other comprehensive income, designated as at fair value through profit or loss and other fair value through profit or loss
.
NWB Group
Annual Report and Accounts 2023
133
Notes to the financial statements 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 | ||||||
Items where fair | ||||||
Carrying | Fair | Fair value hierarchy level | value approximates | |||
value | value | Level 1 | Level 2 | Level 3 | carrying value | |
2023 | £bn | £bn | £bn | £bn | £bn | £bn |
Financial assets | ||||||
Cash and balances at central banks | 48.3 | 48.3 | - | - | - | 48.3 |
Loans to banks | 3.4 | 3.4 | - | 1.7 | 0.3 | 1.4 |
Loans to customers | 318.5 | 310.7 | - | 25.9 | 284.8 | - |
Amounts due from holding companies | ||||||
and fellow subsidiaries | 1.8 | 1.8 | - | - | 1.8 | - |
Other financial assets | ||||||
Securities | 8.0 | 8.0 | 1.9 | 5.7 | 0.4 | - |
2022 | ||||||
Financial assets | ||||||
Cash and balances at central banks | 73.1 | 73.1 | - | - | - | 73.1 |
Loans to banks | 3.2 | 3.2 | - | 2.7 | 0.5 | - |
Loans to customers | 301.7 | 290.8 | - | 19.4 | 271.4 | - |
Amounts due from holding companies | ||||||
and fellow subsidiaries | 4.2 | 4.1 | - | - | 4.1 | - |
Other financial assets | ||||||
Securities | 4.4 | 4.3 | 0.8 | 3.1 | 0.4 | - |
2023 | ||||||
Financial liabilities | ||||||
Bank deposits | 18.1 | 18.2 | - | 14.9 | 0.3 | 3.0 |
Customer deposits | 313.8 | 313.4 | - | 26.8 | 27.1 | 259.5 |
Amounts due to holding companies | - | |||||
and fellow subsidiaries | 47.0 | 47.0 | - | 29.8 | 12.6 | 4.6 |
Other financial liabilities | ||||||
Debt securities in issue | 9.0 | 9.0 | - | 2.1 | 6.9 | - |
Subordinated liabilities | 0.1 | 0.2 | - | 0.2 | - | - |
Notes in circulation | 0.8 | 0.8 | - | - | - | 0.8 |
2022 | ||||||
Financial liabilities | ||||||
Bank deposits | 16.1 | 15.7 | - | 12.3 | - | 3.4 |
Customer deposits | 322.6 | 322.6 | - | 11.9 | 15.8 | 294.9 |
Amounts due to holding companies | - | |||||
and fellow subsidiaries | 38.5 | 38.0 | - | 8.9 | 28.3 | 0.8 |
Other financial liabilities | ||||||
Debt securities in issue | 5.4 | 5.4 | - | 2.9 | 2.5 | - |
Subordinated liabilities | 0.2 | 0.2 | - | 0.2 | - | - |
Notes in circulation | 0.8 | 0.8 | - | - | - | 0.8 |
NWB Group
Annual Report and Accounts 2023
134
Notes to the financial statements continued
Fair value of financial instruments measured at amortised cost on the balance sheet continued
| NWB Plc | ||||||
Items where fair | ||||||
Carrying | Fair | Fair value hierarchy level | value approximates | |||
value | value | Level 1 | Level 2 | Level 3 | carrying value | |
2023 | £bn | £bn | £bn | £bn | £bn | £bn |
Financial assets | ||||||
Cash and balances at central banks | 48.2 | 48.2 | - | - | - | 48.2 |
Loans to banks | 3.0 | 3.0 | - | 1.7 | - | 1.3 |
Loans to customers | 284.3 | 277.8 | - | 25.8 | 252.0 | - |
Amounts due from holding companies | ||||||
and fellow subsidiaries | 32.2 | 31.8 | - | 24.1 | 7.7 | - |
Other financial assets | ||||||
Securities | 7.6 | 7.6 | 1.9 | 5.7 | - | - |
2022 | ||||||
Financial assets | ||||||
Cash and balances at central banks | 73.1 | 73.1 | - | - | - | 73.1 |
Loans to banks | 2.9 | 2.9 | - | 2.8 | 0.1 | - |
Loans to customers | 267.4 | 257.2 | - | 19.3 | 237.9 | - |
Amounts due from holding companies | ||||||
and fellow subsidiaries | 30.6 | 29.4 | - | 19.0 | 10.4 | - |
Other financial assets | ||||||
Securities | 4.1 | 3.9 | 0.8 | 3.1 | - | - |
2023 | ||||||
Financial liabilities | ||||||
Bank deposits | 18.1 | 18.2 | - | 14.9 | 0.3 | 3.0 |
Customer deposits | 276.2 | 275.8 | - | 26.8 | 15.6 | 233.4 |
Amounts due to holding companies | ||||||
and fellow subsidiaries | 83.5 | 83.1 | - | 44.0 | 38.0 | 1.1 |
Other financial liabilities | ||||||
Debt securities in issue | 8.1 | 8.1 | - | 2.1 | 6.0 | - |
Subordinated liabilities | 0.1 | 0.2 | - | 0.2 | - | - |
Notes in circulation | 0.8 | 0.8 | - | - | - | 0.8 |
2022 | ||||||
Financial liabilities | ||||||
Bank deposits | 16.1 | 15.7 | - | 12.3 | - | 3.4 |
Customer deposits | 281.6 | 281.6 | - | 11.9 | 8.0 | 261.7 |
Amounts due to holding companies | ||||||
and fellow subsidiaries | 74.5 | 73.0 | - | 25.8 | 45.3 | 1.9 |
Other financial liabilities | ||||||
Debt securities in issue | 4.5 | 4.5 | - | 2.9 | 1.6 | - |
Subordinated liabilities | 0.2 | 0.2 | - | 0.2 | - | - |
Notes in circulation | 0.8 | 0.8 | - | - | - | 0.8 |
NWB Group
Annual Report and Accounts 2023
135
Notes to the financial statements 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.
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 & Institutional (SME loans) and Private Banking in
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
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
NWB Group
Annual Report and Accounts 2023
136
Remaining maturity
The following table shows the residual maturity of financial instruments, based on contractual date of maturity.
| NWB Group | ||||||
2023 | 2022 | |||||
Less than 12 | More than 12 | Less than 12 | More than 12 | |||
months | months | Total | months | months | Total | |
£m | £m | £m | £m | £m | £m | |
Assets | ||||||
Cash and balances at central banks | 48,259 | - | 48,259 | 73,065 | - | 73,065 |
Derivatives | 312 | 2,872 | 3,184 | 307 | 4,100 | 4,407 |
Loans to banks - amortised cost | 3,091 | 264 | 3,355 | 2,947 | 250 | 3,197 |
Loans to customers - amortised cost | 65,410 | 253,056 | 318,466 | 60,712 | 240,972 | 301,684 |
Amounts due from holding companies and fellow subsidiaries (1) | 1,406 | 402 | 1,808 | 4,159 | 19 | 4,178 |
Other financial assets | 8,458 | 23,486 | 31,944 | 1,161 | 13,385 | 14,546 |
Liabilities | ||||||
Bank deposits | 6,052 | 12,000 | 18,052 | 4,060 | 12,000 | 16,060 |
Customer deposits | 308,379 | 5,373 | 313,752 | 321,584 | 1,030 | 322,614 |
Derivatives | 370 | 1,348 | 1,718 | 521 | 1,567 | 2,088 |
Amounts due to holding companies and fellow subsidiaries (2) | 38,646 | 8,327 | 46,973 | 30,271 | 8,344 | 38,615 |
Other financial liabilities | 8,148 | 863 | 9,011 | 2,486 | 2,898 | 5,384 |
Subordinated liabilities | 2 | 120 | 122 | 74 | 123 | 197 |
Notes in circulation | 806 | - | 806 | 809 | - | 809 |
Lease liabilities | 77 | 436 | 513 | 112 | 789 | 901 |
| NWB Plc | ||||||
| 2023 | 2022 | |||||
Less than 12 | More than 12 | Less than 12 | More than | 12 | ||
months | months | Total | months | months | Total | |
£m | £m | £m | £m | £m | £m | |
Assets | ||||||
Cash and balances at central banks | 48,238 | - | 48,238 | 73,062 | - | 73,062 |
Derivatives | 313 | 2,900 | 3,213 | 308 | 4,122 | 4,430 |
Loans to banks - amortised cost | 2,793 | 250 | 3,043 | 2,620 | 250 | 2,870 |
Loans to customers - amortised cost | 53,079 | 231,235 | 284,314 | 48,498 | 218,903 | 267,401 |
Amounts due from holding companies and fellow subsidiaries (1) | 9,480 | 23,237 | 32,717 | 14,046 | 17,147 | 31,193 |
Other financial assets | 7,607 | 23,485 | 31,092 | 1,161 | 13,019 | 14,180 |
Liabilities | ||||||
Bank deposits | 6,052 | 12,000 | 18,052 | 4,059 | 12,000 | 16,059 |
Customer deposits | 270,947 | 5,255 | 276,202 | 280,778 | 780 | 281,558 |
Amounts due to holding companies and fellow subsidiaries (2) | 54,371 | 29,438 | 83,809 | 48,016 | 26,838 | 74,854 |
Derivatives | 440 | 1,574 | 2,014 | 521 | 2,061 | 2,582 |
Other financial liabilities | 8,147 | - | 8,147 | 2,486 | 2,039 | 4,525 |
Subordinated liabilities | 2 | 117 | 119 | 74 | 117 | 191 |
Notes in circulation | 806 | - | 806 | 809 | - | 809 |
Lease liabilities | 66 | 361 | 427 | 100 | 702 | 802 |
(1)
Amounts due from holding companies and fellow subsidiaries relating to non-financial instruments of £503 million (2022 - £725 million) for NWB Group and £782 million (2022 – £940
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 £279 million (2022 - £156 million) for NWB Group and £365 million (2022 – £183 million)
for NWB Plc have been excluded from the tables.
NWB Group
Annual Report and Accounts 2023
137
Notes to the financial statements continued
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 then 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
The settlement date of debt securities issued by certain
securitisation vehicles consolidated by the NWB 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 £1.3 billion (2022 - £2.0
billion) for the NWB Group and £1.6 billion (2022 - £2.5 billion) for
the NWB Plc 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 | |
2023 | £m | £m | £m | £m | £m | £m |
Liabilities by contractual maturity up to 20 years | ||||||
Bank deposits | 5,965 | 738 | 4,833 | 8,307 | - | - |
Customer deposits | 284,733 | 23,882 | 5,361 | 10 | 9 | - |
Amounts due to holding companies and fellow subsidiaries (1) | 32,260 | 6,846 | 3,279 | 4,740 | 1,840 | - |
Derivatives held for hedging | 71 | 149 | 308 | 149 | 86 | 11 |
Other financial liabilities | 3,618 | 4,635 | 297 | 378 | 110 | 79 |
Subordinated liabilities | - | 10 | 21 | 21 | 55 | 104 |
Notes in circulation | 806 | - | - | - | - | - |
Lease liabilities | 23 | 61 | 134 | 76 | 126 | 102 |
327,476 | 36,321 | 14,233 | 13,681 | 2,226 | 296 | |
Guarantees and commitments notional amount | ||||||
Guarantees (2) | 1,387 | - | - | - | - | - |
Commitments (3) | 75,891 | - | - | - | - | - |
77,278 | - | - | - | - | - | |
2022 | ||||||
Liabilities by contractual maturity up to 20 years | ||||||
Bank deposits | 4,165 | 311 | 5,019 | 8,503 | - | - |
Customer deposits | 314,550 | 7,106 | 1,028 | 1 | 12 | - |
Amounts due to holding companies and fellow subsidiaries (1) | 26,150 | 4,328 | 2,855 | 3,778 | 3,526 | - |
Derivatives held for hedging | 36 | 131 | 357 | 96 | 79 | 11 |
Other financial liabilities | 2,312 | 175 | 2,461 | 375 | 109 | 79 |
Subordinated liabilities | 76 | 10 | 21 | 21 | 59 | 104 |
Notes in circulation | 809 | - | - | - | - | - |
Lease liabilities | 34 | 91 | 211 | 167 | 254 | 206 |
348,132 | 12,152 | 11,952 | 12,941 | 4,039 | 400 | |
Guarantees and commitments notional amount | ||||||
Guarantees (2) | 1,728 | - | - | - | - | - |
Commitments (3) | 86,022 | - | - | - | - | - |
87,750 | - | - | - | - | - | |
For the notes to this table refer to the following page.
NWB Group
Annual Report and Accounts 2023
138
year end.
Notes to the financial statements continued
NWB Plc | ||||||
0-3 months | 3-12 months | 1-3 years | 3-5 years | 5-10 years | 10-20 years | |
2023 | £m | £m | £m | £m | £m | £m |
Liabilities by contractual maturity up to 20 years | ||||||
Bank deposits | 5,965 | 738 | 4,833 | 8,307 | - | - |
Customer deposits | 251,691 | 19,361 | 5,248 | 1 | 9 | - |
Amounts due to holding companies and fellow subsidiaries (1) | 41,705 | 13,625 | 11,048 | 18,227 | 2,613 | - |
Derivatives held for hedging | 70 | 149 | 306 | 147 | 83 | 11 |
Other financial liabilities | 3,619 | 4,635 | - | - | - | - |
Subordinated liabilities | - | 10 | 21 | 21 | 52 | 104 |
Notes in circulation | 806 | - | - | - | - | - |
Lease liabilities | 18 | 53 | 124 | 71 | 118 | 86 |
303,874 | 38,571 | 21,580 | 26,774 | 2,875 | 201 | |
Guarantees and commitments notional amount | ||||||
Guarantees (2) | 1,331 | - | - | - | - | - |
Commitments (3) | 72,101 | - | - | - | - | - |
73,432 | - | - | - | - | - | |
2022 | ||||||
Liabilities by contractual maturity up to 20 years | ||||||
Bank deposits | 4,165 | 311 | 5,019 | 8,503 | - | - |
Customer deposits | 276,773 | 4,035 | 770 | 1 | 12 | - |
Amounts due to holding companies and fellow subsidiaries (1) | 39,068 | 9,478 | 14,078 | 11,004 | 4,139 | - |
Derivatives held for hedging | 33 | 130 | 355 | 94 | 76 | 11 |
Other financial liabilities | 2,312 | 175 | 2,165 | - | - | - |
Subordinated liabilities | 76 | 10 | 21 | 21 | 52 | 104 |
Notes in circulation | 809 | - | - | - | - | - |
Lease liabilities | 29 | 84 | 196 | 160 | 245 | 188 |
323,265 | 14,223 | 22,604 | 19,783 | 4,524 | 303 | |
Guarantees and commitments notional amount | ||||||
Guarantees (2) | 1,664 | - | - | - | - | - |
Commitments (3) | 82,135 | - | - | - | - | - |
83,799 | - | - | - | - | - |
(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
NWB Group
Annual Report and Accounts 2023
139
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 | ||||||
| 2023 | 2022 | |||||
Notional | Assets | Liabilities | Notional | Assets | Liabilities | |
£bn | £m | £m | £bn | £m | £m | |
Exchange rate contracts | 19.7 | 83 | 249 | 33.5 | 158 | 416 |
Interest rate contracts | 669.6 | 3,101 | 1,469 | 490.2 | 4,249 | 1,672 |
Total | 689.3 | 3,184 | 1,718 | 523.7 | 4,407 | 2,088 |
| NWB Plc | ||||||
| 2023 | 2022 | |||||
Notional | Assets | Liabilities | Notional | Assets | Liabilities | |
£bn | £m | £m | £bn | £m | £m | |
Exchange rate contracts | 20.9 | 83 | 271 | 34.7 | 159 | 434 |
Interest rate contracts | 683.5 | 3,130 | 1,743 | 498.4 | 4,271 | 2,148 |
Total | 704.4 | 3,213 | 2,014 | 533.1 | 4,430 | 2,582 |
Hedge accounting using derivatives
For accounting policy information refer to Accounting policies 3.8
and 3.12.
Refer to Note 33 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 the
foreign exchange risk associated with 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.
Cash flow hedges of interest rate risk relate to exposures to the
variability in future interest payments and receipts due to the
movement of 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 interest rates, most notably
SOFR, EURIBOR, SONIA and the Bank of England Official Bank
Rate. The variability in cash flows due to movements in the
relevant interest 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.
Suitable larger fixed rate financial instruments are subject to fair
value hedging in line with documented risk management
strategies.
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 interest rate risk component of the hedged item. The
significant interest rates identified as risk components are SOFR,
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, fair value hedge relationships and net
investment hedging, NWB Group determines that there is an
economic relationship between the hedged item and hedging
instrument via assessing the initial and ongoing effectiveness 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
instrument. The method used for comparing movements is either
regression testing, or the dollar offset method. The method for
testing effectiveness and the period over which the test is
performed depends on the applicable risk management strategy
and is applied consistently to each risk management strategy.
Hedge effectiveness is assessed on a cumulative basis and the
determination of effectiveness is in line with the requirements of
IAS 39.
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 in line with the requirements of
IAS 39 and recognised in the income statement as it arises
.
NWB Group
Annual Report and Accounts 2023
140
Notes to the financial statements continued
Derivatives in hedge accounting relationships
Included in the tables above are derivatives held for hedging purposes as follows.
NWB Group | ||||||||
2023 | 2022 | |||||||
Changes in fair | Changes 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 (2) | 34.1 | 620 | 1,159 | (167) | 23.7 | 981 | 1,022 | 1,563 |
Cash flow hedging | ||||||||
Interest rate contracts | 97.0 | 1,994 | 3,056 | (305) | 117.9 | 3,045 | 3,491 | (552) |
Exchange rate contracts | 2.6 | 2 | 3 | (3) | 0.2 | 4 | 3 | (5) |
Net investment hedging | ||||||||
Exchange rate contracts | 0.1 | - | 7 | (2) | 0.1 | - | 4 | 1 |
133.8 | 2,616 | 4,225 | (477) | 141.9 | 4,030 | 4,520 | 1,007 | |
IFRS netting and clearing | ||||||||
house settlements | (2,090) | (3,820) | (3,289) | (4,262) | ||||
526 | 405 | 741 | 258 | |||||
NWB Plc | ||||||||
2023 | 2022 | |||||||
Changes in fair | Changes 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 (2) | 33.9 | 619 | 1,125 | (183) | 23.4 | 980 | 968 | 1,595 |
Cash flow hedging | ||||||||
Interest rate contracts | 97.0 | 1,994 | 3,056 | (305) | 117.9 | 3,045 | 3,491 | (552) |
Exchange rate contracts | 2.6 | - | 3 | (2) | 0.1 | 2 | 3 | (5) |
133.5 | 2,613 | 4,184 | (490) | 141.4 | 4,027 | 4,462 | 1,038 | |
IFRS netting and clearing | ||||||||
house settlements | (2,090) | (3,786) | (3,289) | (4,211) | ||||
523 | 398 | 738 | 251 | |||||
(1)
The change in fair value used for hedge ineffectiveness includes instruments that were derecognised in the year.
(2)
The hedged risk includes inflation risk.
Hedge ineffectiveness
Hedge ineffectiveness recognised in other operating income comprised.
NWB Group | ||
2023 | 2022 | |
£m | £m | |
Fair value hedging | ||
Gain/(loss) on hedged items attributable to the hedged risk | 194 | (1,548) |
(Loss)/gain on the hedging instruments | (167) | 1,563 |
Fair value hedging ineffectiveness | 27 | 15 |
Cash flow hedging | ||
Interest rate risk | (4) | 5 |
Cash flow hedging ineffectiveness | (4) | 5 |
Total | 23 | 20 |
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.
NWB Group
Annual Report and Accounts 2023
141
Notes to the financial statements continued
Maturity of notional hedging contracts
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 | Over 10 years | Total | |
2023 | £bn | £bn | £bn | £bn | £bn | £bn | £bn |
Fair value hedging | |||||||
Interest rate risk (1) | |||||||
Hedging assets | 0.1 | 1.6 | 5.4 | 7.2 | 4.2 | 2.9 | 21.4 |
Hedging liabilities | 2.2 | 1.7 | 2.7 | 4.3 | 1.8 | - | 12.7 |
2022 | |||||||
Fair value hedging | |||||||
Interest rate risk (1) | |||||||
Hedging assets | 0.2 | 0.2 | 3.0 | 3.5 | 3.2 | 2.1 | 12.2 |
Hedging liabilities | - | 0.2 | 4.5 | 3.4 | 3.4 | - | 11.5 |
2023 | |||||||
Cash flow hedging | |||||||
Interest rate risk | |||||||
Hedging assets | 1.5 | 2.1 | 22.9 | 12.2 | 5.3 | - | 44.0 |
Hedging liabilities | 0.5 | 4.8 | 31.2 | 15.5 | 1.0 | - | 53.0 |
Exchange rate risk | |||||||
Hedging assets | 0.3 | 0.7 | 0.5 | - | - | - | 1.5 |
Hedging liabilities | 0.8 | 0.2 | 0.1 | - | - | - | 1.1 |
2022 | |||||||
Cash flow hedging | |||||||
Interest rate risk | |||||||
Hedging assets | 4.7 | 6.7 | 24.8 | 11.7 | 5.0 | - | 52.9 |
Hedging liabilities | 8.5 | 21.5 | 19.1 | 8.0 | 7.9 | - | 65.0 |
Exchange rate risk | |||||||
Hedging assets | - | - | - | - | - | - | - |
Hedging liabilities | - | 0.2 | - | - | - | - | 0.2 |
(1)
The hedged risk includes inflation risk.
NWB Group
Annual Report and Accounts 2023
142
Notes to the financial statements continued
12 Derivatives continued
| NWB Plc | |||||||
0-3 months | 3-12 months | 1-3 years | 3-5 years | 5-10 years | Over 10 years | Total | |
2023 | £bn | £bn | £bn | £bn | £bn | £bn | £bn |
Fair value hedging | |||||||
Interest rate risk (1) | |||||||
Hedging assets | 0.1 | 1.6 | 5.4 | 7.2 | 4.1 | 3.1 | 21.5 |
Hedging liabilities | 2.2 | 1.7 | 2.7 | 4.3 | 1.5 | - | 12.4 |
2022 | |||||||
Fair value hedging | |||||||
Interest rate risk (1) | |||||||
Hedging assets | 0.2 | 0.2 | 3.0 | 3.4 | 3.1 | 2.0 | 11.9 |
Hedging liabilities | - | 0.2 | 4.5 | 3.4 | 3.4 | - | 11.5 |
2023 | |||||||
Cash flow hedging | |||||||
Interest rate risk | |||||||
Hedging assets | 1.5 | 2.1 | 22.9 | 12.2 | 5.3 | - | 44.0 |
Hedging liabilities | 0.5 | 4.8 | 31.2 | 15.5 | 1.0 | - | 53.0 |
Exchange rate risk | |||||||
Hedging assets | 0.3 | 0.7 | 0.5 | - | - | - | 1.5 |
Hedging liabilities | 0.8 | 0.2 | 0.1 | - | - | - | 1.1 |
2022 | |||||||
Cash flow hedging | |||||||
Interest rate risk | |||||||
Hedging assets | 4.7 | 6.7 | 24.8 | 11.7 | 5.0 | - | 52.9 |
Hedging liabilities | 8.5 | 21.5 | 19.1 | 8.0 | 7.9 | - | 65.0 |
Exchange rate risk | |||||||
Hedging assets | - | - | - | - | - | - | - |
Hedging liabilities | 0.1 | - | - | - | - | - | 0.1 |
(1)
The hedged risk includes inflation risk.
Average fixed interest rates
Average fixed rate for cash flow hedges, interest rate risk, for NWB Group and NWB Plc.
0-3 months | 3-12 months | 1-3 years | 3-5 years | 5-10 years | Over 10 years | Total | |
2023 | % | % | % | % | % | % | % |
Average fixed interest rate | |||||||
Hedging assets | 0.87 | 2.84 | 1.29 | 4.04 | 1.28 | - | 2.11 |
Hedging liabilities | 0.71 | 1.37 | 3.95 | 2.96 | 1.92 | - | 3.36 |
2022 | |||||||
Average fixed interest rate | |||||||
Hedging assets | 1.47 | 1.39 | 1.51 | 2.64 | 0.69 | - | 1.67 |
Hedging liabilities | 0.10 | 0.70 | 2.47 | 1.63 | 2.54 | - | 1.48 |
Average foreign exchange rates
For cash flow hedging of exchange rate risk, the average foreign exchange rates applicable across the relationships for NWB Group
and NWB Plc were as below for the main currencies hedged.
2023 | 2022 | |
USD/GBP | 1.26 | - |
INR/GBP | 105.03 | 100.54 |
CHF/GBP | 1.08 | 1.15 |
NWB Group
Annual Report and Accounts 2023
143
Notes to the financial statements continued
Analysis of hedged items and related hedging instruments
The table below analyses assets and liabilities, including intercompany, subject to hedging derivatives.
NWB Group | |||
Carrying value | Impact on | Changes in fair | |
of hedged | hedged items | value used as a | |
assets | included in | basis to determine | |
and liabilities | carrying value | ineffectiveness (1) | |
2023 | £m | £m | £m |
Fair value hedging - interest rate (2) | |||
Loans to banks and customers - amortised cost | 2,857 | (378) | 79 |
Other financial assets - securities | 18,451 | 265 | 509 |
Total (3) | 21,308 | (113) | 588 |
Other financial liabilities - debt securities in issue | 8,670 | (418) | (297) |
Subordinated liabilities | 3,636 | (115) | (97) |
Total | 12,306 | (533) | (394) |
2022 | |||
Fair value hedging - interest rate (2) | |||
Loans to banks and customers - amortised cost | 2,347 | (490) | (592) |
Other financial assets - securities | 8,600 | (666) | (2,008) |
Total (3) | 10,947 | (1,156) | (2,600) |
Other financial liabilities - debt securities in issue | 8,430 | (696) | 835 |
Subordinated liabilities | 2,241 | (261) | 217 |
Total | 10,671 | (957) | 1,052 |
2023 | |||
Cash flow hedging - interest rate | |||
Loans to banks and customers - amortised cost (4) | 43,693 | (1,529) | |
Other financial assets - securities | 354 | (13) | |
Total | 44,047 | (1,542) | |
Bank and customer deposits | 52,964 | 1,843 | |
Other financial liabilities - debt securities in issue | - | - | |
Total | 52,964 | 1,843 | |
Cash flow hedging - exchange rate | |||
Loans to banks and customers - amortised cost (4) | 583 | - | |
Other financial assets - securities | 1,839 | - | |
Total | 2,422 | - | |
Other | 201 | 3 | |
2022 | |||
Cash flow hedging - interest rate | |||
Loans to banks and customers - amortised cost (4) | 52,540 | 2,593 | |
Other financial assets - securities | 261 | 12 | |
Total | 52,801 | 2,605 | |
Bank and customer deposits | 65,034 | (2,046) | |
Other financial liabilities - debt securities in issue | 80 | (2) | |
Total | 65,114 | (2,048) | |
Cash flow hedging - exchange rate | |||
Loans to banks and customer - amortised cost | - | - | |
Other financial assets - securities | - | - | |
Total | - | - | |
Other | 204 | 5 |
(1)
The change in fair value used for ineffectiveness includes instruments that were derecognised in the year.
(2)
The hedged risk includes inflation risk.
(3)
Carrying values include £25 million (2022 - £24 million) adjustment for discontinued fair value hedges.
(4)
Includes cash and balances at central banks.
NWB Group
Annual Report and Accounts 2023
144
Notes to the financial statements continued
12 Derivatives continued
Analysis of hedged items and related hedging instruments - continued
NWB Plc | |||
Carrying value | Impact on | Changes in fair | |
of hedged | hedged items | value used as a | |
assets | included in | basis to determine | |
and liabilities | carrying value | ineffectiveness (1) | |
2023 | £m | £m | £m |
Fair value hedging - interest rate (2) | |||
Loans to banks and customers - amortised cost | 2,776 | (381) | 77 |
Other financial assets - securities | 18,451 | 265 | 509 |
Total (3) | 21,227 | (116) | 586 |
Other financial liabilities - debt securities in issue | 8,399 | (384) | (280) |
Subordinated liabilities | 3,636 | (115) | (97) |
Total | 12,035 | (499) | (377) |
2022 | |||
Fair value hedging - interest rate (2) | |||
Loans to banks and customers - amortised cost | 2,274 | (491) | (579) |
Other financial assets - securities | 8,600 | (666) | (2,008) |
Total (3) | 10,874 | (1,157) | (2,587) |
Other financial liabilities - debt securities in issue | 8,172 | (644) | 790 |
Subordinated liabilities | 2,241 | (261) | 217 |
Total | 10,413 | (905) | 1,007 |
2023 | |||
Cash flow hedging - interest rate | |||
Loans to banks and customers - amortised cost (4) | 43,693 | (1,529) | |
Other financial assets - securities | 354 | (13) | |
Total | 44,047 | (1,542) | |
Bank and customer deposits | 52,964 | 1,843 | |
Other financial liabilities - debt securities in issue | - | - | |
Total | 52,964 | 1,843 | |
Cash flow hedging - exchange rate | |||
Loans to banks and customers - amortised cost (4) | 583 | - | |
Other financial assets - securities | 1,839 | - | |
Total | 2,422 | - | |
Other | 143 | 2 | |
2022 | |||
Cash flow hedging - interest rate | |||
Loans to banks and customers - amortised cost (4) | 52,540 | 2,593 | |
Other financial assets - securities | 261 | 12 | |
Total | 52,801 | 2,605 | |
Bank and customer deposits | 65,034 | (2,046) | |
Other financial liabilities - debt securities in issue | 80 | (2) | |
Total | 65,114 | (2,048) | |
Cash flow hedging - exchange rate | |||
Other | 149 | 6 |
(1)
The change in fair value used for ineffectiveness includes instruments that were derecognised in the year.
(2)
The hedged risk includes inflation risk.
(3)
Carrying values include nil (2022 - £2 million) adjustment for discontinued fair value hedges.
(4)
Includes cash and balances at central banks.
NWB Group
Annual Report and Accounts 2023
145
Notes to the financial statements continued
Analysis of cash flow and foreign exchange hedge reserve
The following shows analysis of the pre-tax cash flow hedge reserve and foreign exchange hedge reserve.
NWB Group | ||||
2023 | 2022 | |||
Foreign | Foreign | |||
Cash flow hedge | exchange | Cash flow hedge | exchange | |
reserve | hedge reserve | reserve | hedge reserve | |
£m | £m | £m | £m | |
Continuing | ||||
Interest rate risk | (812) | - | (544) | - |
Foreign exchange risk | (1) | (6) | 2 | (16) |
De-designated | ||||
Interest rate risk | (20) | - | (1) | - |
Foreign exchange risk | - | 16 | - | 13 |
Total | (833) | 10 | (543) | (3) |
| NWB Plc | ||||
2023 | 2022 | |||
Foreign | Foreign | |||
Cash flow | exchange | Cash flow | exchange | |
hedge reserve | hedge reserve | hedge reserve | hedge reserve | |
£m | £m | £m | £m | |
Continuing | ||||
Interest rate risk | (812) | - | (544) | - |
Foreign exchange risk | (3) | 1 | (1) | (15) |
De-designated | ||||
Interest rate risk | (20) | - | (1) | - |
Foreign exchange risk | - | (4) | - | - |
Total | (835) | (3) | (546) | (15) |
NWB Group
Annual Report and Accounts 2023
146
Notes to the financial statements continued
12 Derivatives continued
| NWB Group | ||||
2023 | 2022 | |||
Foreign | Foreign | |||
Cash flow hedge | exchange | Cash flow hedge | exchange | |
reserve | hedge reserve | reserve | hedge reserve | |
£m | £m | £m | £m | |
Amount recognised in equity | ||||
Interest rate risk | (218) | - | (288) | - |
Foreign exchange risk | 38 | 14 | 5 | (31) |
Total | (180) | 14 | (283) | (31) |
Amount transferred from equity to earnings | ||||
Interest rate risk to net interest income | (61) | - | (258) | - |
Interest rate risk to non interest income (1) | (8) | - | 16 | - |
Interest rate risk to operating expenses | - | - | (14) | - |
Foreign exchange risk to net interest income | (43) | - | - | - |
Foreign exchange risk to operating expenses | 2 | - | (3) | - |
Total | (110) | - | (259) | - |
NWB Plc | ||||
2023 | 2022 | |||
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 | (218) | - | (288) | - |
Foreign exchange risk | 38 | 12 | - | (33) |
Total | (180) | 12 | (288) | (33) |
Amount transferred from equity to earnings | ||||
Interest rate risk to net interest income | (61) | - | (257) | - |
Interest rate risk to non interest income (1) | (8) | - | 16 | - |
Foreign exchange risk to net interest income | (44) | - | (14) | - |
Foreign exchange risk to operating expenses | 4 | - | - | - |
Total | (109) | - | (255) | - |
(1)
There was £8 million (2022 - £16 million) reclassified with the cash flow reserve to earnings due to forecasted cash flows that are no longer expected to occur in NWB Plc and NWB
NWB Group
Annual Report and Accounts 2023
147
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 | |
2023 | 2022 | 2023 | 2022 | |
£m | £m | £m | £m | |
Loans - amortised cost | ||||
Stage 1 | 288,772 | 266,722 | 258,188 | 236,809 |
Stage 2 | 31,727 | 37,216 | 28,008 | 32,765 |
Stage 3 | 4,405 | 3,783 | 4,003 | 3,383 |
Inter-group (1) | 1,809 | 4,220 | 32,200 | 30,633 |
Total | 326,713 | 311,941 | 322,400 | 303,590 |
ECL provisions (2) | ||||
Stage 1 | 566 | 506 | 521 | 459 |
Stage 2 | 794 | 813 | 746 | 765 |
Stage 3 | 1,512 | 1,262 | 1,416 | 1,170 |
Inter-group | 1 | 4 | 41 | 48 |
2,873 | 2,585 | 2,724 | 2,442 | |
ECL provision coverage (3) | ||||
Stage 1 (%) | 0.2 | 0.19 | 0.2 | 0.19 |
Stage 2 (%) | 2.5 | 2.18 | 2.7 | 2.33 |
Stage 3 (%) | 34.3 | 33.36 | 35.4 | 34.58 |
Inter-group (%) | 0.1 | 0.09 | 0.1 | 0.16 |
0.88 | 0.84 | 0.92 | 0.88 | |
Impairment (releases)/losses | ||||
ECL (release)/charge (4) | ||||
Stage 1 | (319) | (243) | (302) | (256) |
Stage 2 | 529 | 348 | 516 | 373 |
Stage 3 | 297 | 233 | 276 | 234 |
Third party | 507 | 338 | 490 | 351 |
Inter-group | (3) | 3 | (7) | 40 |
504 | 341 | 483 | 391 | |
Amounts written-off | 235 | 321 | 218 | 272 |
(1)
NWB Group’s intercompany assets are classified in Stage 1.
(2)
Includes £8 million (2022 – £2 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 loans and total ECL provisions, including ECL for other (non-
loan) assets and unutilised exposure. Some segments with a high proportion of debt securities or unutilised exposure may result in a not meaningful coverage ratio.
(4)
Includes a £10 million charge (2022 – nil) related to other financial assets, of which a £6 million charge (2022 – £1 million release) related to assets classified as FVOCI, and includes a £2
million release (2022 – nil) 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 £47.8 billion (2022 – £72.5 billion) and debt
securities of £31.5 billion (2022 – £14.1 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.
Accounting policy Note 2.3 sets out how the expected loss
approach is applied. At 31 December 2023, customer loan
impairment provisions amounted to £2,873 million (2022 - £2,585
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 judgements 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
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
NWB Group
Annual Report and Accounts 2023
148
Notes to the financial statements continued
Critical accounting policy: Investments in Group undertakings
At each reporting date, NatWest Bank Plc assesses whether there is any indication that its investment in its Group undertakings is
impaired. If any such indication exists, NatWest Bank Plc undertakes an impairment test by comparing the carrying value of the
investment in its Group undertakings with its estimated recoverable amount. The key judgement is in determining the recoverable
amount. The recoverable amount of an investment in its Group undertakings is the higher of its fair value less cost to sell and its value
in use, being an assessment of the discounted future cash flows of the entity. Impairment testing inherently involves a number of
judgements: the five-year cash flow forecast, the choice of appropriate discount and growth rates, and the estimation of fair value. For
accounting policy information refer to Accounting policy Note 2.5.
Investments in Group undertakings are carried at cost less impairment losses. Movements during the year were as follows
:
NWB Plc | ||
2023 | 2022 | |
£m | £m | |
At 1 January | 2,030 | 2,319 |
Currency translation and other adjustments | (3) | (2) |
Additional investments in Group undertakings | 621 | 276 |
Disposals of investments in Group undertakings | (35) | (227) |
Net reversal/(impairment) of impairment of investments | 2 | (336) |
At 31 December | 2,615 | 2,030 |
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 2023 is supported by the respective
recoverable values of the entities.
2023 additional investments relate primarily to the investments of £471 million in NatWest RT Holdings Limited and of £140 million in
NatWest Nominee 1 Limited. Disposals relate to Coutts & Company’s AT1 redemption of £35 million. The additions and disposals in
2022 were related to Coutts & Company AT1 issuance and redemption.
In 2023, net reversal of impairment of investments comprises a £47 million reversal of NatWest Bank Plc’s investment in Strand
European Holdings AB following the annual assessment of its recoverable amount and a £42 million impairment of NatWest Bank Plc’s
investment in Ulster Bank Limited due to a decline in its recoverable amount. The impairment in 2022 was primarily related to the
investment in Ulster Bank Limited.
The annual assessment of recoverable amount as at 31 December 2023 did not indicate the need for an impairment of the investment
in Coutts & Company. Reasonably possible adverse changes to the more significant variables of the value in use calculation for Coutts
& Company would not lead to a reduction in the recoverable amount below its carrying value.
The principal subsidiary undertakings of NatWest Bank Plc 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 subsidiary
undertakings are included in NWB Group’s consolidated financial statements and have an accounting reference date of 31 December.
Country of incorporation | ||
and principal area of | ||
| Nature of business | operations | |
Coutts & Company (1) | Private banking | Great Britain |
Lombard North Central PLC | Leasing | Great Britain |
(1)
Coutts & Company is incorporated with unlimited liability.
For accounting policy information refer to Accounting policy Note 2.5.
NWB Group
Annual Report and Accounts 2023
149
Notes to the financial statements continued
| NWB Group | |||||||||
| Debt securities | |||||||||
Central and local government | |||||||||
Other | Equity | Settlement | |||||||
UK | US | Other | debt | Total | shares | Loans | balances | Total | |
2023 | £m | £m | £m | £m | £m | £m | £m | £m | £m |
Mandatory fair value through profit or loss | - | - | - | - | - | - | 453 | - | 453 |
Fair value through other comprehensive | |||||||||
income | 5,949 | 3,045 | 5,165 | 9,334 | 23,493 | 2 | - | - | 23,495 |
Amortised cost | 1,728 | - | - | 6,264 | 7,992 | - | - | 4 | 7,996 |
Total | 7,677 | 3,045 | 5,165 | 15,598 | 31,485 | 2 | 453 | 4 | 31,944 |
2022 | |||||||||
Mandatory fair value through profit or loss | - | - | - | - | - | - | 417 | - | 417 |
Fair value through other comprehensive | |||||||||
income | 681 | 3,171 | 431 | 5,428 | 9,711 | 2 | - | - | 9,713 |
Amortised cost | 888 | - | - | 3,522 | 4,410 | - | - | 6 | 4,416 |
Total | 1,569 | 3,171 | 431 | 8,950 | 14,121 | 2 | 417 | 6 | 14,546 |
| NWB Plc | |||||||||
| Debt securities | |||||||||
Central and local government | |||||||||
Other | Equity | Settlement | |||||||
UK | US | Other | debt | Total | shares | Loans | balances | Total | |
2023 | £m | £m | £m | £m | £m | £m | £m | £m | £m |
Mandatory fair value through profit or loss | - | - | - | - | - | - | 453 | - | 453 |
Fair value through other comprehensive | |||||||||
income | 5,467 | 3,045 | 5,165 | 9,334 | 23,011 | 2 | - | - | 23,013 |
Amortised cost | 1,728 | - | - | 5,894 | 7,622 | - | - | 4 | 7,626 |
Total | 7,195 | 3,045 | 5,165 | 15,228 | 30,633 | 2 | 453 | 4 | 31,092 |
2022 | |||||||||
Mandatory fair value through profit or loss | - | - | - | - | - | - | 417 | - | 417 |
Fair value through other comprehensive | |||||||||
income | 681 | 3,171 | 431 | 5,428 | 9,711 | 2 | - | - | 9,713 |
Amortised cost | 888 | - | - | 3,156 | 4,044 | - | - | 6 | 4,050 |
Total | 1,569 | 3,171 | 431 | 8,584 | 13,755 | 2 | 417 | 6 | 14,180 |
NWB Group | NWB Plc | |||
2023 | 2022 | 2023 | 2022 | |
£m | £m | £m | £m | |
Intangible assets (Note 17) | 1,897 | 1,607 | 1,698 | 1,458 |
Property, plant and equipment (Note 18) | 3,751 | 3,704 | 2,021 | 1,969 |
Pension schemes in net surplus (Note 5) | 5 | 7 | - | - |
Assets of disposal groups | 24 | 6 | 24 | 3 |
Prepayments | 331 | 321 | 273 | 286 |
Accrued income | 199 | 151 | 106 | 82 |
Tax recoverable | 40 | 229 | - | 331 |
Deferred tax (Note 7) | 981 | 1,117 | 966 | 1,104 |
Acceptances | 327 | 128 | 312 | 119 |
Other assets | 394 | 397 | 335 | 289 |
7,949 | 7,667 | 5,735 | 5,641 | |
NWB Group
Annual Report and Accounts 2023
150
Notes to the financial statements continued
NWB Group | ||||||
2023 | 2022 | |||||
Goodwill | Other (1) | Total | Goodwill | Other (1) | Total | |
£m | £m | £m | £m | £m | £m | |
Cost | ||||||
At 1 January | 623 | 3,706 | 4,329 | 623 | 3,014 | 3,637 |
Currency translation and other adjustments | - | - | - | - | (3) | (3) |
Additions | - | 737 | 737 | - | 722 | 722 |
Disposals and write-off of fully amortised assets | - | (114) | (114) | - | (27) | (27) |
At 31 December | 623 | 4,329 | 4,952 | 623 | 3,706 | 4,329 |
Accumulated amortisation and impairment | ||||||
At 1 January | 564 | 2,158 | 2,722 | 564 | 1,841 | 2,405 |
Currency translation and other adjustments | - | - | - | - | (3) | (3) |
Disposals and impairment of fully amortised assets | - | (115) | (115) | - | (18) | (18) |
Amortisation charge for the year | - | 425 | 425 | - | 338 | 338 |
Impairment of intangible assets | 1 | 22 | 23 | - | - | - |
At 31 December | 565 | 2,490 | 3,055 | 564 | 2,158 | 2,722 |
Net book value at 31 December | 58 | 1,839 | 1,897 | 59 | 1,548 | 1,607 |
NWB Plc | ||
2023 (1) | 2022 (1) | |
£m | £m | |
Cost | ||
At 1 January | 3,568 | 2,889 |
Currency translation and other adjustments | - | - |
Additions | 669 | 690 |
Disposals and write-off of fully amortised assets | (126) | (11) |
At 31 December | 4,111 | 3,568 |
Accumulated amortisationand impairment | ||
At 1 January | 2,110 | 1,789 |
Currency translation and other adjustments | - | - |
Disposals and write-off of fully amortised assets | (109) | (1) |
Amortisation charge for the year | 394 | 322 |
Impairment of intangible assets | 18 | - |
At 31 December | 2,413 | 2,110 |
Net book value at 31 December | 1,698 | 1,458 |
(1)
Principally consists of 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. Intangible assets of NWB
Group were impaired by £23 million in 2023. In 2022 no
impairment was indicated.
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 2023
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: 2023 - 16% (2022 - 15.3%).
For accounting policy information refer to Accounting policies 3.3
NWB Group
Annual Report and Accounts 2023
151
NWB Group | ||||
Investment | Property, plant | Operating | ||
properties | and equipment | leases | Total | |
2023 | £m | £m | £m | £m |
Cost or valuation | ||||
At 1 January | 941 | 7,042 | 1,129 | 9,112 |
Transfers to disposal groups | - | (485) | - | (485) |
Transfers to fellow subsidiaries | - | (8) | - | (8) |
Currency translation and other adjustments (1) | (51) | (8) | - | (59) |
Additions | 81 | 627 | 156 | 864 |
Disposals and write-off of fully depreciated assets | - | (974) | (211) | (1,185) |
At 31 December | 971 | 6,194 | 1,074 | 8,239 |
Accumulated impairment, depreciation and amortisation | ||||
At 1 January | - | 4,796 | 612 | 5,408 |
Transfers to disposal groups | - | (396) | - | (396) |
Transfers to fellow subsidiaries | - | - | - | - |
Currency translation and other adjustments (2) | - | (3) | - | (3) |
Disposals and write-off of fully depreciated assets | - | (799) | (152) | (951) |
Charge for the year | - | 241 | 115 | 356 |
Impairment of property, plant and equipment | - | 74 | - | 74 |
At 31 December | - | 3,913 | 575 | 4,488 |
Net book value at 31 December | 971 | 2,281 | 499 | 3,751 |
2022 | ||||
Cost or valuation | ||||
At 1 January | 840 | 6,970 | 1,095 | 8,905 |
Transfers to disposal groups | - | (7) | - | (7) |
Transfers to fellow subsidiaries | - | (10) | - | (10) |
Currency translation and other adjustments (1) | (17) | (9) | - | (26) |
Additions | 145 | 399 | 146 | 690 |
Disposals and write-off of fully depreciated assets | (27) | (301) | (112) | (440) |
At 31 December | 941 | 7,042 | 1,129 | 9,112 |
Accumulated impairment, depreciation and amortisation | ||||
At 1 January | - | 4,692 | 569 | 5,261 |
Transfers to disposal groups | - | (4) | - | (4) |
Transfers to fellow subsidiaries | - | 4 | - | 4 |
Currency translation and other adjustments (2) | - | 28 | - | 28 |
Disposals and write-off of fully depreciated assets | - | (224) | (85) | (309) |
Charge for the year | - | 264 | 128 | 392 |
Impairment of property, plant and equipment | - | 36 | - | 36 |
At 31 December | - | 4,796 | 612 | 5,408 |
Net book value at 31 December | 941 | 2,246 | 517 | 3,704 |
(1)
Currency translation and other adjustments includes fair value adjustment in investment properties of £6 million (2022: £7 million) for NWB Group
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 £32 million (2022 - £33 million) on the value of
Investment property.
Valuations were carried out by qualified surveyors working within
the Royal Institution of Chartered Surveyors framework; property
with a fair value of £109 million (2022 - £135million) was valued
by independent valuers for the purposes of year end valuations.
For accounting policy information refer to Accounting policies 3.4
and 3.5.
NWB Group
Annual Report and Accounts 2023
152
(2)
Other adjustments include the effect of the purchase of freeholds for properties where the NWB Group was the primary leaseholder.
Notes to the financial statements continued
NWB Plc | ||
31 December | 31 December | |
2023 | 2022 | |
£m | £m | |
Cost | ||
At 1 January | 6,572 | 6,479 |
Transfers to disposal groups | (485) | (7) |
Transfers to subsidiaries and fellow subsidiaries | (10) | (10) |
Currency translation and other adjustments | (6) | (9) |
Additions | 616 | 381 |
Disposals and write-off of fully depreciated assets | (936) | (262) |
At 31 December | 5,751 | 6,572 |
Accumulated impairment and depreciation | ||
At 1 January | 4,603 | 4,496 |
Transfers to disposal groups | (397) | (4) |
Transfers to subsidiaries and fellow subsidiaries | - | 4 |
Currency translation and other adjustments (1) | (2) | 26 |
Disposals and write-off of fully depreciated assets | (768) | (194) |
Charge for the year | 219 | 240 |
Impairment for the year | 75 | 35 |
At 31 December | 3,730 | 4,603 |
Net book value at 31 December | 2,021 | 1,969 |
(1)
NWB Group | NWB Plc | |||
2023 | 2022 | 2023 | 2022 | |
£m | £m | £m | £m | |
Bank deposits - held-for-trading | 6 | 7 | 6 | 7 |
Customer deposits - held-for-trading | 7 | 10 | 7 | 10 |
Settlement balances | 4 | 2 | 4 | 2 |
Debt securities in issue | ||||
- Commercial paper and certificates of deposit | 6,009 | 1,664 | 6,008 | 1,664 |
- Covered bonds | 2,122 | 2,842 | 2,122 | 2,842 |
- Securitisation | 863 | 859 | - | - |
Total | 9,011 | 5,384 | 8,147 | 4,525 |
NWB Group
Annual Report and Accounts 2023
153
NWB Group | NWB Plc | |||
2023 | 2022 | 2023 | 2022 | |
£m | £m | £m | £m | |
Undated loan capital | 3 | 78 | - | 72 |
Preference shares (2) | 119 | 119 | 119 | 119 |
122 | 197 | 119 | 191 | |
(1)
The table above excludes amounts due to holding company and fellow subsidiaries of £3,636 million (2022 - £2,941 million) for NWB Group and £3,636 million (2022 - £2,941 million) for
NWB Plc. Refer to intercompany balances in Note 33
.
(2)
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 refer to Accounting policies 3.8 and 3.10.
2023 | 2022 | |||||
Undated loan capital | First call date | Maturity date | Capital treatment | £m | £m | |
NatWest Bank Plc | ||||||
£35 million | 11.500% notes | Dec-22 | - | Tier 2 | - | 72 |
- | 72 | |||||
Preference shares | ||||||
NatWest Bank Plc | ||||||
£140 million | Non-cumulative preference shares of £1 | - | - | Not applicable | 119 | 119 |
119 | 119 | |||||
119 | 191 | |||||
Undated loan capital other subsidiaries | 3 | 6 | ||||
122 | 197 |
The following tables analyse these intercompany subordinated liabilities:
NWB Group and NWB Plc | ||
2023 | 2022 | |
Other subsidiaries | £m | £m |
Dated loan capital | 3,636 | 2,241 |
Undated loan capital | - | 700 |
Preference shares | - | - |
3,636 | 2,941 | |
2023 | 2022 | |||||
Dated loan capital | £m | £m | ||||
NatWest Bank Plc | ||||||
€411.4 million | 1.043% notes | Jun-27 | Sep-32 | Tier 2 | 325 | 311 |
$750 million | 3.754% notes | Nov-24 | Nov-29 | Tier 2 | 575 | 594 |
£500 million | 3.622% notes | Aug-25 | Aug-30 | Tier 2 | 479 | 458 |
£1000 million | 2.105% notes | May-26 | Nov-31 | Tier 2 | 919 | 878 |
£650 million | 7.536% notes | Nov-28 | Jun-33 | Tier 2 | 679 | - |
€700 million | 5.763% notes | Jun-28 | Feb-34 | Tier 2 | 659 | - |
3,636 | 2,241 | |||||
Undated loan capital | ||||||
NatWest Bank Plc | ||||||
£700 million | Floating rate notes | - | - | Tier 2 | - | 700 |
700 |
(1)
NWB Group
Annual Report and Accounts 2023
154
Notes to the financial statements continued
NWB Group | NWB Plc | |||
2023 | 2022 | 2023 | 2022 | |
£m | £m | £m | £m | |
Lease liabilities | 513 | 901 | 427 | 802 |
Provisions for liabilities and charges | 456 | 550 | 424 | 519 |
Retirement benefit liabilities (Note 5) | 37 | 35 | 9 | 9 |
Accruals | 1,068 | 1,009 | 872 | 878 |
Deferred income | 264 | 232 | 242 | 212 |
Current tax | 137 | 2 | 46 | 2 |
Deferred tax (Note 7) | 89 | 130 | - | - |
Acceptances | 327 | 128 | 312 | 119 |
Other liabilities | 434 | 483 | 202 | 202 |
Total | 3,325 | 3,470 | 2,534 | 2,743 |
NWB Group | |||||
Financial | |||||
Redress and other | commitments and | ||||
litigation | Property | guarantees | Other (1) | Total | |
Provisions for liabilities and charges | £m | £m | £m | £m | £m |
At 1 January 2023 | 292 | 105 | 59 | 94 | 550 |
Expected credit losses impairment release | - | - | (3) | - | (3) |
Currency translation and other movements | (4) | - | - | (4) | (8) |
Charge to income statement | 102 | 29 | - | 84 | 215 |
Release to income statement | (17) | (47) | - | (24) | (88) |
Provisions utilised | (126) | (23) | - | (61) | (210) |
At 31 December 2023 | 247 | 64 | 56 | 89 | 456 |
NWB Plc | |||||
Financial | |||||
Redress and other | commitments and | ||||
litigation | Property | guarantees | Other (1) | Total | |
Provisions for liabilities and charges | £m | £m | £m | £m | £m |
At 1 January 2023 | 286 | 103 | 57 | 73 | 519 |
Expected credit losses impairment release | - | - | (3) | - | (3) |
Currency translation and other movements | (3) | - | - | (2) | (5) |
Charge to income statement | 98 | 28 | - | 75 | 201 |
Release to income statement | (16) | (46) | - | (21) | (83) |
Provisions utilised | (124) | (22) | - | (59) | (205) |
At 31 December 2023 | 241 | 63 | 54 | 66 | 424 |
(1)
Other materially comprises provisions relating to restructuring costs.
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 refer to Accounting policy Note 2.4.
The key judgement is involved in determining whether a present obligation exists. There is often a high degree of uncertainty and
judgement is based on the specific facts and circumstances relating to individual events in determining whether there is a present
obligation. Judgement 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 26.
Property: This includes provision for contractual costs 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 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 26
NWB Group
Annual Report and Accounts 2023
155
Notes to the financial statements continued
Notes to the financial statements continued
Number of shares - 000s | ||||
Allotted, called up and fully paid | 2023 | 2022 | 2023 | 2022 |
£m | £m | 000s | 000s | |
Ordinary shares of £1 | 1,678 | 1,678 | 1,678,177 | 1,678,177 |
Non-cumulative preference shares of £1 | 116 | 116 | 116,349 | 116,349 |
Ordinary shares
No ordinary shares were issued during 2023 or 2022.
In 2023, NWB Plc paid an ordinary dividend of £1.7 billion to
NWH Ltd (2022 – £3.3 billion).
Preference shares
The 9% non-cumulative preference shares Series A of £1 each
are non-redeemable.
The holders of 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.
The holders of 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.
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
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 distributable reserves of NWB Plc
are taken into account for the purpose of making distributions,
this includes permissible applications within the share premium
account and capital redemption reserve of £631 million (2022
- £631 million).
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 refer to Accounting policy Note 3.10
2023 | 2022 | |
£m | £m | |
Additional Tier 1 instruments | ||
US $2,000 million 3.8495% instruments callable - August 2023 | 1,007 | 1,007 |
US $750 million 4.3517% instruments callable - June 2023 | 541 | 541 |
GBP £400 million 3.9438% instruments callable - March 2028 | 400 | 400 |
GBP £500 million 6.8543% instruments callable - May 2027 | 500 | 500 |
2,581 | 2,581 |
NWB Group
Annual Report and Accounts 2023
156
Notes to the financial statements continued
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.
Securitisations
In a securitisation, assets, or interests in a pool of assets, are
transferred, or the credit risk is transferred via a derivative or
financial guarantee to a SE which then issues liabilities to third
party investors.
NWB Group’s involvement in client securitisations takes a number
of forms. It may provide secured finance to, or purchase asset-
backed notes from, client sponsored SEs secured on assets
transferred by the client entity; or purchase asset backed
securities issued by client sponsored SEs in the primary or
secondary markets. In addition, NWB Group undertakes own-
asset securitisations to transfer the credit risk on portfolios of
financial assets.
Other credit risk transfers securitisations
NWB Group 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
2023, debt securities in issue by such SEs (and held by third
parties) were £863 million (2022 - £859 million). The associated
loans and mortgages at 31 December 2023 were £2,687 million
(2022 - £4,361 million). At 31 December, ECL in relation to non-
defaulted assets was reduced by £11 million (2022 - £20million)
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 2023,
£9,784 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 £2,122
million (2022 - loans to customers - £6,992 million, debt securities
in issue – £2,842 million).
Unconsolidated structured entities
The term ‘unconsolidated structured entities’ refers to structured entities not controlled by NWB Group, and which are established
either by NWB Group or a third party. An interest in a structured entity is any form of contractual or non-contractual involvement
which creates variability in returns for NWB Group arising from the performance of the entity. Such interests include holdings of debt
or equity securities, derivatives that transfer financial risks from the entity to NWB Group, provision of lending and loan commitments,
financial guarantees and investment management agreements. NWB Group enters into transactions with unconsolidated structured
entities in the normal course of business to facilitate customer transactions, to provide risk management services and for specific
investment opportunities. Structured entities may take the form of funds, trusts, partnerships, securitisation vehicles, and private
investment companies. NWB Group considers itself to be the sponsor of a structured entity where it is primarily involved in the set up
and design of the entity and where NWB Group transfers assets to the entity, markets products associated with the entity in its own
name, and/or provides guarantees in relation to the performance of the entity.
| 2023 | 2022 | |||||
Asset-backed | Investment | Asset-backed | Investment | |||
securitisation | funds | securitisation | funds | |||
vehicles | and other | Total | vehicles | and other | Total | |
£m | £m | £m | £m | £m | £m | |
Assets | ||||||
Loans to customers | 215 | 253 | 468 | 30 | 254 | 284 |
Other financial assets | 2,621 | - | 2,621 | 1,403 | - | 1,403 |
Total | 2,836 | 253 | 3,089 | 1,433 | 254 | 1,687 |
Off balance sheet | ||||||
Liquidity facilities/loan commitments | 115 | 50 | 165 | 250 | 38 | 288 |
Guarantees | - | 11 | 11 | - | 14 | 14 |
Total | 115 | 61 | 176 | 250 | 52 | 302 |
Maximum exposure | 2,951 | 314 | 3,265 | 1,683 | 306 | 1,989 |
NWB Group
Annual Report and Accounts 2023
157
Notes to the financial statements continued
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.
NWB Group | NWB Plc | |||
2023 | 2022 | 2023 | 2022 | |
The following assets have failed derecognition (1) | £m | £m | £m | £m |
Loans to bank - amortised cost | 10 | 16 | 10 | 16 |
Loans to customers - amortised cost | 281 | 398 | 281 | 398 |
Other financial assets | 6,469 | 2,140 | 6,469 | 2,140 |
Total | 6,760 | 2,554 | 6,760 | 2,554 |
(1)
Associated liabilities were £6,437 million for both NWB Group and NWB Plc (2022 - £2,137 million).
NWB Group pledges collateral with its counterparties in respect of derivative liabilities, bank and stock borrowings and other
.
transactions
NWB Group | NWB Plc | |||
2023 | 2022 | 2023 | 2022 | |
Assets pledged against liabilities | £m | £m | £m | £m |
Loans to banks - amortised cost | 63 | 66 | - | - |
Loans to customers - amortised cost | 21,611 | 17,493 | 21,611 | 17,493 |
Other financial assets (1) | 1,252 | 697 | 770 | 697 |
Total | 22,926 | 18,256 | 22,381 | 18,190 |
(1)
Includes assets pledged for pension derivatives and £482 million of debt securities under the continuing control of NWB Plc. This follows the agreement between NWB Plc and the Group
Pension Fund to establish a bankruptcy remote reservoir trust to hold these assets. Refer to Note 5 for additional information.
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
.
2023 | 2022 | |
Asset type (1) | £m | £m |
UK mortgages - covered bond programme | 9,784 | 6,992 |
(1)
NWB Group
Annual Report and Accounts 2023
158
Notes to the financial statements continued
Regulatory capital is assessed against minimum requirements that are set out under the UK 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.
2023 | 2022 | |
Shareholders' equity (excluding non-controlling interests) | £m | £m |
Shareholders’ equity | 19,701 | 18,243 |
Other equity instruments | (2,518) | (2,518) |
17,183 | 15,725 | |
Regulatory adjustments and deductions | ||
Cash flow hedging reserve | 601 | 393 |
Deferred tax assets | (332) | (421) |
Prudential valuation adjustments | (41) | (20) |
Goodwill and other intangible assets | (1,698) | (1,458) |
Excess of expected losses over impairment provisions | - | (86) |
Instruments of financial sector entities where the institution has a significant investment | (869) | (430) |
Foreseeable dividends | (880) | (900) |
Adjustment for trust assets (1) | - | (365) |
Adjustment under IFRS 9 transition arrangements | 169 | 281 |
Insufficient coverage for non-performing exposures | - | (6) |
Other adjustments for regulatory purposes | (51) | - |
(3,101) | (3,012) | |
CET1 capital | 14,082 | 12,713 |
Additional Tier 1 (AT1) capital | ||
Qualifying instruments and related share premium | 2,518 | 2,518 |
2,518 | 2,518 | |
Tier 1 capital | ||
Instruments of financial sector entities where the institution has a significant investment | (240) | (275) |
Tier 1 capital | 16,360 | 14,956 |
Qualifying Tier 2 capital | ||
Qualifying instruments and related share premium | 3,704 | 3,188 |
Tier 2 deductions | ||
Instruments of financial sector entities where the institution has a significant investment | (302) | (266) |
Other regulatory adjustments | 36 | (1) |
(266) | (267) | |
Tier 2 capital | 3,438 | 2,921 |
Total regulatory capital | 19,798 | 17,877 |
(
1
)
Prudent deduction in respect of agreement with the pension fund to establish legal structure to remove dividend linked contribution. Refer to Notes 5 and 33 in the NatWest Group 2023
Annual Report and Accounts.
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 4.5%.
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
NWB Group
Annual Report and Accounts 2023
159
Notes to the financial statements continued
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 2023. 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
NWB Group | NWB Plc | |||
2023 | 2022 | 2023 | 2022 | |
£m | £m | £m | £m | |
Contingent liabilities and commitments | ||||
Guarantees | 1,376 | 1,728 | 1,320 | 1,664 |
Other contingent liabilities | 1,003 | 1,197 | 994 | 1,190 |
Standby facilities, credit lines and other commitments | 77,149 | 87,221 | 73,343 | 83,321 |
Total | 79,528 | 90,146 | 75,657 | 86,175 |
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
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
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.
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,
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
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 | |||
2023 | 2022 | 2023 | 2022 | |
£m | £m | £m | £m | |
Capital expenditure on other property, plant and equipment | 35 | 4 | 35 | 4 |
Contracts to purchase goods or services (1) | 1,116 | 671 | 963 | 549 |
1,151 | 675 | 998 | 553 | |
(1)
Of which due within 1 year: £375 million (2022 - £318 million) for NWB Group and £333 million (2022 - £290 million) for NWB Plc.
NWB Group
Annual Report and Accounts 2023
160
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 £205 million (2022 - £215 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.
NWB Plc and its subsidiary and associated undertakings (‘NWB
Group’) are party to various legal proceedings and are involved
in, or subject to, various 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 the 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 the
probability of a liability, if any, arising can reasonably be
estimated in respect of any Matter. 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 Matters 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 or contesting Matters, even for those for which NWB
Group believes it has credible defences and should prevail on the
merits. The uncertainties inherent in all Matters affect the
amount and timing of any potential economic outflows for both
Matters with respect to which provisions have been established
and other contingent liabilities in respect of any such Matter.
It is not practicable to provide an aggregate estimate of potential
liability for our Matters as a class of contingent liabilities.
The future economic outflow in respect of any Matter may
ultimately prove to be substantially greater than, or less than, the
aggregate provision, if any, that NWB Group has recognised in
respect of such Matter. Where a reliable estimate of the
economic outflow cannot be reasonably made, no provision has
been recognised. NWB Group expects that in future periods,
additional provisions and economic outflows relating to Matters
that may or may not be currently known by NWB Group will be
necessary, in amounts that are expected to be substantial in
some instances. Please refer to Note 21 for information on
material provisions.
Matters which are, or could be material, either individually or in
aggregate, having regard to NWB Group, considered as a whole,
in which NWB Group is currently involved are set out below. We
have provided information 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 (including the Matters), see the
Risk Factor relating to legal, regulatory and governmental actions
Litigation
London Interbank Offered Rate (LIBOR) and other rates
litigation
In August 2020, a complaint was filed in the United States District
Court for the Northern District of California by several United
States retail borrowers against the USD ICE LIBOR panel banks
and their affiliates (including NatWest Group plc, NatWest
Markets Plc, NatWest Markets Securities Inc. and NWB Plc),
alleging (i) that the very process of setting USD ICE LIBOR
amounts to illegal price-fixing; and (ii) that banks in the United
States have illegally agreed to use LIBOR as a component of
price in variable retail loans. In September 2022, the district court
dismissed the complaint. The plaintiffs filed an amended
complaint but in October 2023, the district court dismissed that
complaint as well, and indicated that further amendment would
not be permitted. The plaintiffs have commenced an appeal to
the United States Court of Appeals for the Ninth Circuit, which is
currently 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 £143 million to
HMRC, and payment was made in December 2020. The appeal
and the application for judicial review have both been stayed
NWB Group
Annual Report and Accounts 2023
161
pending resolution of separate cases involving other banks.
Notes to the financial statements continued
Regulatory matters
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.
NWB Group expects government and regulatory intervention in
financial services to be high for the foreseeable future, including
increased scrutiny from competition and other regulators in the
retail and SME business sectors.
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.
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 undertaking additional
review / remediation work.
Reviews into customer account closures
In July 2023, NatWest Group plc commissioned an independent
review by the law firm Travers Smith LLP into issues that had
arisen from treatment of a customer in connection with an
account closure decision that attracted significant public attention
and certain related interactions with the media. NatWest Group
plc has received reports in connection with that review (and in
October and December 2023 published summaries of the key
findings and recommendations).
In addition, NatWest Group plc is conducting internal reviews with
respect to certain governance processes, policies, systems and
controls of NatWest Group entities, including with respect to
customer account closures.
The FCA is conducting supervisory work into how the
governance, systems and controls of NatWest Group and Coutts
& Company are working, to identify and address any significant
NWB Group | NWB Plc | |||
2023 | 2022 | 2023 | 2022 | |
£m | £m | £m | £m | |
Additional investment in associates | (5) | - | (5) | - |
Additional investments in Group undertakings | - | - | (531) | (256) |
Disposal of investments in Group undertakings | - | - | 35 | 227 |
Purchase of net assets and liabilities | - | (270) | - | - |
Net outflow of cash in respect of purchases and disposals | (5) | (270) | (501) | (29) |
Net cash expenditure on intangible assets | (719) | (722) | (687) | (690) |
Net outflow of cash | (724) | (992) | (1,188) | (719) |
NWB Group
Annual Report and Accounts 2023
162
Notes to the financial statements continued
This note shows non-cash items adjusted for in the cashflow statement and movement in operating assets and liabilities.
NWB Group | NWB Plc | |||
2023 | 2022 | 2023 | 2022 | |
£m | £m | £m | £m | |
Impairment losses | 504 | 341 | 483 | 389 |
Depreciation and amortisation | 877 | 768 | 705 | 598 |
Net (reversal)/impairment of impairment of investments in Group undertakings | - | - | (2) | 336 |
Change in fair value taken to profit or loss on other financial assets | (541) | 1,177 | (541) | 1,177 |
Change in fair value taken to profit or loss on other financial liabilities and | ||||
subordinated liabilities | 374 | (912) | 383 | (924) |
Elimination of foreign exchange differences | 325 | (47) | 320 | (3) |
Other non-cash items | (38) | (195) | (49) | (215) |
Income receivable on other financial assets | (731) | (303) | (713) | (303) |
Loss on sale of other financial assets | 43 | 93 | 43 | 93 |
Dividends receivable from subsidiaries | - | - | (617) | (1,010) |
Profit on sale of subsidiaries and associates | - | - | (36) | - |
Loss on sale of other assets and net assets and liabilities | 50 | 5 | 46 | 6 |
Gain on redemption of own debt | (234) | - | (234) | - |
Interest payable on MRELs and subordinated liabilities | 484 | 371 | 426 | 358 |
Charges and releases on provisions | 127 | 122 | 118 | 122 |
Defined benefit pension schemes | 89 | 154 | 64 | 132 |
Non-cash and other items | 1,329 | 1,574 | 396 | 756 |
Change in operating assets and liabilities | ||||
Change in derivative assets | 1,043 | (2,230) | 1,037 | (2,171) |
Change in loans to banks | 443 | (198) | 431 | (164) |
Change in loans to customers | (17,296) | (14,448) | (17,405) | (12,313) |
Change in amounts due from holding companies and fellow subsidiaries | 2,607 | (355) | (97) | (6,204) |
Change in other financial assets | (139) | 239 | (139) | 239 |
Change in other assets | (239) | (34) | (243) | 14 |
Change in bank deposits | 1,992 | (6,771) | 1,993 | (6,770) |
Change in customer deposits | (8,862) | (9,065) | (5,356) | (10,912) |
Change in amounts due to holding companies and fellow subsidiaries | 7,578 | (7,218) | 8,225 | (2,191) |
Change in derivative liabilities | (370) | (2,031) | (568) | (1,754) |
Change in other financial liabilities | 3,627 | (1,867) | 3,623 | (1,859) |
Change in notes in circulation | (3) | (95) | (3) | (95) |
Change in other liabilities | (513) | (1,197) | (497) | (1,194) |
Change in operating assets and liabilities | (10,132) | (45,270) | (8,999) | (45,374) |
NWB Group
Annual Report and Accounts 2023
163
Notes to the financial statements continued
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 (1) | MRELs (2) | paid-in equity | liabilities (1) | MRELs (2) | |||||||
2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |
£m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |
At 1 January | 6,421 | 6,280 | 3,138 | 3,285 | 6,339 | 5,687 | 6,421 | 6,280 | 3,132 | 3,279 | 5,709 | 5,133 |
Issue of paid-in equity | - | 500 | - | 500 | ||||||||
Redemption of paid-in equity | - | (388) | - | (388) | ||||||||
Issue of subordinated liabilities | 1,263 | - | 1,263 | - | ||||||||
Redemption of subordinated liabilities | (539) | (55) | (539) | (55) | ||||||||
Interest paid on subordinated liabilities | (145) | (145) | (120) | (144) | ||||||||
Issue of MRELs | 441 | 750 | 441 | 700 | ||||||||
Maturity and redemption of MRELs | (157) | - | (107) | - | ||||||||
Interest paid on MRELs | (293) | (202) | (261) | (191) | ||||||||
Net cash inflow/(outflow) from financing | - | 112 | 579 | (200) | (9) | 548 | - | 112 | 604 | (199) | 73 | 509 |
Effects of foreign exchange | - | - | (47) | 86 | (316) | 612 | - | - | (47) | 86 | (311) | 599 |
Changes in fair value of subordinated | ||||||||||||
liabilities and MRELs | 147 | (178) | 227 | (734) | 148 | (178) | 235 | (746) | ||||
Interest payable on subordinated | ||||||||||||
liabilities and MRELs | 177 | 145 | 307 | 226 | 152 | 144 | 274 | 214 | ||||
Gain on redemption of own debt | (234) | - | (234) | - | ||||||||
Other | - | 29 | (2) | - | - | - | - | 29 | - | - | - | - |
At 31 December | 6,421 | 6,421 | 3,758 | 3,138 | 6,548 | 6,339 | 6,421 | 6,421 | 3,755 | 3,132 | 5,980 | 5,709 |
(1)
Subordinated liabilities include intercompany subordinated liabilities.
(2)
NWB Group MREL balances are included in amounts due to holding companies and fellow subsidiaries. NWB Plc MREL balances are shown net of the effect of down streaming funding to
subsidiary companies.
NWB Group | NWB Plc | |||
2023 | 2022 | 2023 | 2022 | |
£m | £m | £m | £m | |
Cash and balances at central banks | 48,259 | 73,065 | 48,238 | 73,062 |
Other financial assets | 129 | 234 | 129 | 234 |
Loans to banks including intragroup balances (1) | 3,613 | 3,019 | 4,115 | 2,176 |
Cash and cash equivalents | 52,001 | 76,318 | 52,482 | 75,472 |
(1)
NWB Group
Annual Report and Accounts 2023
164
Notes to the financial statements continued
The composition of NWB Plc’s board of directors is aligned to the board of 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.
2023 | 2022 | |
Directors' remuneration | £m | £m |
Non-executive directors emoluments | 1,852 | 1,950 |
Chairman and executive directors emoluments | 6,408 | 5,804 |
8,260 | 7,754 | |
Amounts receivable under long-term incentive plans and share option plans | 2,708 | 542 |
10,968 | 8,296 |
The total emoluments and amounts receivable under long-term incentive plans and share option plans of the highest paid director
were £2,930,000 (2022 - £3,497,000).
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 2023
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
(1)
The aggregate remuneration of directors and other members of key management
during the year was as follows:
2023 | 2022 | |
£m | £m | |
Short-term benefits | 17,244 | 18,390 |
Post-employment benefits | 601 | 594 |
Share-based payments | 6,104 | 1,823 |
23,949 | 20,807 |
(1)
Key management comprises members of the NWH Ltd Executive Committee.
Short term benefits include benefits expected to be settled wholly within twelve months of the balance sheet date. Post-employment
benefits include defined benefit contributions for active members and pension funding to support contributions to the defined
contribution schemes. Share-based payments include awards vesting under rewards schemes.
32 Transactions with directors and key management
For the purposes of IAS 24 Related Party Disclosures, key management comprises directors of NWB Plc and members of the NWB Plc
Executive Committee. 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.
Amounts in the table below are attributed to each person at their highest level of NatWest Group key management and relate to those
who were key management at any time during the financial period.
At 31 December | ||
2023 | 2022 | |
£m | £m | |
Loans to customers - amortised cost | 10,579 | 11,172 |
Customer deposits | 48,595 | 42,932 |
At 31 December 2023, amounts outstanding in relation to transactions, arrangements and agreements entered into by authorised
institutions in NWB Group, as defined in UK legislation, were £8,408,984 in respect of loans to eleven persons who were directors of
NWB Group
Annual Report and Accounts 2023
165
Notes to the financial statements continued
UK Government
UK Government through HM Treasury is the controlling
shareholder of NatWest Group plc as per UK Listing rules. The UK
Government’s shareholding is managed by UK Government
Investments Limited, a company wholly owned by the UK
Government. At 31 December 2023, HM Treasury’s holding in
NatWest Group’s ordinary shares was 37.97%. As a result the UK
Government and UK Government controlled bodies are related
parties of the Group.
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 levy sits
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 0.382% 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 party
(a)
In accordance with IAS 24, transactions or balances between
NWB Group entities that have been eliminated on
consolidation are not reported
(b)
The primary financial statements include transactions and
balances with its subsidiaries which have been further
disclosed in the relevant parent company notes.
Business and loan portfolio transfers
In 2023 no contingent liabilities and commitments were
transferred from NatWest Bank Plc to NWM N.V. in relation to the
Western European Corporate Portfolio (2022 - £0.4 billion). The
total contingent liabilities and commitments transferred from
NWM N.V. to NatWest Bank Plc in 2023 was nil (2022 - nil).
As
part of a larger initiative to increase the diversity of the banking
book portfolio, £0.3 billion of contingent liabilities and
commitments and £0.1 billion of drawn balances were transferred
from NatWest Bank Plc to NWM N.V. in 2022.
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. To further strategic partnerships, NWB Group may seek
to invest in third parties or allow third parties to hold a minority
interest in a subsidiary of NatWest Group. We disclose as related
parties for associates and joint ventures and where equity interest
are over 10%. Ongoing business transactions with these entities
are on normal commercial terms.
At 31 December 2023 NWB Group held investment in associates
and joint Ventures amounting to £4 million (2022- £2 million). For
the year ended 31 December 2023 NWB Group’s share of losses
of associates was £3 million (2022- £6 million). At 31 December
2023 there were balances within customer deposits of £2 million
Post employment benefits
NatWest Group recharges NatWest Group Pension Fund with the
cost of pension management services incurred by it.
NWB Group
Annual Report and Accounts 2023
166
Notes to the financial statements continued
Holding companies and fellow subsidiaries
Transactions NWB Group enters with its holding companies and fellow subsidiaries also meet the definition of related party
transactions. The table below discloses transactions between NWB Group and subsidiaries of NatWest Group.
2023 | 2022 | |||||
Holding company | Fellow subsidiaries | Total | Holding company | Fellow subsidiaries | Total | |
£m | £m | £m | £m | £m | £m | |
Interest receivable | - | 133 | 133 | 1 | 40 | 41 |
Interest payable | (674) | (1,588) | (2,262) | (408) | (369) | (777) |
Fees and commissions receivable | - | 62 | 62 | - | 97 | 97 |
Fees and commissions payable | - | (71) | (71) | - | (70) | (70) |
Other operating income (1) | 11 | 1,532 | 1,543 | 36 | 1,605 | 1,641 |
Other administration expenses (2) | - | (156) | (156) | - | - | - |
Impairment (losses)/releases | 3 | - | 3 | (3) | - | (3) |
(660) | (88) | (748) | (374) | 1,303 | 929 | |
(1) Includes internal service recharges of £1,542 million (2022 - £1,616 million).
(2) Other administration expense relates to a new profit share arrangement with a fellow NatWest Group subsidiary that commenced in 2023. The profit share arrangement was introduced
during the year to reward NWM Group on an arm’s length basis for its contribution to the performance of the NatWest Group Commercial & Institutional business segment, 2023 being the
first full year with the Commercial & Institutional segment in place.
The following tables include amounts due from or to holding companies and fellow subsidiaries:
| NWB Group | ||||||
| 2023 | 2022 | |||||
Holding | Fellow | Holding | Fellow | |||
companies | subsidiaries | Total | companies | subsidiaries | Total | |
£m | £m | £m | £m | £m | £m | |
Assets | ||||||
Loans to banks - amortised cost | - | 1,797 | 1,797 | - | 4,100 | 4,100 |
Loans to customers - amortised cost | - | 11 | 11 | - | 73 | 73 |
Other financial assets | - | - | - | - | 5 | 5 |
Other assets | 104 | 399 | 503 | 15 | 710 | 725 |
Amounts due from holding companies and fellow subsidiaries | 104 | 2,207 | 2,311 | 15 | 4,888 | 4,903 |
Derivatives (1) | 275 | 2,045 | 2,320 | 405 | 2,977 | 3,382 |
Liabilities | ||||||
Bank deposits | - | 30,499 | 30,499 | - | 22,919 | 22,919 |
Customer deposits | 6,262 | 11 | 6,273 | 6,264 | 46 | 6,310 |
Subordinated liabilities | 3,636 | - | 3,636 | 2,941 | - | 2,941 |
MREL instruments issued to NatWest Holdings Ltd | 6,548 | - | 6,548 | 6,339 | - | 6,339 |
Other financial liabilities | - | 17 | 17 | - | 106 | 106 |
Other liabilities | 43 | 236 | 279 | 33 | 123 | 156 |
Amounts due to holding companies and fellow subsidiaries | 16,489 | 30,763 | 47,252 | 15,577 | 23,194 | 38,771 |
Derivatives (1) | 258 | 710 | 968 | 403 | 667 | 1,070 |
(1)
Intercompany derivatives are included within derivative classification on the balance sheet.
There was £0.9 billion (2022 - £5.9 billion) of NWB Group commitments and guarantees related to transactions with fellow group
companies outstanding at the balance sheet date.
NWB Group
Annual Report and Accounts 2023
167
Notes to the financial statements continued
33 Related parties continued
| NWB Plc | ||||||||
| 2023 | 2022 | |||||||
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 | - | 1,547 | 15,516 | 17,063 | - | 3,585 | 10,547 | 14,132 |
Loans to customers - amortised cost | - | 11 | 15,084 | 15,095 | - | 85 | 16,368 | 16,453 |
Other financial assets | - | - | 559 | 559 | - | 4 | 604 | 608 |
Other assets | 104 | 393 | 285 | 782 | 16 | 678 | 246 | 940 |
Amounts due from holding companies | ||||||||
and fellow subsidiaries | 104 | 1,951 | 31,444 | 33,499 | 16 | 4,352 | 27,765 | 32,133 |
Derivatives (1) | 275 | 2,044 | 30 | 2,349 | 405 | 2,977 | 25 | 3,407 |
Liabilities | ||||||||
Bank deposits | - | 23,582 | 36,496 | 60,078 | - | 19,816 | 34,549 | 54,365 |
Customer deposits | 6,284 | 3 | 7,247 | 13,534 | 6,263 | 75 | 4,776 | 11,114 |
Subordinated liabilities | 3,636 | - | - | 3,636 | 2,941 | - | - | 2,941 |
MREL instruments issued to NatWest Holdings Ltd | 6,544 | - | - | 6,544 | 6,328 | - | - | 6,328 |
Other financial liabilities | - | 17 | - | 17 | - | 106 | - | 106 |
Other liabilities | 43 | 223 | 99 | 365 | 33 | 94 | 56 | 183 |
Amounts due to holding companies | ||||||||
and fellow subsidiaries | 16,507 | 23,825 | 43,842 | 84,174 | 15,565 | 20,091 | 39,381 | 75,037 |
Derivatives (1) | 258 | 710 | 317 | 1,285 | 403 | 666 | 527 | 1,596 |
(1)
Intercompany derivatives are included within derivative classification on the balance sheet.
There was £1.2 billion (2022 - £6.2 billion) of NWB Plc commitments and guarantees related to transactions with fellow group
34 Ultimate holding company
NWB Group’s ultimate holding company is NatWest Group plc and its intermediate parent company is NatWest Holdings Limited.
NatWest Group plc is incorporated in the United Kingdom and
registered in Scotland and NWH Ltd is registered in England.
As at 31
December 2023, 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, held 37.97% (at 31 December 2023)
of the issued ordinary share capital of NatWest Group plc and is therefore NWB Group’s
There have been no other significant events between 31 December 2023 and the date of approval of these accounts which would
NWB Group
Annual Report and Accounts 2023
168
Notes to the financial statements continued
Legal entities and activities at 31 December 2023
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 V) and the definitions in Article 4 of the UK Capital Requirements Regulation.
Active related undertakings incorporated in the UK which are 100% owned by NWB Group and fully consolidated for
| Regulatory | |||
Entity name | Activity | treatment | Notes |
Caledonian Sleepers Rail Leasing Ltd | BF | FC | 1 |
Coutts & Company | CI | FC | 10 |
Coutts Finance Co | BF | FC | 10 |
Esme Loans Ltd | BF | FC | 1 |
FreeAgent Central Ltd | SC | FC | 16 |
FreeAgent Holdings Ltd | SC | FC | 16 |
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 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 Invoice Finance Ltd | OTH | FC | 1 |
NatWest Property Investments Ltd | INV | DE | 1 |
NatWest RT Holdings Ltd | OTH | FC | 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 | 8 |
RBS Invoice Finance Ltd | BF | FC | 1 |
RBSG Collective Investments Holdings Ltd | BF | FC | 8 |
RBSSAF (2) 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 |
Silvermere Holdings Ltd | BF | FC | 3 |
The Royal Bank of Scotland Group Independent | BF | FC | 3 |
| Financial Services Ltd | |||
Ulster Bank Ltd | CI | FC | 9 |
Ulster Bank Pension Trustees Ltd | TR | DE | 9 |
Walton Lake Developments Ltd | INV | DE | 1 |
World Learning Ltd | BF | FC | 1 |
Active related undertakings incorporated outside the UK which are 100% owned by NWB Group and fully consolidated for
| Regulatory | |||
Entity name | Activity | treatment | Notes |
Airside Properties AB | BF | FC | 2 |
Arenarena AS | BF | FC | 29 |
Arkivborgen KB | BF | FC | 2 |
Artul Koy | BF | FC | 4 |
BD Lagerhus AS | BF | FC | 5 |
Bilfastighet i Akalla AB | BF | FC | 2 |
Bilfastighet i Avesta AB | BF | FC | 2 |
Bilfastighet i Bollnas AB | BF | FC | 2 |
Bilfastighet i Hemlingby AB | BF | FC | 2 |
Bilfastighet i Hudiksvall AB | BF | FC | 2 |
Bilfastighet i Ludvika AB | BF | FC | 2 |
Bilfastighet i M!rsta AB | BF | FC | 2 |
Bilfastighet i Mora AB | BF | FC | 2 |
Bilfastighet i Uppsala KB | BF | FC | 2 |
Bilfastighet Kista AB | BF | FC | 2 |
Brodmagasinet 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 Flojten i Norrkoping | BF | FC | 2 |
Fastighets Aktiebolaget Sambiblioteket | BF | FC | 2 |
Fastighetsbolaget Elmotorgatan AB | BF | FC | 2 |
| Regulatory | |||
Entity name | Activity | treatment | Notes |
Fastighetsbolaget Holma i Hoor AB | BF | FC | 2 |
Forskningshöjden KB | BF | FC | 2 |
Forvaltningsbolaget Dalkyrkan KB | BF | FC | 2 |
Forvaltningsbolaget Kloverbacken Skola KB | BF | FC | 2 |
Fyrs!te Fastighets AB | 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 | 2 |
KB Eurohill | BF | FC | 2 |
KB Lagermannen | BF | FC | 2 |
KB Likriktaren | BF | FC | 2 |
Kiinteist Oy Turun Mustionkatu 6 | BF | FC | 12 |
Koy Harkokuja 2 | BF | FC | 12 |
Kiinteisto Oy Lohjan Ojamonharjuntie 61 | BF | FC | 12 |
Koy Pennalan Johtotie 2 | BF | FC | 4 |
Kiinteisto Oy Vantaan Rasti IV | BF | FC | 12 |
Koy Helsingin Mechelininkatu 1 | BF | FC | 4 |
Koy Helsingin Osmontie 34 | BF | FC | 4 |
Koy Helsingin Panuntie 11 | BF | FC | 4 |
Koy Helsingin Panuntie 6 | BF | FC | 4 |
accounting purpose
accounting purposes
Notes to the financial statements continued
36 Related undertakings continued
Regulatory | |||
Entity name | Activity | treatment | Notes |
Koy Iisalmen Kihlavirta | BF | FC | 4 |
Koy Jamsan Keskushovi | BF | FC | 4 |
Koy Jasperintie 6 | BF | FC | 12 |
Koy Kokkolan Kaarlenportti Fab | BF | FC | 4 |
Koy Kouvolan Oikeus ja Poliisitalo | 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 | 12 |
Koy Porkkanakatu 2 | BF | FC | 12 |
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 Vapaalan Service-Center | BF | FC | 4 |
Kvam Eiendom AS | BF | FC | 5 |
Lakten 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 | 2 |
Narmovegen 455 AS | BF | FC | 5 |
National Westminster International Holdings B.V. | BF | FC | 3 |
NatWest Digital Services India Private Ltd | SC | FC | 19 |
NatWest Services (Switzerland) Ltd | SC | FC | 23 |
Nordisk Renting AB | BF | FC | 2 |
Regulatory | |||
Entity name | Activity | treatment | Notes |
Nordisk Renting AS | BF | FC | 21 |
Nordisk Renting OY | BF | FC | 4 |
Nordisk Specialinvest AB | BF | FC | 2 |
Nordiska Strategifastigheter Holding AB | BF | FC | 2 |
Nybergflata 5 AS | BF | FC | 5 |
OFH Eiendom AS | BF | FC | 30 |
Optimus KB | BF | FC | 2 |
RBS Deutschland Holdings GmbH | BF | FC | 17 |
RBS Polish Financial Advisory Services Sp. Z o.o. | BF | FC | 22 |
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 |
Solbanken KB | BF | FC | 2 |
Solnorvika AS | BF | FC | 5 |
Strand European Holdings AB | BF | FC | 2 |
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 |
Nordisk Renting Facilities Management AB | BF | FC | 2 Active related undertakings which are 100% owned by NWB Group but are not consolidated for accounting purposes |
| Regulatory | |||
Entity name | Activity | treatment | Notes |
AD Aggregator Platform Ltd | OTH | DE | 25 |
Bioenergie Dargun Immobilien GmbH | OTH | DE | 31 |
Bioenergie Jessen Immobilien GmbH | OTH | DE | 31 |
Bioenergie Wiesenburg GmbH & Co. KG | INV | DE | 31 |
Bioenergie Wiesenburg Verwaltungs GmbH | OTH | DE | 31 |
Bioenergie Zittau GmbH | OTH | DE | 31 |
Bioenergie Zittau Immobilien GmbH | OTH | DE | 31 |
Capulet Homes Florida LLC | OTH | DE | 6 |
Crook Hill Properties Ltd | OTH | DE | 27 |
DBV Deutsche Bioenergie Verbinder GmbH | OTH | DE | 31 |
East Grove Holding Ltd | INV | DE | 26 |
European Investments (Crook Hill) Ltd | OTH | DE | 28 |
German Biogas Holdco Ltd | INV | DE | 25 |
Montague Homes Florida LLC | OTH | DE | 6 |
Reaps Moss Ltd | OTH | DE | 27 |
Reppinichen Dritte Biogas Betriebs GmbH | OTH | DE | 31 |
Reppinichen Erste Biogas Betriebs GmbH | OTH | DE | 31 |
Reppinichen Zweite Biogas Betriebs GmbH | OTH | DE | 31 |
Romeo Homes Florida LLC | OTH | DE | 6 |
Romeo Homes Georgia LLC | OTH | DE | 6 |
Romeo Homes Indiana LLC | OTH | DE | 6 |
Regulatory | |||
Entity name | Activity | treatment | Notes |
Romeo Homes Kansas LLC | OTH | DE | 6 |
Romeo Homes Nevada LLC | OTH | DE | 6 |
Romeo Homes North Carolina LLC | OTH | DE | 6 |
Romeo Homes Oklahoma LLC | OTH | DE | 6 |
Romeo Homes Tennessee LLC | OTH | DE | 6 |
Romeo Homes Texas LLC | OTH | DE | 6 |
Ventus Investments Ltd | OTH | DE | 28 |
West Granite Homes Inc. | INV | DE | 6 |
WGH Development LLC | OTH | DE | 6 |
WGH Florida LLC | OTH | DE | 6 |
WGH Georgia LLC | OTH | DE | 6 |
WGH Indiana LLC | OTH | DE | 6 |
WGH Kansas LLC | OTH | DE | 6 |
WGH Nevada LLC | OTH | DE | 6 |
WGH North Carolina LLC | OTH | DE | 6 |
WGH Oklahoma LLC | OTH | DE | 6 |
WGH Texas LLC | OTH | DE | 6 |
Wiesenburg Dritte Biogas Betriebs GmbH | OTH | DE | 31 |
Wiesenburg Erste Biogas Betriebs GmbH | OTH | DE | 31 |
Wiesenburg Zweite Biogas Betriebs GmbH | OTH | DE | 31 |
Wiesenburger Marktfrucht GmbH | OTH | DE | 31 |
NWB Group
Annual Report and Accounts 2023
170
NWB Group
Annual Report and Accounts 2023
Accounting | Regulatory | Group | |||
Entity name | Activity | treatment | treatment | % | Notes |
Falcon Wharf Ltd | OTH | EAJV | PC | 50 | 15 |
GWNW City Developments Ltd | BF | EAJV | DE | 50 | 15 |
Jaguar Cars Finance Ltd | BF | FC | FC | 50 | 1 |
JCB Finance Ltd | BF | FC | FC | 75 | 13 |
London Rail Leasing Ltd | BF | EAJV | PC | 50 | 20 |
Accounting | Regulatory | Group | |||
Entity name | Activity | treatment | treatment | % | Notes |
NatWest Boxed Ltd | OTH | FC | FC | 82 | 1 |
Natwest Covered Bonds (LM) Ltd | BF | IA | PC | 20 | 11 |
Natwest Covered Bonds LLP | BF | FC | FC | 60 | 1 |
Pollinate Networks Ltd | OTH | AHC | DE | 25 | 1 |
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 | 7 |
Nightingale LF 2021-1 Ltd | BF | FC | DE | 0 | 7 |
Nightingale Project Finance 2019 | |||||
1 Ltd | BF | FC | DE | 0 | 7 |
Nightingale Project Finance Ii | |||||
2023-1 Ltd | BF | FC | DE | 0 | 7 |
Accounting | Regulatory | Group | |||
Entity name | Activity | treatment | treatment | % | Notes |
Nightingale Securities 2017-1 Ltd | BF | FC | DE | 0 | 7 |
Nightingale UK Corp 2020 2 Ltd | BF | FC | DE | 0 | 7 |
Pharos Estates Ltd | OTH | AHC | DE | 49 | 18 |
Related undertakings that are not active (actively being dissolved)
Accounting | Regulatory | Group | ||
Entity name | treatment | treatment | % | Notes |
Lombard Ireland Group Holdings | ||||
Unlimited | FC | FC | 100 | 14 |
Lombard Ireland Ltd | FC | FC | 100 | 14 |
Natwest Nominees Ltd | FC | FC | 100 | 1 |
RBS Asset Management (Dublin) Ltd | FC | FC | 100 | 24 |
Related undertakings that are dormant
Accounting | Regulatory | Group | ||
Entity name | treatment | treatment | % | Notes |
Coutts Scotland Nominees Ltd | FC | FC | 100 | 8 |
JCB Finance Pension Ltd | FC | DE | 88 | 9 |
Natwest FIS Nominees Ltd | FC | FC | 100 | 1 |
NatWest Group Retirement Savings | ||||
Trustee 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 |
NatWest Strategic Investments Ltd | FC | FC | 100 | 1 |
Accounting | Regulatory | Group | ||
Entity name | treatment | treatment | % | Notes |
Nordisk Renting A/S | FC | FC | 100 | 5 |
Nordisk Renting HB | FC | FC | 100 | 2 |
R.B. Leasing (March) Ltd | FC | FC | 100 | 1 |
RBS Investment Executive Ltd | NC | DE | 100 | 3 |
RBSG Collective Investments Nominees | ||||
Ltd | FC | FC | 100 | 8 |
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 |
Overseas regulated branches of NWB Group
Subsidiary | Geographic location |
National Westminster Bank Plc | Germany |
Notes to the financial statements continued
36 Related undertakings continued
Key:
Activity
BF
Banking and financial institution
CI
Credit institution
INV
Investment (shares or property) holding company
SC
Service company
TR
Trustee
OTH
Other
Accounting/Regulatory treatment
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, | UK |
2 | Jakobsbergsgatan 13, 8th Floor, Box 14044, Stockholm, SE-111 44 | Sweden |
3 | Gogarburn, 175 Glasgow Road, Edinburgh, EH12 1HQ, Scotland | UK |
4 | Mikonkatu 9, 6th Floor, Helsinki, 00100 | Finland |
5 | Postboks 1400, 0115 Oslo | Norway |
6 | 251 Little Falls Drive, Wilmington, DE, 19808 | USA |
7 | 44 Esplanade, St Helier, JE4 9WG | Jersey |
8 | 6-8 George Street, Edinburgh, EH2 2PF, Scotland | UK |
9 | 11-16 Donegall Square East, Belfast, Co Antrim, BT1 5UB, Northern Ireland | UK |
10 | 440, Strand, London, England, WC2R OQS | UK |
11 | 1 Bartholomew Lane London EC2N 2AX, England | UK |
12 | Mikonkatu 9, 00100 Helsinki | Finland |
13 | The Mill, High Street, Rocester, Staffordshire, ST14 5JW, England | UK |
14 | Block A Georges Quay Plaza, Georges Quay, Dublin 2 | RoI |
15 | Gate House, Turnpike Road, High Wycombe, Buckinghamshire, HP12 3NR | UK |
16 | One Edinburgh Quay, 133 Fountainbridge, Edinburgh, EH3 9QG, Scotland | UK |
17 | Roßmarkt 10, Frankfurt am Main, 60311 | Germany |
18 | 24 Demostheni Severi, 1st Floor, Nicosia, 1080 | Cyprus |
6th Floor, Building 2, Tower A, GIL IT/ITES SEZ, Candor TechSpace, Sector 21, Dundahera, Gurugram, | ||
| 19 | Haryana, 122016 | India |
20 | 99 Queen Victoria Street, London, EC4V 4EH | UK |
21 | H. Heyerdahlsgate 1, Postboks 2020 Vika, Oslo, 0125 | Norway |
22 | Ilzecka 26 Street, Warsaw, 02-135 | Poland |
23 | Lerchenstrasse 16, Zurich, CH 8022 | Switzerland |
24 | One Dockland Central, Guild Street, IFSC, Dublin 1 | RoI |
25 | Greencoat Capital, 5 The Peak, Wilton Road, London, Greater London, SW1V 1AN, England | UK |
26 | 8 Sackville Street, London, W1S 3DG, England | UK |
27 | 2nd floor, Palm Grove House, Road Town, Tortola | British Virgin Islands |
28 | 18 Riversway Business Village, Navigation Way, Ashton-on Ribble, Preston, PR2 2YP | UK |
29 | Postboks 1400, Oslo, 0115 | Norway |
30 | Dokkveien 1, NO-0250, Oslo | Norway |
31 | Walther-Nernst-Straße 1, Berlin, 12489 | Germany |
32 | 222 Bishopsgate, London, EC2M 4QD | UK |
NWB Group
Annual Report and Accounts 2023
172
Risk factors
NWB Group
Annual Report and Accounts 2023
173
Principal Risks and Uncertainties
Set out below are certain risk factors that could have a material
adverse effect on NWB Group’s future results, its financial
condition and/or prospects and cause them to be materially
different from what is forecast or expected, and directly or
indirectly impact the value of its securities. These risk factors are
broadly categorised and should be read in conjunction with other
risk factors in this section and other parts 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.
Economic and political risk
NWB Group, its customers and its counterparties face continued
economic and political risks and uncertainties in the UK and global
markets, including as a result of inflation and interest rates, supply
chain disruption, and geopolitical developments
.
As a principally UK-focused banking group, NWB Group is affected
by global economic and market conditions, and is particularly
exposed to those conditions in the UK. Uncertain and volatile
economic conditions can create a challenging operating
environment for financial services companies such as NWB Group.
The outlook for the UK and the global economy is affected by
many factors including: GDP growth, inflation and changing
interest rates, changing asset prices (including residential and
commercial property), energy prices, supply chain disruption, and
changes to monetary and fiscal policy.
These conditions could be exacerbated by a number of factors
including: instability in the UK and/or global financial systems,
market volatility and change, fluctuations in the value of the
pound sterling, new or extended economic sanctions, economic
volatility in the UK or globally, volatility in commodity prices,
political uncertainty or instability (for example the upcoming US
presidential election and the UK general election to take place
before February 2025), or concerns regarding sovereign debt or
sovereign credit ratings, changing demographics in the markets
that NWB Group and its customers serve, increasing social and
other inequalities, or rapid changes to the economic environment
due to the adoption of technology, automation, artificial
intelligence, or due to climate change, and/or other sustainability-
related risks. See also ‘Changes in interest rates will continue to
affect NWB Group’s business and results’ and ‘Fluctuations in
currency exchange rates may adversely affect NWB Group’s
results and financial condition’.
NWB Group is also exposed to risks arising out of geopolitical
events or political developments that may hinder economic or
financial activity levels. Political, military or diplomatic events,
geopolitical tensions, armed conflict (for example the Russia-
Ukraine and Israel-Hamas conflicts), terrorist acts or threats,
protectionist policies or trade barriers, widespread public health
crises, related potential adverse effects on supply chains, and the
responses to any of the above scenarios by various governments
and markets, could negatively affect the business and
performance of NWB Group, including as a result of the direct or
indirect impact on UK, regional or global trade and/or NWB
Group’s customers and counterparties.
In recent years, the UK has experienced significant political
uncertainty and a general election will take place before February
2025. Heightened political uncertainty could lead to a loss of
confidence in the UK that could, in turn, negatively impact the
economy and companies operating in the UK. NWB Group also
faces political uncertainty in Scotland as a result of a possible
Scottish independence referendum. Scottish independence may
adversely affect NWB Group both in relation to its entities
incorporated in Scotland and in other jurisdictions. Any changes to
Scotland’s relationship with the UK or the EU may adversely
affect the environment in which NatWest Group plc 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, any of which could adversely affect NWB
Group. See also ‘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
adversely affect NWB Group and its operating environment’.
The value of NWB Group’s own and other securities may be
materially affected by economic and market conditions. Market
volatility, illiquid market conditions and disruptions in the financial
markets may make it very difficult to value certain of NWB
Group’s own and other securities, particularly during periods of
market displacement. This could cause a decline in the value of
NWB Group’s own and other securities, or inaccurate carrying
values for certain financial instruments.
In addition, financial markets are susceptible to severe events
evidenced by, or resulting in, rapid depreciation in asset values,
which may be accompanied by a reduction in asset liquidity.
Under these conditions, hedging and other risk management
strategies may not be as effective at mitigating losses as they
would be under more normal market conditions. Moreover, under
these conditions, market participants are particularly exposed to
trading strategies employed by many market participants
simultaneously (and often automatically) and on a large scale,
increasing NWB Group’s counterparty risk. NWB Group’s risk
management and monitoring processes seek to quantify and
mitigate NWB Group’s exposure to extreme market moves.
However, market events have historically been difficult to predict,
and NWB Group, its customers and its counterparties could realise
significant losses if extreme market events were to occur.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
Changes in interest rates will continue to affect NWB
Group’s business and results.
NWB Group’s performance is affected by changes in interest
rates. Benchmark overnight interest rates, such as the UK base
rate, increased in 2023, although forward rates at 31 December
2023 suggested interest rates may begin to fall in 2024.
Stable interest rates support predictable income flow and less
volatility in asset and liability valuations, although persistently low
and negative interest rates, are generally expected to be less
favourable for banks.
Risk factors continued
NWB Group
Annual Report and Accounts 2023
174
Volatility in interest rates may result in unexpected outcomes both
for interest income and asset and liability valuations which may
adversely affect NWB Group. For example, unexpected
movements in spreads between key benchmark rates such as
sovereign and swap rates may in turn affect liquidity portfolio
valuations. In addition, unexpected sharp rises in rates may also
have negative impacts on some asset and derivative valuations.
Furthermore, customer and investor responses to rapid changes
in interest rates can have an adverse effect on NWB Group. For
example, customers may make deposit choices that provide them
with higher returns than those then being offered by NWB Group,
and NWB Group may not respond with competitive products as
rapidly, for example following an interest rate change, which may
in turn decrease NWB Group’s net interest income.
Movements in interest rates also influence and reflect the
macroeconomic situation more broadly, affecting factors such as
business and consumer confidence, property prices, default rates
on loans, customer behaviour (which may adversely impact the
effectiveness of NWB Group’s hedging strategy) and other
indicators that may indirectly affect NWB Group.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
Fluctuations in currency exchange rates may adversely
affect NWB Group’s results and financial condition.
Decisions of central banks (including the Bank of England, the
European Central Bank (ECB) and the US Federal Reserve) and
political or market events which are outside NWB Group’s control,
may lead to sharp and sudden fluctuations in currency exchange
rates.
Although NWB Group is principally a UK-focused banking group, it
is subject to structural foreign exchange risk from capital
deployed in NatWest Group’s foreign subsidiaries and branches.
NWB Group also issues internal instruments in non-sterling
currencies, such as USD, that assist in meeting NWB Group’s
MREL requirements. In addition, NWB Group conducts banking
activities in non-sterling currencies (for example loans and
deposits) which affect its revenue. NWB Group also uses service
providers based outside of the United Kingdom for certain
services and as a result certain operating results are subject to
fluctuations in currency exchange rates.
NWB Group maintains policies and procedures designed to
manage the impact of its exposure to fluctuations in currency
exchange rates. Nevertheless, changes in currency exchange
rates, particularly in the sterling-US dollar and sterling-euro rates,
may adversely affect various accounting and financial metrics
including, 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.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, reputation
and/or its ability to meet regulatory capital adequacy
requirements.
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 adversely affect NWB Group and its operating
environment.
As a result of the UK’s withdrawal from the EU, certain aspects of
the services provided by NWB Group require local licences or
individual equivalence decisions (temporary or otherwise) by
relevant regulators.
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. When these
proposals become law all ‘banking services’ provided by NatWest
Group (of which NWB Group forms part) in the EU may be
licensable activities in each EU member state in which it provides
such services and member states may not be permitted to offer
bilateral permissions to financial institutions outside the EU
allowing them to provide such ‘banking services’, except in limited
circumstances.
NatWest Group continues to evaluate its EU operating model,
making adaptations as necessary. Changes to NatWest Group’s
EU operating model have been, and may continue to be, costly
and failure to receive regulatory permissions and/or further
changes to its business operations, product offering, customer
engagement, and regulatory requirements could result in further
costs and/or regulatory sanction.
The long-term effects of Brexit and the uncertainty regarding
NWB Group’s EU operating model may adversely affect NWB
Group and its customers and counterparties who are themselves
dependent on trading with the EU or personnel from the EU. The
long-term effects of Brexit may also be exacerbated by wider UK
and global macroeconomic trends and events.
Uncertainties remain as to the extent to which EU/EEA laws will
diverge from UK law. For example, bank regulation in the UK may
diverge from European bank regulation following the enactment
of the Financial Services and Markets Act 2023 (‘FSMA 2023’)
and the Retained EU Law (Revocation and Reform) Act 2023. In
particular, FSMA 2023 provides for the revocation of Retained EU
Law relating to financial services regulation but sets out that this
process will likely take a number of years and that the intention is
that specific retained EU laws will not be revoked until such time
as replacement regulatory rules are in place. The actions taken by
regulators in response to any new or revised bank regulation and
other rules affecting financial services, may adversely affect NWB
Group, including its business, non-UK operations, group structure,
compliance costs, intragroup arrangements and capital
requirements.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
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 Autumn Statement 2023 (presented on 22 November 2023),
the UK Government confirmed its commitment to exiting its
shareholding in NatWest Group plc, subject to market conditions.
It also stated that it “intends to fully exit by 2025-26 utilising a
range of disposal methods” and “will explore options to launch a
share sale to retail investors in the next twelve months, subject to
supportive market conditions”.
NatWest Group plc has most recently: (i) carried out a directed
buyback of NatWest Group plc ordinary shares from HM Treasury
in May 2023, and (ii) made purchases under NatWest Group plc’s
on-market buyback programmes announced in July 2023 and
February 2024. NatWest Group plc may participate in similar
directed or on-market buybacks in the near- and medium-term
future. As at 8 January 2024, HM Treasury held 36.94% of the
ordinary share capital with voting rights of NatWest Group plc.
Achievement of the UK Government’s Autumn Statement 2023
objective is likely to entail it selling a significant number of
NatWest Group plc's shares.
Risk factors continued
NWB Group
Annual Report and Accounts 2023
175
The precise timing, method and extent of further HM Treasury’s
disposal of NatWest Group plc’s shares may be driven by
economic as well as other considerations and is uncertain, which
could result in a prolonged period of price volatility for NatWest
Group plc’s ordinary shares and its (and NatWest Group’s) other
securities.
Any offers or sales of a substantial number of ordinary shares in
NatWest Group plc by HM Treasury (including at a discount or
with other incentives), market expectations about these offers or
sales, or perceptions about the success or failure of any offers or
sales (including for example, media or public attention on any
such offering or post-offer share price performance), and any
directed, on- or off-market buyback activity by NatWest Group
plc, could affect the prevailing market price for the outstanding
ordinary shares of NatWest Group plc, and, in the case of a
directed, on- or off-market buyback, could reduce NatWest Group
plc’s capital and liquidity, which may have an adverse effect on
NWB Group.
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 UK Government Investments Limited (‘UKGI’)
(as manager of HM Treasury’s shareholding) could exercise a
significant degree of influence over NatWest Group (including
NWB Group) including: the election or removal of directors, the
appointment or removal 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.
HM Treasury or UKGI’s approach largely 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 may in
turn adversely affect the governance, business strategy, future
results, financial condition and/or prospects 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.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
Strategic risk
NatWest Group (of which NWB Group forms part) continues
to implement its strategy, which carries significant execution
and operational risks and it may not achieve its stated aims
and targeted outcomes.
NatWest Group (of which NWB Group forms part) continues to
implement its strategy, which is intended to reflect the rapidly
shifting environment and backdrop of significant disruption in
society driven by technology and changing customer
expectations. Further, shifting trends include digitalisation,
decarbonisation, automation, artificial intelligence, e-commerce
and hybrid working, each of which has resulted in significant
market volatility and change.
There is also increasing investor, employee, stakeholder,
regulatory and customer scrutiny regarding how businesses
address these changes and related environmental challenges,
including climate change, biodiversity and other sustainability
issues, including how NatWest Group supports its customers’
transition to net zero, is tackling inequality, working conditions,
workplace health, safety and wellbeing, diversity and inclusion,
data protection and management, workforce management,
human rights and supply chain management.
In recent years, as part of its strategy, NatWest Group has
refocused its NatWest Markets business, and has also created the
Commercial & Institutional business segment. This business
segment combines the previously separately reporting
Commercial, NatWest Markets and RBS International businesses
to form a single business segment, which focuses on serving
Commercial & Institutional customers. It was created to promote
closer operational and strategic alignment to support growth, with
more integrated services to customers across NatWest Group
entities within and outside the ring-fenced banks, with the
potential increased risk of breach of the UK ring-fencing regime
requiring effective conflicts of interest policies. In December 2023,
a transfer pricing arrangement between NWB Group and NWM
Group allowing a sharing of certain Commercial & Institutional
business segment profits through payment from NWB Group to
NWM Group was approved. As a result, NWB Group may suffer
from reduced profitability if the relevant Commercial & Institutional
profits are reduced because of weaker performance in NWM
Group
Many factors may adversely impact the successful implementation
of NatWest Group’s strategy and the delivery of its intended
benefits, including:
macroeconomic challenges including GDP growth, inflation,
changing interest rates, changing asset prices (including
residential and commercial property), energy prices, supply
chain disruption, changes to monetary and fiscal policy, and
the impact of armed conflict, which may adversely affect NWB
Group’s customers and which could in turn impact adversely
certain strategic initiatives and new venture opportunities for
NWB Group;
changing customer expectations and behaviour in response to
macroeconomic conditions or developments, technology and
other factors which could reduce the profitability,
competitiveness, or volume of the services NWB Group offers;
the rapid emergence and rapid deployment of new
technologies (such as artificial intelligence, quantum
computing, blockchain and digital currencies) resulting in a
potential shift across the market, towards products and
services that are not part of NWB Group’s core offering today;
increased competitive threats from incumbent banks, fintech
companies, large technology conglomerates and other new
market entrants (including those that emerge from mergers
and consolidations) who may have competitive advantages in
terms of scale, technology and customer engagement;
uncertainties regarding, or changes by, the senior leadership
of NatWest Group; and
changes to the regulatory environment and associated
requirements which could lead to shifts in operating cost and
regulatory capital requirements, that impact NWB Group’s
product offerings and business models; (see also ‘NWB
Group’s businesses are subject to substantial regulation and
oversight, which are constantly evolving and may adversely
affect NWB Group’; and NWB Group could incur losses or be
required to maintain higher levels of capital as a result of
limitations or failure of various models)
Risk factors continued
NWB Group
Annual Report and Accounts 2023
176
Delivery of NWB Group’s strategy will require:
maintaining effective governance, procedures, systems and
controls giving effect to NatWest Group’s strategy;
managing a broad range of risks and opportunities related to
changes in the macroeconomic environment, customer
expectations and behaviour, technology, regulation and
competition alongside the emerging risks and opportunities
associated with climate and other sustainability-related areas;
achieving a number of financial, capital and operational
targets and expectations within the relevant timeframe, or at
all; and
continued cost-controlling measures, which may result in
provisions in connection to a lower NatWest Group’s (and
NWB Group’s) cost base, may divert investment from other
areas, and may vary considerably from year to year.
In pursuing NatWest Group’s strategy, NWB Group may not be
able to successfully: (i) implement some or all aspects of its
strategy; (ii) meet any or all of the related targets or expectations
of its strategy and otherwise realise the anticipated benefits of its
strategy, in a timely manner, or at all; 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 and regulatory (including
compliance with the UK ring-fencing regime), conflicts, legal,
execution, IT system, cybersecurity, internal culture, conduct and
people risks. Implementing changes and strategic actions,
including in respect of any growth initiatives, requires the effective
application of robust governance and controls frameworks and
robust IT systems; and there is a risk that NatWest Group (and
NWB Group) may not be successful in all these respects. The
ongoing
implementation of NatWest Group’s strategy could result
in materially higher costs than initially contemplated (including due
to material uncertainties and factors outside of NatWest Group’s
control) and may not be completed as planned (both in terms of
substantive targets and timing), or at all. This could lead to
additional management actions by NatWest Group (or NWB
Group).
Each of these risks, and others identified in these Principal Risks
and Uncertainties, individually or collectively could jeopardise the
implementation and delivery of NatWest Group’s strategy, impact
NWB Group’s products and services offering, its reputation with
customers or business model and adversely affect NWB Group’s
ability to deliver its strategy and meet its targets and guidance,
each of which could have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
Acquisitions, divestments or other strategic transactions by
NatWest Group (and/or NWB Group) may not be successful,
and consolidation or fragmentation of the financial services
industry may adversely affect NatWest Group.
The financial services industry is experiencing continued
competitive pressure resulting from technological advancement
that disrupts traditional business models and from incumbent
banks, fintech companies, large technology conglomerates and
other new market entrants. To compete effectively, NatWest
Group may decide (of which NWB Group forms part), as part of its
strategy, to undertake acquisitions, investments, the purchase of
assets and liabilities, divestments, restructurings, reorganisations,
joint ventures and other strategic partnerships, as well as other
transactions and initiatives. In addition, NatWest Group (of which
NWB Group forms part), may decide to grow its business through
these transactions and initiatives to, amongst others, : (i) enhance
capabilities that may lead to better productivity or cost
efficiencies; (ii) acquire talent; (iii) pursue new products or expand
existing products; and/or (iv) enter new markets or enhance its
presence in existing markets.
In pursuing its strategy, NWB Group may not fully realise the
expected benefits and value from the above-mentioned
transactions and initiatives in the time, or to the degree
anticipated, or at all. In particular, NatWest Group (and NWB
Group) may: (i) fail to realise the business rationale for the
transaction or initiative, or rely on assumptions underlying the
business plans supporting the valuation of a target transaction or
initiative that may prove inaccurate, for example, regarding
synergies and expected commercial demand; (ii) fail to
successfully integrate any acquired businesses, investment, joint-
venture or assets (including in respect of technologies, existing
strategies, products, governance, systems and controls, and
human capital) or to successfully divest or restructure a business;
(iii) fail to retain key employees, customers and suppliers of any
acquired or restructured 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; (vi) not obtain
necessary regulatory and other approvals or onerous conditions
may be attached to such approvals, and (vii) compete with
existing larger banks or financial institutions (and those that
emerge from mergers and consolidations) or other larger entities
offering financial services products that may have more
bargaining power in negotiations than NatWest Group (or NWB
Group). Accordingly, NatWest Group (or NWB Group) may not be
successful in changing its business 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.
Continued competitive pressure in the financial services industry
from both established and new market entrants such as
technology companies, may have a negative impact on NWB
Group’s business. Existing larger banks or financial institutions
(and those that emerge from mergers and consolidations) or
other larger entities offering financial services products may have
more bargaining power in negotiations than NatWest Group (and
NWB Group) and therefore may be in a position to extract more
advantageous terms than NatWest Group (and NWB Group). See
also, ‘NWB Group operates in markets that are highly competitive,
with competitive pressures and technology disruption’.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
The transfer of NatWest Group’s Western European
corporate portfolio involves certain risks.
To improve efficiencies and best serve customers following Brexit,
NWB Group expects that certain of NatWest Group’s assets,
liabilities, transactions and activities (including NatWest Group’s
Western European corporate portfolio, principally consisting of
term funding and revolving credit facilities), may be: (i) transferred
from the ring-fenced subgroup of NatWest Group, to NWM Group
and/or (ii) transferred to the ring-fenced subgroup of NatWest
Group from NWM Group, subject to regulatory and customer
requirements. The timing, success and quantum of any of these
transfers remain uncertain as is the impact of these transactions
on its results of operations. As a result, this could have a material
adverse effect on NatWest Group’s (including NWB Group’s)
future results, financial condition, prospects, and/or reputation.
Risk factors continued
NWB Group
Annual Report and Accounts 2023
177
Financial resilience risk
NWB Group may not achieve its ambitions, targets and
guidance it communicates or generate sustainable returns.
As part of NatWest Group’s strategy, it has set a number of
financial, capital and operational targets for NWB Group including
in respect of: MREL targets, funding plans and requirements,
employee engagement, diversity and inclusion as well as climate
strategy (including its climate and sustainable funding and
financing targets) and customer satisfaction targets.
NWB Group’s ability to meet NatWest Group and NWB Group’s
respective ambitions, targets and guidance and make
discretionary capital distributions are subject to various internal
and external factors, risks and uncertainties. These include, but
are not limited to: 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 and
other sustainability-related issues), competitive pressures,
litigation, governmental actions, investigations and regulatory
matters. If assumptions, judgements and estimates (for example
about future economic conditions) prove to be incorrect, NatWest
Group may not achieve any or all or its targets or meet its
ambitions, targets, or guidance. A number of factors may impact
NWB Group’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 strategy, which
carries significant execution and operational risks and may not
achieve its stated aims and targeted outcomes.’
Any failure of NWB Group to achieve NatWest Group and NWB
Group’s respective ambitions, targets or guidance may have a
material adverse effect on NatWest Group’s future results,
financial condition, prospects, and/or reputation.
NWB Group has significant exposure to counterparty and
borrower risk including credit losses, which may have an
adverse effect on NWB Group.
NWB Group has exposure to many different sectors, 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 and systems may fail to identify,
anticipate or quickly react to weaknesses or risks in a particular
sector, market, borrower or counterparty, or NatWest Group’s
credit risk appetite relative to competitors, or fail to appropriately
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 UK and global macroeconomic
and political uncertainties, prevailing economic and market
conditions. These include factors relating to interest rates and
inflation, changing asset prices (including residential and
commercial property), energy prices, supply chain disruption,
changes to monetary and fiscal policy, the impact of armed
conflict, and the legal and regulatory landscape in the UK and
countries where NWB Group is exposed to credit risk. Any further
deterioration in these conditions or changes to legal or regulatory
landscapes could worsen borrower and counterparty credit
quality or impact the enforcement of contractual right, increasing
credit risk.
Any increase in drawings upon committed credit facilities may
also increase NWB Group’s RWAs. In addition, the level of
household indebtedness in the UK (on a per capita basis) remains
high. The ability of households and businesses to service their
debts could be worsened by a period of high unemployment, or
high interest rates or inflation, particularly if prolonged.
NWB Group may be affected by volatility in property prices
(including as a result of UK political or economic conditions) given
that NWB Group’s mortgage loan and wholesale property loan
portfolios as at 31 December 2023, amounted to £214.8 billion,
representing 66% of NWB Group’s total loan exposure. If property
prices in the UK 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, regulatory intervention, or other applicable laws, or if it
is liquidated at prices not sufficient to recover the net amount
outstanding to NWB Group after accounting for any IFRS 9
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 or
intermediary could lead to significant liquidity problems and losses
or defaults by other financial institutions or intermediaries, since
the commercial and financial soundness of many financial
institutions and intermediaries is closely related and
interdependent as a result of credit, trading, clearing and other
relationships. Any perceived lack of creditworthiness of a
counterparty or borrower 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 regular basis. See also,
‘NWB Group may not meet the prudential regulatory
requirements for liquidity and funding or may not be able to
adequately access sources of liquidity and funding, which could
trigger the execution of certain management actions or recovery
options.’
As a result, adverse changes in borrower and counterparty credit
risk may cause additional 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. If NWB Group experiences losses
and a reduction in profitability, this is likely to affect the
recoverable value of fixed assets, including goodwill and deferred
taxes, which may lead to write-downs.
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 judgement 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 judgements used in the MES and ECL
assessment at 31 December 2023 may not prove to be adequate
resulting in incremental ECL provisions for NWB Group.
Risk factors continued
NWB Group
Annual Report and Accounts 2023
178
In line with certain mandated COVID-19 pandemic support
schemes, NWB Group assisted customers with a number of
initiatives including NWB Group’s participation in BBLS, CBILS and
CLBILS products. NWB Group 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, CBILS or CLBILS or
the enforcing or pursuing repayment of BBLS, CBILS and CLBILS
(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 judgements, settlements,
penalties, fines, or removal of recourse to the government
guarantee provided under those schemes for impacted loans.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
NWB Group operates in markets that are highly competitive,
with competitive pressures and technology disruption.
The market for UK financial services is highly competitive. NWB
Group expects competition to continue and intensify in response
to various changes including; evolving customer behaviour,
technological changes (including digital currencies and other
instruments, stablecoins and the growth of digital banking, such
as from fintech entrants), competitor behaviour, new entrants to
the market (including non-traditional financial services providers
such as 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 (or more competitive) banking, lending and payment
products and services offered by rapidly evolving incumbents,
challengers (including shadow banks and alternative lenders, i.e.
entities which carry out activities of a similar nature to banks but
without the same regulatory oversight) and new entrants such as
technology companies (which may result in a shift in customer
behaviour) and the introduction of disruptive technology, may
impede NWB Group’s ability to grow or retain its market share
and impact its revenues and profitability, particularly in its key UK
retail and commercial and institutional banking segments.
Moreover, innovations such as biometrics, artificial intelligence
(including generative artificial intelligence), automation, the cloud,
blockchain, cryptocurrencies and quantum computing may rapidly
facilitate industry transformation.
Some of these trends have been catalysed by various regulatory
and competition policy interventions, including the UK initiative on
Open Banking, ‘Open Finance’ and other remedies imposed by
the Competition and Markets Authority (‘CMA’) which are
designed to further promote competition within the financial
sector (including 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 affect NWB Group’s competitive position and/or
reputation. Failure to comply with the terms of the ARP 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, including
through digitalisation and the use of artificial intelligence. For
example, NWB Group has invested in a number of fintech
ventures, including Mettle, FreeAgent, Tyl, Rapid Cash, Rooster
Money, Vodeno and Cushon. NWB Group’s ability to develop or
acquire such digital solutions (which also need to comply with
applicable and evolving regulations) and their integration in NWB
Group’s systems and controls has become increasingly important
to retaining and growing NWB Group’s competitiveness, market
share and customer facing businesses in the UK or elsewhere.
There is a risk that NWB Group’s innovation strategy, which
includes investment in its IT capability intended to address the
material increase in customer and merchant 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 successfully offer innovative products and services
in the future. For example, NWB Group’s current or future
competitors may be more successful than NWB Group in
implementing technologies for delivering products or services to
their customers, which may adversely affect its competitive
position. NWB Group may also fail to identify future opportunities
or fail to derive benefits from technologies in a context of
technological innovation, changing customer behaviour and
changing regulatory demands resulting in increased competition
from traditional banking businesses as well as new providers of
financial services, including technology conglomerates 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 more effective 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 cost
efficiencies. This could affect NWB Group’s ability to offer
innovative products or technologies for delivering products or
services to customers and its competitive position.
Furthermore, the development of innovative products depends on
NWB Group’s ability to effectively produce, acquire, or manage
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 rolled out in a timely manner, it will lose market
share, incur losses on some or all of its initiatives 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 automated
processes and artificial intelligence. Such initiatives may result in
operational, reputational and conduct risks if the technology used
is not used appropriately, is defective, inadequate or is not fully
integrated into NWB Group’s current solutions, systems and
controls. There can be no certainty that such initiatives will deliver
the expected cost savings and investment in technology (including
automated processes and artificial intelligence) will likely also
result in increased costs for NWB Group.
In addition, the implementation of NatWest Group’s strategy
(including in relation to acquisitions, divestments, reorganisations
and/or partnerships), delivery on its climate ambition, cost-
controlling measures, as well as employee remuneration
constraints, may also have an impact on NWB Group’s ability to
compete effectively. Intensified competition from incumbents,
challengers and new entrants as well as disintermediation by
large technology companies could affect NWB Group’s ability to
maintain satisfactory returns.
Risk factors continued
NWB Group
Annual Report and Accounts 2023
179
Moreover, activist investors have increasingly become engaged
and interventionist in recent years, which may pose a threat to
NatWest Group’s (including NWB Group’s) strategic initiatives.
Furthermore, continued consolidation or technological or other
developments in the financial services industry could result in
NWB Group’s competitors gaining greater capital and other
resources, including the ability to offer a broader and more
attractive or better value range of products and services and
geographic diversity, or the emergence of new competitors.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
NWB Group may not meet the prudential regulatory
requirements for liquidity and funding or may not be able to
adequately access sources of liquidity and funding, which
could trigger the execution of certain management actions
or recovery options.
Liquidity and the ability to raise funds continues to be a key area
of focus for NWB Group and the industry as a whole. NatWest
Group and NWB Plc (as a member of the Domestic Liquidity sub-
group) are required by regulators in the UK, the EU and other
jurisdictions in which they undertake regulated activities to
maintain adequate liquidity and funding resources. To satisfy its
liquidity and funding requirements, NWB Group may therefore
access sources of liquidity and funding through retail and
wholesale deposits, as well as through the debt capital markets.
As at 31 December 2023, NWB Plc held £ 294.3 billion in deposits
from banks and customers. The level of deposits may fluctuate
due to factors outside NWB Group’s control, such as a loss of
customers, loss of customer and/or investor confidence (including
in individual NatWest Group entities and as a result of volatility in
the financial sector), changes in customer behaviour, changes in
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
or more of the other factors mentioned above, adversely affect
NWB Group’s ability to satisfy its liquidity or funding needs, or
comply with its related regulatory requirements. In turn, this could
require NWB Group to adapt its funding plans or change its
operations.
Macroeconomic developments, political uncertainty, changes in
interest rates, and market volatility could affect NWB Group’s
ability to access sources of liquidity and funding on satisfactory
terms, or at all. This 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
change its funding plans.
This could exacerbate funding and
liquidity risk, which may adversely affect NWB Group.
As at 31 December 2023, NWB Plc’s liquidity coverage ratio was
138% and net stable funding ratio was 126%. If NWB Plc’s liquidity
position were to come under stress, and if NWB Group were
unable to raise funds through deposits, in the debt capital markets
or through other reliable funding sources, on acceptable terms, or
at all, its liquidity position would likely 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, and/or to fund new loans,
investments and businesses, or make capital distributions to
NatWest Group.
If, under a stress scenario, the level of liquidity falls outside of
NWB Group’s risk appetite, there are a range of recovery
management actions that NWB Group could take to manage its
liquidity levels, but any such actions may not be sufficient to
restore adequate liquidity levels and the related implementation
may have adverse consequences for NWB Group’s operations.
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 liquidity requirements may
trigger the application of NatWest Group’s recovery plan to
attempt to remediate a deficient liquidity position.
NWB Group may need to liquidate 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 its assets, at
attractive prices, or at all, which may have a material adverse
effect on NWB Group’s liquidity.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
NWB Group may not meet the prudential regulatory
requirements for regulatory 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 (via the Domestic Liquidity sub-
group) are required by regulators in the UK, the EU and other
jurisdictions in which they undertake regulated activities to
maintain adequate financial resources. Adequate levels of capital
provide NatWest Group (including NWB Group) with financial
flexibility specifically in its core UK operations in the face of
turbulence and uncertainty in the UK and the global economy.
As at 31 December 2023, NWB Plc’s CET1 ratio was 11.6%. 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. NatWest
Group plc currently targets a CET1 ratio of 13-14% by 31
December 2024. NatWest Group plc’s target CET1 ratio is based
on a combination of its views on the appropriate level of capital
and its actual and 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 required operating levels.
NatWest Group’s current capital strategy for NWB Plc is based
on: the expected accumulation of additional capital through the
accrual of retained earnings 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 CET1 ratio target and achieve its capital strategy. These
include:
a depletion of its capital resources through increased costs or
liabilities or reduced profits (for example, due to an increase in
provisions due to a deterioration in UK economic conditions);
an increase in the quantum of RWAs/Leverage Exposure in
excess of that expected, including due to regulatory changes
(including their interpretation or application) or a failure in
internal controls or procedures to accurately measure and
report RWAs/Leverage Exposure;
Risk factors continued
NWB Group
Annual Report and Accounts 2023
180
changes in prudential regulatory requirements/ Leverage
Requirement including NWB Plc’s Total Capital Requirement
set by the PRA, including Pillar 2 requirements, as applicable,
and regulatory buffers as well as any applicable scalars; and
reduced upstreaming of dividends from NWB Group plc’s
subsidiaries because of changes in their financial performance
and/or the extent to which local capital requirements exceed
NWB Plc’s target ratio; and limitations on the use of double
leverage (i.e., NWB Group’s use of debt to invest in the equity
of its subsidiaries, as a result of the Bank of England’s and/or
NWB Group’s evolving views on distribution of capital within
groups).
In addition to regulatory capital, NWB Plc is required to maintain a
set quantum of internal MREL set as the higher of its RWAs or
applicable leverage-based minimum capital requirement. The
Bank of England has identified single point-of-entry at NatWest
Group plc, as the preferred resolution strategy for NatWest
Group. As a result, NatWest Group plc is the only entity that can
externally issue securities that count towards its MREL, the
proceeds of which can then be downstreamed to meet the
internal MREL 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 requirements and MREL 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 regulatory capital or MREL
falls outside of NWB Group’s risk appetite, there are a range of
recovery management actions (focused on risk reduction and
mitigation) that NWB Group could seek to take to manage its
capital levels, but any such actions may not be sufficient to
restore adequate capital levels. Under the 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 plc’s
CET1 ratio falls below 7%, certain regulatory capital instruments
issued by NatWest Group plc will be written-down or converted
into equity and there may be an issue of additional equity by
NatWest Group plc, which could result in the reduction in value of
the holdings of NatWest Group plc’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. These actions may, in turn, affect: NWB
Group’s product offering, credit ratings, ability to operate its
businesses, pursue its current strategy and strategic
opportunities. See also, ‘NatWest Group (including NWB Group)
may become subject to the application of UK statutory
stabilisation or resolution powers which may result in, for
example, the write-down or conversion of NWB Group’s eligible
liabilities.'; and also ‘NWB Group may be adversely affected if
NatWest Group fails to meet the requirements of regulatory stress
tests’.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
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 at NatWest Group plc.
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 as well as the internal MREL of
subsidiaries within NWB Group, which in either case may have a
material adverse effect on NWB Group’s future results, financial
condition, prospects, and reputation. 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 NWB Group’s
liquidity position and funding and increase the cost of
funding.
Rating agencies regularly review NatWest Group plc, NWB Plc and
other NatWest Group entities’ credit ratings and outlooks. NWB
Group entities’ credit ratings and outlooks could be negatively
affected (directly and indirectly) by a number of factors that can
change over time, including without limitation: credit rating
agencies’ assessment of NWB Group’s strategy and
management’s capability; its financial condition including in
respect of profitability, asset quality, capital, funding and liquidity,
and risk management practices; the level of political support for
the sectors and regions 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, geopolitical and economic conditions in
NWB Group’s key markets (including inflation and interest rates,
supply chain disruptions and the outcome of any further Scottish
independence referendum); any reduction of the UK’s sovereign
credit rating and market uncertainty.
Risk factors continued
NWB Group
Annual Report and Accounts 2023
181
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. See also ‘A reduction in the ESG ratings of NWB Group
could have a negative impact on NWB Group's reputation and on
investors' risk appetite and customers' willingness to deal with
NWB Group.’
Any reductions in the credit ratings of NatWest Group plc, NWB
Plc or of certain other NatWest Group entities, including, in
particular, any downgrade 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 capital markets, reduce the size of its deposit base and trigger
additional collateral or other requirements in its funding
arrangements or the need to amend such arrangements, which
could adversely affect NWB Group’s (and, in particular, NWB Plc’s)
liquidity and funding position, 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) on favourable terms, or at all. This may in turn
adversely affect NWB Group’s competitive position and threaten
its prospects.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
NWB Group may be adversely affected if NatWest Group
fails to meet the requirements of regulatory stress tests.
NatWest Group is subject to annual and other stress tests by its
regulator in the UK. Stress tests are designed to assess the
resilience of banks such as NWB Group 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 NWB Group may 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
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, all of which
may have a material adverse effect on NatWest Group’s future
results, financial condition, prospects, and/or reputation and, in
turn, 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 external or
internal fraud (collectively, ‘financial crime’). NWB Group’s models,
and the parameters and assumptions on which they are based,
are periodically reviewed.
As model outputs are imperfect representations of real-world
phenomena or simplifications of complex real-world systems and
processes, and are based on a limited set of observations, model
outputs therefore remain uncertain. NWB Group may face
adverse consequences as a result of actions or decisions based on
models that are poorly developed, incorrectly implemented,
outdated or used inappropriately. This includes models that are
based on inaccurate or non-representative data (for example,
where there have been changes in the micro or macroeconomic
environment in which NWB Group operates) or as a result of the
modelled outcome being misunderstood, or by such information
being used for purposes for which it was not designed. This could
result in findings of deficiencies by NatWest Group’s (and in
particular, NWB Group’s) regulators (including as part of NatWest
Group’s mandated stress testing) and increased capital
requirements, may render some business lines uneconomic, may
require management action or may subject NWB Group to
regulatory sanction, any of which in turn may also have an
adverse effect on NWB Group and its customers.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
NWB Group’s financial statements are sensitive to underlying
accounting policies, judgements, estimates and assumptions.
The preparation of financial statements requires management to
make judgements, estimates and assumptions that affect the
reported amounts of assets, liabilities, income, expenses,
exposures and RWAs. While estimates, judgements 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, judgements and assumptions
(particularly those involving the use of complex models). Further,
accounting policy and financial statement reporting requirements
increasingly require management to adjust existing judgements,
estimates and assumptions for the effects of climate-related,
sustainability and other matters that are inherently uncertain and
for which there is little historical experience which may affect the
comparability of NWB Group’s future financial results with its
historical results. Actual results may differ due to the inherent
uncertainty in making climate-related and sustainability estimates,
judgements and assumptions.
Accounting policies deemed critical to NWB Group’s results and
financial position, based upon materiality and significant
judgements and estimates, involve a high degree of uncertainty
and may have a material impact on its results. For 2023, these
include loan impairments, fair value, deferred tax and conduct and
litigation provisions. These are set out in ‘Critical accounting
policies’.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
Changes in accounting standards may materially impact
NWB Group’s financial results.
NWB Group prepares its consolidated financial statements in
conformity with the requirements of the Companies Act 2006 and
in accordance with IFRS as issued by the International Accounting
Standards Board. 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
have an adverse effect on NWB Group.
Risk factors continued
NWB Group
Annual Report and Accounts 2023
182
From time to time, the International Accounting Standards Board
may issue new accounting standards or interpretations that could
materially impact how NWB Group calculates, reports and
discloses its financial results and financial condition, and which
may affect NWB Group capital ratios, including the CET1 ratio.
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’.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
NatWest Group (including NWB Group) may become subject
to the application of UK statutory stabilisation or resolution
powers which may result in, for example, the write-down or
conversion of NWB Group’s eligible liabilities.
HM Treasury, the Bank of England, the PRA and the 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; and
(v) temporary public ownership of the relevant entity. These
options may be applied to NatWest Group plc as the parent
company or to NWB Group, as a subsidiary, 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 procedures for relevant entities within NatWest
Group, 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 2009, the Authorities are generally
required to have regard to specified objectives in exercising the
powers provided for by the UK 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 provides that where resolution
action is taken, the Authorities are required to ensure that no
creditor is in a worse position than if the bank had entered into
normal insolvency proceedings. Although, this safeguard may not
apply in relation to an application of the separate write-down and
conversion power relating to capital instruments under the
Banking Act 2009 in circumstances where a stabilisation power is
not also used, the UK Banking Act still requires the Authorities to
respect the hierarchy on insolvency when using the write-down
and conversion power. Further, 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 UK
Banking Act provisions remain largely untested in practice,
particularly in respect of resolutions of large financial institutions
and groups.
If NatWest Group is at or is approaching the point such that
regulatory intervention is required, there may be a corresponding
material adverse effect on NWB Group’s future results, financial
condition, prospects, and/or reputation.
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 in the future
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. NatWest Group has dedicated significant resources
towards the preparation of NatWest Group for a potential
resolution scenario. In June 2022 the Bank of England
communicated its assessment of NatWest Group’s preparations
and did not identify any shortcomings, deficiencies or substantive
impediments although two areas were highlighted as requiring
further enhancements. NatWest Group, and in turn NWB, could
be adversely affected should future Bank of England assessments
deem NatWest Group’s preparations to be inadequate.
If future Bank of England assessments identify 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 does not have adequate plans in place to meet
resolvability requirements, 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. Such
a scenario 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 its legal or
operational structure, a requirement to cease carrying out certain
activities, and/or to maintain a specified amount of MREL. This
may also impact NatWest Group’s (and NWB Group’s) strategic
plans and may have a material adverse effect on NWB Group’s
future results, financial condition, prospects, reputation, and/or
lead to a loss of investor confidence.
Climate and sustainability-related risks
NWB Group and its value chain face climate-related and
sustainability-related risk that may adversely affect NWB
Group.
NWB Group and its value chain (including its investors, customers,
counterparties (including its suppliers) and employees) may face
financial and non-financial risks arising from sustainability-related
risks, including climate-related risks.
Climate and sustainability-related risks may:
adversely affect asset pricing and valuations of NWB Group’s
own and other securities and, in turn, the wider financial
system;
adversely affect economic activities directly (for example
through lower corporate profitability or the devaluation of
assets) or indirectly (for example through macro-financial
changes);
adversely affect the viability or resilience of business models
over the medium to longer term, particularly those business
models most vulnerable to climate and sustainability-related
risks;
trigger losses stemming directly or indirectly from liability risks
and/or reputational damage, including as a result of adverse
media coverage, activists, the public, customers,
counterparties (including suppliers) and/or investors
associating NWB Group or its customers with adverse climate
and sustainability-related issues;
Risk factors continued
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Annual Report and Accounts 2023
183
adversely affect NWB Group’s ability to contribute to deliver
on NatWest Group’s strategy, including contributing to achieve
NatWest Group’s climate ambitions and targets;
exacerbate other risk categories to which NWB Group is
exposed, including credit risk, operational risk (including
business continuity), market risk (both traded and non-
traded), liquidity and funding risk (for example, net cash
outflows or depletion of liquidity buffers), reputational risk,
pension risk, regulatory compliance risk and conduct risk; and
may have a material adverse effect on NWB Group’s
reputation, future results, financial condition, and/or prospects
(including cash flows, access to finance or cost of capital over
the short, medium or long term).
Climate and sustainability matters are becoming increasingly
political and polarised. Some customers, counterparties (including
suppliers) and investors may decide not to do business with NWB
Group because, according to their own assessment, NatWest
Group’s (including NWB Group) strategy, ambitions and targets
related to climate and sustainability do not meet their
expectations, whereas others may decide not to do business with
NWB Group for failing to progress to contribute to NatWest
Group’s climate and sustainability-related strategy, ambitions and
targets or if they are of the view that they lack credibility.
If NWB Group fails to identify, assess, prioritise, monitor and react
appropriately to climate and sustainability-related risks, in a timely
manner, or at all, climate and sustainability-related physical,
transition and liability risks and opportunities, changing regulatory
and market expectations and societal preferences that NWB
Group, its customers, counterparties (including suppliers) face, this
may have a material adverse effect on NWB Group’s business,
future results, financial condition, prospects, reputation or the
price of its securities.
Climate-related risks may adversely affect the global
financial system, NWB Group or its value chain.
Climate-related risks represent a source of systemic risk in the
global financial system. The financial impacts of climate-related
risks are expected to be widespread and may disrupt the orderly
functioning of financial markets and have an adverse effect on
financial institutions, including NWB Group.
There are significant uncertainties as to the location, extent and
timing of the manifestation of the physical impacts of climate
change, such as more severe and frequent extreme weather
events (storms, flooding, subsidence, heat waves, droughts and
wildfires), rising average global temperatures and sea levels,
nature loss, declining food yields, destruction of critical
infrastructure, supply chain disruption and resource scarcity.
Damage to NWB Group customers’ and counterparties’ (including
suppliers’) properties and operations could disrupt business, result
in the deterioration of the value of collateral or insurance
shortfalls, impair asset values and negatively impact the
creditworthiness of customers and their ability and/or willingness
to pay fees, afford new products or repay their debts, 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. Any of these may have a material adverse effect
on NWB Group’s future results, financial condition, prospects,
and/or reputation.
To meet the goals of the UK’s Net Zero Strategy will require a
net-zero transition across all sectors of the UK economy. The
impacts of the extensive social, commercial, technological, policy
and regulatory changes required to achieve this transition remain
uncertain but are expected to be significant, subject to continuous
changes and developments 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 in a timely manner, or at all. NWB
Group’s business and customers in some sectors, including but
not limited to, residential mortgages, commercial real estate,
agriculture (primary farming), automotive manufacturing, aviation,
shipping, land transport and logistics (freight road, passenger rail
and road), electricity generation and oil and gas are expected to
be particularly impacted. The timing and pace of the net-zero
transition is also uncertain, will depend on many factors and
uncertainties and may be near-term, gradual and orderly, or
delayed, rapid and disorderly, or a combination of these.
Climate-related risks may exacerbate the impact of financial and
non-financial risks and they may have a material adverse effect
on NWB Group’s future results, financial condition, prospects,
and/or reputation, including as a result of financial losses caused
directly or indirectly by climate-related litigation and conduct
matters (referred to as ‘liability risk’). See also, ‘NWB Group may
be subject to potential climate and other sustainability-related
litigation, enforcement proceedings, investigations and conduct
risk.’
NWB Group and its value chain may face other
sustainability-related risks that may adversely affect NWB
Group.
NWB Group and its value chain (including its investors, customers,
counterparties (including its suppliers) and employees) may face
financial and non-financial risks arising from broader (i.e. non-
climate-related) sustainability issues. These include: (i) risks
relating to nature loss (such as the loss and/or decline of the state
of nature including but not limited to, the reduction of any aspect
of biological diversity and other forms of environmental
degradation such as air, water and land pollution, soil quality
degradation and water stress); (ii) risks related to societal
(including human rights) matters, for example, climate change and
environmental degradation negatively impacting people’s standard
of living and health, geopolitical tensions and conflict endangering
people’s lives and security, the displacement of communities, the
violation of indigenous people’s rights, unjust working conditions
and labour rights breaches (including discrimination, lack of
diversity and inclusion, inequality, gender/ethnicity pay gap and
payments under the minimum wage), modern slavery, financial
crime, data privacy breaches and lack of support for the
vulnerable; and (iii) governance-related risks (including board
diversity, ethics, executive compensation and management
structure).
NWB Group is directly and indirectly exposed to multiple types of
nature-related risks through the breadth of its activities, products
and services offering, including through the risk of default by
customers whose businesses are exposed to nature-related risks.
In 2021, NatWest Group (including NWB Group) first classified
‘Biodiversity and Nature Loss’ as an emerging risk for NatWest
Group (including NWB Group) within its Risk Management
Framework. From January 2024, NatWest Group (including NWB
Group) has expanded its key risk definition from climate risk to
climate and nature risk and updated its climate risk policy to
reflect emerging nature-related risks and to capture requirements
that go beyond climate risk.
NatWest Group (including NWB Group) supports the aims of the
Task Force on Nature Related Financial Disclosure and continues
to enhance its reporting and measurement capabilities,
acknowledging challenges associated with data availability, while
continuing to review evolving disclosure standards and
framework. NatWest Group’s (including NWB Group) approach is
to integrate nature its existing strategy on climate, recognising
there is still, much to do in understanding its impacts and
dependencies on nature as well as our nature-related risks and
opportunities.
Risk factors continued
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Annual Report and Accounts 2023
184
There is also increased scrutiny from NWB Group’s investors,
customers, counterparties (including its suppliers), employees,
communities, regulators, the media and other stakeholders on
how NWB Group addresses societal and governance related
matters, including unjust working conditions and labour rights
breaches, resilience in the workplace, safety and wellbeing, data
protection and management, workforce management, human
rights and value chain management. For example, NatWest
Group’s (including NWB Group) ambition is to support
decarbonisation while promoting energy security, may lead to
continued exposure to carbon-intensive activities and sectors
regarded as posing high climate and nature-related and societal
(including human rights) risks, (such as the textiles, agriculture
and mining sectors) each of which may impact NWB Group’s
employees, customers, counterparties (including suppliers) and
stakeholders, and their business activities and/or the communities
in which they operate and, in turn, result in reputational risk for
NWB Group.
There is also growing expectation of the need for a ‘just transition’
and ‘energy justice’ – in recognition that the transition to net zero
should happen in a way that is as fair and inclusive as possible to
everyone concerned.
Although NatWest Group (including NWB Group) continues to
evaluate and assess how it integrates ‘just transition’
considerations into its climate and sustainability strategy, a failure
(or perception of failure) by NatWest Group (including NWB
Group) to sufficiently factor these considerations into existing
products and service offerings may adversely affect NatWest
Group’s (including NWB Group) reputation.
In 2023, NatWest Group (including NWB Group) published its initial
assessment of its ‘salient human rights issues’. Human rights
saliency assessments are high-level scoping exercises based on
internal and external stakeholder engagement and involve
subjective materiality and other judgements including as to
severity and likelihood of human rights impacts. Failure by
NatWest Group (including NWB Group) to identify, assess,
prioritise and monitor any actual or potential adverse human
rights issues that NatWest Group (including NWB Group)
contributes to, or is directly linked to, may adversely impact
people and communities, which in turn may have a material
adverse effect on NWB Group’s future results, financial condition,
prospects and/or reputation. Sustainability-related risks may have
the potential to cause or stress other financial and non-financial
risks, including climate-related risks, and they may have a
material adverse effect on NWB Group’s future results, financial
condition, prospects, and/or reputation including as a result of
financial losses caused directly or indirectly by sustainability-
related litigation and conduct matters (referred to as ‘liability risk’).
See also, ‘NWB Group may be subject to potential climate and
other sustainability-related litigation, enforcement proceedings,
investigations and conduct risk’.
NatWest Group’s climate change related strategy, ambitions,
targets and transition plan entail significant execution and/or
reputational risks and are unlikely to be achieved without
significant and timely government policy, technology and
customer behavioural changes.
NatWest Group has an ambition to become a leading bank in the
UK, helping to address the climate challenge. At NatWest Group’s
Annual General Meeting in April 2022, ordinary shareholders
passed an advisory ‘Say on Climate’ resolution endorsing NatWest
Group’s previously announced strategic direction on climate
change, including its ambitions to at least halve the climate impact
of its financing activity by 2030, achieve alignment with the 2015
Paris Agreement and reach net zero across its financed
emissions, assets under management and operational value chain
by 2050.
Further, in December 2022, NatWest Group published its science-
based targets validated by Science Based Target Initiative for 79%
of its lending book as at 31 December 2019 and 57% of debt
securities and equity shares, excluding sovereign debt securities.
NatWest Group has also announced and in the future it may also
announce other climate ambitions, targets and initiatives which
support its aim to help addressing the climate challenge.
Making the changes necessary to contribute to achieving NatWest
Group’s strategic direction on climate change, including
contributing to achieve NatWest Group’s climate ambitions and
targets and contributing to the execution to NatWest Group’s
transition plan, together with the active management of climate
and sustainability-related risks and other regulatory, policy and
market changes, is likely to necessitate material changes to NWB
Group’s business, operating model, its existing exposures and the
products and services NWB Group provides to its customers
(potentially on accelerated timescales). NWB Group may be
required to (i) significantly reduce its financed emissions and its
exposure to customers that do not align with a transition to net
zero or do not have a credible transition plan in place, and (ii)
divest or discontinue certain activities for regulatory or legal
reasons or in response to the transition to a less carbon-
dependent economy. Increases in lending and financing activities
may wholly or partially offset some or all these reductions, which
may increase the extent of changes and reductions necessary.
Making the necessary changes (or not making the necessary
changes in a timely manner, or at all) may have a material
adverse effect on NWB Group’s business and operations, financial
condition, prospects and competitive position and NWB Group’s
ability to contribute to achieving NatWest Group’s climate and
financial ambitions and targets, take advantage of climate
change-related opportunities and generate sustainable returns.
NWB Group’s ability to contribute to achieving NatWest Group’s
strategy, including contributing to achieve NatWest Group’s
climate ambitions and targets, will significantly depend on many
factors and uncertainties beyond NWB Group’s control. These
include (i) the extent and pace of climate change, including the
timing and manifestation of physical and transition risks; (ii) the
macroeconomic environment; (iii) the effectiveness of actions of
governments, legislators, regulators and businesses; (iv) the
response of the wider society, investors, customers, suppliers and
other stakeholders to mitigate the impact of climate and
sustainability-related risks; (v) changes in customer behaviour and
demand; (vi) appetite for new markets, credit appetite,
concentration risk appetite, lending opportunities; (vii)
developments in the available technology; (viii) the roll-out of low
carbon infrastructure; and (ix) the availability of accurate,
verifiable, reliable, auditable, consistent and comparable data.
These external factors and other uncertainties will make it
challenging for NWB Group to contribute to achieving NatWest
Group’s climate ambitions and targets and there is a significant
risk that all or some of these ambitions and targets will not be
achieved or not achieved within the intended timescales.
NWB Group’s ability to contribute to achieving NatWest Group’s
climate ambitions and targets depends to a significant extent on
the timely implementation and integration of appropriate
government policies. The UK CCC June 2023 Progress Report to
the UK Parliament states that the rate of emissions reduction will
need to significantly increase for the UK to meet its 2030
commitments and continued delays in policy development and
implementation mean achievement is increasingly challenging.
On
20 September 2023, the UK Government announced its revised
plans on reducing emissions to reach net zero, including (i)
delaying the proposed ban on the sale of petrol and diesel cars to
2035; (ii) not proceeding with new policies forcing landlords to
upgrade the energy efficiency of their properties; and (iii) delaying
the ban on new fossil fuel boilers for certain households.
Risk factors continued
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Annual Report and Accounts 2023
185
Accordingly, NatWest Group (including NWB Group) considers
achievement of the following ambitions increasingly challenging (i)
50% of NatWest Group’s mortgage portfolio to have an EPC
rating of C or above by 2030; and (ii) to at least halve the climate
impact of NatWest Group’s financing activity by 2030, against a
2019 baseline.
NatWest Group (including NWB Group) has also stated that it
plans to phase-out coal for UK and non-UK customers who have
UK coal production, coal fired generation and coal related
infrastructure by 1 October 2024, with a full global phase-out by 1
January 2030. Data challenges, particularly the lack of granular
customer information, creates challenges in identifying
customers
with ‘coal related infrastructure’ (e.g. transportation and storage)
and other customers with ‘coal- related operations’ within
NatWest Group’s (including NWB Group) large and diversified
customer portfolios. Therefore, there is a risk that some
customers with UK-based coal activities may not have been
identified and that NatWest Group (including NWB Group) will not
be able to identify all relevant activities to achieve these coal
phase-out plans.
Any delay or failure by NWB Group in contributing to set, make
progress against or meet NatWest Group’s climate-related
ambitions,
targets and plans may have a material adverse effect
on NWB Group’s future results, financial condition, prospects,
and/or reputation and may increase the climate and sustainability-
related risks NWB Group faces.
There are significant limitations related to accessing
accurate, reliable, verifiable, auditable, consistent and
comparable climate and other sustainability-related data
that contribute to substantial uncertainties in accurately
modelling and reporting on climate and sustainability
information, as well as making appropriate important
internal decisions.
Meaningful reporting of climate and sustainability-related risks and
opportunities and their potential impacts and related metrics
depends on access to accurate, reliable, verifiable, auditable,
consistent and comparable climate and sustainability-related data
from counterparties (including suppliers) or customers. Data may
not be generally available or, if available, may not be accurate,
reliable, verifiable, auditable, consistent, or comparable. Any
failure of NWB Group to proportionately collect or develop
accurate, reliable, verifiable, auditable, consistent and comparable
counterparty (including supplier) and customer data, may
adversely affect NWB Group’s ability to prepare meaningful
reporting which is relevant, represented in an accurate, verifiable,
comparable and understandable way of the climate and
sustainability-related risks and opportunities which may adversely
affect NWB Group’s ability to meet external disclosure obligations,
and its reputation, business and its competitive position.
In the absence of other sources, reporting of financed emissions
and other sustainability data by financial institutions, including
NWB Group, is necessarily based on aggregated information
developed by third parties that may be prepared in an
inconsistent way using different methodologies, interpretations, or
assumptions. NWB Group’s climate and sustainability-related
disclosures use a greater number and level of assumptions,
judgements and estimates than many of its financial disclosures.
These assumptions, judgements and estimates are highly likely to
change materially over time, and, when coupled with the longer
timeframes used in these climate and sustainability-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 sector and other
assumptions that may not be accurate for a given counterparty
(including supplier) or customer. There may also be data gaps
that are filled using proxy data, such as sectoral averages or use
of emissions estimated by a third party, again developed in a
variety of ways and in some cases not in a timely manner causing
data to be potentially outdated at the time when they are used.
Significant risks, uncertainties and variables are inherent in the
assessment, measurement and mitigation of climate and
sustainability-related risks. These include data quality gaps and
limitations mentioned above, as well as the pace at which climate
science, greenhouse gas accounting standards and various
emissions reduction solutions develop. In addition, there is
significant uncertainty about how climate change and the world’s
transition to a net-zero economy will unfold over time and how
and when climate and sustainability-related risks will manifest.
These timeframes are considerably longer than NWB Group’s
historical and current strategic, financial, resilience and
investment planning horizons.
As a result, NWB Group’s climate and sustainability-related
disclosures may be amended, updated or restated in the future as
the quality and completeness of NWB Group’s data and
methodologies continue to improve. These data quality challenges,
gaps and limitations may have a material impact on NWB Group’s
ability to make effective business decisions about climate and
sustainability-related risks and opportunities, including risk
management decisions, to comply with disclosure requirements
and to monitor and report progress in meeting ambitions, targets
and pathways.
Climate-related risks are challenging to model due to their
forward-looking nature, the lack of and/or quality of historical
testing capabilities, lack of accuracy, standardisation and
incompleteness of emissions and other climate and sub-sector
related data and the immature nature of risk measurement and
modelling methodologies. As a result, it is very difficult to predict
and model the impact of climate-related risks into precise financial
and economic outcomes.
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 NWB Group would like to happen, rather they
explore the possible implications of different judgements and
assumptions by considering a series of scenarios;
climate scenarios do not provide a comprehensive description
of all possible future outcomes;
lack of specialist expertise in NWB Group that needs to rely on
third party advice, modelling, and data which is also subject to
many limitations and uncertainties;
immaturity of modelling of and data on climate-related risks
on financial assets which will presumably evolve rapidly in the
coming years;
the number of variables and the forward-looking nature of
climate scenarios which makes them challenging to back test
and benchmark;
the 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;
Risk factors continued
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Annual Report and Accounts 2023
186
the assumptions will continue to evolve 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 financed emissions.
Accordingly, these risks and uncertainties coupled with
significantly long timeframes make the outputs of climate-related
risk modelling, climate-related targets (including emission
reduction targets) and pathways, inherently more uncertain than
outputs modelled for traditional financial planning cycles based on
historical financial information. Furthermore, there is a lack of
scientific, industry and regulatory consensus regarding the
appropriate metrics, methodologies, modelling and standardised
reporting to enable the assessment of the location, acuteness,
and severity of climate-related risks and the monitoring and
mitigation of these risks in the economy and financial system.
There is increasing industry concern (acknowledged by the
Network for Greening the Financial System) that model scenarios,
including those provided by central banks and supervisory bodies
and are too benign and may not adequately capture: (i) the
financial implications of increasing frequency and severity of acute
physical risks as global temperatures increase; (ii) second and
third order impacts such as disruptions to supply chains and
increased geo-political risks; nor (iii) possible ‘tipping points’ that
could lead to large, irreversible changes in the climate system (for
example the melting of permafrost or the Greenland and
Antarctic ice sheets).
Capabilities within NWB Group to appropriately assess, model,
report and manage climate-related risks and impacts and the
suitability of the assumptions required to model and manage
climate-related risks appropriately continue to develop. But such
development is still in its early stages. Even when those
capabilities are appropriately 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 judgements and data
quality gaps and limitations may lead to inadequate risk
management information and frameworks, or ineffective business
adaptation or mitigation strategies or regulatory non-compliance,
all of which may have a material adverse effect on NWB Group’s
business, future results, financial condition, prospects, reputation
and the price of its securities.
Failure to implement effective governance, procedures,
systems and controls in compliance with legal, regulatory
requirements and societal expectations to manage climate
and sustainability-related risks and opportunities could
adversely affect NWB Group.
The UK’s prudential regulation of climate-related risk
management is an important driver in how NatWest Group
(including NWB Group) develops its associated risk framework for
financing activities or engaging with counterparties (including
suppliers). Legislative and regulatory authorities are publishing
expectations as to how banks should prudently manage and
transparently disclose climate and sustainability-related risks. In
the UK this includes the Bank of England’s Supervisory Statement
3/19 on the management of climate-related financial risks,
covering governance, risk management, scenario analysis and
disclosure which sets out expectations that firms, such as
NatWest Group (including NWB Group), take a strategic approach
to managing climate-related financial risks, identifying current
risks and those that can plausibly arise in the future, and
appropriate actions to mitigate those risks.
In March 2023, the Bank of England published a report setting out
its latest thinking on climate-related risks and regulatory capital
frameworks. It found there to be uncertainty over whether banks
are sufficiently capitalised for future climate-related losses and it
stated that it will undertake further analysis to explore whether
changes to the regulatory capital frameworks may be required.
Any failure of NatWest Group (including NWB Group) to fully and
timely embed climate and other sustainability-related risks into its
risk management practices and framework to appropriately
identify, assess, prioritise and monitor the various climate-related
physical and transition risks and other sustainability-related risks
and apply the appropriate product governance process in line
with applicable legal and regulatory requirements and
expectations, may adversely affect NWB Group’s regulatory
compliance, prudential capital requirements, liquidity position and
this may have a material adverse effect on NWB Group’s
business, future results, financial condition, prospects, reputation
or the price of its securities.
Increasing levels of climate and other sustainability-related
laws, regulation and oversight may adversely affect NWB
Group.
NatWest Group as well as its subsidiaries in the UK, EU and
elsewhere are increasingly becoming subject to more extensive
climate and sustainability-related legal and regulatory
requirements. In the UK, these include mandatory requirements
by the FCA and under the Companies Act 2006 to make climate-
related disclosures consistent with the recommendations of the
Task Force on Climate related Financial Disclosures. In addition, in
August 2023 the FCA set out its intention to consult in 2024 on
rules and guidance for listed companies to disclose in line with the
UK-endorsed ISSB standards and the Transition Plan Taskforce
Disclosure Framework published in October 2023 as a
complementary package. Further regulatory requirements may
emerge as part of the developing UK sustainability-related
disclosure requirements. In the EU, these climate and
sustainability-related legal and regulatory requirements include
the EU Taxonomy, the EU Corporate Sustainability Reporting
Directive (‘CSRD’), the EU Green Bond Standard and proposed
EU Corporate Sustainability Due Diligence Directive (‘CSDDD’).
Certain non-UK subsidiaries of NatWest Group in the EU and
elsewhere may also be subject to EU, national and other climate
and sustainability laws and regulations which in some cases may
differ. For example, NatWest Group’s Dutch subsidiary, NWM
N.V., is subject to the EU Taxonomy, CSRD, the proposed
CSDDD, and other legal, regulatory and supervisory expectations
relating to climate-related and environmental risk management
and disclosure. A failure of NatWest Group or any of its
subsidiaries, including NWM N.V., to comply with these regulations
(if applicable), whether through insufficient resources, expertise,
support, customer and counterparty data challenges or otherwise
may have an adverse effect on NWB Group’s reputation and the
successful contribution to the implementation of NatWest Group’s
strategy.
In some jurisdictions, particularly the United States, regulatory and
enforcement activity around climate and sustainability initiatives is
becoming increasingly politicised. This has resulted in a
polarisation between promoting more extensive climate and
sustainability-related requirements, such as the proposed SEC
climate disclosure rules, and challenging climate and sustainability-
related initiatives on the basis of allegations that they could
breach applicable laws.
Divergence between UK, EU,US and other climate and
sustainability-related legal and regulatory requirements and their
interpretation may increase the cost of doing business (including
increased operating costs), may result in contentious regulatory
and litigation risk, may require changes to NWB Group’s business
and may restrict NWB Group’s access to the EU/EEA and US
capital markets.
Risk factors continued
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Annual Report and Accounts 2023
187
Failure to comply with these divergent legal and regulatory
requirements which are applicable to NWB Group may result in
NWB Group and/or its subsidiaries not meeting applicable
regulatory requirements or investors’ expectations. Compliance
with these complex and evolving climate and sustainability-related
legal and regulatory requirements and voluntary standards and
initiatives is likely to require NWB Group to implement significant
changes to its business models, IT systems, products, governance,
internal controls over financial reporting, disclosure controls and
procedures, modelling capability and risk management systems,
which may increase the cost of doing business, result in higher
capital requirements, and entail additional change risk and
increased compliance, regulatory sanctions, conduct and litigation
(including settlements) costs. Failure to implement and comply
with these requirements, standards and initiatives may also result
in investigations and/or regulatory sanctions, reputational damage
and investor disapproval each of which may have a material
adverse effect on NWB Group’s future results, financial condition,
prospects, and/or reputation.
Increasing regulation of “greenwashing” is likely to increase
the risk of regulatory enforcement and investigation
and litigation.
Misrepresenting or over-emphasising the extent to which an
investment or other type of product takes into account ‘green’,
‘environmentally friendly’, ‘sustainable’ or ‘ethical’ features and
concerns, using misleading labels and language in relation to such
products and/or omitting material information about NWB Group’s
contribution to the climate crisis (including its direct or indirect
contribution to greenhouse gas emissions), or other sustainability-
related issues, could potentially result in complaints, regulatory
investigation and/or sanction, claims and/or litigation and/or
reputational damage.
This risk is likely to increase as the UK and other jurisdictions
implement and enforce new anti-greenwashing regulations. For
example, the FCA’s Sustainability Disclosure Requirements and
investment labels policy statement (PS 23/16) published in
November 2023 includes a general anti-greenwashing rule that
requires regulated firms (such as NWB Plc) to ensure that
sustainability claims in financial promotions of their products and
services are consistent with the sustainability characteristics of
the product or service and are fair, clear and not misleading. The
FCA has stated that it would publish guidance as to how
regulated firms should comply with its anti-greenwashing rule
including the requirements for sustainability claims that will
become effective on 31 May 2024 (currently the subject of FCA
consultation paper (GC23/3)). In the EU the European Commission
has proposed a Green Claims Directive which will address false
environmental claims and the proliferation of environmental labels
by requiring certain claims to be substantiated with scientific
evidence and independently verified.
NatWest Group (including NWB Group) plans to invest in voluntary
carbon credits to mitigate emissions beyond its own value chain
whilst transitioning towards a state of net zero emissions by 2050.
NatWest Group (including NWB Group) may also be involved in
trading voluntary carbon credits with its clients, or facilitating
clients to trade these credits. Financial market and platform
regulators are increasingly taking an interest in the voluntary
carbon market and voluntary carbon credits retired, sold or
traded by financial institutions or used by them as part of their
own emissions reduction plans. NWB Group could potentially be
exposed to financial, litigation, regulatory enforcement and
reputational risk where it retires, facilitates or is otherwise
associated with voluntary carbon credit transactions or use
(including use to offset own emissions).
This includes where voluntary carbon credits are not of sufficient
quality, potential issues or risks with respect to such carbon
credits (or projects through which they are generated) are not
adequately disclosed or stated benefits are exaggerated or
misleading and/or such carbon credits are used either by NWB
Group or by a third party organisation (such as a customer) as a
substitute for achieving appropriate emissions reductions in their
own operations.
Any failure of NWB Group to implement robust and effective
climate and sustainability-related disclosure, communications and
product governance policies, procedures and controls to make
accurate public statements and claims about how environmentally
friendly, sustainable or ethical NWB Group’s products and services
are and to apply these in line with applicable legal and regulatory
requirements and expectations, may adversely affect NWB
Group’s regulatory compliance and/or reputation and could give
rise to increased regulatory enforcement, investigation and
litigation.
NWB Group may be subject to potential climate 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,
nature-related degradation, human rights violations and other
social, governance and sustainability-related issues.
These risks may arise, for example, from claims pertaining to:
failure 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 balanced, clear, complete, correct, fair,
meaningful, understandable, disclosure (which is capable of
being substantiated) to investors, customers, counterparties
(including suppliers) and other stakeholders;
conduct, mis-selling and customer protection claims, including
claims which may relate to alleged insufficient product
understanding, unsuitable product offering and /or reliance
upon information provided by NWB Group or claims alleging
unfair pricing of climate-related products, for example in
relation to products where limited liquidity or reliable market
data exists for benchmarking purposes or which may be
impacted by future climate policy uncertainty or other factors;
marketing that portrays products, securities, activities or
policies as having positive climate, nature-related or
sustainable outcomes to an extent that may not be the case,
or may not adequately be qualified and/or omits material
information about NWB Group’s contribution to the climate
crisis and/or its direct / indirect contribution to greenhouse gas
emissions or other sustainability-related issues;
damages claims under various tort theories, including common
law public nuisance claims, or negligent mismanagement of
physical and/or transition risks;
alleged violations of officers’, directors’ and other fiduciaries’
duties, for example by financing various carbon-intensive,
environmentally harmful or otherwise highly exposed assets,
companies, and industries;
changes in the understanding of what constitutes positive
climate, nature-related 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;
Risk factors continued
NWB Group
Annual Report and Accounts 2023
188
any weaknesses or failures in specific systems or processes
associated particularly with climate, nature-related or
sustainability linked products, and/or human rights due
diligence, including any failure in the timely implementation,
onboarding and/or updating of such systems or processes;
counterparties, collaborators, customers to whom NWB Group
provides services and third parties in NWB Group’s value
chain who act, or fail to act, or undertake due diligence, or
apply appropriate risk management and product governance
in a manner that may adversely affect NWB Group’s
reputation or sustainability credentials; or
NWB Group’s or its customers’, counterparties’ (including
suppliers’) involvement in, or decision not to participate in,
certain industries or projects associated with causing or
exacerbating climate change and nature-related degradation.
Furthermore, there is a risk that shareholders, campaign groups,
customers and activist groups could seek to take legal action
against NWB Group for financing or contributing to climate
change, nature-related degradation and human rights violations,
failure to implement or follow adequate governance procedures
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 an increase in the number of legal, conduct and
regulatory claims as well as an increase in the variety of legal
bases being alleged, remedies sought and amount of damages
awarded in legal, conduct and regulatory proceedings,
investigations, administrative actions and other adversarial
proceedings against financial institutions for climate and
sustainability matters. There is a risk that as climate, nature-
related and environmental science develop and societal
understanding of these issues increases and deepens, courts,
regulators and enforcement authorities may apply the then
current understandings of climate and the broader sustainability-
related matters retrospectively when assessing claims about
historical conduct or dealings of financial institutions, including
NWB Group. There is also an increase in enforcement and
litigation focusing on challenging public and private sector
sustainability policies and initiatives intended to address climate
change and nature-related degradation. See also, ‘NWB Group is
exposed to the risk of various litigation matters, regulatory and
governmental actions and investigations as well as remedial
undertakings, the outcomes of which are inherently difficult to
predict, and which could have an adverse effect on NWB Group’.
In addition, supervisors and regulators are increasing their
enforcement focus on climate and sustainability-related matters.
For example, the ECB has stated that enforcement measures in
the form of periodic penalty payments may be imposed on banks
that do not fully align with ECB supervisory expectations of sound
practices for managing climate and environmental risks.
These potential litigation, conduct, enforcement and contract
liability risks may have a material adverse effect on NWB Group’s
ability to contribute to achieving NatWest Group’s strategy,
including NatWest Group’s climate ambitions and targets, and this
may have a material adverse effect on NWB Group’s future
results, financial condition, prospects, and/or reputation.
A 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 (including NWB 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 pertaining to NatWest Group’s and/or its
subsidiaries’ securities or being used as a basis to label financial
products and services as environmentally friendly or sustainable.
ESG ratings are often (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). In addition,
certain NatWest Group entities offer and sell products and
services to customers and counterparties based exclusively or
largely on a rating by an unregulated ESG rating agency or data
providers. ESG rating agencies, at this stage, are not subject to
any specific regulatory or other regime or oversight (although
there are proposals by regulators in different jurisdictions to
regulate rating agencies and data providers).
Regulators have expressed concern that harm may arise from
potential conflicts of interest within ESG rating and review or
second party opinion providers and there is a lack of
transparency in methodologies and data points, which renders
ratings and reviews incomparable between agencies or providers.
Any material reduction in the ESG ratings of NatWest Group
(including NWB Group) may have a negative impact on NWB
Group’s reputation, could influence investors’ risk appetite for
NWB Group’s and/or its subsidiaries’ securities, particularly ESG
securities, could potentially affect the pricing of securities issued
by NWB Group and/or its subsidiaries and could affect a
customer’s willingness to deal with NWB Group. A regulatory
sanction or enforcement action involving an ESG rating agency
used by a NatWest Group entity, could also have a negative
impact on NWB Group’s reputation.
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 or disruption resulting from
inadequate or failed internal processes, procedures, people or
systems, or from external events, including legal and regulatory
risks, third party processes, procedures, people or systems. 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 for example, payment errors or
financial crime and fraud), for which there is continued scrutiny by
third parties of 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, the outcomes of
which are inherently difficult to predict, and which could have an
adverse effect on NWB Group.’
Risk factors continued
NWB Group
Annual Report and Accounts 2023
189
These risks are also present when NWB Group relies on critical
service providers (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 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 strategy, and the
organisational and operational changes involved, including:
NatWest Group’s current cost-controlling measures; the
progression towards working as One Bank across NatWest Group
(of which NWB Group is part) to serve customers; the
implementation of the recommendations from the recent
independent reviews by the law firm Travers Smith LLP of
customer account closures, as well as the outcome of ongoing
FCA and internal reviews with respect to certain governance
processes, policies, systems and controls of NatWest Group
entities including with respect to customer account closures; and
conditions affecting the financial services industry generally
(including macroeconomic and other geopolitical developments) as
well as the legal and regulatory uncertainty resulting from these
conditions. It is unclear as to how the future ways of working may
evolve, including in respect of how working practices may further
evolve, 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
and operations, including, without limitation, property, finance,
accounting, treasury, legal, risk, regulatory compliance and
reporting, financial crime, human resources, and certain other
support and administrative functions to other entities within
NatWest Group (in particular, NWM Plc) and receives income in
respect of these services. As a result, NWB Group may be
exposed to a loss of income if these services are not required to
the same extent, or are no longer required at all.
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 may have a material
adverse effect on NWB Group’s future results, financial condition,
prospects, and/or reputation.
NWB Group is subject to sophisticated and frequent
cyberattacks.
NatWest 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 emerging threats. In 2023, 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
threat to the financial services industry. The focus is to manage
the impact of the attacks and sustain availability of services for
NWB Group’s customers. Consequently, NWB Group continues to
invest significant resources in developing and evolving of
cybersecurity controls that are designed to minimise the potential
effect of such attacks.
Third parties continue to make hostile attempts to gain access to,
introduce malware (including ransomware) into and exploit
potential vulnerabilities of NWB Group’s IT systems. NWB Group
has information and cybersecurity controls that seek to minimise
the impact of any such attacks, which are subject to review on a
regular basis, but given the nature of the threat, there can be no
assurance that such measures will prevent the potential adverse
effect of an attack from occurring. See also, ‘NWB Group’s
operations are highly dependent on its complex IT systems and
any IT failure could adversely affect NWB Group.’
Any failure in NWB Group’s information and cybersecurity policies,
procedures or controls, may result in significant financial losses,
major business disruption, inability to deliver customer services, or
loss of, or ability to access, data or systems 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 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, Europe and Asia continue to
recognise cybersecurity as 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 reporting or notification of them, as appropriate
(including, for example, the new SEC cybersecurity requirements).
Furthermore, cyberattacks on NWB Group’s counterparties and
suppliers may also have an adverse effect NWB Group’s
operations. Additionally, third parties may induce employees,
customers, third party providers or other users with access to
NWB Group’s systems to wrongfully disclose sensitive information
to gain access to NWB Group’s data or systems 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 technological failure.
NWB Group expects greater regulatory engagement, supervision
and enforcement to continue in relation to its overall resilience to
withstand IT and IT-related disruption, either through a
cyberattack or some other disruptive event. Such increased
regulatory engagement, supervision and enforcement is uncertain
in relation to the scope, cost, consequence and the pace of
change, which may have a material adverse effect on NWB
Group. Due to NWB Group’s reliance on technology and the
increasing sophistication, frequency and impact of cyberattacks,
such attacks may have an adverse effect on NWB Group’s future
results, financial condition, prospects, and/or reputation.
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.
Risk factors continued
NWB Group
Annual Report and Accounts 2023
190
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.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
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,
innovate its products offering, meet its regulatory obligations, and
deliver its strategy. Investment is being made in data tools and
analytics, including raising awareness around ethical data usage
(for example, in relation to the use of artificial intelligence) and
privacy across NWB Group. The availability and accessibility 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 or be able to access
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 products and services. This could also result 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 weaknesses and
limitations, or the unethical or inappropriate use of data, and/or
non-compliance with data protection laws could give rise to
conduct and litigation risks and may increase the risk of
operational challenges, losses, reputational damage or other
adverse consequences due to inappropriate models, systems,
processes, decisions or other actions.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
NWB Group’s operations are highly dependent on its
complex IT systems 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) transactional and 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 system failure, loss of service
availability or breach of data security could potentially cause
significant damage to: (i) important business services and (ii) NWB
Group’s ability to provide services to its customers, which could
result in reputational damage, significant compensation costs and
regulatory sanctions (including fines resulting from regulatory
investigations), or a breach of applicable regulations and could
affect NWB Group’s regulatory approvals, competitive position,
business and brands, which could undermine its ability to attract
and retain customers and talent. NWB Group outsources certain
functions as it innovates and offers new digital solutions to its
customers to meet the demand for online and mobile banking.
Outsourcing alongside remote working heighten the above risks.
NWB Group uses 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
NWB Group or 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.
In 2023, NWB Group made 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 cybersecurity. Any failure of
these investment and rationalisation initiatives to achieve the
expected results, due to cost challenges or otherwise, may
adversely affect NWB Group’s operations, its reputation and
ability to retain or grow its customer business or adversely affect
its competitive position.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
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 (including technology
and data focused roles), in a highly competitive market and under
internal cost efficiency pressures.
NWB Group’s ability to attract, retain and develop highly skilled
and qualified diverse senior management (this may include a new
permanent CEO in 2024) and skilled personnel may be more
difficult due to the cost-controlling measures, a failure to pay
employees competitive compensation, 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 that have been in
receipt of government support such as NatWest Group). In
addition, certain economic, market and regulatory conditions and
political developments may reduce the pool of candidates for key
management and non-executive roles, including non-executive
directors with the right skills, knowledge and experience, or may
increase the number of departures of existing employees.
Moreover, a failure to foster a diverse and inclusive workforce
may adversely affect NWB Group’s employee engagement and
the formulation and execution of its strategy, and could also have
an adverse effect on its reputation with employees, customers,
investors and regulators.
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 may
adversely affect NWB Group’s ability to operate its business
effectively.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
Risk factors continued
NWB Group
Annual Report and Accounts 2023
191
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 delivery of its long-term strategy. NatWest Group’s
Enterprise-Wide Risk Management Framework sets out the
approach for managing risk within the NWB Group including in
relation to risk governance and risk appetite. A failure to adhere
to this framework, or any material weaknesses or deficiencies in
the framework’s controls and procedures, could adversely affect
NatWest Group’s financial condition and strategic delivery
including in relation to inaccurate adherence to agreed risk
appetite statements and accurate risk reporting of risk exposures.
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 NWB Group inadvertently facilitating financial
crime which may result in regulatory investigation, sanction,
litigation, fines and/or reputational damage. Financial crime
continues to evolve, whether through fraud, scams, cyberattacks
or other criminal activity. These risks are exacerbated as NWB
Group continues to innovate its product offering and increasingly
offers digital solutions to its customers. NatWest Group (including
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.
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,
manual processes and controls, inaccurate data, inadequate IT
systems, unidentified conflicts or misaligned incentives, lack of
accountability control and governance, incomplete risk monitoring
and management or insufficient challenges or assurance
processes to commence or timely complete risk remediation
projects. Failure to manage risks effectively, or within regulatory
expectations, could adversely affect NWB Group’s reputation or
its relationship with its regulators, customers, shareholders or
other stakeholders.
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
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, inappropriate behaviour towards
customers, customer outcomes, 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, contractor or service providers 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. Hybrid working arrangements for NWB
Group employees place heavy reliance on the IT systems that
enable remote working and may place additional pressure on
NWB Group’s ability to maintain effective internal controls and
governance frameworks and increase operational risk.
Hybrid 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.
NWB Group seeks to embed a risk awareness 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 risk
management, including the ongoing development of a NatWest
Group risk management strategy in line with regulatory
expectations. However, such efforts may not insulate NWB Group
from 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 may
result in the inability to achieve its strategic objectives for their
customers, employees and wider stakeholders.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
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 or the public’s expectations, including with respect to
NatWest Group’s strategy and related targets, the progression
towards working as One Bank across NatWest Group (of which
NWB Group is part) to serve customers, or 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, which are constantly evolving and may adversely affect
NWB Group.’ This includes harm to its brand, which may be
detrimental to NWB Group’s business, including its ability to build
or sustain business relationships with customers, stakeholders and
regulators, 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, or there is
perceived to be, a material lapse in standards of integrity,
compliance, customer or operating efficiency, or regulatory or
press scrutiny, and may adversely affect NWB Group’s ability to
attract and retain customers. For example, NWB Group’s
reputational risks were elevated during 2023 as a result of the
departure of its CEO in connection with account closures and
related use of customer data that attracted significant public and
media attention.
In particular, NWB Group’s ability to attract and retain customers
(particularly, corporate/institutional and retail depositors), and
talent, and engage with counterparties may be adversely affected
by factors including: 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.
Risk factors continued
NWB Group
Annual Report and Accounts 2023
192
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 identify, measure and manage material reputational risk
exposures, NWB Group cannot be certain that it will be successful
in avoiding damage to its business from reputational risk.
Any of the above aspects of reputational risk may have a material
adverse effect on NWB Group’s future results, financial condition,
prospects, and/or reputation.
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, guidelines,
corporate governance practice and disclosure requirements,
administrative actions and policies in each jurisdiction in which it
operates, which represents ongoing compliance and conduct
risks. Many of these have been introduced or amended recently
and are subject to further material changes, which may increase
compliance and conduct risks, particularly as EU/EEA and UK
laws diverge as a result of Brexit. NWB Group expects
government and regulatory intervention in the financial services
industry to remain high for the foreseeable future.
Regulators and governments continue to focus on reforming the
prudential regulation of the financial services industry and the
manner in which the business of financial services is conducted.
Measures have included: enhanced capital, liquidity and funding
requirements, through initiatives such as the Basel 3.1 standards
implementation (and any resulting effect on RWAs and models),
the UK ring-fencing regime, the 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 and the FSM Act 2023), LIBOR transition, corporate
governance requirements, rules relating to the compensation of
senior management and other employees, enhanced data
protection and IT resilience requirements, financial market
infrastructure reforms, enhanced regulations in respect of the
provision of ‘investment services and activities’, and increased
regulatory focus in certain areas, including conduct, consumer
protection (such as the FCA’s Consumer Duty) in retail or other
financial markets, competition and disputes regimes, anti-money
laundering, anti-corruption, anti-bribery, anti-tax evasion,
payment systems, sanctions and anti-terrorism laws and
regulations.
In addition, there is significant oversight by competition authorities
of the jurisdictions in which NWB Group operates. The competitive
landscape for banks and other financial institutions in the UK,
EU/EEA, Asia and the US is rapidly changing. Recent regulatory
and legal changes have and may continue to result in new market
participants and changed competitive dynamics in certain key
areas. Regulatory and competition authorities, including the CMA,
are currently also looking at and focusing more on how they can
support competition and innovation in digital and other markets.
Future competition investigations, market reviews, or the
regulation of mergers may lead to the imposition of financial
penalties or market remedies that may adversely affect NatWest
Group’s competitive or financial position.
Recent regulatory changes 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, product offerings and business
models.
Other areas in which, and examples of where, governmental
policies, regulatory and accounting changes, and increased public
and regulatory scrutiny could have an adverse effect (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 or appropriation of assets;
increased scrutiny including from the CMA, FCA and Payment
Systems Regulator (‘PSR’) for the protection and resilience of,
and competition and innovation in, digital and other markets,
UK payment systems (with the development of the
government’s National Payments Vision and Strategy) 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
Market Orders including the Retail Banking Market Order
2017 (the ‘Order’) and SME Undertakings as well as legislation
being drafted to introduce penalties for breaches of such
requirements (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;
increased risk of new class action claims being brought
against NWB Group in the Competition Appeal Tribunal for
breaches of competition law;
new or increased regulations relating to customer data
protection as well as IT controls and resilience, such as the
proposed UK Data Protection and Digital Information (No 2)
Bill and in India, the Digital Personal Data Protection Bill 2022;
the introduction of, and changes to, taxes, levies or fees
applicable to NWB Group’s operations, 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;
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;
regulatory enforcement in the form of PRA imposed financial
penalties for failings in banks’ regulatory reporting governance
and controls, and ongoing regulatory scrutiny; the PRA’s
thematic reviews of the governance, controls and processes
for preparing regulatory returns of selected UK banks,
including NatWest Group (of which NWB Group is a part of);
‘Dear CEO’ letters issued by the Bank of England from time to
time;
recent or proposed US regulations around cybersecurity
incidents, climate disclosures and other climate and
sustainability-related rules;
new or increased regulations relating to financial crime
(including the new criminal offence of failure to prevent fraud)
any regulatory requirements relating to the use of artificial
intelligence and large language models across the financial
services industry (such as the European Union Artificial
Intelligence Act).
Any of these developments (including any failure to comply with
new rules and regulations) could also have an adverse effect 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.
Risk factors continued
NWB Group
Annual Report and Accounts 2023
193
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, capital and risk management planning.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
NWB Group is exposed to the risks of various litigation
matters, regulatory and governmental actions and
investigations as well as remedial undertakings, the
outcomes of which are inherently difficult to predict, and
which could have an adverse 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 civil actions (including those following on from
regulatory sanction), as well as criminal, regulatory and
governmental proceedings. 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, Asia and other jurisdictions.
NWB Group is, has recently been or 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, including in relation to the offering of
securities, conduct in the foreign exchange market, the setting of
benchmark rates such as LIBOR and related derivatives trading,
the issuance, underwriting, and sales and trading of fixed-income
securities (including government securities), product mis-selling,
customer mistreatment, anti-money laundering, antitrust, VAT
recovery and various other 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 expectation
for resolution may change and substantial additional provisions
and costs may be recognised in respect of any matter.
Ongoing matters include the implementation of recommendations
made by the law firm Travers Smith LLP following independent
reviews into issues that had arisen from treatment of a customer
in connection with an account closure decision that attracted
significant public attention and related interactions with the media,
and certain account closures more generally. NatWest Group plc
has received reports in connection with the Travers Smith
reviews, and published summaries of the key findings and
recommendations in October and December 2023. In addition,
NatWest Group plc and the FCA are conducting reviews with
respect to certain governance processes, policies, systems and
controls of NatWest Group entities, including with respect to
customer account closures and the FCA is conducting supervisory
work into how the governance, systems and controls of NatWest
Group and Coutts & Company are working, to identify and
address any significant shortcomings. For additional information
relating to legal, regulatory proceedings and matters to which
NWB Group is exposed, see ‘Litigation and regulatory matters’ at
Note 26 to the consolidated accounts.
Recently resolved matters or adverse outcomes or resolution of
current or future legal, regulatory or other matters, including
conduct-related reviews, redress projects or the subject matter
and outcomes of any of the independent or internal reviews
described above, could increase the risk of greater regulatory and
third-party scrutiny and/or result in future legal or regulatory
actions, and could have material financial, reputational, or
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 and implications of which are
uncertain.
Failure to obtain such licences or waivers may adversely affect
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 may adversely affect
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.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
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’, 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 £362
million as at 31 December 2023. 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.
Any of the above may have a material adverse effect on NWB
Group’s future results, financial condition, prospects, and/or
reputation.
Forward looking statements
NWB Group
Annual Report and Accounts 2023
194
Cautionary statement regarding forward-looking statements
This document may include 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 strategies. In particular, this document may include
forward-looking statements relating to NWB Group in respect of, but not limited to: its economic and political risks, 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 strategy, its climate and sustainability related targets, its
access to adequate sources of liquidity and funding, increasing competition from incumbents, challengers and new entrants 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, and NWB Group’s exposure to, operational risk,
conduct risk, cyber, data and IT risk, financial crime 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, future growth initiatives (including acquisitions, joint ventures and strategic
partnerships), the outcome of legal, regulatory and governmental actions and investigations, the level and extent of future impairments
and write-downs, 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 a 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 2023 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.
National Westminster Bank Plc
2023 Annual Results
Financial review
NWB Group
Annual Results 2023
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 subsidiaries.
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
National Westminster Bank Plc (‘NWB Plc’, which wholly owns Coutts & Company) is a principal entity under NatWest Holdings Limited
(‘NWH Ltd’), together with The Royal Bank of Scotland plc (‘RBS plc’). In 2022 Ulster Bank Ireland DAC (‘UBIDAC’) was also a principal
entity under NWH Ltd. The term ‘NWB Group’ refers to NWB Plc and its subsidiary and associated undertakings.
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.
The reportable operating segments are as follows:
Retail Banking -
serves personal customers in the UK and includes Ulster Bank customers in Northern Ireland.
Private Banking
-
serves UK-connected, high-net-worth individuals and their business interests.
Commercial & Institutional
-
consists of customer businesses reported under Business Banking, Commercial Mid-market and Corporate
& Institutions, supporting our customers across the full non-personal customer lifecycle, both domestically and internationally.
Central items & other
-
includes corporate functions such as treasury, finance, risk management, compliance, legal, communications
and human resources. NWB Plc is the main service 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.
Contents
Page
Presentation of information
2
Description of business
2
Performance overview
3
Financial statements
6
Notes to the financial statements
11
Statement of directors’ responsibilities
21
Forward-looking statements
22
Financial review continued
NWB Group
Annual Results 2023
3
Performance overview
Strong financial performance
NWB Group profit for the year was £3,509 million compared with £3,689 million in 2022, driven by additional operating expenses and
net impairment losses, partially offset by increased income.
Total income increased by £343 million to £12,086 million, primarily reflecting the beneficial impact from base rate rises and lending
growth, partially offset by higher funding costs.
Operating expenses increased by £505 million to £6,793 million, reflecting higher staff costs as a result of increased pay awards to
support our colleagues with cost of living challenges combined with an increase in restructuring costs, an increase in other
administrative costs primarily driven by a new profit share arrangement with a fellow NatWest Group subsidiary, and an increase in
depreciation and amortisation costs.
Net impairment losses of £504 million principally reflects increased economic uncertainty. Defaults remain stable and at low levels
across the portfolio. Total impairment provisions increased by £0.3 billion to £2.9 billion in the year. Expected credit loss (ECL)
coverage ratio increased from 0.84% to 0.88%.
Robust balance sheet with strong capital levels
Total assets increased by £6.0 billion to £415.5 billion at 31 December 2023. This was primarily driven by increases in other financial
assets, as a result of bond activity, and loans to customers, partially offset by a decrease in cash and balances at central banks
resulting from business segment net funding outflows due to overall market liquidity contraction.
Loans to customers increased by £16.8 billion to £318.5 billion primarily driven by growth in Retail Banking mortgage business, an
increase in commercial lending and Treasury reverse repo activity.
Customer deposits decreased by £8.9 billion to £313.8 billion primarily reflecting higher outflows and overall market liquidity
contraction.
The Common Equity Tier 1 (CET1) ratio increased 30 basis points over the period due to a £1.4 billion increase in CET1 capital, driven
by attributable profit, partially offset by interim and foreseeable dividends. This is partially offset by a £9.3 billion increase in RWAs.
Total risk-weighted assets (RWAs) increased by £9.3 billion mainly reflecting an increase in credit risk RWAs of £7.8 billion, primarily
driven by an increase in internal ratings based (IRB) Temporary Model Adjustments as well as increased exposures in Retail Banking
and Commercial & Institutional, and an increase following the annual operational risk RWA recalculation.
Financial review continued
NWB Group
Annual Results 2023
4
Summary consolidated income statement for the year ended 31 December 2023
Retail
Private
Commercial &
Central items
Banking
Banking
Institutional
& other
2023
2022
Variance
£m
£m
£m
£m
£m
£m
£m
%
Net interest income
4,595
709
2,955
(236)
8,023
7,532
491
7
Non-interest income
436
276
1,410
1,941
4,063
4,211
(148)
(4)
Total income
5,031
985
4,365
1,705
12,086
11,743
343
3
Operating expenses
(2,311)
(615)
(2,315)
(1,552)
(6,793)
(6,288)
(505)
8
Profit before impairment losses/releases
2,720
370
2,050
153
5,293
5,455
(162)
(3)
Impairment (losses)/releases
(410)
(13)
(82)
1
(504)
(341)
(163)
48
Operating profit before tax
2,310
357
1,968
154
4,789
5,114
(325)
(6)
Tax charge
(1,280)
(1,425)
145
(10)
Profit for the year
3,509
3,689
(180)
(5)
Key metrics and ratios
2023
2022
Cost:income ratio
(1)
56.2%
53.5%
Loan impairment rate
(2)
15bps
11bps
CET1 ratio
(3)
11.6%
11.3%
Leverage ratio
(4)
4.5%
4.4%
Risk weighted assets (RWAs)
£121.7bn
£112.4bn
Loan:deposit ratio
(5)
97%
90%
(1)
Cost:income ratio is total operating expenses divided by total income.
(2)
Loan impairment rate is the loan impairment charge divided by gross customer loans.
(3)
CET1 ratio is CET1 capital divided by RWAs.
(4)
Leverage ratio is Tier 1 capital divided by total exposure. This is
in accordance with changes to the UK’s leverage ratio framework, refer to page 62 of the NatWest Bank Plc 2023
Annual Report and Accounts for further details.
(5)
Loan deposit ratio is total loans divided by total deposits.
NWB Group reported a profit of £3,509 million compared with £3,689 million in 2022, driven by increased operating expenses of £505
million and impairment losses of £163 million, partially offset by an increase in total income of £343 million.
Total income
increased by £343 million, or 3%, to £12,086 million, primarily reflecting increases in net interest income.
Net interest income
increased by £491 million, or 7%, to £8,023 million, primarily reflecting beneficial impact from base rate rises and
lending growth partially offset by higher funding costs.
Non-interest income
decreased by £148 million, or 4%, to £4,063 million, primarily driven by other operating income, partially offset by
an increase in net fees and commissions.
Net fees and commissions
increased by £43 million, or 3%, to £1,669 million, largely within Commercial & Institutional, driven by
increased lending fees and card volumes coupled with higher payment services income.
Other operating income
reduced by £191 million, or 7%, to £2,394 million primarily reflecting:
£309 million lower income from hedging activities, including reduced gains on economic hedging derivatives, due to interest rate
rises, reflecting interest rate volatility across all currencies. This is partially offset by a £3 million increase as a result of hedge
ineffectiveness; and
an £80 million prior year non-recurring profit from insurance liabilities included within other income; partially offset by
a £234 million gain on redemption of own debt.
Operating expenses
increased by £505 million, or 8%, to £6,793 million reflecting:
an increase in staff costs of £213 million primarily as a result of increased pay awards to support our colleagues with cost of living
challenges combined with an increase in restructuring costs;
an increase in other administrative costs of £138 million primarily driven by a new profit share arrangement with a fellow NatWest
Group subsidiary; and
an increase in depreciation and amortisation costs of £109 million primarily as a result of intangible and fixed asset additions and a
property impairment in 2023.
Net impairment losses
of £504 million principally reflects increased economic uncertainty. Defaults remain stable and at low levels
across the portfolio. Total impairment provisions increased by £0.3 billion to £2.9 billion in the year. ECL coverage ratio increased from
0.84% to 0.88%.
Financial review continued
NWB Group
Annual Results 2023
5
Summary consolidated balance sheet as at 31 December 2023
2023
2022
Variance
£m
£m
£m
%
Assets
Cash and balances at central banks
48,259
73,065
(24,806)
(34)
Derivatives
3,184
4,407
(1,223)
(28)
Loans to banks - amortised cost
3,355
3,197
158
5
Loans to customers - amortised cost
318,466
301,684
16,782
6
Amounts due from holding companies and fellow subsidiaries
2,311
4,903
(2,592)
(53)
Other financial assets
31,944
14,546
17,398
120
Other assets
7,949
7,667
282
4
Total assets
415,468
409,469
5,999
1
Liabilities
Bank deposits
18,052
16,060
1,992
12
Customer deposits
313,752
322,614
(8,862)
(3)
Amounts due to holding companies and fellow subsidiaries
47,252
38,771
8,481
22
Derivatives
1,718
2,088
(370)
(18)
Other financial liabilities
9,011
5,384
3,627
67
Subordinated liabilities
122
197
(75)
(38)
Notes in circulation
806
809
(3)
-
Other liabilities
3,325
3,470
(145)
(4)
Total liabilities
394,038
389,393
4,645
1
Total equity
21,430
20,076
1,354
7
Total liabilities and equity
415,468
409,469
5,999
1
Total assets
increased by £6.0 billion to £415.5 billion at 31 December 2023.
Cash and balances at central banks
decreased by £24.8 billion to £48.3 billion, reflecting:
£19.5 billion decrease due to net bond purchases, disposal and maturity combined with net repo and collateral activity;
£10.7 billion decrease due to business segment net funding outflows; partially offset by
£4.0 billion increase due to the funding of a subsidiary undertaking being transferred from NWB Plc to RBS plc; and
£1.6 billion increase in debt capital market activity.
Loans to banks – amortised cost
increased by £0.2 billion to £3.4 billion, as a result of an increase in non-sterling lending and treasury
activities offset by a reduction in sterling activities.
Loans to customers
increased by £16.8 billion to £318.5 billion, reflecting:
£7.2 billion growth in mortgage business;
£6.7 billion increase as a result of treasury reverse repo activity;
£1.8 billion net increase in commercial lending, primarily due to an increase in term loan facilities, partly offset by UK Government
scheme repayments; and
£0.4 billion increase in credit card balances due to business initiatives.
Amounts due from holding companies and fellow subsidiaries
decreased by £2.6 billion to £2.3 billion primarily due to reduced balances
with fellow subsidiaries of NWH Group.
Other financial assets
increased by £17.4 billion to £31.9 billion, primarily reflecting £36.8 billion of bond purchases, partially offset by
bond disposals of £12.3 billion and maturities of £8.5 billion.
Bank deposits
increased by £2.0 billion to £18.1 billion, driven primarily by an increase in repo balances.
Customer deposits
decreased by £8.9 billion to £313.8 billion, driven primarily by higher outflows from business current account
balances, overall market liquidity contraction and a reduction in savings, demand and non-interest bearing deposits, as a result of a
change in customer behaviour, partly offset by an increase in repo balances.
Amounts due to holding companies and fellow subsidiaries
increased by £8.5 billion to £47.3 billion, primarily due to increased balances
with RBS plc, NWH Ltd and other fellow subsidiaries of NatWest Group, partially offset by a net reduction in balances with NatWest
Group plc.
Derivative liabilities
decreased by £0.4 billion to £1.7 billion, driven by an adverse movement within the liquidity portfolio due to float
rate decreases and foreign exchange swap movements.
Other financial liabilities
increased by £3.6 billion to £9.0 billion, driven by short term issuances as a result of the current market
environment and increasing rates during the year.
Total equity
increased by £1.4 billion to £21.4 billion. The increase reflects attributable profit for 2023 of £3.4 billion, partially offset by
dividends paid to NWH Ltd and an increase in the cash flow hedging reserves due to interest rate rises.
Consolidated income statement
For the year ended 31 December 2023
NWB Group
Annual Results 2023
6
2023
2022
Note
£m
£m
Interest receivable
14,764
9,159
Interest payable
(6,741)
(1,627)
Net interest income
1
8,023
7,532
Fees and commissions receivable
2,177
2,119
Fees and commissions payable
(508)
(493)
Other operating income
2,394
2,585
Non-interest income
2
4,063
4,211
Total income
12,086
11,743
Staff costs
(3,109)
(2,896)
Premises and equipment
(1,039)
(994)
Other administrative expenses
(1,768)
(1,630)
Depreciation and amortisation
(877)
(768)
Operating expenses
3
(6,793)
(6,288)
Profit before impairment losses
5,293
5,455
Impairment losses
13
(504)
(341)
Operating profit before tax
4,789
5,114
Tax charge
7
(1,280)
(1,425)
Profit for the year
3,509
3,689
Attributable to:
Ordinary shareholders
3,368
3,564
Paid-in equity holders
142
120
Non-controlling interests
(1)
5
3,509
3,689
Consolidated statement of comprehensive income
For the year ended 31 December 2023
2023
2022
£m
£m
Profit for the year
3,509
3,689
Items that do not qualify for reclassification
Remeasurement of retirement benefit schemes
(147)
(556)
Tax
40
146
(107)
(410)
Items that do qualify for reclassification
FVOCI financial assets
43
(392)
Cash flow hedges
(1)
(290)
(542)
Currency translation
(17)
(2)
Tax
73
276
(191)
(660)
Other comprehensive loss after tax
(298)
(1,070)
Total comprehensive income for the year
3,211
2,619
Attributable to:
Ordinary shareholders
3,070
2,494
Paid-in equity holders
142
120
Non-controlling interests
(1)
5
3,211
2,619
(2)
Refer to footnotes 2 and 3 of the Consolidated statement in changes in equity.
Balance sheet
NWB Group
Annual Results 2023
7
As at 31 December 2023
NWB Group
NWB Plc
2023
2022
2023
2022
Note
£m
£m
£m
£m
Assets
Cash and balances at central banks
9
48,259
73,065
48,238
73,062
Derivatives
12
3,184
4,407
3,213
4,430
Loans to banks - amortised cost
9
3,355
3,197
3,043
2,870
Loans to customers - amortised cost
9
318,466
301,684
284,314
267,401
Amounts due from holding companies and fellow subsidiaries
9
2,311
4,903
33,499
32,133
Securities subject to repurchase agreements
6,469
2,140
6,469
2,140
Other financial assets excluding securities subject to repurchase agreements
25,475
12,406
24,623
12,040
Other financial assets
15
31,944
14,546
31,092
14,180
Investment in group undertakings
14
-
-
2,615
2,030
Other assets
16
7,949
7,667
5,735
5,641
Total assets
415,468
409,469
411,749
401,747
Liabilities
Bank deposits
9
18,052
16,060
18,052
16,059
Customer deposits
9
313,752
322,614
276,202
281,558
Amounts due to holding companies and fellow subsidiaries
9
47,252
38,771
84,174
75,037
Derivatives
12
1,718
2,088
2,014
2,582
Other financial liabilities
19
9,011
5,384
8,147
4,525
Subordinated liabilities
20
122
197
119
191
Notes in circulation
806
809
806
809
Other liabilities
21
3,325
3,470
2,534
2,743
Total liabilities
394,038
389,393
392,048
383,504
Owners' equity
22
21,395
20,066
19,701
18,243
Non-controlling interests
35
10
-
-
Total equity
21,430
20,076
19,701
18,243
Total liabilities and equity
415,468
409,469
411,749
401,747
Owners’ equity of NWB Plc as at 31 December 2023 includes the profit for the year of £3,625 million (2022 - £3,457million).
Statement of changes in equity
NWB Group
Annual Results 2023
8
For the year ended 31 December 2023
NWB Group
NWB Plc
2023
2022
2023
2022
Note
£m
£m
£m
£m
Called-up share capital - at 1 January and 31 December
22
1,678
1,678
1,678
1,678
Paid-in equity - at 1 January
2,518
2,377
2,518
2,377
Redeemed
-
(359)
-
(359)
Issued
-
500
-
500
At 31 December
22
2,518
2,518
2,518
2,518
Share premium account - at 1 January and 31 December
2,225
2,225
2,225
2,225
Merger reserve - at 1 January
77
14
(2)
(89)
Additions
-
24
-
-
Amortisation
(49)
39
2
87
At 31 December
28
77
-
(2)
FVOCI reserve - at 1 January
(76)
192
(76)
193
Unrealised losses
-
(485)
(11)
(486)
Realised losses
43
93
43
93
Tax
(8)
124
(8)
124
At 31 December
(41)
(76)
(52)
(76)
Cash flow hedging reserve - at 1 January
(391)
(1)
(393)
(2)
Amount recognised in equity
(2)
(180)
(283)
(180)
(288)
Amount transferred from equity to earnings
(3)
(110)
(259)
(109)
(255)
Tax
81
152
81
152
At 31 December
(600)
(391)
(601)
(393)
Foreign exchange reserve - at 1 January
(87)
(85)
(18)
(16)
Retranslation of net assets
(31)
29
(12)
31
Foreign currency gains/(losses) on hedges of net assets
14
(31)
12
(33)
At 31 December
(104)
(87)
(18)
(18)
Capital redemption reserve - at 1 January and 31 December
820
820
820
820
Retained earnings - at 1 January
13,302
13,507
11,491
11,980
Profit attributable to ordinary shareholders and other equity owners
3,510
3,684
3,625
3,457
Paid-in equity dividends paid
(142)
(120)
(142)
(120)
Ordinary dividends paid
(1,738)
(3,293)
(1,738)
(3,293)
Redemption/reclassification of paid-in equity
- gross
-
(29)
-
(29)
- tax
-
(6)
-
(6)
Remeasurement of the retirement benefit schemes
- gross
(147)
(556)
(139)
(565)
- tax
40
146
39
146
Share-based payments
- gross
10
6
10
6
- tax
(13)
2
(13)
2
Amortisation of merger reserve
49
(39)
(2)
(87)
At 31 December
14,871
13,302
13,131
11,491
For the notes to this table refer to the following page.
Statement of changes in equity for the year ended 31 December 2023 continued
NWB Group
Annual Results 2023
9
NWB Group
NWB Plc
2023
2022
2023
2022
£m
£m
£m
£m
Owners' equity at 31 December
21,395
20,066
19,701
18,243
Non-controlling interests - at 1 January
10
10
-
-
(Loss)/profit attributable to non-controlling interests
(1)
5
-
-
Dividends paid
(5)
(5)
-
-
Acquisition of subsidiary
31
-
-
-
At 31 December
35
10
-
-
Total equity at 31 December
21,430
20,076
19,701
18,243
Attributable to:
Ordinary shareholders
18,877
17,548
17,183
15,725
Paid-in equity holders
2,518
2,518
2,518
2,518
Non-controlling interests
35
10
-
-
21,430
20,076
19,701
18,243
(5)
The total distributable reserves for NWB Plc is £12,460 million (2022 – £11,002 million). Refer to Note 22 of the NatWest Bank Plc 2023 Annual Report and Accounts for additional
information.
(6)
The change in the cash flow hedging reserve is driven by realised accrued interest transferred into the income statement and a decrease in swap rates compared to previous periods.
(7)
The portfolio of hedging instruments is predominantly pay fixed swaps.
(8)
As referred to in Note 12 of the NatWest Bank Plc 2023 Annual Report and Accounts, the amount transferred from equity to the income statement is mostly recorded within net interest
income mainly on loans to customers – amortised cost, balances at central banks and loans to banks – amortised cost, and customer deposits as referred to in Note 1
of the NatWest
Bank Plc 2023 Annual Report and Accounts.
Cash flow statement
NWB Group
Annual Results 2023
10
For the year ended 31 December 2023
NWB Group
NWB Plc
2023
2022
2023
2022
Note
£m
£m
£m
£m
Cash flows from operating activities
Operating profit before tax
4,789
5,114
4,705
4,687
Adjustments for:
Non-cash and other items
28
1,329
1,574
396
756
Changes in operating assets and liabilities
28
(10,132)
(45,270)
(8,999)
(45,374)
Income taxes paid
(780)
(1,161)
(484)
(998)
Net cash flows from operating activities
(1,2)
(4,794)
(39,743)
(4,382)
(40,929)
Cash flows from investing activities
Sale and maturity of other financial assets
18,254
25,721
17,887
25,339
Purchase of other financial assets
(35,090)
(13,388)
(34,249)
(13,022)
Income received on other financial assets
450
371
435
371
Net movement
in business interests and intangible assets
27
(724)
(992)
(1,188)
(719)
Dividends received from subsidiaries
-
-
617
1,010
Sale of property, plant and equipment
92
138
34
82
Purchase of property, plant and equipment
(787)
(618)
(544)
(316)
Net cash flows from investing activities
(17,805)
11,232
(17,008)
12,745
Cash flows from financing activities
Issue of paid-in equity
-
500
-
500
Redemption of paid-in equity
-
(388)
-
(388)
Issue of subordinated liabilities
1,263
-
1,263
-
Redemption of subordinated liabilities
(539)
(55)
(539)
(55)
Interest paid on subordinated liabilities
(145)
(145)
(120)
(144)
Issue of MRELs
441
750
441
700
Maturity and redemption of MRELs
(157)
-
(107)
-
Interest paid on MRELs
(293)
(202)
(261)
(191)
Dividends paid
(1,885)
(3,418)
(1,880)
(3,413)
Net cash flows from financing activities
29
(1,315)
(2,958)
(1,203)
(2,991)
Effects of exchange rate changes on cash and cash equivalents
(403)
1,142
(397)
1,101
Net decrease in cash and cash equivalents
(24,317)
(30,327)
(22,990)
(30,074)
Cash and cash equivalents at 1 January
76,318
106,645
75,472
105,546
Cash and cash equivalents at 31 December
30
52,001
76,318
52,482
75,472
(1)
NWB Group includes interest received of £14,320 million (2022 - £9,167 million) and interest paid of £6,043 million (2022 - £1,412 million), and NWB Plc includes interest received of
£13,338 million (2022 – £8,421 million) and interest paid of £6,259 million (2022 - £1,623 million).
(2)
The total cash outflow for leases for NWB Group was £100 million (2022 - £130 million) and for NWB Plc £89 million (2022 - £119 million). This included payment of principal for
NWB Group of £84 million (2022 - £111 million) and NWB Plc of £76 million (2022 - £99 million). These amounts are included in the operating activities in cash flow statement.
Notes to the financial statements
NWB Group
Annual Results 2023
11
1 Presentation of condensed consolidated financial statements
The condensed consolidated financial statements should be read in conjunction with NatWest Group plc’s 2023 Annual Report and
Accounts. The critical and material accounting policies are the same as those applied in the consolidated financial statements.
The directors have prepared the condensed consolidated 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 they are approved.
2 Operating expenses
2023
2022
£m
£m
Wages, salaries and other staff costs
2,407
2,138
Temporary and contract costs
163
207
Social security costs
289
263
Pension costs
250
288
- defined benefit schemes (Note 5)
89
154
- defined contribution schemes
161
134
Staff costs
3,109
2,896
Premises and equipment
1,039
994
Depreciation and amortisation
877
768
Other administrative expenses
(1)
1,768
1,630
Administrative expenses
3,684
3,392
6,793
6,288
(2)
Includes redress and litigation costs. Further details are provided in Note 6.
Notes to the financial statements continued
NWB Group
Annual Results 2023
12
3 Segmental analysis
Reportable operating segments
NWB Plc is organised into the following reportable segments: Retail Banking, Private Banking, Commercial & Institutional and Central
items & other.
Retail Banking
serves personal customers in the UK and includes Ulster Bank customers in Northern Ireland.
Private Banking
serves UK-connected high-net-worth individuals and their business interests.
Commercial & Institutional
consists of customer businesses reported under Business Banking, Commercial Mid-market and Corporate
& Institutions, supporting our customers across the full non-personal customer lifecycle, both domestically and internationally.
Central items & other
includes corporate functions such as treasury, finance, risk management, compliance, legal, communications and
human resources. NWB Plc is the main service 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
Institutional
& other
Total
2023
£m
£m
£m
£m
£m
Net interest income
4,595
709
2,955
(236)
8,023
Net fees and commissions
327
245
1,096
1
1,669
Other operating income
109
31
314
1,940
2,394
Total income
5,031
985
4,365
1,705
12,086
Depreciation and amortisation
-
-
(124)
(753)
(877)
Other operating expenses
(2,311)
(615)
(2,191)
(799)
(5,916)
Impairment (losses)/releases
(410)
(13)
(82)
1
(504)
Operating profit
2,310
357
1,968
154
4,789
2022
Net interest income
4,494
754
2,740
(456)
7,532
Net fees and commissions
334
243
1,038
11
1,626
Other operating income
65
28
248
2,244
2,585
Total income
4,893
1,025
4,026
1,799
11,743
Depreciation and amortisation
-
-
(135)
(633)
(768)
Other operating expenses
(2,115)
(596)
(1,804)
(1,005)
(5,520)
Impairment (losses)/releases
(218)
2
(126)
1
(341)
Operating profit
2,560
431
1,961
162
5,114
Total revenue
(1)
Retail
Private
Commercial &
Central items
Banking
Banking
Institutional
& other
Total
2023
£m
£m
£m
£m
£m
External
6,565
1,156
6,440
5,174
19,335
Inter-segment
(2)
(187)
998
(1,558)
747
-
Total
6,378
2,154
4,882
5,921
19,335
2022
External
5,039
856
4,072
3,896
13,863
Inter-segment
(2)
29
416
(294)
(151)
-
Total
5,068
1,272
3,778
3,745
13,863
Total income
Retail
Private
Commercial &
Central items
Banking
Banking
Institutional
& other
Total
2023
£m
£m
£m
£m
£m
External
4,172
324
4,652
2,938
12,086
Inter-segment
(2)
859
661
(287)
(1,233)
-
Total
5,031
985
4,365
1,705
12,086
2022
External
4,439
719
3,625
2,960
11,743
Inter-segment
(2)
454
306
401
(1,161)
-
Total
4,893
1,025
4,026
1,799
11,743
(3)
Total revenue comprises interest receivable, fees and commissions receivable and other operating income.
(4)
Revenue and income from transactions between segments of the group are now reported as inter-segment in both the current and comparative information.
Notes to the financial statements continued
NWB Group
Annual Results 2023
13
3 Segmental analysis continued
Analysis of net fees and commissions
Retail
Private
Commercial &
Central items
Banking
Banking
Institutional
& other
Total
2023
£m
£m
£m
£m
£m
Fees and commissions receivable
- Payment services
263
32
518
-
813
- Credit and debit card fees
323
13
197
-
533
- Lending and financing
12
5
489
-
506
- Brokerage
27
6
-
-
33
- Investment management, trustee and fiduciary services
2
205
-
-
207
- Underwriting fees
-
-
1
-
1
- Other
4
5
60
15
84
Total
631
266
1,265
15
2,177
Fees and commissions payable
(304)
(21)
(169)
(14)
(508)
Net fees and commissions
327
245
1,096
1
1,669
2022
Fees and commissions receivable
- Payment services
254
25
489
-
768
- Credit and debit card fees
323
14
170
-
507
- Lending and financing
15
8
446
-
469
- Brokerage
34
6
-
-
40
- Investment management, trustee and fiduciary services
4
213
-
-
217
- Underwriting fees
-
-
3
-
3
- Other
-
3
113
(1)
115
Total
630
269
1,221
(1)
2,119
Fees and commissions payable
(296)
(26)
(183)
12
(493)
Net fees and commissions
334
243
1,038
11
1,626
Retail
Private
Commercial &
Central items
Banking
Banking
Institutional
& other
Total
2023
£m
£m
£m
£m
£m
Assets
194,488
19,284
89,783
111,913
415,468
Liabilities
154,083
37,816
123,084
79,055
394,038
2022
Assets
184,140
19,734
86,406
119,189
409,469
Liabilities
153,304
41,489
127,301
67,299
389,393
Notes to the financial statements continued
NWB Group
Annual Results 2023
14
4 Tax
2023
2022
£m
£m
Current tax
Charge for the year
(1,108)
(1,187)
(Under)/over provision in respect of prior years
(63)
63
(1,171)
(1,124)
Deferred tax
Charge for the year
(220)
(151)
UK tax rate change impact
-
(82)
Increase/(decrease) in the carrying value of deferred tax assets in respect of UK losses
137
(6)
Under provision in respect of prior years
(26)
(62)
Tax charge for the year
(1,280)
(1,425)
Current tax for the year ended 31 December 2023 is based on blended rates of 23.5% for the standard rate of UK corporation tax and
4.25% for the UK banking surcharge.
The actual tax charge differs from the expected tax charge, computed by applying the standard rate of UK corporation tax of 23.5%
(2022 – 19%), as follows:
2023
2022
£m
£m
Expected tax charge
(1,125)
(972)
Losses and temporary differences in period where no deferred tax asset recognised
(1)
-
Foreign profits taxed at other rates
(8)
(8)
Items not allowed for tax:
- losses on disposals and write-downs
-
(8)
- UK bank levy
(19)
(12)
- regulatory and legal actions
-
6
- other disallowable items
(32)
(13)
Non-taxable items
15
18
Taxable foreign exchange movements
(1)
2
Increase/(decrease) in the carrying value of deferred tax assets in respect of:
- UK losses
(2)
137
(6)
Banking surcharge
(190)
(373)
Tax on paid in equity dividends
33
22
UK tax rate change impact
-
(82)
Adjustments in respect of prior years
(1) (2)
(89)
1
Actual tax charge
(1,280)
(1,425)
(3)
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.
(4)
Includes a net £69 million benefit from UK group relief and loss relief claims at higher tax rates (refer to the Deferred Tax section of the NatWest Bank Plc 2023 Annual Report and
Accounts for details of the recent changes in UK tax rates).
On 11 July 2023 the government of the UK, where the parent company is incorporated, enacted the Pillar 2 income taxes legislation
effective for the Group’s financial year beginning 1 January 2024. Under the legislation, NatWest Group plc will be required to pay, in
the UK, top-up tax on profits of its subsidiaries that are taxed at a Pillar 2 effective tax rate of less than 15%. This legislation is
expected to have no material impact for NWB Group.
Judgement: Tax contingencies
NWB Group’s corporate income tax charge and its provisions for corporate income taxes necessarily involve 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
relevant tax authorities. 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 refer to Accounting policy 2.1 in the NatWest Bank Plc 2023 Annual Report and Accounts.
Notes to the financial statements continued
NWB Group
Annual Results 2023
15
5 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
2023
2022
2023
2022
£m
£m
£m
£m
Loans - amortised cost
Stage 1
288,772
266,722
258,188
236,809
Stage 2
31,727
37,216
28,008
32,765
Stage 3
4,405
3,783
4,003
3,383
Inter-group
(1)
1,809
4,220
32,200
30,633
Total
326,713
311,941
322,400
303,590
ECL provisions
(2)
Stage 1
566
506
521
459
Stage 2
794
813
746
765
Stage 3
1,512
1,262
1,416
1,170
Inter-group
1
4
41
48
2,873
2,585
2,724
2,442
ECL provision coverage
(3)
Stage 1
(%)
0.2
0.19
0.2
0.19
Stage 2
(%)
2.5
2.18
2.7
2.33
Stage 3
(%)
34.3
33.36
35.4
34.58
Inter-group (%)
0.1
0.09
0.1
0.16
0.88
0.84
0.92
0.88
Impairment (releases)/losses
ECL (release)/charge
(4)
Stage 1
(319)
(243)
(302)
(256)
Stage 2
529
348
516
373
Stage 3
297
233
276
234
Third party
507
338
490
351
Inter-group
(3)
3
(7)
40
504
341
483
391
Amounts written-off
235
321
218
272
(1)
NWB Group’s intercompany assets are classified in Stage 1.
(2)
Includes £8 million (2022 – £2 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 loans and total ECL provisions, including ECL for other
(non-loan) assets and unutilised exposure. Some segments with a high proportion of debt securities or unutilised exposure may result in a not meaningful coverage ratio.
(4)
Includes a £10 million charge (2022 – nil) related to other financial assets, of which a £6 million charge (2022 – £1 million release) related to assets classified as FVOCI, and includes
a £2 million release (2022 – nil) 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 in the NatWest Bank Plc 2023 Annual Report and Accounts for further details. Other financial assets within the scope of the IFRS 9 ECL framework were cash and
balances at central banks totaling £47.8 billion (2022 – £72.5 billion) and debt securities of £31.5 billion (2022 – £14.1 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 of the NatWest Bank Plc 2023 Annual Report and Accounts.
Critical accounting policy: Loan impairment provisions
Accounting policy Note 2.3 in the NatWest Bank Plc 2023 Annual Report and Accounts sets out how the expected loss approach is
applied. At 31 December 2023, customer loan impairment provisions amounted to £2,873 million (2022 - £2,585 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 judgements 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 2023 Annual Report and Accounts.
IFRS 9 ECL model design principles
Refer to Credit risk – IFRS 9 ECL model design principles section of the NatWest Bank Plc 2023 Annual Report and Accounts 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 of the NatWest Bank Plc 2023 Annual Report and Accounts for further details.
Notes to the financial statements continued
NWB Group
Annual Results 2023
16
6 Provisions for liabilities and charges
NWB Group
Redress and other
litigation
Property
Financial
commitments and
guarantees
Other (1)
Total
Provisions for liabilities and charges
£m
£m
£m
£m
£m
At 1 January 2023
292
105
59
94
550
Expected credit losses impairment release
-
-
(3)
-
(3)
Currency translation and other movements
(4)
-
-
(4)
(8)
Charge to income statement
102
29
-
84
215
Release to income statement
(17)
(47)
-
(24)
(88)
Provisions utilised
(126)
(23)
-
(61)
(210)
At 31 December 2023
247
64
56
89
456
NWB Plc
Redress and other
litigation
Property
Financial
commitments and
guarantees
Other (1)
Total
Provisions for liabilities and charges
£m
£m
£m
£m
£m
At 1 January 2023
286
103
57
73
519
Expected credit losses impairment release
-
-
(3)
-
(3)
Currency translation and other movements
(3)
-
-
(2)
(5)
Charge to income statement
98
28
-
75
201
Release to income statement
(16)
(46)
-
(21)
(83)
Provisions utilised
(124)
(22)
-
(59)
(205)
At 31 December 2023
241
63
54
66
424
(2)
Other materially comprises provisions relating to restructuring costs.
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 refer to Accounting policy Note 2.4 in the NatWest Bank Plc 2023 Annual Report and Accounts.
Critical accounting policy: Provisions for liabilities
The key judgement is involved in determining whether a present obligation exists. There is often a high degree of uncertainty and
judgement is based on the specific facts and circumstances relating to individual events in determining whether there is a present
obligation. Judgement 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 7.
Property: This includes provision for contractual costs 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 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 7
.
Notes to the financial statements continued
NWB Group
Annual Results 2023
17
7 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 2023. 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
.
NWB Group
NWB Plc
2023
2022
2023
2022
£m
£m
£m
£m
Contingent liabilities and commitments
Guarantees
1,376
1,728
1,320
1,664
Other contingent liabilities
1,003
1,197
994
1,190
Standby facilities, credit lines and other commitments
77,149
87,221
73,343
83,321
Total
79,528
90,146
75,657
86,175
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 £205 million (2022 - £215 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 various legal proceedings and are involved in, or
subject to, various 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 the 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 the probability of a liability, if any, arising can
reasonably be estimated in respect of any Matter. 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 Matters 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 or contesting Matters, even for those for which NWB Group believes it has credible
defences and should prevail on the merits. The uncertainties inherent in all Matters affect the amount and timing of any potential
economic outflows for both Matters with respect to which provisions have been established and other contingent liabilities in respect of
any such Matter.
It is not practicable to provide an aggregate estimate of potential liability for our Matters as a class of contingent liabilities.
The future economic outflow in respect of any Matter may ultimately prove to be substantially greater than, or less than, the
aggregate provision, if any, that NWB Group has recognised in respect of such Matter. Where a reliable estimate of the economic
outflow cannot be reasonably made, no provision has been recognised. NWB Group expects that in future periods, additional
provisions and economic outflows relating to Matters that may or may not be currently known by NWB Group will be necessary, in
amounts that are expected to be substantial in some instances. Please refer to Note 6 for information on material provisions.
Matters which are, or could be material, either individually or in aggregate, having regard to NWB Group, considered as a whole, in
which NWB Group is currently involved are set out below. We have provided information 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 (including the Matters), see the Risk
Factor relating to legal, regulatory and governmental actions and investigations set out on page 184 of the NatWest Bank Plc 2023
Annual Report and Accounts.
Notes to the financial statements continued
NWB Group
Annual Results 2023
18
7 Memorandum items continued
Litigation
London Interbank Offered Rate (LIBOR) and other rates litigation
In August 2020, a complaint was filed in the United States District Court for the Northern District of California by several United States
retail borrowers against the USD ICE LIBOR panel banks and their affiliates (including NatWest Group plc, NatWest Markets Plc,
NatWest Markets Securities Inc. and NWB Plc), alleging (i) that the very process of setting USD ICE LIBOR amounts to illegal price-
fixing; and (ii) that banks in the United States have illegally agreed to use LIBOR as a component of price in variable retail loans. In
September 2022, the district court dismissed the complaint. The plaintiffs filed an amended complaint but in October 2023, the district
court dismissed that complaint as well, and indicated that further amendment would not be permitted. The plaintiffs have commenced
an appeal to the United States Court of Appeals for the Ninth Circuit, which is currently 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 £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 separate cases involving other banks.
Regulatory matters
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.
NWB Group expects government and regulatory intervention in financial services to be high for the foreseeable future, including
increased scrutiny from competition and other regulators in the retail and SME business sectors.
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.
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 undertaking additional review / remediation work.
Reviews into customer account closures
In July 2023, NatWest Group plc commissioned an independent review by the law firm Travers Smith LLP into issues that had arisen
from treatment of a customer in connection with an account closure decision that attracted significant public attention and certain
related interactions with the media. NatWest Group plc has received reports in connection with that review (and in October and
December 2023 published summaries of the key findings and recommendations).
In addition, NatWest Group plc is conducting internal reviews with respect to certain governance processes, policies, systems and
controls of NatWest Group entities, including with respect to customer account closures.
The FCA is conducting supervisory work into how the governance, systems and controls of NatWest Group and Coutts & Company
are working, to identify and address any significant shortcomings.
Notes to the financial statements continued
NWB Group
Annual Results 2023
19
8 Related parties
UK Government
UK Government through HM Treasury is the controlling shareholder of NatWest Group plc as per UK Listing rules. The UK
Government’s shareholding is managed by UK Government Investments Limited, a company wholly owned by the UK Government. At
31 December 2023, HM Treasury’s holding in NatWest Group’s ordinary shares was 37.97%. As a result the UK Government and UK
Government controlled bodies are related parties of the Group.
NWB Group enters into transactions with many of these bodies. Transactions include the payment of: taxes, principally UK corporation
tax (Note 4) and value added tax; national insurance contributions; local authority rates; and regulatory fees and levies; together with
banking transactions such as loans and levy sits 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 0.382% 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 party
(c)
In accordance with IAS 24, transactions or balances between NWB Group entities that have been eliminated on consolidation are
not reported
(d)
The primary financial statements include transactions and balances with its subsidiaries which have been further disclosed in the
relevant parent company notes.
Business and loan portfolio transfers
In 2023 no contingent liabilities and commitments were transferred from NatWest Bank Plc to NWM N.V. in relation to the Western
European Corporate Portfolio (2022 - £0.4 billion). The total contingent liabilities and commitments transferred from NWM N.V. to
NatWest Bank Plc in 2023 was nil (2022 - nil).
As part of a larger initiative to increase the diversity of the banking book portfolio, £0.3
billion of contingent liabilities and commitments and £0.1 billion of drawn balances were transferred from NatWest Bank Plc to NWM
N.V. in 2022.
Associates, joint ventures and equity investments
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. To further strategic partnerships, NWB Group may seek to invest in
third parties or allow third parties to hold a minority interest in a subsidiary of NatWest Group. We disclose as related parties for
associates and joint ventures and where equity interest are over 10%. Ongoing business transactions with these entities are on normal
commercial terms.
At 31 December 2023 NWB Group held investment in associates and joint Ventures amounting to £4 million (2022- £2 million). For the
year ended 31 December 2023 NWB Group’s share of losses of associates was £3 million (2022- £6 million). At 31 December 2023
there were balances within customer deposits of £2 million (2022 -nil) relating to associates and joint ventures.
Post employment benefits
NatWest Group recharges NatWest Group Pension Fund with the cost of pension management services incurred by it.
Holding companies and fellow subsidiaries
Transactions NWB Group enters with its holding companies and fellow subsidiaries also meet the definition of related party
transactions. The table below discloses transactions between NWB Group and subsidiaries of NatWest Group.
2023
2022
Holding company
Fellow subsidiaries
Total
Holding company
Fellow subsidiaries
Total
£m
£m
£m
£m
£m
£m
Interest receivable
-
133
133
1
40
41
Interest payable
(674)
(1,588)
(2,262)
(408)
(369)
(777)
Fees and commissions receivable
-
62
62
-
97
97
Fees and commissions payable
-
(71)
(71)
-
(70)
(70)
Other operating income
(1)
11
1,532
1,543
36
1,605
1,641
Other administration expenses
(2)
-
(156)
(156)
-
-
-
Impairment (losses)/releases
3
-
3
(3)
-
(3)
(660)
(88)
(748)
(374)
1,303
929
(1)
Includes internal service recharges of £1,387 million (2022 - £1,616 million).
(2)
Other operating expense relates to a new profit share arrangement with a fellow NatWest Group subsidiary that commenced in 2023. The profit share arrangement was introduced
during the year to reward NWM Group on an arm’s length basis for its contribution to the performance of the NatWest Group Commercial & Institutional business segment, 2023 being
the first full year with the Commercial & Institutional segment in place.
Notes to the financial statements continued
NWB Group
Annual Results 2023
20
9 Date of approval
The annual results for the year ended 31 December 2023 were approved by the board of directors on 15 February 2024.
10 Post balance sheet events
There have been no other significant events between 31 December 2023 and the date of approval of these accounts which would
require a change to or additional disclosure in the accounts.
Statement of directors’ responsibilities
NWB Group
Annual Results 2023
21
This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 87 to 98 of the
NatWest Bank Plc 2023 Annual Report and Accounts.
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 judgements 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
John-Paul Thwaite
Katie Murray
Chairman
Chief Executive Officer
Chief Financial Officer
15 February 2024
Board of directors
Chairman
Executive directors
Non-executive directors
Howard Davies
John-Paul Thwaite
Katie Murray
Francesca Barnes
Ian Cormack
Roisin Donnelly
Patrick Flynn
Rick Haythornthwaite
Yasmin Jetha
Stuart Lewis
Mark Rennison
Mark Seligman
Lena Wilson
Forward-looking statements
NWB Group
Annual Results 2023
22
Cautionary statement regarding forward-looking statements
This document may include 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 strategies. In particular, this document may include
forward-looking statements relating to NWB Group in respect of, but not limited to: its economic and political risks, 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 strategy, its climate and sustainability related targets, its
access to adequate sources of liquidity and funding, increasing competition from incumbents, challengers and new entrants 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, and NWB Group’s exposure to, operational risk,
conduct risk, cyber, data and IT risk, financial crime 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, future growth initiatives (including acquisitions, joint ventures and strategic
partnerships), the outcome of legal, regulatory and governmental actions and investigations, the level and extent of future impairments
and write-downs, 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 a 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 2023 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.
Legal Entity Identifier: 213800IBT39XQ9C4CP71